10-Q 1 g69299e10-q.txt CONSUMERS U.S., INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 333-31363-01 ------------------------------------ CONSUMERS U.S., INC. -------------------- (Exact name of registrant as specified in its charter) Delaware 23-2874087 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3140 William Flinn Highway, Allison Park, Pennsylvania 15101 ------------------------------------------------------------ (Address of principal executive offices) (Zip Code) 412-486-9100 ------------ (Registrant's telephone number, including area code) None ---- (Former name, former address and former fiscal year, if changed since last report) 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 [ ]. All voting and non-voting stock of the registrant is held by an affiliate of the registrant. Number of shares outstanding of each class of common stock at May 14, 2001: Common Stock, $.01 par value, 17,000,100 shares 1 of 16 2 CONSUMERS U.S., INC. FORM 10-Q For the Quarterly Period Ended March 31, 2001 INDEX

2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSUMERS U.S., INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED) (DOLLARS IN THOUSANDS)

See Notes to Condensed Consolidated Financial Statements. 3 4 CONSUMERS U.S., INC. CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)

See Notes to Condensed Consolidated Financial Statements. 4 5 CONSUMERS U.S., INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)

See Notes to Condensed Consolidated Financial Statements. 5 6 CONSUMERS U.S., INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - MANAGEMENT'S RESPONSIBILITY In the opinion of Management, the accompanying condensed financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position as of March 31, 2001 and the results of operations and cash flows for the three months ended March 31, 2001 and 2000. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the Financial Statements of Consumers U.S., Inc., consolidated with its majority-owned subsidiary, Anchor Glass Container Corporation ("Anchor"), (together, the "Company") included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. The results of operations for the interim periods are not necessarily indicative of the results of the full fiscal year. Certain reclassifications have been made to prior year financial statements to be consistent with the current year presentation. NOTE 2 - ORGANIZATION OF THE COMPANY Consumers U.S., Inc. ("Consumers U.S."), a wholly-owned subsidiary Consumers International Inc., which is a wholly-owned subsidiary of Consumers Packaging Inc. ("Consumers"), was formed in January 1997 to hold an investment in Anchor Glass Container Corporation ("Anchor") which acquired certain assets and assumed certain liabilities of the former Anchor Glass Container Corporation ("Old Anchor"), which was subsequently liquidated in a proceeding under Chapter 11 of the United States Bankruptcy Code of 1978, as amended. On February 5, 1997, pursuant to an Asset Purchase Agreement dated December 18, 1996, as amended, among Consumers, Owens-Brockway Glass Container Inc. ("Owens") and Old Anchor, the Company (the rights and obligations of Consumers having been assigned to the Company) and Owens acquired substantially all of the assets, and assumed certain liabilities, of Old Anchor (the "Anchor Acquisition"). The Company is part of a group of glass manufacturing companies with Consumers and GGC, L.L.C. ("GGC") each of which is controlled through G&G Investments, Inc. ("G&G"), the majority owner of Consumers. The Company currently engages in a variety of transactions with Consumers and GGC as a part of its strategy to achieve synergies among the companies. These transactions include bulk purchasing of raw and packaging materials, provision of technical and engineering services, joint utilization of the Company's mold and repair shops and the consolidation of certain functions such as sales, engineering and management information services. NOTE 3 - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133 - Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS 137 and SFAS 138 ("SFAS 133"). SFAS 133 establishes accounting and reporting standards requiring every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative fair values that are designated, effective and qualify as cash flow hedges will be deferred and recorded as a component of accumulated other comprehensive income until the hedged transactions 6 7 occur and are recognized in earnings. The ineffective portion of a hedging derivative's change in fair value will be immediately recognized in earnings. The Company hedges certain of its estimated natural gas purchases, typically over a maximum of six to twelve months, through the purchase of natural gas futures. During the quarter, a gain of approximately $595 was recognized in cost of products sold related to these futures. The Company recorded the fair market value of the outstanding futures, approximately $89, as a liability and accumulated other comprehensive income on the balance sheet as of March 31, 2001. NOTE 4 - LIQUIDITY On February 2, 2001, Consumers, the majority owner of Anchor, announced a suspension of interest payments on its senior notes maturing in 2007 and the senior secured notes of Consumers International Inc. maturing in 2005, until it has reached agreement on restructuring