SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2001
Commission File Number: 333-76057
RUSSELL-STANLEY HOLDINGS, INC.
(Exact name of registrant as specified in charter)
Delaware 3412 22-3525626
(State or other (Primary Standard (IRS Employer
jurisdiction of Industrial Classification Identification Number)
incorporation or Code Number)
organization)
685 Route 202/206 Bridgewater, New Jersey 08807
(Address of principal executive offices) (Zip code)
(908) 203-9500
(Registrant's telephone number, including area code)
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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report:
There is no established market for our common stock.
There were 2,200,764 shares of common stock outstanding as of March 31, 2001.
TABLE OF CONTENTS
Page
----
PART I: FINANCIAL INFORMATION
ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK 17
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS 17
ITEM 2: CHANGES IN SECURITIES 17
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 18
ITEM 4: SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 18
ITEM 5: OTHER INFORMATION 18
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 22
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS)
Three Months Ended
March 31,
------------------------
(Unaudited)
2001 2000
-------- --------
NET SALES $ 64,826 $ 72,378
COST OF SALES 53,012 57,934
-------- --------
Gross Profit 11,814 14,444
OPERATING EXPENSES
Selling 5,238 5,652
General and administrative 6,327 6,493
Amortization of intangibles 741 741
Financial restructuring 1,044 --
-------- --------
Total expenses 13,350 12,886
(LOSS) INCOME FROM OPERATIONS (1,536) 1,558
INTEREST EXPENSE 6,089 5,605
OTHER (INCOME) EXPENSE - net (4) 59
-------- --------
LOSS BEFORE INCOME TAXES (7,621) (4,106)
INCOME TAX BENEFIT (2,286) (1,233)
-------- --------
NET LOSS (5,335) (2,873)
OTHER COMPREHENSIVE (LOSS) INCOME (713) 51
-------- --------
COMPREHENSIVE LOSS $ (6,048) $ (2,822)
======== ========
See Notes to Condensed Consolidated Financial Statements.
3
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
March 31, December 31,
2001 2000
-------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 2,508 $ 1,077
Accounts receivable - net 28,582 27,019
Inventories 21,896 22,658
Prepaid taxes and income taxes receivable - net 4,596 827
Prepaid expenses and other current assets 1,949 1,715
-------- --------
Total current assets 59,531 53,296
-------- --------
PROPERTY, PLANT AND EQUIPMENT - net 86,299 87,597
-------- --------
OTHER ASSETS
Goodwill and other intangibles - net 101,553 103,144
Deferred financing costs - net 5,917 6,173
Other noncurrent assets 319 183
Deferred tax benefit - net 8,307 9,424
-------- --------
Total other assets 116,096 118,924
-------- --------
TOTAL ASSETS $261,926 $259,817
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 35,694 $ 32,124
Current portion of long-term debt 218,829 214,263
Deferred taxes - net 1,760 1,760
-------- --------
Total current liabilities 256,283 248,147
LONG-TERM DEBT 39 -
OTHER NONCURRENT LIABILITIES 1,710 1,728
-------- --------
Total liabilities 258,032 249,875
-------- --------
STOCKHOLDERS' EQUITY 3,894 9,942
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $261,926 $259,817
======== ========
See Notes to Condensed Consolidated Financial Statements.
4
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three Months Ended
March 31,
--------------------
2001 2000
-------- --------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,335) $ (2,873)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization 6,980 8,097
Decrease in deferred income taxes 1,117 111
Other noncash items 27 28
Changes in operating assets and liabilities:
Increase in accounts receivable (1,563) (899)
Decrease (increase) in inventories 762 (539)
Increase in prepaids and other
current assets (4,003) (944)
Increase (decrease) in accounts payable and
accrued expenses 3,570 (9,941)
Increase in other - net 1,038 378
-------- --------
Net cash provided by (used in) operating activities 2,593 (6,582)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,901) (4,933)
-------- --------
Net cash used in investing activities (4,901) (4,933)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving credit facility 4,539 12,044
Cash paid for financing costs (85) (240)
Other (2) --
-------- --------
Net cash provided by financing activities 4,452 11,804
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (713) 51
-------- --------
NET CHANGE IN CASH 1,431 340
CASH, BEGINNING OF PERIOD 1,077 704
-------- --------
CASH, END OF PERIOD $ 2,508 $ 1,044
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest $ 1,682 $ 9,490
======== ========
Income taxes $ 351 $ (1,976)
======== ========
See Notes to Condensed Consolidated Financial Statements.
5
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The Condensed Consolidated Financial Statements and related notes
thereto as of March 31, 2001 and for the three-month periods ended March 31,
2001 and 2000 are unaudited.
The information furnished herein reflects all adjustments which are, in
the opinion of management, necessary for a fair presentation of the consolidated
balance sheets as of March 31, 2001 and December 31, 2000, the consolidated
statements of operations and comprehensive (loss) income and the statements of
cash flows for the three month periods ended March 31, 2001 and 2000. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
certain estimates and assumptions that affect the amounts reported on the
financial statements and the accompanying notes. Actual amounts could differ
from those estimates.
