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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

~~FORM~~ý ~~10-Q~~ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~/x/~~For ~~QUARTERLY~~the ~~REPORT~~Quarterly ~~PURSUANT~~Period TOEnded ~~SECTION~~June 29, 132002 Commission ORFile ~~15(d)~~Number: ~~OF THE SECURITIES EXCHANGE ACT OF 1934~~333-57209

For the Quarterly Period Ended September 29, 2001 Commission File Number: 333-57209

OUTSOURCING SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)

Delaware		33-0597491
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

25 Commerce Drive, Allendale, NJ		07401
(Address of principal executive offices)		(Zip Code)

(201) 785-1333 (Registrant's telephone number, including area code) ~~(201) 785-1333~~

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /

Number of shares of common stock, $.001 par value, outstanding as of the close of business on ~~September~~June 29, ~~2001~~2002: 3,~~373~~352,~~265~~970 shares.

OUTSOURCING SERVICES GROUP, INC.
INDEX TO FORM 10-Q

		Page
PART I.	Financial Information
ITEM 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of September 29, 2001 (unaudited) and December 31, 2000	3
	Condensed Consolidated Balance Sheets as of June 29, 2002 (unaudited) and December 31, 2001	3
	Condensed Consolidated Statements of Operations for the Three-and Nine-Month Periods Ended September 29, 2001 and September 30, 2000 (unaudited)	4
	Condensed Consolidated Statements of Operations for the Three- and Six-Month Periods Ended June 29, 2002 and June 30, 2001 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 29, 2001 and September 30, 2000 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 29, 2002 and June 30, 2001 (unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	7
ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	1618
PART II.	Other Information	2026
Item 1.	Legal Proceedings	2026
Item 2.	Changes in Securities	2026
Item 3.	Defaults Upon Senior Securities	2026
Item 4.	Submission of Matters to a Vote of Security Holders	2026
Item 5.	Other Information	2026
Item 6.	Exhibits and Reports on Form 8-K	2026
SIGNATURES		21
CERTIFICATION		27
EXHIBITS		22
SIGNATURES		27
EXHIBITS		28

OUTSOURCING SERVICES GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS AS OF ~~SEPTEMBER~~ JUNE 29, ~~2001~~2002 (UNAUDITED) AND DECEMBER 31, ~~2000~~2001 (Dollars in thousands, except per share data)

				September 29, 2001			December 31, 2000
					June 29, 2002			December 31, 2001
				~~(Unaudited)~~	(Unaudited)
ASSETS
CURRENT ASSETS:
	Cash			$	~~7,079~~$	1,854	$	~~3,801~~$	3,627
	Short-term investments				~~267~~	255		~~254~~	251
	Accounts receivable, net				43,637			47,928
	Accounts receivable, net of allowances of $1,393 and $1,447					44,815			31,397
	Other receivables				~~1,954~~	1,406		~~1,815~~	1,956
	Inventories, net				~~32,645~~	33,730		~~32,907~~	28,449
	Prepaid expenses and other current assets				~~2,071~~	3,807		~~1,043~~	1,557
	Deferred income taxes, current				~~4,551~~	3,108		~~4,551~~	3,108
		Total current assets			~~92,204~~	88,975		~~92,299~~	70,345
PROPERTY AND EQUIPMENT, net	~~PROPERTY AND EQUIPMENT, net~~				~~53,912~~	58,147		~~43,057~~	58,263
GOODWILL AND OTHER INTANGIBLES, net	~~GOODWILL AND OTHER INTANGIBLES, net~~				~~101,295~~	100,127		~~102,272~~	99,691
DEFERRED INCOME TAXES, non-current	~~DEFERRED INCOME TAXES, non-current~~				~~2,702~~	2,852		~~2,702~~	2,852
DEFERRED FINANCING COSTS, net	~~DEFERRED FINANCING COSTS, net~~				~~4,439~~	3,359		~~5,260~~	4,453
ENVIRONMENTAL INSURANCE RECEIVABLE	~~ENVIRONMENTAL INSURANCE RECEIVABLE~~				~~350~~	350		~~350~~	350
DUE FROM CCL	~~DUE FROM CCL~~				~~7,126~~	7,126		~~7,126~~	7,126
OTHER ASSETS	~~OTHER ASSETS~~				~~221~~	1,359		~~602~~	274
		TOTAL ASSETS		$	~~262,249~~$	262,295	$	~~253,668~~$	243,354
LIABILITIES, REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
	Trade accounts payable			$	35,670		$	33,067
	Accounts payable				$	39,798		$	28,184
	Accrued expenses				~~18,118~~	19,750		~~18,621~~	21,327
	Deferred income taxes, current				339			339
	Accrued restructuring and other					876			—
	Income tax payable				304			186
	Income taxes payable					1,096			399
	Other current liabilities				~~282~~	253		~~108~~	85
		Total current liabilities			~~54,713~~	61,773		~~52,321~~	49,995
	DEFERRED INCOME TAXES, non-current				3,550			3,522
ENVIRONMENTAL CONTINGENCIES AND OTHER LIABILITIES						12,275			11,658
	ENVIRONMENTAL CONTINGENCIES AND OTHER LIABILITIES				11,323			11,774
LONG-TERM DEBT						170,779			162,869
	LONG-TERM DEBT				169,668			161,447
		Total liabilities				244,827			224,522
		Total liabilities			239,254			229,064
REDEEMABLE SERIES A PREFERRED STOCK, $.001 par value; 3,750 shares authorized, issued and outstanding						375			375
	REDEEMABLE SERIES A PREFERRED STOCK, $.001 par value; 3,750 shares authorized, issued and outstanding				375			375
REDEEMABLE SERIES B PREFERRED STOCK, $.001 par value; 26,250 shares authorized, issued and outstanding						4,829			4,724
	REDEEMABLE SERIES B PREFERRED STOCK, $.001 par value; 26,250 shares authorized, issued and outstanding				4,672			4,514
COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
STOCKHOLDERS' EQUITY:
	Common stock, $.001 par value; 6,000,000 shares authorized; 3,352,970 shares issued and outstanding as of June 29, 2002 and 3,373,265 as of December 31, 2001					3			3
	Common stock, $.001 par value; 6,000,000 shares authorized; 3,373,265 shares issued and outstanding as of September 29, 2001 and 3,375,483 as of December 31, 2000				3			3
	Common stock warrants					663			663
	Common stock warrants				663			663
	Additional paid-in capital					29,910			30,189
	Additional paid-in capital				29,939			31,092
	Notes receivable from stockholders					(730	)		(830	)
	Notes receivable from stockholders				(580	)		(740	)
	Accumulated deficit					(16,503	)		(14,528	)
	Accumulated deficit				(10,757	)		(10,870	)
	Accumulated other comprehensive loss					(1,079	)		(1,764	)
	Accumulated other comprehensive loss				(1,320	)		(433	)
		Total stockholders' equity				12,264			13,733
		Total stockholders' equity			17,948			19,715
			TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY		$	262,295		$	243,354
		TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY		$	262,249		$	253,668

See notes to condensed consolidated financial statements.

OUTSOURCING SERVICES GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE- AND ~~NINE~~SIX-MONTH PERIODS ENDED ~~SEPTEMBER~~JUNE 29, ~~2001~~2002 AND ~~SEPTEMBER~~JUNE 30, ~~2000~~2001 (Unaudited) (Dollars in thousands, except for per share data) ~~(Unaudited)~~

			~~Three Months Ended~~	Three Months Ended					~~Nine Months Ended~~	Six Months Ended
			September 29, 2001			September 30, 2000			September 29, 2001			September 30, 2000
				June 29, 2002			June 30, 2001			June 29, 2002			June 30, 2001
NET REVENUES			$	~~85,463~~$	87,492	$	~~73,816~~$	83,021	$	~~249,506~~$	167,475	$	~~216,522~~$	164,043
COST OF GOODS SOLD				~~71,011~~	76,815		~~62,262~~	70,666		~~210,553~~	145,390		~~184,083~~	139,542
GROSS PROFIT				~~14,452~~	10,677		~~11,554~~	12,355		~~38,953~~	22,085		~~32,439~~	24,501
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES				~~8,835~~	8,006		~~7,628~~	7,807		~~24,265~~	13,563		~~20,522~~	15,430
INCOME FROM OPERATIONS				5,617			3,926			14,688			11,917
RESTRUCTURING AND OTHER CHARGES					376			—			1,444			—
INTEREST EXPENSE, NET				4,346			4,393			13,193			12,426
INCOME FROM OPERATIONS					2,295			4,548			7,078			9,071
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES				1,271			(467	)		1,495			(509	)
INTEREST EXPENSE, NET					4,278			4,486			8,461			8,847
PROVISION FOR INCOME TAXES				1,016			543			1,195			1,119
(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES					(1,983	)		62			(1,383	)		224
NET INCOME (LOSS)				255			(1,010	)		300			(1,628	)
PROVISION (BENEFIT) FOR INCOME TAXES					233			(177	)		469			179
ACCRETION AND DIVIDENDS ON PREFERRED STOCK				(62	)		(62	)		(186	)		(185	)
NET (LOSS) INCOME					(2,216	)		239			(1,852	)		45
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS				193			(1,072	)		114			(1,813	)
ACCRETION AND DIVIDENDS ON PREFERRED STOCK					(62	)		(62	)		(124	)		(124	)
OTHER COMPREHENSIVE LOSS:
NET (LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS					(2,278	)		177			(1,976	)		(79	)
FOREIGN CURRENCY TRANSLATION ADJUSTMENT				(699	)		(609	)		(887	)		(1,113	)
OTHER COMPREHENSIVE INCOME (LOSS)					660			678			685			(188	)
COMPREHENSIVE LOSS			$	(444	)	$	(1,619	)	$	(587	)	$	(2,741	)
COMPREHENSIVE (LOSS) INCOME				$	(1,556	)	$	917		$	(1,167	)	$	(143	)
EARNINGS (LOSS) PER SHARE: NET INCOME (LOSS) PER SHARE
EARNINGS (LOSS) PER SHARE:
	Basic		$	0.08		$	(0.29	)	$	0.09		$	(0.47	)
	NET INCOME (LOSS) PER SHARE
	Diluted			0.07			—			0.08			—
		Basic		$	(0.66	)	$	0.07		$	(0.55	)	$	0.01
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS PER SHARE
		Diluted			(0.66	)		0.06			(0.55	)		0.01
	Basic		$	0.06		$	(0.31	)	$	0.03		$	(0.53	)
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS PER SHARE
	Diluted			0.05			—			0.03			—
		Basic		$	(0.68	)	$	0.05		$	(0.59	)	$	(0.02	)
WEIGHTED AVERAGE COMMON SHARES
		Diluted			(0.68	)		0.05			(0.59	)		(0.02	)
	Basic			3,373,637			3,441,650			3,373,637			3,441,899
WEIGHTED AVERAGE COMMON SHARES
	Diluted			3,691,646			—			3,691,646			—
		Basic			3,365,873			3,373,824			3,365,873			3,373,824
		Diluted			3,365,873			3,692,353			3,365,873			3,692,353

See notes to condensed consolidated financial statements.

OUTSOURCING SERVICES GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE ~~NINE~~SIX MONTHS ~~PERIOD~~ ENDED ~~SEPTEMBER~~JUNE 29, ~~2001~~2002 AND ~~SEPTEMBER~~JUNE 30, ~~2000~~2001 (Unaudited) (Dollars in thousands) ~~(Unaudited)~~

				September 29, 2001			September 30, 2000
				June 29, 2002			June 30, 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income (loss)			$	300		$	(1,628	)
	Net (loss) income			$	(1,852	)	$	45
	Adjustments to reconcile net income (loss) to net cash provided by operating activities:
	Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
		Depreciation and amortization			104,~~226~~664			96,~~055~~625
		Amortization of deferred financing costs			~~1,171~~919			~~998~~780
		Provision for doubtful accounts			~~329~~359			~~351~~251
		Deferred income taxes			28—			3828
	Change in operating assets and liabilities:
		Trade accounts receivables			4(13,~~129~~777	)		2,~~418~~729
		Other receivables			~~(133~~550	)		~~(327~~234	)
		Inventories			2(5,~~053~~281	)		(1,~~274~~933	)
		Prepaid expenses			(981	)		(833	)
		Prepaid expenses and other current assets			(2,250	)		(769	)
		Other assets			~~381~~(1,085	)		~~210~~(443	)
		Accounts payable			211,~~442~~614			~~(2,309~~916	)
		Income tax payable/receivable			118			—
		Income taxes payable/(receivable)			697			(718	)
		Accrued expenses and other liabilities			(~~816~~617	)		(~~2,509~~129	)
			Net cash provided by operating activities		19,247			4,190
		Accrued restructuring and other			876			—
			Net cash (used in) provided by operating activities		(5,183	)		11,482
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures					(65,~~053~~141	)		(43,~~084~~313	)
Short-term investments					(134	)		(108	)
Sale of property, plant and equipment					~~(35~~582	)		45(33	)
Acquisition of Norwich, net of cash acquired					~~(800~~—	)		—(800	)
Acquisition of Dermal, net of cash acquired					(3,517	)		—
Acquisition of Ivers-Lee, net of cash acquired					—			(2,290	)
Acquisition of Precision Packaging and Ivers-Lee, net of cash acquired					(2,290	)		(47,632	)
			Net cash used in investing activities		(4,563	)		(6,444	)
			Net cash used in investing activities		(12,708	)		(51,681	)

See notes to condensed consolidated financial statements.