this part of Consumers' capital structure. Further, on March 22, 2001, Consumers announced the appointment of Brent Ballantyne as its Chief Restructuring Officer and Chief Executive Officer. Mr. Ballantyne reports to a committee of the Consumers Board of Directors comprised of independent directors. John Ghaznavi stepped down as Chief Executive Officer of Consumers but remains as Chairman of Consumers and Chairman and Chief Executive Officer of Anchor. On March 31, 2001, Consumers announced the appointment of Graeme Eadie as Chief Financial Officer. Dale Buckwalter stepped down as Chief Financial Officer of Consumers but continues as Chief Financial Officer of Anchor. Consumers has begun discussions with its noteholders regarding a restructuring. Management of Anchor is unable to determine what impact this restructuring will have on Anchor, but it may be significant. If a restructuring of Consumers results in Mr. Ghaznavi owning, directly or indirectly, less than 40% of the voting stock of Consumers, this would trigger a "change in control" as defined in the indentures governing Anchor's 11.25% First Mortgage Notes due 2005, aggregate principal amount of $150.0 million (the "First Mortgage Notes") and its 9.875% Senior Notes due 2008, aggregate principal amount of $50.0 million (the "Senior Notes") (the "Indentures"). In addition, G&G and one of its affiliates have pledged common shares of Consumers that they own as collateral for certain indebtedness guaranteed by G&G. If an event of default were to occur on this indebtedness, the lenders would have the right to foreclose on those common shares, which would also trigger a "change in control" as defined in the Indentures. Upon a "change in control" as defined in the Indentures, Anchor would be required to make an offer to repurchase all of the First Mortgage Notes and the Senior Notes at 101% of the outstanding principal amount. Anchor does not have the cash available to make this repurchase offer. The failure to make the offer would result in an event of default that would give the noteholders the right to accelerate the debt resulting in a default under Anchor's credit facility provided by Bank of America. Anchor intends to approach its noteholders regarding a modification of the Indentures, but does not know whether the notes could be restructured in a consensual manner with the noteholders before the occurrence of an event of default. These issues represent significant uncertainties as to the future financial position of Anchor. As a result of these uncertainties, the Company's outside auditors rendered a qualified opinion on the Company's financial statements for the year ended December 31, 2000. The failure by Anchor to obtain an unqualified opinion on its financial statements was an event of default under the Loan and Security Agreement dated as of October 16, 2000, with Bank of America, National Association, as agent. Anchor received a waiver from its lenders. The Company's results of operations were significantly impacted by the cost of natural gas in the first quarter of 2001. This is a variable cost over which the Company has little control. Significant increases in natural gas or energy costs could materially impact the Company's results of operations or liquidity plans in 2001. The Company's principal sources of liquidity through 2001 are expected to continue to be funds derived from operations, borrowings under the Replacement Credit Facility, proceeds from the 7 8 sale/leaseback transactions noted above and proceeds from sales of discontinued manufacturing facilities. The Company's plans to increase liquidity include continuation of its cost reduction efforts, continuation of its natural gas cost recovery program, as well as increased sales volumes from its supply agreements with major customers. Unexpected cash needs resulting from an unusual increase in energy or other costs could force the Company to take additional measures, such as reduction in capital asset spending, price increases, production curtailments and consideration of other cost reduction measures. Management believes that the cash flows discussed above will provide adequate funds for the Company's working capital needs and capital expenditures through December 31, 2001. However, cash flows from operations depend on future operating performance which is subject to prevailing conditions and to financial, business and other factors, many of which are beyond the Company's control. Should the Company suffer material adverse conditions from the issues discussed above, additional measures may be required, including sales of assets and consideration of other strategic alternatives. NOTE 5 - RELATED PARTY INFORMATION During the years 1997, 1998, 1999 and 2000, Anchor participated in bulk purchases of supplies for Anchor and certain of its affiliates, including Consumers, with vendors that were unrelated to Anchor and Consumers. The bulk purchases were negotiated by a sister company to G&G. The sister company received rebates from these unrelated vendors. The rebates attributable to purchases by Anchor totaled $711 over the four-year period. When this practice became known, Anchor took steps to ensure that the practice was discontinued. During the year 1997, Anchor participated in bulk purchases of soda ash for Anchor and certain of its affiliates, including Consumers, with vendors that were unrelated to Anchor and Consumers. The bulk purchases were negotiated by a subsidiary of G&G. The subsidiary received rebates from the unrelated vendors. The rebates attributable to purchases by Anchor totaled $547. This practice was discontinued at the end of 1997. A special committee of the Board has been appointed to review these transactions. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net Sales. Net sales for the first quarter of 2001 were $169.4 million compared to $153.9 million for the first quarter of 2000, an increase of $15.5 million, or 10.1% on a volume increase of approximately 13.3%. This increase in net sales dollars was principally as a result of the increase in shipment volume, particularly in the beer product line, primarily associated with the Southeast Agreement (see below). Also, this improvement reflects the natural gas related price recovery program discussed below. Cost of Products Sold. The Company's cost of products sold in the first quarter of 2001 was $165.5 million (or 97.7% of net sales), while the cost of products sold for the first quarter of 2000 was $143.6 million (or 93.3% of net sales). This increase in the cost of products sold for the first quarter of 2001 as compared with the first quarter of 2000 principally reflects the increases in net sales noted above. In addition, the Company experienced significant increases in the cost of natural gas as compared to the same period of the preceding year. The escalating prices for natural gas, the principal fuel for manufacturing glass, increased costs by approximately $12.2 million compared to the comparable period of 2000. The high prices in December contributed to the Company's decision to reduce manufacturing production in December 2000. The carryover effect of this decision resulted in approximately $1.0 million of unabsorbed overhead costs, negatively impacting results of operations for the first quarter of 2001. In the second half of 2000, the Company initiated a price recovery program for the escalating natural gas costs incurred. Approximately $8.0 million was recovered through this program in the first quarter of 2001, which is included in net sales. Selling and Administrative Expenses. Selling and administrative expenses for the first three months of 2001 were approximately $7.2 million (or 4.2% of net sales), while selling and administrative expenses in the first three months of 2000 were $7.5 million (or 4.9% of net sales). Other Income, net. Other income, net decreased to $0.3 million in the current period from $6.2 million in 2000. Other income for three months ended March 31, 2000 included the gain on sale of approximately $6.1 million, of Anchor's previously closed Houston, Texas glass container manufacturing facility and certain related operating rights to Anheuser-Busch, Inc. ("Anheuser-Busch"). Interest Expense. Interest expense for in the first quarter of 2001 increased approximately $0.5 million over the comparable period of the 2000 due primarily to higher average outstanding borrowings under the Replacement Credit Facility. Net Income (Loss). The Company had a net loss in the first quarter of 2001 of approximately $12.0 million as compared to a net income of $0.5 million in the first quarter of 2000. The results of the 2000 first quarter included a gain on sale of the previously closed Houston, Texas glass container manufacturing facility of approximately $4.1 million and a gain of approximately $2.0 million of certain operating rights related to the Texas facility, both included in Other income, net. Excluding these sales transactions, the Company would have reported a loss of approximately $5.7 million in the quarter ended March 31, 2000. LIQUIDITY AND CAPITAL RESOURCES In the first quarter of 2001, operating activities used $8.3 million in cash as compared to $2.8 million of cash provided in the same period of 2000. This increase in the use of cash reflects the decline in earnings and changes in working capital items. Accounts receivable at March 31, 2001 increased approximately $23.1 million as compared with the December 2000 year end. Inventory levels decreased approximately $5.5 million in 2001. Cash outlays for natural gas purchases in the three months ended March 31, 2001 increased approximately $12.2 million over 2000 levels. In the second half of 2000, the Company initiated a price recovery program for the escalating natural gas costs incurred. Approximately $8.0 million was recovered through this program in the first quarter of 2001. 