As filed with the Securities and Exchange Commission on April 12, 1999
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------
RUSSELL-STANLEY HOLDINGS, INC.
(Exact Name of Registrant Issuer as Specified in Its Charter)
DELAWARE 3412 22-3525626
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
---------------
685 Route 202/206
Bridgewater, NJ 08807
(908) 203-9500
(Address, including zip code, and telephone number, including area code, of
registrant issuer's principal executive offices)
Daniel W. Miller
Russell-Stanley Holdings, Inc.
685 Route 202/206
Bridgewater, NJ 08807
(908) 203-9500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
With a copy to:
Stephan J. Feder, Esq.
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
(212) 455-2000
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act Registration number of the earlier effective
Registration Statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities
Registration Statement number of the earlier effective Registration Statement
for the same offering. [ ]
---------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Proposed Maximum
Title of each Class of Amount to Proposed Maximum Aggregate Offering Amount of
Securities to be Registered Be Registered Offering Price Per Note Price(1) Registration Fee
- ------------------------------------------- --------------- ------------------------- -------------------- -----------------
10 7/8% Senior Subordinated Notes due 2009 $150,000,000 100% $150,000,000 $ 41,700.00
- ------------------------------------------- ------------ --- ------------ -----------
Guarantees of 10 7/8% Senior Subordinated
Notes due 2009 (2) $150,000,000 None(3) None(3) None(4)
---------------
(1) Estimated solely for the purpose of calculating the registration fee.
(2) See inside facing page for table of additional registrant guarantors.
(3) No separate consideration will be received for the guarantees of the 10 7/8%
Senior Subordinated Notes due 2009 by the subsidiary guarantors of
Russell-Stanley Holdings, Inc.
(4) Pursuant to Rule 457(n), no separate filing fee is required for the
guarantees.
The Registrants hereby amend this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrants
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until this Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF ADDITIONAL REGISTRANT GUARANTORS
State or Other
Jurisdiction of
Exact Name of Registrant Incorporation I.R.S. Employer Address, Including Zip Code, and Telephone
Guarantor as Specified in its or Identification Number, Including Area Code, of Registrant
Charter Organization Number Guarantor's Principal Executive Offices
- ------------------------------------- ---------------- ----------------- -------------------------------------------
Russell-Stanley Corp. New Jersey 22-1505645 685 Route 202/206
Bridgewater, NJ 08807, (908-203-9500)
Container Management Services, Inc. South Carolina 57-0941972 685 Route 202/206
Bridgewater, NJ 08807, (908-203-9500)
New England Container Co., Inc. Rhode Island 05-0268961 685 Route 202/206
Bridgewater, NJ 08807, (908-203-9500)
Russell-Stanley, Inc. Illinois 22-2623485 685 Route 202/206
Bridgewater, NJ 08807, (908-203-9500)
RSLPCO, Inc. Delaware 22-3611710 685 Route 202/206
Bridgewater, NJ 08807, (908-203-9500)
Russell-Stanley, L.P. Texas 22-3611707 685 Route 202/206
Bridgewater, NJ 08807, (908-203-9500)
Subject to Completion, Dated April 12, 1999
PRELIMINARY PROSPECTUS
[Russell-Stanley Holdings, Inc. Logo]
Russell-Stanley Holdings, Inc.
Offer to Exchange All Outstanding
10 7/8% Senior Subordinated Notes due 2009
for 10 7/8% Senior Subordinated Notes due 2009
Which Have Been Registered Under the Securities Act of 1933
---------------
The Exchange Offer
o We will exchange all of our outstanding 10 7/8% Senior Subordinated Notes
due 2009 that are validly tendered and not validly withdrawn for an equal
principal amount of 10 7/8% Senior Subordinated Notes due 2009 which have
been registered under the Securities Act of 1933 and are freely tradeable.
Throughout this prospectus, we refer to the outstanding notes as the
"outstanding notes" and the notes that will be issued in exchange for the
oustanding notes as the "exchange notes."
o You may withdraw tenders of outstanding notes at any time prior to the
expiration of the exchange offer.
o The exchange offer expires at 5:00 p.m., New York City time, on ,
1999, unless extended. We do not currently intend to extend the expiration
date.
o The exchange of outstanding notes for exchange notes in the exchange
offer will not be a taxable event for U.S. federal income tax purposes.
o We will not receive any proceeds from the exchange offer.
The Exchange Notes
o The exchange notes are being offered in order to satisfy certain of our
obligations under the exchange and registration rights agreement that we
entered into in connection with the placement of the outstanding notes.
o The form and terms of the Exchange Notes will be substantially identical
to the form and terms of the Outstanding Notes, except that the Exchange
Notes will be freely tradeable by virtue of their registration under the
Securities Act of 1933, will not bear legends restricting their transfer,
will not be subject to any additional obligations regarding registration
under the Securities Act of 1933, and will not be subject to the special
interest payments resulting from a failure to meet certain registration
obligations. The Exchange Notes will be issued under and entitled to the
benefits of the same indenture that authorized the issuance of the
Outstanding Notes. Consequently, both series will be treated as a single
class of debt securities under that Indenture.
Resales of Exchange Notes
o If you are a broker-dealer and you receive exchange notes for your own
account in exchange for outstanding notes, you must acknowledge that you
will deliver a prospectus in connection with any resale of such exchange
notes. By making such acknowledgment, you will not be deemed to admit that
you are an "underwriter" under the Securities Act of 1933.
o Broker-dealers may use this prospectus in connection with any resale of
exchange notes received in exchange for outstanding notes where such
outstanding notes were acquired by the broker-dealer as a result of
market-making activities or trading activities.
o We will make this prospectus available to any broker-dealer for use in
any such resale for a period of 180 days after the date of this
prospectus.
o A broker-dealer may not participate in the exchange offer with respect to
outstanding notes acquired other than as a result of market-making
activities or trading activities.
o If you are an affiliate of Russell-Stanley or are engaged in, or intend
to engage in, or have an agreement or understanding to participate in, a
distribution of the exchange notes you must comply with the registration
requirements of the Securities Act of 1933 in connection with any resale
transaction.
o See "Plan of Distribution."
You should consider carefully the risk factors beginning on page 13 of
this prospectus before participating in the exchange offer.
Neither the Securities and Exchange Commission nor any state securities
commission has approved the exchange notes or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
The date of this prospectus is , 1999.
TABLE OF CONTENTS
Page
-----
Where You Can Find More Information ............ i
Prospectus Summary ............................. 1
Risk Factors ................................... 13
Use of Proceeds ................................ 22
Capitalization ................................. 23
Unaudited Pro Forma Consolidated
Financial Data ................................ 24
Selected Historical Consolidated
Financial and Other Data ...................... 31
Management's Discussion and Analysis
of Financial Condition and Results of
Operations .................................... 34
Business ....................................... 42
Management ..................................... 52
Page
-----
Ownership of Common Stock ...................... 59
Certain Relationships and Related
Party Transactions ............................ 61
Description of Senior Credit Facility .......... 62
The Exchange Offer ............................. 63
Description of Notes ........................... 75
Certain U.S. Federal Income Tax
Consequences of the Exchange Offer ............. 113
Plan of Distribution ........................... 113
Legal Matters .................................. 114
Experts ........................................ 114
Index to Financial Statements .................. F-1
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-4 under the Securities Act of 1933 with respect to the
exchange notes being offered by this prospectus. This prospectus, which forms a
part of the registration statement, does not contain all of the information set
forth in, or filed as an exhibit to, the registration statement. For further
information with respect to Russell-Stanley and the exchange notes, reference
is made to the registration statement. While we believe that the material
information has been provided regarding the contracts and documents described
in this prospectus, the statements contained in this prospectus as to the
contents of any such contract or other document are not necessarily complete,
and, where such contract or other document is an exhibit to the registration
statement, each such statement is qualified in all respects by the provisions
in such exhibit.
We are not currently subject to the informational requirements of the
Securities Exchange Act of 1934. Upon completion of the exchange offer, we will
be subject to the informational requirements of the Securities Exchange Act of
1934 and, as a result, will file periodic reports and other information with
the Securities and Exchange Commission. The registration statement and such
reports and other information can be inspected and copied at the Public
Reference Section of the Securities and Exchange Commission located at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C., 20549 and at
regional public reference facilities maintained by the Securities and Exchange
Commission located at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New
York 10048. Copies of such material, including copies of all or any portion of
the registration statement, can be obtained from the Public Reference Section
of the Securities and Exchange Commission at prescribed rates. Such material
may also be accessed electronically by means of the Securities and Exchange
Commission's home page on the Internet (http://www.sec.gov).
In addition, whether or not required by the Securities and Exchange
Commission, so long as any outstanding notes are outstanding, beginning with
the quarter ended June 30, 1999 we will furnish to the holders of any
outstanding notes, within the time periods specified in the Securities and
Exchange Commission's rules and regulations:
o all quarterly and annual financial information that would be required to
be contained in a filing with the Securities and Exchange Commission on
Forms 10-Q and 10-K if we were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and, with respect to the annual information only, a report
on the annual financial statements by our independent auditors; and
i
o all current reports that would be required to be filed with the
Securities and Exchange Commission on Form 8-K if we were required to file
such reports.
In addition, whether or not required by the Securities and Exchange
Commission, we will file a copy of all of the information and reports referred
to above with the Securities and Exchange Commission for public availability
within the time periods specified in the Securities and Exchange Commission's
rules and regulations (unless the Securities and Exchange Commission will not
accept such a filing) and make such information available to securities
analysts and prospective investors upon request.
----------------
"CMS," "Delcon" and "Russell-Stanley" are trademarks of ours. All other
trademarks, service marks or brand names appearing in this prospectus are the
property of their respective holders.
ii
PROSPECTUS SUMMARY
The following summary contains basic information about Russell-Stanley
Holdings, Inc. and its subsidiaries, and this exchange offer. It may not
contain all the information that may be important to you. You should read this
entire prospectus, including the financial data and related notes, in its
entirety. The term "Russell-Stanley" and references to "we," "us" and "our"
mean Russell-Stanley Holdings, Inc. and its subsidiaries, including predecessor
companies, except where it is clear the context indicates otherwise.
Russell-Stanley
General
We are a leading manufacturer and marketer of plastic and steel industrial
containers and a leading provider of related container services in the United
States and Canada. Our container manufacturing division manufactures and sells
new plastic and steel rigid industrial containers. Our services division (i)
leases plastic rigid industrial containers, (ii) provides plastic container
fleet management services, (iii) reconditions and sells steel drums and (iv)
retrieves and recycles empty industrial containers. Our container manufacturing
and services divisions together have over 1,500 active customers in the
agricultural chemical, food product, lubricant, pharmaceutical and specialty
chemical industries. We believe that our customers base their purchasing
decisions primarily on price, service and quality and are increasingly looking
to maintain relationships with fewer suppliers who can provide a broad range of
high-quality industrial containers and related container services at
competitive prices, often on a national or international basis. We have
increased our net sales from $138.8 million for the year ended December 31,
1995 to $284.5 million on a pro forma basis for the year ended December 31,
1998, representing a compound annual growth rate of 27.0%. During the same
period we increased our Adjusted EBITDA from $17.4 million to $46.2 million,
representing a compound annual growth rate of 38.4%, while our Adjusted EBITDA
margin expanded from 12.5% to 16.2%. The majority of our revenue and Adjusted
EBITDA growth and margin improvement during this period has come from the
successful acquisition and integration of four complementary businesses.
We believe that our container manufacturing division offers one of the
broadest lines of 5- to 70-gallon plastic rigid industrial containers in the
United States and Canada and enjoys the largest share in the U.S. plastic drum
market as well as one of the leading shares in the Canadian plastic drum
market. We are the principal manufacturer in the United States and Canada of
55-gallon plastic tight-head drums, which we sell under the brand names L-1
(LR-1 in Canada) and Delcon. We believe that the design of the L-1 and Delcon
drums is the industry standard for 55-gallon plastic tight-head drums in the
United States and Canada, and we own and/or have a license to use important
proprietary technology relating to the manufacture and sale of these drums. Our
container manufacturing division also offers a broad line of the widely used
55-gallon steel drum and, we believe, enjoys one of the leading shares in the
Northeast, Gulf Coast and Canadian steel drum markets.
Our services division is an innovator and, we believe, the leader in the
United States and Canada in the businesses of leasing plastic containers on a
"per use" or "round-trip" basis and providing plastic container fleet
management services. In our container leasing business, we lease a container to
our customer for filling and shipping to the end-user. We then retrieve the
container directly from the end-user and prepare it for re-use. Container fleet
management involves the same services, but uses containers owned by the
customer. Since 1991, the growth of plastic container leasing and fleet
management has outpaced the growth of the rigid industrial container market as
a whole, and we believe these businesses are among the fastest growing sectors
of the U.S. rigid industrial container market. We believe that our services
division is also the leading reconditioner of steel drums in the Northeast. The
addition of container services to our historical manufacturing business enables
us to serve a wider range of our customers' evolving industrial container
1
requirements and is an important aspect of our strategy to retain and enhance
our leading market position as our customers increasingly look to rely on fewer
suppliers.
We currently operate twelve plastic drum manufacturing plants, three steel
drum manufacturing plants and six container services plants throughout the
United States and Canada, enabling us to be strategically located near our
major customers. We sell, lease and service plastic containers in most markets
in the United States and in most of the major industrial regions in Canada. We
sell new steel drums in the Northeast, the Gulf Coast, parts of the Midwest and
Ontario, Canada, regions where there is a high concentration of purchasers of
steel drums, and we sell reconditioned steel drums in the Northeast.
Recent Acquisitions
The rigid industrial container industry has been undergoing consolidation
for a number of years and remains fragmented. We believe that the industry will
evolve to support a few participants who are able to provide a broad range of
containers and related container services. As a result, we began pursuing, and
in July 1997 began consummating, several acquisitions in furtherance of our
goal to become the preeminent provider of rigid industrial containers and
related container services in the United States and Canada. We acquired
Container Management Services (July 1997), Hunter Drums Limited (October 1997),
the plastics division of Smurfit Packaging Corporation (November 1997) and New
England Container (July 1998). We discuss each of the businesses we acquired
under "Business--Recent Acquisitions."
Competitive Strengths
We believe the following competitive strengths are the primary factors
contributing to our leading position in the marketplace:
o We are a leading industry player with strong market positions.
o We have a broad offering of quality products and services.
o We focus on maintaining a competitive cost structure.
o We have a high quality and diverse customer base.
o We have an experienced management team and strong sponsor.
We discuss each of these competitive strengths under
"Business--Competitive Strengths."
Business Strategy
Our goal is to become the preeminent provider of rigid industrial
containers and related container services in the United States and Canada. In
this effort, we intend to:
o Continue to broaden our product and service offering and geographic
reach.
o Continue to improve our cost structure.
o Pursue selective acquisitions.
We discuss each of these strategies under "Business--Business Strategy."
Our Sponsor
Russell-Stanley was incorporated in 1950 as a steel drum manufacturer and
was acquired in June 1989 by affiliates of Vestar Capital Partners. Throughout
this prospectus we refer to Vestar Capital Partners and its affiliates as
"Vestar."
2
Vestar, headquartered in New York with an office in Denver, Colorado,
manages over $1 billion in private equity capital. Founded in 1988, Vestar
focuses on management buyouts, recapitalizations and growth equity investments
and to date has completed 26 investments with an aggregate value of almost $5
billion. Previous Vestar investments have included Aearo Corporation, Celestial
Seasonings, Inc., Clark-Schwebel, Inc., Cluett American Corp., Consolidated
Cigar Holdings, Inc., Insight Communications Company, L.P., La Petite Holdings,
Inc., Alvey Systems, Inc., a wholly owned division of Pinnacle Automation,
Inc., Prestone Products Corporation, Pyramid Communications, Inc., Siegel &
Gale Holdings, Inc., Sun Apparel, Inc. and Westinghouse Air Brake Company.
* * *
Russell-Stanley is incorporated in Delaware. The address of our principal
executive office is 685 Route 202/206, Bridgewater, New Jersey 08807, and our
telephone number is (908) 203-9500. We invite you to visit our web site at
http://www.russell-stanley.com. Information on our website is not part of this
prospectus.
3
Summary of Terms of the Exchange Offer
On February 10, 1999, we completed the private offering of the outstanding
notes. References to "Notes" in this prospectus are references to both the
outstanding notes and the exchange notes.
We and our subsidiaries which guarantee the outstanding notes entered into
an exchange and registration rights agreement with the initial purchasers in
the private offering in which we and those subsidiaries agreed to deliver to
you this prospectus and to complete the exchange offer within 255 days after
the date of original issuance of the outstanding notes.
The Exchange Offer............ We are offering to exchange up to $150.0
million aggregate principal amount of exchange
notes for up to $150.0 million aggregate
principal amount of outstanding notes.
Outstanding notes may be exchanged only in
integral multiples of $1,000. The form and
terms of the exchange notes:
o will be substantially identical to the form
and terms of the outstanding notes, except
that the exchange notes
o will be freely tradeable by virtue of their
registration under the Securities Act of
1933,
o will not bear legends restricting their
transfer, will not be subject to any
additional obligations regarding
registration under the Securities Act of
1933 and
o will not be subject to the special interest
payments described in "Description of
Notes--Registration Covenant; Exchange
Offer."
The exchange notes will be issued under and
entitled to the benefits of the same Indenture
that authorized the issuance of the
outstanding notes. Consequently, both series
will be treated as a single class of debt
securities under the Indenture.
Resales....................... Based on interpretations of the staff of the
Securities and Exchange Commission set forth in
no-action letters issued to unrelated third
parties, we believe that the exchange notes
issued pursuant to the exchange offer in
exchange for outstanding notes may be offered
for resale, resold and otherwise transferred by
you (unless you are an "affiliate" of
Russell-Stanley within the meaning of Rule 405
under the Securities Act of 1933) without
compliance with the registration and prospectus
delivery provisions of the Securities Act of
1933, provided that you are acquiring the
exchange notes in the ordinary course of your
business and that you have not engaged in, do
not intend to engage in, and have no
arrangement or understanding with any person to
participate in, a distribution of the exchange
notes. Each participating broker-dealer that
receives exchange notes for its own account
pursuant to the exchange offer in exchange for
shares of outstanding notes that were acquired
as a result of market-making or trading
activity must acknowledge that it will deliver
a prospectus in connection with any resale of
the exchange notes. See "Plan of Distribution."
4
Any holder of outstanding notes who
o is an affiliate of Russell-Stanley,
o does not acquire exchange offer in the
ordinary course of its business or
o tenders in the exchange offer with the
intention to participate, or for the purpose
of participating, in a distribution of
exchange notes
cannot rely on the position of the staff of
the Securities and Exchange Commission set
forth in the no-action letters that we
referenced to in the preceding paragraph, and,
in the absence of an exemption, must comply
with the registration and prospectus delivery
requirements of the Securities Act of 1933 in
connection with the resale of the exchange
notes.
Expiration Date; Withdrawal
of Tender.................... The exchange offer expires at 5:00 p.m., New
York City time, on , 1999, or such later
date and time to which we extend the expiration
date. We do not currently intend to extend the
expiration date. You may withdraw tenders of
outstanding notes at any time prior to the
expiration of the exchange offer.
Certain Conditions to the
Exchange Offer............... The exchange offer is subject to customary
conditions, which we may waive. We currently
expect that each of the conditions will be
satisfied and that no waivers will be
necessary. Please read the section captioned
"The Exchange Offer--Certain Conditions to the
Exchange Offer" of this prospectus for more
information regarding the conditions to the
exchange offer.
Procedures for Tendering
Outstanding Notes............ If you wish to accept the exchange offer, you
must complete, sign and date the accompanying
letter of transmittal, or a facsimile of the
letter of transmittal, according to the
instructions contained in this prospectus and
the letter of transmittal. You must also mail
or otherwise deliver the letter of transmittal,
or a facsimile of the letter of transmittal,
together with the outstanding notes and any
other required documents to the exchange agent
at the address set forth on the cover page of
the letter of transmittal. If you hold
outstanding notes through The Depository Trust
Company and wish to participate in the exchange
offer, you must comply with the Automated
Tender Offer Program procedures of The
Depository Trust Company, by which you will
agree to be bound by the letter of transmittal.
Terms and Conditions of the
Letter of Transmittal ......... By signing, or agreeing to be bound by, the letter of
transmittal, you will represent to us that, among other
things:
5
o any exchange notes that you receive will be acquired
in the ordinary course of your business;
o you have no arrangement or understanding with any
person or entity to participate in, and do not intend to
engage in, a distribution of the exchange notes;
o if you are a broker-dealer that will receive exchange
notes for your own account in exchange for
outstanding notes that were acquired as a result of
market-making or trading activities, that you will deliver
a prospectus, as required by law, in connection with
any resale of such exchange notes;
o you are not an "affiliate," as defined in Rule 405 of the
Securities Act of 1933, of Russell-Stanley or, if you are
an affiliate, you will comply with any applicable
registration and prospectus delivery requirements of
the Securities Act of 1933; and
o if you are a person in the United Kingdom, that your
ordinary activities involve you in acquiring, holding,
managing or disposing of investments, as principal or
agent, for the purposes of your business.
Special Procedures for
Beneficial Owners ......... If you are a beneficial owner of outstanding notes which
are registered in the name of a broker, dealer, commercial
bank, trust company or other nominee, and you wish to
tender such outstanding notes in the exchange offer, you
should contact such registered holder promptly and instruct
such registered holder to tender on your behalf. If you wish
to tender on your own behalf, you must, prior to completing
and executing the letter of transmittal and delivering your
outstanding notes, either make appropriate arrangements
to register ownership of the outstanding notes in your name
or obtain a properly completed bond power from the
registered holder. The transfer of registered ownership may
take considerable time and may not be able to be
completed prior to the expiration date.
Guaranteed Delivery
Procedures ................ If you wish to tender your outstanding notes and your
outstanding notes are not immediately available or you
cannot deliver your outstanding notes, the letter of
transmittal or any other documents required by the letter of
transmittal or comply with the applicable procedures under
The Depository Trust Company's Automated Tender Offer
Program prior to the expiration date, you must tender your
outstanding notes according to the guaranteed delivery
procedures which we explain in this prospectus under the
caption "The Exchange Offer--Guaranteed Delivery
Procedures."
6
Effect on Holders of Outstanding
Notes ..................................... As a result of this exchange offer, we will have fulfilled a
covenant contained in the exchange and registration
rights agreement among us and our subsidiaries which
guarantee the outstanding notes and the initial purchases
in the private offering through which we issued the
outstanding notes. Accordingly, there will be no increase
in the interest rate on the outstanding notes. If you do
not tender your outstanding notes in the exchange offer,
you will continue to hold outstanding notes and will be
entitled to all the rights and limitations applicable thereto
under the indenture relating to the outstanding notes and
the exchange notes; however, certain rights under the
exchange and registration rights agreement that
terminate as a result of the acceptance for exchange of
validly tendered outstanding notes pursuant to the
exchange offer will also terminate with respect to such
untendered outstanding notes.
Consequence of Failure to Exchange ......... Holders of outstanding notes who do not exchange their
outstanding notes for exchange notes pursuant to the
exchange offer will continue to be subject to restrictions
on transfer of such outstanding notes. In general, the
outstanding notes may not be offered or sold, unless
registered under the Securities Act of 1933, except
pursuant to an exemption from, or in a transaction not
subject to, the Securities Act of 1933 and applicable
state securities laws. We do not currently anticipate that
we will register the outstanding notes under the
Securities Act of 1933. In addition, the tender of
outstanding notes in the exchange offer will reduce the
principal amount of the outstanding notes outstanding,
which may have an adverse effect upon, and increase
the volatility of, the market price of the outstanding notes
due to a reduction in liquidity.
Certain U.S. Federal Income
Tax Considerations ........................ The exchange of outstanding notes for exchange notes
in the exchange offer, will not be a taxable event for U.S.
federal income tax purposes. See "Certain U.S. Federal
Income Tax Consequences of the Exchange Offer."
Use of Proceeds ............................ We will not receive any cash proceeds from the issuance
of exchange notes pursuant to the exchange offer.
Exchange Agent ............................. The Bank of New York is the exchange agent for the
exchange offer. The address and telephone number of
the exchange agent are set forth in the section captioned
"Exchange Offer--Exchange Agent" of this prospectus.
7
Summary of Terms of the Exchange Notes
Issuer.......................... Russell-Stanley Holdings, Inc.
Notes Offered .................. $150.0 million aggregate principal amount of
10 7/8% Senior Subordinated Notes due 2009.
Maturity ....................... February 15, 2009.
Interest ....................... Annual rate: 10.875%.
Payment frequency: every six months on February 15
and August 15.
Interest on the exchange notes will accrue from the last
interest payment date on which interest was paid on the
outstanding notes or, if no interest was paid on the
outstanding notes, from the date the outstanding notes
were originally issued.
Guarantors ..................... Each guarantor is one of our domestic restricted
subsidiaries. Not all of our subsidiaries are guarantors of
the exchange notes. If we cannot make payments on the
exchange notes when they are due, the guarantors must
make them instead.
Sinking Fund ................... None.
Ranking and Guarantees ......... The exchange notes will rank junior to all of our existing
and future senior indebtedness and will rank senior in
right of payment to all of our future indebtedness that is
expressly subordinated to the outstanding notes. See
"Description of Notes--Subordination."
All of our existing and future domestic restricted
subsidiaries will guarantee our obligation to pay principal,
premium, if any, and interest on the exchange notes. The
guarantees will rank junior in right of payment to all
existing and future senior indebtedness of these
subsidiaries and will rank senior in right of payment to all
of their future indebtedness that is expressly
subordinated to the guarantees. See "Description of
Notes--Subsidiary Guarantees."
At December 31, 1998, we and our guarantors had
approximately $162.4 million of senior indebtedness
outstanding. We do not have any other outstanding
indebtedness that ranks on an equal basis with or junior
to the outstanding notes. In addition, at December 31,
1998, the total liabilities (including trade payables) of our
non-guarantor subsidiary were $17.3 million.
Optional Redemption ............ We may redeem some or all of the exchange notes at
our option at any time on or after February 15, 2004, at
the redemption prices listed in the "Description of
Notes--Optional Redemption."
8
In addition, on or before February 15, 2002, we may, at
our option, use the net proceeds from one or more public
equity offerings to redeem up to 35% of the aggregate
principal amount of the Notes originally issued at the
price listed in the "Description of Notes--Optional
Redemption."
Mandatory Offer to Repurchase ......... If we experience specific kinds of changes of control or
certain types of asset sales, we must offer to repurchase
the Notes at the prices listed in the "Description of
Notes--Repurchase at the Option of Holders--Change of
Control" and "--Asset Sales."
Basic Covenants of Indenture .......... We issued the outstanding notes and will issue the
exchange notes under an indenture with The Bank of
New York (the "Indenture"). The Indenture will limit our
ability and the ability of certain of our subsidiaries to:
o incur more debt;
o pay dividends, redeem stock or make
other distributions;
o issue capital stock;
o make certain investments;
o use assets as security in other transactions;
o enter into transactions with affiliates;
o enter into sale and leaseback transactions; and
o merge or consolidate.
These covenants are subject to a number of important
qualifications and limitations. See "Description of Notes--
Certain Covenants."
Risk Factors
See "Risk Factors" for a discussion of certain factors that you should
consider prior to tendering outstanding notes in the exchange offer.
9
Summary Historical and Pro Forma Consolidated Financial and Other Data
Set forth below is summary historical consolidated financial and other
data as of December 31, 1998 and for each of the years in the three-year period
ended December 31, 1998. The summary historical consolidated financial and
other data were derived from our consolidated financial statements and related
notes audited by Deloitte & Touche LLP, independent auditors, which are
included in this prospectus.
Also set forth below is summary pro forma consolidated financial and other
data as of and for the year ended December 31, 1998 which was derived from the
pro forma consolidated financial data included in this prospectus. The summary
pro forma consolidated financial and other data has been derived by the
application of pro forma adjustments to our historical financial statements.
The pro forma adjustments give effect to (i) our acquisition of New England
Container, (ii) the offering of the outstanding notes and the initial
borrowings under our senior credit facility that we entered into concurrently
with the offering of the outstanding notes and (iii) the application of the net
proceeds as intended, as if the transactions had occurred as of January 1, 1998
for the statement of operations and other financial data and at December 31,
1998 for the balance sheet data. The adjustments, which are based on available
information and upon certain assumptions that management believes are
reasonable, are described in the notes to the pro forma consolidated financial
data included in this prospectus. The summary pro forma consolidated financial
and other data does not include any adjustments for anticipated cost savings or
other operating improvements. See "Capitalization," "Unaudited Pro Forma
Consolidated Financial Data" and "Business--Business Strategy."
Russell-Stanley Holdings, Inc. was formed in July 1997 to serve as a
holding company for Russell-Stanley Corp. and its subsidiaries. The transaction
was accounted for in a method similar to a pooling of interests, and therefore
the financial data presented below has been prepared from financial statements
that include the operations of Russell-Stanley Holdings, Inc. and its
subsidiaries as if they had been combined for all periods presented. We
completed three acquisitions during 1997 and one acquisition during 1998, all
accounted for under the purchase method of accounting. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Introduction."
Historical data are not necessarily indicative of future results. The pro
forma data does not purport to represent what our results of operations would
actually have been had the transactions described above in fact occurred on the
assumed date or to project our results of operations for any future period. The
data presented below should be read in conjunction with the discussion under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the financial statements of
Container Management Services, Hunter Drums Limited and the plastics division
of Smurfit Packaging Corporation and the related notes included in this
prospectus.
10
Pro Forma
Fiscal Year Ended Fiscal Year
December 31, Ended
----------------------------------------- December 31,
1996 1997 1998 1998
----------- ------------- ----------- -------------
(Dollars in Millions)
Statement of Operations Data:
Net sales:
Containers .................................... $ 141.9 $ 161.1 $ 227.4 $ 227.4
Services ...................................... -- 15.2 46.6 57.1
-------- -------- ------- -------
Total net sales .............................. 141.9 176.3 274.0 284.5
Cost of sales .................................. 103.6 133.6 213.2 220.7
-------- -------- ------- -------
Gross profit ................................... 38.3 42.7 60.8 63.8
Selling, general and administrative
expenses ...................................... 24.3 26.8 42.9 45.2
Non-recurring charges (1) ...................... -- -- 6.2 6.2
-------- --------- ------- -------
Income from operations ......................... 14.0 15.9 11.7 12.4
Other (income) expense, net (2) ................ 0.3 0.2 0.5 0.5
Interest expense ............................... 7.5 8.8 16.0 20.5
-------- --------- ------- -------
Income (loss) before income taxes and
extraordinary items ........................... 6.2 6.9 (4.8) (8.6)
Provision (benefit) for income taxes ........... 2.5 2.9 (.5) (2.7)
-------- --------- ------- --------
Income (loss) before extraordinary
items ......................................... $ 3.7 $ 4.0 $ (4.3) $ (5.9)
======== ========= ======== ========
Other Financial Data:
Cash flows from (used in):
Operating activities .......................... $ 4.4 $ 17.7 $ 30.8 $ 30.1
Investing activities .......................... (3.3) (140.3) (41.2) (38.1)
Financing activities .......................... (1.3) 122.5 11.0 8.8
EBITDA (3) ..................................... 19.6 25.8 37.8 39.1
EBITDA margin (3) .............................. 13.8% 14.6% 13.8% 13.7%
Adjusted EBITDA (4) ............................ $ 19.9 $ 26.2 $ 44.9 $ 46.2
Adjusted EBITDA margin (4) ..................... 14.0% 14.9% 16.4% 16.2%
Capital expenditures ........................... $ 3.3 $ 9.9 $ 28.7 $ 29.1
Depreciation and amortization .................. 5.9 10.1 26.6 27.2
Ratio of earnings to fixed charges (5) ......... 1.8x 1.8x -- --
Pro forma ratios of Adjusted EBITDA to
interest expense .............................. 2.3x
Pro forma ratio of total debt to Adjusted
EBITDA ........................................ 3.9x
Balance Sheet Data:
Working capital ................................ $ 12.9 $ 13.5
Property, plant and equipment, net ............. 92.6 92.6
Total assets ................................... 258.3 264.1
Total debt ..................................... 171.6 178.6
Total stockholders' equity (deficit):
Additional paid-in capital .................... 70.2 70.2
Other ......................................... (36.7) (37.4)
-------- --------
Total ........................................ 33.5 32.8
- ----------
(1) In conjunction with the integration of acquired entities and expansion of
our operations, a plan was developed to rationalize our operations and
sales force and consolidate and relocate our corporate headquarters in
order to improve operating efficiencies and reduce costs. As part of this
plan, we recorded non-recurring charges of approximately $3.5 million
during the year ended December 31, 1998. These charges primarily include
costs related to the closure of a container manufacturing facility,
severance and other personnel related costs and the relocation of our
corporate headquarters. Also included in non-recurring charges at December
31, 1998 are $2.7 million of costs associated with proposed acquisitions
that were not consummated. See "Note 18--Non-Recurring Charges" in our
financial statements included in this prospectus.
(2) Other (income) expense, net is comprised of (gains) losses on disposal of
fixed assets, unrealized (gains) losses on forward foreign exchange
contracts recorded at fair value and other miscellaneous (gains) losses.
(3) We define "EBITDA" as income (loss) before extraordinary items, plus
interest expense, income tax expense and depreciation and amortization. We
define "EBITDA Margin" as EBITDA divided by net sales. EBITDA is
calculated for each of the periods presented as follows:
11
Pro forma
-------------
Fiscal Year Ended Fiscal Year
December 31, Ended
---------------------------------- December 31,
1996 1997 1998 1998
---- ---- ---- ----
(In Millions)
Income (loss) before extraordinary items ......... $ 3.7 $ 4.0 $ (4.3) $ (5.9)
Interest expense ................................. 7.5 8.8 16.0 20.5
Provision (benefit) for income taxes ............. 2.5 2.9 (.5) (2.7)
Depreciation & amortization ...................... 5.9 10.1 26.6 27.2
------ ------ ------- -------
EBITDA ........................................... $ 19.6 $ 25.8 $ 37.8 $ 39.1
====== ====== ======= =======
EBITDA does not represent, and should not be considered an alternative to, net
income or cash flow from operations as determined in accordance with GAAP,
and our calculation therefore may not be comparable to that reported by
other companies. While EBITDA should not be considered in isolation or as a
substitute for net income, cash flows from operating activities and other
income or cash flow statement data prepared in accordance with GAAP, or as
a measure of profitability or operating performance, management understands
that EBITDA is commonly used in evaluating a company's ability to service
debt. However, EBITDA does not take into account our debt service
requirements and other commitments and, accordingly, is not necessarily
indicative of amounts that may be available to us for discretionary uses.
(4) We define "Adjusted EBITDA" as EBITDA plus non-recurring charges and
management fees. Adjusted EBITDA is presented as certain financial
covenants in our borrowing arrangements will be based on similar measures.
We pay management fees to Vestar. See "Related Party Transactions." We
define "Adjusted EBITDA margin" as Adjusted EBITDA divided by net sales.
Non-recurring charges for the year ended December 31, 1998 consist
primarily of costs related to the closure of a container manufacturing
facility, severance and other personnel related costs, the relocation of
our corporate headquarters and costs associated with proposed acquisitions
that were not consummated. See "Note 18--Non-Recurring Charges" in our
financial statements included in this prospectus. Adjusted EBITDA is
calculated for each of the periods presented as follows:
Pro forma
-------------
Fiscal Year Ended
December 31, Year Ended
------------------------------------ December 31,
1996 1997 1998 1998
---------- ---------- ---------- -------------
(In Millions)
EBITDA ........................ $ 19.6 $ 25.8 $ 37.8 $ 39.1
Non-recurring charges ......... -- -- 6.2 6.2
Management fees ............... 0.3 0.4 0.9 0.9
------- ------- ------- -------
Adjusted EBITDA ............... $ 19.9 $ 26.2 $ 44.9 $ 46.2
======= ======= ======= =======
(5) For purposes of determining the ratio of earnings to fixed charges,
"earnings" are defined as income (loss) before income taxes and
extraordinary items plus fixed charges. "Fixed charges" consist of
interest expense on all indebtedness, amortization of deferred financing
costs and one-third of rental expense on operating leases, representing
that portion of rental expense which we deem to be attributable to
interest. Earnings were insufficient to cover fixed charges in the year
ended December 31, 1998 by $4.8 million and in the pro forma year ended
December 31, 1998 by $8.6 million.
12
RISK FACTORS
Before you participate in the exchange offer you should be aware that
there are various risks, including those described below. You should consider
carefully these risk factors together with all of the other information
included in this prospectus before you decide to participate in the exchange
offer.
This prospectus includes forward-looking statements. All statements other
than statements of historical facts included in this prospectus, including
certain statements under "Prospectus Summary," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business," may
constitute forward-looking statements. We have based these forward-looking
statements on our 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. Important factors
that could cause our actual results to differ from our expectations are
disclosed below. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
There May Be Adverse Consequences if You Do Not Exchange Your Outstanding Notes
Holders of outstanding notes who do not exchange their outstanding notes
for exchange notes pursuant to the exchange offer will continue to be subject
to restrictions on transfer of such outstanding notes. In general, the
outstanding notes may not be offered or sold, unless registered under the
Securities Act of 1933, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act of 1933 and applicable state
securities laws. Other than in connection with the exchange offer, we do not
currently anticipate that we will register the outstanding notes under the
Securities Act of 1933. In addition, the tender of outstanding notes in the
exchange offer will reduce the principal amount of the outstanding notes
outstanding, which may have an adverse effect upon, and increase the volatility
of, the market price of the outstanding notes due to a reduction in liquidity.
You should refer to "Prospectus Summary--Summary of Terms of the Exchange
Offer" and "The Exchange Offer" for information about how to tender your
outstanding notes.
Substantial Leverage--Our substantial indebtedness could have a material
adverse effect on our financial health and prevent us from fulfilling our
obligations under the Notes.
We have now and after this exchange offer will continue to have a
significant amount of indebtedness. In addition, subject to the restrictions
contained in our indebtedness agreements, we expect to incur additional
indebtedness from time to time to finance acquisitions, for capital
expenditures, to fund working capital and for general business purposes.
The following chart presents certain important credit information assuming
that we had completed the offering of the outstanding notes and made the
initial borrowings under our senior credit facility that we entered into
concurrently with the offering of the outstanding notes (our "senior credit
facility," as described more fully below under the caption "Description of
Senior Credit Facility") and applied the net proceeds as intended as of the
dates or at the beginning of the periods specified below:
At December 31, 1998
---------------------
(Dollars in Millions)
Total indebtedness ........... $ 178.6
Stockholders' equity ......... 32.8
Debt to equity ratio ......... 5.4x
Based upon the same assumptions, our ratio of earnings to fixed charges
for the year ended December 31, 1998 would have been insufficient to cover
fixed charges by $8.6 million.
The amount shown above for total indebtedness assumes that we would have
borrowed $29.7 million under our senior credit facility if we had made the
initial borrowings on December 31, 1998.
13
This is based on the amount of our outstanding indebtedness as of that date.
Concurrently with the offering of the outstanding notes, however, we actually
borrowed $38.3 million under our senior credit facility. This was based on the
amount of indebtedness that was outstanding under our former senior credit
agreement at the time of the offering.
Our substantial indebtedness could have important consequences to you. For
example, it could:
o make it more difficult for us to satisfy or refinance our obligations
with respect to the Notes and our other indebtedness;
o require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures, acquisitions or other general corporate purposes;
o impair our ability to obtain additional financing for, among other
things, working capital, capital expenditures, acquisitions or other
general corporate purposes, or prevent us from obtaining financing to
repurchase the Notes from you upon a change of control;
o make us less attractive to prospective or existing customers or less
attractive to potential acquisition targets; and
o limit our flexibility to adjust to changing business and market
conditions, and make us more vulnerable to a downturn in general economic
conditions as compared to our competitors that have less debt.
In addition, our failure to comply with the financial and other
restrictive covenants contained in our indebtedness agreements could result in
an event of default under such indebtedness, which if not cured or waived,
could have a material adverse effect on us. If we cannot meet or refinance our
obligations when they are due, we may have to sell assets, reduce capital
expenditures or take other actions which could have a material adverse effect
on us.
We cannot assure you that our business will generate sufficient cash flow
from operations or that future borrowings will be available to us under our
senior credit facility or otherwise in an amount sufficient to enable us to pay
our indebtedness, including the Notes, or to fund our other liquidity needs. In
addition, we may need to refinance all or a portion of our indebtedness,
including the Notes, on or before maturity. We cannot assure you that we will
be able to refinance any of our indebtedness, including our senior credit
facility and the Notes, on commercially reasonable terms or at all.
See "Description of Notes--Repurchase at the Option of Holders--Change of
Control" and "Description of Senior Credit Facility."
Subordination--Your right to receive payments on the Notes is junior to our
bank and other unsubordinated indebtedness and possibly all of our future
borrowings, and the guarantees of the Notes are junior to all the guarantors'
existing indebtedness and possibly to all their future borrowings. In addition,
our assets will be encumbered to secure our senior credit facility.
Payments on the Notes are subordinated to all of our existing and future
indebtedness, other than trade payables and future indebtedness that expressly
provides that it is equal to or subordinated in right of payment to the Notes.
Similarly, payments by a guarantor on its guarantee of the Notes are
subordinated to all of that guarantor's existing and future indebtedness, other
than trade payables and future indebtedness that expressly provides that it is
equal to or subordinated in right of payment to its guarantee. As a result,
upon any distribution to our creditors in a bankruptcy, liquidation or
reorganization or similar proceeding relating to us or our property, the
holders of our senior debt will be entitled to be paid in full before any
payment may be made with respect to the Notes; and upon any distribution to the
creditors of a guarantor in a bankruptcy, liquidation or reorganization or
similar proceeding relating to that guarantor or its property, the holders of
the guarantor's senior debt will be entitled to be paid in full before any
payment may be made with respect to its guarantee of the Notes.
14
In the event of a bankruptcy, liquidation or reorganization or similar
proceeding relating to us or the guarantors, holders of the Notes will
participate on a pari passu (or equal) basis with trade creditors and all other
holders of senior subordinated indebtedness of our company and the guarantors.
However, because the Indenture requires that amounts otherwise payable to
holders of the Notes in a bankruptcy or similar preceding be paid instead to
holders of senior debt until they are paid in full, holders of the Notes may
receive less, ratably, than holders of trade payables and other senior
subordinated debt in any such preceding. In addition, any acceleration of the
indebtedness under our senior credit facility will, and acceleration of our
other indebtedness may, constitute an event of default under the Indenture. If
an event of default exists under our senior credit facility or certain other
senior indebtedness, the Indenture may restrict payments on the Notes until
holders of such other indebtedness are paid in full or such default is cured or
waived or has otherwise ceased to exist. In any of these cases, we and the
guarantors may not have sufficient funds to pay all of our creditors and
holders of the Notes may receive less, ratably, than the holders of trade
payables and other senior subordinated debt.
As of February 10, 1999, our and our guarantors' senior debt was
approximately as follows:
Our and our guarantors' senior debt collectively ......... $ 38.3 million
Our guarantors' senior debt .............................. $ 28.7 million
In addition, approximately $61.7 million is available for borrowing as
additional senior debt under our senior credit facility. We will be permitted
to borrow substantial additional indebtedness, including senior debt, in the
future under the terms of the Indenture.
The Notes will not be secured by any of our assets. Our obligations under
our senior credit facility, however, will be secured by a first priority pledge
of and security interest in substantially all of our assets and the assets of
our domestic subsidiaries. If we were to become insolvent or liquidated, or if
payment under our senior credit facility were accelerated, the lenders under
our senior credit facility will be entitled to exercise the remedies available
to a secured lender under applicable law. Accordingly, such lenders will have a
prior claim with respect to our assets securing such indebtedness. See
"Description of Senior Credit Facility" and "Description of
Notes--Subordination."
Holding Company Structure--Our ability to make payments on the Notes depends on
our ability to receive dividends from our subsidiaries.
Substantially all of our properties are owned by, and substantially all of
our operations are conducted through, our subsidiaries. As a result, we depend
on dividends and other payments from our subsidiaries to satisfy our financial
obligations and make payments to our investors. The ability of our subsidiaries
to pay dividends and make other payments to us is subject to certain
restrictions described in this section. See "Risk Factors--Subordination" and
"--Restrictions Imposed by Our Debt Agreements." In addition, the ability of a
subsidiary to pay dividends to us will be limited by applicable law. In the
event of bankruptcy proceedings affecting a subsidiary, to the extent we are
recognized as a creditor of that subsidiary, our claim would still be
subordinate to any security interest in or other lien on any assets of that
subsidiary and to any of its debt and other obligations that are senior to the
payment of the Notes.
Restrictions Imposed by Our Debt Agreements--Covenant restrictions may limit
our ability to make payments on the Notes or operate our business.
Our senior credit facility contains, and certain of our other indebtedness
agreements may contain, covenants that restrict our ability to make
distributions or other payments to our investors and creditors unless certain
financial tests or other criteria are satisfied. In some cases our subsidiaries
are subject to similar restrictions which may restrict their ability to make
distributions to us.
Our senior credit facility will contain, and certain other indebtedness
agreements may contain, additional affirmative and negative covenants,
including limitations on our ability to incur additional
15
indebtedness and to make acquisitions and capital expenditures which could
affect our ability to operate our business. A failure to comply with these
covenants could lead to an event of default under our senior credit facility,
which could lead to an acceleration of the related indebtedness.
The Indenture for the Notes will restrict, among other things, our ability
to incur additional indebtedness, sell assets, create liens or other
encumbrances, make certain payments and dividends or merge or consolidate, all
of which could affect our ability to operate our business and may limit our
ability to take advantage of potential business opportunities as they arise. A
failure to comply with the restrictions in the Indenture could result in an
event of default under the Indenture. See "Description of Senior Credit
Facility" and "Description of Notes--Certain Covenants."
Not All Subsidiaries Are Guarantors--Assets of the non-guarantor subsidiaries
may not be available to make payments on the Notes.
One of our existing subsidiaries, Hunter Drums Limited, a Canadian
corporation, will not be a guarantor of the Notes. Certain of our future
subsidiaries also may not be guarantors of the Notes. Payments on the Notes are
only required to be made by us and the subsidiary guarantors. As a result, no
payments are required to be made from assets of subsidiaries which do not
guarantee the Notes unless those assets are transferred (by dividend or
otherwise) to us or a subsidiary guarantor.
In the event of a bankruptcy, liquidation or reorganization of any of the
non-guarantor subsidiaries, holders of their indebtedness (including their
trade creditors) will generally be entitled to payment of their claims from the
assets of those subsidiaries before any assets are made available for
distribution to us. As of December 31, 1998, Hunter Drums Limited had total
liabilities (including trade payables) of $17.3 million and $5.8 million was
available to Hunter Drums Limited for future borrowing under our senior credit
facility.
Hunter Drums Limited generated approximately 13.1% of our consolidated
revenues in the fiscal year ended December 31, 1998 and held approximately
11.7% of our consolidated assets as of December 31, 1998. See "Note
21--Guarantor Subsidiaries" in our financial statements included at the back of
this prospectus.
Competition--Competition could have a material adverse effect on our
operations.
The markets for our products and services are competitive. We believe
competition is based primarily on price, service and quality. Price competition
may require us to match competitors' prices to retain business or market share.
Some of our competitors are larger and have greater financial and other
resources than we do, and there can be no assurance that we will continue to be
able to compete successfully with them. We also face competition in certain of
our product lines from producers of other types of industrial containers.
Competition from these and future competitors could reduce sales and prices and
have a material adverse effect on our results of operations. See
"Business--Competition."
Additional Future Capital Requirements--Our operations will require significant
capital expenditures.
We will have to make substantial capital expenditures to maintain our
current level of operations and to fund the growth of our operations. Based
upon the current level of operations and revenue growth, our management
believes that cash flow from operations and available cash, together with
available borrowings under our senior credit facility, will be adequate to meet
our future liquidity needs for at least the next several years. If we are
unable to obtain these funds, or if our growth strategy or current level of
business requires more capital than anticipated, it could have a material
adverse effect on the growth of our operations as well as our current level of
business.
Cost and Availability of Raw Materials and Certain Products--We generally do
not have long-term supply contracts and are subject to market price
fluctuations.
High molecular weight, high density polyethylene resin (or HDPE resin) is
the principal raw material and most significant cost component of our plastic
drums. Cold-rolled steel is the principal
16
raw material and most significant cost component of our steel drums. We
generally do not have long-term supply contracts with our suppliers, and our
purchases of raw materials are subject to market prices. We generally pass
changes in the prices of raw materials to our customers over a period of time.
We cannot always do so, however, and therefore we cannot assure you that we
will be able to pass through any future raw material price increases. Any
limitation on our ability to pass through any such price increases could have a
material adverse effect on our results of operations.
We rely on a limited number of suppliers of HDPE resin. Should we need to
secure alternative suppliers, only a small number of alternative suppliers
exist. Any significant interruption in the supply of HDPE resin would have a
material adverse effect on our results of operations.
In addition, we obtain from foreign suppliers a significant portion of our
cold-rolled steel. Foreign suppliers of cold-rolled steel have been accused by
domestic producers of exporting steel to the United States at artificially low
prices. As a result, the Commerce Department has recently imposed anti-dumping
duties on steel imported from Japan and Brazil and negotiated a voluntary
reduction in steel imports from Russia. Additionally, Congress is considering
imposing limits on the amount of steel that may be imported into the U.S. which
would result in significant reductions in steel imports. Such measures could
result in a substantial increase in our cost of cold-rolled steel, which could
have a material adverse effect on our results of operations. See "Business--Raw
Materials."
Integration of Acquired Businesses and Acquisition Strategy--Our acquisition
strategy may not be successful.
The rigid industrial container industry has been undergoing consolidation
for a number of years and remains fragmented. We have acquired and seek to
acquire other companies that can benefit from our production, distribution and
management strengths. Our ability to grow by acquisition is dependent upon, and
may be limited by, the availability of suitable acquisition candidates and
capital, and the restrictions contained in the Indenture and our other
indebtedness agreements. In addition, growth by acquisition involves risks that
could have a material adverse effect on our results of operations, including
difficulties in integrating the operations and personnel of acquired companies
and the potential loss of key employees and customers of acquired companies.
While we have experience in identifying and integrating acquisitions, we cannot
assure you that we will be able to identify suitable acquisition candidates,
obtain the capital necessary to pursue our growth strategy, consummate
acquisitions on satisfactory terms or, if any such acquisitions are
consummated, satisfactorily integrate acquired businesses. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Changing Product Requirements--Increasing usage of IBCs could have a material
adverse effect on our results of operations.
We believe users of rigid industrial containers will increasingly convert
to rigid intermediate bulk containers, or IBCs. Currently, we do not
manufacture IBCs; however, we purchase IBCs which our services division leases
to our customers. Our IBC suppliers are also our competitors in certain product
lines. We do not have long-term contracts for the supply of IBCs with these
manufacturers and compete with other companies for production capacity. Should
we need to secure alternative suppliers, only a small number of alternative
suppliers exist. The unavailability or unwillingness of a manufacturer to
supply IBCs on commercially reasonable terms or at all would restrict our
ability to offer plastic container leasing services to our customers which
could have a material adverse effect on our results of operations. In addition,
the inability of a manufacturer to supply IBCs in a timely fashion, or to
satisfy our quality standards, could cause us to miss the delivery date
requirements of our customers for those items, which could result in a
cancellation of orders, refusal to accept delivery or a reduction in prices
and, as a result, could have a material adverse effect on our results of
operations.
Currently we are evaluating options for obtaining the capacity to
manufacture IBCs. We may decide not to pursue such capacity in the near future
or at all. The combination of competitive pricing pressure and the fact that we
do not manufacture the IBCs leased by our services division results in
17
IBC leasing contributing a lower gross profit as a percentage of net sales as
compared to plastic drum leasing. To the extent that customers of our services
division convert to IBCs, it could result in a material erosion of our gross
profit as a percentage of sales, which could have a material adverse effect on
our results of operations. In addition, a decrease in the demand for plastic
and steel drums resulting from the increasing usage of IBCs could have a
material adverse effect on the net sales of our container manufacturing
division, which could have a material adverse effect on our results of
operations.
Risk of Economic Downturn--A significant economic downturn, particularly one
affecting the chemical industry, could have a material adverse effect on our
results of operations.
Our results of operations are affected by the level of economic activity
in the industries served by our customers, which in turn may be affected by the
level of economic activity in the U.S. and foreign markets which they serve.
Accordingly, a decline in the level of economic activity in such industries as
a result of a decline in the level of economic activity in the U.S. or foreign
markets which they serve or otherwise may have a material adverse effect on our
results of operations. A significant percentage of our net sales was derived
from customers who serve the chemical industry. As a result, a decline in the
level of economic activity in the U.S. or foreign chemical industry in
particular could have a material adverse effect on our results of operations.
In addition, because we operate with little or no backlog, changes in economic
activity, positive and negative, affect our results of operations more quickly
than such changes would affect the results of operations of a company that
operates with a backlog. As a result, our results of operations, including our
cash flow, are subject to a greater degree of volatility and could deteriorate
more rapidly than a company that operates with a backlog.
Dependence on Licensing Partner--The termination of our license with Mauser
could have a material adverse effect on our results of operations.