			September 29, 2001			September 30, 2000
			June 29, 2002			June 30, 2001
CASH FLOWS FROM FINANCING ACTIVTIES:
Net borrowings on revolving loans			$	—		$	49,390
Net borrowings (paydowns) on revolving loans			$	7,910		$	(3,421	)
Net paydowns on revolving loans				(1,779	)		—
Dividends on preferred stock				(19	)		(19	)
Dividends on preferred stock				(28	)		(28	)
Increase in deferred financing costs				—			(175	)
Increase in deferred financing costs				(350	)		(350	)
Repurchase and cancellation of stock				(179	)		(993	)
Proceeds, repurchase/cancellation of stock				(993	)		(2	)
		Net cash provided by (used in) financing activities		7,712			(4,608	)
		Net cash (used in) provided by financing activities	$	(3,150	)	$	49,010
EFFECT OF EXCHANGE RATE CHANGES ON CASH				261			(64	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH				(111	)		(526	)
NET (DECREASE) INCREASE IN CASH				(1,773	)		366
NET INCREASE IN CASH				3,278			993
CASH, beginning of period				3,627			3,801
CASH, beginning of period				3,801			2,530
CASH, end of period			$	1,854		$	4,167
CASH, end of period			$	7,079		$	3,523
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the nine month period:
Cash paid during the six month period:
	Interest		$	147,~~801~~170		$	138,~~891~~115
	U.S. Income taxes		$	~~714~~42		$	~~1,913~~713
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
Accretion attributable to preferred stock			$	~~158~~124		$	~~157~~124
Acquisition of Norwich for note payable			$	~~10,000~~—		$	—10,000
The Company acquired all the capital stock of Precision Packaging Services, Inc. (February 2000), and net assets of Ivers-Lee (August 2000) and Norwich (June 2001) and Dermal (September 2001)
The Company acquired all net assets of Norwich (June 2001)
In conjunction with the acquisitions, liabilities were assumed as follows:
Fair value of assets acquired			$	~~12,555~~—		$	2011,~~031~~980
Intangible assets acquired				~~4,249~~—			~~33,050~~—
Cash paid for capital stock				—			~~(41,318~~—	)
Cash paid for assets				~~(4,317~~—	)		(~~6,000~~800	)
Liabilities assumed			$	~~12,487~~—		$	511,~~763~~180

See notes to condensed consolidated financial statements.

OUTSOURCING SERVICES GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 29, 2002 AND JUNE 30, 2001 (Unaudited)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2001 AND SEPTEMBER 30, 2000

(Unaudited)

1. Basis of Presentation

The interim condensed consolidated financial statements included herein have been prepared by Outsourcing Services Group, Inc. ("OSG" or the "Company") without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such SEC rules and regulations; nevertheless, the management of the Company believes that the disclosures herein are adequate to make the information presented not misleading. The financial statements should be read in conjunction with the financial statements and related notes to the Company's ~~2000~~2001 ~~annual~~Annual Report on Form 10-K, as filed with the SEC.

In OSG ~~the~~consists ~~opinion~~ of ~~management,~~ the ~~condensed~~following ~~consolidated~~subsidiaries, ~~financial~~Aerosol ~~statements~~Services ~~included~~Company, Inc. ~~herein~~("ASC"), ~~reflect~~Piedmont ~~adjustments~~Laboratories, Inc. ~~consisting~~("Piedmont"), ~~only~~Kolmar ofLaboratories, Inc. ~~normal recurring adjustments necessary to present~~("Kolmar"), ~~fairly~~Acupac ~~the consolidated financial position of the Company as of September~~Packaging, 29Inc. ("Acupac"), ~~2001~~Precision ~~the~~Packaging ~~results of its operations for the three~~ and ~~nine~~Services, Inc. ~~month~~("Precision"), ~~periods~~OSG ~~ended September~~Ivers-Lee ~~29,~~Inc. ~~2001~~("Ivers-Lee") and OSG Norwich ~~September 30~~Pharmaceutical, Inc. ~~2000~~("Norwich"). ~~and~~References ~~its~~to ~~cash~~the ~~flows~~"Kolmar ~~for~~Group" ~~the~~include ~~nine~~Kolmar, ~~month~~Kolmar's ~~periods~~wholly-owned ~~ended September 29~~subsidiaries, ~~2001~~Kolmar ~~and~~de ~~September 30~~Mexico, ~~2000~~S.A. ~~The~~de ~~results~~CV ofand ~~operations~~Kolmar ~~for~~Canada Inc. ~~the~~("Kolmar Canada"). ~~interim~~Unless ~~periods~~the ~~are~~context ~~not necessarily~~otherwise ~~indicative~~requires, ofreferences ~~the~~to ~~results~~Kolmar ofinclude ~~operations~~references ~~for~~to the ~~full~~Kolmar ~~year~~Group.

In the opinion of management, the condensed consolidated financial statements included herein reflect adjustments consisting only of normal recurring adjustments necessary to present fairly the consolidated financial position of the Company as of June 29, 2002 and the results of its operations for the three-and six-month periods ended June 29, 2002 and June 30, 2001 and its cash flows for the six- month periods ended June 29, 2002 and June 30, 2001. The results of operations for the interim periods are not necessarily indicative of the results of operations for the full year.

2. New Accounting Pronouncements

On June 29, 2001, Statement of Financial Accounting Standards (SFAS) No. ~~133~~141, ~~Accounting~~Business ~~for Derivative Instruments and Hedging Activities~~Combinations, was ~~effective~~approved ~~for~~by ~~all~~the ~~fiscal~~Financial ~~years~~Accounting ~~beginning~~Standards ~~after~~Board ~~June 15, 2000~~(FASB). SFAS No. ~~133,~~141 asrequires ~~amended,~~that ~~establishes~~the ~~accounting~~purchase ~~and~~method ~~reporting~~of ~~standards~~accounting be used for ~~derivative~~ ~~instruments,~~all ~~including~~business ~~certain~~combinations ~~derivative~~initiated ~~instruments~~after June 30, ~~embedded~~2001. inIn ~~other~~addition, ~~contracts~~goodwill and ~~for~~certain ~~hedging~~intangible ~~activities.~~assets ~~Under~~will ~~SFAS~~remain ~~No. 133,~~on ~~certain~~the ~~contracts~~balance ~~that~~sheet ~~were~~and not ~~formerly~~be ~~considered derivatives~~amortized. ~~may~~On ~~now~~an ~~meet~~annual ~~the~~basis, ~~definition~~and ofwhen athere ~~derivative.~~is ~~The~~reason ~~Company~~to ~~adopted~~suspect ~~SFAS~~that ~~No.~~their values ~~133~~have ~~effective~~been ~~January 1,~~diminished ~~2001.~~or ~~The~~impaired, ~~Company~~these ~~does~~assets ~~not~~must ~~hold~~be ~~any~~tested ~~derivative~~for ~~instruments~~impairment, orand ~~embedded~~write-downs ~~derivative instruments~~may ~~therefore,~~be ~~the~~necessary. ~~adoption~~The ofCompany implemented SFAS No. ~~133~~141 ~~did not have an impact~~ on ~~the financial position~~July 1, ~~results of operations, or cash flows of the Company~~2001.

On June 29, 2001, SFAS No. ~~141~~142, ~~"Business~~Goodwill ~~Combinations"~~and Other Intangible Assets, was approved by the ~~Financial Accounting Standards Board (~~FASB). SFAS No. ~~141~~142 ~~requires~~changes the ~~that~~accounting ~~the~~for ~~purchase~~goodwill from an amortization method to an impairment-only approach. Amortization of ~~accounting~~other beintangible ~~used~~assets ~~for~~related ~~all~~to ~~business~~non-compete ~~combinations~~agreements ~~initiated~~were ~~after~~$37,000 and $76,000 for the three-and six-months ended June 3029, ~~2001~~2002. InAmortization ~~addition~~of goodwill, including goodwill ~~and~~recorded ~~certain~~in ~~intangible~~past ~~assets~~business ~~will remain~~combinations, onceased ~~the~~upon ~~balance~~adoption of ~~sheet~~this ~~and~~statement ~~not~~on beJanuary 1, ~~amortized~~2002. OnAmortization anexpense ~~annual~~related ~~basis~~to goodwill was $1,523,000 and ~~when~~$3,142,000 ~~there~~for isthe ~~reason~~three- toand ~~suspect~~six- ~~that~~month ~~their~~period ~~values~~ended ~~have~~June 30, ~~been~~2001. ~~diminished~~In addition, orthe ~~impaired,~~Company ~~these~~has ~~assets~~completed ~~must~~the befirst ~~tested~~step ~~for impairment,~~of ~~and~~the ~~write-downs~~transitional ~~may~~goodwill beimpairment ~~necessary.~~test, ~~The~~the ~~Company~~results ~~implemented~~indicate ~~SFAS~~that ~~No. 141~~the onConsumer ~~July 1,~~Products ~~2001.~~Division will need further

On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was approved by the FASB. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of this statement. The Company is required to implement SFAS No. 142 on January 1, 2002 and it has not determined the impact, if any, that this statement will have on the financial position, results of operations, or cash flows of the Company.

~~In August 2001, the FASB issued SFAS No~~evaluation. ~~143,~~ ~~"Accounting~~Goodwill ~~for~~at ~~Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with~~ the ~~retirement~~Consumer ofProducts ~~tangible~~Division ~~long-lived assets and the associated retirement costs. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it~~ is ~~incurred if a reasonable estimate of fair value can be made~~$51,216,000. ~~The~~There ~~associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143~~ is ~~effective~~no ~~January 1,~~goodwill ~~2003.~~impairment ~~The~~for ~~Company does not believe that~~ the ~~adoption~~ ofother ~~this~~reporting ~~pronouncement will have a material impact on the consolidated results of operations~~units.

In The ~~October 2001,~~proforma ~~the~~table ~~FASB~~below ~~issued~~represents ~~SFAS~~what ~~No. 144, "Accounting for~~ the ~~Impairment~~net or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. SFAS No. 144 supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. However, SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for (aloss) ~~recognition~~ ~~and~~income ~~measurement~~would ofhave ~~the~~been ~~impairment~~in ~~of long-lived~~all ~~assets~~periods topresented beexclusive ~~held and used and (b) measurement~~ of ~~long-lived~~ ~~assets~~goodwill ~~to be disposed of by sale~~amortization. ~~SFAS No. 144 is effective January 1, 2002. The Company does not believe that the adoption of this pronouncement will have a material impact on the consolidated results of operations.~~

3. Inventories

	Three Months Ended					Six Months Ended
	June 29, 2002			June 30, 2001		June 29, 2002			June 30, 2001
Goodwill amortization	$	—		$	1,523	$	—		$	3,142
Noncompete amortization		37			—		76			—
Net (loss) income	$	(2,216	)	$	1,762	$	(1,852	)	$	3,187

~~Inventories~~ In August 2001, ~~consisted~~the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the ~~following~~associated atretirement ~~September~~costs. SFAS No. ~~29,~~143 ~~2001~~requires ~~and~~that ~~December~~the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 31143 is effective January 1, ~~2000:~~2003. The Company does not believe that the adoption of this pronouncement will have a material impact on their results of operations, financial position or cash flows.

	September 29, 2001			December 31, 2000
	(in thousands)
Raw Material	$	25,521		$	25,300
Work-in-process		4,961			6,171
Finished goods		5,858			5,945
		36,340			37,416
Less reserve for excess and obsolete inventories		(3,695	)		(4,509	)
	$	32,645		$	32,907

In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. SFAS No. 144 supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. However, SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. SFAS No. 144 is effective January 1, 2002. The adoption of this pronouncement did not have a material impact on their results of operations, financial position or cash flows.

In April 2002, the FASB issued SFAS No. 145, Recission of FASB Statements 4, 44 and 64, Amendment of FASB Statement 13, and Technical Corrections. ~~Contingencies~~ SFAS No. 145 rescinds the provisions of SFAS No. 4 that requires companies to classify certain gains and losses from debt extinguishments as extraordinary items, eliminates the provisions of SFAS No. 44 regarding transition to the Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require that certain lease modifications be treated as sale leaseback transactions. The provisions of SFAS No. 145 related to classification of debt extinguishment are effective for fiscal years beginning after May 15, 2002. Commencing January 1, 2003, the Company will classify debt extinguishment costs within income from operations and will reclassify previously reported debt extinguishments as such. The provisions of SFAS No. 145 related to lease modification are effective for transactions occurring after May 15, 2002. The Company does not expect the provisions of SFAS No. 145 related to lease modification to have a material impact on its financial position or results of operations.