9 10 Cash consumed in investing activities for the first three months of 2001 and 2000 were $3.9 million and $4.7 million, respectively. Capital expenditures in the 2001 first quarter were $10.3 million compared to $16.6 million in the same quarter of 2000. In the first quarters of 2001 and 2000, Anchor applied cash that had been deposited into escrow, as provided for under the terms of the indentures, to fund capital expenditures. These escrowed funds resulted from the proceeds of asset sales in the first quarter of 2001 and the fourth quarter of 1999. In conjunction with the Anchor Acquisition, Anchor entered into a credit agreement providing for a $110.0 million revolving credit facility (the "Original Credit Facility"). In October 2000, Anchor replaced the Original Credit Facility with a credit facility under a Loan and Security Agreement dated as of October 16, 2000, with Bank of America, National Association, as agent (the "Loan and Security Agreement"), to provide a $100.0 million senior secured revolving credit facility (the "Replacement Credit Facility"). The Replacement Credit Facility enables Anchor to obtain revolving credit loans for working capital purposes and the issuance of letters of credit for its account in an aggregate amount not to exceed $100.0 million. Advances outstanding at any one time cannot exceed an amount equal to the borrowing base as defined in the Loan and Security Agreement. At May 9, 2001, advances outstanding under the Replacement Credit Facility were $73.2 million, borrowing availability was $11.9 million and total outstanding letters of credit on this facility were $10.6 million. Net cash of $10.9 million was provided in financing activities in the 2001 first quarter, principally reflecting borrowings under the Replacement Credit Facility. Anchor's obligations under the Replacement Credit Facility are secured by a first priority lien on all of Anchor's inventories and accounts receivable and related collateral and a second priority pledge of all of the issued and issuable Series B Preferred Stock of Anchor and 902,615 shares of Anchor's Common Stock. In addition, Anchor's obligations under the Loan and Security Agreement are guaranteed by Consumers U.S., the holder of the outstanding Series B Preferred Stock of Anchor and 902,615 shares of Anchor's Common Stock. The Loan and Security Agreement contains certain covenants that restrict Anchor's ability to take various actions, including, subject to specified exceptions, the incurrence of additional indebtedness, the granting of additional liens, the making of investments, the payment of dividends and other restricted payments, mergers, acquisitions, sales of assets and other fundamental corporate changes, capital expenditures, operating lease payments and transactions with affiliates. The Loan and Security Agreement also contains a financial covenant that requires Anchor to maintain a fixed charge coverage ratio. On February 2, 2001, Consumers, the majority owner of Anchor, announced a suspension of interest payments on its senior notes maturing in 2007 and its senior secured notes of Consumers International, Inc. maturing in 2005, until it has reached agreement on restructuring this part of Consumers' capital structure. Further, on March 22, 2001, Consumers announced the appointment of Brent Ballantyne as its Chief Restructuring Officer and Chief Executive Officer. Mr. Ballantyne reports to a committee of the Consumers Board of Directors comprised of independent directors. John Ghaznavi stepped down as Chief Executive Officer of Consumers but remains as Chairman of Consumers and Chairman and Chief Executive Officer of Anchor. On March 31, 2001, Consumers announced the appointment of Graeme Eadie as Chief Financial Officer. Dale Buckwalter stepped down as Chief Financial Officer of Consumers but continues as Chief Financial Officer of Anchor. Consumers has begun discussions with its noteholders regarding a restructuring. Management of Anchor is unable to determine what impact this restructuring will have on Anchor, but it may be significant. If a restructuring of Consumers results in Mr. Ghaznavi owning, directly or indirectly, less than 40% of the voting stock of Consumers, this would trigger a "change in control" as defined in the indentures governing Anchor's First Mortgage Notes and Senior Notes ("Indentures"). In addition, G&G and one of its affiliates have pledged common shares of Consumers that they own as collateral for certain indebtedness guaranteed by G&G. If an event of default were to occur on this indebtedness, the lenders would have the right to foreclose on those common shares, which would also 10 11 trigger a "change in control" as defined in the Indentures. Upon a "change of control" as defined in the Indentures, Anchor would be required to make an offer to repurchase all of the First Mortgage Notes and the Senior Notes at 101% of the outstanding principal amount. Anchor does not have the cash available to make this repurchase offer. The failure to make the offer would result in an event of default that would give the noteholders the right to accelerate the debt resulting in a default under Anchor's Replacement Credit Facility. Anchor intends to approach its noteholders regarding a modification of the Indentures but does not know whether the notes could be restructured in a consensual manner with the noteholders before the occurrence of an event of default. These issues represent significant uncertainties as to the future financial position of Anchor. As a result of these uncertainties, the Company's outside auditors have rendered a qualified opinion on the Company's financial statements for the year ended December 31, 2000. The failure by the Company to obtain an unqualified opinion on its financial statements was an event of default under the Loan and Security Agreement, for which Anchor received a waiver. G&G, Consumers and their affiliates owe Anchor approximately $23.5 million, in addition to the advance to affiliate receivable of approximately $17.3 million, while Anchor owes G&G, Consumers and their affiliates approximately $11.6 million (of which