These financial statements should be read in conjunction with the
financial statements and notes thereto included in Russell-Stanley Holdings,
Inc.'s (the "Company's") Annual Report on Form 10-K for the year ended December
31, 2000, File No. 333-76057.
The Company announced on January 26, 2001 that it has retained The
Blackstone Group, L.P. in order to assist in developing a financial
restructuring plan and that an ad-hoc committee of its senior subordinated
noteholders has been organized. The Company has commenced discussions with this
committee towards developing a consensual financial restructuring plan to
de-leverage the Company's capital structure. The Company is seeking to
restructure its bond debt and does not intend to impair in any way its
trade creditors or implement layoffs as part of its financial restructuring
plan.
The Company elected not to make the interest payment due February 15,
2001 on its Senior Subordinated Notes. The 30-day grace period to make the
interest payment to cure the default expired on March 15, 2001 and as a
consequence, the Senior Subordinated Notes, revolving credit loans and term loan
are callable and therefore have been classified as current liabilities in the
December 31, 2000 and March 31, 2001 consolidated balance sheets. The Company
and its lenders under the Credit Agreement have entered into a 60-day
Forbearance and Amendment Agreement (the Forbearance Agreement) dated February
15, 2001 pursuant to which the lender will not call the Company's outstanding
debt through the termination of the Forbearance Agreement and will continue to
allow the Company to draw on their revolving credit facility to satisfy working
capital needs subject to certain limitations. In addition, the interest rate on
the Company's term loan and the revolving credit loan margin was increased .50%
and the facility's commitment was temporarily reduced from $75.0 million to
$60.0 million. The Forbearance Agreement was extended an additional sixty days
until June 15, 2001 with an additional .25% interest rate increase in effect
for the period. The Forbearance Agreement terminates on the earlier of (a) the
occurrence of an additional event of default (as defined); (b) June 15, 2001 or
(c) the date on which the Senior Subordinated Notes are accelerated. A joint
meeting of the ad-hoc committee of noteholders and the bank group was held
recently to permit both groups to give their views on the restructuring.
Discussions with these groups will continue and there can be no assurance that
a financial restructuring will be completed. For the period ended March 31,
2001, approximately $1.0 million in professional fees were incurred in
connection with the financial restructuring and were expensed in the
accompanying condensed consolidated statement of operations.
NOTE 2 - ACCOUNTING POLICY MATTERS
Statement of Financial Accounting Standards ("SFAS") 133, Accounting
for Derivative Instruments and Hedging Activities, as amended by SFAS 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133, and SFAS 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, is effective for the
Company as of January 1, 2001. These standards require that an entity recognize
all derivatives as either assets or liabilities measured at fair value. The
accounting for changes in the fair value of a derivative depends on the use of
the derivative. In addition, certain contracts that were not formerly considered
derivatives may now meet the definition of a derivative. Adoption of these new
accounting standards did not have a material impact on the Company's financial
condition or results of operations.
Reclassifications - Certain amounts in 2000 have been reclassified to
conform to the 2001 presentation.
6
NOTE 3 - INVENTORIES
Inventories consist of the following:
March 31, December 31,
2001 2000
---- ----
(Unaudited)
(In Thousands)
Raw materials $12,086 $11,980
Work-in-process 2,415 2,338
Finished goods 7,395 8,340
------- -------
Total $21,896 $22,658
======= =======
NOTE 4 - LONG-TERM DEBT
As discussed in Note 1 of the condensed consolidated financial
statements, the Company elected to withhold the payment of interest due on
February 15, 2001 on its Senior Subordinated Notes and did not make the
payment within the 30-day grace period. As previously disclosed in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000,
due to the violations of the covenants under the Credit Agreement and the
interest payment default, the Senior Subordinated Notes, revolving credit
loans and term loan are callable and therefore have been classified as
current liabilities in the December 31, 2000 and March 31, 2001 consolidated
balance sheets.
The Notes, revolving credit loans, and term loan have the following provisions
(dollars in thousands):
Interest Interest
Rate at Balance at Rate at Balance at
Domestic Eurodollar March 31, March 31, December 31, December 31,
Interest Rate Interest Rate 2001 2001 2000 2000
---------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Revolving Prime plus margin LIBOR plus margin
credit loan not less than 1.75%; 1.25% not less than 3.25%; 8.13-9.75% $37,779 9.19-10.75% $32,543
2.75%
Revolving Canadian prime
credit loan- plus margin not
Foreign less than 2.25%; 1.75% - 9.00 6,941 9.25 7,639
Term Loan C Fixed rate Fixed rate 9.98 25,000 9.48 25,000
Senior
Subordinated
Notes Fixed rate - 10.88 149,109 10.88 149,081
-------- --------
Total $218,829 $214,263
======== ========
In connection with the March 15, 2001 Forbearance Agreement, the margin on the
revolving credit and term loans was increased .50%.