Environmental Regulation and Compliance

The Company's operations and properties are subject to extensive federal, state, local and foreign environmental laws and regulations concerning among other things, emissions to air, discharges to water, the remediation of contaminated soil and groundwater, and the generation, handling, storage, transportation, treatment and disposal of waste and other materials (collectively, "Environmental Laws"). Violations of Environmental Laws can result in civil or criminal penalties or in cease and desist or other orders against the Company. In addition, the Company may be required to spend material amounts to comply with Environmental Laws, and may be liable with respect to contamination of sites

In ~~currently~~June 2002, orthe ~~formerly~~FASB ~~owned~~issued orSFAS ~~operated~~No. 146, byAccounting ~~the~~for ~~Company~~Costs orAssociated with ~~respect~~Exit toor ~~the~~Disposal ~~off-site~~Activities. ~~disposal of hazardous substances~~SFAS No. 146 ~~Based~~nullifies ~~upon~~Emerging ~~the~~Issues ~~Company's~~Task ~~experience~~Force to("EITF") ~~date~~No. 94-3, as"Liability ~~well~~Recognition asfor certain ~~indemnification~~ ~~agreements~~Employee ~~obtained~~Termination inBenefits ~~connection~~and ~~with~~Other ~~the~~Costs ~~ASC~~to ~~acquisition,~~Exit ~~the~~an ~~Kolmar~~Activity (including ~~Acquisition~~Certain ~~and~~Costs ~~the~~Incurred ~~acquisition~~in ofas ~~the~~Restructuring)". ~~Procter~~The ~~and~~principal ~~Gamble~~difference ~~North~~between ~~Norwich~~SFAS ~~facility (see Note~~No. ~~6),~~146 and ~~certain insurance~~EITF ~~coverages,~~No. 94-3 ~~the~~relates ~~Company~~to ~~believes~~its ~~that~~requirements ~~the~~for ~~future~~recognition ~~cost~~ of ~~compliance~~a liability ~~with~~for ~~existing~~a ~~Environmental~~cost ~~Laws~~associated ~~and~~with ~~its~~an ~~liability~~exit ~~for~~or ~~identified~~disposal ~~environmental~~activity. ~~claims~~SFAS ~~will~~No. 146 ~~not~~requires ~~have~~that a ~~material~~liability ~~adverse effect~~for ona ~~the~~cost ~~Company's~~associated ~~business,~~with ~~results~~an ofexit ~~operations~~ or ~~financial~~disposal ~~condition.~~activity ~~There can~~ be norecognized ~~assurance,~~when ~~however, that~~ the liability ~~Company's~~is ~~obligations~~incurred. inUnder ~~this~~EITF ~~regard~~No. 94-3, ~~will~~a ~~not~~liability ~~have~~for ~~such~~ an ~~effect~~exit orcost ~~that the~~was ~~existing~~recognized ~~indemnities~~at ~~and~~the ~~insurance~~date ~~will~~of bean ~~sufficient~~entity's commitment to ~~fund~~an ~~such~~exit ~~liabilities~~plan. ~~Furthermore,~~SFAS ~~future~~No. 146 ~~events,~~is ~~such~~effective asfor exit ~~new~~and ~~information,~~disposal oractivities ~~changes~~that inare ~~Environmental~~initiated ~~Laws~~after ~~(or~~December 31, in2002. ~~their~~The ~~interpretation~~Company ~~or enforcement~~does bynot ~~courts~~expect orthe ~~governmental~~provisions ~~agencies)~~of ~~may~~SFAS ~~give~~No. 146 ~~rise~~ to ~~additional costs or claims that could~~ have a material ~~adverse~~impact ~~effect~~ on ~~the~~its ~~Company's~~financial ~~business,~~position or results of operations~~, financial condition or cash flows~~.

Certain environmental laws, such as the Federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended ("CERCLA") and analogous state laws, impose liability for the investigation and remediation of hazardous substances released into the environment3. ~~Courts~~ ~~have~~Goodwill ~~interpreted CERCLA to impose strict,~~ and inOther some circumstances, joint and several, liability on all potentially responsible parties ("PRPs") at a site if the harm is indivisible, which means that one PRP could be held liable for the entire cost of cleanup at a site where multiple parties contributed to the contamination. As a practical matter, however, the costs typically are allocated, according to volumetric or other standards, among the PRPs. Under CERCLA and analogous state laws, the Company may incur liability for contamination at properties presently or formerly owned or operated by the Company or its subsidiaries or predecessors (including contamination caused by the Company's predecessors or prior owners or operators of such sites), or at properties where such entities sent waste for off-site treatment or disposal. Intangibles

~~In that~~ Goodwill ~~regard,~~and ~~ASC's~~Other ~~operations~~Intangibles ~~are~~consisted ~~located within the boundaries~~ of the ~~Puente~~following Valley Operable Unit ("OU") of the San Gabriel Valley Superfund Site. Prior to the Company's purchase of ASC, the U.S. Environmental Protection Agency ("EPA") identified ASC as one of more than five hundred PRPs for the Puente Valley OU. Subsequently, ASC and forty-three other PRPs entered into a consent agreement to fund certain investigatory work, which work was completed in 1997. To date, the EPA has not finally determined the remedial work that will be required at ~~the site; however, the EPA has issued estimates for the remedial alternatives it is considering which range from approximately $28~~June ~~million to $51 million. In connection with the Company's purchase of ASC~~29, ~~the sellers~~2002 ~~(who currently own the property on which ASC operates) agreed to indemnify the Company with respect to the Puente Valley OU proceeding~~ and certain other environmental matters. Certain of the Company's leases with the sellers also provide for offsets to the Company's rental obligations in the event that the Company incurs liability for such an indemnified matter. Based on this indemnityDecember 31, ~~the~~ ~~lease~~2001: off-set rights, recent EPA cost estimates of the proposed cleanup alternatives and certain preliminary estimates of ASC's share of liability, the Company believes, although there can be no assurance, that ASC's liability at this site will not be material. In addition, prior to the Company's merger with Aerosol Services Holding Corporation, the Los Angeles Regional Water Quality Control Board ("RWQCB") requested that ASC conduct certain soil and groundwater investigation and remediation on its property. ASC has conducted

	June 29, 2002			December 31, 2001
	(in thousands)
Goodwill	$	120,973		$	120,461
Noncompete agreement		750			750
Less accumulated amortization		(21,596	)		(21,520	)

	$	100,127		$	99,691

4. Inventories

Inventories consisted of the following at June 29, 2002 and December 31, 2001:

	June 29, 2002			December 31, 2001
	(in thousands)
Raw Material	$	24,271		$	21,022
Work-in-process		4,531			4,030
Finished goods		7,743			5,737

		36,545			30,789
Less reserve for excess and obsolete inventories		(2,815	)		(2,340	)

	$	33,730		$	28,449

~~the requested investigations and the RWQCB has approved ASC's remediation plan~~5. ~~Although there can be no assurance, the Company does not believe that the costs of remediation will be material. This remediation is also the subject of the above-referenced indemnity.~~ Contingencies

~~Also, in~~ ~~regard~~Environmental toRegulation ~~CERCLA, Kolmar~~ and a former affiliate, Wickhen Products ("Wickhen"), were identified as the two principal PRPs at the Carroll & Dubies Superfund site in Port Jervis, New York. At the Carroll & Dubies site, the remediation work and the final post-remediation facility inspection was completed in December 1999. Final clean-up costs of $6.7 million were incurred and funded through insurance. Post-remediation monitoring expected to last through 2005, commenced in year 2000 and is expected to cost $350,000, which is currently accrued. The entire project has been, and will continue to be, fully indemnified by CCL. Compliance

~~Based~~ The Company's operations and properties are subject to extensive federal, state, local and foreign environmental laws and regulations concerning, among other onthings, emissions to air, discharges to water, the ~~advice~~remediation of ~~outside~~contaminated ~~counsel~~soil and groundwater, and the ~~Company~~generation, ~~also~~handling, ~~maintained~~storage, antransportation, ~~accrual~~treatment and disposal of $9waste and other materials (collectively,~~000,000~~ as"Environmental Laws"). Violations of ~~September 29,~~Environmental ~~2001~~Laws ~~for~~can ~~one~~result in civil or criminal penalties or in cease and desist or other ~~site~~orders ~~where~~against ~~Kolmar~~the ~~may~~Company. ~~have~~In ~~liability~~addition, ~~for~~the ~~contamination~~Company ~~caused~~may bybe ~~former~~required ~~operations~~to spend material amounts to comply with Environmental Laws, ~~although~~and itmay ~~has~~be ~~not~~liable ~~yet~~with ~~been~~respect ~~identified~~to ascontamination aof ~~PRP~~sites ~~and~~currently ~~would~~or ~~have~~formerly ~~certain~~owned ~~indemnification~~or ~~rights~~operated ~~for~~by ~~this~~the Company or with respect to the off-site disposal of hazardous substances. ~~The~~Based upon the Company's ~~believes~~experience to date, ~~based~~as onwell aas ~~file~~certain ~~review~~indemnification byagreements obtained in connection with the anASC ~~independent~~Acquisition, ~~consultant~~Kolmar Acquisition and the Norwich Acquisition, and certain insurance coverages, the Company believes that the ~~accrual~~future ~~would~~cost beof ~~sufficient~~compliance towith ~~fund~~existing ~~all~~Environmental ~~likely~~Laws ~~remediation~~and ~~costs~~its liability atfor identified environmental claims will not have a material adverse effect on the ~~site~~Company's business, results of operations, financial condition or cash flows.

In Certain ~~addition~~environmental laws, ~~the~~such ~~Company~~as ~~maintained~~the anFederal ~~accrual~~Comprehensive atEnvironmental ~~September 29~~Response, ~~2001~~Compensation, and Liability Act of ~~$725~~1980,~~000~~ ~~that~~as ~~includes~~amended ~~potential~~("CERCLA"), ~~liabilities~~and ~~related~~analogous tostate laws, impose liability for the ~~Orange~~investigation ~~County~~and ~~Landfill~~remediation of hazardous substances released into the environment. Courts have interpreted CERCLA to impose strict, ~~located~~and in ~~New~~some ~~York State~~circumstances, joint and ~~the~~several liability ~~Union~~on ~~Metals~~all ~~Property~~potentially responsible parties (~~neighboring~~"PRPs") ~~property~~at ofa ~~Imperial~~site ~~Cosmetics~~if ~~Division~~the harm is indivisible, awhich ~~former~~means ~~division~~that ofone ~~Kolmar).~~PRP Incould ~~each~~be held liable for the entire cost of cleanup at a site where multiple parties contributed to the ~~above~~contamination. ~~mentioned~~Under ~~claims~~CERCLA and analogous state laws, ~~Kolmar~~the ~~has~~Company ~~certain~~may ~~indemnification~~incur ~~rights~~liability for contamination at properties presently or formerly owned or operated by the Company or its subsidiaries or predecessors (~~$250,000~~including ~~deductible~~contamination caused by the Company's predecessors or prior owners or operators of such sites), ~~against~~or ~~CCL~~at properties where such entities sent waste for off-site ~~these~~treatment ~~claims~~or disposal.

~~Piedmont~~ In that regard, ASC's ~~owned~~ ~~facility~~operations inare ~~Gainesville,~~located ~~Georgia~~within isthe ~~listed~~boundaries onof the ~~State~~Puente Valley Operable Unit ("OU") of ~~Georgia~~the San Gabriel Valley Superfund Site. Prior to the Company's ~~Hazardous~~purchase ~~Site~~of ASC, ~~Inventory~~the U.S. Environmental Protection Agency ("~~HSI~~EPA") identified ASC as one of ~~environmentally~~more ~~impacted~~than ~~sites~~five ~~due~~hundred toPRPs for the ~~detection~~Puente ofValley OU. Subsequently, ASC and forty-three other PRPs entered into a consent ~~chlorinated~~agreement ~~solvents~~to fund certain investigatory work, which work was completed in 1997. To date, the ~~groundwater~~EPA ~~beneath~~has not finally determined the ~~facility~~remedial work that will be required at the site; however, the EPA has issued estimates for the remedial alternatives it is considering which range from approximately $28 million to $51 million. ~~The~~In connection with the Company's ispurchase of ASC, the sellers (who currently ~~performing~~own ~~voluntary~~the ~~groundwater~~property ~~remediation~~on which ASC operates) agreed to indemnify the Company with respect to the Puente Valley OU proceeding and ~~maintains~~certain aother ~~$12,000~~environmental ~~reserve~~matters. Certain of the Company's leases with the sellers also provide for ~~future~~offsets ~~remediation~~to ~~costs~~the Company's rental obligations in the event that the Company incurs liability for such an indemnified matter. Based on this indemnity, the lease off-set rights, recent EPA cost estimates of the proposed cleanup alternatives and certain preliminary estimates of ASC's share of liability, the Company believes, although there can be no assurance, that ASC's liability at this site will not be material. In addition, prior to the Company's merger with Aerosol Services Holding

While it is impossible at this time to determine with certainty the ultimate outcome of the environmental matters referred to above, management believes that adequate provisions have been made for probable losses with respect thereto and that the ultimate outcome, after provisions therefore, will not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company. It is reasonably possible that changes in estimates of recorded obligations and related receivables may occur in the near term.

Should any losses be sustained in connection with any of such environmental matters in excess of provisions therefore, they will be charged to income in the future.

