10-Q 1 g65433e10-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 September 30, 2000 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 November 14, 2000: Common Stock, $.01 par value, 17,000,100 shares 1 of 15 ================================================================================ 2 CONSUMERS U.S., INC. FORM 10-Q For the Quarterly Period Ended September 30, 2000 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 September 30, 2000 and the results of operations and cash flows for the three and nine months ended September 30, 2000 and 1999 and cash flows for the nine months ended September 30, 2000 and 1999. 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, 1999. 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 (the "Asset Purchase Agreement"), 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"). Anchor 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. Anchor currently engages (and intends to expand) in a variety of transactions with Consumers and GGC as a part of its strategy to achieve synergies among the companies. These expected transactions may include bulk purchasing of raw and packaging materials, provision of technical and engineering services, joint utilization of Anchor's mold and repair shops and the consolidation of certain functions such as sales, engineering and management information services. NOTE 3 - REVOLVING CREDIT FACILITY 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. 6 7 Revolving credit loans bear interest at a rate based upon the prime rate or LIBOR rate, plus a variable margin, as defined. Interest is payable monthly. An unused line fee of 0.5% on the unused portion of the facility and letter of credit fees, as defined, are payable monthly. The Replacement Credit Facility expires October 16, 2003. Anchor's obligations under the Loan and Security Agreement 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. NOTE 4 - SALE OF CLOSED MANUFACTURING FACILITY In March 2000, Anheuser-Busch Companies, Inc. ("Anheuser-Busch") purchased Anchor's previously closed Houston, Texas glass container manufacturing facility and certain related operating rights. Anchor received proceeds of $10.0 million from the sale. Concurrently, Consumers Packaging Inc. ("Consumers"), the Company's indirect parent, for an aggregate consideration of $15.0 million, entered into a contract with Anheuser-Busch to manage the renovation and provide the technical expertise in the re-opening of the Houston facility, while simultaneously agreeing to give up all rights under a proposed joint venture agreement with Anheuser-Busch to own and operate the Houston facility. Anchor expects to negotiate a contract with Anheuser-Busch to provide management assistance in the operations of the facility upon its refurbishment. NOTE 5- REDEEMABLE PREFERRED STOCK Anchor has designated 2,239,320 shares as Series A Preferred Stock. The Series A Preferred Stock ranks, as to dividends and redemption and upon liquidation, prior to all other classes and series of capital stock of Anchor. The holders of Series A Preferred Stock are entitled to receive, when and as declared by the Board of Directors of Anchor, cumulative dividends, payable quarterly in cash, at an annual rate of 10%. Unpaid dividends have been accrued and included with the value of the related preferred stock on the condensed balance sheets. NOTE 6 - SUBSEQUENT EVENT On November 6, 2000, Anchor and its affiliates, including Consumers, reached a settlement concerning all aspects of the Owens dispute (see Part II - Item 1 - Legal Proceedings). As part of the settlement, the Technical Assistance and License Agreement will be amended and extended through 2005. The amended agreement will cover technology now in place, at the same royalty rate. Upon expiration of the agreement, Anchor and its affiliates, including Consumers, will receive a paid-up license for that technology. Documentation for the amended agreement and mutual releases is expected to be completed by the end of November 2000. Under the settlement, Anchor, Consumers and GGC will pay an aggregate of $5.0 million to Owens. Anchor has estimated its allocation of this settlement to be $2.3 million. This charge has been recorded in the third quarter ended September 30, 2000. Consumers, GGC and another affiliate will receive a refund of $1.213 million of royalties paid previously under protest. The settlement terminates all litigation over the matter, including a federal court suit and an overseas lawsuit, as well as arbitration 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. 7 8 (collectively, the "Plaintiffs"), commenced a shareholder derivative action against certain of Anchor's directors, officers, Consumers U.S. and certain other 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, unjust enrichment and usurpation of a corporate opportunity of Anchor. Plaintiffs claim that Anchor has suffered unspecified damages but which are "believed to be in excess of $50 million," and seek judgment, among other things requiring the defendants to pay to Anchor the amounts by which Anchor has been allegedly harmed. The Company believes that it has meritorious defenses to the Plaintiffs' claims in the action and intends to conduct a vigorous defense. The Company has been advised by the other defendants against whom recovery is sought that they likewise believe that they have meritorious defenses to the Plaintiffs' claims and also intend to conduct a vigorous defense. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Consumers U.S., Inc. was formed in January 1997 to consummate the Anchor Acquisition. Prior to the Anchor Acquisition, neither Anchor nor the Company had any operations. RESULTS OF OPERATIONS Net Sales. Net sales for the 2000 third quarter were $163.7 million compared to $170.1 million for the third quarter of 1999, a decrease of $6.4 million, or 3.7%. Net sales for the nine months ended September 30, 2000 were $492.7 million, an increase of $6.0 million or 1.2%, from $486.7 million for the comparable period of 1999. This increase in year to date net sales was principally as a result of the increase in shipment volume, particularly in the beer and tea product lines. Also, this improvement reflects some minor increases in pricing. The decrease in net sales in the 2000 third quarter compared to the same period of 1999 reflects relatively level overall shipments, with a slight change in mix towards lower priced product lines. Cost of Products Sold. The Company's cost of products sold in the third quarter and first nine months of 2000 were $150.6 million and $453.5 million, respectively (or 92.2% and 92.1% of net sales), while the cost of products sold for the third quarter of 1999 and first nine months of 1999 were $156.7 million and $448.4 million, respectively (or 92.2% and 92.1% of net sales). This level percentage of cost of products sold principally reflects the benefits of the cost savings strategies that the Company began to implement in prior years and improved margins in the beer and tea product lines. These cost decreases have been offset by increases in other manufacturing costs. The Company experienced significant increases in the cost of natural gas as well as increases in the cost of corrugated packaging material as compared to the same periods of the preceding year. Effective April 1, 1999, Anchor finalized its labor contract with approximately 90% of its hourly personnel. As a result, the Company experienced an increase in hourly labor costs and pension expense beginning in the second quarter of 1999. Selling and Administrative Expenses. Selling and administrative expenses for the nine months ended September 30, 2000 were approximately $22.8 million (or 4.6% of net sales), while selling and administrative expenses for the comparable period of 1999 were $20.9 million (or 4.3% of net sales). This increase in selling and administrative expenses, in total dollars and as a percentage of net sales, reflects increased legal costs as a result of the legal proceedings discussed in Part II - Item 1 and higher overall employee related costs. Interest Expense. Interest expense for the third quarter of 2000 was approximately $7.8 million compared to $6.6 million in the third quarter of 1999, an increase of 17.5%. Interest expense for the first nine months of 2000 was approximately $22.2 million compared to $20.5 million in the first nine months of 1999, an increase of 8.2%. Interest expense has increased due to higher interest rates, offset by slightly lower average outstanding borrowings under our revolving credit facility during 2000, as compared to 1999. Net Income (Loss). As a result of the foregoing, the Company had a loss in the third quarter of 2000 of approximately $5.6 million as compared to net income of approximately $2.2 million in the same period of 1999 and a year to date net loss of approximately $5.9 million compared to a net loss of $3.6 million in the comparable period of 1999. 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 on the sale of certain operating rights related to the Texas facility, both included in Other income, net. Excluding the gains on these sales transactions, the Company would have reported a loss of approximately $12.0 million for the nine months ended September 30, 2000. LIQUIDITY AND CAPITAL RESOURCES In the first nine months of 2000, operating activities provided $18.5 million in cash as compared to $36.3 million in the same period of 1999. This decrease in cash provided reflects the improvement in earnings adjusted for changes in working capital items. Accounts receivable at September 30, 2000 increased approximately $11.0 million as compared with the December 1999 year end, primarily reflecting the increased 9 10 sales. Accounts receivable at September 1999 decreased by approximately $18.1 million from year end 1998 primarily reflecting the receipt of $20.0 million of intercompany receivable balances. Cash consumed in investing activities for the first nine months of 2000 and 1999 were $17.0 million and $38.6 million, respectively. Capital expenditures in the nine months ended September 30, 2000 were $28.4 million compared to $32.9 million in the comparable period of 1999. In the first nine months of 2000, the Company 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 fourth quarter of 1999 and the first quarter of 2000. 