10-Q 1 d01-34089.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 2001 Commission File Number: 333-76057 RUSSELL-STANLEY HOLDINGS, INC. (Exact name of registrant as specified in charter) Delaware 3412 22-3525626 (State or other jurisdiction of (Primary Standard Industrial (IRS Employer incorporation or organization) Classification Code Number) Identification Number)

685 Route 202/206 Bridgewater, New Jersey 08807 (Address of principal executive offices) (Zip code) (908) 203-9500 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report: There is no established market for our common stock. There were 2,200,764 shares of common stock outstanding as of June 30, 2001. TABLE OF CONTENTS PAGE PART I: FINANCIAL INFORMATION ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 20 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 24 PART II: OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS 25 ITEM 2: CHANGES IN SECURITIES 25 ITEM 3: DEFAULTS UPON SENIOR SECURITIES 25 ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25 ITEM 5: OTHER INFORMATION 25 ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 25 SIGNATURES 29 2 PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (IN THOUSANDS)

See Notes to Condensed Consolidated Financial Statements. 3 RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)

See Notes to Condensed Consolidated Financial Statements. 4 RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)

See Notes to Condensed Consolidated Financial Statements. 5 RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The Condensed Consolidated Financial Statements and related notes thereto as of June 30, 2001 and for the three and six month periods ended June 30, 2001 and 2000 are unaudited. The information furnished herein reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the consolidated balance sheets as of June 30, 2001 and December 31, 2000, the consolidated statements of operations and comprehensive (loss) income for the three month and six month periods ending June 30, 2001 and 2000 and the statements of cash flows for the six month periods ended June 30, 2001 and 2000. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the amounts reported on the financial statements and the accompanying notes. Actual amounts could differ from those estimates. These financial statements should be read in conjunction with the financial statements and notes thereto included in Russell-Stanley Holdings, Inc.'s (the "Company's") Annual Report on Form 10-K for the year ended December 31, 2000, File No. 333-76057. The Company previously announced on January 26, 2001 that it retained The Blackstone Group, L.P. in order to assist in developing a financial restructuring plan and that an ad-hoc committee of its senior subordinated noteholders was organized. The Company elected not to make the interest payment due February 15, 2001 on its Senior Subordinated Notes. The 30-day grace period to make the interest payment to cure the default expired on March 15, 2001 and as a consequence, the Senior Subordinated Notes, revolving credit loans and term loan are callable and therefore have been classified as current liabilities in the December 31, 2000 and June 30, 2001 consolidated balance sheets. The Company and its lenders under the Credit Agreement entered into a 60-day Forbearance and Amendment Agreement (the Forbearance Agreement) dated February 15, 2001 pursuant to which the lenders will not call the Company's outstanding debt through the termination of the Forbearance Agreement and will continue to allow the Company to draw on their revolving credit facility to satisfy working capital needs subject to certain limitations. In addition, the interest rate on the Company's term loan and the revolving credit loan margin was increased .50% and the facility's commitment was temporarily reduced from $75.0 million to $60.0 million. The Forbearance Agreement was further extended an additional sixty days until June 15, 2001 with an additional .25% interest rate increase in effect for the period. On June 15, 2001 the Forbearance Agreement was extended until August 31, 2001 with an additional .50% interest rate increase on the Company's revolving credit loan margin in effect for the period. The Forbearance Agreement terminates on the earlier of (a) the occurrence of an additional event of default (as defined); (b) August 31, 2001 or (c) the date on which the Senior Subordinated Notes are accelerated. In connection with this agreement, a portion of the Company's revolving credit loan availability is subject to a monthly borrowing base calculation applied to eligible accounts receivable and inventory, not to exceed $30.0 million. The remaining $55.0 million commitment under the revolving credit and term loan facility is not subject to this calculation. The Company announced on July 17, 2001 that it reached an agreement in principle on a term sheet for a restructuring that will significantly de-leverage the Company's balance sheet by eliminating a significant amount of debt and related interest cost. Under terms of the proposed restructuring, bank lenders have indicated they will support an amendment to the existing revolving credit and term loan facility providing for a $95.0 million commitment which is an increase of $10.0 million over the current level. On the effective date of the restructuring, the Company will have unutilized availability of approximately $20.0 million. Management expects to obtain an extended forbearance agreement beyond August 31, 2001 through the transaction's closing date. Note holders will exchange $150.0 million of the existing 6 10.875% Senior Subordinated Notes into all of the equity of the reorganized company and $20.0 million of new unregistered Senior Subordinated Notes due seven years from the effective date. Interest on the new notes will be paid-in-kind until September 30, 2003 and payable in cash thereafter if certain financial conditions are met. An ad-hoc committee of note holders whose members hold more than 90% of the aggregate principal amount of the existing Senior Subordinated Notes has indicated they will support the proposed restructuring. The restructuring will proceed as an exchange offer to existing holders of the Senior Subordinated Notes. The restructuring is subject to documentation and other customary conditions and is expected to be completed during the third quarter. The restructuring will have no effect on trade creditors or customers. For the six-month period ended June 30, 2001, approximately $2.9 million in professional fees were incurred in connection with the financial restructuring and were expensed in the accompanying condensed consolidated statement of operations. NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations." SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company does not believe that the adoption of SFAS 141 will have a significant impact on its financial statements. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective January 1, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS 142 also requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is currently assessing but has not yet determined the impact of SFAS 142 on its financial position and results of operations. NOTE 3 - ACCOUNTING POLICY MATTERS Statement of Financial Accounting Standards ("SFAS") 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, and SFAS 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, is effective for the Company as of January 1, 2001. These standards require that an entity recognize all derivatives as either assets or liabilities measured at fair value. The accounting for changes in the fair value of a derivative depends on the use of the derivative. In addition, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. Adoption of these new accounting standards did not have a material impact on the Company's financial condition or results of operations. Reclassifications - Certain amounts in 2000 have been reclassified to conform to the 2001 presentation. 7 NOTE 4 - INVENTORIES Inventories consist of the following:

NOTE 5 - LONG-TERM DEBT As discussed in Note 1 of the condensed consolidated financial statements, the Company elected to withhold the payment of interest due on February 15, 2001 on its Senior Subordinated Notes and did not make the payment within the 30-day grace period. As previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2000, due to the violations of the covenants under the Credit Agreement and the interest payment default, the Senior Subordinated Notes, revolving credit loans and term loan are callable and therefore have been classified as current liabilities in the December 31, 2000 and June 30, 2001 consolidated balance sheets. The Notes, revolving credit loans, and term loan have the following provisions (dollars in thousands):

In connection with the June 15, 2001 Forbearance Agreement, the margin on the revolving credit loans was increased .50%. The Forbearance Agreement was extended through August 31, 2001 (see Note 1 to the condensed consolidated financial statements). 8 NOTE 6 - CONTINGENCY The U.S. Environmental Protection Agency (the "EPA") confirmed the presence of contaminants, including dioxin, in and along the Woonasquatucket River in Rhode Island. Prior to 1970, New England Container ("NEC"), a wholly-owned subsidiary of the Company, operated a facility in North Providence, Rhode Island along the Woonasquatucket River at a site where contaminants have been found. NEC, the current owners of the property, and others have been formally identified by the EPA as potentially responsible parties, with the site added to the National Priority Superfund Site list in February 2000. In January 2001, the EPA announced it was proceeding with an interim soil removal project and will be undertaking further testing and analysis to determine what, if any, remedial action in addition to the interim soil removal will be required. On March 26, 2001, the EPA issued a unilateral administrative order pursuant to Section 106 (a) of the federal Comprehensive Environmental Response, Compensation and Liability Act requiring NEC and the other potentially responsible parties to perform the interim soil removal project. In an Environmental Engineering and Cost Analysis issued in September 2000, the EPA has estimated that the total cost for implementation of the work covered by the unilateral administrative order will be $2.5 million. NEC is currently working with EPA and three other participating respondents to the unilateral administrative order to implement a scope of work conditionally approved by the EPA by letter dated July 25, 2001. Although NEC no longer operates the facility, and did not operate the facility at the time the Company acquired the outstanding capital stock of NEC in July 1998, NEC could incur liability under federal and state environmental laws and/or as a result of civil litigation. Any resulting liability is subject to, among other possible claims, (i) a contractual indemnity from Vincent J. Buonanno, one of its directors and the former owner of NEC, subject to a $2.0 million limit, and (ii) a right of contribution from other potentially responsible parties and potential insurance reimbursements. The Company entered into a tolling agreement on July 20, 2001 with Mr. Buonanno pursuant to which he agreed to extend the statute of limitations with respect to certain claims it may have against him until September 4, 2001. In the same agreement, the Company and its directors similarly agreed to such a tolling with respect to any claims Mr. Buonanno may have against the Company or its directors. The Company is unable to estimate the likelihood or extent of any liability for long term remedial actions at the North Providence, Rhode Island site. However, this matter may result in liability to NEC that could have a material adverse effect on the Company's financial condition, cash flows and results of operations. NOTE 7 - RESTRUCTURING EXPENSES During the six months ended June 30, 2001, the Company recorded restructuring charges of approximately $13.3 million relating to the adoption by the company of a formal plan to close its Allentown facility. This charge includes a net present value accrual for lease and property tax obligations of approximately $10.5 million, write-off of leasehold improvements of approximately $1.5 million, severance and other personnel related costs of approximately $0.4 million, and other miscellaneous costs of approximately $0.9 million. Cash expenditures of $0.3 million were incurred as of June 30, 2001. Management anticipates the closing of the facility by year-end. (In millions) Restructuring charges $13.3 Charges and payments: Severance and retention (0.1) Asset disposal -- Lease termination and property tax obligations -- Other (0.2) ----- Reserve balance, June 30, 2001 $13.0 =====