The Company also faces risks relating to federal and state environmental regulation of VOCs. Recently enacted or future legislation requiring reductions in the use of these propellants could materially adversely affect the Company's business if the industry does not develop propellant technology and product formulations to meet such future standards. California and New York recently have mandated reductions in VOCs in aerosol products, and it is possible that Georgia and other states may in the future pass similar legislation or enact regulations. All of the Company's products meet the

~~current~~Corporation ~~regulatory standards~~("ASHC"), ~~and~~the ~~management~~Los ~~believes,~~Angeles ~~although~~Regional ~~there~~Water ~~can~~Quality beControl noBoard ~~assurance,~~("RWQCB") requested that ~~propellant~~ASC ~~technology~~conduct certain soil and ~~product~~groundwater ~~formulations~~investigation ~~will~~and beremediation ~~developed~~on ~~that~~its ~~meet~~property. ASC has conducted the ~~future~~requested ~~standards~~investigations, the RWQCB has approved ASC's remediation plan, and remediation began in 2001.

~~Litigation~~ Although there can be no assurance, the Company does not believe that the costs of remediation will be material. This remediation is also the subject of the above-referenced indemnity.

~~There~~ Also, in ~~are~~regard ~~certain~~to ~~other~~CERCLA, ~~legal~~Kolmar ~~proceedings~~ and ~~claims~~a ~~pending~~former ~~against~~affiliate, ~~the~~Wickhen ~~Company~~Products ~~arising~~("Wickhen"), ~~out~~have ofbeen identified as the ~~normal~~two ~~course~~principal ofPRPs ~~business~~at ~~which~~the ~~claims~~Carroll & ~~for~~Dubies ~~monetary~~Superfund ~~damages~~site in ~~are~~Port ~~asserted~~Jervis, New York. ~~While~~At itthe isCaroll & ~~not~~Dubies ~~feasible~~site, tothe ~~predict~~remediation work and the ~~outcome~~final post-remediation facility inspection was completed in December 1999. Final clean-up costs of ~~these~~$6.7 million ~~legal~~were ~~proceedings~~incurred and ~~claims~~funded ~~with~~through ~~certainty~~insurance. Post-remediation monitoring, ~~management~~expected to last through 2005, commenced in year 2000 and is expected ofto cost $350,000, which the ~~belief~~Company ~~that~~has ~~any~~accrued. ~~ultimate~~The ~~liabilities~~entire project has been, and will ~~not~~continue ~~individually~~to orbe, fully indemnified by CCL. Another site formerly operated by a Kolmar affiliate is incurrently undergoing remediation under the ~~aggregate~~direction ~~have~~of a ~~material~~state ~~adverse~~agency. ~~effect~~Based on the advice of outside counsel, the Company's ~~financial~~maintained ~~position~~an accrual of $9,000,000 ~~results~~as of June 29, 2002 for this site where Kolmar may have liability for contamination caused by former operations, oralthough ~~cash~~it ~~flows~~has ofnot ~~the~~yet been identified as a PRP and would have specific indemnification rights for this site from CCL. The Company believes, based on a file review by an independent consultant, that the accrual would be sufficient to fund all likely remediation costs at the site.

5 In November 2000, the Company was served notice of a claim asserted against Kolmar by the State of New York ("State"). ~~Senior~~ ~~Secured~~The ~~Revolving~~claim ~~Loan~~ asserts that Kolmar is a PRP for remediation costs incurred by the State in connection with the cleanup of the Orange County Landfill, located in New York State. Kolmar's records indicate it did generate some waste that was transported to the landfill, between 1979 and 1992. The State alleges that to date it has incurred over $13 million in response costs for the landfill. Approximately thirty-five other PRPs have also been contacted by the State; management believes there are hundreds of other candidate PRPs not yet served notices. The Company established a reserve for off-site waste disposal which is inclusive of the Orange County landfill site. In addition, Kolmar has certain indemnification rights ($250,000 deductible) against CCL for this claim. At June 29, 2002 the reserve was at $697,000.

~~The~~ Piedmont's owned ~~credit~~ facility ~~contains~~in ~~covenants which~~Gainesville, ~~among~~Georgia ~~other~~is ~~things,~~listed ~~require minimum levels for earnings and certain financial ratios and place restrictions~~ on ~~capital~~ ~~expenditures. On August 15, 2001,~~ the ~~Company~~State ~~received~~of anGeorgia's ~~amendment~~Hazardous toSite ~~their~~Inventory ~~senior~~("HSI") ~~secured~~of ~~revolving~~environmentally ~~loan~~impacted ~~which~~sites ~~reset~~due to the ~~minimum~~detection ~~EBITDA requirement at June 30, 2001 and for~~of ~~future~~chlorinated ~~quarters,~~solvents ~~such~~in ~~that~~ the ~~Company~~groundwater ~~was~~beneath inthe ~~compliance at September 29, 2001 and June 30, 2001~~facility. The Company ~~anticipates~~is ~~not~~continuing ~~being in compliance~~ with the ~~minimum~~remediation ~~EBITDA~~ and ~~the~~groundwater ~~funded debt~~monitoring ~~coverage ratio covenants at December 31, 2001~~ and istesting ~~currently~~which ~~negotiating~~will ~~the~~continue ~~covenants~~through ~~with their bank~~2003.

6 The Company also faces risks relating to federal and state environmental regulation of Volatile Organic Compounds ("VOCs"). ~~Asset~~ ~~Acquisition~~ Legislation requires reductions in the use of these propellants could materially adversely affect the Company's business if the industry does not develop propellant technology and product formulations to meet such future standards. The EPA and various state regulations, in particular California and New York, have mandated reductions in VOCs in various aerosol products. Management believes that all of the Company's products meet the current regulatory

On June 29, 2001, the Company completed an asset purchase acquisition of the Procter & Gamble ("P&G") North Norwich facility located in North Norwich, New York which was funded with a $10.0 million note payable to P&G, bearing 8% interest due in June 2006. OSG Norwich Pharmaceutical, Inc. ("Norwich") also entered into a Product Supply Agreement ("PSA") for five years with P&G. The Company will manufacture prescription and over-the-counter pharmaceutical products at the plant.

On September 6, 2001, the Company completed an asset purchase acquisition of Dermal Sciences, Inc. ("Dermal") for approximately $3.5 million. Dermal is primarily a provider of treatment patches and treated nonwovens for the health and beauty aid markets. Its operations will reside at the Company's Acupac facility located in Mahwah, New Jersey.

7. Business Segment Information

The Company operates multiple business segments specializing in the manufacturing and packaging of consumer products, such as aerosol and liquid products, color cosmetics, and pharmaceutical products. The Company provides contract manufacturing and packaging for color cosmetics, personal care, household, automotive care and pharmaceutical markets. The Company has operating facilities in the U.S., Mexico, and Canada.

In the current quarter the Company reorganized its operating divisions into three operating divisions whose respective members are as follows: the Kolmar Division (the Kolmar Group)—Port

~~Jervis~~standards, ~~Corona,~~and ~~Canada~~management ~~and~~further ~~Mexico~~believes, ~~the~~although ~~Consumer~~there ~~Products~~can ~~Division—ASC,~~be ~~Piedmont~~no assurance, ~~Precision~~that ~~and~~propellant ~~Acupac~~technology and ~~the~~product ~~Pharmaceutical~~formulations ~~Division—Norwich~~will ~~and~~be ~~Ivers-Lee~~developed that meet the future standards.

~~Net revenues,~~6. ~~income~~Senior ~~from~~Secured ~~operations,~~Credit ~~identifiable assets and depreciation and amortization by operating division for the nine-and three-month periods ended September 29, 2001, are as follows:~~ Facility

	Nine-Month Period
	Kolmar Division		Consumer Products Division		Pharmaceutical Division		Corporate		Total
	(Dollars in thousands)
Net revenues	$	94,768	$	137,592	$	17,146	$	—	$	249,506
Income from operations		7,062		2,958		3,252		1,416		14,688
Identifiable assets		102,254		122,167		23,532		14,296		262,249
Depreciation and amortization		3,098		6,541		587		—		10,226

On March 21, 2002, the Company received an amendment to their Senior Secured Credit Facility which reset the Minimum EBITDA, the Funded Debt Coverage ratio and Fixed Charge Coverage ratio effective as of December 31, 2001 and for future quarters. Additionally, the amendment extended the term to April 7, 2003 and the interest rate was increased 0.5% to either prime plus 1.25% or LIBOR plus 2.75% effective for fiscal year 2002 and beyond. At June 29, 2002, the Company is in compliance with all covenants. The Company is refinancing its Senior Secured Credit Facility and anticipates finalizing by the end of the third quarter. See Note 8.

	Three-Month Period
	Kolmar Division		Consumer Products Division		Pharmaceutical Division		Corporate		Total
	(Dollars in thousands)
Net revenues	$	27,282	$	46,618	$	11,563	$	—	$	85,463
Income from operations		1,267		520		2,758		1,072		5,617
Identifiable assets		102,254		122,167		23,532		14,296		262,249
Depreciation and amortization		1,104		2,197		300		—		3,601

7. Restructuring and Other Charges

~~Net~~ In ~~revenues~~February 2002, ~~income~~the ~~from~~Company ~~operations,~~formalized ~~identifiable~~its ~~assets~~plan ~~and~~to ~~depreciation~~restructure ~~and~~its ~~amortization by~~ business ~~segment~~processes, aspractices ~~reclassified~~and organization to ~~comply~~streamline ~~with~~functions and remain ~~the~~competitive. ~~reorganized~~The ~~operating~~restructuring ~~divisions,~~include ~~for~~some position eliminations, the ~~nine-and~~elimination ~~three-month~~of ~~periods~~duplicate ~~ended~~or ~~September 30~~overlapping functions, ~~2000~~and in some cases, ~~are~~redeployment asand ~~follows:~~retraining. Management believes that these changes will affect the Company's overall employee population by less than four percent.

	Nine-Month Period
	Kolmar Division		Consumer Products Division		Pharmaceutical Division		Corporate		Total
	(Dollars in thousands)
Net revenues	$	85,116	$	130,383	$	1,023	$	—	$	216,522
Income from operations		3,180		5,974		200		2,563		11,917
Identifiable assets		111,055		118,227		7,056		9,306		245,644
Depreciation and amortization		3,178		5,846		31		—		9,055

Management believes that full implementation will occur during the course of 2002. Employees affected by job elimination will be offered severance benefits to help with the transition, as well as assistance to prepare for their job search. Management is committed to ensuring the Company's ongoing success by creating a stronger, more capable business, which will benefit the vast majority of the Company's employees.

	Three-Month Period
	Kolmar Division		Consumer Products Division		Pharmaceutical Division		Corporate		Total
	(Dollars in thousands)
Net revenues	$	29,844	$	42,949	$	1,023	$	—	$	73,816
Income from operations		1,139		1,877		200		710		3,926
Identifiable assets		111,055		118,227		7,056		9,306		245,644
Depreciation and amortization		1,105		2,109		31		—		3,245

The Company recorded pre-tax restructuring and other charges for consulting, legal fees, recruiting and severance costs in the amount of $1.4 million. The table below reflects the charges incurred as of June 29, 2002.

	Accrued Restructuring and Other (As of February 2002)		Cash Payments
			Cash Payments						Liability at June 29, 2002
			(1^ST QTR)			(2^nd QTR)			Liability at June 29, 2002
Employee separation	$	1,016	$	(12	)	$	(128	)	$	876
Implementation costs		428		(52	)		(376	)		—

Ending Balance	$	1,444	$	(64	)	$	(504	)	$	876

8. Subsequent Event

On August 15, 2002, the Company received an amendment to their Senior Secured Credit Facility which extends the term from April 7, 2003 to July 7, 2003.

~~Net~~9. ~~revenues,~~Business ~~income~~Segment ~~(loss) from operations, identifiable assets and depreciation and amortization by geographic region for the nine-and three-month periods ended September 29, 2001, are as follows:~~ Information

	Nine-Month Period
	United States		Mexico		Canada		Other(1)			Total
	(Dollars in thousands)
Net revenues	$	218,018	$	8,541	$	22,947	$	—		$	249,506
Income (loss) from operations		12,469		70		2,160		(11	)		14,688
Identifiable assets		236,291		5,606		19,647		705			262,249
Depreciation and amortization		9,157		191		862		16			10,226

The Company operates multiple business segments specializing in the manufacturing and packaging of aerosol and liquid products, color cosmetics, and pharmaceutical markets. The Company is a leading provider of outsourced services including manufacturing, packaging and clinical services to the health and beauty aid and healthcare markets. The Company offers its customers a complete range of services, including product conceptualization, formulation, manufacturing, filling, packaging, clinical trials, stability evaluation and microbacterial testing services. Other products manufactured and packaged by the Company include household lubricants and liquid cleaners. The Company has operating facilities in the U.S., Mexico and Canada.

	Three-Month Period
	United States		Mexico			Canada		Other(1)			Total
	(Dollars in thousands)
Net revenues	$	77,414	$	2,856		$	5,193	$	—		$	85,463
Income (loss) from operations		5,365		(188	)		426		14			5,617
Identifiable assets		236,291		5,606			19,647		705			262,249
Depreciation and amortization		3,294		65			250		(8	)		3,601

During fiscal 2001, the Company reorganized its operating divisions into three operating segments whose respective members are as follows: Kolmar Division—the Kolmar Group, Consumer Products Division—ASC, Piedmont, Precision and Acupac and the Pharmaceutical Division—Ivers-Lee and Norwich.