Since 1985, we have licensed manufacturing technology for the L-1/LR-1
plastic drum from Mauser-Werke GmbH, a privately-held German corporation with
significant operations in Europe, and we purchase equipment from Mauser for use
in the manufacture of the L-1. We have the exclusive license to manufacture the
L-1/LR-1 throughout all of the United States (other than certain parts of the
Southeast) and Canada, we and one other manufacturer have the exclusive right
to sell the L-1 throughout the United States and we have the exclusive right to
sell the LR-1 in Canada. Mauser can terminate our licenses under certain
circumstances, including a default by us in the payment of certain amounts and
the failure by us to comply with the covenants contained in the licenses. Such
termination would have a material adverse effect on our results of operations.
We do not believe, however, that any of such circumstances currently exist, and
our payment obligations under the licenses are not material. See
"Business--Intellectual Property."
Grand Jury Investigation of Plastic Drum Industry
In November 1995, the Antitrust Division of the United States Department
of Justice served us with an information subpoena in connection with an ongoing
grand jury investigation into possible price-fixing in the plastic drum
industry between 1991 and 1995. We responded to the information subpoena in a
timely fashion. We do not know the current status of, or the identity of the
subjects of, the investigation. We cannot assure you that the Antitrust
Division will not institute proceedings against us in the future as a result of
this investigation.
It is Difficult to Obtain Reliable Market Information
We operate in an industry in which it is difficult to obtain precise
industry and market information. Although we have obtained some industry data
from third party sources that we believe to be reliable, in many cases, we have
based certain statements contained in this prospectus regarding our industry
and our position in the industry on certain assumptions concerning our
customers and competitors. These assumptions are based on our experience in the
industry and our
18
own investigation of market conditions. We cannot assure you as to the accuracy
of any such assumptions, and such assumptions may not be indicative of our
position in our industry.
Dependence on Key Management--The loss of key personnel could have a material
adverse effect on our results of operations.
Our success depends largely upon the abilities and experience of certain
key management personnel. If we lose the services of one or more of our key
personnel, it could have a material adverse effect on our business and results
of operations. We generally do not have non-compete agreements with such
personnel. In addition, we generally do not maintain key-man life insurance
policies on our executives. See "Management" and "Ownership of Common Stock."
Labor Stoppage--Employee slowdowns, strikes or similar actions could have a
material adverse effect on the results of our operations.
Approximately 29% of our employees are represented under collective
bargaining agreements which expire from May 1999 to June 2002. Unions represent
employees at nine of our 21 facilities. While we believe that our relations
with our unionized employees are good, a prolonged labor dispute could have a
material adverse effect on our business and results of operations. See
"Business--
Employees."
Regulations Regarding Transportation--Our noncompliance with governing
regulations could have a material adverse effect on our ability to sell our
products.
Our operations are subject to federal, state and local transportation laws
and regulations and United Nations international shipping guidelines which
require that plastic and steel containers used in interstate and international
commerce satisfy specified performance requirements. We believe that our
products are in substantial compliance with the terms of all applicable
transportation laws, regulations and guidelines as currently interpreted. While
historically the costs of compliance with these laws and regulations have not
had a material adverse effect on our consolidated financial condition, results
of operations or cash flows, we cannot predict with certainty the future costs
of compliance because of continually changing compliance standards and
technology. We expect that future regulations and changes in the text or
interpretation of existing laws and regulations may subject our operations to
increasingly stringent standards. Compliance with such requirements may make it
necessary for us to incur substantial costs and could have a material adverse
effect on our financial condition, results of operations or cash flows.
Product Liability Exposure--Our insurance coverage may be inadequate.
Our business entails risks of product liability. We maintain $50 million
of insurance coverage for product liability claims. Although we believe this
coverage is adequate, we cannot assure you that coverage under insurance
policies will be adequate to cover product liability claims against us. In
addition, product liability insurance could become more expensive and difficult
to maintain and in the future may not be available on commercially reasonable
terms or at all. The amount and scope of any insurance coverage may be
inadequate in the event that a product liability claim is successfully asserted
against us.
We are Controlled by Vestar
Vestar owns a majority of our outstanding shares of common stock. See
"Ownership of Common Stock." Accordingly, we are controlled by Vestar and they
have the power to elect all of our directors, appoint new management and
approve any action requiring the approval of our stockholders, including
adopting amendments to our certificate of incorporation and approving mergers
or sales of all or substantially all of our assets. In addition, the directors
elected by Vestar have the authority to make decisions affecting our capital
structure, including the incurrence of additional indebtedness, the issuance of
additional capital stock, the implementation of
19
stock repurchase programs and the declaration of dividends. We cannot assure
you that the interests of Vestar will not conflict with your interests as a
holder of the Notes. See "Management" and "Certain Relationships and Related
Party Transactions."
Environmental Matters--Environmental laws and regulations could have a material
adverse effect on our results of operations.
Our operations are subject to federal, state, local and Canadian
environmental laws and regulations. These laws and regulations impose
limitations on the discharge of pollutants into the environment and establish
standards for the handling, generation, emission, release, discharge,
treatment, storage and disposal of certain materials, substances and wastes and
the remediation of environmental contamination. We believe that our operations
are in substantial compliance with the terms of all applicable environmental
laws and regulations as currently interpreted. See "Business--
Environmental Matters."
While historically the costs of environmental compliance have not had a
material adverse effect on our consolidated financial condition, results of
operations or cash flows, we cannot predict with certainty the future costs of
environmental compliance because of continually changing compliance standards
and technology. We expect that future regulations and changes in the text or
interpretation of existing environmental laws and regulations may subject our
operations to increasingly stringent standards. Compliance with such
requirements may make it necessary, at costs which may be substantial, for us
to retrofit existing facilities with additional pollution-control equipment and
to undertake new measures in connection with the storage, transportation,
treatment and disposal of by-products and wastes. In addition, we may become
obligated in the future to incur costs associated with investigation and/or
remediation of contamination at our facilities or at other locations. The costs
of such actions could have a material adverse effect on our financial
condition, results of operations or cash flows.
The U.S. Environmental Protection Agency has confirmed the presence of
certain contaminants, including dioxin, in and along the Woonasquatucket River
in Rhode Island. Prior to 1970, New England Container operated a facility in
North Providence, Rhode Island along the Woonasquatucket River at a site where
contaminants have been found. Recent press reports identify New England
Container as a business that may have contributed to the contamination. We are
not aware that any party has been formally identified by the EPA as a
potentially responsible party. Notwithstanding that New England Container no
longer operates the facility, and did not operate the facility at the time we
acquired the outstanding capital stock of New England Container in July 1998,
New England Container could incur liability under federal and state
environmental laws and/or as a result of civil litigation. We believe that any
resulting liability is subject to a contractual indemnity from Vincent J.
Buonanno, one of our directors and the former owner of New England Container.
However, such indemnity is subject to a $2.0 million limit. We currently are
unable to estimate the likelihood or extent of any liability; however, this
matter may result in liability to New England Container that could have a
material adverse effect on Russell-Stanley's financial condition and results of
operations.
Change of Control Offer--We may not be permitted to purchase the Notes upon a
change of control as required by the Indenture.
Upon the occurrence of certain specific change of control events, we will
be required to offer to purchase all outstanding notes from you. However, a
change of control will also constitute an event of default under our senior
credit facility that would permit the lenders to accelerate the debt
thereunder. In addition, our senior credit facility will restrict our purchase
of the Notes upon a change of control. Therefore, prior to purchasing the Notes
upon a change of control, we must either repay the indebtedness under our
senior credit facility or obtain the consent of the lenders thereunder. If we
do not repay our senior credit facility or obtain such consent, we will be
prohibited from offering to purchase the Notes.
The source of funds for any purchase of the Notes would be our available
cash or cash generated from other sources, including borrowings, sales of
assets, sales of equity or funds
20
provided by an existing or new controlling person. We cannot assure you that
any of these sources will be available. Upon the occurrence of a change of
control event, we may seek to refinance the indebtedness outstanding under our
senior credit facility and the Notes. However, it is possible that we will not
be able to complete such refinancing on commercially reasonable terms or at
all. In such event, we would not have the funds necessary to finance the
required change of control offer. See "Description of Notes--Repurchase at the
Option of Holders--Change of Control."
Year 2000 Risk
As has been widely reported, many computer systems process dates based on
two digits for the year of transaction and may be unable to process dates in
the year 2000 and beyond. There are many risks associated with the year 2000
compliance issue, including but not limited to the possible failure of our
systems and hardware with embedded applications. Any such failure could result
in
o our inability to order raw materials,
o the malfunctioning of our manufacturing or service processes,
o our inability to properly bill and collect payments from our customers
and/or
o errors or omissions in accounting and financial data, any of which could
have a material adverse effect on our results of operations and financial
condition.
In addition, there can be no guarantee that the systems of other
companies, including our vendors, utilities and customers, will be converted in
a timely manner, or that a failure to convert by another company, or a
conversion that is incompatible with our systems, would not have a material
adverse effect on us. We have not yet developed any contingency plans. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Compliance."
No Prior Market for Notes--An active trading market may not develop for the
Notes.
The Notes will constitute a new class of securities for which there is no
established trading market. We do not intend to list the Notes on any national
securities exchange or to seek their quotation on any automated dealer
quotation system. Although the underwriters have informed us that they intend
to make a market in the Notes, they are not obligated to do so, and they may
cease such activities at any time without notice. The liquidity of a market for
the Notes will depend upon a number of factors, including the number of holders
of the Notes and the interest of securities dealers in making a market in the
Notes. Accordingly, we cannot assure you as to the development or liquidity of
any market for the Notes.
If an active trading market for the Notes does not develop, it would have
a material adverse effect on the market price and liquidity of the Notes. If
the Notes are traded, they may trade at a discount from their initial offering
price, depending upon prevailing interest rates, the market for similar
securities, our performance and certain other factors. However, declines in the
liquidity and market price of the Notes may also occur independent of our
financial performance or prospects.
21
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the exchange
notes. The net proceeds from the issuance and sale of the outstanding notes,
which we estimate were approximately $144.0 million after deduction of
underwriting discounts and other expenses, was applied towards the repayment of
outstanding principal and interest under our former senior credit agreement.
22
CAPITALIZATION
The following table sets forth our unaudited consolidated capitalization
as of December 31, 1998 on an actual basis and as adjusted to give effect to
the offering of the outstanding notes, the initial borrowing under our senior
credit facility and the application of the net proceeds as intended.
In consideration for issuing the exchange notes as contemplated in this
prospectus, we will receive in exchange a like principal amount of outstanding
notes. The terms of the exchange notes are identical in all material respects
to the terms of the outstanding notes, except that the exchange notes will
generally be freely tradeable by their holders, will not contain terms with
respect to the special interest payments described in "Description of
Notes--Registration Covenant; Exchange Offer" and will not be subject to any
covenant regarding registration under the Securities Act of 1933. The exchange
notes will evidence the same indebtedness as the outstanding notes. The
outstanding notes surrendered in exchange for the exchange notes will be
retired and canceled and cannot be reissued. Accordingly, issuance of the
exchange notes will not result in any change in our capitalization. This table
should be read in conjunction with the financial statements and related notes
and the unaudited pro forma consolidated financial data included in this
prospectus.
December 31, 1998
-------------------------
Actual As adjusted
(In Millions) ---------- ------------
Cash and cash equivalents ..................... $ 1.6 $ 1.6
======= =======
Long-term debt:
Former senior credit agreement (1) ......... 171.6 --
Senior credit facility (2) ................. -- 29.7
Outstanding notes (3) ...................... -- 148.9
------- -------
Total long-term debt ..................... 171.6 178.6
------- -------
Stockholders' equity:
Additional paid in capital ................. 70.2 70.2
Other ...................................... (36.7) (37.4)
------- -------
Total stockholders' equity .............. 33.5 32.8
------- -------
Total capitalization .......................... $ 205.1 $ 211.4
======= =======
- ----------
(1) Concurrently with the offering of the outstanding notes, we replaced our
former senior credit agreement with our senior credit facility; $25.0
million of term loan indebtedness outstanding under our former senior
credit agreement remains outstanding under our senior credit facility.
(2) This assumes that we would have borrowed $4.7 million under our senior
credit facility, in addition to $25.0 million of term loan indebtedness,
if we had made the initial borrowings on December 31, 1998. This is based
on the amount of our outstanding indebtedness as of that date.
Concurrently with the offering of the outstanding notes, however, we
borrowed approximately $13.3 million under our senior credit facility, in
addition to the $25.0 million of term loan indebtedness. This is based on
the amount of indebtedness that was outstanding under our former senior
credit agreement at the time of the offering.
(3) Represents the outstanding notes issued at 99.248% of their face amount.
23
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated financial data has been
derived by the application of pro forma adjustments to our historical financial
statements as of and for the year ended December 31, 1998. The pro forma
adjustments give effect to (i) our acquisition of New England Container, (ii)
the offering of the outstanding notes and the initial borrowings under our
senior credit facility that we entered into concurrently with the offering of
the outstanding notes and (iii) the application of the proceeds from the
offering of the outstanding notes and the initial borrowings under our senior
credit facility (net of fees and expenses) to repay a portion of our
outstanding long-term indebtedness.
The unaudited pro forma consolidated balance sheet has been prepared as if
the transactions described above had occurred on December 31, 1998. The
unaudited pro forma consolidated statement of operations gives effect to the
transactions described above as if they had occurred on January 1, 1998. The
adjustments, which are based upon available information and upon certain
assumptions that management believes are reasonable, are described in the
accompanying notes. The unaudited pro forma consolidated financial data does
not purport to represent what our financial position or results of operations
would actually have been had the transactions described above in fact occurred
on the assumed dates or to project our financial position or results of
operations for any future date or period.
The acquisition reflected in the unaudited pro forma consolidated
financial data has been accounted for using the purchase method of accounting.
The unaudited pro forma consolidated statement of operations does not
include any adjustments for anticipated cost savings or other operating
improvements. See "Business--Business Strategy."
This unaudited pro forma consolidated financial data should be read in
conjunction with the discussion under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our financial statements and
the financial statements of Container Management Services, Hunter Drums Limited
and the plastics division of Smurfit Packaging Corporation and the related
notes included in this prospectus.
24
RUSSELL-STANLEY HOLDINGS, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
December 31, 1998
Financing
Historical Adjustments Pro Forma
(In Millions) ------------ ----------------- ----------
Assets
Current assets:
Cash and cash equivalents ......................... $ 1.6 $ --(a) $ 1.6
Accounts receivable, net .......................... 29.5 29.5
Inventories ....................................... 18.8 18.8
Other assets ...................................... 6.2 6.2
------- --------- -------
Total current assets ............................ 56.1 -- 56.1
Property, plant and equipment, net ................. 92.6 92.6
Other assets:
Goodwill and other intangibles, net ............... 108.2 108.2
Deferred financing costs and other
noncurrent assets, net ........................... 1.4 7.0 (b) 7.2
( 1.2)(c)
------- --------- -------
Total assets ....................................... $ 258.3 $ 5.8 $ 264.1
======= ========= =======
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses ............. $ 43.1 $ (0.5)(d) $ 42.6
------- --------- -------
Long-term debt:
Former senior credit agreement .................... 171.6 (171.6)(e) --
Senior credit facility ............................ -- 29.7 (f) 29.7
Outstanding notes ................................. -- 148.9 (f) 148.9
Deferred taxes, net ................................ 4.7 4.7
Other noncurrent liabilities ....................... 5.4 5.4
------- --------- -------
Total liabilities ................................ 224.8 6.5 231.3
Stockholders' equity ............................... 33.5 (0.7)(c) 32.8
------- --------- -------
Total liabilities and stockholders' equity ......... $ 258.3 $ 5.8 $ 264.1
======= ========= =======
25
RUSSELL-STANLEY HOLDINGS, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(a) Sources and uses for the transactions are as follows:
(In Millions)
Sources:
Initial borrowings under our senior credit facility and the issuance of the
outstanding notes:
Senior credit facility .......................................................... $ 29.7
Outstanding notes ............................................................... 148.9
-------
Total .......................................................................... $ 178.6
=======
Uses:
Repayment of long-term indebtedness (including current maturities) ............... $ 171.6
Estimated fees and expenses ...................................................... 7.0
-------
Total .......................................................................... $ 178.6
=======
(b) Represents the estimated fees and expenses attributable to our senior
credit facility and the Notes which will be recorded as deferred financing
costs and amortized over the life of the indebtedness (five years for the
revolving credit facility and eight years for the term loan, each under
our senior credit facility, and ten years for the Notes).
(c) Represents the elimination of existing deferred financing costs incurred in
conjunction with the indebtedness to be repaid. With respect to
stockholders' equity, the effect is net of taxes.
(d) Represents the tax effect on the pro forma adjustments at a 42% effective
tax rate.
(e) Represents the repayment of existing indebtedness.
(f) Represents the initial borrowings under our senior credit facility ($29.7
million) and issuance of the outstanding notes ($148.9 million). Initial
borrowings under our senior credit facility consist of (i) $4.7 million of
revolving indebtedness (based on the amount of our outstanding indebtedness
as of December 31, 1998) and (ii) $25.0 million of term loan indebtedness
outstanding under our former credit agreement and which will remain
outstanding under our senior credit facility. Concurrently with the offering
of the outstanding notes, however, we borrowed approximately $13.3 million
of revolving indebtedness, in addition to the $25.0 million of term loan
indebtedness.
26
RUSSELL-STANLEY HOLDINGS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
(a) (b) Acquisition Financing
Historical Acquisitions Adjustments Adjustments Pro Forma
(Dollars in Millions) ------------ -------------- --------------- --------------- ----------
Net sales:
Container manufacturing
division ................................. $ 227.4 $ -- $ -- $ -- $ 227.4
Services division ........................ 46.6 10.5 -- -- 57.1
------- ------ ------- ------- --------
Total net sales .......................... 274.0 10.5 -- -- 284.5
Cost of sales ............................. 213.2 7.5 -- -- 220.7
------- ------ ------- ------- --------
Gross profit .............................. 60.8 3.0 -- -- 63.8
Selling, general and administrative
expenses ................................. 42.9 2.4 (0.1)(c) -- 45.2
Non-recurring charges ..................... 6.2 -- 6.2
------- ------ ------- ------- --------
Income (loss) from operations ............. 11.7 0.6 0.1 -- 12.4
Interest expense .......................... 16.0 0.2 4.3 (d) 20.5
Other (income) expense, net ............... 0.5 1.5 (1.5)(e) 0.5
------- ------ ------- ------- --------
Income (loss) before income taxes
and extraordinary items .................. (4.8) (1.1) 1.6 (4.3) (8.6)
Provision (benefit) for income
taxes .................................... (0.5) (0.2) (0.2)(f) (1.8)(f) (2.7)
------- ------ ------- ------- --------
Income (loss) before extraordinary
items (g) ................................ $ (4.3) $ (0.9) $ 1.8 $ (2.5) $ (5.9)
======== ====== ======= ======= ========
Other Data:
Cash flows from (used in):
Operating activities ..................... $ 30.9 $ (1.2) $ 1.9 $ (1.5) $ 30.1
Investing activities ..................... (41.2) 3.1 -- -- (38.1)
Financing activities ..................... 10.9 (2.1) -- -- 8.8
EBITDA (h) ................................ 37.8 (0.4) 1.7 -- 39.1
Adjusted EBITDA (h) ....................... 44.9 (0.4) 1.7 -- 46.2
Capital expenditures ...................... 28.7 0.4 -- -- 29.1
Depreciation and amortization (i) ......... 26.6 0.5 0.1 -- 27.2
Pro forma ratios:
Earnings to fixed charges (j) ............ --
Adjusted EBITDA to interest
expense ........................ ........ 2.3x
27
RUSSELL-STANLEY HOLDINGS, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(a) Represents historical consolidated results of operations, including the
results of operations of New England Container from the date of
acquisition.
(b) Represents the pre-acquisition operations of New England Container which
was acquired on July 23, 1998.
(c) Represents the net effect of applying purchase accounting to selling,
general and administrative expenses in connection with our acquisition of
New England Container, as follows:
Fiscal
Year Ended
December 31,
1998
-------------
(In Millions)
Amortization expense (1) ............... $ 0.1
Deferred acquisition costs (2) ......... (0.2)
------
Total ............................... $ (0.1)
======
----------
(1) Represents the increase in amortization expense for the amortization of
goodwill related to our acquisition of New England Container. Goodwill
is amortized over 40 years.
(2) Represents the application of purchase accounting to pre-acquisition
compensation agreements.
(d) Represents the net adjustment to interest expense as a result of the
initial borrowings under our senior credit facility and the issuance of the
outstanding notes, calculated as follows:
Fiscal
Year Ended
December 31,
1998
-------------
(In Millions)
Senior credit facility (1) ........................... $ 2.7
Outstanding notes (2) ................................ 16.4
Commitment fees (3) .................................. 0.4
Amortization of deferred financing costs (4) ......... 1.0
-------
Pro forma interest expense ........................... 20.5
Historical interest expense .......................... (16.2)
-------
Net interest expense adjustment ...................... $ 4.3
=======
----------
(1) Represents interest on the initial borrowings of $4.7 million under the
senior credit facility, using an assumed interest rate of 7.70% and
interest on the $25.0 million term loan using a fixed interest rate of
9.48%.
(2) Represents interest on the outstanding notes using an effective interest
rate of 11.00%.
(3) Represents a 0.5% commitment fee on the unused portion of our senior
credit facility.
(4) Deferred financing costs are amortized over the term of the related
indebtedness (five years for the revolving credit facility and eight
years for the term loan, each under our senior credit facility, and ten
years for the Notes).
(e) Represents the net effect of applying purchase accounting to eliminate
certain New England Container shareholder expenses that were terminated
as a result of the acquisition.
(f) Represents the tax effect on the pro forma adjustments at a 42% effective
tax rate. In addition, acquisition adjustments include a pro forma tax
adjustment to treat New England Container as a C-Corporation for federal
and state income tax purposes for the pre-acquisition period.
28
(g) Income (loss) before extraordinary items excludes $1.0 million, net of
taxes relating to deferred financing costs that we expect to write-off as
a result of the transactions.
(h) We define "EBITDA" as income (loss) before extraordinary items, plus
interest expense, income tax expense (benefit) and depreciation and
amortization. EBITDA does not represent, and should not be considered as
an alternative to, net income or cash flow from operations as determined
in accordance with GAAP, and our calculation therefore may not be
comparable to that reported by other companies. While EBITDA should not
be considered in isolation or as a substitute for net income, cash flows
from operating activities and other income or cash flow statement data
prepared in accordance with GAAP, or as a measure of profitability or
operating performance, management understands that EBITDA is commonly
used in evaluating a company's ability to service debt. EBITDA does not
take into account our debt service requirements and other commitments
and, accordingly, it is not necessarily indicative of amounts that may be
available for discretionary uses. We define "Adjusted EBITDA" as EBITDA,
plus non-recurring charges and management fees. Adjusted EBITDA is
presented as certain financial covenants in our borrowing arrangements
will be based on similar measures.
The calculation of pro forma EBITDA and Adjusted EBITDA is as follows:
Fiscal
Year Ended
December 31,
1998
-------------
(In Millions)
Income (loss) before extraordinary items ......... $ (5.9)
Interest expense ................................. 20.5
Income tax expense (benefit) ..................... (2.7)
Depreciation and amortization (1) ................ 27.2
-------
EBITDA ........................................... 39.1
Management fees (2) .............................. 0.9
Non-recurring charges (3) ........................ 6.2
-------
Adjusted EBITDA .................................. $ 46.2
=======
----------
(1) Excludes amortization of deferred financing costs.
(2) Represents fees paid to Vestar.
(3) Represents non-recurring charges incurred during fiscal 1998
consisting of the following:
(In Millions)
Plant and headquarters closure/relocation costs . .......... $ 1.2
Severance and other personnel related costs ..... .......... 2.2
Professional fees on acquisitions not consummated ......... 2.7
Other ........................................... .......... 0.1
------
Non-recurring charges ........................... .......... $ 6.2
======
(i) Excludes amortization of deferred financing costs.
(j) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as income (loss) before income taxes and
extraordinary items, plus fixed charges. Fixed charges consist of
interest expense on all indebtedness, amortization of deferred
financing costs and one-third of rental expense on operating leases,
representing that portion of rental expense which we deem to be
attributable to interest.
29
The calculation of the pro forma ratios of earnings to fixed charges is as
follows:
Fiscal
Year Ended
December 31,
1998
-------------
(Dollars in Millions)
Income (loss) before taxes and extraordinary items ......... $ (8.6)
Fixed charges:
Interest expense .......................................... 20.5
Rental expense ............................................ 1.7
Total fixed charges ........................................ 22.2
-------
Earnings ................................................... $ 13.6
=======
Ratio of earnings to fixed charges (1) ..................... --
- ----------
(1) Earnings were insufficient to cover fixed charges by $8.6 million.
30
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
Set forth below is selected historical consolidated financial and other
data as of, and for the years ended, December 31, 1994, 1995, 1996, 1997 and
1998. The selected consolidated historical financial and other data as of
December 31, 1997 and 1998 and for the years ended December 31, 1996, 1997 and
1998 were derived from the consolidated financial statements and related notes
audited by Deloitte & Touche LLP, independent auditors, which are included in
this prospectus. The selected consolidated historical financial and other data
as of December 31, 1994, 1995 and 1996 and for the years ended December 31,
1994 and 1995 have been derived from our audited consolidated financial
statements and related notes which are not included in this prospectus.
Russell-Stanley Holdings, Inc. was formed in July 1997 to serve as a
holding company for Russell-Stanley Corp. and its subsidiaries. The transaction
was accounted for in a method similar to a pooling of interests, and therefore
the financial data presented below has been prepared from financial statements
that include the operations of Russell-Stanley Holdings, Inc. and its
subsidiaries as if they had been combined for all periods presented. We
completed three acquisitions during 1997 and one acquisition during 1998, all
accounted for under the purchase method of accounting. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Introduction."
Historical data are not necessarily indicative of future results. The
selected consolidated historical financial and other data presented below
should be read in conjunction with the discussion under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements and the financial statements of Container Management
Services, Hunter Drums Limited and the plastics division of Smurfit Packaging
Corporation and the related notes included in this prospectus.
31
Fiscal Year Ended December 31,
---------------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ----------- ------------- -----------
(Dollars in Millions)
Statement of Operations Data:
Net sales:
Container manufacturing
division ........................ $ 126.3 $ 138.8 $ 141.9 $ 161.1 $ 227.4
Services division ................ -- -- -- 15.2 46.6
-------- -------- -------- -------- -------
Total net sales ................. 126.3 138.8 141.9 176.3 274.0
Cost of sales ..................... 95.9 106.5 103.6 133.6 213.2
-------- -------- -------- -------- -------
Gross profit ...................... 30.4 32.3 38.3 42.7 60.8
Selling, general and
administrative expenses .......... 21.6 21.4 24.3 26.8 42.9
Non-recurring charges (1) ......... -- -- -- -- 6.2
-------- -------- -------- --------- -------
Income from operations ............ 8.8 10.9 14.0 15.9 11.7
Other expense, net (2) ............ -- -- 0.3 0.2 0.5
-------- -------- -------- --------- -------
Interest expense .................. 7.8 8.3 7.5 8.8 16.0
-------- -------- -------- --------- -------
Income (loss) before income
taxes and extraordinary items..... 1.0 2.6 6.2 6.9 (4.8)
Provision (benefit) for income
taxes ............................ 0.8 1.2 2.5 2.9 (0.5)
-------- -------- -------- --------- -------
Income (loss) before
extraordinary items .............. $ 0.2 $ 1.4 $ 3.7 $ 4.0 $ (4.3)
======== ======== ======== ========= ========
Other Financial Data:
Cash flows from (used in):
Operating activities ............. $ 2.6 $ 14.0 $ 4.4 $ 17.7 $ 30.8
Investing activities ............. (7.3) (4.9) (3.3) (140.3) (41.2)
Financing activities ............. 4.8 (8.3) (1.3) 122.5 11.0
EBITDA (3) ........................ 15.6 17.1 19.6 25.8 37.8
EBITDA margin(3) .................. 12.4% 12.3% 13.8% 14.6% 13.8%
Adjusted EBITDA (4) ............... $ 15.9 $ 17.4 $ 19.9 $ 26.2 $ 44.9
Adjusted EBITDA margin(4) ......... 12.6% 12.5% 14.0% 14.9% 16.4%
Capital expenditures .............. $ 6.2 $ 4.8 $ 3.3 $ 9.9 $ 28.7
Depreciation and amortization ..... 6.8 6.2 5.9 10.1 26.6
Ratio of earnings to fixed
charges (5) ...................... 1.1x 1.3x 1.8x 1.8x --
Balance Sheet Data:
Working capital ................... $ 16.1 $ 11.7 $ 17.6 $ 20.2 $ 12.9
Property, plant and equipment,
net .............................. 31.4 33.0 31.2 85.0 92.6
Total assets ...................... 96.2 88.4 88.8 245.5 258.3
Total debt ........................ 87.4 83.3 86.2 161.4 171.6
Total stockholders' equity
(deficit):
Additional paid-in capital ....... 7.6 7.6 7.6 69.1 70.2
Other ............................ (19.9) (21.8) (22.1) (30.3) (36.7)
-------- -------- -------- --------- --------
Total ........................... (12.3) (14.2) (14.5) 38.8 33.5
32
(1) In conjunction with the integration of acquired entities and expansion of
our operations, a plan was developed to rationalize our operations and
sales force and consolidate and relocate our corporate headquarters in
order to improve operating efficiencies and reduce costs. As part of this
plan, we recorded non-recurring charges of approximately $3.5 million
during the year ended December 31, 1998. These charges primarily include
costs related to the closure of a container manufacturing facility,
severance and other personnel related costs and the relocation of our
corporate headquarters. Also included in non-recurring charges at December
31, 1998 are $2.7 million of costs associated with proposed acquisitions
that were not consummated. See "Note 18--Non-Recurring Charges" in our
financial statements included at the back of this prospectus.
(2) Other expense, net is comprised of (gains) losses on disposal of fixed
assets, unrealized (gains) losses on forward foreign exchange contracts
recorded at fair value and other miscellaneous (gains) losses.
(3) We define "EBITDA" as income (loss) before extraordinary items, plus
interest expense, income tax expense and depreciation and amortization. We
define "EBITDA margin" as EBITDA divided by net sales. EBITDA is
calculated for each of the periods presented as follows:
Fiscal Year Ended December 31,
----------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ----------
(In Millions)
Income (loss) before extraordinary items ......... $ 0.2 $ 1.4 $ 3.7 $ 4.0 $ (4.3)
Interest expense ................................. 7.8 8.3 7.5 8.8 16.0
Provision (benefit) for income taxes ............. 0.8 1.2 2.5 2.9 (0.5)
Depreciation & amortization ...................... 6.8 6.2 5.9 10.1 26.6
------ ------ ------ ------ -------
EBITDA ........................................... $ 15.6 $ 17.1 $ 19.6 $ 25.8 $ 37.8
====== ====== ====== ====== =======
EBITDA does not represent, and should not be considered an alternative to,
net income or cash flow from operations as determined in accordance with
GAAP, and our calculation therefore may not be comparable to that reported
by other companies. While EBITDA should not be considered in isolation or as
a substitute for net income, cash flows from operating activities and other
income or cash flow statement data prepared in accordance with GAAP, or as a
measure of profitability or operating performance, management understands
that EBITDA is commonly used in evaluating a company's ability to service
debt. However, EBITDA does not take into account our debt service
requirements and other commitments and, accordingly, is not necessarily
indicative of amounts that may be available to us for discretionary uses.
(4) We define "Adjusted EBITDA" as EBITDA plus non-recurring charges and
management fees. Adjusted EBITDA is presented as certain financial
covenants in our borrowing arrangements will be based on similar measures.
We pay management fees to Vestar. See "Related Party Transactions." We
define "Adjusted EBITDA margin" as Adjusted EBITDA divided by net sales.
Non-recurring charges for the year ended December 31, 1998 consist
primarily of costs related to the closure of a container manufacturing
facility, severance and other personnel related costs, the relocation of
our corporate headquarters and costs associated with proposed acquisitions
that were not consummated. See "Note 18--Non-Recurring Charges" in our
financial statements included at the back of this prospectus. Adjusted
EBITDA is calculated for each of the periods presented as follows:
Fiscal Year Ended December 31,
--------------------------------------------------------------
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
(In Millions)
EBITDA ........................ $ 15.6 $ 17.1 $ 19.6 $ 25.8 $ 37.8
Non-recurring charges ......... -- -- -- -- 6.2
Management fees ............... 0.3 0.3 0.3 0.4 0.9
------- ------- ------- ------- -------
Adjusted EBITDA ............... $ 15.9 $ 17.4 $ 19.9 $ 26.2 $ 44.9
======= ======= ======= ======= =======
(5) For purposes of determining the ratio of earnings to fixed charges,
"earnings" are defined as income (loss) before income taxes and
extraordinary items plus fixed charges. "Fixed charges" consist of
interest expense on all indebtedness, amortization of deferred financing
costs and one-third of rental expense on operating leases, representing
that portion of rental expense which we deem to be attributable to
interest. Earnings were insufficient to cover fixed charges in the year
ended December 31, 1998 by $4.8 million.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Introduction
The rigid industrial container industry has been undergoing consolidation
for a number of years and remains fragmented. We believe that the industry will
evolve to support a few participants who are able to provide a broad range of
containers and related container services. As a result, we began pursuing, and
in July 1997 began consummating, several acquisitions in furtherance of our
goal to become the preeminent provider of rigid industrial containers and
related container services in the United States and Canada. Each of these
transactions was accounted for using the purchase method of accounting.
Container Management Services, Inc. In July 1997, we acquired all the
capital stock of Container Management Services. Container Management Services
pioneered the businesses of plastic container leasing on a "per use" or
"round-trip" basis and plastic container fleet management in the United States
and Canada utilizing inventory tracking technology. We believe these businesses
are among the fastest growing sectors of the U.S. rigid industrial container
market and that our acquisition of Container Management Services positions us
as the leader in these businesses in the United States and Canada. Container
Management Services had revenues of approximately $17.8 million for the period
from January 1, 1997 through July 23, 1997 and operated two facilities in South
Carolina.
Hunter Drums Limited. In October 1997, we acquired substantially all of
the capital stock of Hunter Drums Limited. We believe Hunter Drums Limited is a
leading manufacturer and marketer of plastic and steel drums in Canada. Our
acquisition of Hunter Drums Limited, which included an exclusive license to
manufacture and sell the LR-1 drum in Canada, expands our geographic reach for
plastic and steel drums. Located near Toronto, Hunter Drums Limited currently
serves Ontario, Canada and parts of the Midwest and Northeast. Hunter Drums
Limited had revenues of approximately $30.5 million for the period from January
1, 1997 through October 29, 1997 and operated two facilities in Canada.
Plastics Division of Smurfit Packaging Corporation. In November 1997, we
acquired the plastics division of Smurfit Packaging Corporation. At that time,
this division was one of the leading manufacturers and marketers of plastic
drums in the United States. The acquisition of this division broadens our
product line to include open-top drums as well as smaller (i.e., 5- to
20-gallon) plastic containers and enhances our geographic reach and market
position in the United States. The acquisition also provides meaningful
operating efficiency opportunities. The plastics division of Smurfit Packaging
Corporation had revenues of approximately $57.7 million for the period from
January 1, 1997 through November 7, 1997 and operated a facility in each of New
Jersey, Georgia, Illinois, Texas and Delaware.
New England Container Co., Inc. In July 1998, we acquired all the capital
stock of New England Container. We believe that New England Container has the
largest share of the steel reconditioning market in the Northeast and provides
our services division with entry into the steel drum reconditioning market with
a leader in terms of quality and service. New England Container had revenues of
approximately $10.5 million for the period from January 1, 1998 through July
23, 1998, and operated a facility in each of Rhode Island, Maryland and
Virginia.
Substantially all of our revenues are derived from sales of our products
and services. Our expenses consist primarily of cost of sales, selling, general
and administrative expenses and interest expense. The most significant
component of cost of sales is our expense for purchases of HDPE resin (the
principal raw material for plastic drums) and cold-rolled steel (the principal
raw material for steel drums). Over a period of time, we generally pass changes
in the prices for HDPE resin and cold-rolled steel through to our customers,
resulting in relatively consistent gross profit margins on a per unit basis.
Our results of operations are affected by the level of economic activity in the
industries served by our customers, which in turn may be affected by the level
of economic activity in the U.S. and foreign markets which they serve. Because
we operate with little or no backlog, changes in
34
economic activity, positive and negative, affect our results of operations more
quickly than such changes would affect the results of operations of a company
that operated with a backlog. See "Risk Factors--Cost and Availability of Raw
Materials and Certain Products" and "--Risk of Economic Downturn."
Although we anticipate minimal/flat growth in the overall steel drum
market, we believe opportunities exist to increase our market share for our
steel products mainly from
o competitors,
o companies exiting the business due to a lack of funds for investment in
new products, equipment and environmental and quality initiatives and
o geographic expansion.
We expect plastic drum shipments in the United States to increase by 2-3%
per year for the next few years, with gains being restrained as users of rigid
industrial containers increasingly convert to IBCs. A typical IBC replaces the
need for approximately five 55-gallon drums. Although we provide IBCs through
our services division, currently, we do not manufacture IBCs and are evaluating
options for obtaining the capacity to do so. We may decide not to pursue such
capacity in the near future or at all. For a discussion of the related risks,
see "Risk Factors--Cost and Availability of Raw Materials and Certain Products"
and "--Changing Product Requirements."
The following discussion and analysis provides information that we believe
is relevant to an understanding of our consolidated financial position and
results of operations. The following discussion and analysis should be read in
conjunction with our financial statements and the related notes included in
this prospectus.
Results of Operations
The following table sets forth, for each of the periods indicated, certain
statement of operations data, expressed as a percentage of net sales:
Fiscal Year Ended December 31,
---------------------------------------
1996 1997 1998
----------- ----------- -----------
Statement of Operations Data:
Net sales ............................................ 100.0% 100.0% 100.0%
Cost of sales ........................................ 73.0 75.8 77.8
Gross profit ......................................... 27.0 24.2 22.2
Selling, general and administrative expenses ......... 17.1 15.2 15.7
Operating income (loss) .............................. 9.9 9.0 4.3
Interest expense ..................................... 5.3 5.0 5.8
Income (loss) before taxes and extraordinary
items ............................................. 4.4 3.9 (1.8)
Income (loss) before extraordinary items ............. 2.6 2.3 (1.6)
Fiscal Year Ended December 31, 1998 Compared to Fiscal Year Ended December 31,
1997
Net Sales
Net sales increased 55.4% to $274.0 million in 1998 from $176.3 million in
1997. Our container manufacturing division's net sales rose 41.1% to $227.4
million in 1998 from $161.1 million in 1997, due primarily to the full year
volume impact of our acquisitions of Hunter Drums Limited and the plastics
division of Smurfit Packaging Corporation. Our services division's net sales
more than tripled to $46.7 million in 1998 from $15.2 million in 1997, due
primarily to the full year volume impact of the Container Management Services
acquisition and the net sales of New England Container since we acquired it in
July 1998. Selling prices declined for both divisions, primarily in response to
lower raw material prices coupled with competitive pressures.
35
Gross Profit
Gross profit increased $18.1 million to $60.8 million in 1998 from $42.7
million in 1997, primarily from increased sales volume and the benefit of lower
raw material prices. Gross profit as a percentage of net sales declined to
22.2% in 1998 from 24.2% in 1997. The effect of higher sales volume, favorable
raw material prices and improvements in efficiency were more than offset by the
impact of lower selling prices and a mix shift in our services division as the
growth of IBC leasing outpaced the growth of drum leasing. In addition, gross
profit as a percentage of sales was adversely impacted by short-term
manufacturing inefficiencies as a result of the closure of a container
manufacturing facility and the start-up of a co-located container manufacturing
and services facility.
Selling, General & Administrative Expenses
Selling, general and administrative expenses as a percentage of net sales
increased to 15.7% in 1998 from 15.2% in 1997 primarily due to investments in
computer technology, logistics and sales and marketing infrastructure, as well
as the relocation of our corporate headquarters. Additionally, higher
consulting fees associated with integration activities related to the
acquisitions we made in 1997 and 1998 and for other activities contributed to
the increase.
Non-Recurring Charges
In conjunction with the integration of acquired entities and expansion of
our operations, a plan was developed to rationalize our operations and sales
force and consolidate and relocate our corporate headquarters in order to
improve operating efficiencies and reduce costs. As part of this plan we
recorded restructuring, integration and other charges of approximately $3.5
million for the year ended December 31, 1998. These charges primarily include
costs related to the closure of a container manufacturing facility, severance
costs and other personnel related costs, the relocation of corporate
headquarters, and other miscellaneous costs. Also included in non-recurring
charges at December 31, 1998 are $2.7 million of costs associated with proposed
acquisitions that were not consummated.
Operating Income
Operating income for 1998 decreased by $4.2 million to $11.7 million from
$15.9 million in 1997 as a result of the factors described above. Excluding
non-recurring charges, operating income would have increased $2.0 million.
Other (Income) Expense, Net
Other (income) expense, net increased to $.5 million in 1998 from $.2
million in 1997, primarily due to the continuing devaluation of the Canadian
dollar, which adversely impacted the fair value of foreign exchange contracts.
Interest Expense
Interest expense was $16.0 million in 1998 compared with $8.8 million in
1997. The increase in interest expense is the result of increased debt levels
associated with the acquisitions we made in 1997 and 1998 as well as our
capital and debt restructurings in July and November 1997. See
"--Recapitalization" and "Note 1--Organization and Basis of Presentation" in
our financial statements included in this prospectus.
Income (Loss) Before Taxes and Extraordinary Items
In 1998, the income (loss) before taxes and extraordinary items was ($4.8)
million as compared to income (loss) before taxes and extraordinary items of
$6.9 million in 1997, as a result of the factors described above.
36
Fiscal Year Ended December 31, 1997 Compared to Fiscal Year Ended December 31,
1996
Net Sales
Net sales increased 24.2% to $176.3 million in 1997 from $141.9 million in
1996, reflecting unit volume growth as well as the impact of our acquisitions of
Container Management Services, Hunter Drums Limited and the plastics division of
Smurfit Packaging Corporation. Our container manufacturing division's net sales
rose 13.5% to $161.1 million in 1997 from $141.9 million in 1996. Excluding the
impact of our acquisition of Hunter Drums Limited and the plastics division of
Smurfit Packaging Corporation, net sales in this division increased 3.9% in 1997
as compared to 1996 on unit volume growth, primarily in plastic drums, offset by
a decline in selling prices. Our services division, which we created in 1997
with our acquisition of Container Management Services, had net sales of $15.2
million in 1997, reflecting Container Management Service's net sales since the
date of the acquisition.
Gross Profit
Gross profit increased $4.4 million to $42.7 million in 1997 from $38.3
million in 1996, resulting from increased unit volume. Gross profit as a
percentage of net sales declined to 24.2% in 1997 from 27.0% in 1996 as
improvements in productivity and efficiency as well as the effect of higher
unit volume were more than offset by increased raw material costs for HDPE
resin and lower customer selling prices due to intensified competition.
Selling, General & Administrative Expenses
Selling, general and administrative expenses as a percentage of net sales
decreased to 15.2% in 1997 from 17.1% in 1996 due to higher net sales and our
focus on expense-containment strategies.
Operating Income
Operating income increased 13.6% to $15.9 million in 1997 from $14.0
million in 1996 as a result of the factors described above.
Other (Income) Expense, Net
Other (income) expense, net declined to $0.2 million in 1997 from $0.3
million in 1996. Unrealized losses on foreign exchange contracts was the
primary component of the amount recorded in 1997. The write-down of an idled
asset was the primary component of the amount recorded in 1996.
Interest Expense
Interest expense increased 17.3% to $8.8 million in 1997 from $7.5 million
in 1996. The increase in interest expense is the result of increasing debt
levels to finance our acquisitions of Container Management Services, Hunter
Drums Limited and the plastics division of Smurfit Packaging Corporation as
well as the restructuring of our capital structure in July and November 1997.
See "--Recapitalization" and "Note 1--Organization and Basis of Presentation"
in our financial statements included in the back of this prospectus.
Income Before Taxes and Extraordinary Items
Income before taxes and extraordinary items increased 11.3% to $6.9
million in 1997 from $6.2 million in 1996 as a result of the factors described
above.
Fiscal Year Ended December 31, 1996 Compared to Fiscal Year Ended December 31,
1995
Net Sales
Net sales increased 2.2% to $141.9 million in 1996 from $138.8 million in
1995, with increases in plastic drum volumes partly offset by a modest decline
in steel drum volumes. Selling prices eroded across the business due to
competitive conditions and lower raw material costs.
37
Gross Profit
Gross profit increased $6.0 million to $38.3 million in 1996 from $32.3
million in 1995 due to increased plastic drum volumes, reduced purchase prices
for HDPE resin and cold-rolled steel, elimination of plant start-up costs and
improved manufacturing efficiencies. Gross profit margin increased to 27.0% in
1996 from 23.3% in 1995 as these improvements more than offset lower selling
prices and reduced steel unit volumes.
Selling, General & Administrative Expenses
Selling, general and administrative expenses as a percentage of net sales
increased to 17.1% in 1996 from 15.4% in 1995. This increase was driven
primarily by new management incentive plans and increased salaries.
Operating Income
Operating income increased 28.4% to $14.0 million in 1996 from $10.9
million in 1995 as a result of the factors described above.
Other (Income) Expense, Net
Other expense, net was $0.3 million in 1996. The write-down of an idled
asset was the primary component. There was no significant other (income)
expense, net in 1995.
Interest Expense
Interest expense decreased 9.6% to $7.5 million in 1996 from $8.3 million
in 1995. The decrease in interest expense is the result of a reduction in
average borrowings in 1996 as compared to 1995 as we used cash generated from
operations to reduce debt levels during the second half of 1995.
Income Before Taxes and Extraordinary Items
Income before taxes and extraordinary items increased 138.5% to $6.2
million in 1996 from $2.6 million in 1995 as a result of the factors described
above.
Liquidity and Capital Resources
Our principal uses of cash are for capital expenditures, interest expense,
working capital and acquisitions. We utilize funds generated from operations
and borrowings to meet these requirements. For the years ended December 31,
1996, 1997 and 1998, net cash generated by operating activities totaled
approximately $4.4 million, $17.7 million and $30.8 million, respectively.
For the years ended December 31, 1996, 1997 and 1998, we made capital
expenditures of approximately $3.3 million, $9.9 million and $28.7 million,
respectively. In 1998, our capital expenditures included approximately $14.7
million for purchases of containers for our leasing business, $8.5 million for
ongoing maintenance and $5.5 million for productivity and growth initiatives.
We currently have no capital commitments outside the ordinary course of
business. Other significant investing activities included the acquisitions we
made in 1997 and 1998. The aggregate cash purchase price for the acquisitions
was $130.2 million in 1997 and $13.9 million in 1998. In addition, as part of
the consideration for the acquisitions, in 1997 we issued 27,778 shares of
non-voting exchangeable stock exchangeable into 27,778 shares of our Common
Stock under certain circumstances and in 1998 we issued 24,243 shares of our
Common Stock.
Our principal working capital requirements are to finance accounts
receivable and inventories. As of December 31, 1998, we had net working capital
of approximately $12.9 million, including $1.6 million of cash, $29.4 million
of accounts receivable, $18.8 million of inventory, $6.2 of other current
38
assets and approximately $43.1 million of accounts payable, accrued expenses
and the current portion of long-term indebtedness.
Concurrently with the offering of the outstanding notes, we replaced our
former senior credit agreement with our senior credit facility. Our former
senior credit agreement provided for term and revolving indebtedness. Certain
term loans under our former senior credit agreement bore interest at fixed
rates, and the revolving indebtedness as well as certain term loans bore
interest at a combination of domestic source and Eurodollar borrowing rates
which fluctuated based on our EBITDA and debt levels. At December 31, 1998,
outstanding term loan indebtedness under our former senior credit agreement
bore interest at a weighted average rate of 9.35% and outstanding revolving
credit indebtedness bore interest at a weighted average rate of 9.00%. Our
senior credit facility provides for a $25.0 million term loan and $75.0 million
of revolving credit availability. We borrowed approximately $13.3 million of
revolving credit indebtedness concurrently with the offering of the outstanding
notes. The equivalent of U.S. $15.0 million of revolving indebtedness is
available for borrowing in Canadian dollars by our Canadian subsidiary, Hunter
Drums Limited. The term loan under our senior credit facility bears interest at
9.48% per annum. Revolving indebtedness under our senior credit facility bears
interest at a combination of domestic source and Eurodollar borrowing rates
which fluctuate based on our EBITDA and debt levels currently. As of March 31,
1999, the revolving indebtedness under our senior credit facility bore interest
at a weighted average rate of 8.75% per annum. The term loan under our senior
credit facility matures in two equal installments in June 2006 and June 2007.
The outstanding revolving indebtedness, and the revolving credit commitment,
will mature in February 2004. See "Description of Senior Credit Facility."
Based upon the current level of operations and revenue growth, our
management believes that cash flow from operations and available cash, together
with available borrowings under our senior credit facility, will be adequate to
meet our future liquidity needs for at least the next several years. For a
discussion of the factors that could cause us to have insufficient liquidity
and the related risks, see "Risk Factors--Substantial Leverage," "--Additional
Future Capital Requirements" and "--Risk of Economic Downturn."
Recapitalization
In July 1997, we restructured our capital structure through the following
transactions:
o issuance of 1,222,221 shares of common stock in exchange for
$54,999,940, resulting in additional paid-in capital of $54,987,718,
o repurchase of 122,500 shares of common stock for $4,450,500,
o repurchase of all outstanding senior subordinated notes for $29,257,638,
including make whole payments of $3,025,858 and accrued interest of
$240,080,
o repurchase of $15.00/$17.50 cumulative exchangeable redeemable preferred
stock (Series B) for $37,611,126, including make whole payments of
$7,529,123 and accrued interest of $302,745 and
o conversion/repurchase of warrants for $1,059,190.
39
In addition, we restructured our debt through the following transactions:
o repayment of existing bank debt of $25,924,331 and
o borrowing on a new credit facility of $46,102,987.
Immediately following these transactions, we formed Russell-Stanley
Holdings, Inc. to serve as a holding company. The transaction was accounted for
in a manner similar to a pooling of interests, and therefore, our financial
statements as of and for the two years in the period ended December 31, 1997
reflect our results of operations and financial condition as if Russell-Stanley
Holdings, Inc. and its subsidiaries had been combined for the entire period. In
November 1997, we issued 377,779 shares of common stock in exchange for
$17,000,055, resulting in additional paid-in capital of $16,996,277. See
"Description of Senior Credit Facility," "Ownership of Common Stock" and "Note
1--Organization and Basis of Presentation" in our financial statements included
in this prospectus.
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.
Interest Rate Risk and Foreign Currency Exchange Rate Risk
General
Our results of operations and financial condition are affected by changes
in interest rates and foreign currency exchange rates as measured against the
U.S. dollar. We manage this exposure through internal policies and procedures
and the use of derivative financial instruments. In accordance with our internal
policies, we only use derivative financial instruments for risk management and
not for speculative or 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. We maintain an interest rate collar in an aggregate
notional principal amount of $45.0 million to limit our exposure to interest
rate risk. Under this collar, if the actual LIBOR rate at the specified
measurement date is greater than a ceiling rate stated in the collar agreement,
the other party to the collar pays us the differential interest expense. If the
actual LIBOR rate is lower than the floor stated in the collar agreement, we pay
the other party to the collar the differential interest expense. The collar
terminates on November 30, 2000. A 10% increase in interest rates at December
31, 1998 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. Our Canadian subsidiary, Hunter Drums Limited, maintains
U.S. dollar denominated foreign currency exchange contracts which were in place
prior to our acquisition of Hunter Drums. At December 31, 1998 Hunter Drums
held $3.9 million of forward foreign currency exchange contracts with
settlement rates ranging from $1.38 to $1.41 Canadian dollars to U.S. dollars
and settlement dates from January 1999 through December 1999. While these
contracts increase our exposure to foreign currency exchange rate risk, due
primarily to
40
the relatively short maturities of these contracts, a 10% change in the
exchange rate on December 31, 1998 between the U.S. dollar and the Canadian
dollar would not have had a material adverse affect on our results of
operations, financial condition or cash flows.
Recently Issued Accounting Standard
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 133
establishes new disclosure requirements which provide a comprehensive standard
for recognition and measurement of derivatives and hedging activities. This
will require new disclosures, all derivatives to be recorded on the balance
sheet at fair value and special accounting for certain types of hedges. SFAS
133 will take effect in 2000. Based on our current derivatives, an interest
rate collar and foreign currency forward contracts, management does not believe
that SFAS 133 will have a material effect on our financial condition or results
of operations.
Year 2000 Compliance
As has been widely reported, many computer systems process dates based on
two digits for the year of transaction and may be unable to process dates in
the year 2000 and beyond. We believe that we have identified all significant
internal systems and hardware with embedded applications that require
modification to ensure year 2000 compliance. In addition, we have sent
questionnaires to our significant vendors in an attempt to confirm that they
are year 2000 compliant.
Internal and external resources are being used to make required
modifications to or effect replacement of internal systems and test year 2000
compliance. We are currently on schedule to complete the remediation and
testing processes for these applications by September 1999. In addition, we
have contacted the manufacturers of all of our significant hardware with
embedded applications and believe that our significant hardware is year 2000
compliant.
