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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.
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(Exact name of registrant as specified in its charter)
Delaware 23-2874087
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3140 William Flinn Highway, Allison Park, Pennsylvania 15101
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(Address of principal executive offices) (Zip Code)
412-486-9100
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(Registrant's telephone number, including area code)
None
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(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
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CONSUMERS U.S., INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 2000
INDEX
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Statements of Operations and Comprehensive Income -
Three and Nine Months Ended September 30, 2000 and 1999 3
Condensed Consolidated Balance Sheets -
September 30, 2000 and December 31, 1999 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 13
PART II - OTHER INFORMATION 13
SIGNATURES 15
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSUMERS U.S., INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 492,712 $ 486,687 $ 163,729 $ 170,105
Costs and expenses:
Cost of products sold 453,487 448,465 150,635 156,782
Selling and administrative expenses 22,806 20,820 7,229 6,939
Litigation settlement 2,300 -- 2,300 --
Income from operations 14,119 17,402 3,565 6,384
Other income, net 6,293 150 11 337
Interest expense (22,169) (20,485) (7,783) (6,626)
--------- --------- --------- ---------
Income (loss) before preferred stock
dividends of subsidiary (1,757) (2,933) (4,207) 95
Preferred stock dividends of subsidiary (4,188) (4,187) (1,412) (1,411)
--------- --------- --------- ---------
Loss before minority interest (5,945) (7,120) (5,619) (1,316)
Minority interest -- 3,533 -- 3,533
--------- --------- --------- ---------
Net income (loss) $ (5,945) $ (3,587) $ (5,619) $ 2,217
========= ========= ========= =========
Comprehensive income (loss) $ (5,945) $ (3,587) $ (5,619) $ 2,217
========= ========= ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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CONSUMERS U.S., INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
(unaudited)
------------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,228 $ 5,278
Accounts receivable 64,895 53,556
Inventories:
Raw materials and manufacturing supplies 23,798 24,415
Finished products 95,718 82,562
Other current assets 10,172 7,603
--------- ---------
Total current assets 195,811 173,414
Property, plant and equipment, net 299,384 320,001
Other assets 29,113 29,545
Advance to affiliate 17,648 17,571
Strategic alliances with customers 7,529 11,089
Goodwill 47,864 50,096
--------- ---------
$ 597,349 $ 601,716
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Revolving credit facility $ 37,605 $ 40,895
Current maturities of long-term debt 1,946 2,029
Accounts payable 49,502 48,729
Accrued expenses 36,281 38,058
Accrued interest 8,961 5,953
Accrued compensation and employee benefits 25,979 23,895
--------- ---------
Total current liabilities 160,274 159,559
Long-term debt 208,926 210,208
Long-term pension liabilities 27,935 24,569
Long-term post-retirement liabilities 58,842 59,464
Other long-term liabilities 30,333 35,120
--------- ---------
326,036 329,361
Commitments and contingencies
Redeemable preferred stock of subsidiary 75,018 70,830
--------- ---------
Minority interest 6,460 6,460
--------- ---------
Stockholder's equity:
Common stock 170 170
Capital in excess of par value 88,630 88,630
Accumulated deficit (59,239) (53,294)
--------- ---------
29,561 35,506
--------- ---------
$ 597,349 $ 601,716
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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CONSUMERS U.S., INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
2000 1999
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,945) $ (3,587)
Adjustments to reconcile net income (loss) to cash provided
by operating activities:
Depreciation and amortization 42,474 42,108
Gain on sale of property, plant and equipment (4,138) --
Litigation settlement 2,300 --
Dividends accrued on preferred stock of subsidiary 4,188 4,187
Minority interest -- (3,533)
Other (222) 16
Decrease in cash resulting from changes in
assets and liabilities (20,201) (2,888)
-------- --------
18,456 36,303
Cash flows from investing activities:
Expenditures for property, plant and equipment (28,372) (32,920)
Deposit of sale proceeds into escrow account (10,000) --
Withdrawal of funds from escrow account 18,267 --
Proceeds from the sale of property, plant and
equipment 8,069 193
Stock in Parent, held for Pension Fund, pending
government approval -- (3,000)
Payments of strategic alliances with customers (2,750) (2,000)
Other (2,164) (912)
-------- --------
(16,950) (38,639)
Cash flows from financing activities:
Principal payments of long-term debt (1,488) (671)
Net repayments on revolving credit facility (3,290) (8,655)
Sale of note receivable -- 11,200
Other, primarily financing fees (778) (137)
-------- --------
(5,556) 1,737
Cash and equivalents:
Decrease in cash and cash equivalents (4,050) (599)
Balance, beginning of period 5,278 4,106
-------- --------
Balance, end of period $ 1,228 $ 3,507
======== ========
Supplemental disclosure of cash flow information:
Interest payments, net $ 19,161 $ 17,117
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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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.
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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.
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(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.
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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
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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.
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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.
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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.
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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
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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.
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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
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