Net revenues, income (loss) from operations, identifiable assets and depreciation and amortization by ~~geographic~~business ~~region~~segment for the ~~nine~~ six- and three-month periods ended ~~September~~ June 3029, ~~2000~~2002, are as follows:

	Nine-Month Period
	Six-Month Period
	United States			Mexico		Canada		Other(1)			Total
	Kolmar Division			Consumer Products Division		Pharmaceutical Division		Corporate			Total
	(Dollars in thousands)
Net revenues	$	~~196~~45,~~524~~404		$	7100,~~663~~497	$	1221,~~335~~574	$	—		$	~~216~~167,~~522~~475
Income (loss) from operations		~~11,067~~(511	)		~~389~~236		~~513~~855		~~(52~~6,498	)		117,~~917~~078
Identifiable assets		~~218~~97,~~402~~961			6127,~~739~~613		1923,~~709~~139		~~794~~13,582			~~245~~262,~~644~~295
Depreciation and amortization		81,~~363~~444			~~183~~2,021		~~466~~1,063		43136			94,~~055~~664

	Three-Month Period
	United States		Mexico			Canada			Other(1)			Total
	Kolmar Division		Consumer Products Division			Pharmaceutical Division			Corporate			Total
	(Dollars in thousands)
Net revenues	$	6525,~~532~~305	$	353,~~253~~125		$	59,~~031~~062		$	—		$	7387,~~816~~492
Income (loss) from operations		31,~~090~~099		~~556~~(61	)		~~304~~(1,903	)		~~(24~~3,160	)		32,~~926~~295
Identifiable assets		~~218~~97,~~402~~961		6127,~~739~~613			1923,~~709~~139			~~794~~13,582			~~245~~262,~~644~~295
Depreciation and amortization		~~2,942~~713		58966			~~231~~596			1475			32,~~245~~350

~~8. Guarantor~~ Net revenues, ~~Information~~ income from operations, identifiable assets and depreciation and amortization by business segment for the six- and three-month periods ended June 30, 2001, are as follows:

The payment obligations of the Company under the Notes are guaranteed by certain of the Company's wholly owned domestic subsidiaries ("Guarantors"). Such guarantees are full, unconditional and joint and several. Separate financial statements of the Guarantors are not presented because the Company's management has determined that they would not be material to investors. The following financial information presents the condensed combined balance sheets as of September 29, 2001 and the condensed combined statements of operations and cash flows for the nine month period ended September 29, 2001, of the Guarantors, representing Kolmar, ASC, Piedmont, Acupac and Precision and the non-guarantors which consist of Kolmar Canada, Kolmar de Mexico S.A. de C.V. and Kolmar (Aust.) Pty. Limited, Kolmar Laboratories, Inc. (London), Ivers-Lee and Norwich. The financial information is intended to provide information for the Guarantor and non-guarantor operations of the Company, based on amounts derived from the financial statements of the Company for the nine month period ended September 29, 2001.

	Six-Month Period
	Kolmar Division		Consumer Products Division		Pharmaceutical Division		Corporate		Total
	(Dollars in thousands)
Net revenues	$	67,486	$	90,974	$	5,583	$	—	$	164,043
Income from operations		4,601		2,116		494		1,860		9,071
Identifiable assets		109,521		119,460		20,441		9,189		258,611
Depreciation and amortization		1,994		4,344		287		—		6,625

Condensed Combined Balance Sheet At September 29, 2001 (Unaudited)

	Three-Month Period
	Kolmar Division		Consumer Products Division		Pharmaceutical Division		Corporate		Total
	(Dollars in thousands)
Net revenues	$	31,904	$	48,169	$	2,948	$	—	$	83,021
Income from operations		2,091		556		249		1,652		4,548
Identifiable assets		109,521		119,460		20,441		9,189		258,611
Depreciation and amortization		909		2,181		200		—		3,290

	Combined Guarantors		Nonguarantors			OSG			Eliminations			Consolidated Total
	(Dollars in thousands)
ASSETS:
Current Assets:
Cash and short term investments	$	3,816	$	3,397		$	133		$	—		$	7,346
Accounts receivable, net		36,871		6,766			—			—			43,637
Other receivables		1,306		226			422			—			1,954
Inventories		27,333		5,312			—			—			32,645
Prepaid expenses and other current assets		681		544			5,397			—			6,622
Total current assets		70,007		16,245			5,952			—			92,204
Property and equipment, net		37,208		15,539			1,165			—			53,912
Goodwill, net		91,560		9,735			—			—			101,295
Intercompany receivable (payable)		50,256		(584	)		(49,672	)		—			—
Investment in subsidiaries		—		—			108,943			(108,943	)		—
Other long-term assets		7,594		64			7,180			—			14,838
Total assets	$	256,625	$	40,999		$	73,568		$	(108,943	)	$	262,249
LIABILITIES:
Current Liabilities:
Accounts payable	$	31,016	$	4,106		$	548		$	—		$	35,670
Other current liabilities		11,827		5,441			1,775			—			19,043
Total current liabilities		42,843		9,547			2,323			—			54,713
Long-term debt, less current portion		54,668		10,000			105,000			—			169,668
Other liabilities		10,891		244			3,738			—			14,873
Intercompany loan		51,670		11,145			(62,815	)		—			—
Redeemable preferred stock		—		—			5,047			—			5,047
Stockholders' equity		96,553		10,063			20,275			(108,943	)		17,948
Total liabilities, redeemable preferred stock and stockholders' equity	$	256,625	$	40,999		$	73,568		$	(108,943	)	$	262,249

Net revenues, income (loss) from operations, identifiable assets and depreciation and amortization by geographic region for the six-and three-month periods ended June 29, 2002, are as follows:

	Six-Month Period
	United States		Mexico		Canada		Other(1)			Total
	(Dollars in thousands)
Net revenues	$	148,558	$	6,680	$	12,237	$	—		$	167,475
Income (loss) from operations		5,628		445		1,051		(46	)		7,078
Identifiable assets		235,829		6,196		20,289		(19	)		262,295
Depreciation and amortization		4,227		113		321		3			4,664

	Three-Month Period
	United States		Mexico		Canada		Other(1)			Total
	(Dollars in thousands)

Net revenues	$	77,390	$	3,691	$	6,411	$	—		$	87,492
Income (loss) from operations		1,579		58		678		(20	)		2,295
Identifiable assets		235,829		6,196		20,289		(19	)		262,295
Depreciation and amortization		2,135		54		166		(5	)		2,350

Net revenues, income ~~Condensed~~(loss) ~~Combined~~from ~~Statement~~operations, ofidentifiable ~~Operations~~assets and depreciation and amortization by geographic region for the ~~Nine~~six-and ~~Month~~three-month ~~Period~~periods ended ~~September~~ June 2930, 2001 ~~(Unaudited)~~ , are as follows:

	Combined Guarantors		Nonguarantors		OSG			Eliminations			Consolidated Total
	Six-Month Period
	United States		Mexico		Canada			Other(1)			Total
	(Dollars in thousands)
Net revenues	$	~~208~~140,~~727~~604	$	405,~~871~~685	$	—17,754		$	~~(92~~—	)	$	~~249~~164,~~506~~043
Cost of goods sold		180,391		30,254		—			(92	)		210,553
Income (loss) from operations		7,104		258		1,734			(25	)		9,071
Gross profit		28,336		10,617		—			—			38,953
Identifiable assets		231,597		5,768		20,473			773			258,611
Selling, general and administrative expense		19,940		5,741		(1,416	)		—			24,265
Depreciation and amortization		5,863		126		612			24			6,625
Income from operations		8,396		4,876		1,416			—			14,688
Interest expense, net		4,380		855		7,958			—			13,193
Income (loss) before provision for income taxes		4,016		4,021		(6,542	)		—			1,495
Provision for income taxes		79		1,008		108			—			1,195
Net income (loss)	$	3,937	$	3,013	$	(6,650	)	$	—		$	300

Condensed Combined Statement of Cash Flows For The Nine Month Period Ended September 29, 2001 (Unaudited)

	Three-Month Period
	United States		Mexico			Canada		Other(1)			Total
	(Dollars in thousands)

Net revenues	$	72,370	$	2,400		$	8,251	$	—		$	83,021
Income (loss) from operations		3,814		(5	)		757		(18	)		4,548
Identifiable assets		231,597		5,768			20,473		773			258,611
Depreciation and amortization		2,849		66			364		11			3,290

(1): Other—Includes financial data for the Kolmar (Aust.) Pty. Limited and Kolmar Laboratories, Inc. (London)

	Combined Guarantors			Nonguarantors			OSG			Eliminations			Consolidated Total
	(Dollars in thousands)
Cash flows from operating activities
Net income, (loss)	$	3,937		$	3,013		$	(6,650	)	$	—		$	300
Total adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities		15,217			5,445			(1,715	)		—			18,947
Net cash provided by (used in) operating activities		19,154			8,458			(8,365	)		—			19,247
Cash flows from investing activities
Capital expenditures		(4,268	)		(839	)		(946	)		—			(6,053	)
Acquisition of Ivers-Lee		—			—			(2,290	)		—			(2,290	)
Acquisition of Norwich		—			—			(800	)		(800	)
Acquisition of Dermal		(3,517	)		—			—			—			(3,517	)
Short-term investments		(13	)		—			—			—			(13	)
Sales of property, plant or equipment, net		—			(35	)		—			—			(35	)
Net cash used in investing activities		(7,798	)		(874	)		(4,036	)		—			(12,708	)
Cash flows from financing activities
Net paydowns on revolving loan		(1,779	)		—			—			—			(1,779	)
Increase in deferred financing costs		—			—			(350	)		—			(350	)
Repayment (borrowing) of debt due to affiliates		(6,287	)		(4,848	)		11,135			—			—
Proceeds, repurchase/cancellation of stock		—			—			(993	)		—			(993	)
Payment of dividends		(2,700	)		—			2,672			—			(28	)
Net cash (used in) provided by financing activities		(10,766	)		(4,848	)		12,464			—			(3,150	)
Effect of exchange rate changes on cash		(114	)		(62	)		65			—			(111	)
Net increase in cash		476			2,674			128			—			3,278
Cash, beginning of period		3,073			723			5			—			3,801
Cash, end of period	$	3,549		$	3,397		$	133		$	—		$	7,079

10. Guarantor Information

The payment obligations of the Company under the Notes are guaranteed by certain of the Company's wholly-owned domestic subsidiaries ("Guarantors"). Such guarantees are full, unconditional and joint and several. Separate financial statements of the Guarantors are not presented because the Company's management has determined that they would not be material to investors. The following financial information presents the condensed consolidating balance sheets as of June 29, 2002 and the consolidating combined statements of operations and cash flows for the six-month period ended June 29, 2002, of the Guarantors, representing Kolmar, ASC, Piedmont, Acupac and Precision and the non-guarantors which consist of Kolmar Canada, Kolmar de Mexico S.A. de C.V. and Kolmar (Aust.) Pty. Limited, Kolmar Laboratories, Inc. (London), Ivers-Lee and Norwich. The financial information is intended to provide information for the Guarantor and non-guarantor operations of the Company, based on amounts derived from the financial statements of the Company for the six-month period ended June 29, 2002.

Condensed Consolidating Balance Sheet At June 29, 2002
(Unaudited)

	Combined Guarantors		Nonguarantors			OSG			Eliminations			Consolidated Total
	(Dollars in thousands)
ASSETS:
Current Assets:
Cash and short term investments	$	994	$	1,111		$	4		$	—		$	2,109
Accounts receivable, net		37,861		7,046			(92	)		—			44,815
Other receivables		1,216		162			28			—			1,406
Inventories		29,071		4,659			—			—			33,730
Prepaid expenses and other current assets		1,915		704			4,296			—			6,915

Total current assets		71,057		13,682			4,236			—			88,975
Property and equipment, net		39,252		17,211			1,684			—			58,147
Goodwill, net		89,995		10,132			—			—			100,127
Intercompany receivable (payable)		47,059		(2,407	)		(44,652	)		—			—
Investment in subsidiaries		—		—			108,749			(108,749	)		—
Other long-term assets		7,563		(178	)		7,661			—			15,046

Total assets	$	254,926	$	38,440		$	77,678		$	(108,749	)	$	262,295

LIABILITIES:
Current Liabilities:
Accounts payable	$	34,599	$	4,842		$	357		$	—		$	39,798
Other current liabilities		12,369		4,689			4,917			—			21,975

Total current liabilities		46,968		9,531			5,274			—			61,773
Long-term debt, less current portion		55,779		10,000			105,000			—			170,779
Other liabilities		11,108		800			367			—			12,275
Intercompany loan		52,929		7,402			(60,331	)		—			—
Redeemable preferred stock		—		—			5,204			—			5,204
Stockholders' equity		88,142		10,707			22,164			(108,749	)		12,264

Total liabilities, redeemable preferred stock and stockholders' equity	$	254,926	$	38,440		$	77,678		$	(108,749	)	$	262,295

Condensed Consolidating Statement of Operations for the Six-Month Period ended June 29, 2002 (Unaudited)

	Combined Guarantors			Nonguarantors		OSG			Eliminations			Consolidated Total
	(Dollars in thousands)
Net Revenues	$	132,394		$	35,345	$	—		$	(264	)	$	167,475
Cost of goods sold		119,597			25,939		118			(264	)		145,390

Gross profit		12,797			9,406		(118	)		—			22,085
Selling, general and administrative expense		12,632			7,594		(6,663	)		—			13,563
Restructuring charge and other charges		1,397			—		47			—			1,444