The Forbearance Agreement was extended an additional sixty days until June 15,
2001 (see Note 1 to the condensed consolidated financial statements).
7
NOTE 5 - CONTINGENCY
The U.S. Environmental Protection Agency (the "EPA") confirmed the
presence of contaminants, including dioxin, in and along the Woonasquatucket
River in Rhode Island. Prior to 1970, New England Container ("NEC") operated a
facility in North Providence, Rhode Island along the Woonasquatucket River at a
site where contaminants have been found. NEC, the current owners of the
property, and others have been formally identified by the EPA as potentially
responsible parties, with the site added to the National Priority Superfund Site
list in February 2000. Although NEC no longer operates the facility, and did not
operate the facility at the time the Company acquired the outstanding capital
stock of NEC in July 1998, NEC could incur liability under federal and state
environmental laws and/or as a result of civil litigation. Any resulting
liability is subject to, among other possible claims, (i) a contractual
indemnity from Vincent J. Buonanno, one of its directors and the former owner of
NEC, subject to a $2.0 million limit, and (ii) right of contribution from other
potentially responsible parties and potential insurance reimbursements. In
January 2001, the EPA announced it was proceeding with an interim soil removal
project and will be undertaking further testing and analysis to determine
what, if any, remedial action in addition to the interim soil removal will be
required. On March 26, 2001, the EPA issued a unilateral administrative order
pursuant to Section 106 (a) of the federal Comprehensive Environmental
Response, Compensation and Liability Act requiring NEC and the other
potentially responsible parties to perform the interim soil removal project.
The Company is unable to estimate the likelihood or extent of any liability;
however, this matter may result in liability to NEC that could have a material
adverse effect on the Company's financial condition, cash flows and results of
operations.
NOTE 6 - GUARANTOR SUBSIDIARIES
The Company's payment obligations under the Notes are fully,
unconditionally, jointly and severally guaranteed by its current domestic
subsidiaries, principally: Russell-Stanley Corp. ("RSC"), Container Management
Services ("CMS") and NEC (collectively, the "Guarantor Subsidiaries"). Each of
the Guarantor Subsidiaries is a direct or indirect wholly-owned subsidiary of
the Company. The Company's payment obligations under the Notes are not
guaranteed by the remaining subsidiary, Hunter (the "Non-Guarantor Subsidiary").
The obligations of each Guarantor Subsidiary under their guarantee of the Notes
are subordinated to each subsidiary's obligations under their guarantee of the
Senior Credit Facility.
Presented on the next page is condensed combining financial information
for the Parent Company, the Guarantor Subsidiaries and the Non-Guarantor
Subsidiary. In the Company's opinion, separate financial statements and other
disclosures concerning each of the Guarantor Subsidiaries would not provide
additional information that is material to investors. Therefore, the Guarantor
Subsidiaries are combined in the presentation on the next page.
Investments in subsidiaries are accounted for by the Parent Company
using the equity method. Earnings of subsidiaries are, therefore, reflected in
the Parent Company's investments in and advances to/from subsidiaries accounts
and earnings (losses). The elimination entries eliminate investments in
subsidiaries, related stockholders' equity and other intercompany balances and
transactions.
8
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(IN THOUSANDS)
(UNAUDITED)
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiary Eliminations Consolidated
-------- ------------ ------------- ------------ ------------
NET SALES $ - $ 56,476 $ 8,641 $ (291) $ 64,826
COST OF SALES - 46,838 6,465 (291) 53,012
-------- -------- -------- -------- --------
GROSS PROFIT - 9,638 2,176 - 11,814
TOTAL EXPENSES - 11,941 1,409 - 13,350
-------- -------- -------- -------- --------
(LOSS) INCOME FROM OPERATIONS - (2,303) 767 - (1,536)
EQUITY LOSS (4,965) - - 4,965 -
INTEREST EXPENSE 525 5,176 388 - 6,089
OTHER INCOME - net - (4) - - (4)
-------- -------- -------- -------- --------
(LOSS) INCOME BEFORE INCOME
TAXES (5,490) (7,475) 379 4,965 (7,621)
(BENEFIT) PROVISION FOR INCOME
TAXES (155) (2,356) 225 - (2,286)
-------- -------- -------- -------- --------
NET (LOSS) INCOME $(5,335) $ (5,119) $ 154 $ 4,965 $ (5,335)
======== ======== ======== ======== ========
9
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS)
(UNAUDITED)
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiary Eliminations Consolidated
