SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended January 1, 2000
[ ] 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 13-3386709
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1105 SCHROCK ROAD, COLUMBUS, OHIO 43229
(Address, including zip code of principal executive offices)
(614) 842-3000
(Telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
to be filed by Section 13 or Section 15(d) of the Securities and 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 [ ]
As of January 1, 2000 there were 3,414,345 shares outstanding of
Safelite's Class A Common Stock ($.01 par value) and 10,412,638 shares
outstanding of Safelite's Class B Common Stock ($.01 par value).
<PAGE>
SAFELITE GLASS CORP.
Form 10-Q
For the Quarter Ended January 1, 2000
INDEX
Page No.
--------
Part I. Financial Information
- -------------------------------
Item 1. Financial Statements
Condensed Balance Sheets - January 1, 2000 and April 3, 1999... 2
Condensed Statements of Operations - Three Months Ended
January 1, 2000 and January 2, 1999........................ 3
Condensed Statements of Operations - Nine Months Ended
January 1, 2000 and January 2, 1999........................ 4
Condensed Statements of Cash Flows - Nine Months Ended
January 1, 2000 and January 2, 1999........................ 5
Notes to Condensed Financial Statements........................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 7 - 10
Part II. Other Information
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K............................... 11
1
<PAGE>
PART I.
ITEM 1. Financial Statements
SAFELITE GLASS CORP.
CONDENSED BALANCE SHEETS
(In thousands, except per share amounts)
January 1, April 3,
2000 1999
----------- ---------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash ................................................ $ 303 $ 2,876
Accounts receivable, net of allowance for uncollectible
accounts of $4,464 and $5,100 ...................... 54,421 70,296
Inventories ......................................... 55,336 50,451
Prepaid expenses and other current assets ........... 4,473 10,700
Deferred taxes ...................................... 13,282 9,303
--------- ---------
Total current assets ............................. 127,815 143,626
PROPERTY, PLANT AND EQUIPMENT - net of accumulated
depreciation of $71,050 and $64,172 ............... 66,047 64,080
INTANGIBLE ASSETS - net of accumulated amortization
of $28,454 and $21,039 ............................ 273,398 280,814
OTHER ASSETS ......................................... 91,936 85,307
--------- ---------
TOTAL ASSETS ......................................... $559,196 $573,827
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable .................................... $ 60,883 $ 50,305
Current portion - long term debt .................... 5,608 4,537
Current portion - restructuring ..................... 14,352 5,383
Accrued expenses .................................... 26,778 24,074
Accrued interest .................................... 777 6,589
--------- ---------
Total current liabilities ........................ 108,398 90,888
LONG-TERM DEBT - LESS CURRENT PORTION ................ 469,360 482,846
LONG-TERM LIABILITIES:
Restructuring........................................ 11,715 3,933
Other ............................................... 1,880 2,694
--------- ---------
Total long-term liabilities ...................... 13,595 6,627
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Series A preferred stock issued, $0.01 par value .... 1 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 .......................... 374,877 374,877
Accumulated deficit ................................. (401,710) (376,087)
Other ............................................... (5,468) (5,468)
--------- ---------
Total stockholders' deficit ...................... (32,157) (6,534)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT .......... $559,196 $573,827
========= =========
See notes to condensed financial statements
2
<PAGE>
SAFELITE GLASS CORP.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands)
Three Months Ended
-----------------------
January 1, January 2,
2000 1999
---------- ----------
SALES:
Installation and related services ................... $172,639 $175,179
Wholesale ........................................... 9,723 10,858
--------- ---------
Total sales ..................................... 182,362 186,037
--------- ---------
COST OF SALES:
Installation and related services ................... 137,302 136,757
Wholesale ........................................... 8,758 9,510
--------- ---------
Total cost of sales ............................. 146,060 146,267
--------- ---------
GROSS PROFIT ......................................... 36,302 39,770
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ......... 44,375 44,926
RESTRUCTURING EXPENSES ............................... 24,168 --
--------- ---------
OPERATING LOSS ....................................... (32,241) (5,156)
INTEREST EXPENSE .................................... (11,705) (11,832)
INTEREST INCOME ...................................... 63 172
--------- ---------
LOSS BEFORE INCOME TAX BENEFIT ....................... (43,883) (16,816)
INCOME TAX BENEFIT ................................... 16,415 5,610
--------- ---------
NET LOSS ............................................. $(27,468) $(11,206)
========= =========
See notes to condensed financial statements.