Income (loss) from operations		(1,232	)		1,812		6,498			—			7,078
Interest expense, net		2,982			731		4,748			—			8,461

(Loss) income before provision for income taxes		(4,214	)		1,081		1,750			—			(1,383	)
Provision (benefit) for income taxes		17			452		—			—			469

Net (loss) income	$	(4,231	)	$	629	$	1,750		$	—		$	(1,852	)

Condensed Consolidating Statement of Cash Flows For The Six-Month Period Ended June 29, 2002 (Unaudited)

	Combined Guarantors			Nonguarantors			OSG			Eliminations		Consolidated Total
	(Dollars in thousands)
Cash flows from operating activities
Net income, (loss)	$	(4,231	)	$	629		$	1,750		$	—	$	(1,852	)
Total adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities		(2,389	)		32			(974	)		—		(3,331	)

Net cash provided by (used in) operating activities		(6,620	)		661			776			—		(5,183	)

Cash flows from investing activities
Capital expenditures		(3,889	)		(821	)		(431	)		—		(5,141	)
Short-term investments		(4	)		—			—			—		(4	)
Sales of property, plant or equipment, net		—			582			—			—		582

Net cash used in investing activities		(3,893	)		(239	)		(431	)		—		(4,563	)

Cash flows from financing activities
Net borrowings on revolving loan		7,910			—			—			—		7,910
Dividends on preferred stock		—			—			(19	)		—		(19	)
Repayment (borrowing) of debt due to affiliates		3,391			(2,342	)		(1,049	)		—		—
Repurchase/cancellation of stock		—			—			(179	)		—		(179	)
Payment of dividends		(1,350	)		—			1,350			—		—

Net cash provided by (used in) financing activities		9,951			(2,342	)		103			—		7,712

Effect of exchange rate changes on cash		(189	)		924			(474	)		—		261

Net increase (decrease) in cash		(751	)		(996	)		(26	)		—		(1,773	)
Cash, beginning of period		1,490			2,107			30			—		3,627

Cash, end of period	$	739		$	1,111		$	4		$	—	$	1,854

OUTSOURCING SERVICES GROUP, INC.

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS.

General

Outsourcing Services Group, Inc. (the "Company" or "OSG"), through its operating subsidiaries, ASC, Piedmont, Kolmar, Acupac, Precision, Ivers-Lee and Norwich is a ~~full-service~~leading ~~contract~~provider ~~manufacturer and packager~~ of ~~consumer~~outsourced ~~products~~services ~~for~~including ~~marketers~~manufacturing, inpackaging ~~the health~~ and ~~beauty~~clinical ~~aid,~~services ~~personal~~to ~~care, pharmaceutical and over-~~the~~-counter~~ ~~drug~~North ~~markets,~~American ~~household~~health and ~~automotive~~beauty ~~consumer~~aid ~~product~~and healthcare markets. ~~The~~OSG ~~Company~~offers ~~manufactures~~its ~~and~~customers ~~packages~~ a ~~broad~~complete range of ~~products~~services, including ~~color~~product ~~cosmetics (such~~conceptualization, asformulation, ~~lipstick~~manufacturing, ~~face~~filling, ~~powders~~packaging, clinical trials, stability evaluation and microbacterial ~~eye~~testing ~~shadow),~~services. ~~aerosols~~It (also provides ancillary services such as ~~hair~~materials ~~spray~~procurement, ~~shaving~~warehousing ~~cream~~ and ~~gel~~distribution ~~and~~of ~~lubricants),~~finished ~~creams,~~goods. ~~lotions~~The Company's revenues are derived from the manufacturing and ~~liquids~~packaging ~~(such~~of ashealth ~~skin~~and ~~care~~beauty aid products, ~~shampoo~~including lipstick, ~~pump~~face ~~hair~~powder, ~~spray and~~eye ~~household~~shadow, ~~cleaning products)~~mascara, ~~pharmaceutical~~nail ~~(such~~enamel, asskin ~~prescription~~care ~~medications)~~cream and ~~over-the-counter~~lotion, ~~drugs~~hair ~~(such~~spray asand ~~allergy/cold~~gel, ~~remedies~~shampoo and ~~pain~~shaving cream ~~relief~~and ~~products)~~gel. ~~Management~~ ~~believes~~Other ~~OSG~~products ismanufactured and packaged by the ~~largest~~Company ~~independent~~include ~~contract~~household ~~manufacturer~~lubricants and ~~packager~~liquid ofcleaners ~~color~~and ~~cosmetics~~outsourced manufacturing, ~~high-end~~packaging ~~salon~~and ~~aerosol~~clinical ~~hair~~stability ~~care~~and microbacterial ~~products~~testing ~~and~~services ~~shaving~~for ~~creams~~the pharmaceutical and ~~gels~~over-the-counter indrug ~~North America~~markets.

Market Risk

A small number of customers account for a significant portion of the Company's sales. For the six months ended June 29, 2002, Procter and Gamble, WD-40, Dial Corporation, Mary Kay, and Tigi Linea Products accounted for 9.8%, 8.8%, 7.7%, 7.2% and 6.0%, respectively, of the Company's revenues during this period. Although the Company believes that its overall relations with customers are good, there can be no assurance that such customers will continue to purchase the Company's services, continue with a particular product line which requires services which the Company offers or contract for the Company's services in connection with any new or successor product lines. The loss of any of the Company's major customers or a significant decrease in demand for certain products sold by such major customers, could have a material adverse effect on the Company's business, results of operations, financial condition or cash flows.

Critical Accounting Policies

Certain of the Company's accounting policies are particularly important to the portrayal of financial position and results of operations and require judgment by management and as a result they are subject to a degree of uncertainty. In applying those policies, management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on historical experiences and information available from other outside sources.

The Company believes the following critical accounting policies affect the preparation of financial statements in conformity with accounting principles generally accepted in the United States of America and require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Inventories—Inventories are valued at the lower of cost or market using the first-in, first-out method. The Company provides estimates for allowances for slow-moving and obsolete inventory based on current assessments about future demands, market conditions and related management initiatives.

Deferred Financing Costs—The Company's deferred financing costs are capitalized with respect to obtaining long-term debt financing including legal expenses and bank fees. These costs are amortized over the repayment term of the related debt on a straight-line basis.

Goodwill—On June 29, 2001, SFAS No. 142, Goodwill and Other Intangible Assets, was approved by the FASB. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of other intangible assets related to non-compete agreements were $37,000 and $76,000 for the three-and six-months ended June 29, 2002. Amortization of goodwill, including goodwill recorded in past business combinations, ceased upon adoption of this statement on January 1, 2002. Amortization expense related to goodwill was $1,523,000 and $3,142,000 for the three-and six-month periods ended June 30, 2001. In addition, the Company has completed the first step of the transitional goodwill impairment test, the results indicate that the Consumer Products Division will need further evaluation. Goodwill at the Consumer Products Division is $51,216,000. There is no goodwill impairment for the other reporting units.

Long-Lived Assets—The Company accounts for the impairment and disposition of long-lived assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 121 and No. 144, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. Long-lived assets are reviewed for events or changes in circumstances which would indicate that their carrying value may not be recoverable. The Company periodically reviews the carrying value of long-lived assets on an undiscounted cash flow basis to determine whether or not an impairment to such value has occurred.

Revenue Recognition—The Company manufacturers and packages products based on written agreements with customers specifying price, units and shipping terms. Revenue is generally recognized as products are shipped to customers. When customers, under the terms of specific orders, request that the Company manufacture and invoice goods on a bill and hold basis, the Company recognizes revenue at the time the manufacturing process is complete.

Translation of Foreign Currencies—Foreign subsidiary financial statements are translated into U.S. dollars in accordance with SFAS No. 52, Foreign Currency Translations. The balance sheets of foreign affiliates are translated into U.S. dollars at the exchange rates in effect on the last day of the reporting period. The statements of operations of foreign affiliates are translated into U.S. dollars at the average exchange rate effective for the entire period. The differences from historical exchange rates are reflected in stockholders' equity as an adjustment for foreign currency translations.

Results Of Operations

~~For~~ The ~~the~~following ~~nine~~table ~~and~~sets ~~three~~forth ~~month~~the ~~periods~~Company's ~~ended~~statements ~~September 29~~of operations, ~~2001~~certain ~~compared~~data tofor the ~~nine~~periods indicated and ~~three~~the ~~month~~percentage ~~periods~~relationship ~~ended~~of ~~September 30,~~each ~~2000.~~item to net revenues (dollars in thousands):

Net Revenue. Net revenues of $249.5 and $85.5 million for the nine and three month periods ended September 29, 2001 increased by approximately $33.0 million (15.2%) and $11.6 million (15.8%), respectively, from the prior 2000 periods. The increase was primarily attributable to the acquisitions of Precision, Ivers-Lee and Norwich which contributed $5.2 million, $6.7 million and $9.4 million, respectively, and the Kolmar Division which contributed $9.7 million for the nine months ended September 29, 2001. The Consumer Products Division revenues, net of acquisitions increased $2.0 million and the Pharmaceutical Division revenues net of acquisitions remained relatively flat compared to prior year.

	For the Three Months Ended June 29, 2002					For the Three Months Ended June 30, 2001
Net revenues	$	87,492		100.0	%	$	83,021		100.0	%
Cost of goods sold		76,815		87.8	%		70,666		85.1	%
Selling, general and administrative expenses		8,006		9.2	%		7,807		9.4	%
Restructuring and other charges		376		0.4	%		—		—
Income from operations		2,295		2.6	%		4,548		5.5	%
Interest expense, net		4,278		4.9	%		4,486		5.4	%
Net (loss) income		(2,216	)	(2.5	)%		239		0.3	%
Net cash (used in) provided by operating activities		(5,650	)	—			6,210		—
Net cash used in investing activities		(2,323	)	—			(2,524	)	—
Net cash provided by (used in) financing activities		8,016		—			(4,018	)	—
Capital expenditures		2,321		2.7	%		1,718		2.1	%
Adjusted EBITDA		5,292		6.0	%		7,574		9.1	%

Cost of Goods Sold. Cost of goods sold of $210.6 million and $71.0 million for the nine and three month periods ended September 29, 2001, increased by approximately $26.5 million (14.4%) and $8.7 million (14.1%), respectively, from the prior 2000 periods. The increase in cost of goods sold was primarily attributable to the acquisitions of Precision, Ivers-Lee and Norwich which contributed $4.0 million, $5.2 million and $5.0 million, respectively, and the Kolmar Division which contributed $7.5 million for the nine months ended September 29, 2001. Within the Consumer Products Division, net of acquisitions, the continued mix change toward a higher proportion of personal care product sales resulted in a net $2.0 million increase in revenues and an associated $4.8 million of increased cost of goods sold. Total cost of goods sold, as a percentage of sales, decreased to 84.4% from 85.0% for the nine month period ended September 29, 2001 as compared to the nine month period ended September 30, 2000. For the three month period ended September 29, 2001, total cost of goods sold, as a percentage of sales, decreased slightly to 83.1% for the three month period ended September 29, 2001 compared to 84.3% for the three month period ended September 30, 2000. The decrease for the three and nine month period is primarily attributable to the impact of Norwich which carries a lower cost to produce in relation to existing OSG operating segments. 19

~~SG&A~~For ~~Expenses. Selling, general and administrative expenses ("SG&A") of $24.3 million and $8.8 million for~~ the ~~nine and~~ three ~~month~~months ~~periods~~ ended ~~September~~June 29, ~~2001,~~2002 ~~increased~~compared byto ~~approximately~~the ~~$3.7 million~~three ~~(18.2%)~~months ~~and~~ended ~~$1.2~~June ~~million (15.8%)~~30, ~~respectively, from the prior 2000 periods~~2001.

16 Net Revenue. Net revenues of $87.5 million for the three-months ended June 29, 2002 increased approximately $4.5 million, or 5.4% from the prior 2001 period. Excluding the acquisition of Norwich which contributed sales of $6.3 million, sales decreased $1.8 million from the prior 2001 period. The decrease in sales of $1.8 million was primarily attributable to the Kolmar Division and the Pharmaceutical Division (Ivers-Lee) which sustained volume loss of $6.6 million and $0.2 million, respectively, offset by the Consumer Products Division's increased volume of $5.0 million. Although Kolmar is still experiencing volume declines, this current quarter was much stronger than the previous first quarter of 2002 and current sales trends remain positive. The Consumer Products Division continues to exceed prior year sales due to increases from two of its major customers, a new product line and one customer exceeding expectations.