We do not know when our significant vendors will respond to our
questionnaires, if at all. All of our significant vendors are large,
sophisticated institutions, and we expect that they are aware of their year
2000 compliance issues.
There are many risks associated with the year 2000 compliance issue,
including but not limited to the possible failure of our systems and hardware
with embedded applications. Any such failure could result in
o our inability to order raw materials,
o the malfunctioning of our manufacturing or services processes,
o our inability to properly bill and collect payments from our customers
and/or
o errors or omissions in accounting and financial data, any of which could
have a material adverse effect on our results of operations and financial
condition.
In addition, there can be no guarantee that the systems of other
companies, including our vendors, utilities and customers, will be converted in
a timely manner, or that a failure to convert by another company, or a
conversion that is incompatible with our systems, would not have a material
adverse effect on us. We have not yet developed any contingency plans but will
do so if the testing or investigations that we will carry out through 1999
suggest it is necessary.
Through December 31, 1998 we have incurred and capitalized costs of
approximately $3.2 million primarily related to the upgrade and replacement of
our internal systems. We currently expect that we will incur and capitalize
future incremental costs of approximately $0.9 million.
41
BUSINESS
General
We are a leading manufacturer and marketer of plastic and steel industrial
containers and a leading provider of related container services in the United
States and Canada. Our container manufacturing division manufactures and sells
new plastic and steel rigid industrial containers. Our services division (i)
leases plastic rigid industrial containers, (ii) provides plastic container
fleet management services, (iii) reconditions and sells steel drums and (iv)
retrieves and recycles empty industrial containers. Our container manufacturing
and services divisions together have over 1,500 active customers in the
agricultural chemical, food product, lubricant, pharmaceutical and specialty
chemical industries. We believe that our customers base their purchasing
decisions primarily on price, service and quality and are increasingly looking
to maintain relationships with fewer suppliers who can provide a broad range of
high-quality industrial containers and related container services at
competitive prices, often on a national or international basis. We have
increased our net sales from $138.8 million for the year ended December 31,
1995 to $284.5 million on a pro forma basis for the year ended December 31,
1998, representing a compound annual growth rate of 27.0%. During the same
period we increased our Adjusted EBITDA from $17.4 million to $46.2 million,
representing a compound annual growth rate of 38.4%, while our Adjusted EBITDA
margin expanded from 12.5% to 16.2%. The majority of our revenue and Adjusted
EBITDA growth and margin improvement during this period has come from the
successful acquisition and integration of four complementary businesses.
We believe that our container manufacturing division offers one of the
broadest lines of 5- to 70-gallon plastic rigid industrial containers in the
United States and Canada and enjoys the largest share in the U.S. plastic drum
market as well as one of the leading shares in the Canadian plastic drum
market. We are the principal manufacturer in the United States and Canada of
55-gallon plastic tight-head drums, which we sell under the brand names L-1
(LR-1 in Canada) and Delcon. We believe that the design of the L-1 and Delcon
drums is the industry standard for 55-gallon plastic tight-head drums in the
United States and Canada, and we own and/or have a license to use important
proprietary technology relating to the manufacture and sale of these drums. Our
container manufacturing division also offers a broad line of the widely used
55-gallon steel drum and, we believe, enjoys one of the leading shares in the
Northeast, Gulf Coast and Canadian steel drum markets.
Our services division is an innovator and, we believe, the leader in the
United States and Canada in the businesses of leasing plastic containers on a
"per use" or "round-trip" basis and providing plastic container fleet
management services. In our container leasing business, we lease a container to
our customer for filling and shipping to the end-user. We then retrieve the
container directly from the end-user and prepare it for re-use. Container fleet
management involves the same services, but uses containers owned by the
customer. Since 1991, the growth of plastic container leasing and fleet
management has outpaced the growth of the rigid industrial container market as
a whole, and we believe these businesses are among the fastest growing sectors
of the U.S. rigid industrial container market. We believe that our services
division is also the leading reconditioner of steel drums in the Northeast. The
addition of container services to our historical manufacturing business enables
us to serve a wider range of our customers' evolving industrial container
requirements and is an important aspect of our strategy to retain and enhance
our leading market position as our customers increasingly look to rely on fewer
suppliers.
We currently operate twelve plastic drum manufacturing plants, three steel
drum manufacturing plants and six container services plants throughout the
United States and Canada, enabling us to be strategically located near our
major customers. We sell, lease and service plastic containers in most markets
in the United States and in most of the major industrial regions in Canada. We
sell new steel drums in the Northeast, the Gulf Coast, parts of the Midwest and
Ontario, Canada, regions where there is a high concentration of purchasers of
steel drums, and we sell reconditioned steel drums in the Northeast.
42
Recent Acquisitions
The rigid industrial container industry has been undergoing consolidation
for a number of years and remains fragmented. We believe that the industry will
evolve to support a few participants who are able to provide a broad range of
containers and related container services. As a result, we began pursuing, and
in July 1997 began consummating, several acquisitions in furtherance of our
goal to become the preeminent provider of rigid industrial containers and
related container services in the United States and Canada.
Container Management Services, Inc. Acquired in July 1997, Container
Management Services pioneered the businesses of plastic container leasing on a
"per use" or "round-trip" basis and plastic container fleet management in the
United States and Canada utilizing inventory tracking technology. We believe
these businesses are among the fastest growing sectors of the U.S. rigid
industrial container market and that our acquisition of Container Management
Services positions us as the leader in these businesses in the United States
and Canada.
Hunter Drums Limited. We believe Hunter Drums Limited, acquired in October
1997, is a leading manufacturer and marketer of plastic and steel drums in
Canada. Our acquisition of Hunter Drums Limited, which included an exclusive
license to manufacture and sell the LR-1 drum in Canada, expands our geographic
reach for plastic and steel drums. Located near Toronto, Hunter Drums Limited
currently serves Ontario, Canada and parts of the Midwest and Northeast.
Plastics Division of Smurfit Packaging Corporation. Acquired in November
1997, the plastics division of Smurfit Packaging Corporation was one of the
leading manufacturers and marketers of plastic drums in the United States. The
acquisition of the plastics division of Smurfit Packaging Corporation broadens
our product line to include open-top drums as well as smaller (i.e., 5- to
20-gallon) plastic containers and enhances our geographic reach and market
position in the United States. The acquisition also provides meaningful
operating efficiency opportunities.
New England Container Co., Inc. We believe that New England Container,
acquired in July 1998, has the largest share of the steel drum reconditioning
market in the Northeast and provides our services division with entry into the
steel drum reconditioning market with a leader in terms of quality and service.
As a result of these acquisitions, since July 1997 we have overseen the
successful integration of more than 100 products and the addition of our
services division. In addition, we have increased the number of our facilities
from 8 to 21 and improved our operating efficiency and Adjusted EBITDA margin.
Industry Segment Overview
As reported by The Freedonia Group Incorporated, an international
study/database company, the rigid industrial container industry consists of new
plastic, steel and fiber drums, rigid intermediate bulk containers and pails as
well as bulk boxes and materials handling containers. According to The
Freedonia Group, the U.S. market had sales of approximately $3.7 billion in
1996, the most recent period for which The Freedonia Group reports relevant
industry data. This represents a compound annual growth rate of approximately
5.4% from 1987 sales of approximately $2.3 billion. Our container manufacturing
division competes in a sector of the rigid industrial container industry. We
define our sector as consisting of new and reconditioned plastic, steel and
fiber drums, rigid intermediate bulk containers and small containers/pails. Our
services division competes with other providers of similar services. We do not
know of any third-party source of market data for the industrial container
services industry.
Plastic drums are used primarily in the storage and transportation of
chemical products and are also increasingly being used for the storage and
transportation of petroleum and lubricants. Plastic drums are available in a
variety of capacities, ranging from 5 to 70 gallons, with the 55-gallon drum
being the most widely used. According to The Freedonia Group, there were $267
million of new plastic drums shipped from U.S. manufacturing establishments in
1996. Steel drums are used primarily for the transportation and storage of
liquids, semi-solids and dry products, particularly
43
petroleum, lubricants and chemical products, and have been utilized in these
industries for more than 40 years. Steel drums typically range in capacities
from 13 to 85 gallons, with the 55-gallon drum being the most widely used.
According to The Freedonia Group, there were $692 million of new steel drums
shipped from U.S. manufacturing establishments in 1996.
Based on the changes we have experienced in our business and direct
discussions with our customers, we believe the following trends will continue
to play an important role in our industry's future:
o Larger competitors which offer broader product lines and have greater
manufacturing capacities, higher operating efficiencies and a greater
ability to invest in enhanced products and services will capture
increasing market share as smaller, regional companies find it more
difficult to compete, resulting in further consolidation of the industry;
o Customers are increasingly looking to fewer suppliers to provide an
increasing percentage of their industrial container supply and servicing
requirements;
o Customers are increasingly seeking broader product lines and global
service; consequently, our industry is becoming less regional, with
customers increasingly seeking national and international supply
arrangements; and
o Users of fiber drums are converting to the use of plastic drums in
response, in part, to the lower performance and re-use characteristics of
fiber drums and the higher cost of fiber drum disposal. We also believe
certain users of plastic drums are converting to rigid intermediate bulk
containers based, in part, upon the perceived economies of shipping and
handling.
Competitive Strengths
We believe the following competitive strengths are the primary factors
contributing to our leading position in the marketplace:
We Are a Leading Industry Player With Strong Market Positions. We believe
that we hold the largest share in the U.S. plastic drum manufacturing market,
one of the leading shares in the Canadian plastic drum manufacturing market and
one of the leading shares in the Northeast, Gulf Coast and Canadian steel drum
manufacturing markets. We also believe we are the leading provider of plastic
container leasing and fleet management services in the United States and Canada
and the leading steel drum reconditioner in the Northeast.
We Have a Broad Offering of Quality Products and Services. We offer a
broad line of 5- to 70-gallon plastic rigid industrial containers, anchored by
the 55-gallon plastic tight-head L-1 and Delcon drums. We believe that the
design of the L-1/LR-1 and Delcon drums is the industry standard for 55-gallon
plastic tight-head drums in the United States and Canada. We also offer a broad
line of the widely used 55-gallon steel drum. We believe that our integration
of industrial containers and related container services distinguishes us from
most of our competitors and enables us to serve a wide range of our customers'
evolving industrial container requirements.
We pride ourselves in the quality of our products and services. We have
received numerous quality awards from our customers, including a Supplier
Partnership Award from The Dow Chemical Company, three Distinguished Vendor
awards from Ecolab, Inc., a Supplier of the Year award from Novus
International, Inc., three Quality Supplier Q-1 awards from Parker-Amchem, a
division of Henkel Corporation, and a Supplier of the Year award from Union
Carbide Corporation.
We Focus on Maintaining a Competitive Cost Structure. We focus on
maintaining a competitive cost structure. Our cost structure benefits from: (i)
our attaining favorable prices for our most significant raw materials, HDPE
resin and cold-rolled steel, based on our high volume of raw material
purchases, (ii) the economies of scale provided by our high production volumes,
(iii) high plant utilization, (iv) manufacturing techniques that reduce raw
materials requirements, reduce scrap and enhance productivity and (v) low
transportation costs resulting from the proximity of our facilities to our
major customers. We also maintain an ongoing capital investment program
designed to achieve high levels of operating efficiency and productivity.
44
We Have a High Quality and Diverse Customer Base. We have over 1,500
active customers at more than 10,000 locations in the United States and Canada.
No single customer accounts for more than 4% of our 1998 net sales, and our top
15 customers account for less than 25% of our 1998 net sales. Our customers
include major participants in the agricultural chemical, food product,
lubricant, pharmaceutical and specialty chemical industries. We have enjoyed
long-standing relationships with many of our key customers and have been
formally recognized on a number of occasions for outstanding product quality
and service. We have been doing business with 14 of our top 15 customers for
more than five years.
We Have an Experienced Management Team and Strong Sponsor. Our senior
managers have more than 100 years of combined experience in the rigid
industrial container industry. We have successfully retained key members of
management from all recently acquired companies. Our management team has
overseen the successful integration of four complementary businesses and
increased the number of our facilities from 8 to 21. Principally through our
acquisitions we completed in 1997 and 1998, our management team has increased
our Adjusted EBITDA margin from 14.0% for the year ended December 31, 1996 to
16.2% for the year ended December 31, 1998 on a pro forma basis. Our sponsor,
Vestar, led the acquisition of Russell-Stanley in June 1989. Since 1989, Vestar
has been our majority shareholder and has invested over $55 million of equity
in Russell-Stanley. Russell-Stanley currently represents one of Vestar's
largest investments.
Business Strategy
Our goal is to become the preeminent provider of rigid industrial
containers and related container services in the United States and Canada.
Continue to Broaden Our Product and Service Offering and Geographic
Reach. We intend to continue to enhance our existing product lines through the
introduction of new products and product enhancements and selectively expand
our geographic reach in the United States and Canada. Most recently, we
introduced a number of new drum designs for use in specific markets, including
plastic and steel export drums that significantly reduce freight costs for
exporters who use overseas shipping containers, an open-top plastic drum that
is designed for the leasing market served by our services division and a
returnable/reusable drum principally for use in the agricultural market. We
intend to aggressively market our plastic containers and container leasing
services to purchasers of fiber drums. We believe purchasers of fiber drums
represent a significant potential market for us due, in part, to the lower
performance and re-use characteristics of fiber drums and the higher cost of
fiber drum disposal. To expand our geographic reach, we have budgeted for the
addition of a new facility for our services division and we plan to selectively
review new geographic markets for the steel drum business of our container
manufacturing division.
Continue to Improve Our Cost Structure. We intend to continue to lower our
costs by reducing transportation costs, rationalizing manufacturing facilities,
manufacturing certain container parts in-house that we currently purchase from
third parties and reducing our overhead. We believe that we will also continue
to benefit from lower raw material costs based on our high volume of raw
material purchases. We also believe that opportunities exist for the sharing of
best practices of our most efficient manufacturing facilities which we believe
will lead to increased efficiencies and lower costs company-wide.
Pursue Selective Acquisitions. The rigid industrial container industry has
been undergoing consolidation for a number of years and remains fragmented. We
plan to pursue selected acquisition opportunities that complement and expand
our core businesses in terms of products, services and geographic reach. We
believe we can leverage our production, purchasing, distribution and management
strengths to improve the results of acquired operations.
Container Manufacturing Division
Our container manufacturing division manufactures and sells new plastic
and steel rigid industrial containers and generated revenues of $227.4 million
for the year ended December 31, 1998.
45
Plastic Containers
We believe that we hold the largest share in the U.S. plastic drum
manufacturing market and one of the leading shares in the Canadian plastic drum
manufacturing market. We operate twelve plastic drum manufacturing facilities
serving most markets in the United States and most of the major industrial
regions in Canada.
We believe that we offer one of the broadest lines of plastic rigid
industrial containers in the United States and Canada. Our large containers
include full lines of both tight-head and open-top drums in sizes ranging from
30 to 70 gallons. We also produce a line of smaller plastic containers in sizes
ranging from 5 to 20 gallons.
We are the principal manufacturer in the United States and Canada of
55-gallon plastic tight-head drums, which we sell under the brand names L-1
(LR-1 in Canada) and Delcon. We believe that the design of the L-1 and Delcon
drums is the industry standard for 55-gallon plastic tight-head drums in the
United States and Canada, and we own and/or have a license to use important
proprietary technology relating to the manufacture and sale of these drums. See
"--Intellectual Property." We believe that the L-1 and Delcon drums offer
significant production cost advantages over earlier two-piece drum designs,
including higher manufacturing speeds and lower manufacturing costs. We also
believe that the L-1 and Delcon drums are superior to our competitors' similar
products because of their design features. We believe that the primary
advantages offered by the design features of the L-1 and Delcon drums are (i)
superior design which easily accommodates both new and old drum handling
equipment and which is available with an optimally drainable feature which we
were instrumental in pioneering and (ii) excellent performance with high
structural integrity.
A key component of our strategy has been to build on the acceptance of the
L-1 and Delcon drums by enhancing our broad product offering. We have
accomplished this by both the introduction of new products and selective
acquisitions. We have introduced several new products, including a 30-gallon
version of the L-1 and Delcon drums and a light-weight 15-gallon drum. Most
recently, we introduced a number of new drum designs for use in specific
markets, including a plastic export drum that significantly reduces freight
costs for exporters who use overseas shipping containers, an open-top plastic
drum that is designed for the leasing market served by our services division
and a returnable/reusable drum principally for use in the agricultural market.
On many of our drums over 15 gallons, we offer an industry leading optimally
drainable design feature which results in the drum retaining less residual
product than other designs. In addition, through the acquisition of the
plastics division of Smurfit Packaging Corporation, we broadened our product
line to include open-top drums as well as smaller (i.e., 5- to 20-gallon)
plastic containers, providing us with one of the broadest lines of plastic
containers in the industry.
We also manufacture several specialty tight-head drums, including a
high-purity "clean" drum for use in the electronic chemical market, drums for
the lubricant industry which use special replaceable closures and are capable
of four-high stacking, a "raised head" drum for end users with special stacking
requirements and a "heavy" drum that meets United Nations international
shipping standards for certain products. Other products include plastic liners
used for steel, fiber and composite drums.
Steel Containers
We believe that we have one of the leading shares in the Northeast, Gulf
Coast and Canadian steel drum manufacturing markets. We have three steel drum
facilities which serve the Northeast, the Gulf Coast, parts of the Midwest and
Ontario, Canada, regions where there is a high concentration of purchasers of
steel drums.
We produce a broad line of the widely used 55-gallon steel drum,
manufactured to customer specifications, including steel gauge, special
linings, custom painting and special closure systems. Our line of steel drum
products also includes lined and unlined tight-head and open-top drums and
tight-head drums that incorporate our optimally drainable design feature. In
addition, we also manufacture a steel export drum that significantly reduces
freight costs for exporters who use overseas shipping containers.
46
We are actively pursuing new products and product enhancements for our
line of steel drums. For example, in the second quarter of 1997 we introduced
into our product line a drum with an innovative "W" shaped rolling hoop that
has better performance characteristics than steel drums with the standard
rolling hoop.
Services Division
Our services division (i) leases plastic rigid industrial containers, (ii)
provides plastic container fleet management services, (iii) reconditions and
sells steel drums and (iv) retrieves and recycles empty industrial containers
and generated revenues of $46.6 million for the year ended December 31, 1998.
The addition of these container services to our historical manufacturing
business enables us to serve a wider range of our customers' evolving
industrial container requirements and is an important aspect of our strategy to
retain and enhance a leading market position as our customers increasingly look
to maintain relationships with fewer suppliers.
Our services division pioneered the businesses of plastic container
leasing on a "per use" or "round-trip" basis and plastic container fleet
management in the United States and Canada utilizing inventory tracking
technology.
In our plastic container leasing business, our services division leases a
plastic container to a customer, who fills the container and ships the full
container to its customer, the end-user. The end-user then calls a toll-free
number, and we arrange to pick up the empty container directly from the
end-user. Upon its return, the container is thoroughly inspected, cleaned and
graded and either inventoried for re-use or, if below grade, recycled. We
charge our leasing customers a flat "per use" price. We believe that container
leasing on a "per use" or "round trip" basis is an attractive alternative to
purchasing as per use leasing may result in lower container costs for our
customers. Also, our retrieval of the empty container relieves the end-user of
container disposal.
In our plastic container fleet management business, our services division
provides the customer with the same services as described above, but using the
customer's fleet of containers purchased from our container manufacturing
division or from another manufacturer. We also charge our container fleet
management customers a flat "per use" price.
We began steel drum reconditioning in July 1998 with the acquisition of
New England Container, a leader in terms of quality and service. Our services
division arranges for the retrieval of empty industrial containers of all
types, including containers manufactured by other manufacturers. Larger
end-users of drums are provided with trailers to store their empty drums. When
the trailer is filled, we arrange for it to be returned to our service facility
and leave an empty trailer in its place. We also arrange to pick up empty drums
from smaller customers on request. Used drums are returned to our service
facility where they are thoroughly inspected, sorted and graded. The drums are
then cleaned and either processed for recycling or fully reconditioned. The
reconditioning process includes metal preparation (to prepare the steel for a
new coating), metalworkings (to remove all dents and insure the drum meets
dimensional specifications), leak testing, interior lining and exterior
painting to meet the filling customer's specifications. A reconditioned steel
drum sells for approximately 60% of the price of a new steel drum. We generally
charge our customers a fee to pick up and dispose of used drums. In some cases,
however, we will pay the customer a small fee for certain styles of drums which
are in high demand and are of reconditionable quality.
We provide for the environmentally sound destruction of plastic and fiber
containers and steel containers that are not suitable for reconditioning on a
contract basis. The empty containers are cleaned in an environmentally sound
fashion and are then processed for sale as recycled material.
Customers
Our container manufacturing and services divisions together have over
1,500 active customers at more than 10,000 locations in the United States and
Canada. No single customer accounted for more than 4% of our 1998 net sales,
and our top 15 customers accounted for less than 25% of our 1998 net sales.
Some of our major customers include A. Smith Bowman Distillery Incorporated,
47
Ashland Chemical Co., BASF Corporation, CIBA-GEIGY Co., Clariant Corporation,
Crompton & Knowles Corporation, Diversey Lever, The Dow Chemical Company, E.I.
Du Pont De Nemours & Co., Ecolab, Inc., Equilon Enterprises LLC, Exxon
Corporation, Henkel Surface Technologies (Henkel Corporation), National
Packaging Services, Inc., and Rohm and Haas Company. We have been doing
business with 14 of our top 15 customers for more than five years. We have
received numerous quality awards from our customers, including a Supplier
Partnership Award from The Dow Chemical Company, three Distinguished Vendor
awards from Ecolab, Inc., a Supplier of the Year award from Novus
International, Inc., three Quality Supplier Q-1 awards from Parker-Amchem, a
division of Henkel Corporation and a Supplier of the Year award from Union
Carbide Corporation.
Raw Materials
The principal raw material and most significant cost component for our
plastic containers is HDPE resin. We generally maintain less than one month of
HDPE resin inventory at each plastic manufacturing facility. The principal raw
material and most significant cost component for our steel drums is cold-rolled
steel. We generally maintain one to two months of cold-rolled steel inventory
at each steel manufacturing facility.
Raw materials purchasing is centrally managed from our corporate
headquarters. We maintain relationships with various suppliers for HDPE resin,
cold-rolled steel and other raw materials. While we generally believe our
access to raw materials is good, we cannot assure you that we will have an
uninterrupted supply of raw materials at competitive prices. See "Risk
Factors--Cost and Availability of Raw Materials and Certain Products."
We do not manufacture rigid intermediate bulk containers. Our rigid
intermediate bulk containers purchases are effected through individual purchase
orders. For a discussion of related risks, see "Risk Factors--Changing Product
Requirements."
Competition
The markets for our products are competitive. We believe competition is
based primarily on price, service and quality. Price competition may require us
to match competitors' prices to retain business or market share. We believe
that our competitive cost structure, high quality products, broad geographic
coverage and high level of customer service enable us to compete effectively.
Our container manufacturing division competes primarily with Greif Brothers
Corporation, Hoover Materials Handling Group, Inc., Sch\)tz Container Systems,
Inc., and Van Leer Containers, Inc. in plastic drums and Evans Industries,
Inc., Greif Brothers Corporation and Van Leer Containers, Inc. for steel drums.
Our services division competes primarily with Greif Brothers Corporation,
Hoover Materials Handling Group, Inc. and PalEx, Inc. Both of our divisions
also compete with smaller industry participants. See "Risk
Factors--Competition."
Sales and Marketing
Our sales and marketing is conducted through a sales force of
approximately 50 people. While our sales force is generally divided along our
product and service lines, we have a group of four Strategic Account Managers
who sell and market all of our products and services to our large customers who
purchase across our product and services lines. Our Strategic Account Managers
promote us as a source for all of our customers' rigid industrial container
requirements.
Our Strategic Account Managers also coordinate our participation in the
Mauser International Packaging Institute and Drumnet associations of industrial
container suppliers. We and other participants in these organizations can offer
to supply and service a customer's industrial container requirements through
the network of participants in more than 30 countries, primarily in North
America, Europe and Asia. Our ability to provide for our customers' industrial
container requirements on an international basis results in strong customer
relationships in our U.S. and Canadian markets.
Our sales personnel work closely with our customers and business operators
to satisfy all of our customers' industrial container requirements. Our sales
personnel are trained to seek and recognize
48
opportunities to cross-sell all of our products and services. In addition, we
have employees who are trained to provide extensive technical and regulatory
support to our customers.
Properties and Equipment
We own or lease twelve plastic and three steel drum manufacturing
facilities and six service facilities. The following table sets forth certain
information as of December 31, 1998 with respect to our facilities:
Location Description Area (Square Feet) Leased or Owned
- ---------------------------------- ---------------------------- -------------------- ----------------
Allentown, Pennsylvania .......... Plastic Manufacturing 140,000 Leased
Romeoville, Illinois ............. Plastic Manufacturing 70,000 Owned
Houston, Texas ................... Plastic Manufacturing 50,000 Owned
Rancho Cucamonga, California...... Plastic Manufacturing 73,500 Owned
Nitro, West Virginia ............. Plastic Manufacturing 58,000 Leased
Reserve, Louisiana ............... Plastic Manufacturing 72,000 Owned
The Woodlands, Texas ............. Plastic Manufacturing 90,000 Leased
Atlanta, Georgia ................. Plastic Manufacturing 95,000 Owned
South Brunswick, New Jersey ...... Plastic Manufacturing 110,000 Leased
Addison, Illinois ................ Plastic Manufacturing 135,000 Owned
Wilmington, Delaware(*) .......... Plastic Manufacturing 80,000 Leased
Bramalea, Ontario ................ Plastic Manufacturing 80,000 Leased
Woodbridge, New Jersey ........... Steel Manufacturing 120,000 Owned
Houston, Texas ................... Steel Manufacturing 106,500 Owned
Burlington, Ontario .............. Steel Manufacturing 60,000 Owned
Simpsonville, South Carolina
(two facilities) ................ Plastic Services 123,000/40,000 Leased
Allentown, Pennsylvania .......... Plastic Services 150,000 Leased
Smithfield, Rhode Island ......... Plastic and Steel Services 44,000 Owned
Baltimore, Maryland .............. Steel Services 39,000 Leased
Richmond, Virginia ............... Steel Services 16,500 Leased
- ----------
(*) Scheduled to be closed in 1999.
We own and lease a fleet of more than 1,200 trailers to help ensure
on-time delivery of containers directly to our customers' facilities.
Our corporate and executive headquarters, located in Bridgewater, New
Jersey, provides administrative services to our facilities, including
accounting, accounts receivable, financial reporting, human resources,
information technology, insurance, taxes and treasury services.
Intellectual Property
We have the exclusive license from Mauser to manufacture the L-1 drum
throughout all of the United States (other than parts of the Southeast) and
Canada, we and one other manufacturer have the exclusive right to sell the L-1
throughout the United States and we have the exclusive right to sell the LR-1
in Canada. There are over 40 licensees worldwide for Mauser plastic drum
technology, which is generally acknowledged as one of the best large plastic
blow mold production technologies worldwide. Our rights to the Mauser
technology derive from a series of licenses. These licenses terminate on July
31, 2008, unless one or more improvement patents are issued, in which case they
terminate on the earlier of (i) the expiration of the latest to expire of such
improvement patents and (ii) July 31, 2015, unless extended by Mauser. See
"Risk Factors--Dependence on Licensing Partner."
We also have the non-exclusive license from Gallay S.A. to manufacture
steel containers using Gallay's patented production process at our steel drum
manufacturing facilities and the non-exclusive license to sell these steel
containers throughout the United States and Canada.
49
Other than our licenses described above, we do not have any material
patents or other intellectual property.
Employees
As of January 31, 1999, we employed 1,544 persons, of whom 33 were
employed at corporate headquarters, 249 were regional or area managers and
support personnel and 1,262 were employed at our manufacturing and service
facilities. Approximately 29% of our employees are represented under collective
bargaining agreements which expire from May 1999 to June 2002 (including two
agreements pending execution which we believe have been fully negotiated). We
do not anticipate any difficulty in extending or renegotiating these agreements
as they expire. We believe that our labor relations are good. See "Risk
Factors--Labor Stoppage."
Environmental Matters
Our operations are subject to federal, state, local and Canadian
environmental laws that continue to be adopted and amended. These environmental
laws regulate, among other things, air and water emissions and discharges at
our manufacturing and service facilities; our generation, storage, treatment,
transportation and disposal of solid and hazardous waste; and the release of
toxic substances, pollutants and contaminants into the environment at
properties that we operate and at other sites. In some circumstances and
jurisdictions, these laws also impose requirements regarding the environmental
conditions at properties prior to a transfer or sale. These laws apply to
certain facilities that we previously owned or operated. Our business involves
the manufacture, lease and reconditioning of containers, which may be used for
chemical products. Risks of significant costs and liabilities are inherent in
our operations and facilities, as they are with other companies engaged in like
businesses. We believe, however, that our operations are in substantial
compliance with all applicable environmental laws.
In addition, under certain laws, a current or previous owner of real
property, and parties that generate or transport hazardous substances that are
disposed of at real property, may be liable for the costs of investigating and
remediating such substances on or under the property. The federal Comprehensive
Environmental Response, Compensation & Liability Act, as amended, and similar
laws, may impose such liability on a joint and several basis, regardless of
whether the liable party was at fault for the presence of such hazardous
substances. We have not incurred significant liability in several such cases
asserted against us and settled to date involving the cleanup of off-site
locations where we allegedly disposed of waste. However, we cannot assure that
a material claim under such laws will not arise in the future.
The U.S. Environmental Protection Agency has confirmed the presence of
certain contaminants, including dioxin, in and along the Woonasquatucket River
in Rhode Island. Prior to 1970, New England Container operated a facility in
North Providence, Rhode Island along the Woonasquatucket River at a site where
contaminants have been found. Recent press reports identify New England
Container as a business that may have contributed to the contamination. We are
not aware that any party has been formally identified by the EPA as a
potentially responsible party. Notwithstanding that New England Container no
longer operates the facility, and did not operate the facility at the time we
acquired the outstanding capital stock of New England Container in July 1998,
New England Container could incur liability under federal and state
environmental laws and/or as a result of civil litigation. We believe that any
resulting liability is subject to a contractual indemnity from Vincent J.
Buonanno, one of our directors and the former owner of New England Container.
However, such indemnity is subject to a $2.0 million limit. We currently are
unable to estimate the likelihood or extent of any liability; however, this
matter may result in liability to New England Container that could have a
material adverse effect on Russell-Stanley's financial condition and results of
operations. See "Risk Factors--Environmental Matters."
Legal Proceedings
As a result of a grand jury criminal investigation initiated by the
Antitrust Division of the Department of Justice into price fixing in the steel
drum industry prior to the acquisition of Russell-
50
Stanley by Vestar, our former Director of National Sales was indicted in
October 1992 and convicted in February 1993 of conspiring to fix steel drum
prices with certain of our competitors in the Eastern United States during a
period preceding March 1990. As a result of the same investigation, William
Lima, who had been President of Russell-Stanley prior to his termination in
April 1993, was indicted in December 1994 and convicted in November 1995 of the
same offense. Mr. Lima was sentenced in December 1996. In December 1997, Mr.
Lima's conviction was affirmed on appeal by a three judge panel of the U.S.
Court of Appeals, Third Circuit. Mr. Lima's petition for a rehearing of that
decision was denied in January 1998. In June 1993, we negotiated a plea
agreement with the Antitrust Division of the Department of Justice pursuant to
which Russell-Stanley pled guilty to several counts relating to the price
fixing investigation and subsequent information gathering processes and paid
specified fines. In June 1992, we settled a private, class action lawsuit
arising out of the price fixing investigation pursuant to which we paid
monetary damages and attorneys' fees.
In May 1993, Mr. Lima sued Russell-Stanley, Vestar and certain principals
of Vestar who are directors of Russell-Stanley in New Jersey Superior Court for
monetary damages which Mr. Lima estimates to be approximately $7.5 million and
other specified relief. Mr. Lima alleges several causes of action arising out
of Russell-Stanley's decision to treat his termination of employment as being
for "cause" (as defined in a stock subscription agreement and a nonqualified
stock option agreement between Mr. Lima and Russell-Stanley), and therefore to
treat Mr. Lima's stock and options as being without value. Mr. Lima also
alleges a cause of action for breach of contract arising out of our decision to
cease paying Mr. Lima's legal fees in connection with the grand jury
investigation. The defendants counterclaimed against Mr. Lima alleging common
law fraudulent misrepresentation and common law fraudulent inducement in
connection with our acquisition by Vestar and our agreement to enter into the
aforementioned agreements with Mr. Lima. In March 1994, the New Jersey Superior
Court entered an order staying all proceedings in this action pending the
outcome of Mr. Lima's criminal proceeding. In June 1998, following the final
resolution of Mr. Lima's criminal case, defendants moved to lift the stay and
for partial summary judgment dismissing Mr. Lima's claims. On November 5, 1998,
the New Jersey Superior Court entered an order vacating the stay. The Superior
Court denied the partial summary judgment motion without prejudice subject to
being renewed following limited discovery on the issue of the reasons for Mr.
Lima's termination. After discovery was completed, defendants renewed their
partial summary judgment motion. The motion will be fully briefed by April 9,
1999. We believe that Mr. Lima's suit is without merit and intend to continue
to vigorously contest his suit.
In addition to the foregoing proceedings, we are a party to various
lawsuits arising in the ordinary course of business. None of these other
lawsuits is believed to be material with respect to our results of operations
or financial condition.
51
MANAGEMENT
Directors and Executive Officers
Our Directors and executive officers are as follows:
Name Age Position
- -------------------------- -- ----------------------------------------------------
Robert L. Rosner 39 Chairman of the Board of Directors
Robert L. Singleton 50 President, Chief Executive Officer, Secretary and
Director
Daniel W. Miller 48 Executive Vice President, Chief Financial Officer,
Treasurer, Assistant Secretary and Director
Mark E. Daniels 39 Executive Vice President, President of Container
Management Services and Director
Michael W. Hunter 42 Executive Vice President, President of Hunter Drums
Limited and Director
Gerard C. DiSchino 42 President New England Container
Joseph P. Bevilaqua 43 Vice President, Container Manufacturing Division--
Plastic Products
John H. Hunter 52 Vice President, Operations and Engineering--
Container Manufacturing Division
David Garrison 59 Vice President, Container Manufacturing Division--
Steel Products
Kevin H. Kerchner 45 Vice President, Logistics and Planning
Ronald M. Litchkowski 41 Vice President, Controller
Norman W. Alpert 40 Director
Vincent J. Buonanno 55 Director
Todd N. Khoury 33 Director
Leonard Lieberman 70 Director
Kevin Mundt 45 Director
Arthur J. Nagle 60 Director
Vincent J. Naimoli 61 Director
Daniel S. O'Connell 45 Director
John W. Priesing 70 Director
Robert L. Rosner is a Managing Director of Vestar and was a founding
partner of Vestar at its inception in 1988. Mr. Rosner is Chairman of
Russell-Stanley's Board of Directors. Mr. Rosner is also a director of
Remington Products Company, L.L.C. a company in which Vestar has a significant
equity interest. Mr. Rosner holds a B.A. from Trinity College and a M.B.A. from
the University of Pennsylvania.
Robert L. Singleton joined Russell-Stanley in 1996 as President and Chief
Executive Officer. Prior to joining Russell-Stanley, Mr. Singleton served as
Vice President-Materials and Vice President-Plastics Group of Rexam Inc., a
subsidiary of Rexam plc, since 1992. From 1983 to 1992, Mr. Singleton held
positions at GE Plastics, a division of General Electric Company, in global
business development, marketing and product management, most recently serving
as General Manager of General Electric's worldwide LEXAN business. Mr.
Singleton holds a B.S.E. from Princeton University, a S.M. from M.I.T. and a
M.B.A. from Harvard University.
Daniel W. Miller joined Russell-Stanley in March 1995 and was appointed
Senior Vice President and Chief Financial Officer in February 1996. Mr. Miller
was appointed Senior Vice President, Finance and Chief Financial Officer in
June 1996 and is currently Executive Vice President and Chief Financial
Officer. Prior to May 1998, Mr. Miller was also a Managing Director of Vestar
Resources, Inc., an affiliate of Vestar, which he joined in 1993. From 1990 to
1993, Mr. Miller held various executive positions and served as President of
Harding Service Corporation, an affiliate of Wesray Capital Corporation. He has
also held various executive financial positions with Forstmann Little & Co. and
Dresser Industries, Inc. Mr. Miller is a C.P.A. and holds a B.S. from Northern
Illinois University.
52
Mark E. Daniels joined Russell-Stanley as Executive Vice President with
the acquisition of Container Management Services in 1997. Mr. Daniels founded
Container Management Services in 1991, and served as President of Container
Management Services since its inception. In 1983, Mr. Daniels founded and
managed LinTech, Inc. which provided ultra low temperature size reduction and
classification of specialty products such as thermoplastics, pharmaceuticals
and foodstuffs. LinTech was sold to Tanner Chemical/Chamberlain Phipps in 1986,
where Mr. Daniels served as Division Manager from 1986 to 1991. Mr. Daniels
holds a B.S. from Lehigh University.
Michael W. Hunter joined Russell-Stanley as Executive Vice President and
President of Hunter Drums Limited with the acquisition of Hunter Drums Limited
in 1997. Mr. Hunter joined Hunter Drums Limited in 1979 and became President in
1984. Mr. Hunter holds a B.A. from the University of Western Ontario.
Gerard C. DiSchino joined Russell-Stanley as President of New England
Container with the acquisition of New England Container in 1998, where he
became president in 1997. Prior to joining New England Container, Mr. DiSchino
spent over 15 years in various positions with Norton Company, a division of
Saint Gobain Corporation. Mr. DiSchino holds a B.A. from Boston College and a
M.B.A. from Babson College.
Joseph P. Bevilaqua joined Russell-Stanley as Vice President, Sales and
Market Development in 1998. Mr. Bevilaqua is currently Vice President,
Container Manufacturing Division--Plastic Products. Prior to joining
Russell-Stanley, Mr. Bevilaqua was Executive Director, Engineered Products and
Corporate Marketing of Woodbridge Foam Corporation. Mr. Bevilaqua has held a
variety of product management and market development positions at GE Plastics,
a division of General Electric Company. Mr. Bevilaqua holds a B.S. from the
University of Tennessee.
John H. Hunter joined Russell-Stanley in 1984 as a Vice President and was
appointed Vice President--Plastics Division in 1986. Mr. Hunter is currently
Vice President, Operations and Engineering--Container Manufacturing Division.
Prior to joining Russell-Stanley, Mr. Hunter was a Plant Manager for ACT. Mr.
Hunter holds a B.S. from the University of Strathclyde in Glasgow, Scotland.
David Garrison joined Russell-Stanley as Vice President, Operations in
1991. Mr. Garrison is currently Vice President, Container Manufacturing
Division--Steel Products. Prior to joining Russell-Stanley, Mr. Garrison was
Vice President and General Manager at Eastern Steel Barrel Corp. From 1962 to
1978 he was employed by American Thermo Plastics Corporation, a subsidiary of
Phillips Chemical Company. Mr. Garrison holds a B.S. from Lehigh University.
Kevin H. Kerchner joined Russell-Stanley as Vice President, Operations
with its acquisition of the plastics division of Smurfit Packaging Corporation
in 1997. Mr. Kerchner is currently Vice President, Logistics and Planning.
Prior to joining Russell-Stanley, Mr. Kerchner spent ten years with Smurfit
Packaging Corporation in operating assignments in both plastics and fiber
packaging. He has held various positions in finance and planning with Johnson
Matthey PLC and Container Corporation of America. Mr. Kerchner holds a B.A.
from Eastern Illinois University and a M.B.A. from Butler University.
Ronald M. Litchkowski joined Russell-Stanley as Vice President, Controller
in 1997. Prior to joining Russell-Stanley, Mr. Litchkowski was Vice President
of Finance and Administration for the Institutional Products Division of
Colgate-Palmolive Company, where he worked since 1989. Mr. Litchkowski is a
C.P.A. and holds a B.S. from King's College.
Norman W. Alpert is a Managing Director of Vestar and was a founding
partner of Vestar at its inception in 1988. Mr. Alpert is Chairman of the Board
of Directors of Advanced Organics, Inc., International AirParts Corporation and
Aearo Corporation, and a director of Cluett American Corp., Siegel & Gale
Holdings, Inc. and Remington Products Company L.L.C., all companies in which
Vestar has a significant equity interest. Mr. Alpert holds an A.B. from Brown
University.
Vincent J. Buonanno is the Chairman and Chief Executive Officer of Tempel
Steel Company of Chicago, a producer of magnetic steel laminations. Mr.
Buonanno was the principal stockholder and President of New England Container
from 1980 until 1997 and is a trustee of Brown University. Mr. Buonanno holds
an A.B. from Brown University.
53
Todd N. Khoury is a Vice President of Vestar and joined Vestar in 1993.
Mr. Khoury is also a director of Siegel & Gale Holdings, Inc., a company in
which Vestar has a significant equity interest. Mr. Khoury holds a B.A. from
Yale University and a M.B.A. from Harvard University.
Leonard Lieberman is a retired Chief Executive Officer of Supermarkets
General Corporation and Outlet Communications Inc. Mr. Lieberman is also a
director of Advanced Organics, Inc. and Reid Plastics Holdings, Inc., companies
in which Vestar has a significant equity interest, Celestial Seasonings Inc.,
Republic New York Corporation, Republic National Bank of New York, Sonic Corp.,
and Nice-Pak Products, Inc. Mr. Lieberman holds a B.A. from Yale University, a
J.D. from Columbia University and participated in the Advanced Management
Program at Harvard University.
Kevin Mundt is a Vice President, member of the Board of Directors, and
head of the Retail, Consumer & Healthcare Group of Mercer Management
Consulting. Prior to that, Mr. Mundt was a founding partner of Corporate
Decisions, Inc., a Boston strategy consulting firm that focused on developing
growth strategies in changing markets that later merged with Mercer. Mr. Mundt
holds an A.B. from Brown University and holds a M.B.A. from Harvard University.
Arthur J. Nagle is a Managing Director of Vestar and was a founding
partner of Vestar at its inception in 1988. Mr. Nagle is a director of Aearo
Corporation and Remington Products Company, L.L.C., both companies in which
Vestar has a significant equity interest. Mr. Nagle holds a B.S. from
Pennsylvania State University and a M.B.A. from Columbia University.
Vincent J. Naimoli is the Chairman, President and Chief Executive Officer
of Anchor Industries International. Mr. Naimoli is also Managing General
Partner and Chief Executive Officer of the Tampa Bay Devil Rays, Ltd. Major
League Baseball Club and a director of Florida Progress and Players
International Inc. Mr. Naimoli holds a B.S.M.E. from the University of Notre
Dame, a M.S.M.E. from New Jersey Institute of Technology, a M.B.A. from
Fairleigh Dickinson University and participated in the Advanced Management
Program at Harvard University.
Daniel S. O'Connell is the founder and Chief Executive Officer of Vestar.
Mr. O'Connell is a director of Advanced Organics, Inc., Aearo Corporation,
Cluett American Corp., Insight Communications Company, L.P., Remington Products
Company L.L.C. and Siegel & Gale Holdings, Inc., all companies in which Vestar
has a significant equity interest. Mr. O'Connell holds an A.B. from Brown
University and a M.P.P.M. from Yale University.
John W. Priesing is the Chief Executive Officer of Advanced Organics,
Inc., a company in which Vestar has a significant equity interest. Mr. Priesing
was Russell-Stanley's Chairman from 1993 to 1997 and President and Chief
Executive Officer from 1993 to 1996. Prior to joining Russell-Stanley, Mr.
Priesing served as President and Chief Executive Officer of Axel Johnson Inc.
From 1973 to 1978, Mr. Priesing was group vice president and director of Phelps
Dodge Industries. Mr. Priesing holds a B.A. from Amherst College and a M.B.A.
from Harvard University.
Board Compensation
All directors are reimbursed for their usual and customary expenses
incurred in attending all Board and committee meetings. Except for Mark
Daniels, directors who are also employees of ours or Vestar do not receive
remuneration for serving as directors. Mr. Daniels receives $25,000 per year
for his service as a director. Each other director of the Board receives
$15,000 per year for his service as a director, $2,000 for each meeting of the
Board attended in person (or $1,000 for each meeting of the Board attended by
teleconference) and $1,000 for each committee meeting attended in person (or
$500 for each committee meeting attended by teleconference).
Executive Compensation
The following table sets forth certain summary information concerning
compensation for services in all capacities awarded to, earned by or paid to
our Chief Executive Officer and each of our other four most highly compensated
executive officers whose aggregate cash and cash equivalent compensation
exceeded $100,000 (collectively, the "Named Executive Officers"), with respect
to the year ended December 31, 1998.
54
Summary Compensation Table
Long Term Compensation
------------------------
Annual Compensation Awards Payouts
-------------------------------- ------------ ---------
Securities All Other
Underlying LTIP Compen-
Name and Options Payouts sation
Principal Position Year Salary ($) Bonus ($) (#) ($) ($)(1)
- ------------------------- ------ ------------- ---------------- ------------ --------- ----------------
Robert L. Singleton 1998 310,000 100,000 35,000 31,250 129,688(2)
President and Chief
Executive Officer
Daniel W. Miller 1998 247,308(3) 125,000(4) 15,000
Executive Vice
President and Chief
Financial Officer
Mark E. Daniels 1998 225,000 25,000 17,500 795,000(5)
Executive Vice
President and President
of Container
Management Services
Michael W. Hunter 1998 238,319(6) 94,470(7) 17,500 469,000(8)
Executive Vice
President and President
of Hunter Drums Limited
John H. Hunter 1998 166,000 60,000 3,000 41,667 3,760(9)
Vice President,
Operations and
Engineering--Container
Manufacturing Division
- ----------
(1) Russell-Stanley maintains a group life insurance policy under which certain
employees, including all of the Named Executive Officers, receive life
insurance with a death benefit equal to the lesser of the employee's
salary and $300,000. The premiums paid in respect of any individual are
not significant.
During 1998, Russell-Stanley maintained a defined contribution plan under
which contributions are made annually in respect of certain employees,
including Mr. Singleton and John H. Hunter. The contributions under this
plan in respect of 1998 have not been determined.
(2) Represents payment of $124,688 by Russell-Stanley in reimbursement of
expenses incurred by Mr. Singleton in connection with his relocation to
New Jersey and a contribution of $5,000 by Russell-Stanley under
Russell-Stanley's 401(k) Savings Plan.
(3) Represents payment by Russell-Stanley of $75,000 to Vestar in consideration
for Mr. Miller's services as Russell-Stanley's Senior Vice President and
Chief Financial Officer from January through May 1998 and the payment by
Russell-Stanley of $172,308 to Mr. Miller as salary in respect of the
period from May through December 1998. Prior to May 1998, Russell-Stanley
made all payments in respect of Mr. Miller's services to Vestar. See
"Certain Relationships and Related Party Transactions."
(4) Represents a bonus of $100,000 paid by Russell-Stanley and a payment of
$25,000 from Vestar.
(5) Represents payment of $770,000 by Russell-Stanley pursuant to a stay/pay
agreement and payment of $25,000 by Russell-Stanley for Mr. Daniels'
service as a director. See "--Employment Contracts" and "--Board
Compensation."
(6) Mr. Hunter's salary is $355,700 (Canadian) per year. The amount reflected
in the table represents this amount converted at the rate of 0.67 U.S.
dollars per Canadian dollar.
55
(7) Mr. Hunter's bonus for 1998 was $141,000 (Canadian). The amount reflected
in the table represents this amount converted at the rate of 0.67 U.S.
dollars per Canadian dollar.
(8) Represents payment by Russell-Stanley of $700,000 (Canadian) pursuant to a
stay/pay agreement. The amount reflected in the table represents this
amount converted at the rate of 0.67 U.S. dollars per Canadian dollar. See
"--Employment Contracts."
(9) Represents a contribution by Russell-Stanley under Russell-Stanley's 401(k)
Savings Plan.
Stock Option Grants
During the year ended December 31, 1998, Russell-Stanley granted a total
of 88,000 stock options to the Named Executive Officers. The following table
sets forth the grants for each Named Executive Officer during the year ended
December 31, 1998.
Option Grants in 1998
Number
of Potential Realizable
Securities % of Total Value at Assumed
Underlying Options Exercise Annual Rates of
Options Granted to or Base Stock Price
Granted Employees Price Expiration Appreciation for
Name (#)(1) in Fiscal Year ($/Share) Date Option Term ($)
- ------------------------- ------------ ---------------- ----------- ------------------- ----------------------
5% 10%
Robert L. Singleton ..... 35,000 27.9 50.00 February 25, 2008 1,100,400 2,789,150
Daniel W. Miller ........ 15,000 11.9 50.00 May 17, 2008 471,600 1,195,350
Mark E. Daniels ......... 17,500 13.9 50.00 February 25, 2008 550,200 1,394,575
Michael W. Hunter ....... 17,500 13.9 50.00 February 25, 2008 550,200 1,394,575
John H. Hunter .......... 3,000 2.4 50.00 February 25, 2008 94,320 239,070
- ----------
(1) Grants consist of stock options which become exercisable in five equal
annual installments commencing one year after the date of grant and become
immediately exerciseable in the event of a change in control or an initial
public offering of Russell-Stanley's Common Stock or other voting
securities. A change of control will occur on (i) the date Vestar ceases
to beneficially own a majority of the voting power of Russell-Stanley and
cannot elect a majority of our Board of Directors, (ii) subsequent to an
initial public offering, the date any person other than Vestar
beneficially owns more than 35% of the voting power of Russell-Stanley and
Vestar beneficially owns less voting power than such person or (iii) the
date that the continuing members of the Board of Directors cease to
constitute a majority of the Board of Directors during a two-year period.
Option Exercises and Year-End Holdings
During the year ended December 31, 1998, none of the Named Executive
Officers exercised their stock options. The following table sets forth certain
information with respect to unexercised stock options held by each Named
Executive Officer as of December 31, 1998.
Number of Securities Value of Unexercised In-the-
Underlying Unexercised Money Options at
Options at Fiscal Fiscal Year-End
Year-End Unexercisable/Exercisable
Name Unexercisable/Exercisable (#) ($)(1)
- ----------------------------- ------------------------------- -----------------------------
Robert L. Singleton ......... 51,427/12,561 476,383/364,269
Daniel W. Miller ............ 18,650/8,000 0/296,000
Mark E. Daniels ............. 49,719/15,869 0/0
Michael W. Hunter ........... 17,500/0 0/0
John H. Hunter .............. 3,000/16,000 0/592,000
- ----------
(1) Values have been determined assuming a fair market value of $45.00 per
share of Russell-Stanley's Common Stock based on the most recent
third-party valuation of Russell-Stanley's equity value.
56
Long-Term Incentive Plan
We maintain a performance unit incentive plan for certain key employees,
including the Named Executive Officers. During the year ended December 31,
1998, Russell-Stanley awarded a total of 9,675 units to the Named Executive
Officers and established a target EBITDA for the three-year period from January
1, 1998 through December 31, 2000 pursuant to the plan. Each unit has a value
of $100.00 if the EBITDA target is achieved. This per unit value will be
prorated down to $25.00 if less than 100% but more than 85% of the EBITDA
target is achieved. The units will have no value if less than 85% of the EBITDA
target is achieved. The per unit value will be prorated up to $200.00 if the
EBITDA target is exceeded by up to 25%. There is no increase in the per unit
value for achieving EBITDA in excess of 125% of the target amount. The unit
payments will be made in three equal annual installments in 2001, 2002 and
2003, provided that the relevant Named Executive Officer is employed by
Russell-Stanley on the payment dates. The following table sets forth certain
information with respect to the units granted to each Named Executive Officer.
Long-Term Incentive Plan Awards in 1998
Estimated Future Payouts
------------------------------
Number Performance
of Period Threshold Target Maximum
Name Units (#) Until Payout ($) ($) ($)
- ------------------------- ----------- ------------------- ----------- --------- --------
January 1, 1998-
Robert L. Singleton ..... 2,325 December 31, 2000 197,625 232,500 465,000
January 1, 1998-
Daniel W. Miller ........ 2,100 December 31, 2000 178,500 210,000 420,000
January 1, 1998-
Mark E. Daniels ......... 1,875 December 31, 2000 159,375 187,500 375,000
January 1, 1998-
Michael W. Hunter ....... 1,875 December 31, 2000 159,375 187,500 375,000
January 1, 1998-
John H. Hunter .......... 1,500 December 31, 2000 127,500 150,000 300,000
Employment Contracts
Robert L. Singleton entered into an employment agreement with
Russell-Stanley on September 20, 1996. Pursuant to the agreement, Mr. Singleton
received an initial annual base salary of $275,000, subject to discretionary
increases. Mr. Singleton is also entitled to annual incentive bonuses and is
eligible to participate in our long-term incentive program. The employment
agreement renews annually unless Russell-Stanley elects not to renew.