3
<PAGE>
SAFELITE GLASS CORP.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands)
Nine Months Ended
----------------------
January 1, January 2,
2000 1999
---------- ----------
SALES:
Installation and related services ................... $630,710 $621,684
Wholesale ........................................... 32,085 37,372
--------- ---------
Total sales ..................................... 662,795 659,056
--------- ---------
COST OF SALES:
Installation and related services ................... 470,222 456,421
Wholesale ........................................... 27,470 32,108
--------- ---------
Total cost of sales ............................. 497,692 488,529
--------- ---------
GROSS PROFIT ......................................... 165,103 170,527
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ......... 144,281 140,725
RESTRUCTURING EXPENSES ............................... 24,168 4,222
OTHER OPERATING EXPENSES ............................. -- 3,613
--------- ---------
OPERATING INCOME (LOSS) .............................. (3,346) 21,967
INTEREST EXPENSE .................................... (34,664) (34,292)
INTEREST INCOME ...................................... 220 384
--------- ---------
LOSS BEFORE INCOME TAX BENEFIT ....................... (37,790) (11,941)
INCOME TAX BENEFIT ................................... 12,167 1,852
--------- ---------
NET LOSS ............................................. $(25,623) $(10,089)
========= =========
See notes to condensed financial statements.
4
<PAGE>
SAFELITE GLASS CORP.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Nine Months Ended
----------------------
January 1, January 2,
2000 1999
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................. $(25,623) $(10,089)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization ....................... 17,399 17,152
Deferred income taxes ............................... (12,150) (3,055)
(Gain) loss on disposition of assets ................ 203 (92)
Changes in operating assets and liabilities:
Accounts receivable ................................ 15,875 (128)
Inventories ........................................ (4,885) (2,476)
Accounts payable ................................... 10,578 (196)
Accrued expenses ................................... 1,492 (3,037)
Restructuring reserves ............................. 16,751 (13,625)
Accrued interest ................................... (5,812) (5,893)
Prepaid expenses and other current assets .......... 6,227 (648)
Other .............................................. 4,824 961
--------- ---------
Net cash flows provided by (used in) operating
activities..................................... 24,879 (21,126)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................. (15,000) (17,142)
Proceeds from sale of fixed assets ................... 248 323
--------- ---------
Net cash flows used in investing activities ...... (14,752) (16,819)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt ........................... (3,880) (4,176)
Proceeds from bond issuance .......................... -- 50,447
Bonds closed into escrow collateralized by restricted
cash ............................................... -- (46,400)
Capitalized debt issuance costs ...................... -- (2,122)
Borrowings (payments) on revolver, net ............... (8,820) 37,750
--------- ---------
Net cash flows provided by (used in) financing
activities...................................... (12,700) 35,499
--------- ---------
NET DECREASE IN CASH ................................. (2,573) (2,446)
CASH AT BEGINNING OF PERIOD .......................... 2,876 10,254
--------- ---------
CASH AT END OF PERIOD ................................ $ 303 $ 7,808
========= =========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest ............................... $ 39,058 $ 38,362
========= =========
Cash paid for income taxes ........................... $ 254 $ 438
========= =========
See notes to condensed financial statements.
5
<PAGE>
SAFELITE GLASS CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Significant Accounting Policies
These interim financial statements are unaudited but, in the
opinion of management, reflect all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the data
for these periods. The interim financial statements should be read
in conjunction with the audited financial statements and notes
thereto contained in Safelite's Report on Form 10-K for the fiscal
year ended April 3, 1999. Safelite's results for interim periods
are not normally indicative of results to be expected for the
fiscal year. 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
combined with the Company's operating leverage has historically
resulted in a disproportionate decline in operating income during
the first and fourth calendar quarters of each year. The severity
of weather also has an impact on Safelite's sales and operating
income, with severe winter weather generating increased sales and
income and mild winters generating lower sales and income.
Preference Dividends - At January 1, 2000, cumulative unpaid
preference dividends totaled $7.0 million.
Comprehensive Income (loss) - Comprehensive loss was equal to net
loss for the three and nine month periods ended January 1, 2000
and January 2, 1999.
Segments - Safelite has determined that it operates in two
industry segments: installation and related services and
wholesale. Safelite does not allocate assets or overhead by
segment.
Note 2. Restructuring Costs
During the quarter ended January 1, 2000, Safelite recorded a
pretax charge of $24.2 million associated with closing 164
service centers, closing one national call center and for costs
related to reductions in field and corporate management. The
charge included $17.0 million for lease obligations, $4.3 million
for write-off of leasehold improvements and other fixed assets
and $2.9 million for severance and other benefit costs related to
the termination of associates. Safelite will continue to evaluate
cost savings opportunities which may result in additional
restructuring charges. Additional restructuring charges, if any,
will be recorded when the related decision is made and
communicated.
