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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 3, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-21949
SAFELITE GLASS CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 7536 13-3386709
(State or other (Primary Standard (IRS Employer
jurisdiction of Industrial Classification Identification No.)
incorporation) Code Number)
1105 SCHROCK ROAD, COLUMBUS, OHIO 43229 (614) 842-3000
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of April 3, 1999 there were 3,534,283 shares outstanding of
Safelite's Class A Voting Common Stock ($.01 par value) and 10,462,638 shares
outstanding of Class B Non-Voting Common Stock ($.01 par value).
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SAFELITE GLASS CORP.
FORM 10-K
TABLE OF CONTENTS
FOR THE YEAR ENDED APRIL 3, 1999
DESCRIPTION PAGE
PART I
Item 1. Business 2
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 8
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 7a. Quantitative and Qualitative Disclosures About
Market Risk 11
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 47
PART III
Item 10. Directors and Executive Officers of the Registrant 48
Item 11. Executive Compensation 52
Item 12. Security Ownership of Certain Beneficial Owners
and Management 58
Item 13. Relationships and Related Transactions 60
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 61
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PART I
Item 1. Business
COMPANY OVERVIEW
Safelite is the largest provider of automotive glass replacement and
repair services in the United States. Safelite is the industry leader with an
estimated overall market share of approximately 23% and the leading market share
in the insurance segment of the market. The Company installed approximately 2.8
million replacement units in fiscal year 1999 for insurance companies,
commercial fleet leasing and rental car companies, car dealerships and body
shops, government agencies and individual consumers. Safelite provides these
installation services through its service centers, mobile vans, centralized
telephone/dispatch centers and its network of independent automotive glass
replacement and repair providers. Safelite has targeted its marketing efforts
principally towards auto insurance companies which management believes, through
their policyholders, directly or indirectly influence approximately 70% of the
selections of automotive glass replacement and repair providers. Safelite has
developed fully integrated claims processing solutions for auto insurance
companies which reduce their glass loss expenses and total administrative costs
and provide a higher level of customer service to their policyholders.
Management believes that this outsourcing capability, coupled with the
convenience of nationwide coverage, consistently high quality service and low
costs, has provided Safelite with a significant competitive advantage in the
insurance segment of the market. At April 3, 1999, Safelite had two
manufacturing facilities, 76 warehouses, 52 centralized telephone/dispatch
centers, approximately 2,600 mobile vans and 674 service center locations across
the United States.
COMPETITIVE STRENGTHS
INDUSTRY LEADERSHIP AND NATIONWIDE COVERAGE. Safelite is the largest
competitor in the highly fragmented automotive glass replacement and repair
industry. The Company operates service centers in all of the top 100
Metropolitan Statistical Areas in the United States. Through its nationwide
network, Safelite can directly serve 70% of the cars and light trucks in the
United States and, through its authorized independent replacement and repair
providers, achieves over 90% coverage. Safelite has the largest number of
service center locations and the largest network of independent automotive glass
replacement and repair providers in the United States. Management believes that
Safelite's leadership position and breadth of geographic coverage is a
significant competitive advantage in working with insurance companies,
commercial fleet lessors and other large customers which increasingly demand
consistent quality in both claims processing and automotive glass repair and
replacement services on a nationwide basis.
STRONG, ESTABLISHED RELATIONSHIPS WITH MAJOR INSURANCE COMPANIES.
Safelite has successfully established strong relationships with the nation's
major auto insurance companies, and management believes it has more program
relationships with these companies than any of its competitors. The top 30 auto
insurers influence approximately 55% of all repairs and replacements in the
United States. Safelite has entered into Total Customer Solution, or "TCS"
arrangements with approximately 25 of those insurers, including Farmers
Insurance Group, Auto Club of Southern California, and Safeco Corporation. Under
a TCS arrangement, Safelite
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typically serves as one of a few recommended automotive glass replacement
providers for an insurance company and provides a range of additional claims
management services, including computerized referral management, policyholder
call management, electronic auditing and billing services and management
reporting. Of Safelite's approximately 45 TCS arrangements, those with Allstate
Insurance, Nationwide Mutual Insurance Company, United Services Automobile
Association, GEICO, Liberty Mutual Insurance Company, Travelers Group, CNA
Insurance Group, Metropolitan Property and Casualty Insurance Company, and
California State Auto Association are also Master Provider, or "MP"
relationships. Under an MP program, Safelite acts as the administrator of an
insurance company's automotive glass claims. TCS and MP programs significantly
lower the processing costs and loss expenses for the insurance companies,
provide more consistent and rapid service for policyholders, and increase
Safelite's volume with each insurance account. In addition, Safelite has entered
into TCS arrangements with major fleet and rental car companies, including GE
Capital Fleet Services, PHH Vehicle Management Services Corporation, USL Capital
Fleet Services, Hertz Corporation and Budget Rent-A-Car Systems, Inc. Of these
arrangements, those with PHH Vehicle Management, GE Capital Fleet Services and
USL Capital Fleet are also MP relationships. By entering into these arrangements
with insurance, fleet and rental car companies, Safelite has substantially
increased its volume with these accounts and enhanced its base of recurring
revenues.
LOW COST PROVIDER. Safelite has a total cost advantage compared to its
competitors as a result of its manufacturing facilities, its productivity
incentive programs, the efficiency of its nationwide distribution network and
the critical mass of its centralized customer service, claims processing and
information network. Management believes that Safelite is the only full-scale
vertically integrated automotive glass replacement company in the U.S.
Safelite produces 65% of its windshield needs at its two manufacturing
plants in Enfield, North Carolina and Wichita, Kansas. The Enfield facility
encompasses 98,000 square feet of manufacturing space and has an annual capacity
of over one million units. The Wichita facility encompasses 146,000 square feet
with an annual production capacity of over 600,000 units.
Safelite uses a three tiered distribution system to better serve its
customers and minimize its inventory levels. Two central distribution facilities
are located at the Company's manufacturing facilities in Enfield, North Carolina
and Wichita, Kansas. These central distribution facilities send inventory to the
Company's 76 regional warehouses (23 free-standing warehouses and 53 co-located
with Safelite's Central Telephone Units). These regional facilities can then
quickly and accurately stock the service centers and vans in their local markets
on an as-needed basis.
Every Safelite employee participates in some form of incentive
compensation plan which rewards productivity and/or profitability of the
Company. Management estimates that Safelite's performance incentive program has
increased productivity of its installation associates from 2.5 installations per
day in 1991 to approximately 3.9 per day for fiscal 1999. As a result of the
significant economies of scale in its manufacturing, information systems,
distribution and installation infrastructure, management believes it has the
capacity to add incremental contracts and units at relatively low marginal cost.
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SOPHISTICATED INFORMATION SYSTEMS. Safelite's information systems allow
it to handle all aspects of an insured automotive glass claim effectively and
cost efficiently, from the initial phone call placed by the insured policyholder
to the automatic billing of an insurance company. Through Safelite's fully
integrated network called "SAFENET(TM)", Safelite can provide full service to
the policyholder by electronically accessing the insurance company's database,
verifying the policyholder's coverage status, scheduling the glass installation,
checking relevant inventories, ordering delivery, when necessary, of automotive
glass to a Safelite service center, repairing or replacing the glass,
electronically billing the insurance company and, if applicable, paying the
service providers. The insurance company's role is limited to funding the claim
payment and updating its policy files.
In addition to providing an integrated delivery system, SAFENET(TM)
also provides management and Safelite's customers with valuable information.
This "real time" data allows Safelite to track and monitor important statistics,
including customer satisfaction, length of call and speed of installation.
Safelite uses this data to improve its customer service and provide
comprehensive monthly management reports for its large insurance customers.
These reports include information to which the insurance companies otherwise do
not generally have access, including statistics on number of claims, price per
claim and percent of repairs versus replacement. Safelite believes it is the
only company in the industry currently providing these types of detailed
reports.
INDUSTRY OVERVIEW
The market consists of two segments, the manufacture and sale of
automotive glass to large original equipment manufacturers, called "OEMs", and
the manufacturing and installation of automotive glass for the replacement
market. The OEM market is generally characterized as a high-volume,
manufacturing intensive industry. By contrast, the automotive glass replacement
market consists of service providers focused on providing automotive glass
replacement installation to a broad base of institutional and individual
customers. Replacement automotive glass is generally purchased by installers
from large OEM suppliers in the wholesale market.
The automotive glass replacement and repair industry in 1998 was an
estimated $3.0 billion industry representing the installation of approximately
12.2 million replacement units. The replacement and repair of automotive glass
is driven by the incidence of breakage. The market for the installation of
replacement automotive glass is highly fragmented with over 20,000 providers of
automotive glass replacement services. Many competitors in the industry are
small "mom & pop" installers who do not have either the national networks or
sophisticated information systems required to effectively compete in a national
market. Since the early 1990s, the industry has been consolidating and
management expects this consolidation to continue, as insurance companies and
large fleet lessors require nationwide coverage and more consistent service
while seeking to reduce costs by outsourcing their automotive glass claims.
Customers in the automotive glass replacement industry include auto
insurance companies, commercial fleet leasing companies, rental car companies,
car dealerships, body shops, governmental agencies and individual consumers.
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PRICING
The price of replacement automotive glass is related to the list prices
developed by the National Auto Glass Specification, an independent third party,
referred to as "NAGS". Changes to the NAGS list prices generally have followed
the wholesale price increases announced by the OEMs. Prices charged in the
automotive glass replacement industry are calculated using varying percentage
discounts from the NAGS price list. The impact on Safelite's financial results
of NAGS semi-annual price increases depends on the level of discounts granted by
Safelite to its customers and the level of discounts that Safelite can obtain
from its glass suppliers.
CUSTOMERS
Safelite has a broad customer base across two primary segments: (1)
installation and related services and (2) wholesale customers. Safelite's
largest customer base is insurance companies. Insurance companies and Safelite's
top 10 customers have represented the following percentages of Safelite's total
sales:
Top 10 Insurance
Customers Companies
--------- ---------
Fiscal 1999 44% 64%
Three months ended 4/4/98 41% 58%
Fiscal 1997 42% 53%
Fiscal 1996 39% 48%
Approximately 14% and 12% of Safelite's consolidated sales were from
Allstate Insurance for the year ended April 3, 1999 and the three month period
ended April 4, 1998, respectively. No customer accounted for more than 10% of
Safelite's consolidated sales during 1997 and 1996.
PRODUCTS
Safelite's primary installation product is the automotive windshield.
Windshields are made of laminated safety glass, which consists of two layers of
glass bound together with a thin layer of vinyl. The safety benefit of laminated
glass comes from the strength which the vinyl adds; the vinyl makes it very
difficult to penetrate the windshield upon impact. As part of Safelite's
commitment to serve all of its customers' automotive glass needs, the Company
also offers tempered automotive glass and other products. Tempered glass is
generally used for side and rear car and truck windows and is twice as strong as
raw glass because of specialized processing which causes the glass to break into
dull-edged pebbles, reducing glass-related injuries. Safelite also offers auto
products and services including flat glass, bipass glass, installation supplies,
wiper blades, window tinting, sunroofs, alarm systems and vehicle inspection
services for insurance companies.
SUPPLIERS AND RAW MATERIALS
Safelite generally purchases low volume windshields from third parties,
as well as raw glass, vinyl, paint, adhesives and tempered glass. In the year
ended April 3, 1999, the three months ended April 4, 1998 and the year ended
January 3, 1998, Safelite sourced 42%, 79% and
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63%, respectively, of its purchased auto glass from Libby-Owens-Ford. Safelite
also utilizes other suppliers for both domestic and foreign windshields.
Safelite buys all of its raw glass from AFG Industries, Inc. and Visteon, an
enterprise of Ford Motor Company. Vinyl is purchased from E.I. Du Pont De
Nemours. Management believes alternate sources of vinyl are also available. With
few exceptions, inventory is centrally purchased from Safelite's headquarters in
Columbus, Ohio. Management believes that Safelite's primary raw materials are
widely available from numerous suppliers and has not had material difficulty in
sourcing windshields or raw materials in the past.
EMPLOYEES
As of April 3, 1999, Safelite employed approximately 6,300 people. The
Company has approximately 400 employees covered by four unions. Safelite has
experienced no labor related work stoppages and believes that its employee
relations are good.
COMPETITION
The markets for Safelite's products and services are very competitive.
In the automotive glass replacement industry, competition is based on price,
customer service, technical capabilities, quality and geographic coverage. The
industry is highly fragmented with approximately 20,000 competitors. Although
Safelite is the industry leader in the automotive glass replacement industry, it
does compete against several other large competitors in this market, and
Safelite has experienced increasing levels of competition during fiscal 1999,
particularly with respect to price.
Competition in the wholesale market is based principally on price and
quality. Safelite is a relatively small participant in the wholesale market,
which is dominated by several significantly larger companies.
Management believes that future growth in Safelite's revenues will
depend largely upon Safelite's ability to maintain and increase its market share
in the automotive glass replacement industry, while continuing to provide high
levels of customer service, and its ability to access the wholesale market in
order to utilize excess manufacturing capacity.
ENVIRONMENTAL REGULATION
Safelite's manufacturing operations in Wichita, Kansas and Enfield,
North Carolina involve handling of materials and the generation of waste
materials that are classified as hazardous. Safelite is subject to federal,
state and local laws and regulations concerning the handling and disposal of
hazardous materials, and therefore incurs compliance costs in the ordinary
course of its manufacturing operations.
Safelite does not anticipate that compliance with federal, state and
local provisions regarding the use and disposal of materials into the
environment or otherwise relating to the protection of the environment will have
any material adverse effect upon the earnings or competitive position of
Safelite. In addition, Safelite does not anticipate any material capital
expenditures for environmental control facilities for fiscal year 2000. Actions
by federal, state
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and local governments concerning environmental matters, however, could increase
the costs of producing the products manufactured by Safelite. In addition, the
future costs of compliance with environmental laws and regulations and
liabilities resulting from currently unknown circumstances or developments could
be substantial or could have a material adverse effect on Safelite. Regulations
resulting from the 1990 amendments to the Clean Air Act (the "1990 Amendments")
that will pertain to Safelite's manufacturing operations are currently not
expected to be promulgated until late 1999 or later. Safelite cannot predict the
level of required capital expenditures resulting from future environmental
regulations; however, management does not anticipate that expenditures required
by such regulations, if any, will have a material adverse effect on Safelite.
ITEM 2. PROPERTIES
Safelite leases 638 of its 674 installation service centers, with the
terms of its leases generally being five years with one or two five-year renewal
options. Safelite also leases 73 of its 76 warehouses, with the terms of its
leases generally being five years with one or two five-year renewal options. The
Company owns its manufacturing facilities in Enfield, North Carolina and
Wichita, Kansas. Safelite's principal corporate office is at 1105 Schrock Road
in Columbus, Ohio. Safelite leases this space pursuant to agreements expiring in
June 2001. Safelite maintains administrative offices at 2400 Farmers Drive in
Columbus, Ohio, which it leases pursuant to a lease expiring in April 2003. The
Company also has a call center located at 2 North LaSalle Street, Chicago,
Illinois under a lease expiring in July 2005. Safelite also maintains a national
referral center, local central telephone/dispatch center and regional warehouse
at 760 Dearborn Park Lane in Columbus, Ohio. Safelite leases this space pursuant
to agreements expiring in April 2006. Safelite's leases generally require
Safelite to pay property tax, utilities, common area maintenance, and insurance
expenses. Safelite believes that its facilities are adequate for its current
needs and that suitable additional space will be available as required.
ITEM 3. LEGAL PROCEEDINGS
Safelite is party to certain claims and litigation in the ordinary
course of business and litigation concerning environmental compliance which it
does not believe will result, individually or in the aggregate, in a material
adverse effect upon its financial condition, results of operations, or cash
flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
By written consent of a majority of the holders of the outstanding
Class A Voting Common Stock of Safelite and the holders of a majority of the
outstanding Class B Non-Voting Common Stock of Safelite dated January 29, 1999,
in connection with the proposed issuance of 50,000 shares of a new series of
preferred stock, Safelite filed a Restated Certificate of Incorporation which
increased the authorized number of shares of preferred stock from 40,000 to
90,000 shares, designated the additional 50,000 shares as Series A Convertible
Participating Preferred Stock and set forth the powers, preferences and rights
of that series, including those relative to the then issued and outstanding
Non-Voting 8% Preferred Stock.
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PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Each class of equity security of Safelite is privately held.
At April 3, 1999, there were approximately 60 holders of record of the
Company's Class A Voting Common Stock, 60 holders of record of the Company's
Class B Non-Voting Common Stock, two holders of the Company's Non-Voting 8%
Preferred Stock and 41 holders of the Company's Series A Convertible
Participating Preferred Stock.
Safelite's ability to pay dividends is limited by its bank credit
facilities and the indentures governing its senior subordinated notes. These
limitations are discussed in this report under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources -- Liquidity" and in Note 10 to the financial
statements. Safelite has not previously paid dividends on its common stock and
does not currently intend to pay dividends on its common stock. Any future
determination to pay dividends will be at the discretion of Safelite's Board of
Directors and will be dependent upon the Company's results of operations,
capital requirements, financial condition, contractual restrictions and other
factors deemed relevant at the time by Safelite's Board of Directors.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data of Safelite below for fiscal years ended
1994, 1995, 1996, 1997 and 1999, and the three months ended April 4, 1998 are
derived from audited financial statements. The data presented for the three
months ended March 29, 1997 are derived from unaudited financial statements.
These unaudited financial statements include, in the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the data for these periods. The selected financial data below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
accompanying notes also included in this report.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED (1) ------------------- FISCAL
---------------------------------- MARCH 29, APRIL 4, YEAR ENDED
1994 1995 1996 1997 1997 1998 1999(1)
---- ---- ---- ---- -------- -------- ----------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Sales................................ $ 357.4 $ 372.1 $ 438.3 $ 483.3 $ 107.8 $ 213.8 $ 876.8
Cost of sales........................ 246.1 261.7 299.6 331.7 75.8 155.5 645.7
------- ------- ------- ------- ------- ------- -------
Gross profit......................... 111.3 110.4 138.7 151.6 32.0 58.3 231.1
Selling, general &
administrative expenses............. 90.8 93.5 107.3 111.8 26.0 46.5 186.8
Other operating expenses(2).......... 21.1 -- 7.6 5.7 -- 3.1 3.6
Loss on sale of Lear Siegler......... -- -- -- 5.4 -- -- --
Restructuring expense(3)............. -- 6.3 -- 2.9 -- 3.8 4.2
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations........ (0.6) 10.6 23.8 25.8 6.0 4.9 36.5
Interest expense..................... (4.5) (6.0) (6.7) (27.5) (6.3) (10.9) (46.7)
Interest income...................... 2.2 2.9 2.1 1.3 0.3 0.1 0.7
------- ------- ----- -- ------- ------- ------- -------
Income (loss) from continuing
operations before income taxes,
minority interest and
extraordinary items................. (2.9) 7.5 19.2 (0.4) 0.0 (5.9) (9.5)
Income tax benefit (provision)(4).... (0.2) (0.1) 17.6 6.8 (0.1) 1.6 (0.5)
Minority interest.................... (2.7) (1.1) (10.2) -- -- -- --
------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing
operations before extraordinary
items............................... (5.8) 6.3 26.6 6.4 (0.1) (4.3) (10.0)
Discontinued operations(5)........... -- -- 1.7 -- -- -- --
Extraordinary loss(6)................ (1.5) -- (0.5) (2.8) -- -- (4.0)
------- ------- ------- ------- ------- ------- -------
Net Income (loss).................... $ (7.3) $ 6.3 $ 27.8 $ 3.6 $ (0.1) $ (4.3) $ (14.0)
======= ======= ======= ======= ======= ======= =======
OTHER FINANCIAL DATA:
Depreciation and amortization........ $ 7.2 $ 7.6 $ 8.0 $ 8.7 $ 2.0 $ 6.4 $ 22.8
Capital expenditures................. 14.2 12.0 12.8 13.9 4.2 2.4 23.1
Ratio of earnings to fixed
charges(7).......................... -- 1.4x 2.0x -- 1.0x -- --
Deficiency of earnings to fixed
charges(7).......................... (2.9) -- -- (0.4) -- (5.9) (9.5)
BALANCE SHEET DATA:
Working capital...................... $ 41.9 $ 58.1 $ 56.6 $ 29.8 $ 56.6 $ 41.3 $ 52.7
Total assets......................... 193.7 188.3 216.2 558.1 204.0 576.4 573.8
Total indebtedness................... 63.8 69.0 263.7 479.9 270.0 503.6 487.4
Stockholders' equity (deficit)....... 0.2 (0.6) (128.5) (46.9) (128.6) (48.4) (6.5)
</TABLE>
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(1) Prior to 1998, Safelite's fiscal year ended on the Saturday closest to
December 31 of each year. On May 18, 1998, Safelite changed its fiscal
year to the Saturday closest to March 31.