Mark E. Daniels entered into an employment agreement with Russell-Stanley
on July 23, 1997. Pursuant to the agreement, Mr. Daniels received an initial
annual base salary of $225,000, subject to discretionary increases. Mr. Daniels
is also entitled to annual incentive bonuses and is eligible to participate in
our long-term incentive program. The employment agreement has an initial term
of three years which is automatically renewed for one-year periods unless 60
days prior written notice is given by either Mr. Daniels or Russell-Stanley. In
the event Mr. Daniels' employment is terminated by Russell-Stanley without
cause, Mr. Daniels would be entitled to receive a cash lump sum payment in
respect of compensation earned but not yet paid, as well as a severance payment
in an amount equal to the sum of (x) one year's base salary and (y) the product
of (i) Mr. Daniels' bonus for the fiscal year ended prior to his termination of
employment and (ii) a fraction, the numerator of which is the number of days
passed in the current fiscal year prior to this termination and the denominator
of which is 365.
Mr. Daniels also entered into a separate agreement with Russell-Stanley on
July 23, 1997 providing him with additional monetary incentive to remain an
employee of Container Management Services through July 23, 2000. This agreement
provides for Mr. Daniels to receive $770,000 annually through July 23, 2000. In
addition, in the event Mr. Daniels' employment is terminated by Russell-Stanley
without cause, we would continue to make these payments.
57
Michael W. Hunter entered into an employment agreement with
Russell-Stanley on October 30, 1997. Pursuant to the agreement, Mr. Hunter
received an initial annual base salary of $345,000 (Canadian), subject to
discretionary increases. Mr. Hunter is also entitled to annual incentive
bonuses and is eligible to participate in our long-term incentive program. The
employment agreement has an initial term of five years which is automatically
renewed for one-year periods unless 60 days prior written notice is given by
either Mr. Hunter or Russell-Stanley. In the event Mr. Hunter's employment is
terminated by Russell-Stanley without cause, Mr. Hunter would be entitled to
receive a cash lump sum payment in respect of compensation earned but not yet
paid, as well as a severance payment in an amount equal to the sum of (x) a
multiple (ranging from 1 1/2 to 3) of one year's base salary and (y) the product
of (i) the target bonus in respect of the fiscal year in which Mr. Hunter's
termination of employment occurs and (ii) a fraction, the numerator of which is
the number of days lapsed in the current fiscal year prior to his termination
and the denominator of which is 365.
Mr. Hunter also entered into a separate agreement with Hunter Drums
Limited on October 30, 1997 providing him with additional monetary incentive to
remain an employee of Hunter Drums Limited through October 30, 2003. This
agreement provides for Mr. Hunter to receive monthly payments of $58,334
(Canadian) through October 30, 2001 and then $37,500 (Canadian) monthly
thereafter, through October 30, 2003. In addition, in the event Mr. Hunter's
employment is terminated by Russell-Stanley or Hunter Drums Limited without
cause, Mr. Hunter would be entitled to receive (i) 75% of the aggregate
payments remaining to be made pursuant to the previous sentence in equal
monthly installments during the first 50% of the remaining term of the
agreement and (ii) the remaining 25% of such aggregate payments on October 30,
2003. In the event of a change of control (as defined in the agreement), Mr.
Hunter would be entitled to receive a single lump sum payment equal to the
present value of the remaining payments due under the agreement.
58
OWNERSHIP OF COMMON STOCK
The following table sets forth certain information concerning the
beneficial ownership shares of our Common Stock on March 23, 1999 by (i) each
person known by us to be the beneficial owner of more than 5% of any class of
our Common Stock, (ii) each director who is a shareholder, (iii) our Chief
Executive Officer and each of our Named Executive Officers, and (iv) all of our
executive officers and directors as a group:
Number of Shares Percentage of Shares
Name of Beneficial Owner Beneficially Owned(a) Outstanding (a)
- -------------------------------------------- ----------------------- ---------------------
5% Stockholders
Vestar Capital Partners III, L.P. .......... 1,163,637 53.55 %
245 Park Avenue
New York, New York 10167
Vestar/R-S Investment, L.P. ................ 490,000 22.55 %
245 Park Avenue
New York, New York 10167
New York Life Insurance Company ............ 290,909 13.39 %
51 Madison Avenue
New York, New York 10010
Vestar Portfolio Investments, L.P. ......... 29,318 1.35 %
245 Park Avenue
New York, New York 10167
Officers and Directors
Robert L. Rosner(b) ........................ -- --
Robert L. Singleton ........................ 19,561(c) *
Daniel W. Miller ........................... 11,000(d) *
Mark E. Daniels ............................ 19,369(e) *
Michael W. Hunter .......................... 3,500(f) *
John H. Hunter ............................. 20,725(g) *
Norman W. Alpert(b) ........................ -- --
Vincent J. Buonanno ........................ 24,243 1.12 %
Leonard Lieberman .......................... 3,160 *
Arthur J. Nagle(b) ......................... -- --
Vincent J. Naimoli ......................... 3,160 *
Daniel S. O'Connell(b) ..................... -- --
John W. Priesing ........................... 22,000(h) 1.00 %
All officers and directors as a group
(20 persons) .............................. 130,128(i) 5.74 %
- ----------
* Less than one percent.
(a) The amounts and percentage of Common Stock beneficially owned are reported
on the basis of regulations of the Securities and Exchange Commission
governing the determination of beneficial ownership of securities. Under
the regulations, a person is deemed to be a "beneficial owner" of a
security if that person has or shares "voting power," which includes the
power to vote or to direct the voting of such security, or "investment
power," which includes the power to dispose of or to direct the
disposition of such security. A person is also deemed to be a beneficial
owner of any securities of which that person has a right to acquire
beneficial ownership within 60 days. Under these rules, more than one
person may be deemed a beneficial owner of the same securities and a
person may be deemed to be a beneficial owner of securities as to which he
has no economic interest.
(b) Mr. O'Connell is the President and Chief Executive Officer and Messrs.
Rosner, Nagle and Alpert are Vice Presidents of Vestar Associates
Corporation III. Vestar Associates Corporation III is the sole general
partner of Vestar Associates III, L.P., and Vestar Associates III, L.P. is
the sole
59
general partner of Vestar Capital Partners III, L.P., which owns 1,163,637
shares of our Common Stock. Messrs. O'Connell, Rosner, Nagle and Alpert, as
executive officers of Vestar Associates Corporation III, may be deemed to
share beneficial ownership of such shares. Each of these individuals
disclaims such beneficial ownership.
Messrs. Alpert, Nagle and O'Connell are general partners of Vestar/R-S
Investment, L.P. which owns 490,000 shares of our Common Stock. Messrs.
Alpert, Nagle and O'Connell, as general partners of Vestar/R-S Investment,
L.P., may be deemed to share beneficial ownership of such shares. Each of
these individuals disclaims such beneficial ownership.
Messrs. Alpert and O'Connell are general partners of Vestar/MAG Investment
L.P. Vestar/MAG Investment L.P. is the sole general partner of Vestar
Portfolio Investments, L.P., which owns 29,318 shares of our Common stock.
Messrs. Alpert and O'Connell, as general partners of Vestar/MAG Investment
L.P., may be deemed to share beneficial ownership of such shares. Each of
these individuals disclaims such beneficial ownership.
(c) Includes currently exercisable options to purchase 19,561 shares of
Common Stock.
(d) Includes currently exercisable options to purchase 11,000 shares of
Common Stock.
(e) Includes currently exercisable options to purchase 19,369 shares of
Common Stock.
(f) Includes currently exercisable options to purchase 3,500 shares of
Common Stock.
(g) Includes currently exercisable options to purchase 16,600 shares of
Common Stock.
(h) Includes currently exercisable options to purchase 22,000 shares of
Common Stock.
(i) Includes currently exercisable options to purchase 95,440 shares of
Common Stock.
60
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
On July 23, 1997, we entered into a management agreement with Vestar.
Pursuant to the management agreement, Vestar provides us with certain advisory
and consulting services for an annual fee equal to the greater of $225,000 or
0.25% of our net sales for such fiscal year, plus reimbursement of
out-of-pocket expenses. The management agreement terminates at such time as
Vestar and its affiliates hold, in the aggregate, less than 10% of the voting
power of our outstanding voting stock. See "Ownership of Common Stock." In
addition to the fees based on net sales for advisory and consulting services,
in 1998 we paid Vestar $160,000 for consulting services in connection with our
acquisition of New England Container and approximately $224,000 in
reimbursement of out-of-pocket expenses.
Prior to May 1998, Daniel W. Miller, our Executive Vice President and
Chief Financial Officer and one of our directors, was a Managing Director of
Vestar Resources, Inc., an affiliate of Vestar. Between February 1996 when Mr.
Miller became our Senior Vice President and Chief Financial Officer and May
1998 when Mr. Miller became a full-time employee of Russell-Stanley, we paid
Vestar at the rate of $150,000 per year for Mr. Miller's services as our Senior
Vice President and Chief Financial Officer. Pursuant to this arrangement, we
paid Vestar $75,000 in respect of Mr. Miller's services for the period from
January through May 1998.
Kevin Mundt, one of our directors, is a Vice President, member of the
Board of Directors and head of the Retail, Consumer & Healthcare Group of
Mercer Management Consulting ("Mercer"). In 1998, we engaged Mercer to provide
consulting services to Container Management Services, for which we paid Mercer
approximately $189,000. In 1998 we also engaged Mercer to provide consulting
services to Russell-Stanley, for which we paid Mercer approximately $272,000.
In June 1998, Russell-Stanley made an interest-free loan in the amount of
$77,000 to David Garrison, one of our executive officers, in connection with
Mr. Garrison's relocation to our headquarters in Bridgewater, New Jersey. Mr.
Garrison repaid the loan in full in August 1998.
In July 1998, Russell-Stanley acquired all of the capital stock of New
England Container from Vincent J. Buonanno, one of our directors, for $14
million in cash and 24,243 shares of our Common Stock. The consideration was
determined based on negotiations between Russell-Stanley and Mr. Buonanno and
was approved by Russell-Stanley's board of directors. Under the terms of the
transaction, Russell-Stanley and Mr. Buonanno have agreed to indemnify each
other for certain losses pursuant to customary indemnification provisions.
We have entered into a consulting agreement with Mr. Buonanno. In
consideration for his advising us on matters relating to the steel drum
reconditioning business, we will pay Mr. Buonanno four payments of $250,000
each prior to December 31, 2001.
New York Life Insurance Company, one of our 5% stockholders, and New York
Life Insurance and Annuity Corporation, an affiliate of New York Life Insurance
Company, were lenders under our former senior credit agreement, with an
aggregate term loan commitment of $20.0 million which bore interest at 9.48%
per annum. This term loan remains outstanding under our senior credit facility
bearing the same interest rate and will mature in two equal installments in
June 2006 and June 2007. We are required to offer to repay the term loan with
the proceeds from the sale of certain assets and with the proceeds from certain
issuances of our equity securities. We can also make optional prepayments.
Mandatory and optional prepayments are subject to certain prepayment premiums.
In connection with the execution of our senior credit facility, we paid fees of
approximately $100,000 to these lenders.
61
DESCRIPTION OF SENIOR CREDIT FACILITY
Our senior credit facility is provided by a syndicate of banks and other
financial institutions led by BankBoston N.A., as administrative agent, and
Goldman Sachs Credit Partners L.P., as syndication agent. Our senior credit
facility provides for a $25.0 million term loan and $75.0 million of revolving
credit availability. The equivalent of U.S. $15.0 million of such revolving
indebtedness is available for borrowings in Canadian dollars by our Canadian
subsidiary, Hunter Drums Limited. The term loan will mature in two equal
installments in June 2006 and June 2007. The outstanding revolving credit
indebtedness and the revolving credit commitment will mature in February 2004.
The term loan bears interest at 9.48% per annum. Revolving indebtedness
bears interest at a combination of domestic source and Eurodollar borrowing
rates which fluctuate based on our EBITDA and debt levels.
We pay a commitment fee at a rate equal to 0.50% per annum on the undrawn
portion of the revolving credit commitments. Following the first fiscal quarter
of 2000, the commitment fee adjusts quarterly depending on the undrawn portion
of the revolving credit commitments.
We must repay indebtedness under our senior credit facility with the
proceeds from the sale of certain assets and with the proceeds from certain
issuances of our equity securities. We can also make optional prepayments on
the term loan. Mandatory and optional prepayments are subject to certain
prepayment premiums.
Except for the obligations of Hunter Drums Limited, the obligations under
our senior credit facility are joint and several obligations of our material
domestic subsidiaries. The obligations of Hunter Drums Limited under our senior
credit facility are unconditionally and irrevocably guaranteed by us and our
material domestic subsidiaries. In addition, our senior credit facility is
secured by first priority or equivalent security interests in substantially all
of our assets, including all the capital stock of, or other equity interests
in, our domestic subsidiaries and 65% of the capital stock of, or other equity
interests in, our foreign subsidiaries (to the extent permitted by applicable
contractual and legal provisions). See "Description of the
Notes--Subordination" and "Risk Factors--Subordination."
Our senior credit facility contains a number of customary covenants and
restrictions that will restrict our ability to incur additional indebtedness,
incur liens, make capital expenditures, enter into certain related party
transactions, pay dividends, enter into mergers and consolidations, sell
assets, make acquisitions and otherwise restrict corporate activities. In
addition, under our senior credit facility we are required to comply with
specified financial ratios and tests, including minimum interest coverage
ratios and maximum senior leverage ratios.
We maintain an interest rate collar in an aggregate notional principal
amount of $45.0 million to hedge interest rate risk. Under this collar, if the
actual LIBOR rate at the specified measurement date is greater than a ceiling
rate stated in the collar agreement, the lender pays us the differential
interest expense. If the actual LIBOR rate is lower than the floor rate stated
in the collar agreement, we pay the lender the differential interest expense.
The interest rate collar terminates on November 30, 2000.
62
THE EXCHANGE OFFER
General
We hereby offer, upon the terms and subject to the conditions set forth in
this prospectus and in the accompanying letter of transmittal (which together
constitute the exchange offer), to exchange up to $150.0 million aggregate
principal amount of exchange notes for a like aggregate principal amount of
outstanding notes properly tendered on or prior to the expiration date and not
withdrawn as permitted pursuant to the procedures described below. The exchange
offer is being made with respect to all of the outstanding notes.
Purpose and Effect of the Exchange Offer
The outstanding notes were issued on February 10, 1999, in a transaction
exempt from the registration requirements of the Securities Act of 1933.
Accordingly, the outstanding notes may not be reoffered, resold, or otherwise
transferred unless so registered or unless an applicable exemption from the
registration and prospectus delivery requirements of the Securities Act of 1933
is available.
In connection with the issuance and sale of the outstanding notes, we
entered into an exchange and registration rights agreement with the initial
purchasers of the outstanding notes, in which we and our subsidiaries
guaranteeing the outstanding notes agreed, among other things:
o to use our reasonable best efforts to file with the Securities and
Exchange Commission, within 75 days of February 10, 1999, a registration
statement under the Securities Act of 1933 relating to an exchange offer
of Notes whose terms are described immediately below;
The form and terms of the exchange notes will be substantially identical
to the form and terms of the outstanding notes, except that the exchange
notes:
o will be freely tradeable by virtue of their registration under the
Securities Act of 1933,
o will not bear legends restricting their transfer, will not be subject
to any additional obligations regarding registration under the
Securities Act of 1933 and
o will not be subject to the special interest payments described in
"Description of Notes--
Registration Covenant; Exchange Offer."
The exchange notes will be issued under and entitled to the benefits
of the same Indenture that authorized the issuance of the outstanding
notes. Consequently, both series will be treated as a single class of
debt securities under the Indenture;
o to use our reasonable best efforts to cause the registration statement
to become effective as soon as practicable, but no later than 225 days
after February 10, 1999; and
o to commence the exchange offer promptly after the Exchange Offer
Registration Statement has become effective, hold the offer open for at
least 30 days, and exchange the exchange notes for all outstanding notes
validly tendered and not withdrawn before the expiration of the offer.
We are making this exchange offer in order to satisfy our obligations with
respect to the exchange and registration rights agreement. A copy of the
exchange and registration rights agreement has been filed as an exhibit to the
registration statement.
The term "holder," with respect to the exchange offer, means any person in
whose name outstanding notes are registered on our books or any other person
who has obtained a properly completed bond power from the registered holder, or
any person whose outstanding notes are held of record by The Depository Trust
Company. Other than pursuant to the exchange and registration rights agreement,
we are not required to file any registration statement to register any
outstanding notes which remain outstanding. Holders of outstanding notes who do
not tender their outstanding notes or whose outstanding notes are tendered but
not accepted would have to rely on exemptions to registration requirements
under the securities laws, including the Securities Act of 1933, if they wish
to sell their outstanding notes.
63
If we fail to comply with certain obligations under the exchange and
registration rights agreement, we will be required to pay additional interest
to holders of the outstanding notes. Please read the section captioned
"Description of Notes--Registration Covenant; Exchange Offer" for more details
regarding the exchange and registration rights agreement.
Each holder of outstanding notes that wishes to exchange such outstanding
notes for transferable exchange notes in the exchange offer will be required to
represent to us that, among other things:
o any exchange notes that the holder receives will be acquired in the
ordinary course of its business;
o such holder has no arrangement with any person to participate in, and
does not intend to engage in, the distribution of the exchange notes;
o if the holder is a broker-dealer that will receive exchange notes for
its own account in exchange for outstanding notes that were acquired as a
result of market-making or trading activities, that it will deliver a
prospectus, as required by law, in connection with any resale of such
exchange notes;
o such holder is not our "affiliate," as defined in Rule 405 of the
Securities Act of 1933, or if it is our affiliate, that it will comply
with applicable registration and prospectus delivery requirements of the
Securities Act of 1933; and
o if the holder is a person in the United Kingdom, that its ordinary
activities involve it in acquiring, holding, managing or disposing of
investments, as principal or agent, for the purposes of its business.
Resale of Exchange Notes
Based on interpretations of the staff of the Securities and Exchange
Commission set forth in no-action letters issued to unrelated third parties, we
believe that exchange notes issued under the exchange offer in exchange for
outstanding notes may be offered for resale, resold and otherwise transferred
by any exchange note holder without compliance with the registration and
prospectus delivery provisions of the Securities Act of 1933, if:
o any exchange notes that the holder receives will be acquired in the
ordinary course of its business;
o the holder has no arrangement to participate in the distribution of such
exchange notes; and
o such holder is not our "affiliate," as defined in Rule 405 of the
Securities Act of 1933, or if it is our affiliate, that it will comply
with applicable registration and prospectus delivery requirements of the
Securities Act of 1933.
See "K-III Communications Corporation," SEC No-Action Letter (available
May 14, 1993); "Mary Kay Cosmetics, Inc.," SEC No-Action Letter (available June
5, 1991); "Morgan Stanley & Co., Incorporated," SEC No-Action Letter (available
June 5, 1991); and "Exxon Capital Holdings Corporation," SEC No-Action Letter
(available May 13, 1988).
Any holder who tenders in the exchange offer with the intention of
participating in any manner in a distribution of the exchange notes
o cannot rely on the position of the staff of the Securities and Exchange
Commission enunciated in "Exxon Capital Holdings Corporation" or similar
interpretive letters; and
o must comply with the registration and prospectus delivery requirements
of the Securities Act of 1933 in connection with a secondary resale
transaction.
This prospectus may be used for an offer to resell, resale or other
retransfer of exchange notes only as specifically set forth in this prospectus.
With regard to broker-dealers, only broker-dealers that acquired the
outstanding notes as a result of market-making activities or other trading
activities may participate in the exchange offer. Each broker-dealer that
receives exchange notes for its own account in exchange for outstanding notes,
where such outstanding notes were acquired by such
64
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of the exchange notes. Please read the section captioned "Plan
of Distribution" for more details regarding the transfer of exchange notes.
Terms of the Exchange Offer
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept for exchange any outstanding
notes properly tendered and not withdrawn prior to the expiration date. We will
issue $1,000 principal amount of exchange notes in exchange for each $1,000
principal amount of outstanding notes surrendered under the exchange offer.
Outstanding notes may be tendered only in integral multiples of $1,000.
The form and terms of the exchange notes will be substantially identical
to the form and terms of the outstanding notes, except that the exchange notes:
o will be freely tradeable by virtue of their registration under the
Securities Act of 1933,
o will not bear legends restricting their transfer, will not be subject to
any additional obligations regarding registration under the Securities Act
of 1933 and
o will not be subject to the special interest payments described in
"Description of Notes--
Registration Covenant; Exchange Offer."
The exchange notes will be issued under and entitled to the benefits of
the same Indenture that authorized the issuance of the outstanding notes.
Consequently, both series will be treated as a single class of debt securities
under the Indenture.
The exchange offer is not conditioned upon any minimum aggregate principal
amount of outstanding notes being tendered for exchange.
As of the date of this prospectus, $150.0 million aggregate principal
amount of the outstanding notes are outstanding. This prospectus and the letter
of transmittal are being sent to all registered holders of outstanding notes.
There will be no fixed record date for determining registered holders of
outstanding notes entitled to participate in the exchange offer.
We intend to conduct the exchange offer in accordance with the provisions
of the exchange and registration rights agreement, the applicable requirements
of the Securities Act of 1933 and the Securities Exchange Act of 1934 and the
rules and regulations of the Securities and Exchange Commission. Outstanding
notes that are not tendered for exchange in the exchange offer will remain
outstanding and continue to accrue interest and will be entitled to the rights
and benefits such holders have under the Indenture relating to the outstanding
notes and the exchange and registration rights agreement.
We will be deemed to have accepted for exchange properly tendered
outstanding notes when we have given oral or written notice of the acceptance
to the exchange agent. The exchange agent will act as agent for the tendering
holders for the purposes of receiving the exchange notes from us and delivering
exchange notes to such holders. Subject to the terms of the exchange and
registration rights agreement, we expressly reserve the right to amend or
terminate the exchange offer, and not to accept for exchange any outstanding
notes not previously accepted for exchange, upon the occurrence of any of the
conditions specified below under the caption "--Certain Conditions to the
Exchange Offer."
Holders who tender outstanding notes in the exchange offer will not be
required to pay brokerage commissions or fees or, subject to the instructions
in the letter of transmittal, transfer taxes with respect to the exchange of
outstanding notes. We will pay all charges and expenses, other than certain
applicable taxes described below, in connection with the exchange offer. It is
important that you read the section labeled "--Fees and Expenses" below for
more details regarding fees and expenses incurred in the exchange offer.
Expiration Date; Extensions; Amendments
The exchange offer will expire at 5:00 p.m., New York City time on
, 1999, unless in our sole discretion, we extend it.
65
In order to extend the exchange offer, we will notify the exchange agent
orally or in writing of any extension. We will notify the registered holders of
outstanding notes of the extension no later than 9:00 a.m., New York City time,
on the business day after the previously scheduled expiration date.
We reserve the right, in our sole discretion:
o to delay accepting for exchange any outstanding notes;
o to extend the exchange offer or to terminate the exchange offer and to
refuse to accept outstanding notes not previously accepted if any of the
conditions set forth below under "--Certain Conditions to the Exchange
Offer" have not been satisfied, by giving oral or written notice of such
delay, extension or termination to the exchange agent; or
o subject to the terms of the exchange and registration rights agreement,
to amend the terms of the exchange offer in any manner.
Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice of such delay to
the registered holders of outstanding notes. If we amend the exchange offer in
a manner that we determine to constitute a material change, we will promptly
disclose such amendment in a manner reasonably calculated to inform the holders
of outstanding notes of such amendment.
Without limiting the manner in which the we may choose to make public
announcements of any delay in acceptance, extension, termination or amendment
of the exchange offer, we shall have no obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release to a financial news service.
Certain Conditions to the Exchange Offer
Despite any other term of the exchange offer, we will not be required to
accept for exchange, or exchange any exchange notes for, any outstanding notes,
and we may terminate the exchange offer as provided in this prospectus before
accepting any outstanding notes for exchange if in our reasonable judgment:
o any action or proceeding is instituted or threatened in any court or by
or before any governmental agency or regulatory authority, or any
injunction, order or decree is issued with respect to the exchange offer
which, in our sole judgment, might materially impair our ability to
proceed with the exchange offer or have a material adverse effect on the
contemplated benefits of the exchange offer to us; or
o any change (or any development involving a prospective change) shall
have occurred or been threatened in our business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects that is or may be adverse to us, or we shall have become aware
of facts that have or may have adverse significance with respect to the
value of the outstanding notes or the exchange notes or that may
materially impair the contemplated benefits of the exchange offer to us;
or
o any law, rule or regulation or applicable interpretations of the staff
of the Securities and Exchange Commission is issued or promulgated which,
in our good faith determination, do not permit us to effect the exchange
offer; or
o any governmental approval has not been obtained, which approval we, in
our sole discretion, deem necessary for the consummation of the exchange
offer; or
o there shall have been proposed, adopted or enacted any law, statute,
rule or regulation (or an amendment to any existing law, statute, rule or
regulation) which, in our sole judgment, might materially impair our
ability to proceed with the exchange offer or have a material adverse
effect on the contemplated benefits of the exchange offer to us; or
o there shall occur a change in the current interpretation by the staff of
the Securities and Exchange Commission which permits the exchange notes
issued pursuant to the exchange
66
offer in exchange for outstanding notes to be offered for resale, resold
and otherwise transferred by holders thereof (other than any such holder
that is an "affiliate" of ours within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act provided that such exchange
notes are acquired in the ordinary course of such holders' business and
such holders have no arrangement with any person to participate in the
distribution of such exchange notes.
In addition, we will not be obligated to accept for exchange the
outstanding notes of any holder that has not made to us (i) the representations
described under "--Purpose and Effect of the Exchange Offer," "--Procedures for
Tendering" and "Plan of Distribution" and (ii) such other representations as
may be reasonably necessary under applicable Securities and Exchange Commission
rules, regulations or interpretations to make available to us an appropriate
form for registration of the exchange notes under the Securities Act of 1933.
We expressly reserve the right, at any time or at various times, to extend
the period of time during which the exchange offer is open. Consequently, we
may delay acceptance of any outstanding notes by giving oral or written notice
of such extension to their holders. During any such extensions, all outstanding
notes previously tendered will remain subject to the exchange offer, and we may
accept them for exchange. We will return any outstanding notes that we do not
accept for exchange for any reason without expense to their tendering holder as
promptly as practicable after the expiration or termination of the exchange
offer.
We expressly reserve the right to amend or terminate the exchange offer,
and to reject for exchange any outstanding notes not previously accepted for
exchange, upon the occurrence of any of the conditions of the exchange offer
specified above. We will give oral or written notice of any extension,
amendment, non-acceptance or termination to the holders of the outstanding
notes as promptly as practicable. In the case of any extension, such notice
will be issued no later than 9:00 a.m., New York City time, on the business day
after the previously scheduled expiration date.
These conditions are for our sole benefit and we may assert them
regardless of the circumstances that may give rise to them or waive them in
whole or in part at any or at various times in our sole discretion. If we fail
at any time to exercise any of the rights above, this failure will not
constitute a waiver of such right. Each such right will be deemed an ongoing
right that we may assert at any time or at various times.
In addition, we will not accept for exchange any outstanding notes
tendered, and will not issue exchange notes in exchange for any such
outstanding notes, if at such time any stop order will be threatened or in
effect with respect to the registration statement of which this prospectus
constitutes a part or the qualification of the Indenture under the Trust
Indenture Act of 1939.
Procedures for Tendering
Only a holder of outstanding notes may tender such outstanding notes in
the exchange offer. To tender in the exchange offer, a holder must:
o complete, sign and date the letter of transmittal, or a facsimile of the
letter of transmittal; have the signature on the letter of transmittal
guaranteed if the letter of transmittal so requires; and mail or deliver
such letter of transmittal or facsimile to the exchange agent prior to the
expiration date; or
o comply with The Depository Trust Company's Automated Tender Offer
Program procedures described below.
In addition, either:
o the exchange agent must receive outstanding notes along with the letter
of transmittal; or
o the exchange agent must receive, prior to the expiration date, a timely
confirmation of book-entry transfer of such outstanding notes into the
exchange agent's account at The Depository
67
Trust Company according to the procedure for book-entry transfer described
below or a properly transmitted agent's message; or
o the holder must comply with the guaranteed delivery procedures described
below.
To be tendered effectively, the exchange agent must receive any physical
delivery of the letter of transmittal and other required documents at the
address set forth below under "--Exchange Agent" prior to the expiration date.
The tender by a holder that is not withdrawn prior to the expiration date
will constitute an agreement between such holder and us in accordance with the
terms and subject to the conditions set forth in this prospectus and in the
letter of transmittal.
The method of delivery of outstanding notes, the letter of transmittal and
all other required documents to the exchange agent is at the holder's election
and risk. Rather than mail these items, we recommend that holders use an
overnight or hand delivery service. In all cases, holders should allow
sufficient time to assure delivery to the exchange agent before the expiration
date. Holders should not send the letter of transmittal or outstanding notes to
us. Holders may request their respective brokers, dealers, commercial banks,
trust companies or other nominees to effect the above transactions for them.
Any beneficial owner whose outstanding notes are registered in the name of
a broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender should contact the registered holder promptly and instruct it
to tender on the owner's behalf. If such beneficial owner wishes to tender on
its own behalf, it must, prior to completing and executing the letter of
transmittal and delivering its outstanding notes; either:
o make appropriate arrangements to register ownership of the outstanding
notes in such owner's name; or
o obtain a properly completed bond power from the registered holder of
outstanding notes.
The transfer of registered ownership may take considerable time and may
not be completed prior to the expiration date.
Signatures on a letter of transmittal or a notice of withdrawal described
below must be guaranteed by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the
United States or another "eligible institution" within the meaning of Rule
17Ad-15 under the Securities Exchange Act of 1934, unless the outstanding notes
tendered pursuant thereto are tendered:
o by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the letter of
transmittal; or
o for the account of an eligible institution.
If the letter of transmittal is signed by a person other than the
registered holder of any outstanding notes listed on the outstanding notes,
such outstanding notes must be endorsed or accompanied by a properly completed
bond power. The bond power must be signed by the registered holder as the
registered holder's name appears on the outstanding notes and an eligible
institution must guarantee the signature on the bond power.
If the letter of transmittal or any outstanding notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing. Unless waived by us,
they should also submit evidence satisfactory to us of their authority to
deliver the letter of transmittal.
The exchange agent and The Depository Trust Company have confirmed that
any financial institution that is a participant in The Depository Trust
Company's system may use The Depository
68
Trust Company's Automated Tender Offer Program to tender. Participants in the
program may, instead of physically completing and signing the letter of
transmittal and delivering it to the exchange agent, transmit their acceptance
of the exchange offer electronically. They may do so by causing The Depository
Trust Company to transfer the outstanding notes to the exchange agent in
accordance with its procedures for transfer. The Depository Trust Company will
then send an agent's message to the exchange agent. The term "agent's message"
means a message transmitted by The Depository Trust Company, received by the
exchange agent and forming part of the book-entry confirmation, to the effect
that:
o The Depository Trust Company has received an express acknowledgment from
a participant in its Automated Tender Offer Program that is tendering
outstanding notes that are the subject of such book-entry confirmation;
o such participant has received and agrees to be bound by the terms of the
letter of transmittal (or, in the case of an agent's message relating to
guaranteed delivery, that such participant has received and agrees to be
bound by the applicable notice of guaranteed delivery); and
o the agreement may be enforced against such participant.
We will determine in our sole discretion all questions as to the validity,
form, eligibility (including time of receipt), acceptance of tendered
outstanding notes and withdrawal of tendered outstanding notes. Our
determination will be final and binding. We reserve the absolute right to
reject any outstanding notes not properly tendered or any outstanding notes our
acceptance of which would, in the opinion of our counsel, be unlawful. We also
reserve the right to waive any defects, irregularities or conditions of tender
as to particular outstanding notes. Our interpretation of the terms and
conditions of the exchange offer (including the instructions in the letter of
transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of outstanding notes must
be cured within such time as we shall determine. Although we intend to notify
holders of defects or irregularities with respect to tenders of outstanding
notes, neither we, the exchange agent nor any other person will incur any
liability for failure to give such notification. Tenders of outstanding notes
will not be deemed made until such defects or irregularities have been cured or
waived. Any outstanding notes received by the exchange agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the exchange agent without cost to the
tendering holder, unless otherwise provided in the letter of transmittal, as
soon as practicable following the expiration date.
In all cases, we will issue exchange notes for outstanding notes that we
have accepted for exchange under the exchange offer only after the exchange
agent timely receives:
o outstanding notes or a timely book-entry confirmation of such
outstanding notes into the exchange agent's account at The Depository
Trust Company; and
o a properly completed and duly executed letter of transmittal and all
other required documents or a properly transmitted agent's message.
Terms and Conditions of the Letter of Transmittal
The letter of transmittal contains, among other things, the following
terms and conditions, which are part of the exchange offer.
The party tendering outstanding notes for exchange (the "Transferor")
exchanges, assigns and transfers the outstanding notes to us and irrevocably
constitutes and appoints the exchange agent as the Transferor's agent and
attorney-in-fact to cause the outstanding notes to be assigned, transferred and
exchanged. The Transferor represents and warrants that it has full power and
authority to tender, exchange, assign and transfer the outstanding notes and to
acquire exchange notes issuable upon the exchange of such tendered outstanding
notes, and that, when the same are accepted for exchange, we will acquire good
and unencumbered title to the tendered outstanding notes, free and clear of all
liens, restrictions, charges and encumbrances and not subject to any adverse
claim. The Transferor also warrants that it will, upon request, execute and
deliver any additional documents
69
deemed by the exchange agent or us to be necessary or desirable to complete the
exchange, assignment and transfer of tendered outstanding notes or transfer
ownership of such outstanding notes on the account books maintained by a
book-entry transfer facility. The Transferor further agrees that acceptance of
any tendered outstanding notes by us and the issuance of exchange notes in
exchange therefor shall constitute performance in full by us and our
subsidiaries guaranteeing the outstanding notes of certain obligations under
the exchange and registration rights agreement. All authority conferred by the
Transferor will survive the death or incapacity of the Transferor and every
obligation of the Transferor shall be binding upon the heirs, legal
representatives, successors, assigns, executors and administrators of such
Transferor.
By signing the letter of transmittal, each tendering holder of outstanding
notes will represent to us that, among other things:
o any exchange notes that the holder receives will be acquired in the
ordinary course of its business;
o the holder has no arrangement or understanding with any person or entity
to participate in the distribution of the exchange notes;
o if the holder is a broker-dealer that will receive exchange notes for
its own account in exchange for outstanding notes that were acquired as a
result of market-making or trading activities, that it will deliver a
prospectus, as required by law, in connection with any resale of such
exchange notes;
o such holder is not our "affiliate," as defined in Rule 405 of the
Securities Act of 1933, or if it is our affiliate, that it will comply
with applicable registration and prospectus delivery requirements of the
Securities Act of 1933; and
o if the holder is a person in the United Kingdom, that its ordinary
activities involve it in acquiring, holding, managing or disposing of
investments, as principal or agent, for the purposes of its business.
Book-Entry Transfer
The exchange agent will make a request to establish an account with
respect to the outstanding notes at The Depository Trust Company for purposes
of the exchange offer promptly after the date of this prospectus; and any
financial institution participating in The Depository Trust Company's system
may make book-entry delivery of outstanding notes by causing The Depository
Trust Company to transfer such outstanding notes into the exchange agent's
account at The Depository Trust Company in accordance with The Depository Trust
Company's procedures for transfer. Holders of outstanding notes who are unable
to deliver confirmation of the book-entry tender of their outstanding notes
into the exchange agent's account at The Depository Trust Company or all other
documents required by the letter of transmittal to the exchange agent on or
prior to the expiration date must tender their outstanding notes according to
the guaranteed delivery procedures described below.
Guaranteed Delivery Procedures
Holders wishing to tender their outstanding notes but whose outstanding
notes are not immediately available or who cannot deliver their outstanding
notes, the letter of transmittal or any other required documents to the
exchange agent or comply with the applicable procedures under The Depository
Trust Company's Automated Tender Offer Program prior to the expiration date may
tender if:
o the tender is made through an eligible institution;
o prior to the expiration date, the exchange agent receives from such
eligible institution either a properly completed and duly executed notice
of guaranteed delivery (by facsimile transmission, mail or hand delivery)
or a properly transmitted agent's message and notice of guaranteed
delivery setting forth the name and address of the holder, the registered
70
number(s) of such outstanding notes, if applicable, and the principal
amount of outstanding notes tendered, stating that the tender is being
made thereby, and guaranteeing that, within three New York Stock Exchange
trading days after the expiration date, the letter of transmittal (or
facsimile thereof) together with the outstanding notes or a book-entry
confirmation, and any other documents required by the letter of
transmittal will be deposited by the eligible institution with the
exchange agent; and
o the exchange agent receives such properly completed and executed letter
of transmittal (or facsimile thereof), as well as all tendered outstanding
notes in proper form for transfer or a book-entry confirmation, and all
other documents required by the letter of transmittal, within three New
York Stock Exchange trading days after the expiration date.
Upon request to the exchange agent, a notice of guaranteed delivery will
be sent to holders who wish to tender their outstanding notes according to the
guaranteed delivery procedures set forth above.
Withdrawal of Tenders
Except as otherwise provided in this prospectus, holders of outstanding
notes may withdraw their tenders at any time prior to the expiration date.
For a withdrawal to be effective:
o the exchange agent must receive a written notice (which may be by
telegram, telex, facsimile transmission or letter) of withdrawal at one of
the addresses set forth below under "--
Exchange Agent", or
o holders must comply with the appropriate procedures of The Depository
Trust Company's Automated Tender Offer Program system.
Any such notice of withdrawal must:
o specify the name of the person who tendered the outstanding notes to be
withdrawn;
o identify the outstanding notes to be withdrawn (including the principal
amount of such outstanding notes); and
o where certificates for outstanding notes have been transmitted, specify
the name in which such outstanding notes were registered, if different
from that of the withdrawing holder.
If certificates for outstanding notes have been delivered or otherwise
identified to the exchange agent, then, prior to the release of such
certificates, the withdrawing holder must also submit:
o the serial numbers of the particular certificates to be withdrawn; and
o a signed notice of withdrawal with signatures guaranteed by an eligible
institution unless such holder is an eligible institution.
If outstanding notes have been tendered pursuant to the procedure for
book-entry transfer described above, any notice of withdrawal must specify the
name and number of the account at The Depository Trust Company to be credited
with the withdrawn outstanding notes and otherwise comply with the procedures
of such facility. We will determine all questions as to the validity, form and
eligibility (including time of receipt) of such notices, and our determination
shall be final and binding on all parties. We will deem any outstanding notes
so withdrawn not to have validity tendered for exchange for purposes of the
exchange offer. Any outstanding notes that have been tendered for exchange but
that are not exchanged for any reason will be returned to their holder without
cost to the holder (or, in the case of outstanding notes tendered by book-entry
transfer into the exchange agent's account at The Depository Trust Company
according to the procedures described above, such outstanding notes will be
credited to an account maintained with The Depository Trust Company for
outstanding notes) as soon as practicable after withdrawal, rejection of tender
or termination of the exchange offer. Properly withdrawn outstanding notes may
be re-tendered by following one of the
71
procedures described under "--Procedures for Tendering" above at any time on or
prior to the expiration date.
Exchange Agent
The Bank of New York has been appointed as exchange agent for the exchange
offer. You should direct questions and requests for assistance, requests for
additional copies of this prospectus or of the letter of transmittal and
requests for the notice of guaranteed delivery to the exchange agent addressed
as follows:
For Delivery by Registered or Certified Mail: For Overnight Delivery Only or by Hand:
The Bank of New York The Bank of New York
101 Barclay Street 101 Barclay Street
New York, New York 10286 New York, New York 10286
Attn: Reorganization Unit Attn: Reorganization Unit
By Facsimile Transmission (for eligible institutions only):
TheBank of New York
(212) 815-6339
Attn: Reorganization Unit
Questions and requests for assistance, requests for additional copies of this
prospectus or of the letter of transmittal and requests for notices of
guaranteed delivery should be directed to the exchange agent at the address and
telephone number set forth in the letter of transmittal.
Delivery of the letter of transmittal to an address other than as set forth
above or transmission via facsimile other than as set forth above does not
constitute a valid delivery of such letter of transmittal.
Fees and Expenses
We will bear the expenses of soliciting tenders. The principal
solicitation is being made by mail; however, we may make additional
solicitation by telegraph, telephone or in person by our officers and regular
employees and those of our affiliates.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to broker-dealers or others soliciting
acceptances of the exchange offer. We will, however, pay the exchange agent
reasonable and customary fees for its services and reimburse it for its related
reasonable out-of-pocket expenses.
We will pay the cash expenses to be incurred in connection with the
exchange offer. The expenses are estimated in the aggregate to be approximately
$450,000. They include:
o registration fees of the Securities and Exchange Commission;
o fees and expenses of the exchange agent and trustee;
o accounting and legal fees and printing costs; and
o related fees and expenses.
We will pay all transfer taxes, if any, applicable to the exchange of
outstanding notes under the exchange offer. The tendering holder, however, will
be required to pay any transfer taxes (whether imposed on the registered holder
or any other person) if:
o certificates representing outstanding notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be
issued in the name of, any person other than the registered holder of
outstanding notes tendered;
o tendered outstanding notes are registered in the name of any person
other than the person signing the letter of transmittal; or
72
o a transfer tax is imposed for any reason other than the exchange of
outstanding notes under the exchange offer, then the tendering holder will
be required to pay any such transfer taxes (whether imposed on the
registered holder or any other persons). If satisfactory evidence of
payment of such taxes is not submitted with the letter of transmittal, the
amount of such transfer taxes will be billed to that tendering holder.
Transfer Taxes
Holders who tender their outstanding notes for exchange will not be
required to pay any transfer taxes. However, holders who instruct us to
register exchange notes in the name of, or request that outstanding notes not
tendered or not accepted in the exchange offer be returned to, a person other
than the registered tendering holder will be required to pay any applicable
transfer tax.
Consequences of Failure to Exchange
Holders of outstanding notes who do not exchange their outstanding notes
for exchange notes under the exchange offer will remain subject to the
restrictions on transfer of such outstanding notes:
o as set forth in the legend printed on the outstanding notes as a
consequence of the issuance of the outstanding notes pursuant to the
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act of 1933 and applicable state securities
laws; and
o otherwise set forth in the offering memorandum distributed in connection
with the private offering of the outstanding notes.
In general, you may not offer or sell the outstanding notes unless they
are registered under the Securities Act of 1933, or if the offer or sale is
exempt from registration under the Securities Act of 1933 and applicable state
securities laws. Except as required by the exchange and registration rights
agreement, we do not intend to register resales of the outstanding notes under
the Securities Act of 1933. Based on interpretations of the staff of the
Securities and Exchange Commission, exchange notes issued pursuant to the
exchange offer may be offered for resale, resold or otherwise transferred by
their holders (other than any such holder that is our "affiliate" within the
meaning of Rule 405 under the Securities Act of 1933) without compliance with
the registration and prospectus delivery provisions of the Securities Act of
1933, provided that the holders acquired the exchange notes in the ordinary
course of the holders' business and the holders have no arrangement or
understanding with respect to the distribution of the exchange notes to be
acquired in the exchange offer. Any holder who tenders in the exchange offer
for the purpose of participating in a distribution of the exchange notes:
o could not rely on the applicable interpretations of the Securities and
Exchange Commission; and
o must comply with the registration and prospectus delivery requirements
of the Securities Act of 1933 in connection with a secondary resale
transaction.
Accounting Treatment
We will record the exchange notes in our accounting records at the same
carrying value as the outstanding notes, which is the aggregate principal
amount, as reflected in our accounting records on the date of exchange.
Accordingly, we will not recognize any gain or loss for accounting purposes in
connection with the exchange offer. We will capitalize the expenses of the
exchange offer and amortize them over the life of the related debt.
73
Other
Participation in the exchange offer is voluntary, and you should carefully
consider whether to accept. You are urged to consult your financial and tax
advisors in making your own decision on what action to take.
We may in the future seek to acquire untendered outstanding notes in open
market or privately negotiated transactions, through subsequent exchange offers
or otherwise. We have no present plans to acquire any outstanding notes that
are not tendered in the exchange offer or to file a registration statement to
permit resales of any untendered outstanding notes.
74
DESCRIPTION OF NOTES
You can find the definitions of certain terms used in this description
under the subheading "Certain Definitions." In this description, the word
"Holdings" refers only to Russell-Stanley Holdings, Inc. and not to any of its
subsidiaries.
The outstanding notes were issued and the exchange notes will be issued
under an Indenture (the "Indenture") among Holdings, the Guarantors and The
Bank of New York, as trustee (the "Trustee"). Upon the issuance of the exchange
notes, the Indenture will be subject to and governed by the Trust Indenture Act
of 1939. All references to the Notes are to the outstanding notes and the
exchange notes collectively. The terms of the Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939.
The following description is a summary of the material provisions of the
Indenture. It does not restate that agreement in its entirety. We urge you to
read the Indenture because it, and not this description, defines your rights as
holders of the Notes. The Indenture is an exhibit to the registration statement
of which this prospectus is a part.
Brief Description of the Notes and the Guarantees
The Notes
The Notes:
o are general unsecured obligations of Holdings;
o are subordinated in right of payment to all existing and future Senior
Debt of Holdings;
o are senior in right of payment to any future subordinated Indebtedness
of Holdings; and
o are unconditionally guaranteed by the Guarantors.
The Guarantees
The Notes are guaranteed by the following Subsidiaries of Holdings:
Russell-Stanley Corp., Container Management Services, New England
Container, Russell-Stanley, Inc., RSLPCO, Inc. and Russell-Stanley, L.P.
The Guarantees of the Notes:
o are general unsecured obligations of each Guarantor;
o are subordinated in right of payment to all existing and future Senior
Debt of each Guarantor; and
o are senior in right of payment to any future subordinated Indebtedness
of each Guarantor.
At February 10, 1999, Holdings and the Guarantors had total Senior Debt
outstanding of approximately $38.3 million. As indicated above and as discussed
in detail below under the subheading "Subordination," payments on the Notes and
under the Guarantees are subordinated to the payment of Senior Debt. The
Indenture permits us and the Guarantors to incur additional Senior Debt.
Currently, all of our subsidiaries are "Restricted Subsidiaries." However,
under the circumstances described below under the subheading "Certain
Covenants--Designation of Restricted and Unrestricted Subsidiaries," we will be
permitted to designate certain of our subsidiaries as "Unrestricted
Subsidiaries." Unrestricted Subsidiaries are not subject to many of the
restrictive covenants in the Indenture. Unrestricted Subsidiaries do not
guarantee the Notes.
Not all of our Subsidiaries guarantee the Notes. In the event of a
bankruptcy, liquidation or reorganization of any of these non-guarantor
Subsidiaries, these non-guarantor Subsidiaries will pay the holders of their
debt and their trade creditors before they will be able to distribute any of
their
75
assets to us. At December 31, 1998, assuming that we completed the offering of
the outstanding notes and made the initial borrowings under our senior credit
facility and applied the net proceeds as intended, the total liabilities
(including trade payables) of our non-guarantor Subsidiary would have been
approximately $17.3 million. Our non-guarantor Subsidiary generated
approximately 13.1% of our consolidated revenues in the year ended December 31,
1998 and held approximately 11.7% of our consolidated assets as of December 31,
1998. See "Note 21--Guarantor Subsidiaries" to our consolidated financial
statements included at the back of this prospectus for more detail about the
division of our consolidated revenues and assets between our guarantor and
non-guarantor subsidiaries.
Principal, Maturity and Interest
Holdings may issue Notes with a maximum aggregate principal amount of
$225.0 million under the Indenture, of which $150.0 million aggregate principal
amount of outstanding notes were issued on the Issue Date. The form and terms
of the exchange notes will be substantially identical to the form and terms of
the outstanding notes, except that the exchange notes:
o will be freely tradeable by virtue of their registration under the
Securities Act of 1933,
o will not bear legends restricting their transfer, will not be subject to
any additional obligations regarding registration under the Securities Act
of 1933 and
o will not be subject to the special interest payments described in
"--Registration Covenant; Exchange Offer."
The exchange notes will be issued under and entitled to the benefits of
the same Indenture that authorized the issuance of the outstanding notes.
Consequently, both series will be treated as a single class of debt securities
under the Indenture. The Notes will mature on February 15, 2009.
Interest on the Notes will accrue at the rate of 10.875% per annum and
will be payable semi-annually in arrears on February 15 and August 15,
commencing on August 15, 1999. Holdings will make each interest payment to the
Holders of record of the Notes on the immediately preceding February 1 and
August 1.
Interest on the Notes will accrue from the date of original issuance or,
if interest has already been paid, from the date it was most recently paid.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
Methods of Receiving Payments on the Notes
If a Holder has given wire transfer instructions to Holdings, Holdings
will make all principal, premium and interest payments on the Notes in
accordance with those instructions. All other payments on the Notes will be
made at the office or agency of the Paying Agent and Registrar within the City
and State of New York unless Holdings elects to make interest payments by check
mailed to the Holders at their address set forth in the register of Holders.
Paying Agent and Registrar for the Notes
The Trustee will initially act as Paying Agent and Registrar. Holdings may
change the Paying Agent or Registrar without prior notice to the Holders of the
Notes, and Holdings or any of its Subsidiaries may act as Paying Agent or
Registrar.
Transfer and Exchange
A Holder may transfer or exchange notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents, and Holdings may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. Holdings is not required to transfer or exchange any Note selected
for redemption. Also, Holdings is not required to transfer or exchange any Note
for a period of 15 days
76
before a selection of Notes to be redeemed. The registered Holder of a Note
will be treated as the owner of it for all purposes.
Form, Denomination and Book-Entry Procedures
Holdings will issue the exchange notes only in fully registered form,
without interest coupons, in denominations of $1,000 and integral multiples of
$1,000. Holdings will not issue Notes in bearer form. The exchange notes will
initially be represented by one or more global notes (the "Global Notes") that
will be deposited with, or on behalf of, The Depository Trust Company ("DTC")
and registered in the name of Cede & Co., as nominee of DTC, on behalf of the
acquirers of exchange notes represented thereby for credit to the respective
accounts of the acquirers (or to such other accounts as they may direct) at
DTC, or Morgan Guaranty Trust Company of New York, Brussels Office, as operator
of the Euroclear System ("Euroclear"), or Cedel Bank, societe anonyme
("Cedel"). See "The Exchange Offer--Book-Entry Transfer."
Transfers of beneficial interests in the Global Notes will be subject to
the applicable rules and procedures of DTC and its direct or indirect
participants (including, if applicable, those of Euroclear and CEDEL), which
may change from time to time. Except as set forth below, the Global Notes may
be transferred, in whole and not in part, only to another nominee of DTC or to
a successor of DTC or its nominee. You may not exchange your beneficial
interest in the Global Notes for Notes in certificated form except in the
limited circumstances described below under "--Exchanges of Global Notes for
Certificated Notes."
Exchanges of Global Notes for Certificated Notes
You may not exchange your beneficial interest in a Global Note for a Note
in certificated form unless:
(1) DTC (a) notifies Holdings that it is unwilling or unable to continue
as Depositary for the global note or (b) has ceased to be a clearing
agency registered under the Securities Exchange Act of 1934, and in
either case Holdings thereupon fails to appoint a successor Depositary;
or
(2) Holdings, at its option, notifies the Trustee in writing that it is
electing to issue the Notes in certificated form; or
(3) an Event of Default shall have occurred and be continuing with respect
to the Notes.
In all cases, certificated Notes delivered in exchange for any Global Note
or beneficial interests therein will be registered in the names, and issued in
any approved denominations, requested by or on behalf of the Depositary (in
accordance with its customary procedures). Any certificated Notes issued in
exchange for an interest in a Global Note will bear the legend restricting
transfers that is borne by such Global Note. Any such exchange will be effected
through Deposit/Withdraw at Custodian ("DWAC") system and an appropriate
adjustment will be made in the records of the Security Registrar to reflect a
decrease in the principal amount of the relevant Global Note.
Certain Book-Entry Procedures
The description of the operations and procedures of DTC, Euroclear and
CEDEL that follows is provided solely as a matter of convenience. These
operations and procedures are solely within their control and are subject to
changes by them from time to time. Holdings takes no responsibility for these
operations and procedures and urges you to contact the system or their
participants directly to discuss these matters.
DTC has advised Holdings as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants ("participants") and facilitate the clearance
and settlement of securities transactions between participants through
electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical transfer and delivery of certificates.
Participants include securities
77
brokers and dealers, banks, trust companies and clearing corporations and may
include certain other organizations. Indirect access to the DTC system is
available to other entities such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a participant,
either directly or indirectly ("indirect participants").
DTC has advised Holdings that its current practice, upon the issuance of
the Global Notes, is to credit, on its internal system, the respective
principal amount of the individual beneficial interests represented by such
Global Notes to the accounts with DTC of the participants through which such
interests are to be held. Ownership of beneficial interests in the Global Notes
will be shown on, and the transfer of that ownership will be effected only
through, records maintained by DTC or its nominees (with respect to interests
of participants).
As long as DTC, or its nominee, is the registered Holder of a Global Note,
DTC or such nominee, as the case may be, will be considered the sole owner and
Holder of the Notes represented by such Global Note for all purposes under the
Indenture and the Notes. Except in the limited circumstances described above
under "--Exchanges of Global Notes for Certificated Notes," you will not be
entitled to have any portions of a Global Note registered in your names, will
not receive or be entitled to receive physical delivery of Notes in definitive
form and will not be considered the owner or Holder of a Global Note (or any
Note represented thereby) under the Indenture or the Notes.