In addition, the Company recorded approximately $2.9 million in professional fees during the six months ended June 30, 2001 related to the financial restructuring as discussed in Note 1 to the condensed consolidated financial statements. NOTE 8 - INCOME TAXES The Company recorded a valuation allowance of $28.8 million during the three months ended June 30, 2001. Based upon the tax impact of the proposed restructuring, management has determined that it is more likely than not that the benefit of the cumulative net operating loss and the current net operating loss will not be utilized. Therefore, a valuation allowance has been recorded against the deferred tax asset associated with the cumulative net operating losses (NOLs). NOTE 9 - OTHER TRANSACTIONS For the three months ended June 30, 2001, other income, net included approximately a $1.0 million gain from insurance proceeds due to a fire at one of the Company's facilities in September 2000. 9 NOTE 10 - SEGMENT INFORMATION

(1) EBITDA should not be considered a substitute for net income, cash flow from operating activities or other cash flow statement data prepared in accordance with generally accepted accounting standards or as an alternative to net income or as an indicator of operating performance or cash flow as a measure of liquidity. EBITDA is presented here only to provide additional information with respect to the Company's ability to satisfy debt service. While EBITDA is frequently used as a measure of operations and the ability to meet debt service requirements, it is not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the method of calculation. 10 NOTE 11 - GUARANTOR SUBSIDIARIES The Company's payment obligations under the Notes are fully, unconditionally, jointly and severally guaranteed by its current domestic subsidiaries, principally: Russell-Stanley Corp. ("RSC"), Container Management Services ("CMS") and NEC (collectively, the "Guarantor Subsidiaries"). Each of the Guarantor Subsidiaries is a direct or indirect wholly-owned subsidiary of the Company. The Company's payment obligations under the Notes are not guaranteed by the remaining subsidiary, Hunter (the "Non-Guarantor Subsidiary"). The obligations of each Guarantor Subsidiary under their guarantee of the Notes are subordinated to each subsidiary's obligations under their guarantee of the Senior Credit Facility. Presented on the next page is condensed combining financial information for the Parent Company, the Guarantor Subsidiaries and the Non-Guarantor Subsidiary. In the Company's opinion, separate financial statements and other disclosures concerning each of the Guarantor Subsidiaries would not provide additional information that is material to investors. Therefore, the Guarantor Subsidiaries are combined in the presentation on the next page. Investments in subsidiaries are accounted for by the Parent Company using the equity method. Earnings of subsidiaries are, therefore, reflected in the Parent Company's investments in and advances to/from subsidiaries accounts and earnings (losses). The elimination entries eliminate investments in subsidiaries, related stockholders' equity and other intercompany balances and transactions. 11 RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2001 (IN THOUSANDS) (UNAUDITED)