approximately $9.5 million relates to the allocation of the write-off of certain software costs and is the subject of litigation. See Part II Item 1. Legal Proceedings.) Although Anchor does not expect the restructuring to adversely affect operations at Anchor, there can be no assurance that vendors and customers who do business with both Anchor and Consumers will continue to do so. The impact on Anchor of the financial restructuring by Consumers cannot be determined at this time and may negatively impact the liquidity and capital resources of the Company. In 2000, Anchor signed an agreement with Anheuser-Busch to provide all the bottles for the Anheuser-Busch Jacksonville, Florida and Cartersville, Georgia breweries, beginning in 2001 (the "Southeast Agreement"). To meet the expanded demand from the supply contract, Anchor invested approximately $18.0 million in new equipment in 2000 for its Jacksonville plant to increase production efficiency. To date, the funding for this project has been provided through the proceeds from the sale of the Houston plant (as discussed above), certain leasing transactions and internal cash flows. In December 1999, Anchor entered into an agreement with a major lessor for $30.0 million of lease transactions. Under this agreement, in December 2000, March 2001 and April 2001, Anchor financed approximately $4.2 million, $7.8 million and $5.4 million, respectively, of the expansion through sale leaseback arrangements and in December 1999 sold and leased back under a capital lease, equipment located at the Warner Robins, Georgia facility, for a net selling price of approximately $8.2 million. In September 1998, G&G entered into an agreement to purchase a controlling interest in a European glass manufacturer and advanced approximately $17.3 million toward that end. This amount was funded by G&G through a loan from Anchor of approximately $17.3 million in September 1998. The funds were obtained through a borrowing under the Original Credit Facility. The loan was evidenced by a promissory note that originally matured in January 1999. There is a disagreement among the Anchor directors as to the propriety of the extension of the original maturity date of the promissory note beyond January 1999. See Part II - Item 1. Legal Proceedings. The transaction has not closed. Should the transaction not close, the seller is obligated to return the advance to G&G. G&G has demanded the return of the advance plus interest accrued to date and related costs including the devaluation of the Deutschemark. Discussions have been held, but as of this date outstanding issues have not been resolved. In March 2000, G&G commenced an arbitration proceeding in accordance with the terms of the agreement to secure a return of the advance. A hearing is scheduled for June 2001. In connection with the pledge of the note to Bank of America, National Association, as agent under the Loan and Security Agreement, the original promissory note was replaced by a new promissory note (the "Replacement Note"). G&G has provided security against the Replacement Note to Bank of America, National Association, as agent under the Loan and Security Agreement. The maturity date of the Replacement Note is October 31, 2003. Interest on the Replacement Note is payable at the interest rate payable by Anchor on advances under the Loan and Security Agreement plus 0.5% and has been paid through September 2000. Unpaid interest of $457,000 and $391,000 is due for the quarters ended December 31, 2000 and March 31, 2001, respectively. Various rights, including the right to enforce the obligations under the Replacement Note were assigned to 11 12 Bank of America, National Association. Any property received by G&G in respect of the arbitration proceeding has been pledged to Bank of America, National Association, and will be used to repay outstanding borrowings under the Loan and Security Agreement. There is a disagreement among the Anchor directors as to the propriety of the assignment of those rights, the pledge of those proceeds and the replacement of the original promissory note with the Replacement Note. See Part II - Item 1. Legal Proceedings. The Indentures contain certain covenants that restrict Anchor from taking various actions, including, subject to specified exceptions and limits, the incurrence of additional indebtedness, the granting of additional liens, the making of investments, the payment of dividends and other restricted payments, mergers, acquisitions and other fundamental corporate changes, capital expenditures, asset sales and transactions with affiliates. The level of Anchor's and the Company's indebtedness could have important consequences, including: - a substantial portion of Anchor's cash flow from operations must be dedicated to debt service, - Anchor's and the Company's ability to obtain additional future debt financing may be limited and - the level of indebtedness could limit Anchor's and the Company's flexibility in reacting to changes in the industry and economic conditions in general. The Company expects significant expenditures in 2001, including interest expense on the First Mortgage Notes, the Senior Notes and advances under the Replacement Credit Facility, capital expenditures of approximately $40.0 million and payment of the $2.9 million litigation settlement as discussed in Part II - Item 