-------- ------------ ------------- ------------ ------------
NET SALES $ - $ 63,561 $ 9,133 $ (316) $ 72,378
COST OF SALES - 51,159 7,091 (316) 57,934
-------- -------- -------- -------- --------
GROSS PROFIT - 12,402 2,042 - 14,444
TOTAL EXPENSES - 11,464 1,422 - 12,886
-------- -------- -------- -------- --------
INCOME FROM OPERATIONS - 938 620 - 1,558
EQUITY LOSS (2,506) - - 2,506 -
INTEREST EXPENSE 536 4,731 338 - 5,605
OTHER EXPENSE - net - 59 - - 59
-------- -------- -------- -------- --------
(LOSS) INCOME BEFORE INCOME
TAXES (3,042) (3,852) 282 2,506 (4,106)
(BENEFIT) PROVISION FOR INCOME
TAXES (169) (1,212) 148 - (1,233)
-------- -------- -------- -------- --------
NET (LOSS) INCOME $(2,873) $ (2,640) $ 134 $ 2,506 $ (2,873)
======== ======== ======== ======== ========
10
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2001
(IN THOUSANDS)
(UNAUDITED)
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiary Eliminations Consolidated
--------- ------------ ------------- ------------ ------------
ASSETS
CURRENT ASSETS
Cash $ - $ 2,508 $ - $ - $ 2,508
Accounts receivable - net - 24,592 3,990 - 28,582
Inventories - 19,803 2,093 - 21,896
Prepaids and other current
assets - net - 2,348 367 3,830 6,545
--------- --------- --------- --------- ---------
Total current assets - 49,251 6,450 3,830 59,531
--------- --------- --------- --------- ---------
PROPERTY, PLANT AND
EQUIPMENT - net - 81,122 5,177 - 86,299
--------- --------- --------- --------- ---------
OTHER ASSETS
Goodwill and other
intangibles - net - 85,559 15,994 - 101,553
Deferred financing costs - net - 5,917 - - 5,917
Other noncurrent assets - 319 - - 319
Deferred taxes - net - 9,369 (1,063) 1 8,307
Intercompany advances 16,674 41,753 145 (58,572) -
Investment in subsidiaries 11,830 - - (11,830) -
--------- --------- --------- --------- ---------
TOTAL ASSETS $ 28,504 $ 273,290 $ 26,703 $ (66,571) $ 261,926
========= ========= ========= ========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, accrued expenses
and income taxes payable $ (4,283) $ 32,588 $ 3,385 $ 4,004 $ 35,694
Current portion of long-term debt 19,997 191,891 6,941 - 218,829
Deferred taxes - net - 2,172 - (412) 1,760
--------- --------- --------- --------- ---------
Total current liabilities 15,714 226,651 10,326 3,592 256,283
LONG-TERM DEBT - 39 - - 39
OTHER NONCURRENT LIABILITIES - 1,272 438 - 1,710
--------- --------- --------- --------- ---------
Total liabilities 15,714 227,962 10,764 3,592 258,032
INTERCOMPANY ADVANCES - 50,471 6,966 (57,437) -
TOTAL STOCKHOLDERS' EQUITY 12,790 (5,143) 8,973 (12,726) 3,894
--------- --------- --------- --------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 28,504 $ 273,290 $ 26,703 $ (66,571) $ 261,926
========= ========= ========= ========= =========
11
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2000
(IN THOUSANDS)
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiary Eliminations Consolidated
--------- ------------ ------------- ------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ - $ 1,077 $ - $ - $ 1,077
Accounts receivable - net - 23,588 3,431 - 27,019
Inventories - 20,044 2,614 - 22,658
Prepaids and other current assets - net - (427) 378 2,591 2,542
--------- --------- --------- --------- ---------
Total current assets - 44,282 6,423 2,591 53,296
--------- --------- --------- --------- ---------
PROPERTY, PLANT AND
EQUIPMENT - net - 81,888 5,709 - 87,597
--------- --------- --------- --------- ---------
OTHER ASSETS
Goodwill and other intangibles - net - 86,180 16,964 - 103,144
Deferred financing costs - net - 6,173 - - 6,173
Other noncurrent assets - 183 - - 183
Deferred tax benefit - net - 20,168 - (10,744) 9,424
Intercompany advances 17,199 37,436 69 (54,704) -
Investment in subsidiaries 17,280 - - (17,280) -
--------- --------- --------- --------- ---------
TOTAL ASSETS $ 34,479 $ 276,310 $ 29,165 $ (80,137) $ 259,817
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES
Accounts payable and accrued
expenses $ - $ 28,526 $ 3,509 $ 89 $ 32,124
Income taxes payable (4,129) 1,246 29 2,854 -
Current portion of long-term debt 19,997 186,627 7,639 - 214,263
Deferred taxes - net - 2,180 - (420) 1,760
--------- --------- --------- --------- ---------
Total current liabilities 15,868 218,579 11,177 2,523 248,147
LONG-TERM DEBT - - - - -
DEFERRED TAXES - net - 9,627 1,119 (10,746) -
OTHER NONCURRENT LIABILITIES - 1,205 523 - 1,728
--------- --------- --------- --------- ---------
Total liabilities 15,868 229,411 12,819 (8,223) 249,875
INTERCOMPANY ADVANCES - 46,922 7,043 (53,965) -
TOTAL STOCKHOLDERS' EQUITY 18,611 (23) 9,303 (17,949) 9,942
--------- --------- --------- --------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 34,479 $ 276,310 $ 29,165 $ (80,137) $ 259,817
========= ========= ========= ========= =========
12