You may hold your interests in the Global Notes directly through DTC, if
you are participants in such system, or indirectly through organizations
(including Euroclear and CEDEL) which are participants in such system. All
interests in a Global Note, including those held through Euroclear or CEDEL,
will be subject to the procedures and requirements of DTC. Those interests held
through Euroclear or CEDEL will also be subject to the procedures and
requirements of such system.
The laws of some states require that certain persons take physical
delivery in definitive form of securities that they own. Consequently, your
ability to transfer your beneficial interests in a Global Note to such persons
may be limited to that extent. Because DTC can act only on behalf of its
participants, which in turn act on behalf of indirect participants and certain
banks, your ability to pledge your interests in a Global Note to persons or
entities that do not participate in the DTC system, or otherwise take actions
in respect of such interests, may be affected by the lack of a physical
certificate evidencing such interests.
Holdings will make payments of the principal of, premium, if any, and
interest on Global Notes to DTC or its nominee as the registered owner thereof.
Neither Holdings nor the Trustee nor any of their respective agents will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Notes
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
Holdings expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of a Global Note representing any Notes held
by it or its nominee, will immediately credit participants' accounts with
payments in amounts proportionate to their respective beneficial interests in
the principal amount of such Global Note for such Notes as shown on the records
of DTC or its nominee. Holdings also expects that payments by participants to
owners of beneficial interests in such Global Note held through such
participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers
registered in "street name." Such payment will be the responsibility of such
participants.
Except for trades involving only Euroclear and CEDEL participants,
interests in a Global Note will trade in DTC's same day settlement system, and
secondary market trading activity in such interests will therefore settle in
immediately available funds, subject in all cases to the rules and procedures
of DTC and its participants. Transfers between participants in DTC will be
effected in accordance with DTC's procedures, and will be settled in same-day
funds. Transfers between participants in Euroclear and CEDEL will be effected
in the ordinary way in accordance with their respective rules and operating
procedures.
Subject to compliance with the transfer and exchange provisions applicable
to the Notes described elsewhere herein, cross-market transfers between DTC
participants, on the one hand, and
78
Euroclear or CEDEL participants, on the other hand, will be effected by DTC in
accordance with DTC's rules on behalf of Euroclear or CEDEL, as the case may
be, by its respective depositary; however, such cross-market transactions will
require delivery of instructions to Euroclear or CEDEL, as the case may be, by
the counterparty in such system in accordance with the rules and procedures and
within the established deadlines (Brussels time) of such system. Euroclear or
CEDEL, as the case may be, will, if the transaction meets it settlement
requirements, deliver instructions to its respective depository to take action
to effect final settlement on its behalf by delivering or receiving interests
in the relevant Global Note in DTC, and making or receiving payment in
accordance with normal procedures for same-day funds settlement applicable to
DTC. Euroclear participants and CEDEL participants may not deliver instructions
directly to the depositories for Euroclear or CEDEL.
Because of time zone differences, the securities account of Euroclear or
CEDEL participant purchasing an interest in a Global Note from a DTC
participant will be credited, and any such crediting will be reported to the
relevant Euroclear or CEDEL participant, during the securities settlement
processing day (which much be a business day for Euroclear and CEDEL)
immediately following the DTC settlement date. Cash received in Euroclear or
CEDEL as a result of sales of interests in a Global Note by or through a
Euroclear or CEDEL participant to a DTC participant will be received with value
on the DTC settlement date but will be available in the relevant Euroclear or
CEDEL cash account only as of the business day for Euroclear or CEDEL following
the DTC settlement date.
DTC has advised Holdings that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange as
described below and the conversion of Notes) only at the direction of one or
more participants to whose account with DTC interests in the Global Notes are
credited and only in respect of such portion of the aggregate principal amount
of the Notes as to which such participant or participants has or have given
such direction. However, if there is an Event of Default under the Notes, the
Global Notes will be exchanged for Notes in certificated form, and distributed
to DTC's participants.
Although DTC, Euroclear and CEDEL have agreed to the foregoing procedures
in order to facilitate transfers of beneficial ownership interests in the
Global Notes among participants of DTC, they are under no obligation to perform
or continue to perform such procedures, and such procedures may be discontinued
at any time. None of Holdings, the Trustee or any of their respective agents
will have any responsibility for the performance by DTC, Euroclear and CEDEL,
their participants or indirect participants of their respective obligations
under the rules and procedures governing their operations, including
maintaining, supervising or reviewing the records relating to, or payments made
on account of, beneficial ownership interests in Global Notes.
DTC management is aware that some computer applications, systems and the
like for processing data ("Systems") that are dependent upon calendar dates,
including dates before, on, and after January 1, 2000, may encounter "Year 2000
problems." DTC has informed its Participants and other members of the financial
community (the "Industry") that it has developed and is implementing a program
so that its Systems, as the same relate to the timely payment of distributions
(including principal and income payments) to securityholders, book-entry
deliveries and settlement of trades within DTC ("DTC Services"), continue to
function appropriately. This program includes a technical assessment and a
remediation plan, each of which is complete. Additionally, DTC's plan includes
a testing phase, which is expected to be completed within appropriate time
frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed the Industry that it is contacting (and will
continue to contact) third party vendors from whom DTC acquires services to:
(i) impress upon them the importance of such services being Year 2000 compliant
and (ii) determine the extent of their efforts for Year 2000 remediation (and,
as appropriate, testing) of their services. In addition, DTC is in the process
of developing such contingency plans as it deems appropriate.
79
According to DTC, the foregoing information with respect to DTC has been
provided to the Industry for informational purposes only and is not intended to
serve as a representation, warranty, or contract modification of any kind.
Registration Covenant; Exchange Offer
Holdings has entered into an exchange and registration rights agreement
pursuant to which Holdings has agreed, for the benefit of the holders of
outstanding notes:
(1) to use its reasonable best efforts to file with the Securities and
Exchange Commission, within 75 days following the time of delivery of
the outstanding notes (the "Closing"), a registration statement (the
"Exchange Offer Registration Statement") under the Securities Act of
1933 relating to an exchange offer pursuant to which notes
substantially identical to the outstanding notes (except that such
notes will not contain terms with respect to the special interest
payments described below or transfer restrictions) would be offered in
exchange for the the outstanding notes tendered at the option of the
Holders thereof; and
(2) to use its reasonable best efforts to cause the Exchange Offer
Registration Statement to become effective as soon as practicable
thereafter.
Holdings has further agreed to commence the exchange offer promptly after the
Exchange Offer Registration Statement has become effective, hold the offer open
for at least 30 days, and exchange exchange notes for all outstanding notes
validly tendered and not withdrawn before the expiration of the offer.
The registration of which this prospectus is a part has been filed, and
the exchange offer being made by this prospectus, and the letter of transmittal
is being made, to satisfy these obligations.
Under existing Securities and Exchange Commission interpretations, the
exchange notes will in general be freely transferable after the exchange offer
without further registration under the Securities Act of 1933, except that
broker-dealers ("Participating Broker-Dealers") receiving exchange notes in the
exchange offer will be subject to a prospectus delivery requirement with
respect to resales of those exchange notes. The Securities and Exchange
Commission has taken the position that broker-dealers receiving exchange notes
may fulfill their prospectus delivery requirements with respect to the exchange
notes (other than a resale of an unsold allotment from the original sale of the
outstanding notes) by delivery of this prospectus. Under the exchange and
registration rights agreement, Holdings is required to allow broker-dealers
receiving exchange notes and other persons, if any, subject to similar
prospectus delivery requirements to use this prospectus in connection with the
resale of such exchange notes. The registration statement of which this
prospectus is a part will be kept effective for a period of 180 days after the
exchange offer has been consummated in order to permit resales of exchange
notes acquired by broker-dealers in after-market transactions. Each Holder of
outstanding notes (other than certain specified Holders) who wishes to exchange
such outstanding notes for exchange notes in the exchange offer will be
required to represent that any exchange notes to be received by it will be
acquired in the ordinary course of its business, that at the time of the
commencement of the exchange offer it has no arrangement with any person to
participate in the distribution (within the meaning of the Securities Act of
1933) of the exchange notes and that it is not an Affiliate of Holdings.
However, if:
(1) on or before the date of consummation of the exchange offer, the
existing Securities and Exchange Commission interpretations are changed
such that the exchange notes would not in general be freely
transferable in such manner on such date; or
(2) the exchange offer has not been consummated within 255 days following
the time of delivery of the outstanding notes; or
(3) the exchange offer is not available by any holder of the outstanding
notes,
Holdings will, in lieu of (or, in the case of clause (3), in addition to)
effecting registration of exchange notes, use its reasonable best efforts to
cause a registration statement under the Securities Act of
80
1933 relating to a shelf registration of the outstanding notes for resale by
holders or, in the case of clause (3), of the outstanding notes held by the
initial purchasers of the outstanding notes for resale by the initial
purchasers (the "Resale Registration") to become effective and to remain
effective until two years following the effective date of such registration
statement or such shorter period that will terminate when all the securities
covered by the shelf registration statement have been sold pursuant to the
shelf registration statement.
Holdings will, in the event of the Resale Registration, provide to the
Holder or Holders of the applicable outstanding notes copies of the prospectus
that is a part of the shelf registration statement filed in connection with the
Resale Registration, notify such Holder or Holders when such shelf registration
statement for the applicable outstanding notes has become effective and take
certain other actions as are required to permit unrestricted resales of the
applicable outstanding notes. A Holder of outstanding notes that sells such
outstanding notes pursuant to the Resale Registration generally would be
required to be named as a selling securityholder in the related prospectus and
to deliver a prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act of 1933 in connection with such
sales and will be bound by the provisions of the exchange and registration
rights agreement that are applicable to such a Holder (including certain
indemnification obligations).
In the event that:
(1) the exchange offer has not been consummated within 30 Business Days
after the effective date of the registration statement of which this
prospectus is a part; or
(2) any registration statement required by the exchange and registration
rights agreement is filed and declared effective but shall thereafter
cease to be effective (except as specifically permitted therein)
without being succeeded immediately by an additional registration
statement filed and declared effective (any such event referred to in
clause (1) or (2), the "Registration Default"),
then the per annum interest rate on the applicable outstanding notes will
increase, for the period from the occurrence of the Registration Default until
such time as no Registration Default is in effect (at which time the interest
rate will be reduced to its initial rate) by 0.50% during the first 90-day
period following the occurrence of such Registration Default, which rate shall
increase by an additional 0.50% during each subsequent 90-day period, up to a
maximum increase of 1.0%.
The summary herein of certain provisions of the exchange and registration
rights agreement does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the exchange
and registration rights agreement, a copy of which has been filed as an exhibit
to the registration statement of which this prospectus is a part.
Subsidiary Guarantees
The Guarantors will jointly and severally guarantee Holdings' obligations
under the Notes. Each Subsidiary Guarantee will be subordinated to the prior
payment in full of all Senior Debt of that Guarantor. The obligations of each
Guarantor under its Subsidiary Guarantee will be limited as necessary to
prevent that Subsidiary Guarantee from constituting a fraudulent conveyance
under applicable law.
A Guarantor may not sell or otherwise dispose of all or substantially all
of its assets, or consolidate with or merge with or into (whether or not such
Guarantor is the surviving Person), another Person unless:
(1) immediately after giving effect to that transaction, no Default or
Event of Default exists; and
(2) either:
(a) the Person acquiring the property in any such sale or disposition or
the Person formed by or surviving any such consolidation or merger
(if other than the Guarantor) assumes
81
all the obligations of that Guarantor pursuant to a supplemental
indenture reasonably satisfactory to the Trustee; or
(b) the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the Indenture.
The Subsidiary Guarantee of a Guarantor will be released:
(1) in connection with any sale or other disposition of all or
substantially all of the assets of such Guarantor (including by way of
merger or consolidation), if Holdings applies the Net Proceeds of that
sale or other disposition in accordance with the applicable provisions
of the Indenture; or
(2) in connection with any sale of all of the capital stock of a
Guarantor, if Holdings applies the Net Proceeds of that sale in
accordance with the applicable provisions of the Indenture; or
(3) if Holdings designates any Restricted Subsidiary that is a Guarantor
as an Unrestricted Subsidiary in accordance with the Indenture.
See "--Repurchase at the Option of Holders--Asset Sales."
Subordination
The payment of principal, premium and interest, if any, on the Notes will
be subordinated to the prior payment in full in cash of all Senior Debt of
Holdings.
The holders of Senior Debt will be entitled to receive payment in full in
cash of all Obligations due in respect of Senior Debt (including interest after
the commencement of any such proceeding at the rate specified in the applicable
Senior Debt) before the Holders of Notes will be entitled to receive any
payment with respect to the Notes (except that Holders of Notes may receive and
retain Permitted Junior Securities and payments made from the trust described
under "--Legal Defeasance and Covenant Defeasance"), in the event of any
distribution to creditors of Holdings:
(1) in a liquidation or dissolution of Holdings;
(2) in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to Holdings or its property;
(3) in an assignment for the benefit of creditors; or
(4) in any marshaling of Holdings' assets and liabilities.
Holdings also may not make any payment in respect of the Notes (except in
Permitted Junior Securities or from the trust described under "--Legal
Defeasance and Covenant Defeasance") if:
(1) a payment default on Designated Senior Debt occurs and is continuing
beyond any applicable grace period; or
(2) any other default occurs and is continuing on Designated Senior Debt
that permits holders of the Designated Senior Debt to accelerate its
maturity and the Trustee receives a notice of such default (a "Payment
Blockage Notice") from Holdings or the holders of any Designated Senior
Debt.
Payments on the Notes may and shall be resumed:
(1) in the case of a payment default, upon the date on which such default
is cured or waived; and
(2) in case of a nonpayment default, the earlier of the date on which such
nonpayment default is cured or waived or 179 days after the date on
which the applicable Payment Blockage Notice is received, unless the
maturity of any Designated Senior Debt has been accelerated.
No new Payment Blockage Notice may be delivered unless and until 360 days
have elapsed since the effectiveness of the immediately prior Payment Blockage
Notice.
82
No nonpayment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the Trustee shall be, or be made,
the basis for a subsequent Payment Blockage Notice unless such default shall
have been cured or waived for a period of not less than 180 days.
Holdings must promptly notify holders of Senior Debt if payment of the
Notes is accelerated because of an Event of Default.
As a result of the subordination provisions described above, in the event
of a bankruptcy, liquidation or reorganization of Holdings, Holders of the
Notes may recover less ratably than creditors of Holdings who are holders of
Senior Debt. See "Risk Factors--Subordination."
Optional Redemption
On or before February 15, 2002, Holdings may on any one or more occasions
redeem up to 35% of the aggregate principal amount of Notes originally issued
under the Indenture at a redemption price of 110.875% of the principal amount
thereof, plus accrued and unpaid interest to the redemption date, with the net
cash proceeds of one or more Public Equity Offerings; provided that
(1) at least 65% of the aggregate principal amount of Notes originally
issued remains outstanding immediately after the occurrence of such
redemption (excluding Notes held by Holdings and its Subsidiaries); and
(2) the redemption must occur within 90 days of the date of the closing of
such Public Equity Offering.
Except pursuant to the preceding paragraph, the Notes will not be
redeemable at Holdings' option prior to February 15, 2004.
On or after February 15, 2004, Holdings may redeem all or a part of the
Notes upon not less than 30 nor more than 90 days' notice, at the redemption
prices (expressed as percentages of principal amount) set forth below plus
accrued and unpaid interest thereon, if any, to the applicable redemption date,
if redeemed during the twelve-month period beginning on February 15 of the
years indicated below:
Year Percentage
- ------------------------------ -------------
2004 ......................... 105.438%
2005 ......................... 103.625%
2006 ......................... 101.813%
2007 and thereafter .......... 100.000%
83
Repurchase at the Option of Holders
Change of Control
If a Change of Control occurs, each Holder of Notes will have the right to
require Holdings to repurchase all or any part (equal to $1,000 or an integral
multiple thereof) of that Holder's Notes pursuant to the Change of Control
Offer. In the Change of Control Offer, Holdings will offer a Change of Control
Payment in cash equal to 101% of the aggregate principal amount of Notes
repurchased plus accrued and unpaid interest thereon, if any, to the date of
purchase. Within 30 days following any Change of Control, Holdings will mail a
notice to each Holder describing the transaction or transactions that
constitute the Change of Control and offering to repurchase Notes on the Change
of Control Payment Date specified in such notice, pursuant to the procedures
required by the Indenture and described in such notice. Holdings will comply
with the requirements of Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Notes as a
result of a Change of Control.
On the Change of Control Payment Date, Holdings will, to the extent
lawful:
(1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer;
(2) deposit with the Paying Agent an amount equal to the Change of Control
Payment in respect of all Notes or portions thereof so tendered; and
(3) deliver or cause to be delivered to the Trustee the Notes so accepted
together with an Officers' Certificate stating the aggregate principal
amount of Notes or portions thereof being purchased by Holdings.
The Paying Agent will promptly mail to each Holder of Notes so tendered
the Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; provided that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof.
Subject to the third succeeding paragraph, the provisions described above
that require Holdings to make a Change of Control Offer following a Change of
Control will be applicable regardless of whether or not any other provisions of
the Indenture are applicable. Except as described above with respect to a
Change of Control, the Indenture does not contain provisions that permit the
Holders of the Notes to require that Holdings repurchase or redeem the Notes in
the event of a takeover, recapitalization or similar transaction.
Holdings' outstanding Senior Debt currently prohibits Holdings from
purchasing any Notes, and also provides that certain change of control events
with respect to Holdings would constitute a default under the agreements
governing the Senior Debt. Any future credit agreements or other agreements
relating to Senior Debt to which Holdings becomes a party may contain similar
restrictions and provisions. In the event a Change of Control occurs at a time
when Holdings is prohibited from purchasing Notes, Holdings could seek the
consent of its senior lenders to the purchase of Notes or could attempt to
refinance the borrowings that contain such prohibition. If Holdings does not
obtain such a consent or repay such borrowings, Holdings will remain prohibited
from purchasing Notes. In such case, Holdings' failure to purchase tendered
Notes would constitute an Event of Default under the Indenture which would, in
turn, constitute a default under such Senior Debt. In such circumstances, the
subordination provisions in the Indenture would likely restrict payments to the
Holders of Notes.
Holdings will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer
84
made by Holdings and purchases all Notes validly tendered and not withdrawn
under such Change of Control Offer.
Notwithstanding the foregoing, Holdings shall not be required to make a
Change of Control Offer, as provided above, if, in connection with or in
contemplation of any Change of Control, it has made an offer to purchase (an
"Alternate Offer") any and all Notes validly tendered at a cash price equal to
or higher than the Change of Control Payment and has purchased all Notes
properly tendered in accordance with the terms of such Alternate Offer.
The definition of Change of Control includes a phrase relating to the
sale, lease, transfer, conveyance or other disposition of "all or substantially
all" of the assets of Holdings and its Subsidiaries taken as a whole. Although
there is a limited body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a Holder of Notes to require Holdings to
repurchase such Notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of the assets of Holdings and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
Asset Sales
Holdings will not, and will not permit any of its Restricted Subsidiaries
to, consummate an Asset Sale unless:
(1) Holdings (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair
market value of the assets or Equity Interests issued or sold or
otherwise disposed of;
(2) such fair market value is determined by Holdings' Board of Directors
and evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee; and
(3) at least 75% of the consideration therefor received by Holdings or
such Restricted Subsidiary is in the form of cash or Cash Equivalents.
For purposes of this provision, each of the following shall be deemed
to be cash:
(a) any liabilities (as shown on Holdings' or such Restricted
Subsidiary's most recent balance sheet), of Holdings or any
Restricted Subsidiary (other than contingent liabilities and
liabilities that are by their terms subordinated to the Notes
or any Subsidiary Guarantee) that are assumed by the
transferee of any such assets pursuant to a customary
novation agreement that releases Holdings or such Restricted
Subsidiary from further liability; and
(b) any securities, notes or other obligations received by
Holdings or any such Restricted Subsidiary from such
transferee that are contemporaneously (subject to ordinary
settlement periods) converted by Holdings or such Restricted
Subsidiary into cash (to the extent of the cash received in
that conversion).
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
Holdings may apply such Net Proceeds at its option:
(1) to repay Senior Debt;
(2) to acquire all or substantially all of the assets of, or a majority of
the Voting Stock of, another Permitted Business;
(3) to make a capital expenditure; or
(4) to acquire other long-term assets that are used or useful in a
Permitted Business.
Pending the final application of any such Net Proceeds, Holdings may
temporarily reduce revolving credit borrowings or otherwise invest such Net
Proceeds in any manner that is not prohibited by the Indenture.
85
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the preceding paragraph will constitute "Excess Proceeds." When the
aggregate amount of Excess Proceeds exceeds $10.0 million, Holdings will make
an Asset Sale Offer to all Holders of Notes and all holders of other
Indebtedness that is pari passu with the Notes containing provisions similar to
those set forth in the Indenture with respect to offers to purchase or redeem
with the proceeds of sales of assets to purchase the maximum principal amount
of Notes and such other pari passu Indebtedness that may be purchased out of
the Excess Proceeds. The offer price in any Asset Sale Offer will be equal to
100% of principal amount plus accrued and unpaid interest, if any, to the date
of purchase, and will be payable in cash. If any Excess Proceeds remain after
consummation of an Asset Sale Offer, Holdings may use such Excess Proceeds for
any purpose not otherwise prohibited by the Indenture. If the aggregate
principal amount of Notes and such other pari passu Indebtedness tendered into
such Asset Sale Offer exceeds the amount of Excess Proceeds, the Trustee shall
select the Notes and such other pari passu Indebtedness to be purchased on a
pro rata basis. Upon completion of each Asset Sale Offer, the amount of Excess
Proceeds shall be reset at zero.
Notwithstanding the immediately preceding paragraphs, Holdings and its
Restricted Subsidiaries will be permitted to consummate an Asset Sale without
complying with such paragraphs to the extent that (i) at least 75% of the
consideration for such Asset Sale constitutes long-term assets that are used or
useful in a Permitted Business ("Qualified Proceeds") and/or Cash Equivalents
and (ii) such Asset Sale is for fair market value; provided that any
consideration not constituting long-term assets that are used or useful in a
Permitted Business received by Holdings or any of its Restricted Subsidiaries
in connection with any Asset Sale permitted to be consummated under this
paragraph shall constitute Excess Proceeds subject to the provisions of the
preceding paragraphs.
Selection and Notice
If less than all of the Notes are to be redeemed at any time, the Trustee
will select Notes for redemption as follows:
(1) if the Notes are listed, in compliance with the requirements of the
principal national securities exchange on which the Notes are listed;
or
(2) if the Notes are not so listed, on a pro rata basis, by lot or by such
method as the Trustee shall deem fair and appropriate.
No Notes of $1,000 or less shall be redeemed in part. Notices of
redemption shall be mailed by first class mail at least 30 but not more than 60
days before the redemption date to each Holder of Notes to be redeemed at its
registered address. Notices of redemption may not be conditional.
If any Note is to be redeemed in part only, the notice of redemption that
relates to that Note shall state the portion of the principal amount thereof to
be redeemed. A new Note in principal amount equal to the unredeemed portion of
the original Note will be issued in the name of the Holder thereof upon
cancellation of the original Note. Notes called for redemption become due on
the date fixed for redemption. On and after the redemption date, interest
ceases to accrue on Notes or portions of them called for redemption.
Certain Covenants
Restricted Payments
Holdings will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or distribution
on account of Holdings' or any of its Restricted Subsidiaries' Equity
Interests (including, without limitation, any payment in connection
with any merger or consolidation involving Holdings or any of its
Restricted Subsidiaries) or to the direct or indirect holders of
Holdings' or any of its Restricted Subsidiaries' Equity Interests in
their capacity as such (other than dividends or distributions payable
solely in Equity Interests (other than Disqualified Stock) of Holdings
or dividends or distributions payable to Holdings or a Restricted
Subsidiary of Holdings);
86
(2) purchase, redeem or otherwise acquire or retire for value (including,
without limitation, in connection with any merger or consolidation
involving Holdings) any Equity Interests of Holdings or any direct or
indirect parent of Holdings or any Restricted Subsidiary of Holdings
(other than any such Equity Interests owned by Holdings or any
Restricted Subsidiary of Holdings);
(3) make any payment on or with respect to, or purchase, redeem, defease
or otherwise acquire or retire for value any Indebtedness that is
subordinated to the Notes (other than the Notes), except a payment of
interest or principal at the Stated Maturity thereof or as a mandatory
sinking fund payment; or
(4) make any Restricted Investment (all such payments and other actions
set forth in clauses (1) through (4) being collectively referred to as
"Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(2) Holdings would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been
made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant
to the Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant described below under the caption
"--Incurrence of Indebtedness and Issuance of Preferred Stock"; and
(3) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by Holdings and its Restricted
Subsidiaries after the date of the Indenture (excluding Restricted
Payments permitted by clauses (2), (3), (5), (7) and (8) of the next
succeeding paragraph), is less than the sum, without duplication, of
(a) 50% of the Consolidated Net Income of Holdings for the period
(taken as one accounting period) from January 1, 1999 to the
end of Holdings' most recently ended fiscal quarter for which
internal financial statements are available at the time of
such Restricted Payment (or, if such Consolidated Net Income
for such period is a deficit, less 100% of such deficit),
plus
(b) 100% of the aggregate net cash proceeds received by Holdings
since the date of the Indenture as a contribution to its
common equity capital or from the issue or sale of Equity
Interests of Holdings (other than Disqualified Stock) or from
the issue or sale of convertible or exchangeable Disqualified
Stock or convertible or exchangeable debt securities of
Holdings that have been converted into or exchanged for such
Equity Interests (other than Equity Interests (or
Disqualified Stock or debt securities) sold to a Subsidiary
of Holdings), plus
(c) to the extent that any Restricted Investment that was made
after the date of the Indenture is sold for cash or otherwise
liquidated or repaid for cash, the lesser of (without
duplication of amounts included in Consolidated Net Income at
any time after the Closing) (i) the cash return of capital
with respect to such Restricted Investment (less the cost of
disposition, if any) and (ii) the initial amount of such
Restricted Investment.
The preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would
have complied with the provisions of the Indenture;
(2) the redemption, repurchase, retirement, defeasance or other
acquisition of any pari passu or subordinated Indebtedness of Holdings
or any Guarantor or of any Equity Interests of Holdings or any
Restricted Subsidiary in exchange for, or out of the net cash proceeds
of
87
the substantially concurrent sale (other than to a Restricted Subsidiary
of Holdings) of, Equity Interests of Holdings (other than Disqualified
Stock); provided that the amount of any such net cash proceeds that are
utilized for any such redemption, repurchase, retirement, defeasance or
other acquisition shall be excluded from clause (3) (b) of the preceding
paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness of Holdings or any Guarantor with the net
cash proceeds from an incurrence of Permitted Refinancing Indebtedness;
(4) the payment of any dividend by a Restricted Subsidiary of Holdings to
the holders of all of its common Equity Interests on a pro rata basis;
(5) the repurchase of Equity Interests deemed to occur upon the exercise
of stock options if such Equity Interests represent a portion of the
exercise price thereof;
(6) the repurchase, redemption or other acquisition or retirement for
value of any Equity Interests of Holdings or any Restricted Subsidiary
of Holdings held by (A) any director of Holdings or member of Holdings'
(or any of its Restricted Subsidiaries') management pursuant to any
management equity subscription agreement or stock option agreement in
effect as of the date of the Indenture or (B) any employee of Holdings
or any of its Subsidiaries upon the retirement of any such employee;
provided that the aggregate price paid for all such repurchased,
redeemed, acquired or retired Equity Interests shall not exceed $2.5
million in any twelve-month period;
(7) the defeasance, redemption or repurchase of any Disqualified Stock of
Holdings or any Restricted Subsidiary in exchange for, or out of the
substantially concurrent sale (other than to Holdings or a Subsidiary
of Holdings) of Disqualified Stock of Holdings or such Restricted
Subsidiary, respectively; provided that: (A) the aggregate liquidation
preference of such Disqualified Stock does not exceed the aggregate
liquidation preference of the Disqualified Stock so extended,
refinance, renewed, replaced, defeased or refunded (plus the amount of
reasonable expenses incurred in connection therewith); (B) such
Disqualified Stock has a final maturity date later than the final
maturity date of, and has a Weighted Average Life to Maturity equal to
or greater than the Weighted Average Life to Maturity of the Notes; and
(C) such Disqualified Stock is incurred either by Holdings or by the
Restricted Subsidiary who is the obligor on the Disqualified Stock
being extended, refinanced, renewed, replaced, defeased or refunded;
(8) the making of loans by Holdings or any of its Restricted Subsidiaries
to officers or directors of Holdings; provided that the aggregate
outstanding amount of such loans shall not exceed, at any time, $2.0
million; and
(9) so long as no Default or Event of Default is continuing or would be
caused thereby, the defeasance, redemption or repurchase of any
preferred stock or Disqualified Stock issued in connection with the
acquisition of assets or a Permitted Business; provided that the
aggregate amount of such Defeasance, redemption or repurchase payments
shall not exceed $5.0 million.
The amount of all Restricted Payments (other than cash) and Qualified
Proceeds (other than cash) shall be the fair market value on the date of the
Restricted Payment or date of receipt of Qualified Proceeds of the asset(s) or
securities proposed to be transferred or issued by Holdings or such Restricted
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any assets or securities that are required to be valued by this
covenant shall be determined by the Board of Directors whose resolution with
respect thereto shall be delivered to the Trustee. The Board of Directors'
determination must be based upon an opinion or appraisal issued by an
accounting, appraisal or investment banking firm of national standing if the
fair market value exceeds $5.0 million. Not later than the date of making any
Restricted Payment, Holdings shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the
88
basis upon which the calculations required by this "Restricted Payments"
covenant were computed, together with a copy of any fairness opinion or
appraisal required by the Indenture. Accrual of interest, accretion or
amortization of original issue discount, the payment of interest on any
Indebtedness in the form of additional Indebtedness with the same terms and the
payment of dividends on Disqualified Stock in the form of additional shares of
the same class of Disqualified Stock will not be deemed to be a Restricted
Payment for purposes of this covenant; provided in each such case, that the
amount thereof is included in Fixed Charges of Holdings as accrued.
Incurrence of Indebtedness and Issuance of Preferred Stock
Holdings will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create, incur, issue, assume, guarantee or
otherwise become directly or indirectly liable, contingently or otherwise
(collectively, "incur"), with respect to any Indebtedness (including Acquired
Debt), and Holdings will not issue any Disqualified Stock and will not permit
any of its Restricted Subsidiaries to issue any shares of preferred stock;
provided that Holdings and any Restricted Subsidiary may incur Indebtedness
(including Acquired Debt), and Holdings may issue Disqualified Stock, if the
Fixed Charge Coverage Ratio for Holdings' most recently ended four full fiscal
quarters for which internal financial statements are available immediately
preceding the date on which such additional Indebtedness is incurred or such
Disqualified Stock is issued would have been at least 2.0 to 1, determined on a
pro forma basis (including a pro forma application of the net proceeds
therefrom), as if the additional Indebtedness had been incurred, or the
Disqualified Stock had been issued, as the case may be, at the beginning of
such four-quarter period.
The first paragraph of this covenant will not prohibit the incurrence of
any of the following items of Indebtedness (collectively, "Permitted Debt"):
(1) the incurrence by Holdings and any Restricted Subsidiary of
Indebtedness and letters of credit under our senior credit facility
(with letters of credit being deemed to have a principal amount equal
to the maximum potential liability of Holdings and its Restricted
Subsidiaries thereunder) in an aggregate principal amount at any one
time not to exceed $100.0 million less the aggregate amount of all Net
Proceeds of Asset Sales applied by Holdings or any of its Subsidiaries
since the date of the Indenture to repay Indebtedness under our senior
credit facility pursuant to the covenant described above under the
caption "--Repurchase at the Option of Holders--Asset Sales";
(2) the incurrence by Holdings and the Restricted Subsidiaries of
Indebtedness represented by the Notes issued on the date of Closing,
Existing Indebtedness, the exchange notes and the Subsidiary Guarantees
thereof;
(3) the incurrence by Holdings or any of its Restricted Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage
financings or purchase money obligations, in each case, incurred for
the purpose of financing all or any part of the purchase price or cost
of construction or improvement of property, plant or equipment used in
the business of Holdings or such Restricted Subsidiary, in an aggregate
principal amount not to exceed $5.0 million at any time outstanding;
(4) the incurrence by Holdings or any of its Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds
of which are used to refund, refinance or replace, Indebtedness (other
than intercompany Indebtedness) that was permitted by the Indenture to
be incurred under the first paragraph of this covenant or clause (2) of
this paragraph;
(5) the incurrence by Holdings or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among Holdings and any of its
Restricted Subsidiaries; provided that:
(a) if Holdings or any Guarantor is the obligor on such
Indebtedness, such Indebtedness must be expressly
subordinated to the prior payment in full in cash of all
Obligations
89
with respect to the Notes, in the case of Holdings, or the Subsidiary
Guarantee of such Guarantor, in the case of a Guarantor; and
(b) (i) any subsequent issuance or transfer of Equity Interests
that results in any such Indebtedness being held by a Person
other than Holdings or a Restricted Subsidiary thereof and
(ii) any sale or other transfer of any such Indebtedness to a
Person that is not either Holdings or a Restricted Subsidiary
thereof; shall be deemed, in each case, to constitute an
incurrence of such Indebtedness by Holdings or such
Restricted Subsidiary, as the case may be, that was not
permitted by this clause (5);
(6) the incurrence by Holdings or any of its Restricted Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or
hedging (i) interest rate risk with respect to any floating rate
Indebtedness that is permitted by the terms of the Indenture to be
outstanding or (ii) foreign currency exchange rate risk;
(7) the guarantee by Holdings or any of the Restricted Subsidiaries of
Indebtedness of Holdings or a Restricted Subsidiary of Holdings that
was permitted to be incurred by another provision of this covenant;
(8) indebtedness incurred in respect of workers' compensation claims,
self-insurance obligations, performance, surety and similar bonds and
completion guarantees provided by Holdings or a Guarantor in the
ordinary course of business;
(9) Indebtedness arising from guarantees of Indebtedness of Holdings or
any Subsidiary or the agreements of Holdings or a Restricted Subsidiary
providing for indemnification, adjustment of purchase price or similar
obligations, in each case, incurred or assumed in connection with the
disposition of any business, assets or Capital Stock of a Restricted
Subsidiary, or other guarantees of Indebtedness incurred by any person
acquiring all or any portion of such business, assets or Capital Stock
of a Restricted Subsidiary for the purpose of financing such
acquisition; provided that the maximum aggregate liability in respect
of all such Indebtedness shall at no time exceed the gross proceeds
actually received by Holdings and its Restricted Subsidiaries in
connection with such disposition;
(10) Indebtedness of a Receivables Subsidiary that is non-recourse to
Holdings or any other Restricted Subsidiary of Holdings (other than
Standard Securitization Undertakings) incurred in connection with a
Qualified Receivables Transaction;
(11) the incurrence by Holdings or any of its Restricted Subsidiaries of
additional Indebtedness in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding not to exceed $20.0
million; and
(12) the accrual of interest, accretion or amortization of original issue
discount, the payment of interest on any Indebtedness in the form of
additional Indebtedness with the same terms, and the payment of
dividends on Disqualified Stock in the form of additional shares of the
same class of Disqualified Stock; provided in each such case, that the
amount thereof is included in Fixed Charges of Holdings as accrued.
For purposes of determining compliance with this "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant, in the event that an
item of proposed Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (1) through (12) above, or is
entitled to be incurred pursuant to the first paragraph of this covenant,
Holdings will be permitted to classify such item of Indebtedness on the date of
its incurrence in any manner that complies with this covenant.
No Senior Subordinated Debt
Holdings will not incur, create, issue, assume, guarantee or otherwise
become liable for any Indebtedness that is subordinate or junior in right of
payment to any Senior Debt of Holdings and senior in any respect in right of
payment to the Notes. No Guarantor will incur, create, issue, assume,
90
guarantee or otherwise become liable for any Indebtedness that is subordinate
or junior in right of payment to any Senior Debt of such Guarantor and senior
in any respect in right of payment to such Guarantor's Subsidiary Guarantee.
Liens
Holdings will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create, incur, assume or suffer to exist any Lien
of any kind securing Indebtedness, Attributable Debt or trade payables on any
asset now owned or hereafter acquired, except (i) Liens solely on the assets of
Unrestricted Subsidiaries and (ii) Permitted Liens unless all payments due
under the Indenture and the Notes are secured on an equal and ratable basis
with the Indebtedness so secured until such time as such is no longer secured
by a Lien; provided that if such Indebtedness is by its terms expressly
subordinated to the Notes or any Subsidiary Guarantee, the Lien securing such
Indebtedness shall be subordinate and junior to the Lien securing the Notes and
the Subsidiary Guarantees with the same relative priority as such subordinate
or junior Indebtedness shall have with respect to the Notes and the Subsidiary
Guarantees.
Dividend and Other Payment Restrictions Affecting Subsidiaries
Holdings will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create or permit to exist or become effective any
encumbrance or restriction on the ability of any Restricted Subsidiary to:
(1) pay dividends or make any other distributions on its Capital Stock to
Holdings or any of Holdings' Restricted Subsidiaries, or with respect
to any other interest or participation in, or measured by, its profits,
or pay any indebtedness owed to Holdings or any of Holdings' Restricted
Subsidiaries;
(2) make loans or advances to Holdings or any of Holdings' Restricted
Subsidiaries; or
(3) transfer any of its properties or assets to Holdings or any of
Holdings' Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) our senior credit facility and Existing Indebtedness, in each case, as
in effect on the date of the Indenture and any amendments,
modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings thereof, provided that such
amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacement or refinancings are no more
restrictive, taken as a whole, with respect to such dividend and other
payment restrictions than those contained in our senior credit facility
or such Existing Indebtedness, as in effect on the date of the
Indenture;
(2) the Indenture, the Notes and the Exchange Notes;
(3) applicable law;
(4) any instrument governing Indebtedness or Capital Stock of a Person
acquired by Holdings or any of its Restricted Subsidiaries as in effect
at the time of such acquisition (except to the extent such Indebtedness
was incurred in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the
Person, or the property or assets of the Person, so acquired; provided
that, in the case of Indebtedness, such Indebtedness was permitted by
the terms of the Indenture to be incurred;
(5) customary non-assignment provisions in leases entered into in the
ordinary course of business and consistent with past practices;
(6) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions on the property so acquired
of the nature described in clause (3) of the preceding paragraph;
91
(7) any agreement for the sale or other disposition of a Restricted
Subsidiary that restricts distributions by such Restricted Subsidiary
pending its sale or other disposition;
(8) Permitted Refinancing Indebtedness; provided that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive, taken as a whole, than those
contained in the agreements governing the Indebtedness being
refinanced;
(9) Liens securing Indebtedness otherwise permitted to be incurred
pursuant to the provisions of the covenant described above under the
caption "--Liens" that limit the right of Holdings or any of its
Restricted Subsidiaries to dispose of the assets subject to such Lien;
(10) provisions with respect to the disposition or distribution of assets
or property in joint venture agreements and other similar agreements
entered into in the ordinary course of business;
(11) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of
business;
(12) any other security agreement, installment or document relating to
Senior Debt hereafter in effect; provided that such encumbrances or
restrictions are customary in connection with such documents and that
the terms and conditions of such encumbrances or restrictions are, in
the aggregate, no more restrictive or adverse to the holders of the
Notes than those encumbrances or restrictions imposed in connection
with our senior credit facility as in effect on the date of Closing;
and
(13) any agreement relating to a sale and leaseback transaction or Capital
Lease Obligation, in each case, otherwise permitted by the Indenture,
but only on the property subject to such transaction or lease and only
to the extent that such restrictions or encumbrances are customary with
respect to a sale and leaseback transaction or capital lease.
Merger, Consolidation, or Sale of Assets
Holdings may not, directly or indirectly: (1) consolidate or merge with or
into another Person (whether or not Holdings is the surviving corporation); or
(2) sell, assign, lease, transfer, convey or otherwise dispose of all or
substantially all of Holdings' properties or assets (determined on a
consolidated basis for Holdings and its Restricted Subsidiaries), in one or
more related transactions, to another Person; unless:
(1) either: (a) Holdings is the surviving corporation; or (b) the Person
formed by or surviving any such consolidation or merger (if other than
Holdings) or to which such sale, assignment, transfer, conveyance or
other disposition shall have been made is a corporation organized or
existing under the laws of the United States, any state thereof or the
District of Columbia;
(2) the Person formed by or surviving any such consolidation or merger (if
other than Holdings) or the Person to which such sale, assignment,
transfer, conveyance or other disposition shall have been made assumes
all the obligations of Holdings under the Notes, the Indenture and the
exchange and registration rights agreement pursuant to agreements
reasonably satisfactory to the Trustee;
(3) immediately after such transaction no Default or Event of Default
exists (including, without limitation, after giving effect to any Liens
incurred, assumed or granted in connection with or in respect of such
transaction); and
(4) Holdings or the Person formed by or surviving any such consolidation
or merger (if other than Holdings):
(a) will have Consolidated Net Worth immediately after the
transaction equal to or greater than the Consolidated Net
Worth of Holdings immediately preceding the transaction; and
92
(b) will, on the date of such transaction after giving pro forma
effect thereto and any related financing transactions as if
the same had occurred at the beginning of the applicable
four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage
Ratio test set forth in the first paragraph of the covenant
described above under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock."
This "Merger, Consolidation, or Sale of Assets" covenant will not apply to a
sale, assignment, transfer, conveyance or other disposition of assets between
or among Holdings and any of its Wholly Owned Subsidiaries, and Holdings may
merge with an Affiliate incorporated or organized solely for the purpose of
reincorporating or reorganizing Holdings in another jurisdiction to realize tax
or other benefits without complying with the provisions of clauses (3) or (4)
above.
Transactions with Affiliates
Holdings will not, and will not permit any of its Restricted Subsidiaries
to, make any payment to, or sell, lease, transfer or otherwise dispose of any
of its properties or assets to, or purchase any property or assets from, or
enter into or make or amend any transaction, contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any
Affiliate (each, an "Affiliate Transaction"), unless:
(1) such Affiliate Transaction is on terms that are no less favorable to
Holdings or the relevant Restricted Subsidiary than those that would
have been obtained in a comparable transaction by Holdings or such
Restricted Subsidiary with an unrelated Person; and
(2) Holdings delivers to the Trustee:
(a) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate
consideration in excess of $1.0 million, a resolution of the
Board of Directors set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with this
covenant and that such Affiliate Transaction has been
approved by a majority of the disinterested members of the
Board of Directors; and
(b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in
excess of $5.0 million, an opinion as to the fairness to the
Holders of such Affiliate Transaction from a financial point
of view issued by an accounting, appraisal or investment
banking firm of national standing.
The following items shall not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) any employment agreement entered into by Holdings or any of its
Restricted Subsidiaries in the ordinary course of business and
consistent with the past practice of Holdings or such Restricted
Subsidiary;
(2) transactions between or among Holdings and/or its Restricted
Subsidiaries;
(3) any sale or other issuance of Equity Interests (other than
Disqualified Stock of Holdings)
(4) Restricted Payments and Permitted Investments that are permitted by
the provisions of the Indenture described above under the caption
"--Restricted Payments";
(5) the payment of fees and expenses to Vestar Capital Partners ("Vestar")
or any of its Affiliates (i) pursuant to the Management Agreement as in
effect on the date of Closing; (ii) pursuant to any amended,
supplemented or replacement management agreement; provided that the
terms of any such amended, supplemented or replacement management
agreement are not, with respect to the payment of fees and expenses to
Vestar and its Affiliates, more favorable to Vestar or any of its
Affiliates than the Management Agreement; and (iii) consisting of
advisory, investment banking or similar fees in connection with
93
acquisitions or other corporate transactions in an amount not to exceed
1.0% of the value of any such transaction; and
(6) the payment by Holdings or any Restricted Subsidiary of amounts
pursuant to the Buonanno Agreement as in effect on the date of Closing.
Additional Subsidiary Guarantees
If Holdings or any of its Restricted Subsidiaries transfers or causes to
be transferred, in one transaction or a series of related transactions, any
property or assets in excess of $500,000 to any domestic Restricted Subsidiary
that is not a Guarantor, or if Holdings or any of its Restricted Subsidiaries
acquires or creates another domestic Restricted Subsidiary after the date of
the Indenture with a book value in excess of $500,000, then that newly acquired
or created domestic Restricted Subsidiary must become a Guarantor and shall (i)
execute and deliver to the Trustee a supplemental indenture in form reasonably
satisfactory to the Trustee pursuant to which such Restricted Subsidiary shall
unconditionally guarantee all of Holdings' obligations under the Notes and the
Indenture on the terms set forth in the Indenture and (ii) deliver to the
Trustee an opinion of counsel that such supplemental indenture has been duly
authorized, executed and delivered by such Restricted Subsidiary and
constitutes a legal, valid, binding and enforceable obligation of such
Restricted Subsidiary, subject to normal exceptions. Thereafter, such
Restricted Subsidiary shall be a Guarantor for all purposes of the Indenture.
Designation of Restricted and Unrestricted Subsidiaries
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if that designation would not cause a Default. If a
Restricted Subsidiary is designated as an Unrestricted Subsidiary, all
outstanding Investments owned by Holdings and its Restricted Subsidiaries in
the Subsidiary so designated will be deemed to be an Investment made as of the
time of such designation and will reduce the amount available for Restricted
Payments under the first paragraph of the covenant described above under the
caption "--Restricted Payments" or Permitted Investments, as applicable. All
such outstanding Investments will be valued at the fair market value at the
time of such designation. That designation will only be permitted if such
Restricted Payment would be permitted at that time and if such Restricted
Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. The
Board of Directors may redesignate any Unrestricted Subsidiary to be a
Restricted Subsidiary if the redesignation would not cause a Default.
Sale and Leaseback Transactions
Holdings will not, and will not permit any of its Restricted Subsidiaries
to, enter into any sale and leaseback transaction; provided that Holdings or
any Restricted Subsidiary of Holdings that is a Guarantor may enter into a sale
and leaseback transaction if:
(1) Holdings or that Guarantor, as applicable, could have (a) incurred
Indebtedness in an amount equal to the Attributable Debt relating to
such sale and leaseback transaction under the Fixed Charge Coverage
Ratio test in the first paragraph of the covenant described above under
the caption "--Incurrence of Indebtedness and Issuance of Preferred
Stock" and (b) incurred a Lien to secure such Indebtedness pursuant to
the covenant described above under the caption "--Liens";
(2) the gross cash proceeds of that sale and leaseback transaction are at
least equal to the fair market value, as determined in good faith by
the Board of Directors and set forth in an Officers' Certificate
delivered to the Trustee, of the property that is the subject of such
sale and leaseback transaction; and
(3) the transfer of assets in that sale and leaseback transaction is
permitted by, and Holdings applies the proceeds of such transaction in
compliance with, the covenant described above under the caption
"--Repurchase at the Option of Holders--Asset Sales."
94
Issuances and Sales of Equity Interests in Wholly Owned Subsidiaries
Holdings will not, and will not permit any of its Restricted Subsidiaries
to, transfer, convey, sell, lease or otherwise dispose of any Equity Interests
in any Wholly Owned Restricted Subsidiary of Holdings to any Person (other than
Holdings or a Wholly Owned Restricted Subsidiary of Holdings), unless the cash
Net Proceeds from such transfer, conveyance, sale, lease or other disposition
are applied in accordance with the covenant described above under the caption
"--Repurchase at the Option of Holders--Asset Sales."
Issuances of Guarantees of Indebtedness
Holdings will not permit any of its Restricted Subsidiaries, directly or
indirectly, to Guarantee or pledge any assets to secure the payment of any
other Indebtedness of Holdings unless such Restricted Subsidiary simultaneously
executes and delivers a supplemental indenture providing for the Guarantee of
the payment of the Notes by such Restricted Subsidiary, which Guarantee shall
be senior to or pari passu with such Restricted Subsidiary's Guarantee of or
pledge to secure such other Indebtedness, unless such other Indebtedness is
Senior Debt, in which case the Guarantee of the Notes may be subordinated to
the Guarantee of such Senior Debt to the same extent as the Notes are
subordinated to such Senior Debt.
Notwithstanding the preceding paragraph, any Subsidiary Guarantee of the
Notes will provide by its terms that it will be automatically and
unconditionally released and discharged under the circumstances described above
under the caption "--Additional Subsidiary Guarantees." The form of the
Subsidiary Guarantee will be attached as an exhibit to the Indenture.
Business Activities
Holdings will not, and will not permit any Restricted Subsidiary to,
engage in any business other than Permitted Businesses, except to the extent
that any such business would not be material to Holdings and its Subsidiaries,
taken as a whole.
Payments for Consent
Holdings will not, and will not permit any of its Subsidiaries to,
directly or indirectly, pay or cause to be paid any consideration to or for the
benefit of any Holder of Notes for or as an inducement to any consent, waiver
or amendment of any of the terms or provisions of the Indenture or the Notes
unless such consideration is offered to be paid and is paid to all Holders of
the Notes that consent, waive or agree to amend in the time frame set forth in
the solicitation documents relating to such consent, waiver or agreement.
Reports
Whether or not required by the Securities and Exchange Commission, so long
as any Notes are outstanding, Holdings will furnish to the Holders of Notes,
within the time periods specified in the Securities and Exchange Commission's
rules and regulations:
(1) all quarterly and annual financial information that would be required
to be contained in a filing with the Securities and Exchange Commission
on Forms 10-Q and 10-K if Holdings were required to file such Forms,
including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual
information only, a report on the annual financial statements by
Holdings' certified independent accountants; and
(2) all current reports that would be required to be filed with the
Securities and Exchange Commission on Form 8-K if Holdings were
required to file such reports.
In addition, whether or not required by the Securities and Exchange
Commission, Holdings will file a copy of all of the information and reports
referred to in clauses (1) and (2) above with the Securities and Exchange
Commission for public availability within the time periods specified in the
95
Securities and Exchange Commission's rules and regulations (unless the
Securities and Exchange Commission will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request.
Notwithstanding the foregoing, so long as Holdings is in compliance with
its obligations set forth under "--Registration Covenant; Exchange Offer," and
any such exchange offer registration statement contains all of the financial
and other information otherwise required by Forms 10-K and 10-Q for the year
ended December 31, 1998 and the three months ending March 31, 1999,
respectively, Holdings shall not be required to file with the Commission or
otherwise provide an annual report on Form 10-K or a quarterly report on Form
10-Q for the year ended December 31, 1998 or the quarter ending March 31, 1999,
respectively.
Events of Default and Remedies
Each of the following is an Event of Default:
(1) default for a continued period of 30 days in the payment when due of
interest on the Notes, whether or not prohibited by the subordination
provisions of the Indenture;
(2) default in payment when due of the principal of or premium, if any, on
the Notes, whether or not prohibited by the subordination provisions of
the Indenture;
(3) failure by Holdings or any of its Subsidiaries to comply with the
provisions described under the captions "--Repurchase at the Option of
Holders--Change of Control" or "--Asset Sales";
(4) failure by Holdings or any of its Restricted Subsidiaries for 30 days
after notice to comply with any of the other agreements in the
Indenture;
(5) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by Holdings or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by Holdings or any
of its Restricted Subsidiaries) whether such Indebtedness or guarantee
now exists, or is created after the date of the Indenture, if that
default:
(a) is caused by a failure to pay principal of or premium, if
any, or interest on such Indebtedness at final maturity (a
"Payment Default"); or
(b) results in the acceleration of such Indebtedness prior to its
express maturity,
and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under
which there has been a Payment Default or the maturity of which has been
so accelerated, aggregates $5.0 million or more;
(6) failure by Holdings or any of its Restricted Subsidiaries to pay final
judgments aggregating in excess of $5.0 million, which judgments are
not paid, discharged or stayed for a period of 60 days;
(7) except as permitted by the Indenture, any Guarantor's Guarantee shall
be held in any judicial proceeding to be unenforceable or invalid or
shall cease for any reason to be in full force and effect or any
Guarantor, or any Person acting on behalf of any Guarantor, shall deny
or disaffirm its obligations under its Guarantee; and
(8) certain events of bankruptcy or insolvency with respect to Holdings or
any of its Restricted Subsidiaries.
In the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to Holdings, any Restricted Subsidiary
that is a Significant Subsidiary or any group of Restricted Subsidiaries that,
taken together, would constitute a Significant Subsidiary, all outstanding
notes will become due and payable immediately without further action or notice.
If any other Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding notes may
declare all the Notes to be due and payable immediately.
96
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. Subject to certain limitations, Holders of a
majority in principal amount of the then outstanding notes may direct the
Trustee in its exercise of any trust or power. The Trustee may withhold from
Holders of the Notes notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of principal or
interest) if it determines that withholding notice is in their interest.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes.
Holdings is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture. Upon becoming aware of any Default or
Event of Default, Holdings is required to deliver to the Trustee a statement
specifying such Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of Holdings or
any Guarantor, as such, shall have any liability for any obligations of
Holdings or the Guarantors under the Notes, the Indenture, the Guarantors'
Guarantees or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder of Notes by accepting a Note waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. The waiver may not be effective to
waive liabilities under the federal securities laws.
