REPORT ON FORM 10-Q
For the quarter ended October 3, 1998
----------------
SAFELITE GLASS CORP.
(Exact name as specified in charter)
DELAWARE 13-3386709
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1105 SCHROCK ROAD, COLUMBUS, OHIO 43229 (Address, including zip
code of principal executive offices)
(614) 842-3000
(Telephone number, including area code)
As of October 3, 1998 there were 3,414,345 shares outstanding of the
Company's Class A Common Stock ($.01 par value) and 10,412,638 shares
outstanding of the Company's Class B Common Stock ($.01 par value).
<PAGE>
SAFELITE GLASS CORP. AND SUBSIDIARIES
INDEX
Page No.
Part I. Financial Information
--------------------------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
October 3, 1998 and April 4, 1998 3
Consolidated Condensed Statements of Operations -
Three Months Ended October 3, 1998 and September 27, 1997 4
Consolidated Condensed Statements of Operations -
Six Months Ended October 3, 1998 and September 27, 1997 5
Consolidated Condensed Statements of Cash Flows -
Six Months Ended October 3, 1998 and September 27, 1997 6
Notes to Consolidated Condensed Financial Statements 7 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 12
Part II. Other Information
----------------------
Item 6. Exhibits and Reports on Form 8-K 13
<PAGE>
PART I.
ITEM 1. Financial Statements
SAFELITE GLASS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except per share amounts)
October 3, 1998 April 4, 1998
ASSETS (Unaudited)
CURRENT ASSETS:
Cash ........................................... $ 6,281 $ 10,254
Accounts receivable, net ....................... 65,793 62,000
Inventories .................................... 52,928 50,535
Other current assets ........................... 23,602 29,798
--------- ---------
Total current assets .................... 148,604 152,587
PROPERTY, PLANT AND EQUIPMENT - NET ................ 59,522 61,994
INTANGIBLE ASSETS - NET ............................ 293,850 292,325
OTHER ASSETS ....................................... 20,048 24,873
DEFERRED INCOME TAXES .............................. 47,467 44,576
--------- ---------
TOTAL ASSETS ...................................... $ 569,491 $ 576,355
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable ............................... $ 52,938 $ 43,480
Current portion - long term debt ............... 10,665 5,941
Accrued expenses:
Payroll and related items .................. 9,718 9,669
Self-insurance reserves .................... 6,998 7,018
Restructuring reserves ..................... 9,397 22,390
Accrued interest ........................... 3,772 8,695
Other ...................................... 10,410 15,075
--------- ---------
Total current liabilities ............... 103,898 112,268
LONG-TERM DEBT - LESS CURRENT PORTION .............. 501,776 497,645
OTHER LONG-TERM LIABILITIES ........................ 11,111 14,853
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock issued, 8%, $0.01 par value .... 0 0
Class A common stock issued, $0.01 par value ... 38 38
Class B common stock issued, $0.01 par value ... 104 104
Additional paid-in capital ..................... 324,879 324,879
Accumulated deficit ............................ (360,960) (362,077)
Other .......................................... (11,355) (11,355)
--------- ---------
Total stockholders' deficit ............. (47,294) (48,411)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT ........ $ 569,491 $ 576,355
========= =========
See notes to consolidated condensed financial statements.
<PAGE>
SAFELITE GLASS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands)
Three Months Ended
October 3, 1998 September 27, 1997
(Unaudited) (Unaudited)
SALES:
Installation and related services ............ $ 219,447 $ 113,185
Wholesale .................................... 12,405 13,136
--------- ---------
Total sales .............................. 231,852 126,321
COST OF SALES .................................... 171,530 85,436
--------- ---------
GROSS PROFIT ..................................... 60,322 40,885
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ..................................... 48,307 27,012
LOSS ON SALE OF SUBSIDIARY ....................... -- 5,418
RESTRUCTURING EXPENSES ........................... 713 --
OTHER OPERATING EXPENSES ......................... 2,628 --
--------- ---------
OPERATING INCOME ................................. 8,674 8,455
INTEREST EXPENSE ................................. (11,273) (6,872)
INTEREST INCOME .................................. 57 358
--------- ---------
INCOME (LOSS) BEFORE INCOME TAX PROVISION ........ (2,542) 1,941
INCOME TAX (PROVISION) BENEFIT ................... 210 (3,016)
--------- ---------
NET LOSS ......................................... $ (2,332) $ (1,075)
========= =========
See notes to consolidated condensed financial statements.