The following is a summary related to the restructuring charges
(in millions):
Balance at April 3, 1999 (prior restructuring charges) $ 9.3
Charge recorded 24.2
Used for intended purpose (7.4)
------
Balance at January 1, 2000 $26.1
======
6
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Sales. Sales for the quarter ended January 1, 2000, decreased $3.7 million, or
2.0% to $182.3 million, from $186.0 million for the same period of the prior
year. Installation and related services sales of $172.6 million for the third
quarter decreased by 1.4%, or $2.5 million from $175.1 million for the same
period of the prior year. Within installation and related services, service
center sales declined $6.9 million, or 5.1% to $127.1 million while network
sales grew $4.3 million, or 10.5% to $45.5 million. Network sales consist of
sales derived from the Company's network of independent auto glass providers
which replace or repair auto glass for Safelite under subcontract agreements.
Overall market conditions in the auto glass replacement industry remained soft
during the quarter as both pricing levels and unit volumes were down from the
prior year period. Safelite service center replacement unit volumes were 5.3%
lower during the quarter than the same period of the prior year, while the
successful rollout of Safelite's Repair Medics(SM) repair only locations caused
windshield repair volumes to nearly double. Combined service center repair and
replacement volumes increased 3.5% over the quarter ended January 2, 1999.
Despite combined repair and replacement unit volumes increasing 3.5%, service
center sales declined 5.1% as a result of an approximate 3.0% decrease in
pricing and the higher rate of repairs, which have a lower per unit price than
replacements. The increase in network sales was primarily due to a 10.0%
increase in repair and replacement unit volumes.
Wholesale sales for the quarter ended January 1, 2000, fell 10.5% to $9.7
million as a result of a decline in unit sales. These results reflect not only
the soft industry conditions, but also a strategic shift by Safelite towards
higher margin local sales and away from lower margin truckload sales. Also,
increasing demand for Safelite manufactured product within company owned service
center locations has limited the allocation of glass available for sale in the
wholesale market.
For the nine months ended January 1, 2000, total Company sales increased $3.7
million, or 0.6% to $662.8 million from $659.1 million. Installation and related
services sales rose $9.0 million, or 1.5% to $630.7 million. The increase in
installation and related services sales resulted from a 3.3% increase in
replacement unit sales and a 59.7% increase in repair unit sales, partially
offset by lower pricing. Wholesale sales fell 14.2% to $32.1 million for the
reasons discussed above.
Gross Profit. Gross profit for the quarter ended January 1, 2000 decreased 8.7%
to $36.3 million from $39.8 million for the same period of the prior year. Gross
profit margin decreased to 19.9% in the third quarter of fiscal 2000, from 21.4%
in the comparable period of fiscal year 1999. In addition to lower industry-wide
pricing, the proportion of network sales to total sales increased during the
latest quarter as compared to the same period in the prior year, which served to
compress gross profit margin. The gross profit margin on network sales is
substantially lower than on work performed through Company owned service
centers. Partially offsetting the higher proportion of network sales was an
improved margin on network business.
For the nine months ended January 1, 2000, gross profit was $165.1 million, a
decrease of $5.4 million, or 3.2% over the comparable period in fiscal year
1999. Gross profit rate declined to 24.9% in the first nine months of fiscal
2000, from 25.9% in the comparable period of the prior year. The first quarter
of fiscal 1999 benefited from unusually high industry wide pricing levels which
dissipated in the second and third quarters of that fiscal year, making
comparisons with the current nine month period unfavorable. Installation costs
per replacement unit were approximately 2% higher in the current year to date
period than for the comparable period last year.
7
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $0.5 million, or 1.2% in the third quarter to
$44.4 million from $44.9 million in the prior year period. As a percentage of
sales for the quarter ended January 1, 2000, selling, general and administrative
expenses remained constant at approximately 24% compared with the same period in
the prior year.
For the nine months ended January 1, 2000, selling, general and administrative
expenses increased $3.6 million or 2.5% to $144.3 million from $140.7 million in
the corresponding nine months of fiscal 1999. Primary factors driving the
increase were higher costs related to increased call center volume, national
media advertising campaign expenses and costs relating to the Year 2000 issue.
As a percentage of sales for the nine months ended January 1, 2000, selling,
general and administrative expenses rose to 21.8% from 21.4% in the
corresponding prior year period.
Restructuring Expenses. During the quarter and nine months ended January 1,
2000, Safelite recorded $24.2 million in restructuring expenses. Items included
within the restructuring provision are the closing of 164 service centers, the
closing of one national call center and reductions in field management and
support functions. Management is continuing to evaluate cost reduction
opportunities in light of current industry conditions and the announcement made
by Allstate Insurance Company that it does not expect to renew its Best Efforts
Agreement when that contract expires in October 2000 (see Safelite Report on
Form 8-K dated October 28, 1999). This effort may result in additional
restructuring provisions in the fourth quarter of the current fiscal year.