(2) Other operating expenses in 1994 are comprised of a $2.5 million
one-time charge recorded by Safelite to conform its method of
accounting to Statement of Position (SOP) No. 93-7, "Reporting on
Advertising Costs" and $18.6 million primarily related to curtailment
and settlement losses for pension plans of previously disposed Lear
Siegler subsidiaries. Other operating expenses in 1996 are comprised of
management transaction bonuses related to the THL Transactions of $6.9
million and estimated costs (primarily severance) of $0.7 million to
exit the activities of Lear Siegler. Other operating expenses in 1997
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include $1.0 million of management transaction bonuses, $3.0 million
related to acceleration of vesting of management stock options and $0.5
million related to forgiveness of officer loans made in connection with
the Vistar merger. Also included in other operating expenses in 1997
are costs related to obtaining bondholder consent to the Vistar merger
of $1.2 million. Other operating expenses in the three months ended
April 4, 1998, and the year ended April 3, 1999, consist solely of
costs associated with the integration of corporate systems, moving,
relocation and other expenses associated with the Vistar merger. See
Notes 1, 2, 4 and 10 to Safelite's financial statements and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(3) In 1995, Safelite recorded $6.3 million in restructuring charges. Of
this amount, $5.6 million related to the planned closing of 100 service
center locations and $0.7 million related to field management
reorganization. In 1997, Safelite recorded restructuring charges
totaling $2.9 million consisting of $0.4 million for planned closing of
Safelite service center locations and $2.5 million related to Safelite
employee severance resulting from the consolidation of Safelite and
Vistar field and administrative activities. Restructuring charges of
$3.8 million for the three months ended April 4, 1998 consisted of $2.5
million for planned closing of 50 Safelite service center locations and
$1.3 million related to Safelite employee severance. Restructuring
charges of $4.2 million for the year ended April 3, 1999 consisted of
$3.6 million for planned closing of 55 Safelite service centers and
$0.6 million related to Safelite employee severance. See Notes 4 and 5
to Safelite's financial statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(4) During 1996 and 1997, the valuation allowance provided against
Safelite's deferred tax assets was reduced by $25.9 million and $3.0
million. See Note 14 to Safelite's financial statements and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(5) In 1996, a gain from discontinued operations totaling approximately
$1.7 million was recorded, consisting of $27.2 million in favorable
resolution of various tax contingencies of previously discontinued Lear
Siegler operations offset by $25.5 million of settlement costs for
various liability issues related to previously disposed of Lear Siegler
subsidiaries. See Note 16 to Safelite's financial statements.
(6) In each of the fiscal years 1994, 1996, 1997 and 1999, Safelite
recorded extraordinary losses as a result of expensing unamortized loan
origination fees related to the early retirement of the associated
debt. The amount recorded for 1994 was $1.5 million, net of minority
interest and income tax $0.3 million. The amount recorded for 1996 was
$0.5 million, net of tax of $0.3 million. The amount recorded for 1997
was $2.8 million, net of tax of $1.9 million. The amount recorded for
1999 was $4.0 million, net of tax of $2.7 million.
(7) For purposes of determining the ratio of earnings to fixed charges and
deficiency of earnings to fixed charges, earnings are defined as
earnings before income taxes and cumulative effect of accounting
changes, plus fixed charges (net of capitalized interest). Fixed
charges consist of interest expense on all debt plus capitalized
interest, amortization of deferred financing costs and one-half of
rental expense on operating leases. One-half of rent expense represents
that portion of rental expense which management believes is
attributable to interest.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Safelite is the largest provider of automotive glass replacement and
repair services in the United States. The Company's installation and related
services customers include insurance companies, commercial fleet leasing and
rental car companies, car dealerships and body shops, government agencies and
individual consumers. Safelite also acts as a subcontractor for other automotive
glass replacement and repair providers. Approximately 95%, or $828.7 million, of
Safelite's sales for the year ended April 3, 1999, were installation and related
services sales. Of these sales, approximately 78% were generated through
Safelite's own service centers, mobile vans, and centralized telephone/dispatch
centers ("service center sales"). The remainder of installation and related
services sales, or $183.8 million, for the year ended April 3, 1999, were
derived from Safelite's network of independent automotive glass installation and
repair providers which install or repair glass for Safelite under subcontracting
arrangements ("network sales").
Insurance companies represent the largest installation and related
services customer segment comprising approximately 67% of installation and
related services sales in 1999.
Safelite manufactures approximately 65% of the windshields it installs
and utilizes its excess manufacturing capacity to produce windshields for sale
into the wholesale market. Wholesale customers are primarily regional and local
automotive glass replacement and repair companies. Approximately 5% of
Safelite's sales for 1999 were wholesale sales. Safelite's strategic focus for
its wholesale operations is to maintain sales and increase overall gross
margins.
Safelite's costs and expenses include cost of sales and selling,
general and administrative expenses. Cost of sales includes product and
distribution costs, installation labor, service center occupancy and vehicle
expenses. Selling, general and administrative expenses include costs of
Safelite's national phone centers, sales force and other general and
administrative functions.
FORWARD-LOOKING STATEMENTS
Readers are cautioned that there are statements contained in this
report including but not limited to those under the caption Year 2000 Issues,
which are "forward-looking" statements within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Act"). Forward-looking statements
include statements which are predictive in nature, which depend upon or refer to
future events or conditions, which include words such as "expects",
"anticipates", "intends", "plans", "believes", "estimates", or similar
expressions. In addition, any statements concerning future financial performance
(including future revenues, earnings or growth rates), ongoing business
strategies or prospects, and possible future Company actions, which may be
provided by management are also forward-looking statements as defined by the
Act. Forward-looking statements are based on current expectations and
projections about future events and are subject to risks, uncertainties, and
assumptions about the Company, economic and market factors and the industries in
which Safelite does business, among other things. These
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<PAGE> 13
statements are not guaranties of future performance and Safelite has no specific
intention to update these statements.
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. The 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 Safelite, including updating software and hardware
and potential system interruptions. This list should not be construed as
exhaustive.
VISTAR MERGER AND CURRENT OPERATING PERFORMANCE
On December 19, 1997, Safelite acquired Vistar, the second largest
automotive glass replacement and repair company in the United States. As a
result, Safelite's results of operations for the three months ended April 4,
1998 and the year ended April 3, 1999 are not directly comparable to results
recorded in prior periods.
In connection with the Vistar merger, Safelite took a number of actions
in order to consolidate redundant overhead in both field and corporate
operations, eliminate redundant service center locations and eliminate redundant
sales and marketing activities. These actions included the closing of 179
service center locations, the conversion of all remaining Vistar service center
locations to the Safelite point of sale system, the closing of the former Vistar
corporate headquarters, the conversion of Vistar call center and billing systems
to Safelite systems, and the elimination of redundant field management, sales
and marketing activities.
Most redundant corporate overhead, sales and marketing activities were
consolidated prior to May 1, 1998 in accordance with management's original
integration plan. By January 2, 1999, substantially all remaining actions
required to achieve merger-related cost savings were completed. The completion
of these remaining activities, however, occurred later than management's
original plan which would have had much of the field and call-center integration
processes completed before the summer of 1998. The summer months are
traditionally Safelite's highest volume sales months as automobile miles driven
increase significantly in that period.
Management estimates annual net cost savings related to the Vistar
merger will total $30 million to $35 million, which is consistent with the
original plan. Approximately 40% of these net cost savings are reflected in
Safelite's results of operations for the year ended April 3, 1999. The entire
net cost savings are expected to be realized in Safelite's fiscal year ended
April 1, 2000. There can be no assurance, however, that these cost savings will
be achieved or that other factors will not negate the realization of the
savings.
At the time of the Vistar merger, management estimated that
merger-related closing and consolidation costs would range from $37 million to
$42 million. In addition, management estimated that Safelite would incur between
$5 million and $10 million in one-time expenses associated with the integration
of corporate systems, temporary services fees, training, moving and other costs
related to the Vistar merger. Actual results for these items were in line with
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<PAGE> 14
management's estimates. As of April 3, 1999, Safelite has recorded $38.0 million
in Vistar merger related closing and consolidation costs and $6.7 million in
one-time merger integration costs. Management expects to incur no further Vistar
merger related restructuring or one-time charges.
As discussed above, the consolidation and elimination of redundant
service centers and related field operations activities took longer, and was
more disruptive to Safelite's business, than was originally anticipated. This
disruption and delay, combined with lower overall automotive glass replacement
industry unit volumes, had an adverse impact on Safelite's fiscal year 1999
sales and results of operations.
Key items which have impacted Safelite's performance are described
below:
-- The focus of the field sales force on merger integration
activities has adversely impacted unit sales. This has resulted in
reduced sales to local commercial accounts such as car
dealerships, body shops and local car rental companies compared to
pre-merger combined results for Safelite and Vistar. Sales to
insurance customers, most notably State Farm, where Safelite does
not have a Total Customer Solution or Master Provider relationship
have also been negatively affected.
-- Field operations management likewise has been focused on
integrating the two companies, which had different operating
cultures and strategies. This has resulted in both lower sales to
individual consumers than the combined companies had experienced
prior to the merger and lower productivity levels than had been
previously achieved by Safelite.
-- A higher proportion of sales have been serviced through the
Company's network of independent automotive glass installation
providers than had been experienced by Safelite prior to the
Vistar merger. The gross profit margin on network sales is
substantially lower than on Safelite-owned service center sales.
-- The overall automotive glass replacement industry has experienced
a decline in unit volumes and increased price competition during
fiscal 1999.
Management is devoting substantial time and attention in an effort to
address these issues and to improve Safelite's sales growth and operating
efficiencies to expected levels. Specific actions taken include continued
training of former Vistar field operations and call center associates on
Safelite systems and market-based operating strategies, refocusing Safelite's
field sales force on sales growth, and aligning service center and warehouse
headcount with current unit volumes. In addition, management made changes
related to key leadership positions in field operations, field sales and call
center management at the former Vistar call center. All such positions are now
held solely by experienced Safelite associates. While management believes that
these actions will improve sales and operating performance, there can be no
assurances regarding timing within which these actions may have impact or that
these effects will ultimately be successful.
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<PAGE> 15
RESULTS OF OPERATIONS
The following table reflects Safelite's sales, related expenses and
earnings expressed as a percentage of sales for the periods set forth below.
THREE MONTHS ENDED FISCAL
YEAR ENDED (1) ------------------ YEAR
-------------- MARCH 29, APRIL 4, ENDED
1996 1997 1997 1998 1999 (1)
---- ---- ---- ---- --------
SALES:
Installation and related
services:
Service center............... 75.9% 75.3% 77.0% 75.4% 73.5%
Network...................... 10.8 13.7 11.4 18.9 21.0
Wholesale.................... 13.3 11.0 11.6 5.7 5.5
----- ----- ----- ----- -----
Total sales..................... 100.0 100.0 100.0 100.0 100.0
Cost of sales................... 68.4 68.6 70.3 72.7 73.6
----- ----- ----- ----- -----
Gross profit.................... 31.6 31.4 29.7 27.3 26.4
Selling, general and
administrative expenses........ 24.5 23.2 24.1 21.7 21.3
Restructuring expense........... -- 0.6 -- 1.8 0.5
Other operating expenses........ 1.7 1.2 -- 1.5 0.4
Loss on sale of Lear Siegler.... -- 1.1 -- -- --
Interest expense................ (1.5) (5.7) (5.9) (5.1) (5.3)
Interest income................. 0.5 0.3 0.3 -- --
----- ----- ----- ----- -----
Income (loss) before income
taxes.......................... 4.4 (0.1) 0.0 (2.8) (1.1)
Income tax benefit (provision).. 4.0 1.4 -- 0.8 --
Minority interest............... (2.4) -- -- -- --
Discontinued operations......... 0.4 -- -- -- --
Extraordinary loss.............. (0.1) (0.6) -- -- (0.5)
----- ----- ----- ----- -----
Net income (loss)............... 6.3% 0.7% 0.0% (2.0)% (1.6)%
===== ===== ===== ===== =====
- -------------
(1) Prior to 1998, Safelite's fiscal year ended on the Saturday closest to
December 31 of each year. On May 18, 1998, Safelite changed its fiscal
year to the Saturday closest to March 31.
FISCAL YEAR ENDED APRIL 3, 1999 COMPARED WITH FISCAL YEAR ENDED JANUARY 3, 1998
SALES. Sales for the year ended April 3, 1999, increased $393.5
million, or 81.4%, to $876.8 million, from $483.3 million in the fiscal year
ended January 3, 1998. Installation and related services grew $398.4 million, or
92.6% to $828.7 million. Approximately 71% of this growth was derived through
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. While sales have increased substantially over
last year due to the Vistar merger, Safelite's focus on the complexities of
merger integration activities has had an adverse effect on post-merger sales
growth. Overall installation and related services unit volumes for the first
three quarters of the current fiscal year were down 8% from the combined
pre-merger unit sales volumes of Safelite and Vistar in the comparable prior
year period. Unit volumes in the fourth quarter improved as merger related
activities subsided. Fourth quarter installation and related services units
increased 7% over the same quarter of the prior year.
Wholesale sales for the year ended April 3, 1999, fell 9.3% to $48.1
million as a result of a 7% decline in unit sales further impacted by lower
prices. These results reflect the soft market conditions currently being
experienced in the auto glass replacement market.
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<PAGE> 16
GROSS PROFIT. Gross profit for the year ended April 3, 1999 increased
52.4% to $231.1 million, from $151.6 million in the fiscal year ended January 3,
1998, mainly as a result of increased sales volume from the Vistar merger. Gross
profit margin decreased to 26.4% as compared to 31.4% in the prior year, due
primarily to the higher percentage of network business relative to total sales,
offset partially by higher prices and improved customer mix. 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 and warehouse operations
during the merger integration period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses rose 67.0% in fiscal 1999 to $186.8 million as a result
of the Vistar merger. Selling, general and administrative expenses as a percent
of sales decreased to 21.3% in the year ended April 3, 1999, from 23.2% in the
fiscal year ended January 3, 1998. This decrease is primarily due to the
achievement of merger synergies. Selling, general and administrative expenses as
a percent of sales was negatively impacted by slower post-merger sales growth.
INCOME BEFORE INCOME TAXES. Income (loss) before income taxes decreased
to a loss of $9.5 million in the fiscal year 1999 from a loss of $0.4 million
for the fiscal year ended January 3, 1998. In addition to the impact of
restructuring and merger integration expenses on sales and gross profit
described above, income (loss) before income taxes in the year ended April 3,
1999 was adversely affected by $19.2 million in increased interest costs. Income
(loss) before income taxes in the year ended January 3, 1998 included a $5.4
million loss on the sale of Safelite's former parent, Lear Siegler.
INCOME TAXES. In fiscal year 1999, Safelite's provision for income
taxes was significantly above income taxes computed using statutory rates
primarily due to non-deductible amortization of goodwill arising from the Vistar
merger.
NET INCOME. Net income (loss) for the year ended April 3, 1999, was
$(14.0) million, down from income of $3.6 million in the fiscal year ended
January 3, 1998. The decrease in net income from 1997 was primarily due to the
changes in income before income taxes described above. Also contributing to the
change was a $4.0 million extraordinary loss related to early extinguishment of
debt in 1999, while 1997 results included a $2.8 million extraordinary loss for
early extinguishment of debt.
THREE MONTHS ENDED APRIL 4, 1998 COMPARED WITH THREE MONTHS ENDED MARCH 29, 1997
SALES. Sales increased $106.0 million in the three months ended April
4, 1998, or 98.3%, to $213.8 million, from $107.8 million in the three months
ended March 29, 1997. Installation and related services grew $106.4 million, or
111.7% to $201.7 million. Approximately 73% of this growth was attributable to
service center sales while the remainder was provided by increased network
sales. The growth in installation and related services revenue over the prior
year was due primarily to the Vistar merger and favorable pricing, as overall
market volumes were soft in the first three months of calendar 1998.
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<PAGE> 17
Wholesale sales fell 3.5% to $12.1 million despite an 8.0% increase in
unit sales. Soft market conditions and greater industry capacity increased
competition at the wholesale level, particularly in the higher margin smaller
local glass chains and shops. As a result, much of the increase in unit sales
was derived from the more price sensitive truckload buyers who were purchasing
in advance of the industry-wide NAGS price increase which took effect March 16,
1998.
GROSS PROFIT. Gross profit increased 81.8% to $58.3 million in the
three months ended April 4, 1998, from $32.0 million in the corresponding period
of the prior year. Gross profit margin decreased to 27.3% in the first three
months of 1998, from 29.7% in the corresponding prior year period, as the impact
of improved installation and related services pricing and customer mix was more
than offset by the higher growth rate of network business relative to total
sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses rose 78.8% in the first three months of 1998 to $46.5
million, with the Vistar merger accounting for substantially all of the
increase. As a percentage of sales, selling, general and administrative expenses
declined to 21.7% in the first three months of 1998 from 24.1% for the
corresponding prior year period. This decline in selling, general and
administrative expenses as a percent of sales was a result of Safelite's
improved operating leverage.
INCOME BEFORE INCOME TAXES. Income (loss) before taxes declined to a
loss of $5.9 million for the three months ended April 4, 1998, compared with
essentially break-even performance for the corresponding prior year period. The
decline in income (loss) before income taxes despite higher overall gross margin
dollars and lower selling, general and administrative expenses as a percent of
sales was caused primarily by $6.9 million in restructuring charges and merger
integration costs and $4.6 million in increased interest costs associated with
the Vistar merger.
INCOME TAXES. Safelite recorded an income tax benefit in the first
three months of 1998 of $1.6 million, compared to a $0.1 million income tax
provision for the first three months of 1997. The income tax benefit (provision)
in both periods differed from amounts computed using statutory rates due
primarily to amortization of goodwill.
NET INCOME. Net income (loss) declined to a loss of $4.3 million for
the three months ended April 4, 1998 from a loss of $0.1 million in the
corresponding prior year period due to the changes described above.