<PAGE>
SAFELITE GLASS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands)
Six Months Ended
October 3, 1998 September 27, 1997
(Unaudited) (Unaudited)
SALES:
Installation and related services .......... $ 446,505 $ 226,626
Wholesale .................................. 26,514 28,816
--------- ---------
Total sales ............................ 473,019 255,442
COST OF SALES .................................. 342,262 170,494
--------- ---------
GROSS PROFIT ................................... 130,757 84,948
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ................................... 95,799 56,340
LOSS ON SALE OF SUBSIDIARY ..................... -- 5,418
RESTRUCTURING EXPENSES ......................... 4,222 --
OTHER OPERATING EXPENSES ....................... 3,613 --
--------- ---------
OPERATING INCOME ............................... 27,123 23,190
INTEREST EXPENSE ............................... (22,460) (13,240)
INTEREST INCOME ................................ 212 590
--------- ---------
INCOME BEFORE INCOME TAX PROVISION ............. 4,875 10,540
INCOME TAX PROVISION ........................... (3,758) (6,528)
--------- ---------
NET INCOME ..................................... $ 1,117 $ 4,012
========= =========
See notes to consolidated condensed financial statements.
<PAGE>
SAFELITE GLASS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
October 3, 1998 September 27, 1997
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................ $ 1,117 $ 4,012
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization .................. 11,611 4,129
Loss on sale of subsidiary ..................... -- 5,418
Deferred income taxes .......................... 2,872 6,528
(Gain) loss on disposition of assets ........... (179) 8
Changes in operating assets and liabilities:
Accounts receivable ........................... (3,793) (2,975)
Inventories ................................... (2,393) 4,700
Accounts payable .............................. 9,458 3,952
Restructuring reserves ........................ (14,274) --
Accrued expenses .............................. (4,636) 3,900
Accrued interest .............................. (4,923) 488
Other ......................................... 1,459 (12,234)
Cash flows provided by discontinued operations . -- 7,915
--------- ---------
Net cash flows provided by operating activities (3,681) 25,841
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ........................... (9,338) (4,963)
Proceeds from sale of fixed assets ............. 191 45
Net cash transferred upon sale of subsidiary ... -- (3,407)
--------- ---------
Net cash flows provided by (used in) investing
activities ................................... (9,147) (8,325)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt ..................... (2,995) (2,699)
Borrowings on revolver ......................... 114,740 3,520
Payments on revolver ........................... (102,890) (11,120)
Stock transactions ............................. -- 40
--------- ---------
Net cash flows provided by (used in) financing
activities ................................... 8,855 (10,259)
--------- ---------
NET DECREASE IN CASH .............................. (3,973) 7,257
CASH AT BEGINNING OF PERIOD ....................... 10,254 16,515
--------- ---------
CASH AT END OF PERIOD ............................. $ 6,281 $ 23,772
========= =========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest ......................... $ 26,174 $ 11,864
========= =========
Cash paid for income taxes ..................... $ 431 $ 219
========= =========
See notes to consolidated condensed financial statements.
<PAGE>
SAFELITE GLASS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Significant Accounting Policies
The consolidated condensed financial statements of the Company
include the accounts of all wholly owned subsidiaries and all
significant intercompany amounts have been eliminated. On
December 19, 1997, Safelite completed a merger with Vistar, Inc.
(the "Vistar Merger"). The merger was accounted for as a
purchase; accordingly, the operations of Vistar are included in
the Company's financial statements beginning December 19, 1997.
Prior to the Vistar Merger, Vistar was the second largest
provider of automotive glass replacement and repair services in
the United States (see Note 3).
The balance sheet at April 4, 1998 is condensed financial
information taken from the audited balance sheet. The interim
consolidated condensed financial statements are unaudited but, in
the opinion of management, reflect all adjustments necessary for
a fair presentation of the results of operations and financial
position for such periods. All such adjustments reflected in the
consolidated condensed financial statements are considered to be
of a normal recurring nature. On May 18, 1998, the Company made
the decision to change its fiscal year end from the Saturday
closest to December 31 to the Saturday closest to March 31. The
financial statements for the three months and six months ended
October 3, 1998 should be read in conjunction with the audited
consolidated financial statements and notes thereto contained in
the Company's transition period report for the three months ended
April 4, 1998 and the Company's annual report for the fiscal year
ended January 3, 1998. Results of operations in interim periods
are not necessarily indicative of results to be expected for a
full year.