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(IN THOUSANDS)
(UNAUDITED)
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiary Eliminations Consolidated
--------- ------------ ------------- ------------ ------------
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net (loss) income $(5,335) $(5,119) $ 154 $ 4,965 $(5,335)
Adjustments to reconcile net
(loss) income to net cash
provided by operating activities:
Equity loss 4,965 - - (4,965) -
Depreciation and amortization 256 6,374 350 - 6,980
Other changes 114 672 162 - 948
------- ------- ------- ------- -------
Net cash provided by
operating activities - 1,927 666 - 2,593
------- ------- ------- ------- -------
CASH FLOWS USED IN
INVESTING ACTIVITIES - (4,856) (45) - (4,901)
------- ------- ------- ------- -------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES - 4,643 (191) - 4,452
------- ------- ------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH - - (713) - (713)
------- ------- ------- ------- -------
NET CHANGE IN CASH - 1,714 (283) - 1,431
CASH, BEGINNING OF PERIOD - 1,251 (174) - 1,077
------- ------- ------- ------- -------
CASH, END OF PERIOD $ - $ 2,965 $ (457) $ - $ 2,508
======= ======= ======= ======= =======
13
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS)
(UNAUDITED)
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiary Eliminations Consolidated
--------- ------------ ------------- ------------ ------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net (loss) income $ (2,873) $ (2,640) $ 134 $ 2,506 $ (2,873)
Adjustments to reconcile net
(loss) income to net cash
used in operating activities:
Equity loss 2,506 - - (2,506) -
Depreciation and amortization 237 7,419 441 - 8,097
Other changes 130 (11,249) (687) - (11,806)
-------- -------- -------- -------- --------
Net cash used in
operating activities - (6,470) (112) - (6,582)
-------- -------- -------- -------- --------
CASH FLOWS USED IN
INVESTING ACTIVITIES - (4,482) (451) - (4,933)
-------- -------- -------- -------- --------
CASH FLOWS PROVIDED BY
FINANCING ACTIVITIES - 11,434 370 - 11,804
-------- -------- -------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH - - 51 - 51
-------- -------- -------- -------- --------
NET CHANGE IN CASH - 482 (142) - 340
CASH, BEGINNING OF PERIOD - 1,022 (318) - 704
-------- -------- -------- -------- --------
CASH, END OF PERIOD $ - $ 1,504 $ (460) $ - $ 1,044
======== ======== ======== ======== ========
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED MARCH 31, 2001 COMPARED TO THREE MONTH PERIOD ENDED
MARCH 31, 2000
NET SALES
Net sales decreased 10.4 % to $64.8 million in 2001 from $72.4
million in 2000. Our container manufacturing division's net sales decreased
7.5% to $52.8 million in 2001, from $57.1 million in 2000, due primarily to
an economic downturn and consequently lower unit volumes. Net sales in our
services division decreased 21.2% to $12.0 million in 2001 from $15.3 million
in 2000 due primarily to planned lower trip lease volumes in plastic services
and lower steel reconditioning revenues, which were partially offset by
higher average selling prices. We continue to transition our plastic services
drum business from a leasing to reconditioning business model.
GROSS PROFIT
Gross profit decreased $2.7 million to $11.8 million in 2001 from $14.5
million in 2000, primarily due to the lower unit volumes. Gross profit as a
percentage of net sales decreased to 18.2% in 2001 from 20.0% in 2000 as a
result.
OPERATING EXPENSES
Operating expenses increased $0.4 million to $13.3 million in 2001
from $12.9 in 2000. The increase is due to financial restructuring expenses
of approximately $1.0 million, partially offset by cost savings, including
personnel reductions and lower delivery expenses due to lower volume. As a
percentage of net sales, operating expenses were 20.6% in 2001 compared to
17.8% in 2000.
(LOSS) INCOME FROM OPERATIONS
(Loss) income from operations decreased by $3.1 million to a $1.5
million loss in 2001 from income of $1.6 million in 2000 as a result of the
factors described above.
INTEREST EXPENSE
Interest expense was $6.1 million in 2001 compared with $5.6 million in
2000. The increase in interest expense is the result of increased debt levels
and a higher weighted average interest rate.
LOSS BEFORE INCOME TAXES
In 2001, the loss before income taxes was $7.6 million versus $4.1
million in 2000, as a result of the factors described above.
INCOME TAX BENEFIT
The effective tax rate on the loss was approximately 30.0% in both 2001
and 2000, lower than the statutory federal income tax benefit due to the
non-deductible portion of goodwill associated with our acquisitions and higher
foreign income taxes.
NET LOSS
In 2001, the net loss was $5.3 million versus $2.9 million in 2000, as
a result of the factors described above.