12 RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000 (IN THOUSANDS) (UNAUDITED)

13 RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2001 (IN THOUSANDS) (UNAUDITED)

14 RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 (IN THOUSANDS) (UNAUDITED)

15 RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET JUNE 30, 2001 (IN THOUSANDS) (UNAUDITED)

16 RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 2000 (IN THOUSANDS)

17 RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2001 (IN THOUSANDS) (UNAUDITED)

18 RUSSELL-STANLEY HOLDINGS, INC. AND SUBSIDIARIES SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2000 (IN THOUSANDS) (UNAUDITED)

19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTH PERIOD ENDED JUNE 30, 2001 COMPARED TO THREE MONTH PERIOD ENDED JUNE 30, 2000 NET SALES Net sales decreased 7.8 % to $64.8 million in 2001 from $70.3 million in 2000. Our container manufacturing division's net sales decreased 4.6% to $52.6 million in 2001, from $55.1 million in 2000, due primarily to lower unit volumes reflective of a soft economy. Net sales in our services division decreased 19.4% to $12.2 million in 2001 from $15.1 million in 2000 due primarily to planned lower trip lease volumes in plastic services and lower steel reconditioning revenues, which were partially offset by higher average selling prices. Our plastic services drum business completed its transition from a leasing to reconditioning business model late in the second quarter 2001. GROSS PROFIT Gross profit decreased $1.0 million to $10.9 million in 2001 from $11.9 million in 2000, primarily due to the lower unit volumes. Gross profit as a percentage of net sales decreased to 16.8% in 2001 from 17.0% in 2000 as a result. OPERATING EXPENSES Operating expenses (excluding restructured operations and financial restructuring), decreased slightly to $12.0 million in 2001 compared to $12.2 million in 2000 and as a percentage of net sales, operating expenses were 18.6% compared to 17.3% in 2000. RESTRUCTURING EXPENSES During the three months ended June 30, 2001, we recorded restructured operations charges of approximately $13.3 million relating to the adoption by us of a formal action plan to close our Allentown facility. The provision included a net present value accrual for the lease and property tax obligations of approximately $10.5 million, write-off of leasehold improvements of approximately $1.5 million, severance and other personnel related costs of approximately $0.4 million, and other miscellaneous costs of approximately $0.9 million. Cash expenditures of $0.3 million were incurred as of June 30, 2001. We recorded approximately $1.8 million in professional fees related to the financial restructuring as discussed in Note 1 to the condensed consolidated financial statements. We did not record any restructured operations charges or financial restructuring charges for the three months ended June 30, 2000. LOSS FROM OPERATIONS Loss from operations increased by $16.0 million to $16.2 million in 2001 from $0.2 million in 2000 as a result of the factors described above. INTEREST EXPENSE Interest expense was $6.1 million in 2001 compared with $5.7 million in 2000. The increase in interest expense is the result of increased debt levels. OTHER (INCOME) EXPENSE, NET Other income, net, increased $1.1 million to $1.0 million in 2001 from other expense, net, of $0.1 million in 2000 due to a gain of approximately $1.0 million from insurance proceeds due to a fire at one of the Company's facilities in September 2000. 20 LOSS BEFORE INCOME TAXES In 2001, the loss before income taxes was $21.3 million versus $6.0 million in 2000, as a result of the factors described above. INCOME TAX PROVISION (BENEFIT) We recorded a valuation allowance of $28.8 million during the three months ended June 30, 2001. Based upon the tax impact of the proposed restructuring, management has determined that it is more likely than not that the benefit of the cumulative net operating loss and the current net operating loss will not be utilized. Therefore, a valuation allowance has been recorded against the deferred tax asset associated with the cumulative net operating losses (NOLs). In 2000, the effective tax rate on the loss was 30.0%, lower than the statutory federal income tax rate due to the non-deductible portion of goodwill associated with our acquisitions and higher foreign income taxes. NET LOSS In 2001, the net loss was $43.8 million versus $4.2 million in 2000, as a result of the factors described above. SIX MONTH PERIOD ENDED JUNE 30, 2001 COMPARED TO SIX MONTH PERIOD ENDED JUNE 30, 2000 NET SALES Net sales decreased 9.1 % to $129.6 million in 2001 from $142.6 million in 2000. Our container manufacturing division's net sales decreased 6.1% to $105.3 million in 2001, from $112.2 million in 2000, due principally to the economic slowdown, particularly in the chemicals and automotive markets which adversely effected container