1997 COMPARED WITH 1996
SALES. Sales increased $45.0 million in 1997, or 10.3%, to $483.3
million, from $438.3 million in 1996. Installation and related services grew
$50.1 million, or 13.2% to $430.3 million. Approximately 63% of this growth was
attributable to service center sales while the remainder was provided by
increased network sales. The growth in installation and related services revenue
over the prior year was due primarily to favorable pricing and improved customer
mix. Instrumental to the improved customer mix was the addition of new
multi-year "Master
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<PAGE> 18
Provider" programs with several large insurers, most notably GEICO. Under a
Master Provider program, Safelite administers 100% of an insurance company's
automotive glass claims and, as a result, receives more referrals both to be
performed in its own service centers and through its network of independent
automotive glass installation providers. The increase in insurance customer
sales volume was partially offset by a decline in subcontracting sales volume,
as overall market conditions were soft in 1997.
Wholesale sales fell 8.9% to $53.0 million as a result of a 13% decline
in unit sales partially offset by increased pricing. The pricing improvement
came about through a shift of business from more price sensitive truckload
buyers to smaller local glass chains and shops. The wholesale business
performance reflected the soft market conditions and resulting competition at
the wholesale level.
GROSS PROFIT. Gross profit increased 9.3% to $151.6 million, from
$138.7 million in 1996. Gross profit margin remained virtually constant in 1997
at 31.4% compared to 31.6% in 1996, as the impact of improved installation and
related services pricing and customer mix was partially offset by higher product
and installation costs. Also negatively affecting the gross margin percentage
was the higher growth rate 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses rose 4.2% in 1997 to $111.8 million. Vistar selling,
general and administrative expenses from the December 19, 1997 merger date
through year-end accounted for nearly all of the total increase. As a percentage
of sales, selling, general and administrative expenses declined to 23.2% in 1997
from 24.5% in 1996.
INCOME BEFORE INCOME TAXES. Income (loss) before income taxes decreased
to a loss of ($0.4) million in 1997 from income of $19.2 million in 1996. The
decrease was due primarily to $20.8 million in higher interest costs incurred as
a result of Safelite's December 20, 1996 recapitalization, coupled with a $5.4
million loss on the sale of Lear Siegler and $2.9 million in restructuring
charges. Partially offsetting these items was a decline in other operating
expenses of $1.9 million. Other operating expenses in 1997 consisted of one-time
charges related to the Vistar merger as follows: (1) $3.0 million for
acceleration of vesting of certain management stock options, (2) $1.0 million in
management transaction bonuses, (3) $0.5 million related to the forgiveness of
officer loans and (4) $1.2 million in costs associated with obtaining bondholder
consent to amend the terms of the Company's subordinated notes and approve the
Vistar merger.
INCOME TAXES. In 1997, Safelite recorded an income tax benefit
substantially in excess of the statutory rate primarily due to a reduction of
Safelite's valuation allowance for deferred tax assets in recognition of
Safelite's improved profitability, and the recognition of the right to use
previously unrecognized federal net operating loss carryforwards obtained in
connection with the Lear Siegler sale transaction. The income tax benefit in
1997 was $10.8 million less than 1996. The valuation allowance was substantially
reduced in 1996 in recognition of Safelite's improved profitability at that
time.
NET INCOME. Net income declined to $3.6 million from $27.8 million in
1996 primarily as a result of the changes described above as well as the
elimination of the adjustment for minority interest as a result of the THL
Transactions in 1996. Also contributing to the change
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<PAGE> 19
was a $2.8 million extraordinary loss in 1997 for the early extinguishment of
debt which was made in connection with obtaining new financing for the Vistar
merger.
RESTRUCTURING CHARGES
As a result of the Vistar merger, Safelite took actions to consolidate
redundant overhead in both field and corporate operations, eliminate redundant
service center locations and eliminate redundant sales and marketing activities.
Merger-related closing and consolidation costs totaled $38 million of which
$27.1 million was recorded as purchase accounting adjustments and $10.9 million
was recorded as restructuring charges.
The $27.1 million of purchase accounting adjustments relate to Vistar
employee severance, closure of Vistar service center locations and elimination
of duplicative Vistar corporate functions. The restructuring charges of $2.9
million recorded in fiscal 1997, $3.8 million in the three months ended April 4,
1998 and $4.2 million in the year ended April 3, 1999, relate to Safelite
employee severance and closing of Safelite service centers. As of April 3, 1999,
Safelite has made approximately $27.6 million in cash payments in connection
with these items. Safelite anticipates additional cash payments of $4.7 million
in fiscal 2000, $3.0 million in fiscal 2001, $1.1 million in fiscal 2002, and
$0.5 million in fiscal 2003 relating to these accruals.
EFFECTIVE INCOME TAX RATE
For the year ended April 3, 1999, Safelite's provision for income taxes
was above the statutory rate due to permanent differences, primarily
amortization of non-deductible goodwill. Safelite recorded a tax benefit of $6.8
million for fiscal year 1997. This tax benefit resulted primarily from a
reduction in the valuation allowance relating to net operating loss
carryforwards generated prior to 1994, and from obtaining the right to use
approximately $16.2 million of previously unrecognized federal net operating
loss carryforwards as part of the Lear Siegler sale transaction. The reduction
in the valuation allowance was based upon management's review of Safelite's
historical and current pre-tax earnings, giving effect to adjustments and
statutory limitations resulting from the THL Transactions and the Vistar merger.
Based upon this review, management believes that Safelite will realize the
benefit of a portion of its existing deductible temporary differences.
Management expects that the increase in interest expense which will occur as a
result of the Vistar merger combined with Safelite's net operating loss
carryforwards may result in reduced Federal tax payments for a period of up to
10 years.
EFFECTS OF INFLATION
Inflation has not been material to Safelite's operations for the
periods presented.
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SALES DATA BY QUARTER
The following table shows Safelite's quarterly sales for 1996, 1997 and
fiscal 1999.
NET SALES
(DOLLARS IN MILLIONS)
CALENDAR YEARS
-----------------------------------
1996 1997
--------------- --------------
SALES % SALES %
----- --- ----- ---
First Quarter...... $102.9 24% $107.8 22%
Second Quarter..... 122.0 28 129.1 27
Third Quarter...... 115.8 26 126.3 26
Fourth Quarter..... 97.6 22 120.1 25
------ ---- ------ ----
Total Annual...... $438.3 100% $483.3 100%
====== === ====== ===
FISCAL YEAR
1999
---------------
SALES %
----- ---
First Quarter...... $241.2 28%
Second Quarter..... 231.9 26
Third Quarter...... 186.0 21
Fourth Quarter..... 217.7 25
------ ----
Total Annual...... $876.8 100%
====== ===
Historically, Safelite has experienced seasonal variations in revenues,
with lower revenues typically reported in the first and fourth calendar quarters
of each year. See "-- Effect of Weather Conditions; Seasonal Earnings."
EFFECT OF WEATHER CONDITIONS; SEASONAL EARNINGS
The severity of weather has historically affected Safelite's sales and
operating income, with severe winters generating increased sales and income and
mild winters generating lower sales and income. Accordingly, mild weather
conditions have an adverse affect Safelite's results of operations.
Safelite's business is somewhat seasonal, with the first and fourth
calendar quarters of each year traditionally being its slowest periods of
activity. This reduced level of sales in the first and fourth calendar quarters
has resulted in a disproportionate decline in operating income during those
quarters due to Safelite's significant operating leverage. Management believes
these seasonal trends will continue for the foreseeable future.
YEAR 2000 ISSUES
Many computer systems in use today may be unable to correctly process
data or may not operate at all after December 31, 1999 because those systems
recognize the year within a date only by the last two digits. Some computer
programs may interpret the year "00" as 1900, instead
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<PAGE> 21
of as 2000, causing errors in calculations or the value "00" may be considered
invalid by the computer program, causing the system to fail. Year 2000 issues
may affect (1) Information Technology (IT) utilized in Safelite's widely
diversified business information systems, including mainframe and client server
hardware and software communications and point of sale equipment (IT Systems);
(2) non-IT systems utilized by Safelite, such as communications, facilities
management, and manufacturing and service equipment containing embedded computer
chips; and (3) IT and non-IT systems of third parties relied on by Safelite,
such as customers, suppliers, distributors, banks and utilities.
Safelite could be adversely affected if Year 2000 issues are not
resolved by Safelite or material third parties before the Year 2000. Possible
adverse consequences include, but are not limited to (1) the inability to obtain
products or services used in business operations, (2) the inability to transact
business with customers, (3) the inability to execute transactions through the
financial markets, and (4) the inability to manufacture or deliver goods or
services sold to customers. Safelite's management believes that at least some
minor disruptions due to Year 2000 issues will occur. On a worst case basis, if
Safelite, one or more of its significant customers or suppliers, or key
government bodies are unable to implement timely and effective solutions to the
Year 2000 issues, Safelite could suffer material adverse effects. The financial
impact of these effects cannot currently be estimated.
Safelite relies heavily on computer technologies to operate its
business. As a result, Safelite continuously seeks to upgrade and improve its
computer systems in order to provide better service to its customers and to
support the Company's growth. Safelite has initiated a program to prepare its
computer systems and applications to accurately process date/time data from,
into, and between the years 1999 and 2000. As part of this program, a team has
been assigned to assess the nature and extent of the work required to make
Safelite's IT Systems and non-IT Systems Year 2000 compliant.
The assessment phase of the Year 2000 project is complete. Remediation
for Year 2000 compliance is underway and is currently estimated to be 70%
complete with final completion expected by August 1999. Implementation and
testing is underway and is scheduled to be complete by September 1999.
Remediation of systems and applications software is being effected through
outside consultants, "factory support", in-house staff and in some cases by the
replacement of software packages. Safelite is building an isolated test
environment where systems will be tested by resetting dates to various points
beyond the year 2000. Management expects that by the end of calendar 1999, all
of Safelite's critical systems that are not currently Year 2000 compliant will
be corrected or replaced.
Surveys of critical customers and suppliers are currently underway to
assess the status of their Year 2000 compliance efforts. However, there can be
no assurance that the systems of other companies on which Safelite relies will
be timely converted. There can be no assurance that Year 2000 failures
experienced by Safelite or third parties will not have a material adverse effect
on Safelite's financial condition and operations. Safelite has begun
consideration of contingency plans to deal with Year 2000 issues in the event
that remediation efforts are unsuccessful. These plans will be more fully
developed in 1999 to address specific areas of need.
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Based on Safelite's latest assessments, the total cost of addressing
the Year 2000 issue is estimated to be in the range of $2.0 million to $3.0
million, with the majority of these costs representing incremental business
costs to outside vendors and consultants. As of April 3, 1999, approximately
$1.0 million of external costs have been incurred. Safelite does not separately
track the internal costs for the Year 2000 project, with these costs being
principally the related payroll costs for the management information systems
staff.
LIQUIDITY AND CAPITAL RESOURCES
Net Cash Used in Operating Activities
Net cash used in operating activities for the year ended April 3, 1999
was $14.0 million, an increase in cash usage of $16.5 million from the fiscal
year ended January 3, 1998. Excluding the cash flows associated with Lear
Siegler discontinued operations during the year ended ended January 3, 1998, the
increase in cash usage of $12.5 million was primarily due to restructuring cash
payments as well as debt service associated with the Vistar merger.
Net cash used in operating activities for the three months ended April
4, 1998 was $15.6 million, a decrease in cash usage of $1.1 million from the
corresponding prior year period. Excluding Lear Siegler discontinued operations
in the quarter ended March 29, 1997, cash usage increased by $2.8 million,
primarily due to increases in accounts receivable, inventory and debt service
associated with the Vistar merger.
Net cash provided by operating activities for 1997 was $2.4 million, an
increase in operating cash flows of $2.3 million from 1996. Excluding Lear
Siegler discontinued operations, cash flows decreased by $23.3 million in 1997.
The primary factor in this decrease was the additional cash required to service
the increase in debt which resulted from the THL Transactions in December 1996.
Capital Expenditures
Safelite'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 $23.1 million for the year ended April
3, 1999 and $13.9 million for the fiscal year ended January 3, 1998. The
increase in capital spending during the year ended April 3, 1999 reflects
spending for merger integration related activities as well as the increase in
the size of the business as a result of the Vistar merger.
Capital expenditures totaled $4.2 million for the three months ended
March 29, 1997 and $2.4 million for the three months April 4, 1998. Capital
spending during the three months ended April 4, 1998 reflects Safelite's focus
on planning merger consolidation activities.
Capital spending totaled $13.9 million in the year ended 1997 and $12.8
million in the year ended 1996. The level of 1996 capital expenditures reflects
expansion of service center and warehouse coverage into new markets and an
upgrade to Safelite's manufacturing facilities. The increase in capital spending
during 1997 reflects Safelite's expansion of service center and
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<PAGE> 23
warehouse coverage and the purchase of new point of sale equipment at the end of
the year for the former Vistar service centers.
Management expects post-integration capital spending levels to
approximate $22.0 million annually after the Vistar merger, with maintenance
spending of approximately $10.0 million to $12.0 million annually. Additional
integration-related capital expenditures of $3.0 million to $5.0 million in
fiscal year 2000 is expected as a result of (1) converting Vistar service
centers and mobile vans to the Safelite logo and format and (2) expansion of
certain centralized telephone/dispatch center locations.
Liquidity
Historically, Safelite has utilized internally generated funds and
borrowings under credit facilities to meet ongoing working capital and capital
expenditure requirements. In connection with the Vistar merger, Safelite retired
existing debt of approximately $150.0 million and incurred new debt aggregating
approximately $365.0 million. Substantially all of the proceeds of this debt
were used to refinance existing bank debt, to fund a distribution to Safelite
shareholders, to pay Vistar merger consideration and to pay bonuses, fees and
expenses related to the Vistar merger.
During 1999 Safelite completed an offering of $55.0 million aggregate
principal amount of 9-7/8% Series C Senior Subordinated Notes due 2006. Net
proceeds from the sale of the bonds along with proceeds from the sale of $50.0
million in preferred stock (Note 11 to Safelite's financial statements) were
used to repay $61.4 million in term loan borrowings and $35.0 million of
revolver borrowings. These repayments were made as part of an amendment to
Safelite's Bank Credit Agreement.
As a result of the Vistar merger, Safelite has significantly increased
cash requirements for debt service relating to Safelite's credit facilities. See
Note 10 to Safelite's financial statements for a description of the amortization
of the term loan facility. Safelite will rely on internally generated funds and,
to the extent necessary, on borrowings under its revolving credit facility,
which provides for borrowings up to $100.0 million, to meet its liquidity needs.
At April 3, 1999, Safelite had long-term borrowings of $487.4 million
and availability under the revolving credit facility of $49.0 million.
Safelite's credit facilities contain financial and other covenants that
limit the ability of the Company to, among other things, dispose of assets,
borrow money, make guarantees, prepay other debt 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 transactions with affiliates and otherwise restrict certain corporate
activities. In addition, Safelite is required to comply with financial
covenants, including specified financial ratios, minimum interest coverage
ratios and maximum leverage ratios.
22
<PAGE> 24
At the same time that Safelite issued the Series C Senior Subordinated
Notes, Safelite obtained an amendment to its Bank Credit Agreement to make the
interest coverage ratio and debt leverage ratio less restrictive. There can be
no assurance that Safelite will be able to comply with these amended financial
covenants or that Safelite will not require amendments and/or waivers in future
periods to these or other covenants contained in the Bank Credit Agreement.
The ability of Safelite 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 Safelite's control. A portion of Safelite's debt bears interest at
floating rates; therefore, its financial condition is and will continue to be
effected by changes in prevailing interest rates. Safelite uses interest rate
exchange agreements to manage exposure associated with interest rate
fluctuations. An increase of 1% in interest rates would have the effect of
increasing annual interest expense by approximately $1.8 million based upon
Safelite's year end debt position.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7.
CHANGES IN ACCOUNTING STANDARDS
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement requires derivatives to be
recorded on the balance sheet as assets or liabilities, measured at fair value.
Gains or losses resulting from changes in fair value of the derivatives are
recorded depending upon whether the instruments meet the criterion for hedge
accounting. This statement is effective for fiscal years beginning after June
15, 1999, however an amendment to this statement, delaying the effective date to
fiscal years beginning after June 15, 2000 is currently in the exposure draft
stage. The impact of adopting this statement has not been determined.
23
<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) Financial Statements
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF SAFELITE GLASS CORP. AND SUBSIDIARIES:
Independent Auditors' Report................................................. 25
Balance Sheets -- April 4, 1998 and April 3, 1999............................ 26
Statements of Operations -- Years Ended December 28, 1996,
January 3, 1998, and April 3, 1999, and Three Months
Ended March 29, 1997 (unaudited) and April 4, 1998........................ 27
Statements of Stockholders' Equity (Deficit) -- Years Ended
December 28, 1996, January 3, 1998 and April 3, 1999,
and Three Months Ended April 4, 1998...................................... 28
Statements of Cash Flows -- Years Ended December 28, 1996,
January 3, 1998, and April 3, 1999 and Three Months
Ended March 29, 1997 (unaudited) and April 4, 1998........................ 29
Notes to Financial Statements................................................ 30
24
<PAGE> 26
INDEPENDENT AUDITORS' REPORT
Safelite Glass Corp.:
We have audited the accompanying balance sheets of Safelite Glass Corp.
as of April 4, 1998 and April 3, 1999, and the related statements of operations,
stockholders' equity (deficit), and cash flows for the years ended December 28,
1996, January 3, 1998, and April 3, 1999, and for the three months ended April
4, 1998. These financial statements are the responsibility of Safelite's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of Safelite Glass Corp. at April 4,
1998 and April 3, 1999, and the results of its operations and its cash flows for
the years ended December 28, 1996, January 3, 1998, and April 3, 1999, and for
the three months ended April 4, 1998, in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Dayton, Ohio
April 16, 1999
25
<PAGE> 27
SAFELITE GLASS CORP.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
April 4, April 3,
1998 1999
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................ $ 10,254 $ 2,876
Accounts receivable, net......................... 62,000 70,296
Inventories...................................... 50,535 50,451
Prepaid expenses................................. 11,382 10,700
Deferred income taxes............................ 19,411 9,303
-------- --------
Total current assets..................... 153,582 143,626
PROPERTY, PLANT AND EQUIPMENT - net................... 61,994 64,080
INTANGIBLE ASSETS - net............................... 286,542 280,814
OTHER ASSETS.......................................... 24,873 24,464
DEFERRED INCOME TAXES................................. 49,364 60,843
-------- --------
TOTAL ASSETS.......................................... $576,355 $573,827
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable................................. $ 43,480 $ 50,305
Current portion - long-term debt................. 5,941 4,537
Accrued expenses:
Payroll and related items.................... 7,805 6,687
Self-insurance reserves...................... 7,018 7,099
Taxes........................................ 2,410 5,090
Accrued interest............................. 8,695 6,589
Restructuring................................ 22,390 5,383
Other........................................ 14,529 5,198
-------- --------
Total current liabilities................ 112,268 90,888
LONG-TERM DEBT - less current portion................. 497,645 482,846
OTHER LONG-TERM LIABILITIES:
Self-insurance reserves.......................... 4,895 2,125
Restructuring.................................... 8,983 3,933
Other............................................ 975 569
-------- --------
Total other long-term liabilities........ 14,853 6,627
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Series A Preferred Stock issued, $0.01 par
value........................................... 1
8% Non-Voting Preferred Stock issued, $0.01
par value....................................... 1 1
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....................... 324,878 374,877
Accumulated deficit.............................. (362,077) (376,087)
Other............................................ (11,355) (5,468)
-------- --------
Total stockholders' deficit............. (48,411) (6,534)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT........... $576,355 $573,827
======== ========
See notes to financial statements.