~~The~~ Cost ~~increase~~of ~~was~~Goods ~~attributable~~Sold. Cost of goods sold increased by approximately $6.1 million, or 8.7% to $76.8 million for the ~~acquisition~~three-months ofended ~~Precision~~June 29, ~~Ivers~~2002 from $70.7 million for the three-~~Lee~~months ~~and~~ended June 30, 2001. Excluding the acquisition of Norwich which contributed costs of $0.5.1 million, cost of goods sold increased $1.10 million. ~~and~~Cost of goods sold for the Kolmar Division decreased $05.78 million, ~~respectively~~as a result of the decreased sales volume from the prior 2001 period, in which ~~together~~ ~~includes~~direct labor and manufacturing overhead decreased $02.64 million, collectively, all profit was lost in net revenue decline. Cost of ~~goodwill~~goods ~~amortization,~~sold for the ~~nine~~Consumer ~~months~~Products Division ~~ended~~increased ~~September~~$6.8 ~~29,~~million ~~2001.~~partially ~~For~~as ~~the~~a ~~nine~~result ~~months~~of ~~ended~~positive ~~September 29,~~sales volume when compared to the prior 2001 period, ~~SG&A~~as ~~expenses~~well ~~include~~as anincreases in direct labor and manufacturing overhead, mainly at ~~increase~~the ofPrecision ~~$0.5 million~~plant towhich ~~support~~is experiencing labor inefficiencies in the start-up of new ~~corporate~~product ~~research~~lines and ~~development~~excess ~~center~~lab expenses at the Piedmont plant. The Pharmaceutical Division excluding Norwich remained unchanged. As a percentage of net revenues, ~~SG&A~~total cost of goods sold increased to 987.78% for the ~~nine~~three-months ~~month period~~ ended ~~September~~ June 29, ~~2001~~2002 asfrom ~~compared to 9~~85.51% for the ~~nine~~three-months ~~month period~~ ended ~~September~~ June 30, ~~2000~~2001. AsThe aincrease ~~percentage~~is ofdue ~~net~~to ~~revenues,~~the ~~SG&A~~product ~~remained~~mix ~~stable~~change atin ~~10.3% for~~ the ~~three~~Consumer ~~month~~Products ~~periods ended~~Division ~~September 29,~~which ~~2001~~carry ~~and~~higher ~~September 30,~~costs ~~2000~~to produce.

~~Interest~~ SG&A ~~Expense~~Expenses. ~~Interest~~ Selling, ~~expense~~general ofand administrative expenses ("SG&A") increased approximately $130.2 million ~~and~~or 2.5% to $48.30 million for the ~~nine and~~ three-months ~~month periods~~ ended ~~September~~June 29, ~~2001,~~2002 ~~increased~~from ~~by approximately~~ $07.8 million ~~(6.2%)~~for ~~and~~the ~~unchanged,~~three-months ~~respectively~~ended June 30, ~~from~~2001. Excluding the ~~prior~~acquisition ~~2000~~of ~~periods.~~Norwich ~~Total~~which ~~indebtedness~~contributed costs ~~increased~~of $70.9 million ~~from $161.8 million at September 30~~, ~~2000~~SG&A todecreased $~~169~~0.7 million ~~at September 29, 2001~~. The ~~increase~~decrease in SG&A was due to ~~the~~a ~~Norwich~~decrease ~~acquisition~~ in ~~June 2001~~amortization of ~~$10.0 million, the~~goodwill ~~Dermal acquisition in September 2001~~ of $31.5 million ~~and~~due ~~the final payment related~~ to the ~~Ivers-Lee~~implementation ~~acquisition in March 2001~~ of $2SFAS No.3 ~~million~~141 ~~and is partially~~ offset by ~~positive~~increased ~~cash~~insurance ~~flow~~and ~~from~~administrative ~~operations~~costs of $0.8 million.

Restructuring and Other Charges. In the first quarter 2002, the Company formalized its plan to restructure its business processes, practices and organization to streamline functions and remain competitive. For the three-months ended June 29, 2002, the Company incurred charges of $0.4 million related to recruiting costs, training, legal and consulting fees.

Adjusted EBITDA. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) is included herein as it is a basis upon which the Company assesses its ability to service indebtedness. Adjusted EBITDA is not intended to represent cash flows from operations as defined by U.S. Generally Accepted Accounting Principles and should not be considered as an alternative to net income as an indicator of the Company's operating performance or to cash flows as a measure of liquidity. For the three-months ended June 29, 2002, adjusted EBITDA represents the sum of income from operations and depreciation and amortization and excludes (i) the impact of the restructuring charge of $0.4 million and (ii) the impact of a foreign currency translation loss of $0.3 million associated with its Mexican operations. Adjusted EBITDA decreased approximately $2.3 million or 30.1% to $5.3 million for the three-months ended June 29, 2002 from $7.6 million for the three-months ended June 30, 2001. Kolmar is down principally due to volume declines, the Consumer Products Division down due to inefficiencies and manufacturing overhead and increased insurance and administrative costs. Additionally, Norwich contributed $0.8 million excluding management fees.

Interest Expense. Interest expense decreased $0.2 million, or 4.6% to $4.3 million for the three-months ended June 29, 2002 from $4.5 million for the three-months ended June 30, 2001, due to interest rate reductions from prior year offset by an interest accrual of $0.2 million on the $10.0 million note payable attributable to the Norwich acquisition.

The following table sets forth the Company's statements of operations, certain data for the periods indicated and the percentage relationship of each item to net revenues (dollars in thousands):

	For the Six Months Ended June 29, 2002					For the Six Months Ended June 30, 2001
Net revenues	$	167,475		100.0	%	$	164,043		100.0	%
Cost of goods sold		145,390		86.8	%		139,542		85.1	%
Selling, general and administrative expenses		13,563		8.1	%		15,430		9.4	%
Restructuring and other charges		1,444		0.9	%		—		—
Income from operations		7,078		4.2	%		9,071		5.5	%
Interest expense, net		8,461		5.1	%		8,847		5.4	%
Net (loss) income		(1,852	)	(1.1	)%		45		0.0	%
Net cash (used in) provided by operating activities		(5,183	)	—			11,482		—
Net cash used in investing activities		(4,563	)	—			(6,444	)	—
Net cash provided by (used in) financing activities		7,712		—			(4,608	)	—
Capital expenditures		5,141		3.1	%		3,313		2.0	%
Adjusted EBITDA		11,902		7.1	%		15,442		9.4	%

For the six months ended June 29, 2002 compared to the six months ended June 30, 2001.

Net Revenues. Net revenues of $167.5 million for the six-months ended June 29, 2002 increased approximately $3.4 million, or 2.1% from the prior 2001 period. Excluding the acquisition of Norwich which contributed sales of $16.3 million, sales decreased $12.8 million from the prior 2001 period. The decrease in sales of $12.8 million was primarily attributable to the Kolmar Division and the Pharmaceutical Division (Ivers-Lee) which sustained volume loss of $22.1 million and $0.2 million, respectively, offset by the Consumer Products Division's increased volume of $9.5 million. Kolmar's year-to-date volume decline appears larger than normal due to excess volume in 2001 as well as actual volume decline in the first half of 2002 as a result of reduced demand from key customers serving the prestige retail cosmetic markets. However, during the second quarter, Kolmar has experienced a return to more normal volume. The Consumer Products Division continues to exceed prior year sales due to increases from its major customers, a new product line and one customer that has exceeded expectations.

Cost of Goods Sold. Cost of goods sold increased by approximately $5.8 million, or 4.2% to $145.4 million for the six-months ended June 29, 2002 from $139.5 million for the six-months ended June 30, 2001. Excluding the acquisition of Norwich which contributed costs of $10.3 million, cost of goods sold decreased $4.5 million. Cost of goods sold for the Kolmar Division decreased $17.7 million as a result of the decreased sales volume from the prior 2001 period, in which total material, labor and manufacturing overhead decreased $11.9 million, $3.2 million and $2.6 million, respectively. Reductions in labor and manufacturing overhead at Kolmar helped offset volume declines. Cost of goods sold for the Consumer Products Division increased $13.0 million partially as a result of positive sales volume when compared to the prior 2001 period, as well as increases in direct labor, manufacturing support and lab expenses increased $5.3 million, collectively, due mainly at the Precision and Piedmont plants. The Pharmaceutical Division excluding Norwich increased slightly by $0.1 million. As a percentage of net revenues, total cost of goods sold increased to 86.8% for the six-months ended June 29, 2002 from 85.1% for the six-months ended June 30, 2001. The increase is due to product mix change in the Consumer Products Division which carrying higher costs to produce.

SG&A Expenses. Selling, general and administrative expenses ("SG&A") decreased approximately $1.9 million or 12.1% to $13.6 million for the six-months ended June 29, 2002 from $15.4 million for the six-months ended June 30, 2001. Excluding the acquisition of Norwich which contributed costs of $1.7 million, SG&A decreased $3.6 million. Exclusive of Norwich, the decrease in SG&A was due to a decrease in amortization of goodwill of $3.1 million due to the implementation of SFAS No. 141, the net gain on sale of Australia of $1.4 million, offset by increased insurance and administrative costs.

Restructuring and Other Charges. In the first quarter 2002, the Company formalized its plan to restructure its business processes, practices and organization to streamline functions and remain competitive. The Company recorded a restructuring charge of $1.0 million related to severance costs. For the six-months ended June 29, 2002, the Company incurred other charges of $0.4 million related to recruiting costs, training, legal and consulting fees which resulted in restructuring expenses of $1.4 for the six-months ended June 29, 2002.

Adjusted EBITDA. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) included herein as it is a basis upon which the Company assesses its ability to service indebtedness. Adjusted EBITDA is not intended to represent cash flows from operations as defined by U.S. Generally Accepted Accounting Principles and should not be considered as an alternative to net income as an indicator of the Company's operating performance or to cash flows as a measure of liquidity. For the six-months ended June 29, 2002, adjusted EBITDA represents the sum of income from operations and depreciation and amortization and excludes (i) the impact of the restructuring charge of $1.4 million and (ii) the impact of a foreign currency translation loss of $0.2 million associated with its Mexican operations and (iii) the gain on the sale of Australia of $1.4 million. Adjusted EBITDA decreased approximately $3.5 million or 22.9% to $11.9 million for the six-months ended June 29, 2002 from $15.4 million for the six-months ended June 30, 2001. Kolmar is down principally due to volume declines, Consumer is down due to inefficiencies and manufacturing overhead and increased insurance and administrative costs.

Interest Expense. Interest expense decreased $0.4 million, or 4.4% to $8.4 million for the six-months ended June 29, 2002 from $8.8 million for the six-months ended June 30, 2001, due to interest rate reductions from prior year offset by interest accrual of $0.8 million on the $10.0 million note payable attributable to the Norwich acquisition.

Liquidity and Capital Resources

As of ~~September~~June 29, ~~2001~~2002, OSG had cash and ~~short-term~~cash ~~investments~~equivalents of $72.31 million, working capital of $3727.52 million, long-term debt of $~~169~~170.78 million and $1413.54 million available under the senior secured credit facility. ~~The Company's primary source of liquidity during the nine month period ended September 29, 2001, was cash flows generated through its operations.~~ Cash ~~provided~~used byin operating activities was $195.2 million ~~and $4.2 million~~ for the ~~nine~~six-months ~~month periods~~ ended ~~September~~ June 29, ~~2001~~2002 and ~~September 30, 2000, respectively. Net~~ cash ~~used~~provided inby ~~investing~~operating activities was $1211.75 million ~~and $51.7 million~~ for the ~~nine~~six-months ~~month periods~~ ended ~~September 29,~~ ~~2001 and September~~June 30, ~~2000, respectively~~2001. Net cash used in investing activities ~~for the nine months period ended September 29, 2001, includes the final payment for~~was ~~the Ivers-Lee acquisition of~~ $24.~~3 million, increased capital expenditures of $~~6.1 million and ~~the acquisition of Dermal in September 2001,~~ $36.54 million. ~~Net cash used in investing activities~~ for the ~~nine~~ six-months ~~period~~ ended ~~September~~June 3029, ~~2000~~2002 ~~included the acquisition of Precision in February 2000 $42.1 million~~ and ~~Ivers-Lee~~ ~~in August~~June ~~2000~~30, ~~$5.5 million. Net cash used in financing activities was $3.2 million for the nine months ended September 29~~2001, ~~2001~~respectively. Net cash provided by financing activities was $497.07 million for the ~~nine~~ six-months ended ~~September~~June 3029, ~~2000.~~2002 ~~Net~~and cash used in financing activities ~~for~~was ~~the nine months ended September 29, 2001 includes paydowns of~~ $14.86 million ~~on the Company's outstanding revolver and the repurchase of stock. Net cash provided by financing activities~~ for the ~~nine~~ six-months ended ~~September~~June 30, ~~2000 included borrowing on the revolving loan to fund the acquisitions of Precision and Ivers-Lee~~2001.

The Company anticipates that its primary uses of working capital in future periods will be to service its indebtedness and provide funds for operations and future acquisitions. Should the Company seek to acquire additional businesses, it will have to incur additional indebtedness and possibly raise additional equity. The Company's ability to grow through acquisitions is dependent upon the availability of such financing as well as the availability of acquisition candidates and the terms on which such candidates may be acquired, which may be adversely affected by competition for such acquisitions. The Company regularly examines opportunities for strategic acquisitions of other companies or lines of business. The Company historically has financed its acquisitions through a combination of borrowings under bank credit facilities, seller provided financing, internally generated cash flows and the issuance of equity and debt securities and anticipates that it may from time to time issue additional debt and/or equity securities either as direct consideration for such acquisitions or to raise additional funds to be used (in whole or in part) in payment for acquired businesses or assets. There can be no assurance as to

1722

~~There can be no assurance as to~~ whether or when any acquired business would contribute positive operating results commensurate with the associated acquisition cost.