unit volumes. Net sales in our services division decreased 20.3% to $24.3 million in 2001 from $30.5 million in 2000 due primarily to a planned rationalization in plastic services and lower steel reconditioning revenues, which were partially offset by higher average selling prices. Our plastic services drum business completed its transition from a leasing to reconditioning business model late in the second quarter 2001. GROSS PROFIT Gross profit decreased $3.7 million to $22.7 million in 2001 from $26.4 million in 2000, primarily due to the lower unit volumes. Gross profit as a percentage of net sales decreased to 17.5% in 2001 from 18.5% in 2000 as a result. OPERATING EXPENSES Operating expenses (excluding restructured operations and financial restructuring), decreased slightly to $24.3 million in 2001 compared to $25.1 million in 2000 and as a percentage of net sales, operating expenses were 18.8% compared to 17.6% in 2000. RESTRUCTURING EXPENSES During the six months ended June 30, 2001, we recorded restructured operations charges of approximately $13.3 million relating to the adoption by us of a formal action plan to close our Allentown facility. The provision included a net present value accrual for the lease and property tax obligations of approximately $10.5 million, write-off of leasehold improvements of approximately $1.5 million, severance and other personnel related costs of approximately $0.4 million, and other miscellaneous costs of approximately $0.9 million. Cash expenditures of $0.3 million were incurred as of June 30, 2001. We recorded approximately $2.9 million in professional fees related to the financial restructuring as discussed in Note 1 to the condensed consolidated financial statements. We did not record any restructured operations charges or financial restructuring charges for the six months ended June 30, 2000. 21 INTEREST EXPENSE Interest expense was $12.1 million in 2001 compared with $11.3 million in 2000. The increase in interest expense is the result of increased debt levels. OTHER (INCOME) EXPENSE, NET Other income, net, increased $1.1 million to $1.0 million in 2001 from other expense, net, of $0.1 million in 2000 due to a gain of approximately $1.0 million from insurance proceeds due to a fire at one of the Company's facilities in September 2000. LOSS BEFORE INCOME TAXES In 2001, the loss before income taxes was $28.9 million versus $10.1 million in 2000, as a result of the factors described above. INCOME TAX PROVISION (BENEFIT) We recorded a valuation allowance of $28.8 million during the six months ended June 30, 2001. Based upon the tax impact of the proposed restructuring, management has determined that it is more likely than not that the benefit of the cumulative net operating loss and the current net operating loss will not be utilized. Therefore, a valuation allowance has been recorded against the deferred tax asset associated with the cumulative NOLs. In 2000, the effective tax rate on the loss was 30.0%, lower than the statutory federal income tax rate due to the non-deductible portion of goodwill associated with our acquisitions and higher foreign income taxes. NET LOSS In 2001, the net loss was $49.1 million versus $7.1 million in 2000, as a result of the factors described above. LIQUIDITY AND CAPITAL RESOURCES Our principal uses of cash are for capital expenditures, interest expense, and working capital. We utilize funds generated from operations and borrowings to meet these requirements. For the six months ended June 30, 2001, net cash provided by operating activities was $8.6 million compared to $1.1 million for the six months ended June 30, 2000. This change is due to improved working capital. For the six months ended June 30, 2001 and 2000, we made capital expenditures of $7.9 million and $10.7 million. We currently have no capital commitments outside the ordinary course of business. Our principal working capital requirements are to finance accounts receivable and inventories. As of June 30, 2001, we had total indebtedness of approximately $223.1 million, $74.0 million of which was senior indebtedness. The Company previously announced on January 26, 2001 that it retained The Blackstone Group, L.P. in order to assist in developing a financial restructuring plan and that an ad-hoc committee of its senior subordinated note holders was organized. The Company elected not to make the interest payment due February 15, 2001 on its Senior Subordinated Notes. The 30-day grace period to make the interest payment to cure the default expired on March 15, 2001 and as a consequence, the Senior Subordinated Notes, revolving credit loans and term loan are callable and therefore have been classified as current liabilities in the December 31, 2000 and June 30, 2001 consolidated balance sheets. The Company and its lenders under the Credit Agreement entered into a 60-day Forbearance and Amendment Agreement (the Forbearance Agreement) dated February 15, 2001 