Loss Before Income Taxes. Loss before income taxes increased to a loss of $43.9
million in the quarter ended January 1, 2000 from a loss of $16.8 million in the
same quarter of the prior year. The decline was primarily due to the
restructuring provision, as well as to the decrease in gross margin. For the
nine months ended January 1, 2000, loss before income taxes increased to a $37.8
million loss from a $11.9 million loss in the nine months ended January 2, 1999,
primarily due to the third quarter restructuring provision.
Income Taxes. For the quarter and nine month periods ended January 1, 2000 and
January 2, 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 Loss. Net loss for the quarter ended January 1, 2000, was $27.5 million, an
increase in net loss further decline of $16.3 million from the $11.2 million
loss recorded in the quarter ended January 2, 1999. This was primarily the
result of the restructuring provision offset by the related reduction in income
taxes. Net loss for the nine months ended January 1, 2000 was $25.6 million, an
increase in net loss of $15.5 million, from the $10.1 million loss recorded in
the nine months ended January 2, 1999, for the same primary reasons discussed
for the quarter.
Year 2000 Issues
The Year 2000 issue is the result of many computer programs being written where
dates were abbreviated by using two digits to represent the year in date fields,
potentially resulting in the inability to correctly process data or to operate
properly. Year 2000 issues could have affected: (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.
8
<PAGE>
Safelite underwent a comprehensive evaluation and remediation to ensure that its
systems and that of its business partners were Year 2000 compliant.
Consequently, Safelite successfully entered Year 2000 without disruption to its
services from its internal computer systems and software. In addition, the
Company has not experienced any significant Year 2000 problems with respect to
vendors, customers, and/or other third parties. The monitoring of hardware,
software and third party exchanges of information is ongoing and contingency
plans are in place if any problems arise.
While no Year 2000 related disruptions have been experienced to date, there are
some remaining Year 2000 risks. However, based on currently available
information, management believes that Year 2000 related disruptions would not
have a material adverse effect on the Company's financial condition or results
of operations.
The total cost of addressing the Year 2000 issue was 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 January 1, 2000, approximately $2.1 million of external costs have been
incurred. Management believes that any remaining Year 2000 costs will be
insignificant. 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 provided by operating activities for the nine month period ended
January 1, 2000 was $24.9 million, an increase in operating cash flows of $46.0
million from the same period of the prior year. The increase in operating cash
flow resulted primarily from decreased restructuring requirements in the current
year, as well as significant reductions in working capital, particularly in
receivables.
Historically, Safelite has utilized internally generated funds and borrowings
under credit facilities to meet ongoing working capital and capital expenditure
requirements. As of January 1, 2000, Safelite had long-term borrowings of $475.0
million and $55.4 million of availability under its revolving credit facility.
Safelite's credit facilities contain financial and other covenants that limit
the ability of Safelite to, among other things, dispose of assets, incur
additional indebtedness, incur guarantee obligations, prepay other indebtedness,
or amend other debt instruments, pay dividends, create liens on assets, make
investments, loans or advances, make acquisitions, create subsidiaries, engage
in mergers, or engage in certain transactions with affiliates and otherwise
restrict certain corporate activities. In addition, Safelite is required to
comply with certain financial covenants, including specified financial ratios,
minimum interest coverage ratios and maximum leverage ratios. In the absence of
improved performance which is not now anticipated, Safelite will not comply with
certain covenants now contained in its senior credit facilities during the three
month period ended April 1, 2000 or the three month period ended July 1, 2000.
Safelite has initiated discussions with its lenders under the senior credit
facilities seeking modifications of certain covenants in the senior credit
facilities which would facilitate Safelite's continued compliance with its
covenants. There can be no assurance that Safelite will be successful in
modifying its credit facilities or, if successful, be able to do so on terms
that will not impose other restrictions on the Company. If Safelite is unable to
obtain such a modification and is unable to remain in compliance with certain
covenants, then, in the absence of a waiver by the lenders, Safelite would be in
default under its senior credit facilities, which in the aggregate totaled
$320.1 million as of January 1, 2000.
9
<PAGE>
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. This performance, in turn, will be subject to
general economic conditions and to financial, business, and other factors,
including Safelite's success in achievement of cost reductions in connection
with its restructuring activities as well as 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 affected 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 $1.7 million based upon Safelite's nine months ended January 1,
2000 borrowing levels.
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 statements are not guarantees
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.
10
<PAGE>
PART II.
Item 6. Exhibits and Reports on Form 8-K
1. Exhibits
Exhibit 27 -- Financial Data Schedule
2. Reports on Form 8-K
The Company filed a Current Report on Form 8-K, dated October 28, 1999
which reported Allstate Insurance Company (Allstate) had advised
Safelite that it did not intend to renew its Best Efforts Agreement
with Safelite for autoglass repair, replacement and administrative
services when that contract expires in October 2000. Safelite planned
actions to reduce its overall cost structure in light of current
industry conditions as well as this development. The Company expected
to record restructuring charges in the quarter ended January 1, 2000
related to this effort.
11
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