15
LIQUIDITY AND CAPITAL RESOURCES
Our principal uses of cash are for capital expenditures, interest
expense, and working capital. We utilize funds generated from operations and
borrowings to meet these requirements. For the three months ended March 31,
2001, net cash provided by operating activities was $2.6 million compared to net
cash used in operating activities of $6.6 million for the three months ended
March 31, 2000. This change is due to improved trade working capital more than
offsetting a higher net loss during the first three months of 2001. For the
three months ended March 31, 2001 and 2000, we made capital expenditures of $4.9
million. We currently have no capital commitments outside the ordinary course of
business. Our principal working capital requirements are to finance accounts
receivable and inventories. As of March 31, 2001, our subsidiaries and we had
total indebtedness of approximately $218.8 million, $69.7 million of which was
senior indebtedness.
The Company announced on January 26, 2001 that it has retained The
Blackstone Group, L.P. in order to assist in developing a financial
restructuring plan and that an ad-hoc committee of its senior subordinated
noteholders has been organized. The Company has commenced discussions with
this committee towards developing a consensual financial restructuring plan
to de-leverage the Company's capital structure. The Company is seeking to
restructure its bond debt and does not intend to impair in any way its
trade creditors or implement layoffs as part of its financial restructuring
plan.
The Company elected not to make the interest payment due February
15, 2001 on its Senior Subordinated Notes. The 30-day grace period to make
the interest payment to cure the default expired on March 15, 2001 and as a
consequence, the Senior Subordinated Notes, revolving credit loans and term
loan are callable and therefore have been classified as current liabilities
in the December 31, 2000 and March 31, 2001 consolidated balance sheets. The
Company and its lenders under the Credit Agreement have entered into a 60-day
Forbearance and Amendment Agreement (the Forbearance Agreement) dated
February 15, 2001 pursuant to which the lender will not call the Company's
outstanding debt through the termination of the Forbearance Agreement and
will continue to allow the Company to draw on their revolving credit facility
to satisfy working capital needs subject to certain limitations. In addition,
the interest rate on the Company's term loan and the revolving credit loan
margin was increased .50% and the facility's commitment was temporarily
reduced from $75.0 million to $60.0 million. The Forbearance Agreement was
extended an additional sixty days until June 15, 2001 with an additional .25%
interest rate increase in effect for the period. The Forbearance Agreement
terminates on the earlier of (a) the occurrence of an additional event of
default (as defined); (b) June 15, 2001 or (c) the date on which the Senior
Subordinated Notes are accelerated. A joint meeting of the ad-hoc committee
of noteholders and the bank group was held recently to permit both groups to
give their views on the restructuring. Discussions with these groups will
continue and there can be no assurance that a financial restructuring will be
completed. For the period ended March 31, 2001, approximately $1.0 million in
professional fees were incurred in connection with the financial
restructuring.
The consolidated financial statements of the Company indicate that as a
result of the above matters, at March 31, 2001, current liabilities exceeded
current assets by $196.8 million. Historically, cash flows generated from
operations, supplemented by the unused borrowing capacity under the Revolving
Credit Agreement, have been sufficient to pay the Company's debts as they come
due, provide for capital expenditures and meet its other cash requirements. The
consolidated financial statements of the Company presented herein do not reflect
any adjustments that could result from the Company's financial restructuring
plan.
EFFECT OF INFLATION
Inflation generally affects our business by increasing the interest
expense of floating rate indebtedness and by increasing the cost of raw
materials, labor and equipment. We do not believe that inflation has had any
material effect on our business during the periods discussed herein.
16
FORWARD LOOKING STATEMENTS
Readers are cautioned that the Results of Operations, Liquidity and
Capital Resources and other sections of this report contain forward-looking
statements that are based on management's current expectations and
projections about future events. Although we believe that our assumptions
made in connection with the forward-looking statements are reasonable, we
cannot assure you that our assumptions and expectations will prove to have
been correct. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. A description of some of the factors that could cause
actual results to differ materially from expectations expressed in the
Company's forward-looking statements set forth in the Company's Form S-4
(File No. 333-76057) filed with the Securities and Exchange Commission under
the caption "Forward-Looking Statements" is incorporated herein by reference.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MANAGING FOREIGN CURRENCY AND INTEREST RATE EXPOSURE
The Company is exposed to market risk from foreign currency exchange
rate fluctuations as measured against the U.S. dollar and interest rates. We
manage this exposure through internal policies and procedures and the use of
derivative financial instruments when considered appropriate. As a matter of
policy, the Company does not speculate in financial markets and therefore does
not hold or issue derivative financial instruments for trading purposes.
INTEREST RATE RISK
The revolving indebtedness under our senior credit facility bears
interest at a floating rate. Our primary exposure to interest rate risk is as a
result of changes in interest expense related to this indebtedness due to
changes in market interest rates. A 10% increase in interest rates at March 31,
2001 would not have a material adverse affect on our results of operations,
financial condition or cash flows.