26
<PAGE> 28
SAFELITE GLASS CORP.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
--------------------- --------------------- YEAR ENDED
DECEMBER 28, JANUARY 3, MARCH 29, APRIL 4, APRIL 3,
1996 1998 1997 1998 1999
----------- ---------- --------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SALES:
Installation and related services .................. $380,142 $430,290 $ 95,249 $201,684 $828,709
Wholesale .......................................... 58,183 53,014 12,544 12,108 48,102
-------- -------- -------- -------- --------
Total sales ...................................... 438,325 483,304 107,793 213,792 876,811
COST OF SALES:
Installation and related services .................. 257,304 291,952 66,609 145,824 604,967
Wholesale .......................................... 42,319 39,706 9,149 9,721 40,759
-------- -------- -------- -------- --------
Total cost of sales .............................. 299,623 331,658 75,758 155,545 645,726
-------- -------- -------- -------- --------
GROSS PROFIT ......................................... 138,702 151,646 32,035 58,247 231,085
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ........................................... 107,350 111,815 25,993 46,467 186,800
RESTRUCTURING EXPENSES ............................... 2,865 3,791 4,222
LOSS ON THE SALE OF LEAR SIEGLER ..................... 5,418
OTHER OPERATING EXPENSES ............................. 7,558 5,704 3,079 3,613
-------- -------- -------- -------- --------
OPERATING INCOME ..................................... 23,794 25,844 6,042 4,910 36,450
INTEREST EXPENSE ..................................... (6,726) (27,517) (6,357) (10,987) (46,655)
INTEREST INCOME ...................................... 2,094 1,254 279 138 656
-------- -------- -------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAX (PROVISION) BENEFIT
AND MINORITY INTEREST .............................. 19,162 (419) (36) (5,939) (9,549)
INCOME TAX (PROVISION) BENEFIT ....................... 17,605 6,842 (59) 1,623 (433)
MINORITY INTEREST .................................... (10,199)
-------- -------- -------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS ............. 26,568 6,423 (95) (4,316) (9,982)
DISCONTINUED OPERATIONS .............................. 1,706
EXTRAORDINARY ITEM - early extinguishment of debt,
net of tax benefit ................................. (500) (2,835) (4,028)
-------- -------- -------- -------- --------
NET INCOME (LOSS) .................................... $ 27,774 $ 3,588 $ (95) $ (4,316) $(14,010)
======== ======== ======== ======== ========
</TABLE>
See notes to financial statements.
27
<PAGE> 29
Safelite Glass Corp.
Statements of Stockholders' Equity (Deficit)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Preferential
Participating and Class A Class B Additional
Preferred Preferred Preferred Common Common Paid-in Accumulated
Stock Stock Stock Stock Stock Capital Deficit
----- ----- ----- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 30, 1995 ............... $ 32 $ 11 $ 1 $ 393,567 $(384,329)
Issuance of 4,209,689 shares of
Class A Common Stock net of
issuance costs of $6,502 ................ 42 49,866
Issuance of 582,498 shares of
preferred stock ......................... 58,250
Redemption of preferential common
stock ................................... (32) (293,107)
Contributed capital ...................... 21,314
Purchase of 353,557 shares of Class
A Common Stock ..........................
Exercise of 6,080 stock options .......... 63
Net income ............................... 27,774
Purchase of minority interest ............ 10,665
Minimum pension liability adjustment,
net of tax ..............................
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 28, 1996 ............... 58,250 53 1 182,368 (356,555)
Purchase of 1,000 shares of Class A
Common Stock ............................
Exercise of 203,611 stock options ........ 2 5,273
Dividend ($12.99 per common share) ....... (67,194)
Redemption of preferred stock,
including payment of accumulated
dividends of $4,794 ..................... (58,250) (4,794)
Elimination of stock subscription
receivable ..............................
Reverse stock split (1 for 3) ............ (34) 34
Stock dividend (2 shares of Class B
Common Stock for each share of
Class A Common Stock) ................... 34 (34)
Issuance of 1,690,101 shares of Class
A Common Stock and 6,959,771 shares
of Class B Common Stock ................. 17 69 164,348
Issuance of 40,000 shares of 8% Non-
Voting Preferred Stock .................. $ 1 39,999
Net income ............................... 3,588
Minimum pension liability adjustment,
net of tax ..............................
--------- --------- --------- --------- --------- --------- ---------
BALANCE, JANUARY 3, 1998 ................. 1 38 104 324,794 (357,761)
Issuance of 4,378 shares of Class B
Common Stock ............................ 84
Net loss ................................. (4,316)
Minimum pension liability adjustment,
net of tax ..............................
--------- --------- --------- --------- --------- --------- ---------
BALANCE, APRIL 4, 1998 ................... 1 38 104 324,878 (362,077)
Issuance of 50,000 shares of Series
A Preferred Stock ....................... $ 1 49,999
Net loss ................................. (14,010)
Minimum pension liability adjustment,
net of tax ..............................
--------- --------- --------- --------- --------- --------- ---------
BALANCE, APRIL 3, 1999 ................... $ 1 $ 1 $ $ 38 $ 104 $ 374,877 $(376,087)
========= ========= ========= ========= ========= ========= =========
Other
--------------------------------
Stock Minimum
Treasury Subscription Pension Comprehensive
Stock Receivable Liability Total Income(Loss)
----- ---------- --------- ----- ------------
BALANCE, DECEMBER 30, 1995 ............... $ (737) $ (372) $ (8,787) $ (614)
Issuance of 4,209,689 shares of
Class A Common Stock net of
issuance costs of $6,502 ................ 49,908
Issuance of 582,498 shares of
preferred stock ......................... 58,250
Redemption of preferential common
stock ................................... (293,139)
Contributed capital ...................... 21,314
Purchase of 353,557 shares of Class
A Common Stock .......................... (4,720) (4,720)
Exercise of 6,080 stock options .......... (4) 59
Net income ............................... 27,774 $ 27,774
Purchase of minority interest ............ 10,665
Minimum pension liability adjustment,
net of tax .............................. 1,971 1,971 1,971
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 28, 1996 ............... (5,457) (376) (6,816) (128,532) $ 29,745
Purchase of 1,000 shares of Class A
Common Stock ............................ (11) (11)
Exercise of 203,611 stock options ........ 5,275
Dividend ($12.99 per common share) ....... (67,194)
Redemption of preferred stock,
including payment of accumulated
dividends of $4,794 ..................... (63,044)
Elimination of stock subscription
receivable .............................. 376 376
Reverse stock split (1 for 3) ............
Stock dividend (2 shares of Class B
Common Stock for each share of
Class A Common Stock) ...................
Issuance of 1,690,101 shares of Class
A Common Stock and 6,959,771 shares
of Class B Common Stock ................. 164,434
Issuance of 40,000 shares of 8% Non-
Voting Preferred Stock .................. 40,000
Net income ............................... 3,588 $ 3,588
Minimum pension liability adjustment,
net of tax .............................. (1,766) (1,766) (1,766)
--------- --------- --------- --------- ---------
BALANCE, JANUARY 3, 1998 ................. (5,468) (8,582) (46,874) $ 1,822
Issuance of 4,378 shares of Class B
Common Stock ............................ 84
Net loss ................................. (4,316) $ (4,316)
Minimum pension liability adjustment,
net of tax .............................. 2,695 2,695 2,695
--------- --------- --------- --------- ---------
BALANCE, APRIL 4, 1998 ................... (5,468) (5,887) (48,411) $ (1,621)
Issuance of 50,000 shares of Series
A Preferred Stock ....................... 50,000
Net loss ................................. (14,010) $ (14,010)
Minimum pension liability adjustment,
net of tax .............................. 5,887 5,887 5,887
--------- --------- --------- --------- ---------
BALANCE, APRIL 3, 1999 ................... $ (5,468) $ $ $ (6,534) $ (8,123)
========= ========= ========= ========= =========
See notes to financial statements.
</TABLE>
28
<PAGE> 30
SAFELITE GLASS CORP.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
------------------------ ---------------------- YEAR ENDED
DECEMBER 28, JANUARY 3, MARCH 29, APRIL 4, APRIL 3,
1996 1998 1997 1998 1999
------------ ---------- --------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES: (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income (loss) ................................................. $ 27,774 $ 3,588 $ (95) $ (4,316) $ (14,010)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Extraordinary loss-early extinguishment of debt .................. 500 2,835 4,028
Depreciation and amortization .................................... 8,031 8,700 2,003 6,377 22,763
Loss on sale of subsidiary ....................................... 5,418
Stock compensation from exercise of stock options ................ 2,976
Minority interest ................................................ 10,199
Deferred income taxes ............................................ (19,715) (6,887) 59 (1,552) 433
(Gain) loss on disposition of assets ............................. 258 324 346 (35)
Gain from discontinued operations ................................ (1,706)
Changes in operating assets and liabilities:
Accounts receivable ............................................. 2,379 560 (1,217) (7,073) (8,296)
Inventories ..................................................... (704) (145) (690) (2,402) 84
Accounts payable ................................................ 4,277 1,852 (3,937) (1,833) 6,825
Accrued expenses ................................................ 1,615 (2,288) (10,643) (5,099) (25,620)
Other ........................................................... (11,179) (18,478) 1,754 (42) (214)
Cash flows provided by (used in) discontinued operations ......... (21,604) 3,975 (3,940)
--------- --------- --------- -------- ---------
Net cash flows provided by (used in) operating activities ........ 125 2,430 (16,706) (15,594) (14,042)
--------- --------- --------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................................. (12,843) (13,856) (4,233) (2,425) (23,114)
Proceeds from sale of fixed assets ............................... 87 87 5 28 494
Acquisition of intangibles ....................................... (392) (30) (30) (2,821)
Sale of subsidiary ............................................... (3,407)
Purchases of short-term investments .............................. (29,570)
Maturities of short-term investments ............................. 64,224
Cash paid in Vistar transaction (net of cash acquired) ........... (68,224)
--------- --------- --------- -------- ---------
Net cash flows provided by (used in) investing activities ........ 21,506 (85,430) (4,258) (5,218) (22,620)
--------- --------- --------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common and preferred stock ........................... 108,217 7 50,000
Redemption of preferential common stock .......................... (293,139)
Purchase of treasury stock ....................................... (4,720) (11)
Payments on long-term borrowings ................................. (47,500) (166,996) (1,316) (2,219) (66,564)
Proceeds from long-term borrowings ............................... 263,740 350,000 50,407
Borrowings (payments) on revolver, net ........................... (21,500) 15,368 7,600 25,881 (150)
Capitalized debt issuance costs .................................. (9,323) (11,206) (4,409)
Exercise of stock options ........................................ 2,299
Dividends paid ................................................... (71,988)
Redemption of preferred stock .................................... (58,250)
--------- --------- --------- -------- ---------
Net cash flows provided by (used in) financing activities ........ (4,225) 59,216 6,291 23,662 29,284
--------- --------- --------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ...................................................... 17,406 (23,784) (14,673) 2,850 (7,378)
CASH AND CASH EQUIVALENTS AT BEG. OF PERIOD ....................... 13,782 31,188 31,188 7,404 10,254
--------- --------- --------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................ $ 31,188 $ 7,404 $ 16,515 $ 10,254 $ 2,876
========= ========= ========= ======== =========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest ........................................... $ 5,127 $ 29,550 $ 2,936 $ 3,857 $ 46,234
========= ========= ========= ======== =========
Cash paid (refunded) for income taxes............................. $ 350 $ 492 $ 203 $ 123 $ (2,282)
========= ========= ========= ======== =========
Contributed capital .............................................. $ 21,314
=========
Common and preferred stock issued ................................ $ 204,434 $ 84
========= ========
</TABLE>
See notes to financial statements.
29
<PAGE> 31
SAFELITE GLASS CORP.
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 28, 1996, JANUARY 3, 1998 AND APRIL 3, 1999 AND
THREE MONTHS ENDED MARCH 29, 1997 (UNAUDITED) AND APRIL 4, 1998
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - Safelite Glass Corp. is engaged principally
in the manufacture, distribution, repair and installation of replacement auto
glass and related insurance claims processing. Safelite is the largest
automotive glass replacement and repair company in the United States. Currently,
approximately 95% of Safelite's sales represent installation and related
services with the balance representing sales to wholesale customers. On December
19, 1997, Safelite acquired Vistar, Inc., the second largest automotive glass
replacement and repair company in the United States (see Note 4). At April 3,
1999, Safelite had two manufacturing facilities, 76 warehouses and 674 service
center locations across the United States.
BASIS OF ACCOUNTING - The financial statements have been prepared on
the basis of accounting principles generally accepted in the United States of
America and all amounts are expressed in U.S. dollars. The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses for the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION - The financial statements include the
accounts of Safelite Glass Corp. and its wholly-owned subsidiaries, which
include the accounts of Lear Siegler Holdings Corp. through September 12, 1997
(see Notes 2 and 3). As of April 3, 1999, Safelite had no subsidiaries.
FISCAL YEAR - Prior to 1998, Safelite used a 52 or 53 week fiscal year
that ended on the Saturday nearest December 31. In May 1998, Safelite changed
its fiscal year to a 52 or 53 week fiscal year that ends on the Saturday closest
to March 31. The footnote references to year ends are as follows: December 28,
1996 ("1996"), January 3, 1998 ("1997") and April 3, 1999 ("1999"). The footnote
references to the three months ended information are as follows: April 4, 1998
("1998") and March 29, 1997 ("1997").
INTERIM FINANCIAL STATEMENTS - Management believes the unaudited
financial statements for the three months ended 1997 reflect all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the financial position and results of operations for that period.
CASH AND CASH EQUIVALENTS - Safelite considers all short-term
investments which have a purchased term of three months or less to be cash
equivalents. The carrying amount approximates fair value because of the short
maturity of those instruments.
30
<PAGE> 32
CONCENTRATION OF CREDIT RISK - Approximately 57% at April 4, 1998 and
77% at April 3, 1999, of trade accounts receivable are due from insurance
companies in connection with sales to individual customers. The balance of trade
accounts receivable is due primarily from wholesale and other commercial
customers. The number and relative financial strength of the insurance companies
limit Safelite's exposure to credit risk for insurance related receivables.
During 1999, $120,470 or 14% of total sales for the period were to a single
insurance customer. During the three months ended April 4, 1998, $25,779 or 12%
of total sales were to a single insurance customer. No single customer accounted
for more than 10% of total sales in any previous period. The diversity and wide
geographic dispersion limits the credit risk of receivables from wholesale and
other commercial customers. Safelite also performs ongoing credit evaluations of
the financial condition of its wholesale and other commercial customers which
reduces its exposure to loss. Safelite maintains reserves for potential
uncollectible accounts.
INVENTORIES - Safelite accounts for inventories, which are primarily
finished goods, at the lower of standard cost, which approximates actual cost
determined utilizing the first in, first out method, or market. Valuation
allowances for obsolete and slow moving inventories were $1,723 and $877 at
April 4, 1998, and April 3, 1999.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are
recorded at cost. Depreciation is provided using the straight-line method over
the following estimated useful lives:
Buildings and improvements 25 years
Leasehold improvements 5 - 10 years
Information technology equipment 3 - 5 years
Other equipment and furniture 3 - 7 years
DEBT ISSUANCE COSTS - Debt issuance costs are amortized over the life
of the related debt.
INTANGIBLE ASSETS - Intangible assets consist principally of trademarks
and goodwill which are being amortized using the straight-line method over their
estimated useful lives of five to forty years, primarily 30 years.
LONG-LIVED ASSETS - Long-lived assets, identifiable intangibles and
goodwill related to those assets to be held and used, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable from undiscounted future cash
flows.
REVENUE RECOGNITION - Revenue from auto glass installation and related
services is recognized when the service is performed. Revenue from the
distribution of auto glass to wholesale customers is recognized when the product
is shipped.
COST OF SALES - Cost of sales includes product and distribution costs
as well as installation labor, occupancy and vehicle expenses.
31
<PAGE> 33
ADVERTISING COSTS - Safelite expenses all advertising costs. The costs
of yellow pages advertising are expensed at the time the yellow pages phone book
is published. Total advertising expense was $7,123, $7,367, and $11,104 in 1996,
1997, and 1999. Total advertising expense for the three months ended 1997 and
1998 was $1,807 and $2,298.
OTHER OPERATING EXPENSES - Other operating expenses in 1996 consist of
$6,858 in management transaction bonuses related to the THL Transaction and
estimated costs (primarily severance) of $700 to exit the activities of Lear
Siegler (see Note 3). Other operating expenses in 1997 include $1,000 of
management transaction bonuses, $2,976 related to the acceleration of vesting of
management stock options, and $470 related to forgiveness of officer loans made
in connection with the Vistar merger (see Note 4). Also included in other
operating expenses in 1997 are costs related to obtaining bondholder consent to
the Vistar merger of $1,258 (see Note 10). Other operating expenses in the three
months ended 1998 and the year ended 1999, consist of costs associated with the
integration of corporate systems, moving, relocation and other expenses
associated with the Vistar merger.
INTEREST RATE SWAPS - Safelite uses settlement accounting to account
for its interest rate swap agreements. Net interest received or paid on these
contracts is reflected in interest expense.
OTHER - Safelite adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" as of April 3, 1999. Safelite has determined
that it operates in two industry segments: installation and related services and
wholesale. Safelite does not allocate assets and corporate overhead by segment.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued by the Financial Accounting Standards Board in June
1998. The statement requires derivatives to be recorded on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting from
changes in fair value of the derivatives are recorded depending upon whether the
instruments meet the criteria for hedge accounting. This statement is effective
for fiscal years beginning after June 15, 1999. The impact of adopting this
statement has not been determined.
RECLASSIFICATIONS - Some reclassifications have been made to prior year
balances to conform them with the fiscal 1999 presentation.
2. THE THL TRANSACTIONS
Prior to December 20, 1996, Safelite was an indirect subsidiary of Lear
Siegler. On December 20, 1996, Safelite completed a series of transactions which
resulted in Thomas H. Lee Equity Fund III, L.P., other affiliates of Thomas H.
Lee Company and certain other investors (collectively "THL"), obtaining 88% of
Safelite's common stock. Some existing shareholders, primarily Safelite
management, retained the remaining interest. These transactions also resulted in
Safelite acquiring (through a newly formed subsidiary) substantially all of the
outstanding common stock of Lear Siegler, its former parent.
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<PAGE> 34
The transactions above were accounted for as a recapitalization of
Safelite and were recorded using the guidance provided by FASB Technical
Bulletin No. 85-5. This meant that the stock held by the former minority
shareholders of Safelite was treated as if it was acquired by Lear Siegler. The
carrying value of the minority interest exceeded the fair value of the minority
shares acquired by approximately $5,800. Inventory was increased by $1,600 and
non-current assets were reduced by $7,400 to allocate this fair value
adjustment.
In connection with these transactions, some of the selling shareholders
agreed to reimburse Safelite if Safelite had to pay tax liabilities of Lear
Siegler arising from disputes with various taxing authorities. Additional
paid-in capital of $21,314, the amount of tax liabilities recorded by Lear
Siegler, was recorded to reflect the assumption of these tax liabilities by the
selling shareholders.