Legal Defeasance and Covenant Defeasance
Holdings may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding notes and all
obligations of the Guarantors discharged with respect to their Guarantees
("Legal Defeasance") except for:
(1) the rights of Holders of outstanding notes to receive payments in
respect of the principal of, premium, if any, and interest on such
Notes when such payments are due from the trust referred to below;
(2) Holdings' obligations with respect to the Notes concerning issuing
temporary Notes, registration of Notes, mutilated, destroyed, lost or
stolen Notes and the maintenance of an office or agency for payment and
money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the Trustee, and
Holdings' obligations in connection therewith; and
(4) the Legal Defeasance provisions of the Indenture.
In addition, Holdings may, at its option and at any time, elect to have
the obligations of Holdings and the Guarantors released with respect to certain
covenants that are described in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with those covenants shall not constitute a
Default or Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to the
Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) Holdings must irrevocably deposit with the Trustee, in trust, for the
benefit of the Holders of the Notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as
will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if
any, and interest on the outstanding notes on the stated maturity or on
the applicable redemption date, as the case may be, and Holdings must
specify whether the Notes are being defeased to maturity or to a
particular redemption date;
97
(2) in the case of Legal Defeasance, Holdings shall have delivered to the
Trustee an Opinion of Counsel reasonably acceptable to the Trustee
confirming that (a) Holdings has received from, or there has been
published by, the Internal Revenue Service a ruling or (b) since the
date of the Indenture, there has been a change in the applicable
federal income tax law, in either case to the effect that, and based
thereon such opinion of counsel shall confirm that, the Holders of the
outstanding notes will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Legal
Defeasance had not occurred;
(3) in the case of Covenant Defeasance, Holdings shall have delivered to
the Trustee an Opinion of Counsel reasonably acceptable to the Trustee
confirming that the Holders of the outstanding notes will not recognize
income, gain or loss for federal income tax purposes as a result of
such Covenant Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would
have been the case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be continuing
on the date of such deposit (other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such deposit);
(5) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material
agreement or instrument (other than the Indenture) to which Holdings or
any of its Restricted Subsidiaries is a party or by which Holdings or
any of its Restricted Subsidiaries is bound;
(6) Holdings must have delivered to the Trustee an opinion of counsel to
the effect that after the 91st day following the deposit, the trust
funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally;
(7) Holdings must deliver to the Trustee an Officers' Certificate stating
that the deposit was not made by Holdings with the intent of preferring
the Holders of Notes over the other creditors of Holdings with the
intent of defeating, hindering, delaying or defrauding creditors of
Holdings or others; and
(8) Holdings must deliver to the Trustee an Officers' Certificate stating
that all conditions precedent relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
Amendment, Supplement and Waiver
Without the consent of each Holder affected, an amendment or waiver may
not (with respect to any Notes held by a non-consenting Holder):
(1) reduce the principal amount of Notes whose Holders must consent to an
amendment, supplement or waiver;
(2) reduce the principal of or change or have the effect of changing the
fixed maturity of any Note or alter the provisions with respect to the
redemption of the Notes (other than provisions relating to the
covenants described above under the caption "--Repurchase at the Option
of Holders");
(3) reduce the rate of or change the time for payment of interest on any
Note;
(4) waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest on the Notes (except a rescission of
acceleration of the Notes by the Holders of at least a majority in
aggregate principal amount of the Notes and a waiver of the payment
default that resulted from such acceleration);
(5) make any Note payable in money other than that stated in the Notes;
98
(6) make any change in the provisions of the Indenture relating to waivers
of past Defaults or the rights of Holders of Notes to receive payments
of principal of or premium, if any, or interest on the Notes;
(7) waive a redemption payment with respect to any Note (other than a
payment required by one of the covenants described above under the
caption "--Repurchase at the Option of Holders");
(8) amend, change or modify in any material respect the obligation of
Holdings to make and consummate a Change of Control Offer in the event
of a Change of Control or make and consummate an Asset Sale Offer with
respect to any Asset Sale that has been consummated or modify any of
the provisions or definitions with respect thereto;
(9) release any Guarantor from any of its obligations under its Guarantee
or the Indenture otherwise than in accordance with the terms of the
Indenture; or
(10) make any change in the preceding amendment and waiver provisions.
In addition, any amendment to, or waiver of, the provisions of the
Indenture relating to subordination (including the related definitions) that
adversely affects the rights of the Holders of the Notes will require the
consent of the Holders of at least 75% in aggregate principal amount of Notes
then outstanding.
Notwithstanding the preceding, without the consent of any Holder of Notes,
Holdings and the Trustee may amend or supplement the Indenture or the Notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated Notes in addition to or in place of
certificated Notes;
(3) to provide for the assumption of Holdings' obligations to Holders of
Notes in the case of a merger or consolidation or sale of all or
substantially all of Holdings' assets;
(4) to make any change that would provide any additional rights or
benefits to the Holders of Notes or that does not adversely affect the
legal rights under the Indenture of any such Holder; or
(5) to comply with requirements of the Commission in order to effect or
maintain the qualification of the Indenture under the Trust Indenture
Act.
Governing Law
The Indenture, the Notes and the Guarantors' Guarantees will be governed
by the laws of the State of New York.
Concerning the Trustee
If the Trustee becomes a creditor of Holdings or any Guarantor, the
Indenture limits its right to obtain payment of claims in certain cases, or to
realize on certain property received in respect of any such claim as security
or otherwise. The Trustee will be permitted to engage in other transactions;
however, if it acquires any conflicting interest it must eliminate such
conflict within 90 days, apply to the Commission for permission to continue or
resign.
The Holders of a majority in principal amount of the then outstanding
notes will have the right to direct the time, method and place of conducting
any proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur and be continuing, the Trustee will be required, in the exercise of
its power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the Trustee will be under no obligation to
exercise any of its rights or powers under the Indenture at the request of any
Holder of Notes, unless such Holder shall have offered to the Trustee security
and indemnity satisfactory to it against any loss, liability or expense.
99
Certain Definitions
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such other
Person is merged with or into or became a Restricted Subsidiary of such
specified Person, whether or not such Indebtedness is incurred in
connection with, or in contemplation of, such other Person merging with
or into, or becoming a Restricted Subsidiary of, such specified Person;
and
(2) Indebtedness secured by a Lien encumbering any asset acquired by such
specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
as used with respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise; provided that beneficial ownership of 10% or more of
the Voting Stock of a Person shall be deemed to be control. For purposes of
this definition, the terms "controlling," "controlled by" and "under common
control with" shall have correlative meanings.
"Asset Sale" means:
(1) the sale, lease, conveyance or other disposition of any property,
assets or rights, other than sales or leases of inventory in the
ordinary course of business consistent with past practices; provided
that the sale, lease, conveyance or other disposition of all or
substantially all of the assets of Holdings and its Restricted
Subsidiaries taken as a whole will be governed by the provisions of the
Indenture described above under the caption "--Repurchase at the Option
of Holders--Change of Control" and/or the provisions described above
under the caption "--Certain Covenants--Merger, Consolidation, or Sale
of Assets" and not by the provisions of the Asset Sale covenant; and
(2) the issuance of Equity Interests by any of Holdings' Restricted
Subsidiaries or the sale of Equity Interests in any of its
Subsidiaries,
Notwithstanding the preceding, the following items shall not be deemed to be
Asset Sales:
(1) any single transaction or series of related transactions that involves
assets having a fair market value of less than $2.0 million in any
consecutive 12-month period;
(2) a transfer of assets between or among Holdings and its Wholly Owned
Restricted Subsidiaries;
(3) an issuance of Equity Interests by a Wholly Owned Restricted
Subsidiary to Holdings or to another Wholly Owned Restricted
Subsidiary;
(4) disposals or replacements of obsolete equipment or Cash Equivalents in
the ordinary course of business;
(5) a Restricted Payment or a Permitted Investment that is permitted by
the covenant described above under the caption "--Certain
Covenants--Restricted Payments"; and
(6) any sale of accounts receivable, or participations therein, in
connection with any Qualified Receivables Transaction.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value of the obligation of the lessee
for net rental payments during the remaining term of the lease included in such
sale and leaseback transaction including any period for which such lease has
been extended or may, at the option of the lessor, be extended. Such present
100
value shall be calculated using a discount rate equal to the rate of interest
implicit in such transaction, determined in accordance with GAAP.
"Beneficial Owner" has the meaning assigned to such term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person" (as such term is used in Section 13(d)(3)
of the Exchange Act), such "person" shall be deemed to have beneficial
ownership of all securities that such "person" has the right to acquire,
whether such right is currently exercisable or is exercisable only upon the
occurrence of a subsequent condition.
"Buonanno Agreement" means a consulting, advisory or similar agreement to
be entered into between Holdings and Vincent J. Buonanno providing for payments
of fees in an aggregate amount not to exceed $1.0 million, plus expense
reimbursement.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at that time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means:
(1) in the case of a corporation, all corporate stock (however
designated);
(2) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however
designated) of corporate stock;
(3) in the case of a partnership or limited liability company, partnership
or membership interests (whether general or limited); and
(4) any other interest or participation that confers on a Person the right
to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"Cash Equivalents" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by the
United States government or any agency or instrumentality thereof
(provided that the full faith and credit of the United States is
pledged in support thereof) having maturities of not more than twelve
months from the date of acquisition;
(3) certificates of deposit and eurodollar time deposits with maturities
of six months or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight bank
deposits, in each case, with any domestic commercial bank having
capital and surplus in excess of $500 million and a Thompson Bank Watch
Rating of "B" or better;
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (3)
above entered into with any financial institution meeting the
qualifications specified in clause (3) above;
(5) commercial paper and other securities having the highest rating
obtainable from Moody's Investors Service, Inc. or Standard & Poor's
Corporation and in each case maturing within twelve months after the
date of acquisition; and
(6) money market funds at least 95% of the assets of which constitute Cash
Equivalents of the kinds described in clauses (1) through (5) of this
definition.
"Change of Control" means the occurrence of any of the following:
(1) the sale, transfer, conveyance or other disposition (other than by way
of merger or consolidation), in one or a series of related
transactions, of all or substantially all of the assets of Holdings and
its Restricted Subsidiaries taken as a whole to any "person" (as such
term is used in Section 13(d)(3) of the Exchange Act) other than a
Principal;
(2) the adoption of a plan relating to the liquidation or dissolution of
Holdings;
101
(3) the consummation of any transaction (including, without limitation,
any merger or consolidation) the result of which is that any "person"
(as defined above), other than the Principals, becomes the Beneficial
Owner, directly or indirectly, of more than (i) 50% of the Voting Stock
of Holdings or (ii) 35% of the Voting Stock of Holdings and such Person
Beneficially Owns a greater percentage of the Voting Stock of Holdings
than the Principals, in either case (i) or (ii), measured by voting
power rather than number of shares;
(4) the first day on which a majority of the members of the Board of
Directors of Holdings are not Continuing Directors; or
(5) Holdings consolidates with, or merges with or into, any Person, or any
Person consolidates with, or merges with or into, Holdings, in any such
event pursuant to a transaction in which any of the outstanding Voting
Stock of Holdings is converted into or exchanged for cash, securities
or other property, other than any such transaction where the Voting
Stock of Holdings outstanding immediately prior to such transaction is
converted into or exchanged for Voting Stock (other than Disqualified
Stock) of the surviving or transferee Person constituting a majority of
the outstanding shares of such Voting Stock of such surviving or
transferee Person immediately after giving effect to such issuance.
"Closing" means the original issuance of Notes on the date of the
Indenture.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus:
(1) an amount equal to any extraordinary loss plus any net loss realized
in connection with an Asset Sale, to the extent such losses were
deducted in computing such Consolidated Net Income; plus
(2) provision for taxes based on income or profits of such Person and its
Restricted Subsidiaries for such period, to the extent that such
provision for taxes was deducted in computing such Consolidated Net
Income; plus
(3) consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued and whether or
not capitalized (including, without limitation, amortization of debt
issuance costs and original issue discount, non-cash interest payments,
the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease
Obligations, interest on guaranteed indebtedness, commissions,
discounts and other fees and charges incurred in respect of letter of
credit or bankers' acceptance financings, and net payments, if any,
pursuant to Hedging Obligations), to the extent that any such expense
was deducted in computing such Consolidated Net Income; plus
(4) fees and expenses paid to Vestar or any of its Affiliates pursuant to
the Management Agreement during such period in an aggregate amount not
to exceed $1.0 million; plus
(5) charges classified and reflected as non-recurring on the date of
Closing and for any other such period, in each case, on Holdings'
consolidated financial statements prepared in accordance with GAAP;
plus
(6) amounts paid pursuant to the Buonanno Agreement (to the extent not
already included in (7) below) during such period; plus
(7) depreciation, amortization (including amortization of goodwill and
other intangibles but excluding amortization of prepaid cash expenses
that were paid in a prior period) and other non-cash expenses
(excluding any such non-cash expense to the extent that it represents
an accrual of or reserve for cash expenses in any future period or
amortization of a prepaid cash expense that was paid in a prior period)
of such Person and its Restricted Subsidiaries for such period to the
extent that such depreciation, amortization and other non-cash expenses
were deducted in computing such Consolidated Net Income; minus
102
(8) non-cash items increasing such Consolidated Net Income for such
period, other than items that were accrued in the ordinary course of
business, in each case, on a consolidated basis and determined in
accordance with GAAP.
Notwithstanding the preceding, the provision for taxes based on the income or
profits of, and the depreciation and amortization and other non-cash charges
of, a Restricted Subsidiary of Holdings shall be added to Consolidated Net
Income to compute Consolidated Cash Flow of Holdings only to the extent that a
corresponding amount would be permitted at the date of determination to be
dividended to Holdings by such Restricted Subsidiary without prior approval
(that has not been obtained), pursuant to the terms of its charter and all
agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to that Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to any specified Person for
any period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that:
(1) the Net Income (but not loss) of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of accounting
shall be included only to the extent of the amount of dividends or
distributions received in cash by the specified Person or a Restricted
Subsidiary thereof; provided that if such Restricted Subsidiary is not
a Guarantor, the amount of such dividends or distributions includable
in Consolidated Net Income shall be limited to Holdings' direct and
indirect pro rata portion of the outstanding Equity Interests in such
Restricted Subsidiary;
(2) the Net Income of any Restricted Subsidiary shall be excluded to the
extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not
at the date of determination permitted without any prior governmental
approval (that has not been obtained) or, directly or indirectly, by
operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation
applicable to that Restricted Subsidiary or its stockholders;
(3) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall
be excluded;
(4) the cumulative effect of a change in accounting principles shall be
excluded;
(5) any restoration to income of any contingency reserve of an
extraordinary, non-recurring or unusual nature shall be excluded,
except to the extent that provision for such reserve was made out of
Consolidated Net Income accrued in any period for which Consolidated
Net Income is required to be calculated for purposes of the Indenture;
and
(6) for purposes of the "Restricted Payments" covenant, in the case of a
successor to the specified Person by consolidation or merger or as a
transferee of the specified Person's assets, any earnings of the
successor corporation prior to such consolidation, merger or transfer
of assets shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of:
(1) the consolidated equity of the common stockholders of such Person and
its consolidated Subsidiaries as of such date; plus
(2) the respective amounts reported on such Person's balance sheet as of
such date with respect to any series of preferred stock (other than
Disqualified Stock) that by its terms is not entitled to the payment of
dividends unless such dividends may be declared and paid only out of
net earnings in respect of the year of such declaration and payment,
but only to the extent of any cash received by such Person upon
issuance of such preferred stock.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of Holdings who:
(1) was a member of such Board of Directors on the date of the Indenture;
or
103
(2) was nominated for election or elected to such Board of Directors with
the approval of a majority of the Continuing Directors who were members
of such Board at the time of such nomination or election.
"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"Designated Senior Debt" means (1) the Obligations of Holdings under our
senior credit facility and (2) any other Senior Debt permitted under the
Indenture (a) the principal amount of which is $25.0 million or more and (b)
that has been designated by Holdings as "Designated Senior Debt."
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder thereof), or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the option of the holder
thereof, in whole or in part, on or prior to the date that is 91 days after the
date on which the Notes mature. Notwithstanding the preceding sentence, any
Capital Stock that would constitute Disqualified Stock solely because the
holders thereof have the right to require Holdings to repurchase such Capital
Stock upon the occurrence of a change of control or an asset sale shall not
constitute Disqualified Stock if the terms of such Capital Stock provide that
Holdings may not repurchase or redeem any such Capital Stock pursuant to such
provisions unless such repurchase or redemption complies with the covenant
described above under the caption "--Certain Covenants--Restricted Payments."
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means the Obligations of Holdings and its
Restricted Subsidiaries in existence on the date of the Indenture (including
amounts outstanding under our senior credit facility on such date), until such
amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of:
(1) the consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued, including,
without limitation, amortization of debt issuance costs and original
issue discount, non-cash interest payments, the interest component of
any deferred payment obligations, the interest component of all
payments associated with Capital Lease Obligations, imputed interest
with respect to Attributable Debt, commissions, discounts and other
fees and charges incurred in respect of letter of credit or bankers'
acceptance financings, and net payments, if any, pursuant to Hedging
Obligations; plus
(2) the consolidated interest of such Person and its Restricted
Subsidiaries that was capitalized during such period (other than
Capital Lease Obligations); plus
(3) any interest expense on Indebtedness of another Person that is
Guaranteed by such Person or one of its Restricted Subsidiaries or
secured by a Lien on assets of such Person or one of its Restricted
Subsidiaries, whether or not such Guarantee or Lien is called upon;
plus
(4) the product of (a) all dividend payments, whether or not in cash, on
any series of Disqualified Stock of such Person and on any series of
preferred stock of any of its Restricted Subsidiaries, other than
dividend payments on Equity Interests payable solely in Equity
Interests of Holdings (other than Disqualified Stock) or payable to
Holdings or a Restricted Subsidiary of Holdings, times (b) a fraction,
the numerator of which is one and the denominator of which is one minus
the then current combined federal, state and local statutory tax rate
of such Person, expressed as a decimal, in each case, on a consolidated
basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any specified Person
for any period, the ratio of the Consolidated Cash Flow of such Person for such
period to the Fixed Charges of such
104
Person for such period. In the event that the specified Person or any of its
Restricted Subsidiaries incurs, assumes, Guarantees, redeems or repays any
Indebtedness (other than revolving credit borrowings) or issues or redeems
preferred stock subsequent to the commencement of the period for which the
Fixed Charge Coverage Ratio is being calculated but prior to the date on which
the event for which the calculation of the Fixed Charge Coverage Ratio is made
(the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be
calculated giving pro forma effect to such incurrence, assumption, Guarantee,
redemption or repayment of Indebtedness, or such issuance or redemption of
preferred stock, as if the same had occurred at the beginning of the applicable
four-quarter reference period.
In addition, for purposes of calculating the Fixed Charge Coverage Ratio:
(1) acquisitions that have been made by the specified Person or any of its
Restricted Subsidiaries, including through mergers or consolidations
and including any related financing transactions, during the
four-quarter reference period or subsequent to such reference period
and on or prior to the Calculation Date shall be deemed to have
occurred on the first day of the four-quarter reference period and
Consolidated Cash Flow for such reference period shall be calculated
without giving effect to clause (3) of the proviso set forth in the
definition of Consolidated Net Income (including any pro forma expense
and cost reductions attributable to the assets acquired calculated on a
basis consistent with the standard set forth in Regulation S-X under
the Act as in effect on the date of Closing);
(2) the Consolidated Cash Flow attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses
disposed of prior to the Calculation Date, shall be excluded; and
(3) the Fixed Charges attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses
disposed of prior to the Calculation Date, shall be excluded, but only
to the extent that the obligations giving rise to such Fixed Charges
will not be obligations of the specified Person or any of its
Restricted Subsidiaries following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of Closing; provided that all
reports and other financial information provided by Holdings to the holders of
the Notes, the Trustee and/or the Commission shall be prepared in accordance
with GAAP, as in effect on the date of such report or other financial
information.
"Guarantee" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Indebtedness.
"Guarantors" means each of:
(1) Russell-Stanley Corp., Container Management Services, Inc., New
England Container Co., Inc., Russell-Stanley, Inc., RSLPCO, Inc. and
Russell-Stanley, L.P.; and
(2) any other subsidiary that executes a Guarantee in accordance with the
provisions of the Indenture;
and their respective successors and assigns.
"Hedging Obligations" means, with respect to any Person, the obligations
of such Person under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements;
105
(2) and other agreements or arrangements designed to protect such Person
against fluctuations in interest rates or foreign currency exchange
rates.
"Indebtedness" means, with respect to any specified Person, any
indebtedness of such Person, whether or not contingent:
(1) in respect of borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or
letters of credit (or reimbursement agreements in respect thereof);
(3) in respect of banker's acceptances;
(4) representing Capital Lease Obligations;
(5) representing the balance deferred and unpaid of the purchase price of
any property, except any such balance that constitutes an accrued
expense or trade payable;
(6) representing any Hedging Obligations; or
(7) representing any Disqualified Stock of such Person and any preferred
stock issued by a Restricted Subsidiary of such Person,
if and to the extent any of the preceding items (other than letters of credit,
Hedging Obligations, Disqualified Stock and preferred stock of a Restricted
Subsidiary) would appear as a liability upon a balance sheet of the specified
Person prepared in accordance with GAAP. In addition, the term "Indebtedness"
includes (a) all Indebtedness of others secured by a Lien on any asset of the
specified Person (whether or not such Indebtedness is assumed by the specified
Person), and (b) to the extent not otherwise included, the Guarantee by such
Person of any indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date shall be:
(1) the accreted value thereof, in the case of any Indebtedness issued
with original issue discount;
(2) the maximum fixed redemption or repurchase price, in the case of
Disqualified Stock of such Person;
(3) the maximum voluntary or involuntary liquidation preferences plus
accrued and unpaid dividends, in the case of preferred stock of a
Restricted Subsidiary of such Person; and
(4) the principal amount thereof, together with any interest thereon that
is more than 30 days past due, in the case of any other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions, purchases or other acquisitions for
consideration of Indebtedness, Equity Interests or other securities, together
with all items that are or would be classified as investments on a balance
sheet prepared in accordance with GAAP. If Holdings or any Restricted
Subsidiary of Holdings sells or otherwise disposes of any Equity Interests of
any direct or indirect Restricted Subsidiary of Holdings such that, after
giving effect to any such sale or disposition, such Person is no longer a
Restricted Subsidiary of Holdings, Holdings shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair market
value of the Equity Interests of such Restricted Subsidiary not sold or
disposed of in an amount determined as provided in the final paragraph of the
covenant described above under the caption "Certain Covenants--Restricted
Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law,
including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and
106
any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction.
"Management Agreement" means the management agreement dated July 23, 1997
between Holdings and Vestar, as amended, modified or supplemented from time to
time.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends and Disqualified Stock dividends,
excluding, however:
(1) any gain or loss, together with any related provision for taxes on
such gain or loss, realized in connection with: (a) any Asset Sale; or
(b) the disposition of any securities by such Person or any of its
Restricted Subsidiaries or the extinguishment of any Indebtedness of
such Person or any of its Restricted Subsidiaries; and
(2) any extraordinary gain (but not loss), together with any related
provision for taxes on such extraordinary gain.
"Net Proceeds" means the aggregate cash proceeds received by Holdings or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale, including, without limitation, legal, accounting
and investment banking fees, and sales commissions, and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof, in
each case after taking into account any available tax credits or deductions and
any tax sharing arrangements and amounts required to be applied to the
repayment of Indebtedness, other than Senior Debt, secured by a Lien on the
asset or assets that were the subject of such Asset Sale.
"Non-Recourse Debt" means Indebtedness:
(1) as to which neither Holdings nor any of its Restricted Subsidiaries
(a)provides credit support of any kind (including any undertaking,
agreement or instrument that would constitute Indebtedness), (b) is
directly or indirectly liable as a guarantor or otherwise, or (c)
constitutes the lender;
(2) no default with respect to which (including any rights that the
holders thereof may have to take enforcement action against an
Unrestricted Subsidiary) would permit upon notice, lapse of time or
both any holder of any other Indebtedness (other than the Notes) of
Holdings or any of its Restricted Subsidiaries to declare a default on
such other Indebtedness or cause the payment thereof to be accelerated
or payable prior to its stated maturity; and
(3) as to which the lenders have been notified in writing that they will
not have any recourse to the stock or assets of Holdings or any of its
Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Business" means the business of Holdings and its Restricted
Subsidiaries conducted on the date of Closing and businesses ancillary or
reasonably related thereto.
"Permitted Investments" means:
(1) any Investment in Holdings or in a Restricted Subsidiary of Holdings;
(2) any Investment in Cash Equivalents;
(3) any Investment by Holdings or any Restricted Subsidiary of Holdings in
a Person, if as a result of such Investment:
(a) such Person becomes a Restricted Subsidiary of Holdings; or
107
(b) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets
to, or is liquidated into, Holdings or a Restricted
Subsidiary of Holdings;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption
"--Repurchase at the Option of Holders--Asset Sales" or any transaction
not constituting an Asset Sale by reason of the $2.0 million threshold
contained in the definition thereof;
(5) any acquisition of assets solely in exchange for the issuance of
Equity Interests (other than Disqualified Stock) of Holdings;
(6) other Investments in any Person having an aggregate fair market value
(measured on the date each such Investment was made and without giving
effect to subsequent changes in value), when taken together with all
other Investments made pursuant to this clause (6), not exceed $10.0
million at any one time outstanding;
(7) Investments in securities of trade creditors or customers received in
settlement of obligations or pursuant to any plan of reorganization or
similar arrangement upon the bankruptcy of insolvency of such trade
creditors of customers; and
(8) Investments by Holdings or a Restricted Subsidiary in a Receivables
Subsidiary or any Investment by a Receivables subsidiary in any other
Person, in each case, in connection with a Qualified Receivables
Transaction.
"Permitted Junior Securities" means: (1) Equity Interests in Holdings or
any Guarantor; or (2) debt securities of Holdings or any Guarantor that (A) are
subordinated to all Senior Debt and any debt securities issued in exchange for
Senior Debt to substantially the same extent as, or to a greater extent than,
the Notes and the Subsidiary Guarantees are subordinated to Senior Debt
pursuant to of the Indenture and (B) have a Weighted Average Life to Maturity
equal to or greater than the Weighted Average Life to Maturity of the Notes.
"Permitted Liens" means:
(1) Liens on the assets of Holdings and any Restricted Subsidiary securing
Indebtedness and other Obligations under our senior credit facility
that were permitted by the terms of the Indenture to be incurred;
(2) Liens in favor of Holdings or any Restricted Subsidiary;
(3) Liens on property of a Person existing at the time such Person is
merged with or into or consolidated with Holdings or any Restricted
Subsidiary of Holdings; provided that such Liens were in existence
prior to the contemplation of such merger or consolidation and do not
extend to any assets other than those of the Person merged into or
consolidated with Holdings;
(4) Liens on property existing at the time of acquisition thereof by
Holdings or any Restricted Subsidiary of Holdings; provided that such
Liens were in existence prior to the contemplation of such acquisition
and do not extend to any assets other than the property so acquired;
(5) Liens to secure the performance of statutory obligations, surety or
appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business;
(6) Liens to secure Indebtedness (including Capital Lease Obligations)
permitted by clause (3) of the second paragraph of the covenant
entitled "Incurrence of Indebtedness and Issuance of Preferred Stock"
covering only the assets acquired with such Indebtedness;
(7) Liens existing on the date of the Indenture;
108
(8) Liens on Assets of Restricted Subsidiary to secure Senior Debt of such
Restricted Subsidiary that was permitted by the Indenture to be
incurred;
(9) judgment Liens not giving rise to an Event of Default so long as such
Lien is adequately bonded and any appropriate legal proceedings which
may have been duly initiated for the review of such judgment shall not
have been finally terminated or the period within which such
proceedings may be initiated shall not have expired;
(10) Liens securing Permitted Refinancing Indebtedness which is incurred to
refinance any Indebtedness which has been secured by a Lien permitted
under the Indenture and which has been incurred in accordance with the
provisions of the Indenture; provided that such Liens (A) are not
materially less favorable to the Holders and are not materially more
favorable to the lienholders with respect to such Liens that the Liens
in respect of the Indebtedness being refinanced and (B) do not extend
to or cover any property or assets of Holdings or any of its Restricted
Subsidiaries not securing the Indebtedness so refinanced;
(11) Liens upon specific items of inventory or other goods and proceeds of
any Person securing such Person's obligations in respect of bankers'
acceptance issued or created for the account of such Person to
facilitate the purchase, shipment or storage of such inventory or other
goods;
(12) Liens securing reimbursement obligations with respect to letters of
credit which encumber documents and other property relating to such
letters of credit and products and proceeds thereof;
(13) Liens for taxes, assessments or governmental charges or claims that
are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded,
provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor;
(14) Liens on assets of a Receivables Subsidiary granted in connection with
a Qualified Receivables Transaction;
(15) Liens securing Hedging Obligations;
(16) any interest or title of a lessor under any lease, whether or not
characterized as capital or operating; provided that such Liens do not
extend to any property or assets which is not leased property subject
to such lease; and
(17) Liens incurred in the ordinary course of business of Holdings or any
Restricted Subsidiary of Holdings with respect to obligations that,
together with all other Liens incurred pursuant to this clause (17), do
not exceed $5.0 million at any one time outstanding.
"Permitted Refinancing Indebtedness" means any Indebtedness of Holdings or
any of its Restricted Subsidiaries issued in exchange for, or the net proceeds
of which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of Holdings or any of its Restricted Subsidiaries (other than
intercompany Indebtedness); provided that:
(1) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Indebtedness does not exceed the principal amount
of (or accreted value, if applicable), plus accrued interest on, the
Indebtedness so extended, refinanced, renewed, replaced, defeased or
refunded (plus the amount of reasonable expenses incurred in connection
therewith);
(2) such Permitted Refinancing Indebtedness has a final maturity date
later than the final maturity date of, and has a Weighted Average Life
to Maturity equal to or greater than the Weighted Average Life to
Maturity of, the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded;
(3) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the Notes,
such Permitted Refinancing Indebtedness
109
has a final maturity date later than the final maturity date of, and is
subordinated in right of payment to, the Notes on terms at least as
favorable to the Holders of Notes as those contained in the
documentation governing the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded; and
(4) such Indebtedness is incurred either by Holdings or by the Restricted
Subsidiary who is the obligor on the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded.
"Person" means an individual, partnership, corporation, limited liability
company, unincorporated organization, trust or joint venture or a governmental
agency or political subdivision thereof.
"Principals" means Vestar and its Affiliates.
"Public Equity Offering" means any underwritten public offering of common
stock of Holdings in which the gross proceeds to Holdings are at least $35.0
million.
"Purchase Money Note" means a promissory note evidencing a line of credit,
or evidencing other Indebtedness owed to Holdings or any Restricted Subsidiary
in connection with a Qualified Receivables Transaction, which note shall be
repaid from cash available to the maker of such note, other than amounts
required to be established as reserves pursuant to agreement, amount paid to
investors in respect of interest, principal and other amounts owing to such
investors and amounts paid in connection with the purchase of newly generated
receivables.
"Qualified Receivables Transaction" means any transaction or series of
transactions that may be entered into by Holdings or any Restricted Subsidiary
pursuant to which Holdings or any Restricted Subsidiary may sell, convey or
otherwise transfer to (a) a Receivables Subsidiary (in the case of a transfer
by Holdings or any Restricted Subsidiary) and (b) any other Person (in the case
of a transfer by a Receivables Subsidiary), or may grant a security interest
in, any accounts receivable (whether now existing or arising in the future) of
Holdings or any Restricted Subsidiary and any asset related thereto including,
without limitation, all collateral securing such accounts receivable and all
guarantees or other obligations in respect of such accounts receivable,
proceeds of such accounts receivable and other assets which are customarily
transferred, or in respect of which security interests are customarily granted,
in connection with asset securitization transactions involving accounts
receivable.
"Receivable Subsidiary" means a Wholly Owned Restricted Subsidiary (other
than a Guarantor) which engages in no activities other than in connection with
the financing of accounts receivables and which is designated by the Board of
Directors of Holdings (as provided below) as a Receivables Subsidiary (a) no
portion of the Indebtedness of any other Obligations (contingent or otherwise)
of which (i) is guaranteed by Holdings or any other Restricted Subsidiary
(excluding guarantees of Obligations (other than the principal of, and interest
on, Indebtedness) constituting Standard Securitization Undertakings), (ii) is
recourse to or obligates Holdings or any other Restricted Subsidiary in any way
other than pursuant to Standard Securitization Undertakings or (iii) subjects
any property or asset of Holdings or any other Restricted Subsidiary, directly
or indirectly, contingently or otherwise, to the satisfaction thereof, other
than pursuant to Standard Securitization Undertakings, (b) with which neither
Holdings nor any other Restricted Subsidiary has any material contract,
agreement, arrangement or understanding (except in connection with a Purchase
Money Note or Qualified Receivables Transaction) other than on terms no less
favorable to Holdings or such other Restricted Subsidiary than those that might
be obtained at the time from persons that are not Affiliates of Holdings, other
than fees payable in the ordinary course of business in connection with
servicing accounts receivable, and (c) to which neither Holdings nor any other
Restricted Subsidiary has any obligation to maintain or preserve such entity's
financial condition or cause such entity to achieve certain level of operating
result. Any such designation by the Board of Directors of Holdings shall be
evidenced to the Trustee by filing with the Trustee a certified copy of the
resolution of the Board of Directors of Holdings giving effect to such
designation and an Officers' Certificate certifying, to the best of such
officer's knowledge and belief after consulting with counsel, that such
designation complied with the foregoing conditions.
110
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Senior Credit Facility" means the Fifth Amended and Restated Credit
Agreement, to be dated as of February 10, 1999, among Holdings 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, as amended, restated, modified, renewed, refunded, replaced or
refinanced in whole or in part from time to time.
"Senior Debt" means:
(1) all Indebtedness outstanding under our senior credit facility, and all
Hedging Obligations with respect thereto;
(2) any other Indebtedness permitted to be incurred by Holdings or a
Guarantor under the terms of the Indenture, unless the instrument under
which such Indebtedness is incurred expressly provides that it is on a
parity with the Notes or subordinated in right of payment to the Notes
or any other Indebtedness of Holdings; and
(3) all Obligations with respect to the items listed in the preceding
clauses (1) and (2)
Notwithstanding anything to the contrary in the preceding, Senior Debt will not
include:
(1) any liability for federal, state, local or other taxes owed or owing
by Holdings;
(2) any Indebtedness of Holdings to any of its Subsidiaries or other
Affiliates;
(3) any trade payables; or
(4) any Indebtedness that is incurred in violation of the Indenture.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"Standard Securitization Undertakings" means representations, warranties,
covenants and indemnities entered into by Holdings or any Restricted Subsidiary
which are reasonably customary in an accounts receivable transaction.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person:
(1) any corporation, association or other business entity of which more
than 50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by such Person or one or
more of the other Subsidiaries of that Person (or a combination
thereof); and
(2) any partnership (a) the sole general partner or the managing general
partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"Unrestricted Subsidiary" means any Subsidiary of Holdings that is
designated by the Board of Directors of Holdings as an Unrestricted Subsidiary
pursuant to a Board Resolution, but only to the extent that such Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
111
(2) is not party to any agreement, contract, arrangement or understanding
with Holdings or any Restricted Subsidiary of Holdings unless the terms
of any such agreement, contract, arrangement or understanding are no
less favorable to Holdings or such Restricted Subsidiary than those
that might be obtained at the time from Persons who are not Affiliates
of Holdings;
(3) is a Person with respect to which neither Holdings nor any of its
Restricted Subsidiaries has any direct or indirect obligation (a) to
subscribe for additional Equity Interests or (b) to maintain or
preserve such Person's financial condition or to cause such Person to
achieve any specified levels of operating results; and
(4) has not guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of Holdings or any of its Restricted
Subsidiaries.
Any designation of a Subsidiary of Holdings as an Unrestricted Subsidiary
shall be evidenced to the Trustee by filing with the Trustee a certified copy
of the Board Resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the preceding
conditions and was permitted by the covenant described above under the caption
"Certain Covenants--Restricted Payments." If, at any time, any Unrestricted
Subsidiary would fail to meet the preceding requirements as an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the Indenture and any Indebtedness of such Subsidiary shall be
deemed to be incurred by a Restricted Subsidiary of Holdings as of such date
and, if such Indebtedness is not permitted to be incurred as of such date under
the covenant described under the caption "Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock," Holdings shall be in default of
such covenant. The Board of Directors of Holdings may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation shall be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of Holdings of any outstanding Indebtedness of such Unrestricted
Subsidiary and such designation shall only be permitted if (1) such
Indebtedness is permitted under the covenant described under the caption
"Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock," calculated on a pro forma basis as if such designation had occurred at
the beginning of the four-quarter reference period; and (2) no Default or Event
of Default would be in existence following such designation.
"Voting Stock" of any Person means the Capital Stock of such Person that
is entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees of such Person.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness or Disqualified Stock at any date, the number of years obtained by
dividing:
(1) the sum of the products obtained by multiplying (a) the amount of each
then remaining installment, sinking fund, serial maturity or other
required payments of principal or liquidation preference, including
payment at final maturity, in respect thereof, by (b) the number of
years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment; by
(2) the then outstanding principal amount or liquidation preference of
such Indebtedness or Disqualified Stock.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person and/or by one or more Wholly Owned Restricted
Subsidiaries of such Person.
112
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
OF THE EXCHANGE OFFER
Exchange of Notes
The following summary describes the material United States federal income
tax consequences of the exchange offer. The exchange of outstanding notes for
exchange notes in the exchange offer will not constitute a taxable event to
holders. Consequently, no gain or loss will be recognized by a holder upon
receipt of an exchange note, the holding period of the exchange notes will
include the holding period of the outstanding note and the basis of the
exchange notes will be the same as the basis of the outstanding note
immediately before the exchange.
In any event, persons considering the exchange of outstanding notes for
exchange notes should consult their own tax advisors concerning the United
States federal income tax consequences in light of their particular situations
as well as any consequences arising under the laws of any other taxing
jurisdiction.
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such exchange notes. This
prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of exchange notes received in
exchange for outstanding notes where such outstanding notes were acquired as a
result of market-making activities or other trading activities. To the extent
any such broker-dealer participates in the exchange offer and so notifies us,
or causes us to be so notified in writing, we have agreed that for a period of
180 days after the date of this prospectus, we will make this prospectus, as
amended or supplemented, available to such broker-dealer for use in connection
with any such resale, and will promptly send additional copies of this
prospectus and any amendment or supplement to this prospectus to any
broker-dealer that requests such documents in the letter of transmittal.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the exchange notes or a combination of such
methods of resale, at prevailing market prices at the time of resale, at prices
related to such prevailing market prices or at negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from any
such broker-dealer or the purchasers or any such exchange notes. Any
broker-dealer that resells exchange notes that were received by it for its own
account pursuant to the exchange offer and any broker or dealer that
participates in a distribution of such exchange notes may be deemed to be an
"underwriter" within the meaning of the Securities Act of 1933, and any profit
on any such resale of exchange notes and any commissions or concessions
received by any such persons may be deemed to be underwriting compensation
under the Securities Act of 1933. The letter of transmittal states that, by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act of 1933.
We have agreed to pay all expenses incident to the exchange offer (other
than commissions and concessions of any broker-dealers), subject to certain
prescribed limitations, and will indemnify the holders of the outstanding notes
against certain liabilities, including certain liabilities that may arise under
the Securities Act of 1933.
By its acceptance of the exchange offer, any broker-dealer that receives
exchange notes pursuant to the exchange offer hereby agrees to notify us prior
to using the prospectus in connection with the sale or transfer of exchange
notes, and acknowledges and agrees that, upon receipt of notice from us of the
happening of any event which makes any statement in this prospectus untrue in
any material respect or which requires the making of any changes in this
prospectus in order to
113
make the statements herein not misleading or which may impose upon us
disclosure obligations that may have a material adverse effect on us (which
notice we agree to deliver promptly to such broker-dealer), such broker-dealer
will suspend use of this prospectus until we have notified such broker-dealer
that delivery of this prospectus may resume and has furnished copies of any
amendment or supplement to this prospectus to such broker-dealer.
LEGAL MATTERS
Certain legal matters will be passed upon for Russell-Stanley by Simpson
Thacher & Bartlett, New York, New York.
EXPERTS
The financial statements of Russell-Stanley Holdings, Inc. and
subsidiaries as of December 31, 1997 and 1998 and for each of the three years
in the period ended December 31, 1998, of Container Management Services, Inc.
as of July 23, 1997 and for the period January 1, 1997 through July 23, 1997,
of Hunter Drums Limited as of October 29, 1997, and for the period January 1,
1997 through October 29, 1997 and of Smurfit Plastic Packaging as of December
31, 1996 and November 7, 1997, for the year ended December 31, 1996 and for the
period January 1, 1997 through November 7, 1997, included in this prospectus
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports appearing herein and elsewhere in the registration statement, and
are included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
The financial statements of Container Management Services, Inc. as and for
the year ended December 31, 1996 included in this prospectus have been audited
by Elliott, Davis & Company, LLP, independent auditors, as stated in their
report appearing herein and elsewhere in the registration statement, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
114
(This page intentionally left blank)
INDEX TO FINANCIAL STATEMENTS
Index to Consolidated Financial Statements of Russell-Stanley Holdings, Inc. and Subsidiaries
Independent Auditors' Report ......................................................... F-2
Financial Statements as of December 31, 1997 and 1998 and for each of the years
ended December 31, 1996, 1997 and 1998:
Consolidated Balance Sheets .......................................................... F-3
Consolidated Statements of Operations and Comprehensive Income (Loss) ................ F-5
Consolidated Statements of Redeemable Preferred Stock and Stockholders' Equity
(Deficit) ............................................................................ F-6
Consolidated Statements of Cash Flows ................................................ F-7
Notes to Consolidated Financial Statements ........................................... F-8
Index to Financial Statements of Container Management Services, Inc.
Independent Auditors' Report ......................................................... F-32
Report of Independent Certified Public Accountants ................................... F-33
Financial Statements as of December 31, 1996 and July 23, 1997 and for the year ended
December 31, 1996 and the period from January 1, 1997 through July 23, 1997:
Balance Sheets ....................................................................... F-34
Statements of Operations ............................................................. F-35
Statements of Stockholders' Equity ................................................... F-36
Statements of Cash Flows ............................................................. F-37
Notes to Financial Statements ........................................................ F-38
Index to Consolidated Financial Statements of Hunter Drums Limited
Independent Auditors' Report ......................................................... F-42
Financial Statements as of October 29, 1997 and for the period from January 1, 1997
through October 29, 1997:
Consolidated Balance Sheet ........................................................... F-43
Consolidated Statement of Operations and Retained Earnings ........................... F-44
Consolidated Statement of Cash Flows ................................................. F-45
Notes to Consolidated Financial Statements ........................................... F-46
Index to Financial Statements of Smurfit Plastic Packaging
Independent Auditors' Report ......................................................... F-50
Financial Statements as of December 31, 1996 and November 7, 1997 and
for the year ended December 31, 1996 and the period from January 1, 1997
to November 7, 1997:
Balance Sheets ....................................................................... F-51
Statements of Operations ............................................................. F-52
Statements of Cash Flows ............................................................. F-53
Notes to Financial Statements ........................................................ F-54
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Russell-Stanley Holdings, Inc.
Bridgewater, New Jersey
We have audited the accompanying consolidated balance sheets of
Russell-Stanley Holdings, Inc. and subsidiaries (the "Company") as of December
31, 1997 and 1998, and the related consolidated statements of operations and
comprehensive income (loss), redeemable preferred stock and stockholders'
equity (deficit), and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1997 and 1998, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 22, 1999
F-2
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(In Thousands)
1997 1998
------------ ------------
ASSETS (NOTE 8)
CURRENT ASSETS:
Cash and cash equivalents ......................................... $ 1,051 $ 1,630
Accounts receivable, less allowances of $224 and $169,
respectively ..................................................... 29,641 29,408
Inventories (Note 3) .............................................. 19,004 18,761
Prepaid taxes and income taxes receivable -- net (Note 9) ......... 1,700 3,460
Prepaid and other current assets .................................. 2,512 2,132
Deferred tax benefit -- net (Note 9) .............................. 1,289 602
--------- ---------
Total current assets ............................................ 55,197 55,993
--------- ---------
PROPERTY, PLANT AND EQUIPMENT-- Net
(Notes 4 and 6) ................................................... 84,962 92,643
--------- ---------
OTHER ASSETS:
Goodwill and other intangibles -- net (Note 5) .................... 103,734 108,195
Deferred financing costs -- net (Note 15) ......................... 1,498 1,294
Other noncurrent assets ........................................... 139 129
--------- ---------
Total other assets .............................................. 105,371 109,618
--------- ---------
TOTAL ASSETS ....................................................... $ 245,530 $ 258,254
========= =========
See notes to consolidated financial statements.
F-3
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(In Thousands)
1997 1998
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses (Notes 7 and 14) ......... $ 34,191 $ 42,230
Income taxes payable (Note 9) .................................. 47 849
Current maturities of long-term debt (Note 8) .................. 745 10
--------- ---------
Total current liabilities ................................... 34,983 43,089
LONG-TERM DEBT (Notes 8, 17 and 20) ............................. 160,617 171,592
DEFERRED TAXES--Net (Note 9) .................................... 5,819 4,662
OTHER NONCURRENT LIABILITIES (Note 14) .......................... 5,320 5,374
--------- ---------
Total liabilities ........................................... 206,739 224,717
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 14 and 20)
STOCKHOLDERS' EQUITY (Note 13)--At December 31, 1997
and 1998, 2,181 shares and 2,205 shares were issued and
outstanding .................................................... 38,791 33,537
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...................... $ 245,530 $ 258,254
========= =========
See notes to consolidated financial statements.
F-4
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(In Thousands)
1996 1997 1998
------------ ------------ ------------
NET SALES
Containers ............................................. $ 141,925 $ 161,107 $ 227,392
Services ............................................... -- 15,206 46,650
--------- --------- ---------
Total net sales ...................................... 141,925 176,313 274,042
COST OF SALES
Containers ............................................. 103,636 121,576 171,851
Services ............................................... -- 12,027 41,356
--------- --------- ---------
Total cost of sales .................................. 103,636 133,603 213,207
--------- --------- ---------
Gross profit ......................................... 38,289 42,710 60,835
--------- --------- ---------
EXPENSES:
Selling ................................................ 11,268 12,254 17,532
General and administrative ............................. 11,976 12,862 21,911
Amortization of intangibles ............................ 1,070 1,726 3,487
Nonrecurring charges (Notes 7 and 18) .................. -- -- 6,167
--------- --------- ---------
Total expenses ....................................... 24,314 26,842 49,097
--------- --------- ---------
INCOME FROM OPERATIONS .................................. 13,975 15,868 11,738
INTEREST EXPENSE ........................................ 7,473 8,754 16,025
OTHER EXPENSE -- Net .................................... 268 197 550
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEMS .................................... 6,234 6,917 (4,837)
PROVISION (BENEFIT) FOR INCOME TAXES
(Note 9) ............................................... 2,559 2,925 (505)
--------- --------- ---------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS .................................... 3,675 3,992 (4,332)
EXTRAORDINARY ITEMS (less applicable
income tax benefit of $2,655 in 1997) (Note 15)......... -- 5,100 --
--------- --------- ---------
NET INCOME (LOSS) ....................................... 3,675 (1,108) (4,332)
OTHER COMPREHENSIVE
INCOME (LOSS) (Note 2) ................................. 7 (171) (2,012)
--------- --------- ---------
COMPREHENSIVE INCOME
(LOSS) ................................................. $ 3,682 $ (1,279) $ (6,344)
========= ========= =========
See notes to consolidated financial statements.
F-5
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1996 AND 1997 AND 1998
(In Thousands, Except Share Data)
Redeemable
Preferred Common
Stock Stock Additional
------------------------- ---------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit
------------- ----------- ------------- -------- ------------ -------------
BALANCE, JANUARY 1, 1996 ........... 236,498 $ 23,517 645,000 $ 7 $ 7,600 $ (21,067)
Net income ........................ -- -- -- -- -- 3,675
Issued as dividends ............... 39,094 3,910 -- -- -- --
Amortization of discount .......... -- 38 -- -- -- --
Preferred stock dividends ......... -- -- -- -- -- (3,913)
Minimum pension liability
adjustment ........................ -- -- -- -- -- --
------- --------- ------- ---- -------- ----------
BALANCE, DECEMBER 31, 1996 ......... 275,592 27,465 645,000 7 7,600 (21,305)
Net loss .......................... -- -- -- -- -- (1,108)
Issued as dividends ............... 22,149 2,214 -- -- -- --
Reacquired by purchase ............ (297,741) (29,774) (122,500) -- -- --
Amortization of discount .......... -- 95 -- -- -- --
Shares issued ..................... -- -- 1,627,778 16 71,984 --
Preferred stock dividends ......... -- -- -- -- -- (2,525)
Conversion of warrants ............ -- -- 30,243 -- (1,059) --
Premium paid on repurchase of
preferred stock ................... -- -- -- -- (7,529) --
Transaction fees .................. -- -- -- -- (1,907) --
Minimum pension liability
adjustment ........................ -- -- -- -- -- --
Translation adjustment ............ -- -- -- -- -- --
-------- --------- --------- ---- -------- ----------
BALANCE, DECEMBER 31, 1997 ......... -- -- 2,180,521 23 69,089 (24,938)
Net loss .......................... -- -- -- -- -- (4,332)
Shares issued ..................... -- -- 24,243 -- 1,090 --
Minimum pension liability
adjustment ........................ -- -- -- -- -- --
Translation adjustment ............ -- -- -- -- -- --
-------- --------- --------- ---- -------- ----------
BALANCE, DECEMBER 31, 1998 ......... $ -- $ -- 2,204,764 $ 23 $ 70,179 $ (29,270)
=========== ========= ========= ==== ======== ==========
Other Comprehensive
Income (Loss) (Note 2)
--------------------------
Minimum Notes Treasury Total
Cumulative Pension Receivable Stock Stockholders'
Translation Liability for Shares to ------------------------ Equity
Adjustments Adjustment Management Shares Amount (Deficit)
------------- ------------ --------------- ---------- ------------- --------------
BALANCE, JANUARY 1, 1996 ........... $ -- $ (302) $ (64) 117,000 $ (402) $ (14,228)
Net income ........................ -- -- -- -- -- 3,675
Issued as dividends ............... -- -- -- -- -- --
Amortization of discount .......... -- -- -- -- -- --
Preferred stock dividends ......... -- -- -- -- -- (3,913)
Minimum pension liability
adjustment ........................ -- 7 -- -- -- 7
--------- ------- ------ ------- --------- ----------
BALANCE, DECEMBER 31, 1996 ......... -- (295) (64) 117,000 (402) (14,459)
Net loss .......................... -- -- -- -- -- (1,108)
Issued as dividends ............... -- -- -- -- -- --
Reacquired by purchase ............ -- -- -- 122,500 (4,451) (4,451)
Amortization of discount .......... -- -- -- -- -- --
Shares issued ..................... -- -- -- -- -- 72,000
Preferred stock dividends ......... -- -- -- -- -- (2,525)
Conversion of warrants ............ -- -- -- -- -- (1,059)
Premium paid on repurchase of
preferred stock ................... -- -- -- -- -- (7,529)
Transaction fees .................. -- -- -- -- -- (1,907)
Minimum pension liability
adjustment ........................ -- (68) -- -- -- (68)
Translation adjustment ............ (103) -- -- -- -- (103)
--------- ------- ------ ------- --------- ----------
BALANCE, DECEMBER 31, 1997 ......... (103) (363) (64) 239,500 (4,853) 38,791
Net loss .......................... -- -- -- -- -- (4,332)
Shares issued ..................... -- -- -- -- -- 1,090
Minimum pension liability
adjustment ........................ -- (381) -- -- -- (381)
Translation adjustment ............ (1,631) -- -- -- -- (1,631)
--------- ------- ------ ------- --------- ----------
BALANCE, DECEMBER 31, 1998 ......... $ (1,734) $ (744) $ (64) 239,500 $ (4,853) $ 33,537
========= ======= ====== ======= ========= ==========
See notes to consolidated financial statements.
F-6
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(In Thousands)
1996 1997 1998
------------- --------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................ $ 3,675 $ (1,108) $ (4,332)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation .................................................... 4,799 8,475 23,479
Amortization .................................................... 1,069 1,613 3,127
Amortization of deferred financing costs ........................ 887 594 276
Extraordinary items, noncash (Note 15) .......................... -- 7,755 --
Other noncash items ............................................. 340 393 770
Changes in operating assets and liabilities,
excluding effects of acquisitions:
Decrease (increase) in accounts receivable ...................... 270 (135) 1,916
Decrease (increase) in inventories .............................. (4,252) 2,147 1,024
Decrease (increase) in prepaid and other current assets ......... (221) (1,085) 672
(Decrease) increase in accounts payable, accrued
expenses and income taxes payable .............................. (1,852) (1,763) 4,482
Decrease in deferred income taxes ............................... (489) (418) (848)
Increase in other -- net ........................................ 142 1,265 231
-------- --------- ---------
Net cash provided by operating activities ..................... 4,368 17,733 30,797
-------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions -- net of cash acquired (Note 16) ................... -- (130,249) (13,874)
Capital expenditures ............................................. (3,335) (9,949) (28,679)
Proceeds from sale of property, plant and equipment .............. 1,394
Other, net ....................................................... 4 (147) (74)
-------- --------- ---------
Net cash used in investing activities ......................... (3,331) (140,345) (41,233)
-------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings ............................... 7,875 282,733 --
Repayments of long-term borrowings ............................... (3,924) (144,708) (429)
(Repayments of) borrowings under revolver credit -- net .......... (5,124) (8,515) 11,777
Dividends on redeemable preferred stock .......................... (4) (2) --
Increase in deferred financing costs ............................. (130) (6,877) (72)
Repurchase of senior subordinated notes .......................... -- (29,258) --
Capital restructuring ............................................ -- (42,880) --
Issuance of common stock ......................................... -- 72,000 --
Other, net........................................................ -- 21 (287)
-------- --------- ---------
Net cash (used in) provided by financing activities ........... (1,307) 122,514 10,989
-------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS ..................................... -- (103) 26
-------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS ........................... (270) (201) 579
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ...................... 1,522 1,252 1,051
-------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR ............................ $ 1,252 $ 1,051 $ 1,630
======== ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Interest ......................................................... $ 6,541 $ 6,580 $ 12,883
======== ========= =========
Income taxes ..................................................... $ 3,668 $ 2,276 $ 209
======== ========= =========
See notes to consolidated financial statements.