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 October 27, 2000, advances outstanding under the Replacement Credit Facility were $49.2 million, borrowing availability was $26.0 million and total outstanding letters of credit on this facility were $11.3 million. Net cash of $5.6 million was used in financing activities in the first nine months of 2000, principally reflecting repayments under the Original 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. In September 1998, G&G Investments, Inc. ("G&G) (acting on behalf of Consumers) entered into an agreement to purchase a controlling interest in a European glass manufacturer and advanced $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. This loan was permitted through an amendment to the Intercompany Agreement, which was approved by Anchor's Board of Directors. In connection with Anchor's 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 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 1/2% and has been paid through September 2000. A number of issues have arisen and 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 costs related to the devaluation of the Deutschemark, and will upon receipt, repay the loan from Anchor. 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. 10 11 The indentures covering Anchor's $150.0 million aggregate principal amount of 11-1/4% First Mortgage Notes due 2005 (the "First Mortgage Notes") and Anchor's $50.0 million aggregate principal amount of 9 7/8% Senior Notes due 2008 (the "Senior Notes") 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 the Company's indebtedness could have important consequences, including: o a substantial portion of the Company's cash flow from operations must be dedicated to debt service, o the Company's and Anchor's ability to obtain additional future debt financing may be limited and o the level of indebtedness could limit the Company's and Anchor's flexibility in reacting to changes in the industry and economic conditions in general. The Company expects significant expenditures in 2000, including interest expense on the First Mortgage Notes, the Senior Notes and advances under the Credit Facility, capital expenditures in the range of $28.0 million to $31.0 million, any additional capital expenditures beyond this level will be financed from sources outside the Company and the payment of the $2.3 million litigation settlement as discussed in Part II-Item 1- Legal Proceedings. Anchor announced that it signed an agreement with Anheuser-Busch to provide all the bottles for the Anheuser-Busch Jacksonville, Florida and Cartersville, Georgia breweries, beginning in 2001. To meet the expanded demand from the supply contract, Anchor will invest approximately $18.0 million in new equipment for its Jacksonville plant to increase production efficiency. Of this amount, approximately $8.0 million has been spent. To date, the funding for this project has been provided through the proceeds from the sale of the Houston plant (see below), 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, Anchor sold, in December 1999, and leased back under a capital lease, equipment located at the Warner Robins facility, for a net selling price of approximately $8.2 million. Anchor is continuing discussions with certain co-lessors identified as part of the $30.0 million transaction for the remaining Jacksonville expansion funding. In March 2000, Anheuser-Busch purchased the previously closed Houston, Texas glass container manufacturing facility and certain related operating rights. Anchor received proceeds of $10.0 million from the sale. Concurrently, Consumers, for an aggregate consideration of $15.0 million, entered into a contract with Anheuser-Busch to manage the renovation and provide the technical expertise in the re-opening of the Houston facility, while simultaneously agreeing to give up all rights under a proposed joint venture agreement with Anheuser-Busch to own and operate the Houston facility. Anchor expects to negotiate a contract with Anheuser-Busch to provide management assistance in the operations of the facility upon its refurbishment. Effective April 1, 1999, Anchor finalized its labor contract with approximately 90% of its hourly personnel. As a result, the Company experienced an increase in hourly labor costs and pension expense in 1999 and will incur increased costs in subsequent years. 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 principal sources of liquidity through the end of the year are expected 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. Management believes that the cash flows discussed above, will provide adequate funds for the Company's working capital needs and capital expenditures. 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. 11 12 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 pricing pressures in the current market and while it has not been fully able to pass on inflationary cost increases to its customers, it did realize some price relief in 2000. 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 generally schedules 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 adversely affect profitability during the first and fourth quarters. 