1. Legal Proceedings. In addition, the Company anticipates purchases of natural gas at significantly higher prices during 2001 and estimates that its cash outlays for purchases of natural gas, based on current natural gas prices, will increase by approximately $19.0 million over 2000 levels. The Company expects to partially offset this impact through the cost recovery program implemented in 2000. Peak needs are in spring and fall at which time working capital borrowings are estimated to be $20.0 million higher than at other times of the year. The Company's results of operations were significantly impacted by the cost of natural gas in the first quarter of 2001. This is a variable cost over which the Company has little control. Significant increases in natural gas or energy costs could materially impact the Company's results of operations or liquidity plans in 2001. The Company's principal sources of liquidity through 2001 are expected to continue to be funds derived from operations, borrowings under the Replacement Credit Facility, proceeds from the sale/leaseback transactions noted above and proceeds from sales of discontinued manufacturing facilities. The Company's plans to increase liquidity include continuation of its cost reduction efforts, continuation of its natural gas cost recovery program, as well as increased sales volumes from its supply agreements with major customers. Unexpected cash needs resulting from an unusual increase in energy or other costs could force the Company to take additional measures, such as reduction in capital asset spending, price increases, production curtailments and consideration of other cost reduction measures. Management believes that the cash flows discussed above will provide adequate funds for the Company's working capital needs and capital expenditures through December 31, 2001. However, cash flows from operations depend on future operating performance which is subject to prevailing conditions and to financial, business and other factors, many of which are beyond the Company's control. Should the Company suffer material adverse conditions from the issues discussed above, additional measures may be required, including sales of assets and consideration of other strategic alternatives. 12 13 IMPACT OF INFLATION The impact of inflation on the costs of the Company, and the ability to pass on cost increases in the form of increased sales prices, is dependent upon market conditions. While the general level of inflation in the domestic economy has been relatively low, the Company has experienced significant cost increases in specific materials and energy and has not been fully able to pass on inflationary cost increases to its customers for several years, although it did realize some price relief in 2000, primarily due to the abnormally high energy costs experienced during the year. SEASONALITY Due principally to the seasonal nature of the brewing, iced tea and other beverage industries, in which demand is stronger during the summer months, the Company's shipment volume is typically higher in the second and third quarters. Consequently, the Company will build inventory during the first quarter in anticipation of seasonal demands during the second and third quarters. In addition, the Company has historically scheduled shutdowns of its plants for furnace rebuilds and machine repairs in the first and fourth quarters of the year to coincide with scheduled holiday and vacation time under its labor union contracts. These shutdowns normally adversely affect profitability during the first and fourth quarters, however the Company has in the past and will continue in the future to implement alternatives to reduce downtime during these periods in order to minimize disruption to the production process and its negative effect on profitability. INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS With the exception of the historical information contained in this report, the matters described herein contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words "believe," "anticipate," "expect," "estimate," "intend," "project," "will be," "will likely continue," "will likely result," or words or phrases of similar meaning including, statements concerning: - the Company's liquidity and capital resources, - the Company's debt levels and ability to obtain financing and service debt, - competitive pressures and trends in the glass container industry, - prevailing interest rates, - legal proceedings and regulatory matters, and - general economic conditions. Forward-looking statements involve risks and uncertainties (including, but not limited to, economic, competitive, governmental and technological factors outside the control of the Company) which may cause actual results to differ materially from the forward-looking statements. These risks and uncertainties may include the restructuring of Consumers; the ability of management to implement its business strategy in view of the Company's limited operating history; the highly competitive nature of the glass container industry and the intense competition from makers of alternative forms of packaging; the Company's focus on the beer industry and its dependence on certain key customers; the fluctuation in the price of natural gas; the seasonal nature of brewing, iced tea and other beverage industries; the Company's dependence on certain executive officers; and changes in environmental and other government regulations. The Company operates in a very competitive environment in which new risk factors can emerge from time to time. It is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the Company's business or the extent to which any factor, or a combination of factors, may cause actual results to differ materially from those contained in forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on forward-looking statements. 