F-7
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization -- Through its direct operating subsidiaries, Russell-Stanley
Corp. ("RSC"), Container Management Services, Inc. ("CMS"), Hunter Drums
Limited ("Hunter"), and New England Container Co., Inc. ("NEC"),
Russell-Stanley Holdings, Inc. ("Holdings" or the "Company") is a leading
manufacturer and marketer of plastic and steel industrial containers and a
leading provider of related container services in the United States and Canada.
The Company's products are used in a broad range of industries such as
agricultural, chemical, food product, lubricant, pharmaceutical and specialty
chemicals. In July 1997, the Company restructured its capital structure through
the following transactions, i) issuance of 1,222,221 shares of common stock in
exchange for $54,999,940, resulting in additional paid-in capital of
$54,987,718, ii) repurchase of 122,500 shares of common stock for $4,450,500,
iii) repurchase of all outstanding senior subordinated notes for $29,257,638,
including make whole payments and accrued interest of $3,025,858 and $240,080,
respectively, iv) repurchase of $15.00/$17.50 Cumulative Exchangeable
Redeemable Preferred Stock (Series B) for $37,611,126, including make whole
payments and accrued interest of $7,529,123 and $302,745, respectively, and v)
conversion/repurchase of warrants for $1,059,190 (the "Capital Restructuring").
In addition, the Company restructured its debt through the following
transactions: i) repayment of existing bank debt of $25,924,331 and ii)
borrowing on a new credit facility of $46,102,987 (the "July Debt
Restructuring"). Immediately following the Capital Restructuring and the July
Debt Restructuring, Holdings was formed to serve as a holding company for RSC
and subsidiaries. The transaction was accounted for in a manner similar to a
pooling of interests, therefore, the financial statements as of and for the two
years in the period ended December 31, 1997 include the operations of Holdings
and RSC and subsidiaries as if Holdings and RSC had been combined for the
entire period. In connection with the transaction, all RSC shares and options
were exchanged for shares and options in Holdings with the same par value and
exercise price. In July 1997, CMS was acquired; CMS pioneered the businesses of
plastic container leasing on a "per use" or "round-trip" basis and plastic
container fleet management in the United States and Canada utilizing inventory
tracking technology. In October 1997, the Company acquired the stock of Hunter,
a leading Canadian manufacturer and marketer of steel and plastic drums. In
November 1997, Holdings issued 377,779 shares of common stock in exchange for
$17,000,055, resulting in additional paid-in capital of $16,996,277, and
acquired certain assets of Smurfit Plastic Packaging Corporation ("SPP" or "SPP
Assets"), a leading manufacturer and marketer of plastic drums in the United
States. In addition, the Company entered into an amended and restated revolving
credit and term loan agreement (Notes 8 and 15). In July 1998, NEC was
acquired; NEC has the largest share of the steel drum reconditioning market in
the Northeast and provides the Company with entry into the steel drum
reconditioning market, (with respect to the above acquisitions refer to Note
16).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Revenue Recognition -- Revenue is recognized when products are shipped or
services are provided to customers.
Use of Estimates -- The preparation of these financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Estimates are used to a significant extent in determining the recoverability of
intangibles from future operations and in establishing other valuation
allowances.
F-8
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
Cash Equivalents -- The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents and are valued at cost which approximates fair value.
Inventories -- Inventories are stated at the lower of cost or market
value. Cost is determined on the first-in, first-out (FIFO) method.
Property, Plant and Equipment -- Property, plant and equipment, stated at
cost, is being depreciated for financial reporting purposes on the
straight-line method over the estimated useful lives of the assets or the lease
term, whichever is shorter. The estimated useful lives for each class of
property, plant and equipment are as follows:
Buildings and improvements ......... 15-30 years
Furniture and fixtures ............. 3-7 years
Machinery and equipment ............ 3-10 years
Containers held for lease .......... 14-25 months
Goodwill and Other Intangibles -- The excess of cost over the fair value
of net assets acquired ("goodwill") is being amortized on a straight-line basis
over its estimated useful life of 40 years. Other intangible assets, consisting
primarily of customer lists and patents, are recorded at cost and are being
amortized over the life of the related assets (up to 17 years), using the
straight-line method. Management periodically evaluates the recoverability of
long-term assets, including goodwill, based upon current and future anticipated
income and cash flows. For the three-year period ended December 31, 1998, there
were no adjustments to the carrying values of long-term assets resulting from
those evaluations.
Deferred Financing Costs -- Deferred financing costs incurred in
connection with the Company's debt restructurings are being amortized for
financial reporting purposes over the average life of the debt, using the
straight-line method.
Income Taxes -- Deferred tax assets and liabilities are recognized for the
expected future tax consequences attributable to the difference between the
financial statement carrying amounts of assets and liabilities and their
respective tax basis. Management periodically evaluates the available evidence
about future taxable income and other possible sources of realization of
deferred tax assets and establishes valuation allowances if necessary.
Translation of Foreign Currencies -- The assets and liabilities of Hunter
are translated into U.S. dollars at year-end exchange rates, with resulting
translation gains and losses accumulated in a separate component of
stockholders' equity. Income and expense items are converted into U.S. dollars
at average rates of exchange prevailing throughout the year.
Financial Instruments -- The Company utilizes financial instruments to
limit its exposure to interest rate fluctuations.
F-9
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
Comprehensive Income (Loss) -- The Company has adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive
Income. Comprehensive income (loss) consists of the following:
Year Ended December 31,
------------------------------------------
1996 1997 1998
---------- ------------- -------------
(In Thousands)
Comprehensive income (loss):
Net income (loss) ................................ $ 3,675 $ (1,108) $ (4,332)
Other comprehensive income (loss):
Foreign currency translation adjustment ......... -- (103) (1,631)
Minimum pension liability adjustment ............ 7 (68) (381)
------- --------- ---------
Other comprehensive income (loss) ................ 7 (171) (2,012)
------- --------- ---------
Total ............................................. $ 3,682 $ (1,279) $ (6,344)
======= ========= =========
Recently Issued Accounting Standard -- In June 1998, SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133") was
issued. SFAS 133 establishes new disclosure requirements which provide a
comprehensive standard for recognition and measurement of derivatives and
hedging activities. SFAS 133 will require new disclosures to be recorded on the
balance sheet at fair value and establishes special accounting for certain
types of hedging activities and will take effect in 2000. Based on the
Company's current derivatives, an interest rate collar and foreign currency
forward contracts, management does not believe that SFAS 133 will have a
material effect on the Company's financial condition or results of operations.
3. INVENTORIES
Inventory consists of the following:
December 31,
-------------------------
1997 1998
----------- -----------
(In Thousands)
Raw materials ........... $ 12,003 $ 12,435
Work-in-process ......... 637 562
Finished goods .......... 6,364 5,764
-------- --------
Total ................... $ 19,004 $ 18,761
======== ========
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
December 31,
---------------------------
1997 1998
------------ ------------
(In Thousands)
Land .................................. $ 5,205 $ 5,518
Buildings and improvements ............ 16,518 15,418
Machinery and equipment ............... 107,605 138,049
--------- ---------
Total ................................. 129,328 158,985
Less accumulated depreciation ......... (44,366) (66,342)
--------- ---------
Total ................................. $ 84,962 $ 92,643
========= =========
Included in machinery and equipment are containers held for lease,
consisting of plastic drums and intermediate bulk containers ("IBCs")
which are leased to customers.
F-10
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
5. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles consists of the following:
December 31,
---------------------------
1997 1998
------------ ------------
(In Thousands)
Goodwill ..................................... $ 110,262 $ 117,840
Customer lists and other intangibles ......... 2,846 2,817
Patents ...................................... 206 245
--------- ---------
113,314 120,902
Less accumulated amortization ................ (9,580) (12,707)
--------- ---------
Total ........................................ $ 103,734 $ 108,195
========= =========
6. LEASES
Capital Leases -- Leased equipment included in machinery and equipment
consists of the following:
December 31,
---------------------
1997 1998
-------- ----------
(In Thousands)
Leased equipment ...................... $ 850 $ 25
Less accumulated depreciation ......... (233) (7)
------ ------
Total ................................. $ 617 $ 18
====== =====
Future minimum lease payments under the capital lease obligations at
December 31, 1998, are as follows:
(In Thousands)
---------------
1999 .......................................................... $ 9
2000 .......................................................... 4
---
Minimum lease payments ........................................ 13
Less amounts representing interest ............................ 2
---
Present value of net minimum lease payments (Note 8) .......... $11
===
Operating Leases -- The Company has operating lease commitments expiring
at various dates, principally for real property, machinery and equipment, and
transportation equipment. Total lease expense amounted to $840,000, $1,456,000
and $4,416,000 in 1996, 1997 and 1998, respectively.
Future minimum lease payments under the terms of the noncancelable
operating leases with initial or remaining terms in excess of one year at
December 31, 1998 are as follows:
(In Thousands)
---------------
1999 ...................... $ 4,365
2000 ...................... 3,568
2001 ...................... 3,190
2002 ...................... 2,433
2003 ...................... 2,159
Thereafter ................ 9,833
--------
Total ..................... $ 25,548
========
F-11
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following:
December 31,
-------------------------
1997 1998
----------- -----------
(In Thousands)
Accounts payable .................. $ 18,900 $ 19,873
Accrued payroll ................... 2,217 1,932
Accrued professional fees ......... 565 3,016
Accrued interest payable .......... 3,943 3,909
Other accrued expenses ............ 8,566 13,500
-------- --------
Total ............................. $ 34,191 $ 42,230
======== ========
Included in accrued professional fees are $2.3 million of unpaid costs
incurred in 1998 associated with proposed transactions that were not
consummated. The total costs of $2.7 million are included in nonrecurring
expenses in the accompanying statement of operations and comprehensive income
(loss).
8. LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
---------------------------
1997 1998
------------ ------------
(In Thousands)
Revolving credit loan and term loans ......... $ 161,034 $ 171,591
Capital lease obligations (Note 6) ........... 328 11
--------- ---------
161,362 171,602
Less current maturities ...................... 745 10
--------- ---------
Long-term debt ............................... $ 160,617 $ 171,592
========= =========
In July and November 1997, the Company entered into amended and restated
revolving credit and term loan agreements (the "Agreements"). The Agreements
bear interest at a combination of domestic source and Eurodollar borrowing
rates which fluctuate based on earnings before interest, taxes, depreciation
and amortization ("EBITDA"). Up to $50 million can be borrowed on the revolving
credit loan. In addition, up to $5 million can be borrowed under a Swing Line,
as long as total borrowings under the revolving credit loan and Swing Line do
not exceed $50 million in the aggregate. The term loans consist of three
tranches A, B, and C (the "Term Loans"). Term Loan A is for an aggregate of $45
million and is payable in quarterly installments commencing March 31, 1999 in
increasing amounts through September 30, 2003. Term Loan B is for an aggregate
of $80 million and is payable in quarterly installments commencing June 30,
1998 in increasing amounts through September 30, 2005. Term Loan C is for an
aggregate of $25 million and is payable in two equal installments on June 30,
2006 and 2007. The Term Loans carry mandatory repayment terms based upon any of
the following i) the sale of certain assets, ii) the closing of any public
offering of equity securities or iii) 50% of excess cash flow, as defined, for
each fiscal year commencing with the year ending December 31, 1998. Optional
prepayments can also be made on the Term Loans, and are subject to prepayment
premiums as defined in the agreement. The Company is required to meet certain
financial covenants under the Agreements including fixed charge and leverage
ratios and capital expenditure spending limits. The Company was in compliance
with all such covenants as of December 31, 1998 and throughout the year. The
debt is secured by substantially all assets of the Company. In addition, the
Agreements restrict the payments of dividends by the Company. Subsequent to
year-end the Company refinanced its long-term debt (Note 20).
F-12
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
The revolving credit loans and term loans have the following provisions
(dollars in thousands):
Interest Interest
Rate at Balance at Rate at Balance at
Domestic Eurodollar December 31, December 31, December 31, December 31,
Interest Rate Interest Rate 1997 1997 1998 1998
--------------------- --------------------- -------------- -------------- -------------- -------------
Revolving Prime plus margin LIBOR plus margin
credit loan ......... not less than 1.00% not less than 2.50% 9.50% $ 11,034 9.00% $ 22,837
Term Loan A-- Prime plus margin LIBOR plus margin
Domestic ............ not less than 1.00% not less than 2.50% 8.44 35,000 9.00 35,000
Term Loan A-- Prime plus margin LIBOR plus margin
Foreign ............. not less than 1.00% not less than 2.50% 8.44 10,000 9.00 9,182
Term Loan B .......... Prime plus margin LIBOR plus margin
not less than 1.50% not less than 3.00% 8.94 80,000 9.50 79,572
Term Loan C .......... Fixed rate Fixed rate 9.48 25,000 9.48 25,000
--------- ---------
Total ................ $ 161,034 $ 171,591
========= =========
In addition to the interest rate provisions stated above, the Company
maintains an interest rate collar in an aggregate notional principal amount of
$45 million to hedge interest rate risk through November 2000. Under this
collar, if the actual LIBOR rate at the specified measurement date is greater
than a ceiling rate of 7.5%, the lender pays the Company the differential
interest expense. If the actual LIBOR rate is lower than the floor rate of
5.27%, the Company pays the lender the differential interest expense.
Senior Subordinated Notes -- In conjunction with the Capital Restructuring
and July Debt Restructuring, all senior subordinated notes were repurchased
(Note 1).
Maturities of Long-Term Debt -- As of December 31, 1998, taking into
account subsequent events, maturities of long-term debt are as follows:
(In Thousands)
---------------
1999 ......................... $ 10
2004 and thereafter .......... 171,592
--------
Total ........................ $171,602
========
(Maturities of long-term debt under the agreements entered into subsequent
to year-end are disclosed in Note 20.)
9. INCOME TAXES
Year Ended December 31,
---------------------------------------
1996 1997 1998
---------- ---------- -------------
(In Thousands)
Income (loss) before income taxes
and extraordinary items: .........
U.S. .............................. $ 6,234 $ 7,063 $ (7,538)
Foreign ........................... -- (146) 2,701
------- ------- ---------
Total .............................. $ 6,234 $ 6,917 $ (4,837)
======= ======= =========
F-13
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
The provision (benefit) for income taxes consists of the following:
Year Ended December 31,
-----------------------------------
1996 1997 1998
---------- --------- ----------
(In Thousands)
Current:
Federal ............................... $ 2,688 $2,794 $ (261)
Foreign ............................... -- 79 461
State ................................. 161 219 (235)
------- ------ --------
Total current .......................... 2,849 3,092 (35)
------- ------ --------
Deferred: ..............................
Federal ............................... (290) (211) (1,963)
Foreign ............................... -- 44 1,493
------- ------ --------
Total deferred ......................... (290) (167) (470)
------- ------ --------
Net provision for income taxes ......... $ 2,559 $2,925 $ (505)
======= ====== ========
The difference between the effective income tax and the statutory Federal
income tax rate is explained as follows:
Year Ended December 31,
---------------------------------------
1996 1997 1998
---------- ---------- -------------
Federal statutory tax rate ...................... 34.0 % 34.0 % (34.0)%
Goodwill amortization ........................... 4.1 3.6 9.7
State taxes, net of Federal tax benefit ......... 1.7 2.0 6.3
Travel and entertainment ........................ 0.9 0.6 2.2
Foreign tax rate differential ................... -- 2.1 2.5
Other ........................................... 0.3 -- 2.9
---- ---- -----
Effective tax rate .............................. 41.0 % 42.3 % (10.4)%
===== ==== =====
The components of the net deferred tax liabilities as of December 31, 1997
and 1998 were as follows:
1997 1998
-------------------------- ------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilties
---------- ------------- ---------- -----------
(In Thousands)
Current:
Accounts receivable .................... $ 31 $ -- $ 76 $ --
Inventory .............................. -- 172 -- 335
Prepaid expenses ....................... -- 520 -- 520
Accrued expenses ....................... 1,879 -- 1,255 --
Other .................................. 71 -- 126 --
------ ------ ------ ------
Total current ........................... $1,981 $ 692 $1,457 $ 855
====== ====== ====== ======
Noncurrent:
Property, plant and equipment .......... $ -- $5,612 $ -- $6,747
Goodwill ............................... -- 244 -- 974
Accrued expenses ....................... -- -- 562 --
Alternative minimum tax credit ......... -- -- 180 --
Net operating loss ..................... -- -- 2,153 --
Other .................................. 37 -- 164 --
------ ------ ------ ------
Total noncurrent ........................ $ 37 $5,856 $3,059 $7,721
====== ====== ====== ======
F-14
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
As of December 31, 1998, the Company had a net operating loss carryover
for Federal tax purposes of approximately $6,333,000. The carryover will expire
after December 31, 2018. The Company also had an alternative minimum tax credit
carryover of approximately $180,000. This credit does not expire, but can be
carried forward indefinitely.
10. RETIREMENT BENEFIT PLANS
RSC has a defined contribution plan which covers all eligible nonunion
employees. Contributions to the defined contribution plan are based on years of
service, age and salary. Total expense for such plan was approximately
$298,000, $418,000 and $515,000 for 1996, 1997 and 1998, respectively.
The Company also contributes to a defined benefit pension plan for certain
union employees. The defined benefit pension plan assets are comprised
primarily of mutual funds.
Net pension cost for this defined benefit pension plan is as follows:
1996 1997 1998
-------- -------- -------
(In Thousands)
Service cost--benefits earned during the period ......... $ 76 $ 77 $ 141
Interest cost on projected benefit obligation ........... 88 89 119
Actual return on plan assets ............................ (49) (48) (48)
Net amortization and deferral ........................... 19 20 3
----- ----- -----
Net periodic pension cost ............................... $ 134 $ 138 $ 215
===== ===== =====
Assumptions used in the accounting for the plans were:
1996 1997 1998
--------- --------- ---------
Weighted-average discount rates ...................... 7.5 % 7.5 % 6.5 %
Expected long-term rate of return on assets .......... 9.5 10.5 10.5
The following table sets forth the funded status and amounts recognized
for this defined benefit pension plan at December 31:
1997 1998
------------ ------------
(In Thousands)
Accumulated benefit obligation--vested ............................ $ 1,575 $ 1,631
Accumulated benefit obligation--nonvested ......................... 115 220
-------- --------
Total accumulated benefit obligation .............................. $ 1,690 $ 1,851
-------- --------
Projected benefit obligation for service rendered to date ......... $ (1,690) $ (1,851)
Plan assets at fair value ......................................... 1,081 889
-------- --------
Projected benefit obligation in excess of plan assets ............. (609) (962)
Prior service cost not yet recognized
in net periodic pension cost ................................... 246 218
Unrecognized portion of net obligation
existing at date of adoption of FAS No. 87 ..................... 67 54
Unrecognized net loss ............................................. 310 591
Adjustment to recognize minimum liability ......................... (623) (863)
-------- --------
Accrued pension cost .............................................. $ (609) $ (962)
======== ========
F-15
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
The following table sets forth the change in benefit obligation and plan
assets for this defined benefit pension plan at December 31:
1997 1998
--------- ---------
(In Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year ..................... $1,497 $1,690
Service cost ................................................ 77 141
Interest cost ............................................... 89 119
Actuarial gain .............................................. (58)
Actuarial assumptions ....................................... 118 300
Benefits paid ............................................... (91) (341)
------ ------
Benefit obligation at end of year ........................... 1,690 1,851
Change in plan assets:
Fair value of plan assets at beginning of plan year ......... 927 1,081
Actual return on plan assets ................................ 48 48
Employer contribution ....................................... 197 101
Benefits paid ............................................... (91) (341)
------ ------
Fair value of plan assets at end of year .................... 1,081 889
------ ------
Funded status ............................................... (609) (962)
Unrecognized actuarial loss ................................. 310 591
Unrecognized prior service cost ............................. 246 218
Unrecognized net obligation ................................. 67 54
------ ------
Net amount recognized ....................................... $ 14 $ (99)
====== ======
Amounts recognized in the balance sheet consist of:
Prepaid (accrued) pension cost .............................. $ 14 $ (99)
Accrued benefit liability ................................... (609) (962)
Intangible asset ............................................ 246 218
Accumulated other comprehensive income ...................... 363 744
------ ------
Net amount recognized ....................................... $ 14 $ (99)
====== ======
The Company offers all eligible RSC nonunion and certain eligible union
employees a 401(k) tax deferred savings plan. Eligibility in the plan is
dependent upon the completion of one year of service. The Company matches 50%
of the employee's contribution, up to 4%. The Company's contribution for 1996,
1997 and 1998 was $177,000, $186,000 and $198,000, respectively.
The vesting period for the Company's 401(k) plan, defined contribution
plan, and defined benefit plan is 20% after the first three years and each year
thereafter, until the participant becomes fully vested after a seven-year
period.
Pursuant to the acquisition of the SPP Assets, formerly a division of
Jefferson Smurfit Corporation ("JSC") (Note 16), salaried, union and non-union
employees of SPP continued to be covered under defined benefit plans and 401(k)
plans maintained by JSC for the remainder of 1997. The Company paid JSC $70,000
for the expenses JSC incurred relating to the maintenance of these plans for
the period in 1997 subsequent to the acquisition. Effective January 1, 1998,
these employees were transferred to a retirement plan established by the
Company.
Effective January 1, 1999, the 401(k) plans for all non-union RSC, former
SPP and CMS employees were replaced with a new 401(k) savings and retirement
plan. Eligibility in the plan is
F-16
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
dependent upon the completion of one year of service and the attainment of age
21. Under the plan, the Company matches 100% of the employee's contribution, up
to 4%. In addition, at the discretion of the Board, the Company may contribute
an additional 1% to 4.75% of each employee's salary, as defined, depending upon
age.
Certain employees of Hunter (Note 16) are covered under a money purchase
pension plan. Eligibility in the plan is dependent upon the completion of one
year of service. Employees can contribute up to 3% of eligible income and
executives can contribute up to 9% of eligible income, with a maximum yearly
contribution of $6,750. Hunter matches 100% of employee and executive
contributions and such employer contributions vest after two full years as a
member of the plan. Company contributions for the periods ended December 31,
1997 and 1998, were $2,000 and $80,000, respectively.
Certain employees of NEC are covered under a 401(k) plan. Eligibility in
the plan is dependent upon the completion of one year of service. Participants
can defer up to 15% of eligible compensation. Matching contributions are
provided by the employer at the rate of 10% of the participant contributions,
up to a maximum of 5% of each participants compensation in any plan year.
Employer contributions made in 1998 were $21,000.
11. RELATED PARTIES
The Company has a management agreement with Vestar Capital Partners, Inc.,
together with its affiliates, ("Vestar"), a majority shareholder of the
Company, which provides the Company with certain management services for the
greater of $225,000 per year or .25% of the consolidated net sales of the
Company, plus out-of-pocket expenses. For the years ended December 31, 1996,
1997 and 1998, the Company paid $391,000, $561,000 and $952,000, respectively,
for these services. In conjunction with the 1997 acquisitions and
restructurings and the 1998 acquisition, Vestar was paid transaction fees of
approximately $2.4 million and $160,000, respectively. During 1996, the Company
also paid $213,000 to Vestar for outside consulting services.
12. LONG-TERM INCENTIVE PLAN
The Company currently provides a performance unit incentive plan for
certain key employees. Under this plan, approximately 10,000 units were awarded
to the participants of the plan in 1995. The value of each unit is dependent
upon the Company's achievement of certain operating cash flow levels, as
defined, for the three-year period ended December 31, 1997. The Company
recognizes expense in relation to this plan based on the estimate of the final
payout of the plan. Accordingly, the Company recognized expense of $411,000,
and $467,000 in 1996 and 1997, respectively. The total amount to be paid under
this plan is approximately $1,113,000, of which $609,000 was paid in 1998 and
$252,000, plus interest, will be paid in each of 1999 and 2000.
During 1998, the Company established a new performance unit incentive plan
for certain key employees to cover the three year period ended December 31,
2000. Under the new plan 27,925 units were awarded to the participants of the
plan in 1998. The value of each unit is dependent upon the Company's
achievement of certain operating cash flow levels, as defined, for the
three-year period ended December 31, 2000. The Company recognizes expense in
relation to this plan based on the estimate of the final payout of the plan.
Accordingly, the Company recognized expense of $233,000 in 1998.
13. REDEEMABLE PREFERRED STOCK AND COMMON STOCK
Redeemable Preferred Stock -- In conjunction with the Capital
Restructuring all redeemable preferred stock was repurchased and cancelled in
July 1997 (Note 1).
F-17
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
Common Stock -- The par value of the Company's common stock is $0.01.
There were 3,000,000 shares of common stock authorized at December 31, 1997 and
1998. In 1989, common stock was issued to certain of the Company's management
in exchange for notes receivable totaling $64,000. Simple interest accrues at
9% per annum on the notes and the principal plus interest becomes due and
payable in full in June 1999. Total principal and interest due was $113,000 and
$119,000 at December 31, 1997 and 1998, respectively.
The shares of the Company's common stock issued to directors and
management investors are subject to various restrictions on transferability and
the Company has the right to repurchase such shares under certain
circumstances.
During 1997, the Company repurchased substantially all outstanding
warrants, originally issued in 1989, in conjunction with the Capital
Restructuring (Note 1).
The Company maintains a stock option plan which provides for the granting
of stock options to certain officers and key employees. Information relating to
the option plan is as follows:
1996 1997 1998
-------- ----------- ------------
Options outstanding at January 1 ............ 30,000 92,988 174,679
Options cancelled ........................... -- (1,000) (46,953)
Options granted ............................. 62,988 82,691 125,550
------ ------ -------
Options outstanding at December 31 .......... 92,988 174,679 253,276
====== ======= =======
Options exercisable at December 31 .......... 57,012 65,669 75,430
====== ======= =======
In 1996, the Company granted a total of 34,000 options at an exercise
price of $8 per share and 28,988 options at an exercise price of $16 per share
to purchase shares of the Company's common stock. In 1997, the Company granted
a total of 56,547 options at an exercise price of $45 per share and 26,144
options at an exercise price of $38.25 per share to purchase shares of the
Company's common stock. In 1998, the Company granted a total of 120,550 options
at an exercise price of $50 per share and 5,000 options at an exercise price of
$60 per share. All options granted prior to 1996 have an exercise price of
$8.00 per share. Common stock acquired in accordance with the stock option
agreement is not transferable except as provided in the Stockholders' Transfer
Rights Agreement or pursuant to an effective registration statement filed under
the provisions of the Securities Act of 1933.
The 177,846 nonvested options at December 31, 1998 will become vested over
the following periods: 105,550 vest evenly over five years commencing in
February 1999; 15,000 vest evenly over five years commencing in May 1999;
32,219 vest over two years commencing July 1999; 3,650 vest in July 1999; 5,000
vest evenly over five years commencing in August 1999; 4,831 vest in November
1999; and the remaining 11,596 fully vest if the Company achieves certain
performance objectives. All options must be exercised, or will expire, within
10 years of the date of the grant. In addition, in the event of a change in
control, all options vest.
The Company accounts for the stock option plan in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, under which no compensation cost has been recognized for stock
option awards. However, under Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation ("SFAS 123"), the Company must
disclose the pro forma net income as if the Company had adopted the accounting
requirements of SFAS 123. Based on the Minimum Value Method of SFAS 123, the
Company's pro forma net income (loss) for 1996, 1997 and 1998 would have been
$3,067,000, $(1,263,000), and $(4,588,000), respectively.
F-18
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
The weighted average exercise price for options at the beginning of year,
granted during the year and as of December 31, 1998 was $19.58, $50.20 and
$34.44 per share, respectively. The weighted average exercise price of options
exercisable as of December 31, 1998 was $12.15 per share. The weighted average
fair value of the stock options granted during 1998 was $7.49. This amount
represents the estimated fair market value of the Company's common stock
reduced by the present value of the exercise price of the options granted
during 1998. The fair value of each stock option grant is estimated on the date
of grant using the Minimum Value Method with the following weighted average
assumptions used for grants:
1996 1997 1998
------------ ----------- -----------------
Risk-free interest rate .................... 6.84 % 6.75 % 6.00 %
Expected dividend yield .................... 0 % 0 % 0 %
Expected life in years ..................... 5 5 5
Expected volatility ........................ 0 % 0 % 0 %
The following table summarizes options outstanding at December 31,
1998:
Exercise price range ....................... $ 8.00 $ 16.00 $ 45.00-$60.00
Options outstanding ........................ 47,000 28,988 177,288
Weighted average exercise price ............ $ 8.00 $ 16.00 $ 48.82
Weighted average remaining contractual life 6 years 8 years 9 y
ears
Options currently exercisable .............. 47,000 12,561 15,869
Weighted average exercise price of options
currently exercisable ................... $ 8.00 $ 16.00 $ 45.00
14. COMMITMENTS AND CONTINGENCIES
The Company has entered into employment agreements with certain employees,
through its acquisitions, whereby the Company is committed to provide
employment and reimbursement for specified expenses providing the employees
comply with the provisions of said agreements. Future minimum payments under
these agreements as of December 31, 1998 are as follows:
(In Thousands)
---------------
1999 ................. $1,285
2000 ................. 1,285
2001 ................. 515
2002 ................. 330
2003 ................. 330
------
Total ................ $3,745
======
The above future payments were recorded in conjunction with purchase
accounting; $1,285,000 is included in accounts payable and accrued expenses at
both December 31, 1997 and 1998, and $3,745,000 and $2,460,000 is included in
other noncurrent liabilities at December 31, 1997 and 1998, respectively.
The Company is party to various claims, legal actions, complaints and
union negotiations arising in the ordinary course of business. In management's
opinion, the ultimate resolution of these matters will not have a material
adverse effect on its financial condition or results of operations (Note 20).
F-19
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
15. EXTRAORDINARY ITEMS
The Company used a portion of the proceeds from the debt refinancings to
repay its pre-existing debt. As a result of this early extinguishment of debt,
the Company incurred extraordinary charges, in both July and November 1997,
totaling approximately $5.1 million, net of tax benefits of $2.7 million,
consisting of the write-off of unamortized deferred financing costs and premium
payments on the repurchase of senior subordinated notes.
16. ACQUISITIONS
In July 1997, the Company acquired CMS, which pioneered the businesses of
plastic container leasing on a "per use" or "round-trip" basis and plastic
container fleet management in the United States and Canada utilizing inventory
tracking technology. The purchase price of the stock acquisition was $32.5
million, plus transaction-related expenses.
In October 1997, the Company acquired Hunter, a leading manufacturer and
marketer of plastic and steel drums in Canada. The purchase price of the stock
acquisition was $23.7 million, plus transaction related expenses and 27,778
shares of nonvoting exchangeable stock, exchangeable into 27,778 shares of
Holdings common stock. The non-voting exchangeable stock is exchangeable upon
the occurrence of specific events, but in any event no later than October 2004.
Such shares have been treated as outstanding shares of Holdings in the
accompanying financial statements.
In November 1997, the Company acquired certain assets of SPP, formerly a
division of JSC, a leading manufacturer and marketer of plastic drums in the
United States. The assets were acquired for $70 million, plus
transaction-related expenses.
In July 1998, the Company acquired NEC. NEC has a large share of the steel
drum reconditioning market in the Northeast and provides the Company entry into
the steel drum reconditioning market. The purchase price of the stock
acquisition was $14.0 million, plus transaction-related expenses and 24,243
shares of common stock.
All of these transactions (collectively, the "Acquisitions"), have been
accounted for as purchases, and, accordingly, the purchase prices were
allocated to the net tangible and intangible assets acquired based on estimated
fair values at the respective dates of acquisition. The excess purchase price
over the net assets and liabilities acquired was allocated to goodwill which is
being amortized on a straight-line basis over its estimated useful life of 40
years. The results of operations of the Acquisitions have been included in the
consolidated financial statements since the respective dates of acquisition.
The following unaudited pro forma information assumes that the
Acquisitions occurred on January 1 of the year acquired for each year
presented, after giving effect to certain adjustments, including amortization
of goodwill, increased depreciation expense, increased interest expense on the
acquisition debt incurred, the elimination of pre-acquisition sales, the
elimination of certain shareholder expenses and the related income tax effects.
The pro forma results are not necessarily indicative of the results of
operations which would actually have occurred had the transaction taken place
on the dates indicated or of the results which may occur in the future:
Year Ended December 31,
(In Thousands)
---------------------------------------
1996 1997 1998
----------- ----------- -----------
Net sales ........................... $284,666 $297,300 $284,510
Income (loss) before income taxes and
extraordinary items ............... 10,017 3,200 (5,428)
Net income (loss) ................... 5,879 (3,200) (4,623)
F-20
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
The following represents the cash flow details of the Acquisitions:
(In Thousands)
------------------------
1997 1998
----------- ----------
Fair value of assets acquired ......... $158,984 $18,329
Liabilities assumed ................... 27,874 3,264
Common stock issued ................... -- 1,091
-------- -------
Cash paid for acquisitions ............ 131,110 13,974
Less cash acquired .................... 861 100
-------- -------
$130,249 $13,874
======== =======
17. FINANCIAL INSTRUMENTS AND RELATED DISCLOSURES
Foreign Exchange Contracts -- The Company's Canadian subsidiary maintains
U.S. dollar denominated foreign currency exchange contracts which were in place
prior to the Company's acquisition of Hunter. At December 31, 1997 and 1998,
$15.8 million and $3.9 million, respectively, of forward contracts were held
with settlement rates ranging from $1.3821 to $1.4072, Canadian dollars to U.S.
dollars, and settlement dates from January 1998 to December 1999. The foreign
exchange contracts are recorded at fair value with the related unrealized gains
or losses included in other expense-net on the accompanying statement of
operations and comprehensive income (loss). Included in other expense-net for
the years ended December 31, 1997 and 1998, was $465,000 and $629,000,
respectively, of losses on foreign exchange contracts.
Fair Value of Financial Instruments -- The Company does not enter into
financial instruments for trading purposes. For cash and cash equivalents,
accounts receivable and payable and accrued expenses, the carrying amount
approximates fair value due to their short maturities. The fair values of
long-term debt are estimated based on the borrowing rates currently available
for borrowings with similar terms and maturities. At December 31, 1997, the
carrying amount approximates fair value due to the debt being restructured
during November 1997. At December 31, 1998, the carrying amount approximates
fair value based on current borrowing rates. The fair value of the interest
rate collar was not material at either December 31, 1997 or 1998. The foreign
exchange contracts are recorded at a fair value of $680,000 and $342,000 at
December 31, 1997 and 1998, respectively.
18. NON-RECURRING CHARGES
In conjunction with the integration of acquired entities and expansion of
the Company's operations, a plan was developed to rationalize the Company's
operations and sales forces and to consolidate and relocate the Company's
corporate headquarters in order to improve operating efficiencies and reduce
costs. This plan is expected to be substantially complete by the end of the
first quarter of 1999. As part of this plan, the Company recorded
restructuring, integration and other charges of approximately $3.5 million for
the year ended December 31, 1998. These charges primarily include costs related
to the closure of a container manufacturing facility, severance costs and other
personnel related costs and the relocation of corporate headquarters and other
miscellaneous costs.
F-21
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
The liabilities accrued for the restructuring, integration and other costs
are as follows (in thousands):
Severance Plant and
and other Headquarters
Personnel Closure/
Related Relocation
Costs Costs Other Total
----------- ------------- ------- ---------
Initial liability assumed .......... $2,166 $1,239 $62 $3,467
Cash expenditures .................. 681 876 31 1,588
------ ------ --- ------
Balance, December 31, 1998 ......... $1,485 $ 363 $31 $1,879
====== ====== === ======
In addition, professional fees of $2.7 million were incurred during 1998
associated with proposed acquisitions that were not consummated.
19. SEGMENT REPORTING
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, during the fourth quarter of 1998. SFAS 131
establishes standards for reporting information about operating segments in
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
Operating segments are defined as components of an enterprise for which
separate, discrete financial information is available that is evaluated
regularly by the chief operating decision maker, to make decisions about
resources to be allocated and to assess its performance.
The Company has two reportable operating segments. Containers manufactures
and sells new plastic and steel rigid industrial containers. Services leases
plastic rigid industrial containers, provides plastic container fleet
management services, reconditions and sells steel drums and retrieves and
recycles empty industrial containers.
Information as to the operations of the Company's business segments is set
forth below based on the nature of the products and services offered. The
Company evaluates performance based on several factors, of which the primary
financial measure is business segment profit or loss from operations before
amortization of intangible assets, depreciation, interest, income taxes and
extraordinary items. The accounting policies of the segments are the same as
those described in the summary of significant accounting policies (Note 2).
Intersegment sales are recorded at cost plus applicable margin and are
eliminated upon consolidation.
F-22
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
1996 1997 1998
----------- ----------- -----------
(In Thousands)
Sales:
Containers ................................................ $141,925 $164,407 $229,692
Services .................................................. -- 15,206 46,650
-------- -------- --------
141,925 179,613 276,342
Intersegment sales:
Containers ................................................ -- 3,300 2,300
Services .................................................. -- -- --
-------- -------- --------
-- 3,300 2,300
Net sales:
Containers ................................................ 141,925 161,107 227,392
Services .................................................. -- 15,206 46,650
-------- -------- --------
Consolidated net sales ..................................... $141,925 $176,313 $274,042
======== ======== ========
Earnings before amortization, depreciation, interest,
income taxes and extraordinary items:
Containers ................................................ $ 19,575 $ 20,654 $ 23,453
Services .................................................. -- 5,105 14,341
-------- -------- --------
19,575 25,759 37,794
Interest expense ........................................... 7,473 8,754 16,025
Depreciation and amortization expense ...................... 5,868 10,088 26,606
-------- -------- --------
Consolidated income (loss) before income taxes and
extraordinary items ...................................... $ 6,234 $ 6,917 $ (4,837)
======== ======== ========
Depreciation and amortization expense:
Containers ................................................ $ 5,868 $ 6,728 $ 11,617
Services .................................................. -- 3,360 14,989
-------- -------- --------
Consolidated depreciation and amortization expense ......... $ 5,868 $ 10,088 $ 26,606
======== ======== ========
Segment assets:
Containers ................................................ $ 88,844 $200,305 $188,376
Services .................................................. -- 43,727 64,902
Other ..................................................... -- 1,498 4,976
-------- -------- --------
Consolidated segment assets ................................ $ 88,844 $245,530 $258,254
======== ======== ========
Capital Expenditures:
Containers ................................................ $ 3,335 $ 5,655 $ 10,484
Services .................................................. -- 4,294 18,195
-------- -------- --------
Consolidated capital expenditures .......................... $ 3,335 $ 9,949 $ 28,679
======== ======== ========
Net sales by geographic area, as determined by the location of customer,
are as follows:
1996 1997 1998
----------- ----------- -----------
(In Thousands)
Net sales by geographic area:
United States .............. $141,925 $172,310 $257,150
Canada ..................... -- 4,003 15,490
Other countries ............ -- -- 1,402
-------- -------- --------
Total ....................... $141,925 $176,313 $274,042
======== ======== ========
F-23
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
Long-lived assets by geographic area, consisting of property, plant and
equipment -- net and goodwill and other intangibles -- net, as determined by
location of the asset, is as follows:
1996 1997 1998
----------- ------------ ------------
(In Thousands)
Long-lived assets -- net by geographic area:
United States ............................. $ 56,689 $ 162,044 $ 177,345
Canada .................................... -- 26,652 23,493
-------- --------- ---------
Total ...................................... $ 56,689 $ 188,696 $ 200,838
======== ========= =========
The Company does not have a single customer which represents 10 percent or
more of consolidated revenues.
20. SUBSEQUENT EVENTS
On February 10, 1999, the Company refinanced its revolving credit loan and
term loans by entering into a new senior credit facility consisting of a $75.0
million revolving credit facility ($13.3 million was drawn on February 10,
1999), bearing interest at LIBOR plus 2.75%, and a $25.0 million term loan,
bearing interest at 9.48% (collectively, the "Senior Credit Facility'). The
revolving credit facility matures in February 2004 and the term loan matures in
two equal installments in June 2006 and 2007. In addition, the Company issued
$150 million of 10 7/8% Senior Subordinated Notes (the "Notes") due February 15,
2009, issued at 99.248%, resulting in an effective yield of 11.0%. The Senior
Credit Facility contains certain covenants and restrictions and is guaranteed
by substantially all assets of the Company. The Notes require semiannual
interest payments commencing August 15, 1999 and mature February 2009. The
Notes are subordinate to all current and future debt of the Company and are
unconditionally guaranteed by the guarantor subsidiaries, (Note 21). Deferred
financing charges of approximately $7.0 million were incurred in connection
with the refinancing.
In January 1999, the U.S. Environmental Protection Agency (the "EPA")
confirmed the presence of certain contaminants, including dioxin, in and along
the Woonasquatucket River in Rhode Island. Prior to 1970, NEC operated a
facility in North Providence, Rhode Island along the Woonasquatucket River at a
site where contaminants have been found. Recent press reports identify NEC as a
business that may have contributed to the contamination. The Company is not
aware that any party has been formally identified by the EPA as a potentially
responsible party. Notwithstanding that 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.
The Company believes that any resulting liability is subject to a contractual
indemnity from Vincent J. Buonanno, one of its directors and the former owner
of NEC. However, such indemnity is subject to a $2.0 million limit. The Company
is currently 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 and results of operations.
21. GUARANTOR SUBSIDIARIES
The Company's payment obligations under the Notes will be fully and
unconditionally guaranteed on a joint and several basis by its current domestic
subsidiaries, principally: RSC, 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 will not be 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.
F-24
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
Presented below 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 below.
Investments in subsidiaries are accounted for by the Company on the equity
method of accounting. Earnings of subsidiaries are, therefore, reflected in the
Company's investments in and advances to/from subsidiaries account and earnings
(losses). The elimination entries eliminate investments in subsidiaries,
related stockholders' equity and other intercompany balances and transactions.
F-25
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1998
(In Thousands)
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiary Eliminations Consolidated
------------ -------------- -------------- -------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................ $ -- $ 1,246 $ 384 $ -- $ 1,630
Accounts receivable -- net ............... -- 26,263 3,226 (81) 29,408
Inventories .............................. -- 16,354 2,407 -- 18,761
Prepaid and other current
assets -- net .......................... -- 2,412 398 3,384 6,194
-------- -------- ------- ---------- --------
Total current assets ................... -- 46,275 6,415 3,303 55,993
-------- -------- ------- ---------- --------
PROPERTY, PLANT AND
EQUIPMENT -- Net ........................ -- 86,720 5,923 -- 92,643
-------- -------- ------- ---------- --------
OTHER ASSETS:
Goodwill and other intangibles -- net..... -- 91,869 17,570 (1,244) 108,195
Deferred financing costs -- net .......... 1,294 -- -- -- 1,294
Other noncurrent assets .................. -- 129 -- -- 129
Intercompany advances .................... 21,434 76,033 390 (97,857) --
Investment in subsidiaries ............... 37,788 -- -- (37,788) --
-------- -------- ------- ---------- --------
TOTAL ASSETS .............................. $ 60,516 $301,026 $30,298 $ (133,586) $258,254
======== ======== ======= ========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and
accrued expenses ......................... $ (2,149) $ 37,767 $ 4,336 $ 3,125 $ 43,079
Current maturities of long-term debt ..... -- 10 -- -- 10
-------- -------- ------- ---------- --------
Total current liabilities ................ (2,149) 37,777 4,336 3,125 43,089
LONG-TERM DEBT ............................ 19,997 142,413 9,182 -- 171,592
DEFERRED TAXES -- Net ..................... -- 2,331 2,331 -- 4,662
OTHER NONCURRENT LIABILITIES .............. -- 4,714 1,410 (750) 5,374
-------- -------- ------- ---------- --------
Total liabilities ........................ 17,848 187,235 17,259 2,375 224,717
INTERCOMPANY ADVANCES ..................... -- 90,252 6,790 (97,042) --
TOTAL STOCKHOLDERS' EQUITY ................ 42,668 23,539 6,249 (38,919) 33,537
-------- -------- ------- ---------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY .................... $ 60,516 $301,026 $30,298 $ (133,586) $258,254
======== ======== ======= ========== ========
F-26
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(In Thousands)
Parent Guarantor Non-Guarantor Elimination
Company Subsidiaries Subsidiary Adjustments Consolidated
----------- -------------- --------------- ------------- -------------
NET SALES ............................. $ -- $ 238,292 $ 35,750 $ -- $274,042
COST OF SALES ......................... -- 187,550 25,657 -- 213,207
-------- --------- -------- ------ --------
GROSS PROFIT .......................... -- 50,742 10,093 -- 60,835
TOTAL EXPENSES ........................ -- 43,670 5,427 -- 49,097
-------- --------- -------- ------ --------
INCOME FROM OPERATIONS ................ -- 7,072 4,666 -- 11,738
EQUITY LOSS ........................... (2,876) -- -- 2,876 --
INTEREST EXPENSE ...................... 2,185 12,505 1,335 -- 16,025
OTHER (INCOME) EXPENSE -- Net ......... -- (79) 629 -- 550
-------- --------- -------- ------ --------
INCOME (LOSS) BEFORE
INCOME TAXES ......................... (5,061) (5,354) 2,702 2,876 (4,837)
PROVISION (BENEFIT) FOR
INCOME TAXES ......................... (729) (1,034) 1,258 -- (505)
-------- --------- -------- ------ --------
NET INCOME (LOSS) ..................... $ (4,332) $ (4,320) $ 1,444 $2,876 $ (4,332)
======== ========= ======== ====== ========
F-27
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
(In Thousands)
Parent Guarantor Non-Guarantor Elimination
Company Subsidiaries Subsidiary Adjustment Consolidated
------------- -------------- --------------- ------------ -------------
CASH FLOWS PROVIDED BY
OPERATING ACTIVITIES:
Net (loss) income ...................... $ (4,332) $ (4,320) $ 1,444 $ 2,876 $ (4,332)
Adjustments to reconcile net (loss)
income to net cash provided by
operating activities:
Equity loss ........................... 2,876 -- -- (2,876) --
Depreciation and amortization ......... -- 25,301 1,305 -- 26,606
Amortization of deferred
financing costs ..................... 276 -- -- -- 276
Other noncash items ................... -- 770 -- -- 770
Changes in operating assets
and liabilities ..................... 1,252 8,288 (2,063) -- 7,477
--------- --------- ------- -------- ---------
Net cash provided by
operating activities .............. 72 30,039 686 -- 30,797
--------- --------- ------- -------- ---------
CASH FLOWS USED IN INVESTING
ACTIVITIES ............................. -- (40,690) (543) -- (41,233)
--------- --------- ------- -------- ---------
CASH FLOWS (USED IN) PROVIDED
BY FINANCING ACTIVITIES ................ (72) 11,067 (6) -- 10,989
--------- --------- ---------- -------- ---------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH AND
CASH EQUIVALENTS ....................... -- -- 26 -- 26
--------- --------- --------- -------- ---------
NET CHANGE IN CASH AND
CASH EQUIVALENTS ....................... -- 416 163 -- 579
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD .................... -- 829 222 -- 1,051
--------- --------- --------- -------- ---------
CASH AND CASH EQUIVALENTS,
END OF PERIOD .......................... $ -- $ 1,245 $ 385 $ -- $ 1,630
========= ========= ========= ======== =========
F-28
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1997
(In Thousands)
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiary Eliminations Consolidated
------------- -------------- -------------- -------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................ $ -- $ 829 $ 222 $ -- $ 1,051
Accounts receivable -- net ............... -- 25,739 4,029 (127) 29,641
Inventories .............................. -- 17,022 1,982 -- 19,004
Prepaid and other current
assets -- net .......................... 1,082 2,633 229 1,557 5,501
--------- -------- ------- ---------- --------
Total current assets ................... 1,082 46,223 6,462 1,430 55,197
--------- -------- ------- ---------- --------
PROPERTY, PLANT AND
EQUIPMENT -- Net ........................ -- 78,481 6,481 -- 84,962
--------- -------- ------- ---------- --------
OTHER ASSETS:
Goodwill and other intangibles -- net..... -- 83,563 20,171 -- 103,734
Deferred financing costs -- net .......... 1,498 ---- -- -- 1,498
Other noncurrent assets .................. -- 139 -- -- 139
Intercompany advances .................... 21,418 73,560 -- (94,978) --
Investment in subsidiaries ............... 42,453 -- -- (42,453) --
--------- -------- ------- ---------- --------
TOTAL ASSETS .............................. $ 66,451 $281,966 $33,114 $ (136,001) $245,530
========= ======== ======= ========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and
accrued expenses ....................... $ (1,643) $ 28,510 $ 5,941 $ 1,430 $ 34,238
Current maturities of long-term debt ..... -- 745 -- -- 745
--------- -------- ------- ---------- --------
Total current liabilities .............. (1,643) 29,255 5,941 1,430 34,983
========= ======== ======= ========== ========
LONG-TERM DEBT ............................ 19,997 130,620 10,000 -- 160,617
DEFERRED TAXES -- Net ..................... 1,306 3,971 542 -- 5,819
OTHER NONCURRENT LIABILITIES .............. -- 3,011 2,309 -- 5,320
--------- -------- ------- ---------- --------
Total liabilities ...................... 19,660 166,857 18,792 1,430 206,739
INTERCOMPANY ADVANCES ..................... -- 87,284 7,694 (94,978) --
TOTAL STOCKHOLDERS' EQUITY ................ 46,791 27,825 6,628 (42,453) 38,791
--------- -------- ------- ---------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS'EQUITY ..................... $ 66,451 $281,966 $33,114 $ (136,001) $245,530
========= ======== ======= ========== ========
F-29
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(In Thousands)
Parent Guarantor Non-Guarantor Elinination
Company Subsidiaries Subsidiary Adjustments Consolidated
------------ -------------- --------------- ------------- -------------
NET SALES ............................. $ -- $170,673 $5,640 $ -- $176,313
COST OF SALES ......................... -- 129,267 4,336 -- 133,603
-------- -------- ------ -------- --------
GROSS PROFIT .......................... -- 41,406 1,304 -- 42,710
TOTAL EXPENSES ........................ -- 25,924 918 -- 26,842
-------- -------- ------ -------- --------
INCOME FROM OPERATIONS ................ -- 15,482 386 -- 15,868
EQUITY INCOME ......................... 1,648 -- -- (1,648) --
INTEREST EXPENSE ...................... 898 7,625 231 -- 8,754
OTHER (INCOME) EXPENSE -- Net ......... -- (104) 301 -- 197
-------- -------- ------ -------- --------
INCOME (LOSS) BEFORE
INCOME TAXES AND
EXTRAORDINARY ITEMS .................. 750 7,961 (146) (1,648) 6,917
PROVISION (BENEFIT) FOR
INCOME TAXES ......................... (305) 3,107 123 -- 2,925
-------- -------- ------ -------- --------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS .................. 1,055 4,854 (269) (1,648) 3,992
EXTRAORDINARY ITEMS ................... 2,163 2,937 -- -- 5,100
-------- -------- ------ -------- --------
NET INCOME (LOSS) ..................... $ (1,108) $ 1,917 $ (269) $ (1,648) $ (1,108)
======== ======== ====== ======== ========
F-30
RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
(In Thousands)
Parent Guarantor Non-Guarantor Elimination
Company Subsidiaries Subsidiary Adjustments Consolidated
------------ -------------- --------------- ------------- -------------
CASH FLOWS PROVIDED BY
OPERATING ACTIVITIES:
Net (loss) income ...................... $ (1,108) $ 1,917 $ (269) $ (1,648) $ (1,108)
Adjustments to reconcile net (loss)
income to net cash provided by
operating activities:
Equity income ......................... (1,648) -- -- 1,648 --
Depreciation and amortization ......... 196 10,222 264 -- 10,682
Extraordinary items ................... 3,277 4,478 -- -- 7,755
Other noncash items-- ................. -- 200 193 -- 393
Changes in operating assets
and liabilities ..................... (1,419) 1,465 (35) -- 11
-------- ---------- --------- -------- ----------
Net cash provided by
operating activities .............. (702) 18,282 153 -- 17,733
-------- ---------- --------- -------- ----------
CASH FLOWS USED IN INVESTING
ACTIVITIES ............................. (7,000) (115,823) (17,522) -- (140,345)
-------- ---------- --------- -------- ----------
CASH FLOWS (USED IN)
PROVIDED BY FINANCING
ACTIVITIES ............................. 7,702 97,118 17,694 -- 122,514
-------- ---------- --------- -------- ----------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH AND
CASH EQUIVALENTS ....................... -- -- (103) -- (103)
-------- ---------- --------- -------- ----------
NET CHANGE IN CASH AND CASH
EQUIVALENTS ............................ -- (423) 222 -- (201)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD .................... -- 1,252 -- -- 1,252
-------- ---------- --------- -------- ----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD .......................... $ -- $ 829 $ 222 $ -- $ 1,051
======== ========== ========= ======== ==========
F-31
INDEPENDENT AUDITORS' REPORT
Board of Directors
Container Management Services, Inc.