3. SALE OF LEAR SIEGLER
Prior to December 20, 1996, Lear Siegler operated as a holding company
whose principal activity was to oversee its discontinued operations. These
activities did not provide future benefit to Safelite and, as a result,
Safelite's management adopted a formal plan to exit the activities of Lear
Siegler on December 20, 1996. Severance, lease termination and related costs of
$700 to close Lear Siegler's office located in New Jersey were accrued as part
of the exit plan using the guidance provided by Emerging Issues Task Force
Statement No. 94-3. This amount was included in other operating expenses for
1996.
On September 12, 1997, Safelite sold all of the issued and outstanding
shares of the capital stock of Lear Siegler to BPLSI Investment Company. The net
book value of Lear Siegler on the sale date was $5,500, which was comprised of
$3,500 in cash, $13,400 in other assets and $11,400 in liabilities.
The sale price of Lear Siegler was $100 in cash and a promissory note
delivered by BPLSI to Safelite. The promissory note is not for a fixed dollar
amount, but instead provides that BPLSI must pay to Safelite an amount equal to
50% of the net proceeds realized by Lear Siegler from the liquidation or other
disposition of the assets belonging to Lear Siegler which were seized by the
Cuban government when Fidel Castro came to power. The payment is required only
to the extent that BPLSI receives dividends or other distributions from Lear
Siegler. Due to restrictions in the documents governing the December 20, 1996,
recapitalization of Safelite, it is not expected that BPLSI will be able to make
any payments on the note for at least six years. The promissory note will remain
in effect until the earlier of (a) June 21, 2017, or (b) after six years, the
date when Safelite receives 50% of the net proceeds from the sale or other
distribution of the "Cuban Assets" plus interest from the date of disposition to
the date of payment. Due to the wholly-contingent nature of the ability of Lear
Siegler to realize any proceeds from the Cuban Assets, there can be no assurance
that BPLSI will make any payments to Safelite under the promissory note.
Accordingly, Safelite has recorded this promissory note at a net book value of
zero, and a loss of $5,418 related to the sale.
33
<PAGE> 35
4. THE VISTAR TRANSACTIONS
On December 19, 1997, Safelite merged with Vistar, with Safelite as the
corporation surviving the merger. The merger has been accounted for as a
purchase transaction, with results of Vistar included in Safelite=s financial
statements from the acquisition date.
The purchase price paid by Safelite for all of the outstanding capital
stock of Vistar consisted of 1,690,101 shares of Class A Voting Stock (valued at
$19.01 a share), 6,959,771 shares of Class B Non-Voting Stock (valued at $19.01
a share), 40,000 shares of Non-Voting Preferred Stock ($40,000 aggregate
liquidation preference) and $65,000 cash. The aggregate purchase price was
$269,434. Safelite shareholders retained ownership of 50.5% of the outstanding
Class A Voting Stock and became the owners of approximately 33% of the
outstanding Class B Non-Voting Stock (including shares subject to exercisable
options to acquire Class B Non-Voting Stock). Vistar shareholders became the
owners of 49.5% of the outstanding Class A Voting Stock, approximately 67% of
the outstanding Class B Non-Voting Stock and 100% of the outstanding Non-Voting
Preferred Stock.
In connection with the merger, substantially all of the Safelite
shareholders and all of the Vistar shareholders entered into a Shareholders
Agreement, which established rights and restrictions with respect to the
management of Safelite and transfers of the Class A Voting Stock and the Class B
Non-Voting Stock. They also entered into a Registration Agreement providing for
rights to cause Safelite to register the Class A Voting Stock and the Class B
Non-Voting Stock under the Securities Act of 1933, as amended.
The excess purchase price over the fair value of identifiable net
assets acquired has been allocated to goodwill. Goodwill of $276,686 recorded in
the transaction will be amortized over 30 years using the straight-line method.
Fees and expenses paid in connection with the merger totaled
approximately $14,550. Of these total fees and expenses, approximately $3,000,
$3,010 and $2,737 were paid to THL, Belron International (a former Vistar
shareholder) and The Windsor Park Management Group. The Windsor Park Management
Group is affiliated with an individual who became a director of Safelite
subsequent to the merger. Safelite also paid THL $1,000 in connection with the
debt refinancing.
At the closing of the merger, Safelite entered into management
agreements with both THL and Belron. Under the terms of the management
agreements, Safelite agreed to pay both THL and Belron an annual management fee
of $1 million. Safelite had a similar agreement with THL prior to the merger.
Management fees paid to THL were $1,000, $250, and $1,000 in the year ended
1997, the three months ended 1998 and the year ended 1999, respectively.
Management fees paid to Belron were $250 in the three months ended 1998 and
$1,000 in the year ended 1999.
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<PAGE> 36
As a result of the merger, Safelite went through a process to
consolidate redundant overhead in both field and corporate operations, eliminate
redundant service center locations and eliminate redundant sales and marketing
force activities. This process was substantially complete as of January 2, 1999.
The following accruals were recorded as part of the purchase accounting
for Vistar as a result of this process:
YEAR THREE YEAR
ENDED MONTHS ENDED
1997 ENDED 1998 1999
---- ---------- ----
Closing of Vistar service center locations $ 1,734 $ 1,472 $ 2,338
Vistar field and corporate severance 13,556 1,873 578
Elimination of redundant Vistar corporate functions 5,559
------- ------ -------
$20,849 $ 3,345 $ 2,916
======= ======= =======
5. RESTRUCTURING EXPENSES
As described in Note 4, Safelite undertook a process to review
redundant corporate and field operations after its merger with Vistar. This
review resulted in restructuring provisions of $2,865, $3,791 and $4,222, in the
year ended 1997, the three months ended 1998 and the year ended 1999,
respectively. The 1997 provision consisted of $415 related to Safelite service
center closings and $2,450 related to Safelite employee severance. The three
months ended 1998 provision consisted of $2,491 related to Safelite service
center closings and $1,300 related to Safelite employee severance. The 1999
provision consisted of $3,580 related to Safelite service center closings and
$642 related to Safelite employee severance. A summary of restructuring reserve
activity including amounts related to restructuring activities prior to the
Vistar merger, is detailed below.
<TABLE>
<CAPTION>
Years Ended Three Months Ended
------------------ ------------------- Year Ended
1996 1997 1997 1998 1999
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Beginning balance $ 5,098 $ 1,689 $ 1,689 $ 26,853 $ 31,373
Restructuring liabilities acquired - Vistar 2,438
Restructuring merger accrual 20,849 3,345 2,916
Restructuring provision 2,865 3,791 4,222
Used for intended purpose (3,409) (988) (264) (2,616) (29,195)
-------- -------- -------- -------- --------
Ending balance $ 1,689 $ 26,853 $ 1,425 $ 31,373 $ 9,316
======== ======== ======== ======== ========
</TABLE>
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<PAGE> 37
6. ACCOUNTS RECEIVABLE
April 4, April 3,
1998 1999
---- ----
Trade receivables $ 74,622 $ 75,396
Less allowance for uncollectible accounts (12,622) (5,100)
-------- --------
Net $ 62,000 $ 70,296
======== ========
<TABLE>
<CAPTION>
Years Ended Three Months Ended
--------------- ------------------ Year Ended
1996 1997 1997 1998 1999
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Allowance for uncollectible accounts:
Balance, beginning of period $ 2,413 $ 2,101 $ 2,101 $ 15,828 $ 12,622
Provision 1,015 1,469 618 1,319 2,795
Vistar merger 14,002
Charge-offs (1,327) (1,744) (587) (4,525) (10,317)
-------- -------- -------- -------- --------
Balance, end of period $ 2,101 $ 15,828 $ 2,132 $ 12,622 $ 5,100
======== ======== ======== ======== ========
</TABLE>
7. PROPERTY, PLANT & EQUIPMENT
April 4, April 3,
1998 1999
---- ----
Land $ 5,569 $ 5,328
Buildings and leaseholds 47,333 45,247
Equipment and furniture 81,186 77,677
-------- --------
Total 134,088 128,252
Less accumulated depreciation (72,094) (64,172)
-------- --------
Net $ 61,994 $ 64,080
======== ========
Depreciation expense was $7,239, $7,622 and $12,607 for the years ended
1996, 1997 and 1999, respectively. Depreciation expense for the three months
ended 1997 and 1998 was $1,822 and $3,876, respectively.
8. INTANGIBLE AND OTHER ASSETS
April 4, April 3,
1998 1999
---- ----
Trademarks $ 24,264 $ 24,264
Goodwill 273,135 277,563
Non-compete agreements 76 26
-------- --------
Total 297,475 301,853
Less accumulated amortization (10,933) (21,039)
-------- --------
Net $286,542 $280,814
======== ========
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<PAGE> 38
Amortization expense in 1996, 1997 and 1999 was $792, $1,078 and
$10,156, respectively. Amortization expense for the three months ended 1997 and
1998 was $181 and $2,501, respectively.
9. LEASES
Safelite leases many of its vehicles and service center locations under
operating leases. Most of the service center location leases provide renewal
options. Future minimum rental commitments under non-cancelable operating leases
for facilities (including commitments for closed service centers of $5,044),
vehicles and equipment at April 3, 1999, are as follows:
Year:
2000 $ 43,118
2001 32,419
2002 20,289
2003 11,833
2004 6,376
Thereafter 7,515
--------
Total $121,550
========
For the years ended 1996, 1997 and 1999, rent expense under all
operating leases was $25,180, $28,585 and $52,654, respectively. Rent expense
for the three months ended 1997 and 1998 was $6,674 and $14,164, respectively.
10. LONG-TERM DEBT
Maturities of Safelite's long-term debt are as follows:
<TABLE>
<CAPTION>
SENIOR
DUE DATE FOR REVOLVING TERM SUBORDINATED
YEAR ENDING NOTES LOANS NOTES OTHER TOTAL
----------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
2000........................... $ 1,237 $ 3,300 $ 4,537
2001........................... 12,835 1,472 14,307
2002........................... 34,149 1,200 35,349
2003........................... 53,889 1,200 55,089
2004........................... 87,747 87,747
Thereafter..................... $ 41,100 98,743 $155,000 294,843
-------- -------- -------- -------- --------
Subtotal.............. 41,100 288,600 155,000 7,172 491,872
Less: unamortized debt discount (4,489) (4,489)
-------- -------- -------- -------- --------
Total ...................... $ 41,100 $288,600 $150,511 $ 7,172 $487,383
======== ======== ======== ======== ========
</TABLE>
Safelite has an outstanding credit facility as amended in 1999
consisting of a term loan facility in an aggregate principal amount of $288,600
and a revolving credit facility which provides for revolving loans and letters
of credit of up to $100,000. The term loan facility consists of three tranches
in principal amounts of $123,600 (the "Tranche A Term Loan"),
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<PAGE> 39
$82,500 (the "Tranche B Term Loan"), and $82,500 (the "Tranche C Term Loan").
Safelite had letters of credit outstanding totaling $9,929 at April 3, 1999.
The Tranche A Term Loan and the revolving credit facility mature on
December 17, 2003, the Tranche B Term Loan matures on December 17, 2004 and the
Tranche C Term Loan matures on December 17, 2005. In addition, the term loan
facility is subject to mandatory principal prepayment and commitment reductions
in an amount generally equal to (1) 100% of the net cash proceeds of (a) debt
and equity offerings by Safelite, and (b) most asset sales or other
dispositions, and (2) 50% of Safelite's excess cash flow (as defined).
Borrowings under the facility are collateralized by substantially all assets of
Safelite. The rate of interest on these borrowings is based on the prime rate,
or LIBOR, at Safelite's option. At April 3, 1999, the interest rates in effect
were 7.83%, 7.60%, 7.85% and 8.10% on the revolver, Tranche A, Tranche B and
Tranche C Term Loans, respectively.
The Bank Credit Agreement for this credit facility contains a number of
covenants that, among other things, restrict the ability of Safelite to dispose
of assets, borrow money, make guarantees, prepay other debt or amend other debt
instruments, pay dividends, create liens on assets, make investments, loans or
advances, make acquisitions, create subsidiaries, engage in mergers or
consolidations, change the business conducted by Safelite, make capital
expenditures, or engage in transactions with affiliates and otherwise restrict
corporate activities. In addition, Safelite must comply with specified financial
ratios and minimum tests, including minimum interest coverage ratios and maximum
debt leverage ratios.
Safelite also has outstanding $100,000 in 9 7/8% Series B Senior
Subordinated Notes due December 15, 2006 (the "Series B Notes@). The Series B
Notes are subordinated in right of payment to all existing and future senior
debt of Safelite. Upon a change in control triggering event, as defined,
Safelite is required to make an offer to repurchase the Series B Notes at 101%.
The Series B Notes are redeemable at the option of Safelite on or after December
15, 2001, at prices decreasing from 104 15/16% on December 15, 2001 to par at
December 15, 2004. In addition, prior to December 15, 1999, Safelite, at its
option, may redeem (at 109 7/8%) up to $35,000 of principal with the proceeds of
one or more equity offerings. During 1997, the noteholders were paid $5,000 in
exchange for their consent for Safelite to modify the terms of the Series B
Notes and to allow Safelite to enter into the Vistar merger. This payment is
being amortized over the remaining life of the Series B Notes. Costs of the
consent solicitation of $1,258 were expensed in 1997.
During 1999, Safelite completed an offering of $55 million aggregate
principal amount of 9 7/8% Series C Senior Subordinated Notes due 2006 (the
"Series C Notes"). The Series C Notes were issued at an offering price of
91.649% plus accrued interest from the date of original issuance. The Series C
Notes have the same terms as the Notes described above.
Proceeds from the sale of the Series C Notes along with proceeds from
the sale of $50 million in preferred stock (see Note 11) were used to repay
$61,400 of term loan borrowings and $35,000 of revolver borrowings. These
repayments were made as part of an amendment to Safelite's Bank Credit
Agreement. Safelite recorded an extraordinary charge of approximately
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<PAGE> 40
$4.0 million, net of tax benefit of $2.7 million, in the year ended April 3,
1999, from the write off of unamortized debt issue costs related to this
amendment and the related debt repayments.
Safelite uses interest rate exchange agreements to manage its exposure
to interest rate fluctuations. Swap agreements provide for interest to be
received on notional amounts at variable rates and provides for interest to be
paid on the same notional amounts at fixed rates. The fixed interest rates do
not change over the life of the swap agreements while the variable interest
rates are reset every three months based on LIBOR. In essence, interest rate
swaps allow Safelite to "swap" variable interest payments for fixed interest
payments. At April 3, 1999, Safelite had outstanding interest rate swaps in the
notional amount of $149,438 to hedge the impact of changing interest rates on
its variable rate debt. Swap agreements totaling $99,438 mature March 31, 2000;
the counterparty, however, has the option to extend maturity until March 31,
2002. Swap agreements totaling $50,000 mature December 31, 2000; the
counterparty, however, has the option to extend maturity until June 30, 2003.
The credit risk associated with the interest rate swap agreements revolves
around the ability of the counterparty to perform its obligation under the
agreement. Safelite does not anticipate nonperformance by the counterparty.
Terms of the swap agreements are as follows:
APRIL 4, APRIL 3,
1998 1999
-------- --------
Notional amount....................... $150,000 $149,438
Fair value (unrealized losses)........ (2,250) (2,708)
Average received rate (variable)...... 5.69% 5.00%
Average pay rate (fixed).............. 6.19% 5.96%
Average life (years).................. 2.00 1.24
Safelite has various unsecured notes payable with interest rates
ranging from 7.5% to 8.5%.
The carrying amount of debt approximates its fair value.
11. CAPITAL STOCK
The following represents the number of shares outstanding and held in
treasury for each class of stock.
<TABLE>
<CAPTION>
APRIL 4, APRIL 3,
1998 1999
-------- ---------
<S> <C> <C>
Series A Convertible Participating Preferred Stock 50,000
8% Non-Voting Preferred Stock 40,000 40,000
Class A Voting Common Stock 3,534,283 3,534,283
Class A Voting Common Stock Held in Treasury 119,938 119,938
Class B Non-Voting Common Stock 10,462,638 10,462,638
Class B Non-Voting Common Stock Held in Treasury 50,000 50,000
</TABLE>
39
<PAGE> 41
Safelite has outstanding Non-Voting 8% Preferred Stock (the "Non-Voting
Preferred Stock"). The Non-Voting Preferred Stock is an accumulating perpetual
preferred stock. As a result of restrictions contained in the indenture
governing the Notes and the Series C Notes, dividends are not payable in respect
of the Non-Voting Preferred Stock unless the payment is in compliance with the
"Limitation on Restricted Payments" covenant contained in the note indentures.
The Non-Voting Preferred Stock is not mandatorily redeemable however, the
Non-Voting Preferred Stock is redeemable by Safelite, at its option, at any time
(provided that Safelite is in compliance with the "Limitation of Restricted
Payments" covenant).
In 1999 Safelite completed the sale of $50 million in Series A
Convertible Participating Preferred Stock (see also Note 10) (the "Series A
Preferred Stock"), to existing Safelite shareholders. The Series A Preferred
Stock is an 8% accumulating perpetual preferred stock, which also entitles its
holders to participate in common stock dividends in the same amount as would
have been received by holders if they had converted the Series A Preferred into
Class B common stock. Holders of the Series A Preferred Stock can convert their
shares into Class B Common Stock at any time. The conversion formula is 212
shares of Class B Common Stock for each share of Series A Preferred Stock. The
conversion formula can be changed under some circumstances such as a stock
dividend or stock split. Cumulative undeclared preference dividends were $798
and $4,265 as of April 4, 1998 and April 3, 1999.
Both the Non-Voting Preferred and the Series A Preferred are non-voting
stock. Safelite has outstanding two series of common stock, which are
essentially identical in all respects except that the Class A common stock has
voting rights while the Class B common stock has no voting rights.
Safelite has several stock option plans and agreements which provide
for the sale of Class B Common Stock to key associates, consultants and members
of the Board of Directors. Options vest in periods ranging from zero to five
years and are generally exercisable for a period of ten years from the date of
grant. All options granted have exercise prices which were not less than fair
market value at the date of grant. At April 3, 1999, there were 72,500 options
available for grant under the 1998 Stock Option Plan and 37,500 options
available for grant under the 1999 Stock Option Plan.