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: o the Company's liquidity and capital resources, o the Company's debt levels and ability to obtain financing and service debt, o competitive pressures and trends in the glass container industry, o prevailing interest rates, o legal proceedings and regulatory matters, and o 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 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 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. 12 13 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Anchor'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, Consumers U.S., Inc. (the "Company") and certain other 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, unjust enrichment and usurpation of a corporate opportunity of Anchor. Plaintiffs claim that Anchor has suffered unspecified damages but which are "believed to be in excess of $50 million," and seek judgment, among other things requiring the defendants to pay to Anchor the amounts by which Anchor has been allegedly harmed. The Company believes that it has meritorious defenses to the Plaintiffs' claims in the action and intends to conduct a vigorous defense. The Company has been advised by the other defendants against whom recovery is sought that they likewise believe that they have meritorious defenses to the Plaintiffs' claims and also intend to conduct a vigorous defense. On February 16, 2000, Owens commenced an action against the Company and certain of its affiliates, including Consumers and GGC, L.L.C., 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 is seeking various forms of relief including (1) a permanent injunction restraining the Company and its affiliates from infringing Owens' patents and using or disclosing Owens' trade secrets and (2) damages for breaches of the TALA. The Company and its affiliates filed a demand for arbitration with the American Arbitration Association on February 24, 2000. On March 15, 2000, the Court ruled that the dispute as to whether there was a valid termination of the TALA is subject to arbitration. On March 31, 2000, Owens submitted its answer and counterclaims in the arbitration. Owens has asserted the position that (i) the Court referred to arbitration only the question whether there was a valid termination of the TALA and (ii) certain of Owens' claims are not arbitrable. On May 1, 2000, the Company and its affiliates submitted Claimants' Reply to the counterclaim in the arbitration. The hearing on the merits in the arbitration is scheduled to begin in November 2000. On April 14, 2000, Owens and the Company and certain of its affiliates consented to the entry of an order by the Court which requires compliance with the TALA until further order of the Court. In addition, the order requires the Company and its affiliates to inventory all equipment, other technology and documents subject to the TALA and certify to the Court periodically that all royalties have been paid and no unauthorized technology transfer has occurred. In compliance with the order, Consumers' Italian subsidiary ceased using the disputed technology. 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, the TALA will be amended and extended through 2005. The amended agreement will cover technology now in place, at the same royalty rate. Upon expiration of the agreement, Anchor and its affiliates, including Consumers, will receive a paid-up license for that technology. Documentation for the amended agreement and mutual releases is expected 13 14 to be completed by the end of November 2000. Under the settlement, Anchor, Consumers and GGC will pay an aggregate of $5.0 million to Owens. Anchor has estimated its allocation of this settlement to be $2.3 million. This charge has been recorded in the third quarter ended September 30, 2000. Consumers, GGC and another affiliate will receive a refund of $1.213 million of royalties paid previously under protest. The settlement terminates all litigation over the matter, including a federal court suit and an overseas lawsuit, as well as arbitration proceedings. 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 10.65 Restated Intercompany Agreement dated as of October 16, 2000 (filed as an exhibit to Anchor's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 and incorporated herein by reference). 10.66 Consumers U.S., Inc. Guaranty and Pledge Agreement dated as of October 16, 2000 among Consumers U.S., Inc. and Bank America, National Association, as agent (filed as an exhibit to Anchor's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 and incorporated herein by reference). 27 Financial Data Schedule b. Reports on Form 8-K Current Report on Form 8-K dated October 13, 2000 (filed October 24, 2000) reporting a stockholder derivative action against certain of Anchor's directors, officers and certain related entities commenced by certain stockholders of Anchor. See Note 6 to the Condensed Consolidated Financial Statement and Part II - Item 1. - Legal Proceedings. 14 15 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: November 14, 2000 By /s/ C. Kent May -------------------------- C. Kent May Secretary 15

CONSUMERS US INC 10-Q