pursuant to which the lenders will not call the Company's outstanding debt through the termination of the Forbearance Agreement and will continue to allow the Company to draw on their revolving credit facility to satisfy working capital needs subject to certain limitations. In addition, the interest rate on the Company's term loan and the revolving credit loan margin was increased .50% and the facility's commitment was temporarily reduced from $75.0 million to $60.0 million. The Forbearance Agreement was further extended an additional sixty days until 22 June 15, 2001 with an additional .25% interest rate increase in effect for the period. On June 15, 2001 the Forbearance Agreement was extended until August 31, 2001 with an additional .50% interest rate increase on the Company's revolving credit loan margin in effect for the period. The Forbearance Agreement terminates on the earlier of (a) the occurrence of an additional event of default (as defined); (b) August 31, 2001 or (c) the date on which the Senior Subordinated Notes are accelerated. In connection with this agreement, a portion of the Company's revolving credit loan availability is subject to a monthly borrowing base calculation applied to eligible accounts receivable and inventory, not to exceed $30.0 million. The remaining $55.0 million commitment under the revolving credit and term loan facility is not subject to this calculation. The Company announced on July 17, 2001 that it reached an agreement in principle on a term sheet for a restructuring that will significantly de-leverage the Company's balance sheet by eliminating a significant amount of debt and related interest cost. Under terms of the proposed restructuring, bank lenders have indicated they will support an amendment to the existing revolving credit and term loan facility providing for a $95.0 million commitment which is an increase of $10.0 million over the current level. On the effective date of the restructuring, the Company will have unutilized availability of approximately $20.0 million. Management expects to obtain an extended forbearance agreement beyond August 31, 2001 through the transaction's closing date. Note holders will exchange $150.0 million of the existing 10.875% Senior Subordinated Notes into all of the equity of the reorganized company and $20.0 million of new unregistered Senior Subordinated Notes due seven years from the effective date. Interest on the new notes will be paid-in-kind until September 30, 2003 and payable in cash thereafter if certain financial conditions are met. An ad-hoc committee of note holders whose members hold more than 90% of the aggregate principal amount of the existing Senior Subordinated Notes has indicated they will support the proposed restructuring. The restructuring will proceed as an exchange offer to existing holders of the Senior Subordinated Notes. The restructuring is subject to documentation and other customary conditions and is expected to be completed within approximately three months. The restructuring will have no effect on trade creditors or customers. For the period ended June 30, 2001, approximately $2.9 million in professional fees were incurred in connection with the financial restructuring. The consolidated financial statements of the Company indicate that as a result of the above matters, at June 30, 2001, current liabilities exceeded current assets by $208.2 million. Historically, cash flows generated from operations, supplemented by the unused borrowing capacity under the Revolving Credit Agreement, have been sufficient to pay the Company's debts as they come due, provide for capital expenditures and meet its other cash requirements. The consolidated financial statements of the Company presented herein do not reflect any adjustments that could result from the Company's financial restructuring plan. EFFECT OF INFLATION Inflation generally affects our business by increasing the interest expense of floating rate indebtedness and by increasing the cost of raw materials, labor and equipment. We do not believe that inflation has had any material effect on our business during the periods discussed herein. FORWARD LOOKING STATEMENTS Readers are cautioned that the Results of Operations, Liquidity and Capital Resources and other sections of this report contain forward-looking statements that are based on management's current expectations and projections about future events. Although we believe that our assumptions made in connection with the forward-looking statements are reasonable, we cannot assure you that our assumptions and expectations will prove to have been correct. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. A description of some of the factors that could cause actual results to differ materially from expectations expressed in the Company's forward-looking statements set 23 forth in the Company's Form S-4 (File No. 333-76057) filed with the Securities and Exchange Commission under the caption "Forward-Looking Statements" is incorporated herein by reference. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations." SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company does not believe that the adoption of SFAS 141 will have a significant impact on its financial statements. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective January 1, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS 142 also requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is currently assessing but has not yet determined the impact of SFAS 142 on its financial position and results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK MANAGING FOREIGN CURRENCY AND INTEREST RATE EXPOSURE The Company is exposed to market risk from foreign currency exchange rate fluctuations as measured against the U.S. dollar and interest rates. We manage this exposure through internal policies and procedures and the use of derivative financial instruments when considered appropriate. As a matter of policy, the Company does not speculate in financial markets and therefore does not hold or issue derivative financial instruments for trading purposes. INTEREST RATE RISK The revolving indebtedness under our senior credit facility bears interest at a floating rate. Our primary exposure to interest rate risk is as a result of changes in interest expense related to this indebtedness due to changes in market interest rates. A 10% increase in interest rates at June 30, 2001 would not have a material adverse affect on our results of operations, financial condition or cash flows. FOREIGN CURRENCY EXCHANGE RATE RISK We have operations in Canada and sales denominated in Canadian dollars. Our primary exposure to foreign currency exchange rate risk is as a result of changes in the exchange rate between the U.S. dollar and the Canadian dollar. We currently do not maintain any derivative financial instruments to limit our exposure to this risk. The Company has also entered into foreign currency forwards to hedge the currency exposure of firm fixed asset purchases denominated in Deutsche Marks. 24 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not Applicable ITEM 2. CHANGES IN SECURITIES Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES The Company elected not to make the interest payment of $8.3 million due February 15, 2001 on its Senior Subordinated Notes. The 30-day grace period to make the interest payment to cure the default expired on March 15, 2001. The Company and its lenders under the Credit Agreement have entered into a 60-day Forbearance and Amendment Agreement (the Forbearance Agreement) dated February 15, 2001 pursuant to which the lenders will not call the Company's outstanding debt through the termination of the Forbearance Agreement and will continue to allow the Company to draw on their revolving credit facility to satisfy working capital needs subject to certain limitations. The Forbearance Agreement was extended until June 15, 2001 and again was further extended until August 31, 2001 or may terminate earlier, as described in Note 1 to the condensed consolidated financial statements. The Company does not intend to make the August 15, 2001 interest payment on its Senior Subordinated Notes. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable ITEM 5. OTHER INFORMATION Not Applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits EXHIBIT NO. DESCRIPTION OF EXHIBIT *3.1 Certificate of Incorporation of Russell-Stanley Holdings, Inc. *3.2 By-Laws of Russell-Stanley Holdings, Inc. *3.3 Amended and Restated Certificate of Incorporation of Russell-Stanley Corp. *3.4 By-Laws of Russell-Stanley Corp. *3.5 Articles of Incorporation of Container Management Services, Inc. *3.6 By-Laws of Container Management Services, Inc. *3.7 Restated Articles of Incorporation of New England Container Co., Inc. 25 EXHIBIT NO. DESCRIPTION OF EXHIBIT *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) *10.1 Fifth Amended and Restated Revolving Credit and Term Loan Agreement, dated as of February 10, 1999, among Russell- Stanley Holdings, Inc. and its subsidiaries, as borrowers, the lenders listed therein and BankBoston, N.A. as administrative agent, and Goldman Sachs Credit Partners, L.P., as syndication agent *10.2 Stock Purchase Agreement dated as of July 21, 1998, among Vincent J. Buonanno, New England Container Co., Inc. and Russell-Stanley Holdings, Inc. *10.3 Stock Purchase Agreement dated as of July 1, 1997, among Mark E. Daniels, Robert E. Daniels, Mark E. Daniels Irrevocable Family Trust, R.E. Daniels Irrevocable Family Trust, Container Management Services, Inc. and Russell-Stanley Corp. *10.4 Share Purchase Agreement dated as of October 24, 1997, among Michael W. Hunter, John D. Hunter, Michael W. Hunter Holdings Inc., John D. Hunter Holdings Inc., Hunter Holdings Inc., 373062 Ontario Limited, Hunter Drums Limited, Russell-Stanley Holdings, Inc. and HDL Acquisition, Inc. *10.5 Purchase