40
<PAGE> 42
The following table summarizes the stock options outstanding:
<TABLE>
<CAPTION>
December 28, 1996 January 3, 1998 April 4, 1998 April 3, 1999
------------------- ------------------- -------------------- --------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Shares Price Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period 45,532 $ 29.35 54,780 $ 24.90 17,190 $ 12.08 424,690 $ 18.72
Granted 15,328 3.00 175,000 13.40 407,500 19.00 487,500 4.75
Exercised (6,080) 3.00 (203,611) 11.17
Forfeited (8,979) 136.63 (70,000) 19.00
------ -------- -------- -------- ------- -------- ------- --------
Outstanding at end of period 54,780 $ 24.90 17,190 $ 12.08 424,690 $ 18.72 842,190 $ 10.61
====== ======== ======== ======== ======= ======== ======= ========
Exercisable at period end 11,209 $ 110.05 876 $ 3.00 1,314 $ 3.00 92,710 $ 18.28
====== ======== ======== ======== ======= ======== ======= ========
Weighted-average fair value of
options granted during the period
using the Black-Scholes pricing
model $ 1.43 $ 3.64 $ 4.64 $ 1.06
Assumptions used:
Expected dividend yield 0% 0% 0% 0%
Expected volatility 0% 0% 0% 0%
Risk-free interest rate 6.6% 6.2% 5.7% 5.1%
Expected life of option (in years) 10.0 5.2 5.0 5.0
</TABLE>
The following table shows various information about stock options outstanding at
April 3, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING AT REMAINING EXERCISE EXERCISABLE AT EXERCISE
PRICES APRIL 3, 1999 LIFE PRICE APRIL 3, 1999 PRICE
------ ------------- ---- ----- ------------- -----
$ 3.00 2,190 5.9 $ 3.00 1,752 $ 3.00
4.75 487,500 10.0 4.75
13.40 15,000 8.3 13.40 6,833 13.40
19.00 337,500 9.0 19.00 84,125 19.00
------- ---- ------ ------ ------
$3.00-$19.00 842,190 9.5 $10.61 92,710 $18.28
======= ==== ====== ====== ======
During 1997, Safelite recorded $2,976 of expenses associated with the
acceleration of the vesting of 160,000 management stock options. Safelite
accounts for employee stock options using the intrinsic value method allowed by
Accounting Principles Board Opinion No. 25. Had compensation costs been
determined based on the fair value method of Statement of Financial Accounting
Standard No. 123 for all plans, Safelite=s net earnings would have been reduced
to the pro forma amounts as follows:
41
<PAGE> 43
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
-------------- ------------------ YEAR ENDED
1996 1997 1997 1998 1999
---- ---- ---- ---- ----
Net earnings (loss) (in thousands): (UNAUDITED)
<S> <C> <C> <C> <C> <C>
As reported $27,774 $3,588 $(95) $(4,316) $(14,010)
Pro forma $27,764 $3,577 $(95) $(4,319) $(14,306)
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
For certain of its workers= compensation, automobile, product and
associate health care liabilities, Safelite is self-insured, subject to certain
stop-loss coverage. The estimated costs of reported claims and
incurred-but-not-reported claims are accrued, generally using actuarial
estimates based on claims history. The amount Safelite will ultimately incur for
these liabilities could differ from these estimates.
During 1996, Safelite purchased insurance to cover Safelite's remaining
workers' compensation, automobile and product liabilities for the period July 1,
1989 through December 31, 1994. Safelite no longer has any liability for these
contingencies, therefore, the self-insured accrual for this period has been
removed from the financial statements. This transaction had no significant
impact on results of operations for 1996. During 1996, Safelite also purchased
workers' compensation, automobile and product liability coverage for the period
December 20, 1996 through December 31, 1999. The cost of this insurance was
partially financed by $13,740 in premium financing, payable in monthly
installments, including interest of 6.67% to 6.99%, of $514 in the year ended
1997 and $416 in the three months ended 1998 and the year ended 1999. Under the
terms of the financing, if Safelite cancels its insurance policies for any
reason, corresponding unearned premium refunds would be applied directly against
the outstanding principal balance. At April 3, 1999, the outstanding principal
balance of this premium financing was $2,585.
Safelite is involved in various litigation and disputes arising in the
normal course of its business, primarily related to vehicle accidents and human
resource related issues. Safelite is also involved in certain environmental
actions brought by the U.S. Environmental Protection Agency and certain state
agencies. The ultimate resolution of these matters is not presently determinable
but, in the opinion of management, the resolution is not expected to have a
significant impact on Safelite's financial statements.
13. SAVINGS AND RETIREMENT PLANS
Safelite maintains a 401(k) savings plan, covering substantially all
associates, that provides basic employer matching contributions of up to 40%
(depending upon the participant's years of service) of the first 4% of each
participant's compensation. Bonus employer contributions up to 50% of the basic
employer contribution are also made depending upon the level of associate
participation in the plan. Safelite's contributions to its 401(k) savings plans
were $762, $998 and $1,726 for the years 1996, 1997 and 1999, and $386 and $491
for the three months ended 1997 and 1998.
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<PAGE> 44
As part of the sale of Lear Siegler (Note 3), Safelite retained the
liability for pension obligations of former Lear Siegler employees and related
pension assets. Plan benefits are based on various formulae, the principal
factors of which are years of service and compensation during the years
immediately preceding retirement. Safelite also has a defined benefit plan whose
benefits were frozen and fully vested to participants effective June 30, 1993.
Safelite's funding policy for these plans is to make the minimum annual
contributions required by applicable regulations. No further accruals for
service costs will be made. Information related to these defined benefit plans
is detailed below.
<TABLE>
<CAPTION>
SAFELITE PLAN LEAR SIEGLER PLAN
----------------------------- -----------------------------
THREE THREE
MONTHS ENDED YEAR ENDED MONTHS ENDED YEAR ENDED
APRIL 4, 1998 APRIL 3, 1999 APRIL 4, 1998 APRIL 3, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 17,192 $ 18,548 $ 35,475 $ 35,576
Interest cost 309 1,275 603 2,560
Actuarial (gain)/loss 1,213 292 30 113
Benefits paid (166) (664) (532) (2,251)
-------- -------- -------- --------
Benefit obligation at end of year 18,548 19,451 35,576 35,998
-------- -------- -------- --------
CHANGE IN PLAN ASSETS
Fair value in plan assets at beginning of year 16,932 18,738 31,637 34,905
Actual return on plan assets 1,972 2,252 3,800 3,818
Employer contributions 398
Benefits paid (166) (664) (532) (2,251)
-------- -------- -------- --------
Fair value of plan assets at end of year 18,738 20,724 34,905 36,472
-------- -------- -------- --------
Funded status 190 1,273 (671) 474
Unrecognized actuarial loss 895 516 9,814 8,758
-------- -------- -------- --------
Net amount recognized $ 1,085 $ 1,789 $ 9,143 $ 9,232
======== ======== ======== ========
Amounts recognized in the balance sheet
consist of:
Other assets $ 1,085 $ 1,789 $ 0 $ 9,232
Other long term liabilities 0 0 (671) 0
Accumulated other comprehensive income 0 0 9,814 0
-------- -------- -------- --------
Net amount recognized $ 1,085 $ 1,789 $ 9,143 $ 9,232
======== ======== ======== ========
WEIGHTED AVERAGE ASSUMPTIONS AS OF
APRIL 4, 1998 AND APRIL 3, 1999
Discount rate 7.00% 7.00% 7.00% 7.00%
Expected return on plan assets 8.50% 8.50% 8.50% 8.50%
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
--------------------- ------------------- YEAR ENDED
1996 1997 1997 1998 1999
------- ------- ----- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT
COST FOR BOTH PLANS
Interest cost $ 3,225 $ 3,560 $ 890 $ 911 $ 3,835
Expected return on plan assets (3,343) (3,553) (888) (1,019) (4,463)
Recognized actuarial loss 113 250 62 88 232
------- ------- ----- ------- -------
Net periodic benefit cost (income) $ (5) $ 257 $ 64 $ (20) $ (396)
======= ======= ===== ======= =======
</TABLE>
43
<PAGE> 45
Plan assets are invested in common and preferred stocks, corporate and U.S.
government bonds and money market funds.
At December 28, 1996, January 3, 1998, and April 4, 1998, Safelite
recorded, as required by SFAS No. 87, an additional minimum pension liability of
$11,360, $14,304, and $9,814, related to under funded pension obligations. The
corresponding cumulative charge to stockholders' equity (deficit) for these
amounts at December 28, 1996, January 3, 1998 and April 4, 1998, net of
applicable taxes, was $6,816, $8,582, and $5,887.
14. INCOME TAXES
Income taxes are provided for the amounts estimated to be payable on
tax returns for the current year. Deferred income taxes are provided for all
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. If
necessary, based upon available evidence, a valuation allowance is provided for
the amount of deferred tax assets that are not expected to be realized.
The components of the income tax provision (benefit) before
extraordinary items are as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
--------------------- ------------------ YEAR ENDED
1996 1997 1997 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current $ 2,110 $ 45 $ (71)
Deferred (19,715) (6,887) $59 (1,552) $433
-------- ------- --- -------- ----
Total $(17,605) $(6,842) $59 $(1,623) $433
======== ======= === ======= ====
</TABLE>
The income tax provision (benefit) differs from the amounts determined
by applying the statutory income tax rate as a result of the following:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
--------------------- ------------------- YEAR ENDED
1996 1997 1997 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income taxes at statutory rate $ 6,706 $ (147) $(13) $(2,079) $(3,342)
Reduction in valuation allowance (25,894) (2,996)
State income taxes 958 (21) (1) (197) 54
Lear Siegler net operating losses (5,674)
Non deductible goodwill amortization 317 431 72 1,000 3,549
Other, principally permanent differences 308 1,565 1 (347) 172
-------- ------- ---- ------- -------
Provision (benefit) for income taxes $(17,605) $(6,842) $ 59 $(1,623) $ 433
======== ======= ==== ======= =======
</TABLE>
44
<PAGE> 46
Items comprising Safelite's net deferred tax assets are as follows:
<TABLE>
<CAPTION>
APRIL 4, APRIL 3,
1998 1999
------- -------
<S> <C> <C>
Deferred tax assets:
Loss carryforwards $51,608 $71,145
Differences between book and tax basis
of inventories 3,770 3,720
Reserves and accrued liabilities 14,321 7,376
Restructuring reserves 12,549 3,749
Pension 3,925
Difference between book and tax basis of
property, plant and equipment 4,373 5,364
Other 29 592
Valuation allowance (21,800) (21,800)
------- -------
Total $68,775 $70,146
======= =======
</TABLE>
A valuation allowance reduces the amount of deferred tax assets that
management believes more likely than not will not be recognized. The valuation
allowance is based on available information at the balance sheet date including
historical earnings, net operating loss limitations and other factors which may
impact Safelite's ability to realize the tax benefits.
At April 3, 1999, Safelite has net operating loss carryforwards for
federal income tax purposes totaling approximately $170,219 which expire through
2019.
15. EXTRAORDINARY LOSS
In 1999, Safelite recorded an extraordinary loss of $4,028, net of
income tax benefit of $2,686. This extraordinary loss is comprised of the write
off of unamortized debt issue costs and fees paid to creditors in connection
with the December 18, 1998, amendment of its Bank Credit Agreement and related
debt repayments.
During 1997 Safelite recorded an extraordinary loss of $2,835, net of
income tax benefit of $1,890, as a result of expensing unamortized loan
origination costs related to its 1996 credit facility and fees paid to the
lenders of its new credit facility. In 1996, Safelite recorded an extraordinary
loss of $500, net of income tax benefit of $344, for the unamortized loan
origination fees related to the early repayment of another debt obligation.
45
<PAGE> 47
16. DISCONTINUED OPERATIONS
In 1996, Safelite recorded income from discontinued operations of
$1,706. This income was primarily the result of resolving, in 1996, various
liability and tax issues associated with operating units of Lear Siegler which
were discontinued in prior years. The following summarizes the significant
items:
<TABLE>
<CAPTION>
<S> <C>
Settlement of liability issues $(25,500)
Adjustment of state tax contingencies 19,606
Tax refund 7,600
--------
$ 1,706
========
</TABLE>
46
<PAGE> 48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
47
<PAGE> 49
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The table below provides information on the directors and executive
officers of Safelite.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Garen K. Staglin........................ 54 Chairman of the Board and Director
John F. Barlow.......................... 55 President, Chief Executive Officer and Director
Douglas A. Herron....................... 49 Senior Vice President, Chief Financial Officer and Director
Thomas M. Feeney........................ 47 Senior Vice President, Client Sales and Support
Douglas R. Maehl........................ 50 Senior Vice President, Manufacturing, Distribution and Purchasing
Elizabeth A. Wolszon.................... 43 Senior Vice President, Marketing and Strategic Planning
James K. West........................... 55 Senior Vice President, Global Business Development
Nicholas A. Greville.................... 55 Executive Vice President, Retail Operations
Poe A. Timmons.......................... 39 Vice President -- Finance
Anthony J. DiNovi....................... 36 Director
Selwyn Herson........................... 46 Director
Adrian F. Jones......................... 45 Director
Seth W. Lawry........................... 34 Director
Thomas H. Lee........................... 55 Director
Gary Lubner............................. 39 Director
John E. Mason........................... 50 Director
M. Louis Shakinovsky.................... 54 Director
Scott M. Sperling....................... 41 Director
Rodney Stansfield....................... 59 Director
</TABLE>
A brief biography of each director and executive officer follows:
GAREN K. STAGLIN has served as Safelite's Chairman of the Board since
July 1991 and served as Safelite's Chief Executive Officer from July 1991
through the completion of the THL Transactions. From January 1979 to June 1991,
Mr. Staglin served in various management roles, most recently as President of
the Automotive Services Group of ADP, Inc., a computer services firm. He
currently serves as a director for First Data Corp., Cyber Cash, Inc. and
QuickResponse Services, Inc. and serves on the Advisory Board of the Stanford
Graduate School of Business.
JOHN F. BARLOW has served as a director and Safelite's Chief Operating
Officer since September 1991. Mr. Barlow was made Chief Executive Officer
following the THL Transactions. From 1986 to August 1991, Mr. Barlow served as
the President and Chief Executive Officer of Western Auto Stores, a retailer of
automobile parts.
DOUGLAS A. HERRON has served as Safelite's Senior Vice President and
Chief Financial Officer since June 1992. Mr. Herron was elected as a Director of
Safelite in March 1998. From December 1989 to May 1992, Mr. Herron served as
Manager, Finance Operation of GE Medical Systems, a leading manufacturer and
supplier of diagnostic imaging equipment and financing products to hospitals and
clinics throughout the world.
48
<PAGE> 50
THOMAS M. FEENEY has served as Safelite's Senior Vice President Client
Sales and Support since 1991 and has been employed with Safelite since 1988.
Prior to joining Safelite, Mr. Feeney was a Vice President with Tenneco
Automotive Retail.
DOUGLAS R. MAEHL has served as Safelite's Senior Vice President of
Manufacturing, Distribution and Purchasing since 1991. From September 1978 to
September 1991, Mr. Maehl served as Vice President of Merchandising for Western
Auto Stores, a retailer of automobile parts.
ELIZABETH A. WOLSZON has served as Safelite's Senior Vice President of
Marketing and Strategic Planning since July 1992. From January 1989 to June
1992, Ms. Wolszon served as Senior Vice President of Marketing for Western Auto
Stores, a retailer of automobile parts, and Director of Strategic Planning for
Sears Specialty Merchandising, a group of specialty retailing chains owned by
Sears Roebuck & Co.
JAMES K. WEST served as Safelite's Senior Vice President of Information
Systems from June 1990 through February 1998 and recently assumed the role of
Senior Vice President, Global Business Development. From November 1987 to May
1990, Mr. West served as the Director of Information Systems for Transworld
Music, the largest record retailer in the United States.
NICHOLAS A. GREVILLE joined Safelite in 1990 as the Regional Vice
President of Operations for the Company's Pacific Region. Mr. Greville has held
various progressing positions with Safelite and currently serves as Safelite's
Executive Vice President, Retail Operations. Prior to joining Safelite, Mr.
Greville served as Executive Vice President of Operations for Jiffy Lube
International.
POE A. TIMMONS has served as Safelite's Vice President-Finance since
January 1996. Prior to 1996, Ms. Timmons was an audit partner at Deloitte &
Touche LLP, where she served clients in the manufacturing, retail and service
industries.
ANTHONY J. DINOVI has served as a director since December 1996. Mr.
DiNovi has been employed by Thomas H. Lee Company, an investment company, since
1988 and currently serves as a Managing Director. Mr. DiNovi is also Vice
President and Trustee of THL Equity Trust III, the general partner of the THL
Equity Advisors III Limited Partnership, which is the general partner of the
Thomas H. Lee Equity Fund III, L.P. and Vice President of Thomas H. Lee Advisors
I and T.H. Lee Mezzanine II, affiliates of ML-Lee Acquisition Fund, L.P., ML-Lee
Acquisition Fund II, L.P. and ML-Lee Acquisitions Fund II (Retirement Accounts),
L.P., respectively. Mr. DiNovi also serves as a director of Celpage, Inc., Eye
Care Centers of America, Inc., Fisher Scientific International Inc., LiveWire
Systems, LLC and Procure Net, Inc.
SELWYN HERSON has served as a director since the Vistar merger. Mr.
Herson is the Founder and Managing Director of The Windsor Park Management
Company, an investment banking and strategic consulting firm based in Los
Angeles. Mr. Herson has consulted for Belron International on a number of major
projects. Mr. Herson also serves as a Director of S&K Famous Brands, Inc. and
several private corporations.
49
<PAGE> 51
ADRIAN F. JONES has served as a director since the Vistar merger. Mr.
Jones is the Chief Financial Officer of Belron International which he joined in
1986. Prior to joining Belron, Mr. Jones was a manager for Arthur Andersen.
SETH W. LAWRY has served as a director since December 1996. Since April
1994, Mr. Lawry has been employed by Thomas H. Lee Company, an investment
company, and currently serves as a Managing Director. Mr. Lawry is also Vice
President of THL Equity Trust III, the general partner of the THL Equity
Advisors III Limited Partnership, which is the general partner of the Thomas H.
Lee Equity Fund III, L.P. Mr. Lawry also serves as a director of Freedom
Securities Corporation and Syratech Corp. From September 1992 to March 1994, Mr.
Lawry served as an Associate at Morgan Stanley & Co. Incorporated, an investment
bank.
THOMAS H. LEE has served as a director since March 1998. Mr. Lee is
Founder and President of Thomas H. Lee Company, an investment company. Mr. Lee
is also Chairman of THL Equity Trust III, the general partner of the THL Equity
Advisors III Limited Partnership, which is the general partner of the Thomas H.
Lee Equity Fund III, L.P. and President and a Trustee and beneficial owner of
Thomas H. Lee Advisors I and T.H. Lee Mezzanine II, affiliates of ML-Lee
Acquisition Fund, L.P., ML-Lee Acquisition Fund II, L.P. and ML-Lee Acquisitions
Fund II (Retirement Accounts), L.P., respectively. Mr. Lee also serves as a
director of Finlay Enterprises, Inc., First Security Services Corporation,
Livent, Inc. (which filed for protection under Chapter 11 of the Federal
Bankruptcy Code in November 1998), Miller Import Corporation, Sondik Supply
Company and Vail Resorts, Inc.
GARY LUBNER has served as a director since March 1998. Mr. Lubner is
Managing Director of Autoglass Limited, the United Kingdom's leading automotive
glass repair and replacement company. Prior to his appointment as Managing
Director of Autoglass Limited in 1995, Mr. Lubner held various positions with
Plate Glass & Shatterprufe Industries Limited, South Africa's leading glass and
wood processor and distributor. Mr. Lubner is the son of Ronnie Lubner.
RONNIE LUBNER has served as a director since the Vistar merger. Mr.
Lubner is the Chairman and Chief Executive Officer of Plate Glass & Shatterprufe
Industries Limited which he joined in 1953. Mr. Lubner is also a director of
South African Breweries and Advanta Corporation. Mr. Lubner is the father of
Gary Lubner.
JOHN E. MASON has served as a director since the Vistar merger. Mr.
Mason is the Chief Executive officer of Belron International which he joined in
1983 and an Executive Director of Plate Glass & Shatterprufe Industries Limited.
M. LOUIS SHAKINOVSKY has served as a director since the Vistar merger.
Mr. Shakinovsky is the Group Legal Services Director of Belron International and
Plate Glass & Shatterprufe Industries Limited which he joined in 1965.