Comprehensive Income - Comprehensive income was equal to net
income for the six months ended October 3, 1998 and September 27,
1997.
Note 2. Purchase Accounting Adjustments and Restructuring
As a result of the Vistar Merger, the Company has undertaken a
process to consolidate redundant overhead in both field and
corporate operations, eliminate redundant service center
locations and eliminate redundant sales and marketing activities.
During the quarter ended October 3, 1998, the Company recorded an
accrual of $0.8 million for Vistar service center closings and
employee severance as part of its purchase price allocation for
Vistar. In addition, during the quarter ended October 3, 1998, a
restructuring provision of $0.7 million was recorded to provide
for Safelite service center closings and related severance costs.
<PAGE>
As of October 3, 1998, the majority of this consolidation
activity had been completed. Prior to December 1998, the Company
expects to complete its market-by-market analysis of overlapping
field locations and administrative activities of both Vistar and
the Company. Costs associated with additional consolidation of
Vistar functions and activities will be recorded as an adjustment
to the initial purchase allocation. The costs associated with
closing Safelite locations will be expensed when the decision as
to which facilities to close is made. Management estimates the
aggregate of all merger related closing and consolidation costs
will range from $38.0 million to $40.0 million.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Sales. Sales for the quarter ended October 3, 1998, increased $105.5 million, or
84% to $231.8 million, from $126.3 million in the corresponding quarter of 1997.
Installation and related services for the second quarter grew $106.3 million, or
94% to $219.4 million. Approximately 70% of this growth was attributable to
service center sales while the remainder was provided by increased network
sales. Most of the sales growth in installation and related services is
attributable to the Vistar Merger, with some pricing favorability and improved
customer mix also contributing to the increase. While sales have increased
substantially over last year due to the Vistar Merger, the Company's focus on
the complexities of merger integration activities has had an adverse impact on
post-merger sales growth.
Wholesale sales for the quarter ended October 3, 1998, fell 6% to $12.4 million
as a result of a 2% decline in unit sales further impacted by lower prices.
These results are reflective of the soft market conditions currently being
experienced in the auto glass replacement market.
For the six months ended October 3, 1998, sales increased $217.6 million, or 85%
to $473.0 million from $255.4 million. Installation and related services rose
$219.9 million, or 97% to $446.5 million, and wholesale sales fell 8% to $26.5
million for the reasons discussed above.
Gross Profit. Gross profit for the quarter ended October 3, 1998, increased
47.5% to $60.3 million, from $40.9 million in the comparable quarter of 1997,
mainly as a result of increased sales volume from the Vistar Merger. Gross
profit margin decreased to 26% as compared to 32% in the comparable period of
the prior year as higher prices and improved customer mix were more than offset
by the higher rate of growth of network business relative to total sales. The
gross profit margin on network sales is substantially lower than on work
performed through Safelite owned service centers. Additional gross margin
compression occurred as a result of decreased productivity in service center
operations during the merger integration period.
<PAGE>
For the six months ended October 3, 1998, gross profit was $130.8 million,
reflecting an increase of $45.8 million, or 54% over the comparable period in
1997. Gross profit margin decreased to 27.6% in the first half of 1998, from 33%
in the comparable period of 1997, primarily due to the shift in mix of business
towards network business and away from Safelite owned service centers and the
decreased service center productivity described above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses rose 79% in the second quarter of 1998 to $48.3 million,
as compared to $27.0 million in the corresponding quarter in 1997, mainly as a
result of the Vistar Merger. As a percentage of sales for the quarter ended
October 3, 1998, selling, general and administrative expenses remained flat at
21% as merger synergies achieved by the elimination of overlapping general and
administrative functions offset the effects of slower post-merger sales growth.
For the six months ended October 3, 1998, selling, general and administrative
expenses rose 70% to $95.8 million from $56.3 million in the corresponding six
months of 1997. As a percentage of sales for the six months ended October 3,
1998, selling, general and administrative expenses decreased to 20% from the
corresponding prior year percentage of 22% due to the achievement of merger
synergies.