~~The~~ As a result of refinancing the existing indebtedness in 1998 and the indebtedness incurred to consummate acquisitions, the Company ~~believes~~remains ~~that~~highly ~~cash~~leveraged. The Company's ability to pay principal and interest on ~~hand,~~its indebtedness will depend upon the future operating performance of its subsidiaries and will require a substantial portion of the Company's cash flow from operations. ~~and~~The obligations ~~available~~of ~~borrowings~~the Company's subsidiaries under the Senior Secured Credit Facility ~~will~~are besecured ~~sufficient~~by toa ~~meet~~security interest in substantially all of their assets, and the Company's ~~presently~~obligations under its ~~anticipated~~guarantee ~~working~~of ~~capital~~the ~~and~~Senior ~~capital~~Secured ~~expenditure~~Credit ~~needs~~Facility ~~through~~are ~~fiscal~~secured ~~2001~~by substantially all of its assets.

~~The~~ On ~~Company's~~March 21, ~~capital~~2002, ~~expenditures~~the ~~are~~Company ~~expected~~received an amendment to ~~increase~~their ~~slightly~~Senior ~~from~~Secured ~~historical~~Credit ~~levels.~~Facility ~~The~~which ~~Company's~~reset ~~capital~~the ~~expenditures~~Minimum ~~will~~EBITDA, bethe ~~primarily~~Funded ~~for~~Debt ~~replacements~~Coverage ofratio ~~existing~~and ~~assets,~~Fixed Charge ~~new~~Coverage ~~customer~~ratio ~~requirements~~effective as of December 31, 2001 and tofor ~~upgrade~~future ~~various~~quarters. ~~manufacturing~~Additionally, ~~equipment~~the amendment extended the term to April 7, ~~facilities~~2003 and ~~information~~the ~~technology~~interest ~~equipment~~rate was increased 0.5% to either prime plus 1.25% or LIBOR plus 2.75% effective for fiscal year 2002 and ~~software~~beyond. At June 29, 2002, the Company is in ~~order~~compliance with all covenants. On August 15, 2002, the Company received an amendment to ~~reduce~~their ~~manufacturing~~Senior Secured Credit Facility which extends the term from April 7, ~~operating~~2003 ~~costs~~to ~~and~~July 7, ~~SG&A~~2003. The Company is refinancing its Senior Secured Credit Facility and ~~costs~~anticipates finalizing by the end of the third quarter.

The Company believes that cash on hand, cash flow from operations and available borrowings under the Senior Secured Credit Facility will be sufficient to meet the Company's presently anticipated working capital and capital expenditure needs through fiscal 2002.

The Company's capital expenditures are expected to rise over historical levels in an effort to add new product line manufacturing technology at its Kolmar Division and to modernize certain aerosol, liquid and packaging production lines. The Company's capital expenditures will be primarily for replacements and modernization of existing assets and new customer requirements.

The following table outlines the Company's obligations and commitments for future payments concerning debt and contingencies:

	Payments Due by Period
Contractual Obligations	Total		Less than 1 year		1-3 years		4-5 years		After 5 years
Senior Subordinated Notes	$	105,000		—		—	$	105,000		—
Senior Secured Credit Facility		55,779		—	$	55,779		—		—
P&G Note(a)		10,000		—		—		10,000		—
Operating Leases		20,532	$	3,866		9,082		3,689	$	3,895

Total Obligations	$	191,311	$	3,866	$	64,861	$	118,689	$	3,895

(a): Does not include accrued interest of $0.8 million which is included in Other Long-Term Liabilities and will be paid with the P&G Note due June 2006.

New Accounting Pronouncements

On June 29, 2001, Statement of Financial Accounting Standards (SFAS) No. ~~133~~141, ~~Accounting~~Business ~~for Derivative Instruments and Hedging Activities~~Combinations, was ~~effective~~approved ~~for~~by ~~all~~the ~~fiscal~~Financial ~~years~~Accounting ~~beginning~~Standards ~~after~~Board ~~June 15, 2000~~(FASB). SFAS No. ~~133,~~141 asrequires ~~amended,~~that ~~establishes~~the ~~accounting~~purchase ~~and~~method ~~reporting~~of ~~standards~~accounting be used for ~~derivative~~ ~~instruments,~~all ~~including~~business ~~certain~~combinations ~~derivative~~initiated ~~instruments~~after June 30, ~~embedded~~2001. inIn ~~other~~addition, ~~contracts~~goodwill and ~~for~~certain ~~hedging~~intangible ~~activities.~~assets ~~Under~~will ~~SFAS~~remain ~~No. 133,~~on ~~certain~~the ~~contracts~~balance ~~that~~sheet ~~were~~and not ~~formerly~~be ~~considered derivatives~~amortized. ~~may~~On ~~now~~an ~~meet~~annual ~~the~~basis, ~~definition~~and ofwhen athere ~~derivative.~~is ~~The~~reason ~~Company~~to ~~adopted~~suspect ~~SFAS~~that ~~No. 133~~their values ~~effective~~have ~~January 1,~~been ~~2001.~~diminished ~~The~~or ~~Company~~impaired, ~~does~~these ~~not~~assets ~~hold~~must ~~any~~be ~~derivative~~tested ~~instruments~~for orimpairment, ~~embedded derivative~~and ~~instruments~~write-downs ~~therefore,~~may ~~the~~be ~~adoption~~necessary. ofThe Company implemented SFAS No. ~~133~~141 ~~did not have an impact~~ on ~~the financial position~~July 1, ~~results of operations, or cash flows of the Company~~2001.

On June 29, 2001, SFAS No. 141, "Business Combinations" was approved by the Financial Accounting Standards Board (FASB). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. In addition, goodwill and certain intangible assets will remain on the balance sheet and not be amortized. On an annual basis, and when there is reason to suspect that their values have been diminished or impaired, these assets must be tested for impairment, and write-downs may be necessary. The Company implemented SFAS No. 141 on July 1, 2001. 23

On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets", was approved by the FASB. SFAS No. 142 ~~changes~~ changes the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of other intangible assets related to non-compete agreements were $37,000 and $76,000 for the three-and six-months ended June 29, 2002. Amortization of goodwill, including goodwill recorded in past business combinations, ~~will cease~~ceased upon adoption of this statement. ~~The~~on ~~Company~~January 1, is2002. ~~required~~Amortization expense related to ~~implement~~goodwill ~~SFAS~~was ~~No.~~ $1,523,000 and $3,142,000 onfor ~~January~~the three-and six-month periods ended June 130, 2001. ~~2002~~In ~~and~~addition, itthe Company has ~~not~~completed ~~determined~~the first step of the ~~impact,~~transitional ifgoodwill ~~any~~impairment test, the results indicate that ~~this~~the ~~statement~~Consumer Products Division will ~~have~~need onfurther evaluation. Goodwill at the ~~financial~~Consumer ~~position,~~Products ~~results~~Division ofis ~~operations~~$51,216,000. orThere ~~cash~~is ~~flows~~no ofgoodwill impairment for the ~~Company~~other reporting units.

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 ~~addresses~~ addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset ~~retirement~~ retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective January 1, 2003. The Company does not believe that the adoption of this pronouncement will have a material impact on ~~the~~their ~~consolidated~~ results of operations, financial position or cash flows.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. SFAS No. 144 supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Bebe Disposed of. However, SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. SFAS No. 144 is effective January 1, 2002. The adoption of this pronouncement did not have a material impact on their results of operations, financial position or cash flows.

18 In April 2002, the FASB issued SFAS No. 145, Recission of FASB Statements 4, 44 and 64, Amendment of FASB Statement 13, and Technical Corrections. SFAS No. 145 rescinds the provisions of SFAS No. 4 that requires companies to classify certain gains and losses from debt extinguishments as extraordinary items, eliminates the provisions of SFAS No. 44 regarding transition to the Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require that certain lease modifications be treated as sale leaseback transactions. The provisions of SFAS No. 145 related to classification of debt extinguishment are effective for fiscal years beginning after May 15, 2002. Commencing January 1, 2003, the Company will classify debt extinguishment costs within income from operations and will reclassify previously reported debt extinguishments as such. The provisions of SFAS No. 145 related to lease modification are effective for transactions occurring after May 15, 2002. The Company does not expect the provisions of SFAS No. 145 related to lease modification to have a material impact on its financial position or results of operations.

In June 2002, ~~Of.~~the ~~However,~~FASB issued SFAS No. ~~144~~146, ~~retains~~Accounting ~~the~~for ~~fundamental~~Costs ~~provisions~~Associated ofwith Exit or Disposal Activities. SFAS No. 146 nullifies Emerging Issues Task Force ("EITF") No. ~~121~~94-3, "Liability Recognition for certain Employee Termination Benefits and Other Costs to Exit an Activity (aincluding Certain Costs Incurred in as Restructuring)". The principal difference between SFAS No. ~~recognition~~146 and ~~measurement~~EITF ofNo. 94-3 ~~the~~relates ~~impairment~~to its requirements for recognition of a ~~long-lived~~liability ~~assets~~for toa becost ~~held~~associated ~~and~~with ~~used~~an ~~and~~exit ~~(b)~~or disposal activity. SFAS No. ~~measurement~~146 ofrequires ~~long-lived~~that ~~assets~~a toliability for a cost associated with an exit or disposal activity be ~~disposed~~recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of byan ~~sale~~entity's commitment to an exit plan. SFAS No. ~~144~~146 is effective ~~January~~for exit and disposal activities that are initiated after December 131, 2002. The Company does not ~~believe~~expect ~~that~~ the ~~adoption~~provisions of ~~this~~SFAS ~~pronouncement~~No. 146 ~~will~~to have a material impact on ~~the~~its ~~consolidated~~financial position or results of operations.

Certain Trends and Uncertainties

Historically, the Company has grown its business through acquisitions and investments in its operations. The Company intends to continue during ~~2001~~2002 to make significant investments in the growth of its business and to examine opportunities for additional growth through acquisitions and strategic investments. The impact of these decisions on future profitability cannot be predicted with any certainty. The Company's commitment to growth may increase its vulnerability to unforeseen downturns in its markets and shifts in competitive conditions. However, the Company believes that significant opportunities exist in the markets for each of its product lines and services, and continued investment in its marketing and sales capabilities and product development will enhance its opportunities for long term growth and profitability.

Forward Looking Statements

Certain statements and information contained or incorporated by reference in this report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act, which represent the Company's expectations or beliefs, including but not limited to, statements concerning industry performance, the Company's operations, performance, financial condition, growth and acquisition strategies, margins and growth in sales of the Company's products and services. For this purpose, any statements contained in this Form 10-Q and the Company's Form 10-K, that are not statements of historical fact may be deemed to be forward-looking statements. Such statements can be identified by the use of forward-looking terminology such as "believes," "expects," "intends," "may," "will," "should," or "anticipates," or the negative therefore, other variations thereon or comparable terminology, or by discussions of strategy. No assurances can be given that the future results covered by the forward-looking statements will be achieved. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond the Company's control.

Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general and economic business conditions, both domestic and foreign; industry and market capacity; fashion industry changes; wage rates; existing government regulations and changes in, or failure to comply with, government regulations; liabilities and other claims asserted against the Company; competition; the loss of any significant customers; change in operating strategy or development plans; the ability to attract or retain qualified personnel; the significant indebtedness of the Company; the availability and terms of capital to fund the expansion of the Company's business; and other factors referenced in this Form 10-Q and the Company's Form 10-K, copies of which may be obtained from the Company without cost.

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PART II
Other Information

Item 1.		Legal Proceedings
		See Part I, Item 1, Notes to Condensed Consolidated Financial Statements, Note 4, "Contingencies".
Item 2.		Changes in Securities
		None.
Item 3.		Defaults Upon Senior Securities
		None.
Item 4.		Submission of Matters to a Vote of Security Holders
		None.
Item 5.		Other Information
		None.
Item 6.		Exhibits and Reports on Form 8-K
(a)		Exhibit Index
10.39		Amendment No. 7 to the Credit Agreement, dated as of August 15, 2002, by and among the Company, Aerosol, Piedmont, Kolmar, Acupac and Precision as initial borrowers, each financial institution from time to time party to the Credit Agreement, BT Commercial Corporation, as Agent for the Lenders and Heller Financial, Inc., as Co-Agent.

Item Number		Exhibit		Page
11.		Statement of computation of basic and diluted net ~~income~~loss per share		2228

(b) Reports on Form 8-K None.

2026

CERTIFICATION

Each of the undersigned hereby certifies in his capacity as an officer of Outsourcing Services Group, Inc. (the "Company") that the Quarterly Report of the Company on Form 10-Q for the period ended June 29, 2002 fully complies with the requirements of Section 13 (a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition of the Company at the end of such period and the results of operations of the Company for such period.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	OUTSOURCING SERVICES GROUP, INC.
Dated: November 13, 2001	By:	/s/ JOSEPH HEALY Joseph Healy Chief Executive Officer, President and Director (Principal Executive Officer)
Dated: August 16, 2002	By:	/s/ JOSEPH HEALY Joseph Healy Chief Executive Officer, President and Director (Principal Executive Officer)
Dated: November 13, 2001	By:	/s/ PERRY MORGAN Perry Morgan Chief Financial Officer, Vice President And Secretary (Principal Financial and Accounting Officer)
Dated: August 16, 2002	By:	/s/ PERRY MORGAN Perry Morgan Chief Financial Officer, Vice President And Secretary (Principal and Accounting Officer)

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QuickLinks

INDEX TO FORM 10–Q
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS.

PART II Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
CERTIFICATION
SIGNATURES

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