FOREIGN CURRENCY EXCHANGE RATE RISK
We have operations in Canada and sales denominated in Canadian
dollars. Our primary exposure to foreign currency exchange rate risk is as a
result of changes in the exchange rate between the U.S. dollar and the
Canadian dollar. We currently do not maintain any derivative financial
instruments to limit our exposure to this risk. The Company has also entered
into foreign currency forwards to hedge the currency exposure of firm fixed
asset purchases denominated in Deutsche Marks.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
Not Applicable
17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company elected not to make the interest payment of $8.3
million due February 15, 2001 on its Senior Subordinated Notes. The 30-day grace
period to make the interest payment to cure the default expired on March 15,
2001. The Company and its lenders under the Credit Agreement have entered into a
60-day Forbearance and Amendment Agreement (the Forbearance Agreement) dated
February 15, 2001 pursuant to which the lender will not call the Company's
outstanding debt through the termination of the Forbearance Agreement and will
continue to allow the Company to draw on their revolving credit facility to
satisfy working capital needs subject to certain limitations. The Forbearance
Agreement was extended until June 15, 2001 or may terminate earlier, as
described in Note 1 to the condensed consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
*3.1 Certificate of Incorporation of
Russell-Stanley Holdings, Inc.
*3.2 By-Laws of Russell-Stanley Holdings, Inc.
*3.3 Amended and Restated Certificate of
Incorporation of Russell-Stanley Corp.
*3.4 By-Laws of Russell-Stanley Corp.
*3.5 Articles of Incorporation of Container
Management Services, Inc.
*3.6 By-Laws of Container Management Services, Inc.
*3.7 Restated Articles of Incorporation of New
England Container Co., Inc.
*3.8 Amended and Restated By-Laws of New England
Container Co., Inc.
*3.9 Articles of Incorporation of Russell-Stanley, Inc.
*3.10 By-Laws of Russell-Stanley, Inc.
*3.11 Certificate of Incorporation of RSLPCO, Inc.
*3.12 By-Laws of RSLPCO, Inc.
*3.13 Certificate of Limited Partnership of
Russell-Stanley, L.P.
*3.14 Agreement of Limited Partnership of
Russell-Stanley, L.P.
18
Exhibit No. Description of Exhibit
----------- ----------------------
*4.1 Indenture, dated as of February 10, 1999, by
and among Russell-Stanley Holdings, Inc., the
guarantors named therein and The Bank of New
York, as the Trustee
*4.2 Form of 10 7/8% Senior Subordinated Notes due
2009 (included as part of the Indenture filed
as Exhibit 4.1 hereto)
*10.1 Fifth Amended and Restated Revolving Credit
and Term Loan Agreement, dated as of February
10, 1999, among Russell-Stanley Holdings,
Inc. and its subsidiaries, as borrowers, the
lenders listed therein and BankBoston, N.A.
as administrative agent, and Goldman Sachs
Credit Partners, L.P., as syndication agent
*10.2 Stock Purchase Agreement dated as of July 21,
1998, among Vincent J. Buonanno, New England
Container Co., Inc. and Russell-Stanley
Holdings, Inc.
*10.3 Stock Purchase Agreement dated as of July 1,
1997, among Mark E. Daniels, Robert E.
Daniels, Mark E. Daniels Irrevocable Family
Trust, R.E. Daniels Irrevocable Family Trust,
Container Management Services, Inc. and
Russell-Stanley Corp.
*10.4 Share Purchase Agreement dated as of October
24, 1997, among Michael W. Hunter, John D.
Hunter, Michael W. Hunter Holdings Inc., John
D. Hunter Holdings Inc., Hunter Holdings
Inc., 373062 Ontario Limited, Hunter Drums
Limited, Russell-Stanley Holdings, Inc. and
HDL Acquisition, Inc.
*10.5 Purchase and Sale Agreement dated as of
October 23, 1997, among Smurfit Packaging
Corporation, Russell-Stanley Holdings, Inc.
and Russell-Stanley Corp.
*10.6 Vestar Management Agreement dated as of July
23, 1997, among Russell-Stanley Holdings,
Inc., Russell-Stanley Corp., Container
Management Services, Inc. and Vestar Capital
Partners
+*10.7 Know How and Patent Licensing Agreement
between Mauser-Werke GmbH and Russell-Stanley
Corp., dated June 26, 1995
+*10.8 Licensing Agreement between Mauser-Werke GmbH
and Russell-Stanley Corp., dated June 26,
1995
+*10.9 Know How and Patent Licensing Agreement
between Mauser-Werke GmbH and Russell-Stanley
Corp., dated June 26, 1995
+*10.10 Know How and Patent Licensing Agreement
between Mauser-Werke GmbH and Hunter Drums
Limited, dated July 31, 1996
+*10.11 Know How and Patent Licensing Agreement
between Mauser-Werke GmbH and Hunter Drums
Limited, dated July 31, 1996
19
Exhibit No. Description of Exhibit
----------- ----------------------
+*10.12 Consent and Agreement between Hunter Drums
Limited and Mauser-Werke GmbH, dated
September 29, 1997
*10.13 1998 Stock Option Plan
*10.15 Employment Agreement, dated October 30, 1997,
among Russell-Stanley, Holdings, Inc., Hunter
Drums Limited and Michael W. Hunter
*10.16 Stay Pay Agreement, dated October 30, 1997,
among Russell-Stanley Holdings, Inc., Hunter
Drums Limited and Michael W. Hunter
*10.21 Services Agreement, dated as of February 10,
1999, between Russell-Stanley Holdings, Inc.