50
<PAGE> 52
SCOTT M. SPERLING has served as a director since December 1996. Since
July 1994, Mr. Sperling has served as a Managing Director of Thomas H. Lee
Company. Mr. Sperling is also Vice President of THL Equity Trust III, the
general partner of the THL Equity Advisors III Limited Partnership, which is the
general partner of the Thomas H. Lee Equity Fund III, L.P. Mr. Sperling also
serves as a director of Fisher Scientific International Inc., Livent, Inc.
(which filed for protection under Chapter 11 of the Federal Bankruptcy Code in
November 1998), LiveWire Systems, LLC, The General Chemical Group Inc. and
Procure Net, Inc. Prior to joining Thomas H. Lee Company in 1994, Mr. Sperling
was managing partner of Aeneas Group, Inc., an investment company and a
wholly-owned subsidiary of Harvard Management Company, Inc.
RODNEY STANSFIELD has served as a director since March 1998. Mr.
Stansfield was recently appointed Chief Executive Officer of Glass South Africa.
Prior to joining Glass South Africa, Mr. Stansfield served as Chief Executive
Officer of Libbey-Owens-Ford Co. Mr. Stansfield also serves as a director of
Plate Glass & Shatterprufe Industries Limited.
51
<PAGE> 53
ITEM 11. EXECUTIVE COMPENSATION
The following table provides information about the compensation paid by
Safelite to its Chief Executive Officer and its four most highly paid executive
officers other than the Chief Executive Officer (the "Named Executive
Officers"), for the fiscal years 1999, 1997, and 1996 and the three months ended
April 4, 1998.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE(1)
ANNUAL COMPENSATION
--------------------------------------------------
FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION PERIOD(2) SALARY BONUS COMPENSATION OPTIONS(#) COMPENSATION
- --------------------------- --------- -------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Garen K. Staglin................... 1999 $700,000 -- -- 10,000 $ 3,434(4)
Chairman of the Board 1998 $175,000 $ 34,500 -- 10,000 $ 3,643(4)
1997 $700,000 $ 502,851 $57,977(3) 8,424 $ 75(4)
1996 $666,827 $2,230,000 $75,628(3) -- $ 5,246(4)
John F. Barlow..................... 1999 $700,000 -- -- 40,000 $ 3,567(5)
President and Chief Executive Officer 1998 $175,000 $ 34,500 -- 40,000 $ 3,621(5)
1997 $693,269 $ 472,274 -- 50,000 $ 3,453(5)
1996 $573,798 $2,040,000 -- -- $ 5,024(5)
Douglas A. Herron.................. 1999 $385,000 -- -- 40,000 $ 3,697(6)
Senior Vice President and 1998 $ 96,250 $20,653 -- 17,500 $ 3,505(6)
Chief Financial Officer 1997 $374,904 $222,278 -- 23,370 $ 1,479(6)
1996 $327,885 $691,713 -- -- $ 4,772(6)
Elizabeth A. Wolszon............... 1999 $295,000 -- -- 40,000 $ 3,267(7)
Senior Vice President 1998 $ 73,750 $15,825 -- 15,000 $ 3,200(7)
Marketing and Strategic Planning 1997 $289,231 $163,602 -- 14,076 $ 1,270(7)
1996 $270,192 $430,703 -- -- $ 2,113(7)
Nicholas A. Greville............... 1999 $350,000 -- -- 25,000 $ 3,491(8)
Executive Vice President 1998 $ 87,500 13,948 -- 15,000 $ 3,770(8)
Retail Operations 1997 $258,654 133,188 -- 4,380 $ 1,100(8)
1996 $225,000 242,000 -- -- $186,175(8)
</TABLE>
- ----------
(1) In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits
have been omitted because the aggregate amount of these perquisites and
other personal benefits were less than the lesser of $50,000 or 10% of the
total annual salary and bonuses for the Named Executive Officers for the
period. Amounts presented reflect compensation earned in the period
presented, although payment may have been made in other periods.
(2) References to fiscal periods above are as follows: year ended April 3, 1999
("1999"), year ended January 3, 1998 ("1997"), year ended December 28, 1996
("1996"), and three months ended April 4, 1998 ("1998").
(3) Includes $37,267 and $60,591, respectively, for compensation related to
reimbursement of certain expenses.
(4) Represents $3,200, $3,200, $0 and $1,980, respectively, in Safelite
contributions to the 401(k) plan and $234, $443, $75 and $3,266,
respectively, in medical plan benefits.
(5) Represents $3,200, $3,200, $0 and $1,980, respectively, in Safelite
contributions to the 401(k) plan and $363, $421, $3,453 and $3,044,
respectively, in medical plan benefits.
(6) Represents $3,200, $3,200, $0 and $2,336, respectively, in Safelite
contributions to the 401(k) plan and $497, $305, $1,479 and $2,436,
respectively, in medical plan benefits.
(7) Represents $3,200, $3,200, $0 and $2,024, respectively, in Safelite
contributions to the 401(k) plan and $67, $0, $1,270 and $89, respectively,
in medical plan benefits.
(8) Represents $3,200, $3,200, $0 and $925, respectively, in Safelite
contributions to the 401(k) plan and $291, $570, $1,100 and $1,750,
respectively, in medical plan benefits.
52
<PAGE> 54
The following table provides information about stock options granted
during fiscal year 1999, the three months ended April 4, 1998 and fiscal year
1997 to each of the executive officers named in the Summary Compensation Table.
No stock options were granted to the named executive officers in fiscal 1996.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED
ANNUAL RATES OF STOCK PRICE
INDIVIDUAL GRANTS APPRECIATION FOR OPTION TERM(1)
- --------------------------------------------------------------------------------------- -----------------------------------
% OF
NUMBER OF TOTAL
SECURITIES OPTIONS/
UNDERLYING SARS
OPTIONS/ GRANTED TO EXERCISE
SARS EMPLOYEES OR BASE
FISCAL GRANTED IN FISCAL PRICE EXP.
NAME PERIOD(2) (#) PERIOD ($/SH)(4) DATE 5% ($) 10% ($)
---- --------- --------- ---------- --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Garen K. Staglin 1999 10,000 2.1% $ 4.75 3/03/09 $ 29,900 $ 75,703
Chairman of the Board 1998 10,000 2.4% $19.00 3/26/08 $119,500 $ 302,811
1997 8,424(3) 4.8% $13.40 2/14/07 $ 71,014 $ 179,937
John F. Barlow 1999 40,000 8.2% $ 4.75 3/03/09 $119,600 $ 302,800
President and Chief Executive 1998 40,000 9.8% $19.00 3/26/08 $478,000 $1,211,200
Officer 1997 50,000(3) 28.6% $13.40 2/14/07 $421,500 $1,068,000
Douglas A. Herron 1999 40,000 8.2% $ 4.75 3/03/09 $119,600 $ 302,800
Senior Vice President and Chief 1998 17,500 4.3% $19.00 3/26/08 $209,125 $ 529,900
Financial Officer 1997 23,370(3) 13.4% $13.40 2/14/07 $197,009 $ 499,183
Elizabeth A. Wolszon 1999 40,000 8.2% $ 4.75 3/03/09 $119,600 $ 302,800
Senior Vice President Marketing 1998 15,000 3.7% $19.00 3/26/08 $179,250 $ 454,200
and Strategic Planning 1997 14,076(3) 8.0% $13.40 2/14/07 $118,661 $ 300,663
Nicholas A. Greville 1999 25,000 5.1% $ 4.75 3/03/99 $ 74,750 $ 189,250
Executive Vice President Retail 1998 15,000 3.7% $19.00 3/26/08 $179,250 $ 454,200
Operations 1997 1,250 0.7% $13.40 2/14/07 $ 10,537 $ 26,700
</TABLE>
- ----------
(1) The amounts under the columns labeled "5% ($)" and "10% ($)" are included by
Safelite pursuant to rules promulgated by the Securities and Exchange
Commission and are not intended to forecast future appreciation, if any, in
the price of Safelite's common stock. These amounts are based on the
assumption that the option holders hold the options granted for their full
term. The actual value of the options will vary in accordance with the
market price of Safelite's common stock.
(2) References to fiscal periods above are as follows: year ended April 3,
1999 ("1999"), three months ended April 4, 1998 ("1998") and year ended
January 3, 1998 ("1997").
(3) Vesting of options granted was accelerated immediately prior to the Vistar
merger.
(4) The exercise price of the options is the fair market value of the underlying
common stock at the date of the grant.
53
<PAGE> 55
The following table provides information regarding the exercise of
stock options during the fiscal years ended April 3, 1999 and January 3, 1998,
and the three months ended April 4, 1998, and the number and value of stock
options held by the executive officers named in the Summary Compensation Table
as of April 3, 1999, April 4, 1998, and January 3, 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS/SARS
SHARES FY-END (#) AT FY-END($)
FISCAL ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME PERIOD(1) ON EXERCISE(#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
---- --------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Garen K. Staglin............................... 1999 -- -- 20,000 --
Chairman of the Board 1998 -- -- 10,000 --
1997 8,424 $156,686 -- --
John F. Barlow................................. 1999 -- -- 80,000 --
President and Chief Executive Officer 1998 -- -- 40,000 --
1997 50,000 $930,000 -- --
Douglas A. Herron.............................. 1999 -- -- 57,500 --
Senior Vice President and Chief Financial 1998 -- -- 17,500 --
Officer 1997 23,370 $434,682 -- --
Elizabeth A. Wolszon........................... 1999 -- -- 55,000 --
Senior Vice President Marketing and 1998 -- -- 15,000 --
Strategic Planning 1997 14,076 $261,814 -- --
Nicholas A. Greville........................... 1999 -- -- 41,250 --
Executive Vice President Retail Operations 1998 -- -- 16,250 --
1997 -- -- 1,250 --
</TABLE>
- ----------
(1) References to fiscal periods above are as follows: as of and for the year
ended April 3, 1999 ("1999"), as of and for the three months ended April 4,
1998 ("1998") and as of and for the year ended January 3, 1998 ("1997").
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established an Audit Committee and a
Compensation Committee. The Compensation Committee makes recommendations
concerning the salaries and incentive compensation of employees of and
consultants to Safelite, and oversees and administers Safelite's stock option
plans. Messrs. Barlow, DiNovi, Mason and Sperling are members of the
Compensation Committee. The Audit Committee is responsible for reviewing the
results and scope of audits and other services provided by Safelite's
independent auditors. Messrs. Jones, Lawry, Shakinovsky, and Staglin are members
of the Audit Committee.
DIRECTOR COMPENSATION
Directors that are not employees of Safelite, Thomas H. Lee Company or
Belron receive $1,000 for every Board meeting they attend. These directors are
also eligible to receive options under Safelite's 1996, 1998 and 1999 Stock
Option Plans.
54
<PAGE> 56
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Barlow, President and Chief Executive Officer, is a member of the
Compensation Committee.
COMPENSATION PHILOSOPHY
Safelite's executive compensation program is administered by the
Compensation Committee. The committee establishes and administers the Company's
executive compensation policies and plans and administers the Safelite's stock
option plans. The committee considers internal and external information in
determining officers' compensation.
Safelite's compensation policies for executive officers are based on
the belief that the interests of executives should be closely aligned with those
of Safelite's shareholders. The compensation policies are designed to achieve
the following objectives:
* Offer compensation opportunities that attract highly qualified
executives, reward outstanding initiative and achievement, and
retain the leadership and skills necessary to build long-term
shareholder value.
* Maintain a significant portion of executives' total
compensation at risk, tied to both the annual and long-term
financial performance of Safelite and the creation of
shareholder value.
* Further Safelite's short and long-term strategic goals and
values by aligning compensation with business objectives and
individual performance.
COMPENSATION PROGRAM
Safelite's executive compensation program has three major integrated
components, base salary, annual incentive awards, and long-term incentives.
BASE SALARY. Base salary levels for executive officers are determined
annually by reviewing the skills, performance level, and contribution to the
business of individual executives, and the needs of Safelite.
ANNUAL INCENTIVE AWARDS. Safelite's executive officers are eligible to
receive annual cash bonus awards based upon Safelite's operating income
performance. The committee establishes the annual incentive opportunity for each
executive officer in relation to his or her base salary. No bonuses for Safelite
executive officers were earned in fiscal year 1999.
LONG-TERM INCENTIVES. The committee believes that stock options are an
excellent vehicle for compensating its officers and employees. Safelite provides
long-term incentives through its stock option plans, the purpose of which are to
create a direct link between executive compensation and increases in shareholder
value. Stock options are granted at fair market value and vest in installments,
generally over four years. When determining option awards for an
55
<PAGE> 57
executive officer, the committee considers the executive's current contribution
to Safelite's performance, the anticipated contribution to meeting Safelite's
long term strategic performance goals, and industry practices and norms.
Long-term incentives granted in prior years and existing levels of stock
ownership are also taken into consideration. Because the receipt of value by an
executive officer under a stock option is dependent upon an increase in the
market value of Safelite's common stock, this portion of the executive's
compensation is directly aligned with an increase in shareholder value.
CHIEF EXECUTIVE OFFICER COMPENSATION
Mr. Barlow's base salary, annual incentive award and long-term
incentive compensation are determined by the committee based upon the same
factors as those employed by the committee for executive officers generally. Mr.
Barlow's current annual base salary is $700,000 subject to annual review and
increase by the Board of Directors of Safelite. During fiscal 1999, Mr. Barlow
was granted options to purchase 40,000 shares of Class B Non-Voting Common Stock
at an exercise price of $4.75 per share, the fair market value of the underlying
common stock on the date of the grant. The options have a ten-year term and
provide that the options vest ratably over a four year period.
EMPLOYMENT AGREEMENTS
Safelite has entered into employment agreements with Messrs. Staglin,
Barlow and Herron. Mr. Staglin serves as Chairman of the Board with an annual
base salary of at least $700,000 and a performance bonus determined by the Board
of Directors. Mr. Barlow serves as President and Chief Executive Officer of
Safelite with a base salary of at least $700,000 and a performance bonus
determined by the Board of Directors of Safelite. Mr. Herron serves as Senior
Vice President and Chief Financial Officer of Safelite with a base salary of at
least $350,000 and an annual bonus to be determined by the Board of Directors in
accordance with an executive bonus plan.
Each of the agreements provides for the following:
(1) An initial term of three years, with automatic 2 year renewal
periods. Either party can elect not to renew by giving notice
between 30 and 60 days prior to the expiration of the agreement.
(2) In the event the executive is terminated due to death or
disability:
* his base salary will continue for nine months;
* a pro rata share of his bonus will be paid; and
* his additional benefits will continue for 12 months.
(3) If the executive is terminated without cause:
* his base salary will continue for the greater of the remaining
term of the agreement or 24 months;
* he will be paid a pro rata portion of his bonus; and
56
<PAGE> 58
* his additional benefits will continue for a period of up to
12 months following the date of termination.
STOCK OPTION PLANS
1999 AND 1998 STOCK OPTION PLANS. Safelite's 1999 Stock Option Plan
provides for grants of options to acquire up to 525,000 shares of Class B
Non-Voting Common Stock. Safelite's 1998 Stock Option Plan provides for grants
of options to acquire up to 410,000 shares of Class B Non-Voting Common Stock.
Incentive stock options may be granted to employees and officers of Safelite and
non-qualified stock options may be granted under each of the Plans to
consultants, directors, employees and officers of Safelite.
Each of the Plans is administered by the Board of Directors or a
committee thereof consisting of two or more directors. The Board of Directors
has the authority to select optionees and determine the terms of the options
granted, including (1) the number of shares subject to each option, (2) when the
option becomes exercisable, (3) the exercise price of the option (which in the
case of an incentive stock option cannot be less than the fair market value of
the common stock on the date of grant, or less than 110% of fair market value in
the case of employees or officers holding 10% or more of the voting stock of
Safelite), (4) the duration of the option and (5) the time, manner and form of
payment upon exercise of an option. At April 3, 1999, Safelite had 487,500
options outstanding under the 1999 Plan and 37,500 options available for future
grant, and 337,500 options outstanding under the 1998 Plan and 72,500 options
available for future grant.
An option is not transferable by the optionee except by will or by the
laws of descent and distribution. Options are exercisable only while the
optionee remains an employee of Safelite or for a period of time thereafter. If
an optionee becomes disabled while an employee of Safelite, the option is
exercisable prior to the last day of the third month following the date of
termination of employment. If an optionee dies while an employee of Safelite,
the option is exercisable prior to the last day of the ninth month following the
date of termination of employment. If the optionee leaves Safelite for any other
reason, the option terminates immediately upon termination of employment. The
Board of Directors, however, may extend this period up to the original
expiration date of the option. Options which are exercisable following
termination of employment are exercisable only to the extent that the options
were vested on the date of termination.
57
<PAGE> 59
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information regarding the beneficial
ownership of Safelite's Class A Voting Stock, Class B Non-Voting Stock,
Non-Voting Preferred Stock and Series A Convertible Participating Preferred
Stock, as of April 3, 1999 by (1) each person (or group of affiliated persons)
known by Safelite to be the beneficial owner of more than 5% of the outstanding
common stock, (2) each Director, (3) Safelite's Chief Executive Officer and
Safelite's other named executive officers (as determined in accordance with the
rules of the Securities and Exchange Commission), and (4) all of Safelite's
executive officers and Directors as a group. Except as indicated in the
footnotes to this table, Safelite believes that the persons named in this table
have sole voting and investment power with respect to all the shares of common
stock indicated.
<TABLE>
<CAPTION>
NO. OF SHARES
NO. OF OF SERIES A
SHARES NO. OF SHARES NO. OF SHARES CONVERTIBLE
OF CLASS A OF CLASS B OF NON-VOTING PARTICIPATING
VOTING % OF NON-VOTING % OF PREFERRED % OF PREFERRED % OF
NAME OF BENEFICIAL OWNER STOCK(1) CLASS STOCK(1) CLASS STOCK(1) CLASS STOCK (1) CLASS
- ------------------------ ---------- ----- --------- ----- ------------ ----- ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Garen K. Staglin(2)(3).............. 72,101 2.1% 146,703 1.4% -- -- 968.089 1.9%
John F. Barlow(2)(4)................ 72,101 2.1% 154,203 1.5% -- -- 968.089 1.9%
Douglas A. Herron(2)(5)............. 21,649 * 47,672 * -- -- 301.824 *
Elizabeth A. Wolszon(2)(6).......... 11,993 * 27,735 * -- -- 174.309 *
Nicholas A. Greville (2)(7)......... 1,460 * 11,569 * -- -- 38.552 *
Anthony J. DiNovi(8)................ 1,447,080 42.4% 2,894,160 25.7% -- -- 19,109.736 38.2%
Seth W. Lawry(8).................... 1,447,080 42.4% 2,894,160 25.7% -- -- 19,109.736 38.2%
Thomas H. Lee(8).................... 1,447,080 42.4% 2,894,160 25.7% -- -- 19,109.736 38.2%
Scott M. Sperling(8)................ 1,447,080 42.4% 2,894,160 25.7% -- -- 19,109.736 38.2%
Gary Lubner......................... -- -- -- -- -- -- -- --
Ronnie Lubner....................... -- -- -- -- -- -- -- --
M. Louis Shakinovsky................ -- -- -- -- -- -- -- --
John E. Mason....................... -- -- -- -- -- -- -- --
Adrian F. Jones..................... -- -- -- -- -- -- -- --
Selwyn Herson....................... -- -- -- -- -- -- -- --
Rodney Stansfield................... -- -- -- -- -- -- -- --
All Directors and Executive Officers
as a Group (20 Persons)........... 1,668,867 50.5% 3,467,314 32.0% -- -- 3,063.761 6.1%
5% Stockholders:
Belron (USA) BV..................... 1,690,101 49.5% 4,487,123 43.1% 20,000 50.0% 27,191.567 54.4%
Kellman Shareholders(9)(10)......... -- -- 2,472,648 23.8% 20,000 50.0% -- --
Thomas H. Lee Equity Fund, III,
L.P.(11) ......................... 1,241,479 36.7% 2,482,959 23.9% -- -- 16,394.631 32.8%
THL-CCI Limited Partnership(12)..... 128,782 3.8% 257,563 2.5% -- -- 1,700.655 3.4%
Thomas H. Lee Foreign Fund III,
L.P.(12).......................... 76,819 2.2% 153,638 1.5% -- -- 1,014.450 2.0%
</TABLE>
- ----------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Shares of common stock subject to
options and warrants currently exercisable within 60 days of April 3,
1999 are considered to be outstanding.