13 14 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Replacement Credit Facility is subject to variable interest rates. A change in interest rates could have an impact on results of operations. The Company's long-term debt instruments are subject to fixed interest rates and, in addition, the amount of principal to be repaid at maturity is also fixed. Therefore, the Company is not subject to market risk from its long-term debt instruments. Less than 1% of the Company's sales are denominated in currencies other than the U.S. dollar, and the Company does not believe its total exposure to be significant. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. On October 13, 2000, certain stockholders of Anchor, specifically CoMac Partners, L.P., CoMac Endowment Fund, L.P., CoMac Opportunities Fund, L.P., CoMac International, N.V., Carl Marks Strategic Investments, LP, Carl Marks Strategic Investments II, LP, Varde Partners, L.P., Varde Fund (Cayman) Ltd., Pequod Investments, L.P., Pequod International Ltd., Cerberus Partner L.P. and Cerberus International Ltd. (collectively, the "Plaintiffs"), commenced a shareholder derivative action against certain of Anchor's directors, officers and certain related entities in The Court of Chancery of the State of Delaware in and for New Castle County. The action seeks recovery to Anchor, which is named as a party to the action in the capacity of a nominal defendant, for damages Plaintiffs allege Anchor suffered through breach of fiduciary duties (including extension of the G&G promissory note without proper authority and approval of an allocation of write off of certain software costs from Consumers to Anchor), unjust enrichment and usurpation of corporate opportunity of Anchor (including the receipt of $15.0 million by Consumers in connection with an agreement to manage the renovation of the Houston facility). Anchor is named as a party to the case for procedural purposes but no recovery is sought from the Company. The Company has been advised by the other defendants that they will vigorously defend the action and that they believe they have meritorious defenses. On February 16, 2000, Owens commenced an action against Anchor and certain of its affiliates, including Consumers and GGC, in the United States District Court for the Southern District of New York. Owens alleged violations of the Technical Assistance and License Agreement ("TALA") and its resulting termination. Owens sought various forms of relief including (1) a permanent injunction restraining Anchor and its affiliates from infringing Owens' patents and using or disclosing Owens' trade secrets and (2) damages for breaches of the TALA. On November 6, 2000, Anchor and its affiliates, including Consumers, reached a settlement concerning all aspects of the Owens dispute. As part of the settlement, Owens will grant Anchor and its affiliates a limited license through 2005. The limited license will cover technology in place during the term of the TALA, at the same royalty rate as in the TALA. Upon expiration of the limited license, Anchor and its affiliates, including Consumers, will receive a paid-up license for that technology. Documentation for the settlement (including mutual releases) and the limited license agreement is being negotiated. Implementation of the settlement has not been finalized as the parties have not reached agreement upon all of the terms of the definitive documentation. The Company intends to continue its efforts to complete the settlement process. Under the settlement, Anchor, Consumers and GGC will pay an aggregate of $5.0 million to Owens. Anchor estimated its allocation of this settlement to be $2.9 million, based on sales and machine installations. Consumers, GGC and another affiliate will receive a refund of $1.2 million, in the aggregate, of royalties paid previously under protest. Consummation of the settlement will terminate all litigation over the matter, including the federal court suit and an overseas lawsuit, as well as arbitration proceedings. In addition, the Company is, and from time to time may be, a party to routine legal proceedings incidental to the operation of its business. The outcome of these proceedings is not expected to have a material adverse effect on the financial condition or operating results of the Company, based on the Company's current understanding of the relevant facts and law. 14 15 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. None ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None ITEM 5. OTHER INFORMATION. None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. a. Exhibits None b. Reports on Form 8-K None 15 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CONSUMERS U.S., INC. Date: May 15, 2001 By /s/ C. Kent May ------------------------------- C. Kent May Secretary 16

CONSUMERS US INC 10-Q