Simpsonville, South Carolina
We have audited the accompanying balance sheet of Container Management
Services, Inc. (the "Company") as of July 23, 1997, and the related statements
of operations, stockholders' equity and cash flows for the period from January
1, 1997 through July 23, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The financial
statements of the Company for the year ended December 31, 1996 were audited by
other auditors whose report, dated February 28, 1997, expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such 1997 financial statements present fairly, in all
material respects, the financial position of Container Management Services,
Inc. as of July 23, 1997, and the results of its operations and its cash flows
for the period from January 1, 1997 through July 23, 1997, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
January 29, 1998
F-32
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Container Management Services, Inc.
Simpsonville, South Carolina
We have audited the accompanying balance sheet of Container Management
Services, Inc. as of December 31, 1996, and the related statements of
operations, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Container Management
Services, Inc. as of December 31, 1996, and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.
Elliott, Davis & Company, LLP
Greenville, South Carolina
February 28, 1997, excepting Note 2 which is
as of May 23, 1997
F-33
CONTAINER MANAGEMENT SERVICES, INC.
BALANCE SHEET
DECEMBER 31, 1996 AND JULY 23, 1997
1996 1997
------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents ......................................... $1,173,716 $ 583,932
Accounts receivable -- net of allowance for doubtful accounts
of $30,000 at December 31, 1996 and July 23, 1997................ 3,206,013 3,519,337
Prepaid expenses and other assets ................................. 32,360 278,365
---------- ----------
Total current assets ........................................... 4,412,089 4,381,634
PROPERTY, PLANT AND EQUIPMENT -- At cost, less
accumulated depreciation and amortization
(Notes 2 and 5) ................................................. 3,012,753 3,746,394
INTANGIBLE ASSETS -- Net of accumulated amortization of
$6,402 at December 31, 1996 and $6,734 at July 23, 1997.......... 8,237 7,905
---------- ----------
TOTAL ASSETS ....................................................... $7,433,079 $8,135,933
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable .................................................. $2,376,068 $3,240,720
Current portion of long-term debt (Note 4) ........................ 206,064 --
Obligations under capital lease (Note 5) .......................... 13,975 13,975
Accrued expenses and other liabilities (Note 3) ................... 277,517 181,702
---------- ----------
Total current liabilities ...................................... 2,873,624 3,436,397
---------- ----------
LONG-TERM LIABILITIES:
Long-term debt (Note 4) ........................................... 49,869 --
Obligations under capital lease (Note 5) .......................... 7,254 9,217
---------- ----------
TOTAL LIABILITIES .................................................. 57,123 9,217
Commitments and contingencies (Note 5) ............................. -- --
---------- ----------
STOCKHOLDERS' EQUITY:
Class A voting common stock -- No par value; 240,000
shares authorized; 90,000 shares issued and outstanding ......... 90,000 90,000
Class B nonvoting common stock -- $1 par value; 10,000
shares authorized, issued and outstanding ....................... 10,000 10,000
Retained earnings ................................................. 4,402,332 4,590,319
---------- ----------
4,502,332 4,690,319
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......................... $7,433,079 $8,135,933
========== ==========
See notes to financial statements.
F-34
CONTAINER MANAGEMENT SERVICES, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
AND THE PERIOD FROM JANUARY 1, 1997 THROUGH JULY 23, 1997
Period from
January 1,
Year Ended through
December 31, July 23,
1996 1997
-------------- --------------
NET SALES ........................... $28,266,486 $17,805,750
COST OF SALES ....................... 22,952,361 14,527,511
----------- -----------
Gross profit ...................... 5,314,125 3,278,239
----------- -----------
EXPENSES:
Selling ............................ 107,427 154,266
General and administrative ......... 2,566,249 919,153
Amortization ....................... 1,157 332
----------- -----------
Total expenses .................... 2,674,833 1,073,751
----------- -----------
INCOME FROM OPERATIONS .............. 2,639,292 2,204,488
INTEREST EXPENSE .................... 38,989 34,142
OTHER INCOME ........................ 7,596 51,576
----------- -----------
NET INCOME .......................... $ 2,607,899 $ 2,221,922
=========== ===========
See notes to financial statements.
F-35
CONTAINER MANAGEMENT SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1996
AND THE PERIOD FROM JANUARY 1, 1997
THROUGH JULY 23, 1997
Class A, Voting Class B, Nonvoting
Common Stock Common Stock Total
------------------- ------------------- Retained Stockholders'
Shares Amount Shares Amount Earnings Equity
-------- ---------- -------- ---------- --------------- --------------
BALANCE, JANUARY 1, 1996 ...... 90,000 $90,000 10,000 $10,000 $ 3,557,177 $ 3,657,177
Net income ................... -- -- -- -- 2,607,899 2,607,899
Distributions to stockholders -- -- -- -- (1,762,744) (1,762,744)
------ ------- ------ ------- ------------ ------------
BALANCE, DECEMBER 31,
1996 ......................... 90,000 90,000 10,000 10,000 4,402,332 4,502,332
Net income ................... -- -- -- -- 2,221,922 2,221,922
Distributions to stockholders -- -- -- -- (2,033,935) (2,033,935)
------ ------- ------ ------- ------------ ------------
BALANCE, JULY 23, 1997 ........ 90,000 $90,000 10,000 $10,000 $ 4,590,319 $ 4,690,319
====== ======= ====== ======= ============ ============
See notes to financial statements.
F-36
CONTAINER MANAGEMENT SERVICES, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
AND THE PERIOD FROM JANUARY 1, 1997
THROUGH JULY 23, 1997
Period from
January 1,
Year Ended through
December 31, July 23,
1996 1997
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................... $2,607,899 $2,221,922
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .................................. 6,543,563 4,543,009
Loss on disposal of equipment .................................. 18,514 --
Changes in assets and liabilities which provided (used)
cash:
Accounts and other receivables ................................ (353,901) (544,452)
Prepaid expenses and other assets ............................. (21,112) (14,877)
Accounts payable .............................................. (35,112) 864,652
Accrued expenses and other liabilities ........................ 169,300 (95,815)
---------- ----------
Net cash provided by operating activities .................... 8,929,151 6,974,439
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES:
Purchase of equipment ......................................... (6,550,411) (5,263,365)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable and capital lease obligations ......... (61,526) (266,923)
Distributions to stockholders ................................... (1,762,744) (2,033,935)
---------- ----------
Net cash used in financing activities ........................ (1,824,270) (2,300,858)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 554,470 (589,784)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ..................... 619,246 1,173,716
---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR ........................... $1,173,716 $ 583,932
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest .......................................... $ 38,989 $ 34,142
========== ==========
Noncash activities:
Capital lease of equipment .................................... $ -- $ 12,953
========== ==========
See notes to financial statements.
F-37
CONTAINER MANAGEMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
Year Ended December 31, 1996 and the
Period from January 1, 1997 through July 23, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES
Description of Business -- Container Management Services, Inc. (the
"Company") provides the chemical, textile and other industries with a closed
loop container return/reuse program. CMS purchases, leases and reconditions
containers, drums and intermediate bulk containers and manages the logistics
(i.e., warehousing, transportation and disposal) of containers; it also grinds
worn drums and IBC's into resin for resale into the recycling market. CMS was
the first industrial container company to combine these services into an
integrated container management program. The Company is located in
Simpsonville, South Carolina, and extends credit to customers primarily in the
eastern United States.
On July 23, 1997, 100% of the Company's common stock was purchased by
Russell-Stanley Corp. for $33,900,000. The accompanying financial statements
represent the historical financial statements of the Company prior to the
acquisition.
Cash and Cash Equivalents -- The Company considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents.
Property, Plant and Equipment -- Equipment is stated at cost. Containers,
which include containers, rings and lids, are depreciated using an accelerated
method over their estimated useful lives. The cost and related accumulated
depreciation of containers is removed from the books when fully depreciated.
All other equipment is depreciated using accelerated methods based on the
estimated useful lives of the respective assets. Maintenance, repairs and other
expenses not resulting in betterments are charged to expense as incurred.
Intangible Assets -- Organization costs and other intangible assets are
stated at cost and are amortized using the straight-line method over a period
of 5 to 19 years.
Income Taxes -- The Company, with the consent of its stockholders, has
elected to be taxed as an S corporation for Federal and state income tax
purposes. Under this election, the Company's income, deductions and credits are
reported by its stockholders on their individual income tax returns. Therefore,
no provision for income taxes is recorded by the Company.
The Company maintains a policy of making distributions to its stockholders
in amounts at least sufficient to pay individual income taxes resulting from
reporting the Company's income on the stockholders' individual income tax
returns.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure 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.
Advertising -- The Company's policy is to expense advertising costs as
incurred. Such costs were approximately $34,000 and $68,000 for the year ended
December 31, 1996 and for the period January 1, 1997 through July 23, 1997,
respectively.
F-38
CONTAINER MANAGEMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Year Ended December 31, 1996 and the
Period from January 1, 1997 through July 23, 1997
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1996 and July 23, 1997
consists of the following:
December 31, July 23,
Useful Lives 1996 1997
--------------- ---------------- ----------------
Furniture and fixtures ........... 5-7 years $ 209,761 $ 232,407
Plant equipment .................. 5-7 years 2,716,691 2,833,766
Containers ....................... 16-36 months 11,495,183 16,562,421
Vehicles ......................... 5 years 27,035 27,035
Leasehold improvements ........... 31.5-39 years 54,933 66,656
Construction in progress ......... -- 37,920 95,556
------------- -----------
14,541,523 19,817,841
Less accumulated depreciation and
amortization ................... (11,528,770) (16,071,447)
------------- -----------
Total ............................ $ 3,012,753 $ 3,746,394
============= ===========
The Company began capitalizing costs associated with rings and lids in
1997 as a result of a modernization of plant equipment which enables the
Company to recycle the rings and lids. Amounts capitalized for rings and lids
as of July 23, 1997 totaled approximately $669,000 which is included in
"containers." The rings and lids are being depreciated over a three-year period
using an accelerated method; accumulated depreciation of the rings and lids
totaled $167,000 at July 23, 1997.
3. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities at December 31, 1996 and July 23,
1997 consists of the following:
December 31, July 23,
1996 1997
-------------- -----------
Salaries and wages ......................... $ 75,841 $ 79,836
Accrued and withheld payroll taxes ......... 10,288 24,681
Insurance .................................. 5,390 2,164
Sales tax -- NC ............................ 111,000 6,365
Real estate taxes .......................... 33,288 21,509
Personal property taxes .................... -- 47,052
Other ...................................... 41,710 95
-------- --------
Total ...................................... $277,517 $181,702
======== ========
4. NOTES PAYABLE
The note payable to a bank in monthly installments of $5,148, including
interest at 7% through September 1998, was paid in full in July 1997. Payments
for the period from January 1, 1997 through July 23, 1997 totaled $109,741,
including $3,808 of interest expense.
The demand note payable to a stockholder in monthly payments of interest
only at prime plus two percent was paid in full in July 1997. Payments for the
period from January 1, 1997 through July 23, 1997 totaled $150,000 of principal
and $8,208 of interest expense.
F-39
CONTAINER MANAGEMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Year Ended December 31, 1996 and the
Period from January 1, 1997 through July 23, 1997
5. LEASE COMMITMENTS
Capital Leases -- Obligations under capital leases have been discounted to
present value by use of the Company's incremental borrowing rate for such funds
at the inception of the lease. Assets under capital leases totaled $42,009 at
December 31, 1996 and $54,962 at July 23, 1997 and are included in property,
plant and equipment. Amortization of capitalized leases for the year ended
December 31, 1996 totaled $9,982 and for the period from January 1, 1997
through July 23, 1997 totaled $12,241 and is included in depreciation and
amortization expense. The future minimum lease payments under capital leases,
together with the discount to arrive at present value, are as follows:
Period Ending
July 23,
1998 ................................................... $ 18,249
1999 ................................................... 7,703
2000 ................................................... 2,274
---------
Total minimum lease payments ........................... 28,226
Less portion of payments representing interest ......... (5,034)
---------
Present value of net minimum lease payments ............ 23,192
Current portion ........................................ (13,975)
---------
Long-term portion ...................................... $ 9,217
=========
Operating Leases -- The Company rents buildings and various equipment
under the terms of noncancelable operating leases. The Company is responsible
for property taxes, insurance and nonstructural maintenance costs. Aggregate
rentals for the year ended December 31, 1996 totaled $435,887 and for the
period from January 1, 1997 through July 23, 1997 totaled $257,318.
The following is a summary of future minimum lease payments under
operating leases that have initial or remaining noncancelable terms in excess
of one year as of July 23, 1997:
Period Ending
July 23,
1998 ..................... $ 423,830
1999 ..................... 398,274
2000 ..................... 398,274
2001 ..................... 398,274
2002 ..................... 349,228
Thereafter ............... 792,097
----------
Total .................... $2,759,977
==========
The Company also has a month-to-month operating lease for a building with
monthly payments of $5,348.
During the period ended July 23, 1997, the Company entered into an
agreement with a bank for the purchase of equipment, not to exceed $550,000, to
be accounted for as operating leases. Under the agreement, the Company uses its
funds to purchase the equipment and is then reimbursed by the bank. All amounts
associated with the agreement were paid in full to the Company in January 1998.
6. RELATED PARTY TRANSACTIONS
As described in Note 4, the Company paid in full during July 1997 the note
payable to one of its stockholders.
F-40
CONTAINER MANAGEMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Year Ended December 31, 1996 and the
Period from January 1, 1997 through July 23, 1997
7. CONCENTRATION OF RISK
Sales to two customers represented 11.2% and 10.0% of revenues for the
year ended December 31, 1996 and 12.8% and 10.6% of revenues for the period
January 1, 1997 through July 23, 1997. Accounts receivable from those customers
totaled 6.9% and 8.4% at December 31, 1996 and 11.1% and 8.3% of accounts
receivable at July 23, 1997. The Company performs ongoing credit evaluations of
its customers' financial condition but does not require collateral to support
customer receivables.
Purchases of drum containers from two vendors represented 65.7% and 34.3%
of purchases for the year ended December 31, 1996 and 47.9% and 45.3% of
purchases for the period January 1, 1997 through July 23, 1997. Accounts
payable to those customers totaled 39.9% and 11.1% at December 31, 1996 and
29.9% and 27.7% at July 23, 1997.
Purchases of industrial bulk containers from two vendors represented 78.2%
and 21.8% for the year ended December 31, 1996 and 71.7% and 28.3% of purchases
for the period January 1, 1997 through July 23, 1997. Accounts payable to those
customers totaled 7.9% and 5.6% at December 31, 1996 and 6.0% and 2.1% at July
23, 1997.
F-41
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Hunter Drums Limited:
We have audited the accompanying consolidated balance sheet of Hunter
Drums Limited, a Canadian company, (the "Company") as of October 29, 1997 and
the consolidated statements of operations and retained earnings and cash flows
for the period from January 1, 1997 through October 29, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of October 29,
1997 and the results of its operations and its cash flows for the period from
January 1, 1997 through October 29, 1997 in accordance with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
January 29, 1998
F-42
HUNTER DRUMS LIMITED
CONSOLIDATED BALANCE SHEET
AS OF OCTOBER 29, 1997
(Amounts in United States Dollars)
ASSETS
CURRENT ASSETS:
Cash .................................................................. $ 28,540
Accounts receivable, net of allowance for doubtful accounts of $ 98,284 4,200,958
Inventories (Note 3) .................................................. 2,040,185
Prepaid expenses ...................................................... 357,669
Deferred income taxes (Note 5) ........................................ 136,400
----------
Total current assets .................................................. 6,763,752
PROPERTY, PLANT AND EQUIPMENT -- NET (Note 4) .......................... 2,495,460
----------
TOTAL ASSETS ........................................................... $9,259,212
==========
LIABILITIES
CURRENT LIABILITIES:
Accounts payable and accrued liabilities .............................. $4,742,738
Income taxes payable .................................................. 422,487
----------
Total current liabilities ............................................ 5,165,225
----------
DEFERRED INCOME TAXES (Note 5) ......................................... 252,402
----------
Total liabilities .................................................... 5,417,627
----------
COMMITMENTS (Note 9) ...................................................
SHAREHOLDERS' EQUITY ...................................................
Common stock (Note 7) ................................................. 928
Retained earnings ..................................................... 3,939,108
Cumulative translation adjustment ..................................... (98,452)
----------
Total shareholders' equity ........................................... 3,841,585
----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............................. $9,259,212
==========
See notes to consolidated financial statements.
F-43
HUNTER DRUMS LIMITED
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOR THE PERIOD FROM JANUARY 1, 1997 THROUGH OCTOBER 29, 1997
(Amounts in United States Dollars)
SALES .......................................... $30,503,187
COST OF SALES .................................. 22,524,685
-----------
GROSS PROFIT ................................... 7,978,502
-----------
OPERATING EXPENSES:
Selling ....................................... 3,339,609
General and administration .................... 2,001,662
-----------
Total Expenses ............................... 5,341,271
-----------
INCOME FROM OPERATIONS ......................... 2,637,231
INTEREST EXPENSE ............................... 61,791
OTHER (INCOME) EXPENSE -- Net .................. 249,140
-----------
EARNINGS BEFORE INCOME TAXES ................... 2,326,300
PROVISION FOR INCOME TAXES ..................... 990,623
-----------
NET INCOME ..................................... 1,335,677
RETAINED EARNINGS, BEGINNING OF PERIOD ......... 4,313,874
DIVIDENDS ...................................... (1,710,443)
-----------
RETAINED EARNINGS, END OF PERIOD ............... $ 3,939,108
===========
See notes to consolidated financial statements.
F-44
HUNTER DRUMS LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1997 THROUGH OCTOBER 29, 1997
(Amounts in United States Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................................... $1,335,677
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization .................................................. 397,438
Loss on sale of assets ......................................................... 6,539
Deferred income taxes .......................................................... (136,400)
Changes in operating assets and liabilities: ....................................
(Increase) decrease in accounts receivable ..................................... (1,210,237)
(Increase) decrease in inventories ............................................. (106,858)
(Increase) decrease in prepaid expenses ........................................ 1,112,215
Increase (decrease) in accounts payable ........................................ 441,118
Increase (decrease) in income taxes payable .................................... 130,211
-----------
Net cash provided by operating activities ..................................... 1,969,703
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in investments .............................................. 1,710,443
Purchase of property, plant & equipment ......................................... (500,970)
Disposal of property, plant & equipment ......................................... 194,419
-----------
Net cash provided by investing activities ..................................... 1,403,892
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt ..................................................... (187,040)
Repayment of notes payable to shareholders ...................................... (221,656)
Dividends ....................................................................... (1,710,443)
-----------
Net cash used for financing activities ........................................ (2,119,139)
-----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH .......................................... 9,716
-----------
NET CHANGE IN CASH ............................................................... 1,264,172
CASH, BEGINNING OF YEAR .......................................................... (1,235,632)
-----------
CASH, END OF YEAR ................................................................ $ 28,540
===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ...................................................................... $ 61,791
===========
Taxes ......................................................................... $ 878,275
===========
See notes to consolidated financial statements.
F-45
HUNTER DRUMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED OCTOBER 29, 1997
1. DESCRIPTION OF BUSINESS
Hunter Drums Limited (the "Company") is incorporated under the Ontario
Business Corporations Act and is engaged in the manufacturing of steel and
plastic drums and laminated and plastic products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America and include the
operations of Hunter Drums Limited and two inactive subsidiaries which have
been subsequently dissolved.
On October 29, 1997, the Company's common stock was purchased by
Russell-Stanley Holdings, Inc. ("RSH"). The Company's financial statements
represent the historical financial statements of the Company prior to
acquisition.
Inventories -- Inventories are valued at the lower of cost or net
realizable value, with cost being determined on a first-in, first-out basis.
Revenue Recognition -- Revenue is recognized when products are shipped or
services are provided to customers.
Use of Estimates -- The preparation of these financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Property, Plant & Equipment -- Property, plant and equipment, stated at
cost, is being depreciated for financial reporting purposes on the
straight-line method over the estimated useful lives of the assets or the lease
term, whichever is shorter. The estimated useful lives for each class of
capital assets are as follows:
Building ......................... 15-30 years
Machinery and equipment .......... 3-10 years
Furniture and fixtures ........... 3-7 years
Transportation equipment ......... 3-10 years
Leasehold improvements ........... Lesser of useful life or the life of the lease
Translation of Foreign Currencies -- The Canadian dollar is the
functional currency in which the Company operates. The assets and liabilities
of the Company are translated into U.S. dollars at period-end exchange rates,
with resulting translation gains and losses accumulated in a separate component
of shareholders' equity. Income and expense items are converted into U.S.
dollars at average rates of exchange prevailing throughout the year.
Financial Instruments -- The Company utilizes financial instruments to
limit its exposure to foreign currency exchange rate fluctuations.
Income Taxes -- The Company follows the tax allocation method of
accounting for income taxes whereby provisions for income taxes are based on
reported income. Deferred income taxes arise from claiming amortization for
income tax purposes at different rates than amounts recorded for accounting
purposes.
F-46
HUNTER DRUMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
PERIOD ENDED OCTOBER 29, 1997
Molds and Dies -- Expenditures on molds and dies are amortized on a
straight-line basis over two years commencing upon productive use. At October
29, 1997, prepaid expenses include $281,187 of moulds and dies, net of
accumulated amortization.
3. INVENTORIES
Inventory consists of the following:
As of
October 29,
1997
------------
Raw Materials ................. $ 858,828
Work-in-process ............... 700,552
Finished goods ................ 480,805
----------
Total ......................... $2,040,185
==========
4. PROPERTY, PLANT & EQUIPMENT
Net Book Value
As of
Accumulated October 29,
Cost Amortization 1997
-------------- -------------- ---------------
Land ............................. $ 78,918 $ -- $ 78,918
Building ......................... 936,207 580,250 355,957
Machinery and equipment .......... 8,192,510 6,275,333 1,917,177
Furniture & fixtures ............. 575,165 455,243 119,922
Transportation equipment ......... 214,343 199,440 14,903
Leasehold improvements ........... 23,423 14,840 8,583
----------- ----------- -----------
$10,020,566 $ 7,525,106 $ 2,495,460
=========== =========== ===========
5. INCOME TAXES
The provision (benefit) for income taxes for the period ended October 29,
1997 consists of the following:
Period Ended
October 29,
1997
-------------
Current:
Federal ............................... $ 717,000
Provincial ............................ 410,023
---------
Total Current .......................... 1,127,023
---------
Deferred:
Federal ............................... (87,000)
Provincial ............................ (49,400)
---------
Total Deferred ......................... (136,400)
---------
Net provision for income taxes ......... $ 990,623
=========
The difference between the effective income tax rate and the statutory
federal income tax rate is due to permanent differences related to travel and
entertainment and life insurance premiums.
F-47
HUNTER DRUMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
PERIOD ENDED OCTOBER 29, 1997
The components of the net deferred taxes as of October 29, 1997 were as
follows:
For the Period Ended
October 29, 1997
--------------------------------------------
Deferred Tax Asset Deferred Tax Liability
Current:
Other Assets ...................... $136,400 $ --
-------- --------
Total current ........................ 136,400 --
-------- --------
Noncurrent: ..........................
Property, plant & equipment ......... -- 252,402
-------- --------
Total noncurrent ..................... -- 252,402
-------- --------
Total deferred tax ................... $136,400 $252,402
======== ========
6. LONG TERM DEBT AND SHAREHOLDER NOTES PAYABLE
At October 29, 1997, the Company had no outstanding balances for long term
debt or shareholder notes payable. The long term debt consisted of a
non-revolving loan with interest at the bank's prime rate plus 1/2%. The
balance of $187,040 was paid in full in October 1997. The shareholder notes
were non-interest bearing notes payable to Hunter Holdings, Inc. and Ontario
Ltd. The balance of $221,656 were paid in full in October 1997.
7. COMMON STOCK
Authorized:
Unlimited number of voting Class A common shares
Unlimited number of voting Class B common shares
Unlimited number of nonvoting, noncumulative, redeemable and retractable
Class A special shares, issuable in series
200 voting Class B special shares, noncumulative, redeemable and
retractable
Unlimited number of voting, redeemable and retractable Class C special
shares
Issued and outstanding:
As of
October 29,
1997
------------
90,000 Class A common shares ........................ $ 6
900,000 Class B common shares ........................ 63
880,000 Class A special shares, first series ......... 630
20,000 Class B special shares ....................... 143
120,000 Class C special shares ....................... 86
-----
$ 928
=====
The Class A common shares rank equally in priority to Class B common
shares. Both classes are entitled to a noncumulative dividend. The holders of
Class A common shares are entitled to two votes in respect of each Class A
common share held by them at all meetings of shareholders. The holders of Class
B common shares are entitled to one vote in respect of each Class B common
share held by them at all meetings of shareholders.
The Class A special shares rank equally with the Class C special shares in
priority to all other classes of shares, and may be redeemed, purchased or
acquired by the Company or put to the Company by the holder, in whole or in
part, for an amount determined in accordance with the Articles of Amendment
dated June 26, 1997. These shares are entitled to a noncumulative cash
dividend.
F-48
HUNTER DRUMS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
PERIOD ENDED OCTOBER 29, 1997
The Class B special shares rank in priority to the common shares, and may
be redeemed, purchased or acquired by the Company for an amount not exceeding
$1 per share together with all declared and unpaid noncumulative cash dividends
thereon.
On July 26, 1997, the Company amended its Articles of Incorporation by
creating an unlimited number of Class C special shares.
On September 29, 1997, the Company amended its Articles of Incorporation
to change each issued and outstanding:
i) Class A common share into 100 issued and outstanding Class A common
shares, and
ii) Class B common share into 100 issued and outstanding Class B common
shares.
8. SUBSEQUENT EVENT
In connection with the acquisition of the Company by RSH, the Company
amended its Articles of Incorporation and merged into HDL Acquisition, Inc. The
merged company will continue operations under the name Hunter Drums Limited.
The authorized capital of the merged company is an unlimited number of Class A
voting shares and an unlimited number of Class B nonvoting shares.
The 8,800 Class A special shares, the 200 Class B special shares, the
1,200 Class C special shares, the 9,000 Class B common shares and 330 Class A
common shares were canceled. The remaining 570 Class A common shares were
converted to 27,778 nonvoting shares.
9. COMMITMENTS
The future minimum lease payments under the terms of the noncancelable
operating leases for certain facilities and equipment are as follows:
1998 ............ $872,569
1999 ............ 665,799
2000 ............ 485,910
2001 ............ 347,445
2002 ............ 117,075
10. FINANCIAL INSTRUMENTS
Foreign Exchange Contracts -- The Company utilizes U.S. dollar denominated
foreign exchange contracts to limit its exposure to foreign currency exchange
rate fluctuations. At October 29, 1997, $13,750,000 of forward contracts were
held with settlement rates ranging from $1.353 to $1.407, Canadian dollars to
U.S. dollars, and settlement dates from January 1998 to December 1999. The
foreign exchange contracts are recorded at fair value with related unrealized
gains or losses included in other (income) expense. For the period ended
October 29, 1997, the Company recorded $378,619 of losses on foreign exchange
contracts.
11. RETIREMENT BENEFIT PLAN
Certain employees of the Company are covered under a money purchase
pension plan. Eligibility in the plan is dependent upon one year of service.
Employees can contribute up to 3% of eligible income, executives can contribute
up to 9% of eligible income, with a maximum yearly contribution of $6,750.
Hunter matches 100% of employee and executive contributions and such employer
contributions vest after two full years as a member of the plan.
F-49
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Smurfit Plastic Packaging
Wilmington, Delaware
We have audited the accompanying balance sheets of Smurfit Plastic
Packaging (the "Company") as of December 31, 1996 and November 7, 1997 and the
related statements of operations and cash flows for the year ended December 31,
1996 and the period from January 1, 1997 to November 7, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1996 and
November 7, 1997 and the results of its operations and its cash flows for the
year ended December 31, 1996 and for the period from January 1, 1997 to
November 7, 1997, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
June 8, 1998
F-50
SMURFIT PLASTIC PACKAGING
BALANCE SHEETS
DECEMBER 31, 1996
AND NOVEMBER 7, 1997
(In Thousands)
December 31, November 7,
1996 1997
-------------- ------------
ASSETS
CURRENT ASSETS:
Cash ...................................................... $ 2 $ 2
Accounts receivable, less allowances of $89 in 1996 and $94
in 1997 ................................................. 8,425 8,331
Inventories (Note 3) ...................................... 4,847 4,925
Prepaid expenses and other current assets ................. 144 185
------- -------
Total current assets ...................................... 13,418 13,443
PROPERTY, PLANT AND EQUIPMENT --
Net (Note 4) ............................................ 19,558 19,461
------- -------
TOTAL ASSETS ............................................... $32,976 $32,904
======= =======
LIABILITIES AND DIVISIONAL EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses ..................... $ 7,726 $ 7,250
Income taxes payable (Note 6) ............................. 2,850 1,275
------- -------
Total current liabilities ................................ 10,576 8,525
DEFERRED TAXES -- Net (Note 6) ............................. 2,467 2,544
------- -------
Total liabilities ........................................ 13,043 11,069
COMMITMENTS AND CONTINGENCIES (Note 5) .....................
DIVISIONAL EQUITY .......................................... 19,933 21,835
------- -------
TOTAL LIABILITIES AND DIVISIONAL EQUITY ................... $32,976 $32,904
======= =======
See notes to financial statements.
F-51
SMURFIT PLASTIC PACKAGING
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
AND FOR THE PERIOD FROM
JANUARY 1, 1997 TO NOVEMBER 7, 1997
(In Thousands)
Period from
January 1,
Year Ended 1997 to
December 31, November 7,
1996 1997
-------------- ------------
NET SALES (Note 8) .......................... $ 64,492 $57,679
COST OF SALES (Note 8) ...................... 50,294 48,283
-------- -------
Gross profit .............................. 14,198 9,396
-------- -------
EXPENSES:
Selling .................................... 2,426 2,005
General and administrative ................. 3,927 3,333
-------- -------
Total expenses ............................ 6,353 5,338
-------- -------
INCOME FROM OPERATIONS ...................... 7,845 4,058
INTEREST EXPENSE ............................ 531 480
-------- -------
INCOME BEFORE INCOME TAXES .................. 7,314 3,578
PROVISION FOR INCOME TAXES (Note 6) ......... 2,756 1,352
-------- -------
NET INCOME .................................. $ 4,558 $ 2,226
======== =======
See notes to financial statements.
F-52
SMURFIT PLASTIC PACKAGING
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996 AND FOR THE
PERIOD FROM JANUARY 1, 1997 TO NOVEMBER 7, 1997
(In Thousands)
Period from
January 1,
Year Ended 1997 to
December 31, November 7,
1996 1997
-------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................ $ 4,558 $ 2,226
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ........................ 1,924 1,976
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable ........... (881) 94
Increase in inventories .............................. (49) (78)
Increase in prepaid and other current assets ......... (29) (41)
Increase (decrease) in accounts payable, accrued
expenses and income taxs payable ................... 2,004 (2,051)
Increase (decrease) in deferred income taxes ......... (94) 77
-------- --------
Net cash provided by operating activities .......... 7,433 2,203
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES --
Capital expenditures .................................. (2,657) (1,502)
-------- --------
Net cash used in investing activities .............. (2,657) (1,502)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES --
Intercompany cash settlements and transfers ........... (4,776) (701)
-------- --------
Net cash used in financing activities .............. (4,776) (701)
-------- --------
NET CHANGE IN CASH ..................................... -- --
CASH, BEGINNING OF PERIOD .............................. 2 2
-------- --------
CASH, END OF PERIOD .................................... $ 2 $ 2
======== ========
See notes to financial statements.
F-53
SMURFIT PLASTIC PACKAGING
NOTES TO FINANCIAL STATEMENTS
Year Ended December 31, 1996, and the
Period from January 1, 1997 to November 7, 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization -- Smurfit Plastic Packaging ("SPP" or the "Company") is a
leading U.S. producer of plastic industrial drums and is also a manufacturer of
liners for use in steel and fiber drum composites.
The Company was acquired by Smurfit Packaging Corporation ("SPC"), a
subsidiary of the Jefferson Smurfit Group (the "Parent Company") as part of
their acquisition of Container Corporation of America in 1986. Effective
November 8, 1997, the assets of the Company were acquired by Russell-Stanley
Holdings, Inc. ("RSH").
Basis of Presentation -- The accompanying financial statements have been
prepared from the separate accounting records maintained by SPP, a division of
SPC. The results of these financials may not necessarily be indicative of the
conditions that would have existed if the Division had been operated as an
unaffiliated company. Amounts collected from the related parties and amounts
distributed to the Parent Company are reflected as cash settlements and
transfers in the accompanying financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash -- As a subsidiary of the Parent Company, SPP was a participant in
the Parent Company's cash management system. All of the cash receipt and
disbursement activities of SPP were performed by the Parent Company on behalf
of SPP. The cash presented on the financial statements represents petty cash
maintained at each of the SPP plants.
Inventories -- Inventories are stated at the lower of cost or market
value. Cost is determined on the first-in, first-out (FIFO) method.
Property, Plant and Equipment -- Property, plant and equipment, stated at
cost, is being depreciated for financial reporting purposes on the
straight-line method over the estimated useful lives of the assets or the lease
term, whichever is shorter. The estimated useful lives for each class of
property, plant and equipment are as follows:
Buildings and improvements ......... 40 years
Furniture and fixtures ............. 5 years
Machinery and equipment ............ 15 years
Transportation equipment ........... 5 years
Revenue Recognition -- Revenue is recognized when products are shipped to
customers.
Income Taxes -- Deferred tax assets and liabilities are recognized for the
expected future tax consequences attributable to the difference between the
financial statement carrying amounts of assets and liabilities and their
respective tax basis, as if the division had been operated as an unaffiliated
company.
Interest Expense -- Under the Parent Company's corporate policies, SPP was
charged an amount of interest each month based upon the balance of SPP's
working capital during the month calculated using the London Interbank Offered
Rate ("LIBOR") in effect at the end of that month. SPP carried no separate
outstanding debt during 1996 or 1997.
Use of Estimates -- The preparation of these financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
F-54
SMURFIT PLASTIC PACKAGING
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Year Ended December 31, 1996, and the
Period from January 1, 1997 to November 7, 1997
3. INVENTORIES
At December 31, 1996 and November 7, 1997, inventory consists of:
December 31, November 7,
1996 1997
-------------- ------------
(In thousands)
Raw materials .......... $ 1,859 $ 1,892
Finished goods ......... 2,988 3,033
------- -------
TOTAL .................. $ 4,847 $ 4,925
======= =======
4. PROPERTY, PLANT AND EQUIPMENT
At December 31, 1996 and November 7, 1997, property, plant and equipment
consists of:
December 31, November 7,
1996 1997
-------------- ------------
(In thousands)
Land ...................................... $ 606 $ 606
Buildings and improvements ................ 4,193 4,208
Machinery and equipment ................... 25,746 29,685
Furniture and fixtures .................... 13 13
Transportation equipment .................. 24 23
Construction in progress .................. 3,480 895
-------- --------
Total ..................................... 34,062 35,430
Less accumulated depreciation ............. 14,504 15,969
-------- --------
Property, plant and equipment-net ......... $ 19,558 $ 19,461
======== ========
5. COMMITMENTS
Operating Leases -- The Company has operating lease commitments expiring
at various dates, principally for real property, machinery and equipment, and
transportation equipment leases. Total rent expense amounted to $1,184,000 and
$1,036,000 in 1996 and 1997, respectively.
Future minimum commitments under these leases are as follows:
(In thousands)
1998 ..................... $1,040
1999 ..................... 945
2000 ..................... 937
2001 ..................... 896
2002 ..................... 509
Thereafter ............... 1,689
------
Total .................... $6,016
======
F-55
SMURFIT PLASTIC PACKAGING
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Year Ended December 31, 1996, and the
Period from January 1, 1997 to November 7, 1997
6. INCOME TAXES
The provision (benefit) for income taxes for the year ended December 31,
1996, and the period ended November 7, 1997 consists of the following:
December 31, November 7,
1996 1997
-------------- ------------
(In thousands)
Current:
Federal ............................... $2,429 $1,081
State ................................. 421 194
------ ------
Total current .......................... 2,850 1,275
------ ------
Deferred:
Federal ............................... (80) 65
State ................................. (14) 12
------ ------
Total deferred ......................... (94) 77
------ ------
Net provision for income taxes ......... $2,756 $1,352
====== ======
The difference between the effective income tax rate and the statutory
Federal income tax rate is due to state taxes.
The components of net deferred tax liabilities as of December 31, 1996 and
November 7, 1997 were as follows:
December 31, November 7,
1996 1997
-------------- ------------
(In thousands)
Deferred tax liabilities:
Property, plant and equipment ......... $2,467 $2,544
------ ------
Total deferred tax liabilities ......... $2,467 $2,544
====== ======
7. PENSION AND POSTRETIREMENT HEALTH CARE BENEFITS
Substantially all employees of the Company participate in a
noncontributory defined benefit pension plan sponsored by the Parent Company.
The Company's portion of the present value of accumulated plan benefits and the
net assets available for the payment of such benefits are not presented because
such information is not determined for each participating company. For the year
ended December 31, 1996, and the period ended November 7, 1997, pension expense
allocated to the Company was approximately $314,000 and $412,000, respectively.
The Company has a savings and investment plan which allows employees to
defer up to 15% of their salary, with the Company matching 60% of each
employee's contribution not exceeding 6% of the employee's salary. The
Company's contributions charged to operations for the year ended December 31,
1996, and the period ended November 7, 1997 were approximately , $129,000 and
$120,000, respectively.
In addition, the Company provides certain health care and life insurance
benefits for all salaried and certain hourly employees. The Company has various
plans under which the cost may be borne either by the Company, the employee or
partially by each party. The Company does not currently
F-56
SMURFIT PLASTIC PACKAGING
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Year Ended December 31, 1996, and the
Period from January 1, 1997 to November 7, 1997
fund these plans. These benefits are discretionary and are not a commitment to
long-term benefit payments.
8. TRANSACTIONS WITH AFFILIATES
The Company is a member of a group of companies affiliated through common
ownership and management.
The net intercompany cash settlements and transfers resulted in the Parent
Company contributing a loan payable to the Company in the amount of $4,776,000,
and $547,000 for 1996 and 1997, respectively. Also the Company was subject to a
charge from the Parent Company based upon the monthly balance of the Company's
working capital (Note 2), which amounted to approximately $530,000 and $480,000
for 1996 and 1997, respectively.
9. SUPPLEMENTAL CASH FLOWS INFORMATION
There were no interest or income tax payments for the year ended December
31, 1996, and the period ended November 7, 1997.
10. MATAWAN FACILITY
During a portion of 1996, the Company operated a fiber drum manufacturing
facility in Matawan, NJ. During October 1996, SPC ceased operations at this
facility and leased the space to a third party. The Company received the rental
income from this property for the remainder of 1996 and for part of 1997.
Beginning in September 1997, SPC received the rental income from this property.
Rental income received by the Company was $60,000. The rental income, as well
as all other balances and transactions relating to the Matawan facility for
1996 and 1997 have not been included in the accompanying financial statements
due to the facility not being part of the assets sold (Note 1).
F-57
(This page intentionally left blank)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information or
to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
exchange the exchange notes for outstanding notes only under circumstances and
in jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
--------------------------------
TABLE OF CONTENTS
Page
-------
Where You Can Find More Information ........... i
Prospectus Summary ............................ 1
Risk Factors .................................. 13
Use of Proceeds ............................... 22
Capitalization ................................ 23
Unaudited Pro Forma Consolidated
Financial Data ............................... 24
Selected Historical Consolidated
Financial and Other Data ..................... 31
Management's Discussion and Analysis
of Financial Condition and
Results of Operations ........................ 34
Business ...................................... 42
Management .................................... 52
Ownership of Common Stock ..................... 59
Certain Relationships and Related
Party Transactions ........................... 61
Description of Senior Credit Facility ......... 62
The Exchange Offer ............................ 63
Description of Notes .......................... 75
Certain U.S. Federal Income Tax
Consequences of the
Exchange Offer ............................ 113
Plan of Distribution .......................... 113
Legal Matters ................................. 114
Experts ....................................... 114
Index to Financial Statements ................. F-1
Russell-Stanley
Holdings, Inc.
Offer to Exchange All Outstanding
10 7/8% Senior Subordinated Notes
due 2009
for 10 7/8% Senior Subordinated
Notes due 2009
Which Have Been Registered
Under the Securities Act of 1933
--------------------------------
[Russell-Stanley Holdings, Inc. Logo]
--------------------------------
--------------------------------------
PROSPECTUS
--------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
that a corporation may indemnify directors and officers as well as other
employees and individuals against expenses (including attorneys' fees),
judgments, fines, and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative, or
investigative (other than action by or in the right of the corporation a
"derivative action"), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceedings, had no
reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to expenses (including attorneys' fees) incurred in connection with the
defense or settlement of such actions, and the statute requires court approval
before there can be any indemnification where the person seeking
indemnification has been found liable to the corporation. The statute provides
that it is not exclusive of other indemnification that may be granted by a
corporation's charter, by-laws, disinterested director vote, stockholder vote,
agreement or otherwise. The Registrant's by-laws provide that the Registrant
will indemnify any person to the fullest extent permitted by Delaware law who
is or was made, or threatened to be made, a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, including, without limitation, an action by or in the right
of the Registrant to procure a judgment in its favor, by reason of the fact
that such person, or a person of whom such person is the legal representative,
is or was a director or officer of the Registrant, or is or was serving in any
capacity at the request of the Registrant for any other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
against judgments, fines, penalties, excise taxes, amounts paid in settlement
and costs, charges and expenses (including attorneys' fees and disbursements).
Persons who are not directors or officers of the Registrant may be similarly
indemnified in respect of service to the Registrant or to any of the above
other entities at the request of the Registrant to the extent the board of
directors at any time specifies that such persons are entitled to the benefits
of such indemnification. Pursuant to the by-laws, the Registrant also has the
power to purchase officers' and directors' liability insurance which insures
against liabilities that officers and directors of the Registrant, in such
capacities, may incur.
Such 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duties as a director, except for liability (i) for any
transaction from which the director derives an improper personal benefit, (ii)
for acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law, (iii) for improper payment of dividends or
redemptions of shares, or (iv) for any breach of a director's duty of loyalty
to the company or its stockholders. Article Seventh of the Registrant's
certificate of incorporation includes such a provision.
Item 21. Exhibits and Financial Statement Schedules
The following exhibits are filed pursuant to Item 601 of Regulation S-K.
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.
II-1
Exhibit No. Description of Exhibit
- ------------- --------------------------------------------------------------------------------------
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.
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)
5 Opinion of Simpson Thacher & Bartlett
10.1 Fifth Amended and Restated Revolving Credit Agreement 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
*10.12 Consent and Agreement between Hunter Drums Limited and Mauser-Werke GmbH,
dated September 29, 1997
II-2
Exhibit No. Description of Exhibit
- ----------------- ----------------------------------------------------------------------------------------
10.13 1998 Stock Option Plan
10.14 Russell-Stanley Holdings, Inc. Management Annual Incentive Compensation Plan
1998
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
10.17 Employment Agreement, dated as of July 23, 1997, between Russell-Stanley
Holdings, Inc. and Mark E. Daniels
10.18 Stay Pay Agreement, dated as of July 23, 1997, between Russell-Stanley Holdings,
Inc. and Mark Daniels
10.19 Employment Agreement, dated as of July 23, 1998, between Russell-Stanley
Holdings, Inc. and Gerard C. DiSchino
*10.20 Employment Agreement, dated September 20, 1996, between Russell-Stanley Corp.
and Robert Singleton
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
12 Computation of Earnings to Fixed Charges
21 Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP, Independent Auditors
23.2 Consent of Elliott, Davis & Company, L.L.P., Independent Certified Public
Accountants, with respect to Container Management Services, Inc. as of and for the year
ended December 31, 1996
23.3 Consent of Simpson Thacher & Bartlett (included as part of its opinion filed as Exhibit
5 hereto).
24 Power of Attorney
25 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of The Bank of
New York, as Trustee
27 Financial Data Schedule for the year ended December 31, 1998
99.1 Form of Letter of Transmittal
99.2 Form of Notice of Guaranteed Delivery
- ----------------
* To be filed by amendment.
II-3
Item 22. Undertakings
(a) Insofar as indemnification for liabilities arising under Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more that a 20
percent change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, on March 31, 1999.
RUSSELL-STANLEY HOLDINGS, INC.
By: /s/ Daniel W. Miller
-------------------------------------
Daniel W. Miller
Executive Vice President,
Chief Financial Officer and Treasurer
Pursuant to the requirements of the Securities Act, the Registration
Statement has been signed on the 31st day of March, 1999 by the following
persons in the capacities indicated:
Signature Title
- --------------------------- ---------------------------------------
* President, Chief Executive Officer,
- ------------------------- Secretary and Director (principal
Robert L. Singleton executive officer)
/s/ Daniel W. Miller Executive Vice President, Chief
- ------------------------- Financial Officer, Treasurer and
Daniel W. Miller Director (principal financial officer)
* Vice President, Controller
- ------------------------- (principal accounting officer)
Ronald M. Litchkowski
* Executive Vice President and
- ------------------------- Director
Mark E. Daniels
* Executive Vice President and
- ------------------------- Director
Michael W. Hunter
* Chairman of the Board of
- ------------------------- Directors
Robert L. Rosner
* Director
- -------------------------
Norman W. Alpert
* Director
- -------------------------
Vincent J. Buonanno
* Director
- -------------------------
Todd N. Khoury
II-5
* Director
- -------------------------
Leonard Lieberman
* Director
- -------------------------
Kevin Mundt
* Director
- -------------------------
Arthur J. Nagle
* Director
- -------------------------
Vincent J. Naimoli
* Director
- -------------------------
Daniel S. O'Connell
* Director
- -------------------------
John W. Priesing
* By: /s/ Daniel W. Miller
---------------------
Daniel W. Miller,
Attorney-in-fact
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, on March 31, 1999.
RUSSELL-STANLEY CORP.
By: /s/ Daniel W. Miller
-------------------------------------
Daniel W. Miller
Executive Vice President, Chief
Financial Officer and Treasurer
Pursuant to the requirements of the Securities Act, the Registration
Statement has been signed on the 31st day of March, 1999 by the following
persons in the capacities indicated:
Signature Title
- --------------------------- ---------------------------------------
* President, Chief Executive Officer
- ------------------------- and Director (principal executive
Robert L. Singleton officer)
Executive Vice President, Chief
- ------------------------- Financial Officer, Treasurer and
Daniel W. Miller Director (principal financial officer)
* Vice President, Controller and
- ------------------------- Secretary (principal accounting
Ronald M. Litchkowski officer)
* Director
- -------------------------
Robert L. Rosner
* By: /s/ Daniel W. Miller
---------------------
Daniel W. Miller,
Attorney-in-fact
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, on March 31, 1999.
RUSSELL-STANLEY, INC.
By: /s/ Daniel W. Miller
-------------------------------------
Daniel W. Miller
Executive Vice President, Chief
Financial Officer and Treasurer
Pursuant to the requirements of the Securities Act, the Registration
Statement has been signed on the 31st day of March, 1999 by the following
persons in the capacities indicated:
Signature Title
- --------------------------- ---------------------------------------
* President, Chief Executive Officer
- ------------------------- and Director (principal executive
Robert L. Singleton officer)
/s/ Daniel W. Miller Executive Vice President, Chief
- ------------------------- Financial Officer, Treasurer and
Daniel W. Miller Director (principal financial officer)
* Vice President, Controller and
- ------------------------- Secretary (principal accounting
Ronald M. Litchkowski officer)
* Director
- -------------------------
Robert L. Rosner
* By: /s/ Daniel W. Miller
---------------------
Daniel W. Miller,
Attorney-in-fact
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, on March 31, 1999.
RSLPCO, INC.
By: /s/ Daniel W. Miller
-------------------------------------
Daniel W. Miller
Executive Vice President, Chief
Financial Officer and Treasurer
Pursuant to the requirements of the Securities Act, the Registration
Statement has been signed on the 31st day of March, 1999 by the following
persons in the capacities indicated:
Signature Title
- --------------------------- ------------------------------------
* President, Chief Executive Officer,
- ------------------------- Secretary and Director (principal
Robert L. Singleton executive officer)
/s/ Daniel W. Miller Executive Vice President, Chief
- ------------------------- Financial Officer, Treasurer and
Daniel W. Miller Director (principal financial and
accounting officer)
* Director
- -------------------------
Robert L. Rosner
* By: /s/ Daniel W. Miller
---------------------
Daniel W. Miller,
Attorney-in-fact
II-9
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, on March 31, 1999.
RUSSELL-STANLEY, L.P.
By: Russell-Stanley, Inc., its General
Partner
By: /s/ Daniel W. Miller
-------------------------------------
Daniel W. Miller
Executive Vice President, Chief
Financial Officer and Treasurer
Pursuant to the requirements of the Securities Act, the Registration
Statement has been signed on the 31st day of March, 1999 by the following
persons in the capacities indicated:
Signature Title
- --------------------------- ------------------------------------
* Director, Russell-Stanley, Inc., as
- ------------------------- General Partner
Robert L. Singleton
/s/ Daniel W. Miller Director, Russell-Stanley, Inc., as
- ------------------------- General Partner
Daniel W. Miller
* Director, Russell-Stanley, Inc., as
- ------------------------- General Partner
Robert L. Rosner
* By: /s/ Daniel W. Miller
---------------------
Daniel W. Miller,
Attorney-in-fact
II-10
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, on March 31, 1999.
CONTAINER MANAGEMENT SERVICES, INC.
By: /s/ Daniel W. Miller
-------------------------------------
Daniel W. Miller
Executive Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Act, the Registration
Statement has been signed on the 31st day of March, 1999 by the following
persons in the capacities indicated:
Signature Title
- --------------------------- ----------------------------------
* President and Director (principal
- ------------------------- executive officer)
Mark E. Daniels
/s/ Daniel W. Miller Executive Vice President, Chief
- ------------------------- Financial Officer and Director
Daniel W. Miller (principal financial officer)
* Director
- -------------------------
Robert L. Singleton
* By: /s/ Daniel W. Miller
---------------------
Daniel W. Miller,
Attorney-in-fact
II-11
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, on March 31, 1999.
NEW ENGLAND CONTAINER CO., INC.
By: /s/ Daniel W. Miller
-------------------------------------
Daniel W. Miller
Executive Vice President, Chief
Financial Officer and Secretary
Pursuant to the requirements of the Securities Act, the Registration
Statement has been signed on the 31st day of March, 1999 by the following
persons in the capacities indicated:
Signature Title
- --------------------------- ---------------------------------------
* President and Director (principal
- ------------------------- executive officer)
Gerard C. DiSchino
/s/ Daniel W. Miller Executive Vice President, Chief
- ------------------------- Financial Officer, Secretary and
Daniel W. Miller Director (principal financial officer)
* Vice President, Controller and
- ------------------------- Treasurer (principal accounting
Eugene D. Onofrio officer)
* Director
- -------------------------
Robert L. Singleton
* By: /s/ Daniel W. Miller
---------------------
Daniel W. Miller,
Attorney-in-fact
II-12
EXHIBIT INDEX
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.
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)
5 Opinion of Simpson Thacher & Bartlett
10.1 Fifth Amended and Restated Revolving Credit Agreement 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
*10.12 Consent and Agreement between Hunter Drums Limited and Mauser-Werke GmbH, dated
September 29, 1997
10.13 1998 Stock Option Plan
10.14 Russell-Stanley Holdings, Inc. Management Annual Incentive Compensation
Plan 1998
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
10.17 Employment Agreement, dated as of July 23, 1997, between Russell-Stanley
Holdings, Inc. and Mark E. Daniels
10.18 Stay Pay Agreement, dated as of July 23, 1997, between Russell-Stanley
Holdings, Inc. and Mark Daniels
10.19 Employment Agreement, dated as of July 23, 1998, between Russell-Stanley
Holdings, Inc. and Gerard C. DiSchino
*10.20 Employment Agreement, dated September 20, 1996, between Russell-Stanley
Corp. and Robert Singleton
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
12 Computation of Earnings to Fixed Charges
21 Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP, Independent Auditors
23.2 Consent of Elliot, Davis & Company, L.L.P., Independent Certified Public Accountants,
with respect to Container Management Services, Inc. as of and for the year ended
December 31, 1996
23.3 Consent of Simpson Thacher & Bartlett (included as part of its opinion filed as
Exhibit 5 hereto).
24 Power of Attorney
25 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of
The Bank of New York, as Trustee
27 Financial Data Schedule for the year ended December 31, 1998
99.1 Form of Letter of Transmittal
99.2 Form of Notice of Guaranteed Delivery
* To be filed by amendment.