(2) The address of this stockholder is c/o Safelite Glass Corp., 1105 Schrock
Road, Columbus, Ohio 43229.
(3) Includes 54,076 shares of Class A Voting Stock, 108,152 shares of Class B
Non-Voting Stock and 2,500 options to purchase shares of Class B
Non-Voting Stock owned of record by a Charitable Remainder Unit Trust
established for the benefit of Mr. Staglin and his wife.
58
<PAGE> 60
(4) Includes 11,087 shares of Class A Voting Stock and 22,174 shares of Class
B Non-Voting Stock owned of record by trusts established for the benefit
of Mr. Barlow's children. Also includes 10,000 options to purchase shares
of Class B Non-Voting Stock.
(5) Includes options to purchase 4,375 shares of Class B Non-Voting Stock.
(6) Includes options to purchase 3,750 shares of Class B Non-Voting Stock.
(7) Includes options to purchase 4,271 shares of Class B Non-Voting Stock.
(8) The address of this stockholder is c/o Thomas H. Lee Company, 75 State
Street, Boston, Massachusetts 02109. All of these securities are owned by
the THL Equity Fund, THL-CCI Limited Partnership and Thomas H. Lee
Foreign Fund III, L.P. and can be considered to be beneficially owned by
Messrs. Lee, DiNovi, Lawry and Sperling, officers of the Thomas H. Lee
Company, based on to the definition of beneficial ownership provided in
footnote (1). Each of these persons disclaims beneficial ownership of the
shares.
(9) The Kellman Shareholders and their individual holdings consist of: (1)
Family Revocable Trust (2,225,141 shares of Class B Non-Voting Stock and
17,998 shares of Non-Voting Preferred Stock); (2) Jack Kellman Gift Trust
U/A/D 12/16/91 (137,833 shares of Class B Non-Voting Stock and 1,114
shares of Non-Voting Preferred Stock); (3) Joseph Kellman 1995
Descendants Test for the Family of Jack U/A/D 11/8/95 (13,716 shares of
Class B Non-Voting Stock and 111 shares of Non-Voting Preferred Stock);
(4) Joseph Kellman 1995 Descendants Trust for the Family of Richard U/A/D
11/8/95 (13,716 shares of Class B Non-Voting Stock and 111 shares of
Non-Voting Preferred Stock); (5) Joseph Kellman 1995 Descendants Trust
for the Family of Celia U/A/D 11/8/95 (13,716 shares of Class B
Non-Voting Stock and 111 shares of Non-Voting Preferred Stock); (6)
Joseph Kellman Gift Trust for the Family of Jack U/A/D 11/8/95 (22,842
shares of Class B Non-Voting Stock and 185 shares of Non-Voting Preferred
Stock); (7) Joseph Kellman Gift Trust for the Family of Richard U/A/D
11/8/95 (22,842 shares of Class B Non-Voting Stock and 185 shares of
Non-Voting Preferred Stock); and (8) Joseph Kellman Gift Trust for the
Family of Celia U/A/D 11/8/95 (22,842 shares of Class B Non-Voting Stock
and 185 shares of Non-Voting Preferred Stock).
(10) Joseph Kellman is the Trustee of the Family Revocable Trust (which owns
2,225,141 shares of Class B Non-Voting Stock and 17,998 shares of
Non-Voting Preferred Stock). Joseph Kellman maintains a principal address
at 1000 North Lake Shore Drive, Apartment 47-B, Chicago, Illinois 60610.
Allan B. Muchin, Maurice Raizes and Marvin Zimmerman are the Trustees of
each of the other Kellman Shareholders listed above in footnote (9)
(which own an aggregate of 247,507 shares of Class B Non-Voting Stock and
2,002 shares of Non-Voting Preferred Stock). Messrs. Muchin, Raizes and
Zimmerman each maintain a principal business address at c/o Katten,
Muchin & Zavis, 525 West Monroe Street, Suite 1600, Chicago, Illinois
60661, and each disclaims beneficial ownership of these shares.
(11) THL Equity Advisors III Limited Partnership ("Advisors"), the general
partner of the THL Equity Fund and Thomas H. Lee Foreign Fund III, LP.,
THL Equity Trust III ("Equity Trust"), the general partner of Advisors,
Thomas H. Lee, Messrs., DiNovi and Sperling and other managing directors
of Thomas H. Lee Company, as Trustees of Equity Trust, and Thomas H. Lee
as sole shareholder of Equity Trust, could be considered to be beneficial
owners of the shares held by the THL Equity Fund and Thomas H. Lee
Foreign Fund III, L.P. (which owns 76,819 shares of Class A Voting Stock,
153,638 shares of Class B Non-Voting Stock and 1,014.450 shares of Series
A Convertible Participating Preferred Stock). Each of these persons
maintains a principal business address at c/o Thomas H. Lee Company, 75
State Street, Suite 2600, Boston, MA 02109. Each of these persons
disclaims beneficial ownership of the shares.
(12) THL Investment Management Corp., the general partner of THL-CCI Limited
Partnership, and Thomas H. Lee, as director and sole shareholder of THL
Investment Management Corp., could also be considered to be beneficial
owners of the shares held by THL-CCI Limited Partnership. Each of these
persons maintains a principal business address at c/o Thomas H. Lee
Company, 75 State Street, Suite 2600, Boston, MA 02109.
Each of these persons disclaims beneficial ownership of the shares.
59
<PAGE> 61
ITEM 13. RELATIONSHIPS AND RELATED TRANSACTIONS
SHAREHOLDERS' AGREEMENTS
At the time of the Vistar merger, Safelite entered into a Shareholders
Agreement with its shareholders. The Shareholders Agreement, as amended to date,
provides for the composition of the Board of Directors of Safelite to be
designated one half by Belron and one half by THL and contains provisions
relating to the transfer of Safelite's capital stock, preemptive rights and
voting rights. The Shareholders Agreement is incorporated by reference as an
exhibit to this report.
REGISTRATION AGREEMENT
At the closing of the Vistar merger, Safelite and some of its
shareholders (including Thomas H. Lee Equity Fund III, L.P., Thomas H. Lee
Foreign Fund III, L.P., THL-CCI Investors Limited Partnership, Belron, the
Kellman shareholders and certain management shareholders) entered into a
Registration Agreement. The "Registration Agreement" gives these shareholders
so-called "demand" and "piggy-back" rights to require Safelite to effect the
registration of shares of Registrable Securities (as defined in the Registration
Agreement) they hold for sale to the public. All fees, costs and expenses of any
registration effected on behalf of these shareholders under the Registration
Agreement (other than underwriting discounts and commission) will be paid by
Safelite. The Registration Agreement is incorporated by reference as an exhibit
to this report.
MANAGEMENT AGREEMENTS
At the closing of the Vistar merger, Safelite entered into management
agreements with both Thomas H. Lee Company and Belron. Under the terms of the
management agreements, Safelite agreed to pay both Thomas H. Lee Company and
Belron an annual fee of $1 million for management services provided to Safelite.
These management services consist of on-going operational, financial, accounting
and strategic planning analysis and advice. The management agreements do not
have a specified termination date. However, either party may terminate the
management agreements if there is a material breach of the terms of the
agreements and the breach is not cured within 30 days following written notice
of the breach. Each of the management agreements also specifies that they will
automatically terminate upon the sale of shares of Safelite's common stock in an
initial public offering registered under the Securities Act. The management
agreements are incorporated by reference as exhibits to this report.
TRANSACTIONS WITH SAFELITE MANAGEMENT
Safelite has entered into employment agreements with Messrs. Staglin,
Barlow and Herron. See "Executive Compensation -- Employment Agreements." Each
of Safelite's executive officers is also entitled to participate in stock option
plans maintained by Safelite. See "Executive Compensation -- Stock Option
Plans."
60
<PAGE> 62
PART IV
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The financial statements of Safelite Glass Corp. are included in Item 8
of Part II of this Report beginning at page 24.
(a)(2) FINANCIAL STATEMENT SCHEDULE
All schedules are omitted because they are either not applicable or
the information is presented in the financial statements or notes thereto.
(a)(3) EXHIBITS
Copies of exhibits incorporated herein by reference can be obtained
by written request. Any such request should be forwarded to the Company at its
principal executive offices, 1105 Schrock Road, Columbus, Ohio 43216-2000,
Attention: Rebecca Scott.
3.1 Restated Certificate of Incorporation of the Company, as amended.
Incorporated by reference to Exhibit 3(i) of the Company's Form 10-Q
for the quarter ended January 2, 1999.
3.2 Amended and Restated By-Laws of the Company. Incorporated by reference
to Exhibit 3.2 of the Company's Registration Statement on Form S-4
(File No. 333-21949).
4.1 Indenture dated as of December 20, 1996 between the Company and Fleet
National Bank, as Trustee. Incorporated by reference to Exhibit 4.1 of
the Company's Registration Statement on Form S-4 (File No.
333-21949).
4.2 First Supplemental Indenture dated as of December 12, 1997 between the
Company and State Street Bank and Trust Company, as Trustee.
Incorporated by reference to Exhibit 4.2 of the Company's Registration
Statement on Form S-4 (File No. 333-21949).
4.3 Second Supplemental Indenture dated as of December 18, 1997 between the
Company and State Street Bank and Trust Company. Incorporated by
reference to Exhibit 4.3 of the Company's Registration Statement on
Form S-4 (File No. 333-21949).
4.4 Indenture, dated as of December 18, 1998, by and between the Company
and State Street Bank and Trust Company. Incorporated by reference to
Exhibit 10.18 of the Company's Registration Statement on Form S-4 (File
No. 333-76341).
10.1 Credit Agreement, amended and restated through December 17, 1997, by
and among the Company, various lending institutions, The Chase
Manhattan Bank, Bankers Trust Company and Goldman Sachs Credit Partners
L.P. Incorporated by reference to Exhibit 10.2 of the Company's
Registration Statement on Form S-4 (File No. 333-21949).
10.2 Amendment No. 1 to Credit Agreement, dated as of December 18, 1998, by
and among the Company, various lending institutions, The Chase
Manhattan Bank, Bankers Trust Company and Goldman Sachs Credit Partners
L.P.
10.3 Employment Agreement, dated as of December 20, 1996, by and between the
Company and Garen K. Staglin. Incorporated by reference to Exhibit 10.3
of the Company's
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<PAGE> 63
Registration Statement on Form S-4 (File No. 333-21949).
10.4 Employment Agreement, dated as of December 20, 1996, by and between the
Company and John F. Barlow. Incorporated by reference to Exhibit 10.4
of the Company's Registration Statement on Form S-4 (File No.
333-21949).
10.5 Employment Agreement, dated as of December 20, 1996, by and between the
Company and Douglas A. Herron. Incorporated by reference to Exhibit
10.5 of the Company's Registration Statement on Form S-4 (File No.
333-21949).
10.6 Safelite Glass Corp. 1996 Stock Option Plan. Incorporated by reference
to Exhibit 10.6 of the Company's Registration Statement on Form S-4
(File No. 333-21949).
10.7 Safelite Glass Corp. 1998 Stock Option Plan. Incorporated by reference
to Exhibit 10.7 of the Company's Registration Statement on Form S-4
(File No. 333-21949).
10.8 Amendment to the Safelite Glass Corp. 1998 Stock Option Plan.
Incorporated by reference to Exhibit 10.13 of the Company's
Registration Statement on Form S-4 (File No. 333-21949).
10.9 Safelite Glass Corp. 1999 Stock Option Plan. Incorporated by reference
to Exhibit 10.17 of the Company's Registration Statement on Form S-4
(File No. 333-76341).
10.10 Amended and Restated Management Agreement, dated as of December 18,
1997, by and between the Company and Thomas H. Lee Company.
Incorporated by reference to Exhibit 10.8 of the Company's Registration
Statement on Form S-4 (File No. 333-21949).
10.11 Amended and Restated Management Agreement, dated as of December 18,
1997, by and between the Company and Belron International BV.
Incorporated by reference to Exhibit 10.9 of the Company's Registration
Statement on Form S-4 (File No. 333-21949).
10.12 Amended and Restated Shareholders Agreement, dated as of December 18,
1997, among the Company and the stockholders named therein.
Incorporated by reference to Exhibit 10.10 of the Company's
Registration Statement on Form S-4 (File No. 333-21949).
10.13 Amendment No. 1 to the Amended and Restated Shareholders' Agreement,
dated as of March 26, 1998. Incorporated by reference to Exhibit 10.12
of the Company's Registration Statement on Form S-4 (File No.
333-21949).
10.14 Pledge Agreement, dated as of December 17, 1997, made by the Company in
favor of The Chase Manhattan Bank, as Collateral Agent. Incorporated by
reference to Exhibit 10.11 of the Company's Registration Statement on
Form S-4 (File No. 333-21949).
10.15 Registration Agreement, dated as of December 18, 1997, among the
Company and the stockholders named therein. Incorporated by reference
to Exhibit 10.14 of the Company's Registration Statement on Form S-4
(File No. 333-21949).
10.16 Security Agreement, as amended and restated through December 17, 1997,
among the Company and The Chase Manhattan Bank, as Collateral Agent.
Incorporated by reference to Exhibit 10.15 of the Company's
Registration Statement on Form S-4 (File No. 333-21949).
12.1* Computation of the Ratio of Earnings to Fixed Charges for the Company.
27.1* Financial Data Schedule.
* Filed herewith.
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<PAGE> 64
(b) FORM 8-K
The Company filed a Current Report on Form 8-K, dated February
1, 1999, which reported the completion of an offering of
50,000 shares of Series A Convertible Participating Preferred
Stock, all of which were purchased on January 29, 1999 by
existing stockholders at a price of $1,000 per share.
63
<PAGE> 65
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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.
By: /s/ JOHN F. BARLOW
------------------------------------
JOHN F. BARLOW
DIRECTOR, PRESIDENT AND CHIEF
EXECUTIVE
OFFICER (PRINCIPAL EXECUTIVE
OFFICER)
Date: June 14, 1999
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT IN THE CAPACITIES INDICATED AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JOHN F. BARLOW Director, President and Chief Executive June 14, 1999
- --------------------------------------------------- Officer (principal executive officer)
JOHN F. BARLOW
/s/ GAREN K. STAGLIN Director and Chairman of the Board June 14, 1999
- ---------------------------------------------------
GAREN K. STAGLIN
/s/ DOUGLAS A. HERRON Senior Vice President, Treasurer and June 14, 1999
- --------------------------------------------------- Chief Financial Officer (principal
DOUGLAS A. HERRON financial and accounting officer)
/s/ ANTHONY J. DINOVI Director June 14, 1999
- ---------------------------------------------------
ANTHONY J. DINOVI
Director , 1999
- ---------------------------------------------------
SELWYN HERSON
Director , 1999
- ---------------------------------------------------
ADRIAN F. JONES
/s/ SETH W. LAWRY Director June 14, 1999
- ---------------------------------------------------
SETH W. LAWRY
/s/ THOMAS H. LEE Director June 14, 1999
- ---------------------------------------------------
THOMAS H. LEE
Director , 1999
- ---------------------------------------------------
RONNIE LUBNER
Director , 1999
- ---------------------------------------------------
JOHN E. MASON
Director , 1999
- ---------------------------------------------------
M. LOUIS SHAKINOVSKY
/s/ SCOTT M. SPERLING Director June 14, 1999
- ---------------------------------------------------
SCOTT M. SPERLING
Director , 1999
- ---------------------------------------------------
RODNEY STANSFIELD
</TABLE>
<PAGE> 66
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
The registrant has not sent an annual report to its securityholders
covering the registrant's last fiscal year.
The registrant has not sent a proxy statement or other proxy
soliciting material to more than 10 of the registrant's securityholders with
respect to any annual or other meeting of securityholders.
<PAGE> 1
EXHIBIT 12.1
SAFELITE GLASS CORP.
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
<TABLE>
<CAPTION>
3 MONTHS 3 MONTHS YEAR
ENDED ENDED ENDED
1994 1995 1996 1997 MAR 29, 1997 APR 4, 1998 APR 3, 1999
---- ---- ---- ---- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS & LOSSES:
PRE-TAX INCOME (LOSS) FROM
CONTINUING OPERATIONS (2.9) 7.5 19.2 (0.4) 0.0 (5.9) (9.5)
INTEREST EXPENSE 4.5 6.0 6.7 27.5 6.3 10.9 46.7
PORTION OF RENTAL EXPENSE
REPRESENTATIVE OF AN
INTEREST FACTOR 11.5 12.0 12.5 14.3 3.3 7.1 26.3
TOTAL EARNINGS (LOSSES) 13.1 25.5 38.4 41.4 9.6 12.1 63.5
FIXED CHARGES:
INTEREST EXPENSE 4.5 6.0 6.7 27.5 6.3 10.9 46.7
PORTION OF RENTAL EXPENSE
REPRESENTATIVE OF AN
INTEREST FACTOR 11.5 12.0 12.5 14.3 3.3 7.1 26.3
TOTAL FIXED CHARGES 16.0 18.0 19.2 41.8 9.6 18.0 73.0
RATIO OF EARNINGS TO FIXED
CHARGES -- 1.4 2.0 -- 1.0 -- --
DEFICIENCY OF EARNINGS TO FIXED
CHARGES (2.9) -- -- (0.4) -- (5.9) (9.5)
</TABLE>
(1) Prior to 1998, the Company's fiscal year ended on the Saturday closest to
December 31 of each year. On May 18, 1998, the Company changed its
fiscal year to the Saturday closest to March 31.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001033671
<NAME> SAFELITE GLASS CORP.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-03-1999
<PERIOD-START> APR-04-1998
<PERIOD-END> APR-03-1999
<EXCHANGE-RATE> 1
<CASH> 2,876
<SECURITIES> 0
<RECEIVABLES> 75,396
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<PP&E> 128,252
<DEPRECIATION> 64,172
<TOTAL-ASSETS> 573,827
<CURRENT-LIABILITIES> 90,888
<BONDS> 482,846
0
2
<COMMON> 142
<OTHER-SE> (6,678)
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<SALES> 876,811
<TOTAL-REVENUES> 876,811
<CGS> 645,726
<TOTAL-COSTS> 645,726
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<INTEREST-EXPENSE> 46,655
<INCOME-PRETAX> (9,549)
<INCOME-TAX> 433
<INCOME-CONTINUING> (9,982)
<DISCONTINUED> 0
<EXTRAORDINARY> (4,028)
<CHANGES> 0
<NET-INCOME> (14,010)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