Income Before Income Taxes. Income before income taxes decreased to a loss of
$2.5 million in the second quarter of 1998 from net income of $1.9 million in
the comparable quarter of 1997. For the six months ended October 3, 1998, income
before taxes decreased to $4.9 million from $10.5 million in the comparable
period of 1997. In addition to the impact of merger integration on sales and
gross profit described above, income before income taxes in 1998 was adversely
affected by $9.2 million in increased interest costs and $7.8 million in
restructuring and one-time integration costs associated with the Vistar Merger.
Income before income taxes in the quarter and six months ended September 27,
1997 included a $5.4 million loss on sale of the Company's former parent, Lear
Siegler.
Income Taxes. In the second quarter and first half of 1998, the Company's
provisions for income taxes were significantly higher than income taxes computed
using statutory rates due to permanent differences, of which the principal item
is non-deductible amortization of goodwill.
Net Income. Net loss for the quarter ended October 3, 1998, was $2.3 million,
compared with a loss of $1.1 million in the comparable quarter of 1997. For the
six months ended October 3, 1998, net income was $1.1 million, down from $4.0
million in the corresponding period of 1997. The decreases in net income from
1997 were primarily due to the changes in income before income taxes described
above.
<PAGE>
Current Business Environment
Since its merger with Vistar, the Company has been implementing a cost
savings program. While the Company's cost savings program has been successful,
sales levels have been adversely impacted by the complexities of integration and
difficulties in combining the disparate cultures of the two merger partners.
Management is taking actions to refocus its field sales and operations
organizations in order to improve the Company's sales performance, but no
assurance can be given that the Company will be successful in these efforts. See
also "Liquidity and Capital Resources."
Liquidity and Capital Resources
Net cash used in operating activities for the six months ended October
3, 1998 was $3.7 million, an increase in cash usage of $29.5 million from the
corresponding prior year period. Excluding the cash flows associated with Lear
Siegler discontinued operations during the six month period ended September 27,
1997, the increase in cash usage of $21.6 million was primarily due to
restructuring cash payments and debt service requirements associated with the
Vistar Merger.
The Company's investing activities consist mainly of capital
expenditures for new and existing service center and warehouse locations,
capacity and efficiency upgrades to manufacturing facilities, and information
technology equipment. Capital expenditures totaled $9.3 million and $5.0 million
for the six months ended October 3, 1998 and September 27, 1997, respectively.
Management expects post-integration capital spending levels to
approximate $22.0 million annually after the Vistar Merger, with maintenance
spending approximating $10.0 million to $12.0 million annually. Additional
integration-related capital expenditures of $3.0 million to $5.0 million in both
fiscal years 1999 and 2000 are expected as a result of (i) converting Vistar
service centers and mobile vans to the Safelite logo and format and (ii)
expansion of certain centralized telephone/dispatch center locations.
Historically, the Company has utilized internally generated funds and
borrowings under credit facilities to meet ongoing working capital and capital
expenditure requirements. The Company will rely on internally generated funds
and, to the extent necessary, on borrowings under its revolving credit facility
to meet its liquidity needs. As of October 3, 1998, the Company had long-term
borrowings of $512.4 million and $46.9 million of availability under its
revolving credit facility (less $13.5 million in letters of credit outstanding
).
The Company's credit facilities contain financial and other covenants
that limit the ability of the Company to, among other things, dispose of assets,
incur additional indebtedness, incur guarantee obligations, prepay other
indebtedness or amend other debt instruments, pay dividends, create liens on
assets, make investments, loans or advances, make acquisitions, create
subsidiaries, engage in mergers, or engage in certain transactions with
affiliates and otherwise restrict certain corporate activities. In addition, the
Company is required to comply with certain financial covenants, including
specified financial ratios, minimum interest coverage ratios and maximum
leverage ratios. Depending
<PAGE>
on the Company's performance, the Company may not comply with certain covenants
contained in its senior credit facilities during the three month period ended
January 2, 1999 or the three month period ended April 3, 1999.
The Company has initiated discussions with its lenders under the senior
credit facilities seeking modifications of certain covenants in the senior
credit facilities which would more likely assure the Company's continued
compliance with its covenants. There can be no assurance that the Company will
be successful in modifying its credit facilities or, if successful, be able to
do so on terms that will not impose other restrictions on the Company. If the
Company is unable to obtain such a modification and is unable to remain in
compliance with certain covenants, then, in the absence of a waiver by the
lenders, the outstanding principal balances under the Company's senior credit
facilities, which in the aggregate totaled $503.1 million as of October 3, 1998,
may be subject to acceleration by the lenders.