and Sale Agreement dated as of October 23, 1997, among Smurfit Packaging Corporation, Russell-Stanley Holdings, Inc. and Russell- Stanley Corp. *10.6 Vestar Management Agreement dated as of July 23, 1997, among Russell-Stanley Holdings, Inc., Russell-Stanley Corp., Container Management Services, Inc. and Vestar Capital Partners 26 EXHIBIT NO. DESCRIPTION OF EXHIBIT +*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 *10.15 Employment Agreement, dated October 30, 1997, among Russell-Stanley, Holdings, Inc., Hunter Drums Limited and Michael W. Hunter *10.16 Stay Pay Agreement, dated October 30, 1997, among Russell-Stanley Holdings, Inc., Hunter Drums Limited and Michael W. Hunter *10.21 Services Agreement, dated as of February 10, 1999, between Russell-Stanley Holdings, Inc. and Vincent J. Buonanno *10.22 License Agreement between Gallay SA and Hunter Drums Limited, dated February 7, 1997 *10.23 License Agreement between Gallay SA and Hunter Drums Limited, dated April 16, 1987 **10.24 Amendment No. 1 to the Fifth Amended and Restated Revolving Credit and Term Loan Agreement, dated as of August 11, 2000, among Russell-Stanley Holdings, Inc. and its subsidiaries, as borrowers, the lenders listed therein and Fleet National Bank (f/k/a BankBoston, N.A.), as administrative agent, and Goldman Sachs Credit Partners, L.P., as syndication agent ***10.25 Forbearance and Amendment Agreement to the Fifth Amended and Restated Revolving Credit and Term Loan Agreement, dated as of February 10, 1999 among the Registrant, certain of its subsidiaries, the lenders party thereto and Fleet National Bank, as agent ****10.26 Employment and Change-In-Control Severance Agreement, dated as of December 11, 2000, between Russell-Stanley Holdings, Inc. and Daniel W. Miller 27 EXHIBIT NO. DESCRIPTION OF EXHIBIT ****10.27 Employment and Change-In-Control Severance Agreement, dated as of December 11, 2000, between Russell-Stanley Holdings, Inc. and Ronald M. Litchkowski ****10.28 Employment and Change-In-Control Severance Agreement, dated as of December 11, 2000, between Russell-Stanley Holdings, Inc. and John H. Hunter ****10.29 Employment and Change-In-Control Severance Agreement, dated as of December 11, 2000, between Russell-Stanley Holdings, Inc. and David C. Garrison *****10.30 First Amendment to the Employment and Change-In-Control Severance Agreement, dated as of April 16, 2001, between Russell-Stanley Holdings, Inc. and Daniel W. Miller *****10.31 First Amendment to the Employment and Change-In-Control Severance Agreement, dated as of April 16, 2001, between Russell-Stanley Holdings, Inc. and Ronald M. Litchkowski *****10.32 First Amendment to the Employment and Change-In-Control Severance Agreement, dated as of April 16, 2001, between Russell-Stanley Holdings, Inc. and John H. Hunter *****10.33 First Amendment to the Employment and Change-In-Control Severance Agreement, dated as of April 16, 2001, between Russell-Stanley Holdings, Inc. and David C. Garrison ***10.34 Agreement in Principle on a Term Sheet for a Financial Restructuring, dated as of July 17, 2001, between Russell-Stanley Holdings, Inc., the Note Holders and Bank Lenders *21 Subsidiaries of the Company *This Exhibit is incorporated by reference to the Exhibit of the same number filed as part of the Company's Registration Statement on Form S-4 (File No. 333-76057) **This Exhibit is incorporated by reference to the Exhibit of the same number filed as part of the Company's Form 10-Q for period ended September 30, 2000. ***This Exhibit is incorporated by reference to the Exhibits filed in the Company's Form 8-K dated February 15, 2001, April 20, 2001, July 2, 2001 and July 18, 2001. ****This Exhibit is incorporated by reference to the Exhibit of the same number filed in the Company's Form 10-K dated December 31, 2000. *****This Exhibit is incorporated by reference to the Exhibit of the same number filed as part of the Company's Form 10-Q for period ended March 31, 2001. +The Registrant was afforded confidential treatment of portions of this exhibit by the Securities and Exchange Commission. Accordingly, portions thereof have been omitted and filed separately with the Securities and Exchange Commission. 28 (b) Reports on Form 8-K A current report on Form 8-K, dated April 20, 2001, relating to a sixty day extension of the Forbearance and Amendment Agreement, was filed April 25, 2001. A current report on Form 8-K, dated June 15, 2001, relating to an additional extension of the Forbearance and Amendment Agreement, was filed July 2, 2001. A current report on Form 8-K, dated July 17, 2001, relating to an agreement in principle on a term sheet for a financial restructuring was filed July 18, 2001. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. RUSSELL-STANLEY HOLDINGS, INC. Date: August 14, 2001 By: /s/ RONALD M. LITCHKOWSKI ------------------------------------- Ronald M. Litchkowski, Chief Financial Officer 29

RUSSELL-STANLEY HOLDINGS INC 10-Q