and Vincent J. Buonanno
*10.22 License Agreement between Gallay SA and
Hunter Drums Limited, dated February 7, 1997
*10.23 License Agreement between Gallay SA and
Hunter Drums Limited, dated April 16, 1987
**10.24 Amendment No. 1 to the Fifth Amended and
Restated Revolving Credit and Term Loan
Agreement, dated as of August 11, 2000, among
Russell-Stanley Holdings, Inc. and its
subsidiaries, as borrowers, the lenders
listed therein and Fleet National Bank (f/k/a
BankBoston, N.A.), as administrative agent,
and Goldman Sachs Credit Partners, L.P., as
syndication agent
***10.25 Forbearance and Amendment Agreement to the
Fifth Amended and Restated Revolving Credit
and Term Loan Agreement, dated as of February
10, 1999 among the Registrant, certain of its
subsidiaries, the lenders party thereto and
Fleet National Bank, as agent
****10.26 Employment and Change-In-Control Severance
Agreement, dated as of December 11, 2000,
between Russell-Stanley Holdings, Inc. and
Daniel W. Miller
****10.27 Employment and Change-In-Control Severance
Agreement, dated as of December 11, 2000,
between Russell-Stanley Holdings, Inc. and
Ronald M. Litchkowski
****10.28 Employment and Change-In-Control Severance
Agreement, dated as of December 11, 2000,
between Russell- Stanley Holdings, Inc. and
John H. Hunter
****10.29 Employment and Change-In-Control Severance
Agreement, dated as of December 11, 2000,
between Russell-Stanley Holdings, Inc. and
David C. Garrison
10.30 First Amendment to the Employment and
Change-In-Control Severance Agreement, dated
as of April 16, 2001, between Russell-Stanley
Holdings, Inc. and Daniel W. Miller
20
Exhibit No. Description of Exhibit
----------- ----------------------
10.31 First Amendment to the Employment and
Change-In-Control Severance Agreement, dated
as of April 16, 2001, between Russell-Stanley
Holdings, Inc. and Ronald M. Litchkowski
10.32 First Amendment to the Employment and
Change-In-Control Severance Agreement, dated
as of April 16, 2001, between Russell-
Stanley Holdings, Inc. and John H. Hunter
10.33 First Amendment to the Employment and
Change-In-Control Severance Agreement, dated
as of April 16, 2001, between Russell-Stanley
Holdings, Inc. and David C. Garrison
*21 Subsidiaries of the Company
*This Exhibit is incorporated by reference to the Exhibit of the same number
filed as part of the Company's Registration Statement on Form S-4 (File No.
333-76057)
**This Exhibit is incorporated by reference to the Exhibit of the same number
filed as part of the Company's Form 10-Q for period ended September 30, 2000.
***This Exhibit is incorporated by reference to the Exhibits filed in the
Company's Form 8-K dated February 15, 2001 and April 20, 2001.
****This Exhibit is incorporated by reference to the Exhibit of the same number
filed in the Company's Form 10-K dated December 31, 2000.
+The Registrant was afforded confidential treatment of portions of this exhibit
by the Securities and Exchange Commission. Accordingly, portions thereof have
been omitted and filed separately with the Securities and Exchange Commission.
(b) Reports on Form 8-K
A current report on Form 8-K, dated January 26, 2001, retaining The
Blackstone Group, L.P. to assist the Company in exploring strategic alternatives
for capital restructuring, was filed during the quarter ended March 31, 2001.
A current report on Form 8-K, dated February 9, 2001, indicating the
Company elected to withhold the payment of interest due February 15, 2001 under
its 10 7/8% Senior Subordinated Notes due 2009, was filed during the quarter
ended March 31, 2001.
A current report on Form 8-K, dated February 15, 2001, relating to the
Forbearance and Amendment Agreement, was filed during the quarter ended March
31, 2001.
A current report on Form 8-K, dated April 20, 2001, relating to a sixty
day extension of the Forbearance and Amendment Agreement, was filed April 25,
2001.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
RUSSELL-STANLEY HOLDINGS, INC.
Date: May 15, 2001 By: /s/ RONALD M. LITCHKOWSKI
-------------------------
Ronald M. Litchkowski,
Chief Financial Officer
22