In addition, the ability of the Company to operate its business, service
its debt service obligations and reduce its total debt will be dependent on the
future performance of the Company, which in turn, will be subject to general
economic conditions and to financial, business, and other factors, including
factors beyond the Company's control. A portion of the Company's debt bears
interest at floating rates; therefore, its financial condition is and will
continue to be affected by changes in prevailing interest rates.
Impact of Year 2000
The Company has initiated a program to prepare its computer systems and
applications for the Year 2000 change ("Year 2000"). As part of this program a
team has been assigned to evaluate the nature and extent of the work required to
make the Company's systems, products, electronic linkages with insurance company
customers and infrastructure Year 2000 compliant. Included in the scope of the
project are computer, network and communications hardware, systems and
applications software, telecommunication and point of sale equipment, "embedded
chip" issues within manufacturing and other facilities, as well as verification
with key suppliers and customers as to their compliance with the Year 2000
issue.
The assessment phase of the Year 2000 project is approximately 60%
complete with final completion of the assessment phase scheduled for December
1998. Implementation of remediation for Year 2000 compliance is already underway
and is currently estimated to be 25% complete with final completion expected by
August 1999. Completion of remediation testing is scheduled for September 1999,
while contingency planning is anticipated to be finished by March 1999.
Remediation of systems and applications software is being affected
through outside consultants, "factory support", in-house staff and in some cases
by the replacement of packages. Safelite is building an isolated test
environment where systems will be tested by resetting dates to various points
beyond the year 2000.
<PAGE>
Based on the Company's latest assessments, the total cost of addressing
the Year 2000 issue is estimated to be in the range of $2.0 to $3.0 million with
the majority of these costs representing incremental business costs to outside
vendors and consultants. As of October 3, 1998 less than $0.1 million of
external costs have been incurred. The Company does not separately track the
internal costs for the Year 2000 project, with such costs being principally the
related payroll costs for the Management Information Systems staff.
Surveys of critical suppliers and vendors are currently underway to
determine whether their systems will be timely converted. However, there can be
no assurance that the systems of other companies on which the Company relies
will be timely converted or that any such failure to convert by another company
would not have an adverse effect on the Company's systems. Furthermore, no
assurance can be given that any or all of the Company's systems are or will be
Year 2000 compliant, or that the ultimate costs required to address the Year
2000 project or the impact of any failure to achieve Year 2000 compliance will
not have a material adverse effect on the Company's financial condition. Readers
are cautioned that forward-looking statements contained in the Impact of Year
2000 should be read in conjunction with the Company's disclosures under the
heading "Cautionary Statement for the Purposes of the "Safe Harbor" Provisions
of the Private Securities Litigation Reform Act of 1995" beginning on page 12.
Cautionary Statement for the Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
Statements contained in this report that are prefaced with the words
"may," "will," "expect," "anticipate," "continue," "estimate," "project,"
"intend," "designed" and similar expressions, are intended to identify
forward-looking statements regarding events, conditions and financial trends
that may affect the Company's future plans of operations, business strategy,
results of operations and financial position. These statements are based on the
Company's current expectations and estimates as to prospective events and
circumstances about which the Company can give no firm assurance. Further, any
forward-looking statement speaks only as of the date on which such statement is
made, and the Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made. As it is not possible to predict every new factor that may
emerge, forward-looking statements should not be relied upon as a prediction of
actual future financial condition or results. These forward-looking statements,
like any forward-looking statements, involve risks and uncertainties that could
cause actual results to differ materially from those projected or anticipated.
Such risks and uncertainties include product demand, regulatory uncertainties,
the effect of economic conditions, the impact of competitive products and
pricing, changes in customers' ordering patterns and costs and expenses
associated with any Year 2000 issues associated with the Company, including
updating software and hardware and potential system interruptions. The foregoing
list should not be construed as exhaustive.
<PAGE>
PART II.
ITEM 6. Exhibits and Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
October 3, 1998.
13
<PAGE>
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.
SAFELITE GLASS CORP.
Date: November 17, 1998 /s/ Douglas A. Herron
------------------------
Douglas A. Herron
Senior Vice President
Chief Financial Officer
<PAGE>
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