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 October 2, 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 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 October 2, 1999 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).
SAFELITE GLASS CORP.
Form 10-Q
For the Quarter Ended October 2, 1999
INDEX
Page No.
Part I. Financial Information
- -------------------------------
Item 1. Financial Statements
Condensed Balance Sheets - October 2, 1999 and April 3, 1999... 2
Condensed Statements of Operations - Three Months Ended
October 2, 1999 and October 3, 1998........................ 3
Condensed Statements of Operations - Six Months Ended
October 2, 1999 and October 3, 1998........................ 4
Condensed Statements of Cash Flows - Six Months Ended
October 2, 1999 and October 3, 1998........................ 5
Notes to Condensed Financial Statements........................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 6 - 11
Part II. Other Information
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K............................... 12
PART I.
ITEM 1. Financial Statements
SAFELITE GLASS CORP.
CONDENSED BALANCE SHEETS
(In thousands, except per share amounts)
October 2, 1999 April 3, 1999
--------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash ........................................ $ 3,091 $ 2,876
Accounts receivable, net of allowance for
uncollectible accounts of $5,361 and $5,100 70,976 70,296
Inventories ................................. 55,650 50,451
Prepaid expenses and other current assets ... 6,178 10,700
Deferred taxes .............................. 8,295 9,303
---------- ----------
Total current assets ...................... 144,190 143,626
PROPERTY, PLANT AND EQUIPMENT - net of accumulated
depreciation of $70,425 and $64,172.......... 66,491 64,080
INTANGIBLE ASSETS - net of accumulated
amortization of $25,981 and $21,039 ......... 275,859 280,814
OTHER ASSETS .................................. 81,515 85,307
---------- ----------
TOTAL ASSETS .................................. $ 568,055 $ 573,827
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable ............................ $ 56,005 $ 50,305
Current portion - long term debt ............ 2,668 4,537
Accrued expenses ............................ 29,319 29,457
Accrued interest ............................ 4,859 6,589
---------- ----------
Total current liabilities ................. 92,851 90,888
LONG-TERM DEBT - LESS CURRENT PORTION ......... 474,416 482,846
OTHER LONG-TERM LIABILITIES ................... 5,477 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 ......................... (374,242) (376,087)
Other ....................................... (5,468) (5,468)
---------- ----------
Total stockholders' deficit ............... (4,689) (6,534)
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT ... $ 568,055 $ 573,827
========== ==========
See notes to condensed financial statements.
2
SAFELITE GLASS CORP.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands)
Three Months Ended
October 2, 1999 October 3, 1998
--------------- ---------------
SALES:
Installation and related services.............. $230,199 $219,447
Wholesale ..................................... 11,139 12,405
---------- ----------
Total sales ............................... 241,338 231,852
---------- ----------
COST OF SALES:
Installation and related services.............. 169,581 160,210
Wholesale ..................................... 9,360 11,320
---------- ----------
Total cost of sales ....................... 178,941 171,530
---------- ----------
GROSS PROFIT .................................. 62,397 60,322
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES .. 50,674 48,307
RESTRUCTURING EXPENSES ........................ 0 713
OTHER OPERATING EXPENSES ...................... 0 2,628
---------- ----------
OPERATING INCOME .............................. 11,723 8,674
INTEREST EXPENSE .............................. (11,501) (11,273)
INTEREST INCOME ............................... 69 57
---------- ----------
INCOME (LOSS) BEFORE INCOME TAX PROVISION ..... 291 (2,542)
INCOME TAX (PROVISION) BENEFIT ................ (815) 210
---------- ----------
NET LOSS ...................................... $ (524) $ (2,332)
========== ==========
See notes to condensed financial statements.
3
SAFELITE GLASS CORP.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands)
Six Months Ended
October 2, 1999 October 3, 1998
--------------- ---------------
SALES:
Installation and related services.............. $458,071 $446,505
Wholesale ..................................... 22,362 26,514
---------- ----------
Total sales ............................... 480,433 473,019
---------- ----------
COST OF SALES:
Installation and related services.............. 332,920 319,664
Wholesale ..................................... 18,712 22,598
---------- ----------
Total cost of sales ....................... 351,632 342,262
---------- ----------
GROSS PROFIT .................................. 128,801 130,757
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES... 99,906 95,799
RESTRUCTURING EXPENSES ........................ 0 4,222
OTHER OPERATING EXPENSES ...................... 0 3,613
---------- ----------
OPERATING INCOME .............................. 28,895 27,123
INTEREST EXPENSE .............................. (22,959) (22,460)
INTEREST INCOME ............................... 157 212
---------- ----------
INCOME BEFORE INCOME TAX PROVISION ............ 6,093 4,875
INCOME TAX PROVISION .......................... (4,248) (3,758)
---------- ----------
NET INCOME .................................... $ 1,845 $ 1,117
========== ==========
See notes to condensed financial statements.
4
SAFELITE GLASS CORP.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Six Months Ended
October 2, 1999 October 3, 1998
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................... $ 1,845 $ 1,117
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization................ 11,649 11,611
Deferred income taxes........................ 4,248 2,872
(Gain) loss on disposition of assets......... 33 (179)
Changes in operating assets and liabilities:
Accounts receivable........................ (680) (3,793)
Inventories................................ (5,199) (2,393)
Accounts payable........................... 5,700 9,458
Accrued expenses........................... 661 (4,636)
Restructuring reserves..................... (1,543) (14,274)
Accrued interest........................... (1,730) (4,923)
Other...................................... 4,859 1,459
---------- ----------
Net cash flows provided by (used in)
operating activities...................... 19,843 (3,681)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures......................... (9,562) (9,338)
Proceeds from sale of fixed assets........... 9 191
---------- ----------
Net cash flows used in investing activities (9,553) (9,147)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term borrowings............. (2,315) (2,995)
Borrowings (payments) on revolver, net....... (7,760) 11,850
---------- ----------
Net cash flows provided by (used in)
financing activities...................... (10,075) 8,855
---------- ----------
NET INCREASE (DECREASE) IN CASH................ 215 (3,973)
CASH AT BEGINNING OF PERIOD.................... 2,876 10,254
---------- ----------
CASH AT END OF PERIOD.......................... $ 3,091 $ 6,281
========== ==========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest..................... $ 23,760 $ 26,174
========== ==========
Cash paid for income taxes................. $ 293 $ 431
========== ==========
See notes to condensed financial statements.
5
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 October 2, 1999, cumulative unpaid
preference dividends totaled $6.0 million.
Comprehensive Income - Comprehensive income was equal to net
income for the three and six month periods ended October 2, 1999
and October 3, 1998.
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.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Sales. Sales for the quarter ended October 2, 1999, increased $9.5 million, or
4.1% to $241.3 million, from $231.8 million for the same period of the prior
year. Installation and related services sales during the quarter of $230.2
million increased by 4.9%, or $10.8 million from $219.4 million for the same
period of the prior year. The increase in installation and related services
sales was due to a 4.0% increase in replacement unit sales, partially offset by
lower pricing. Substantially all of the unit growth for the quarter came from
network sales. 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.
6
Wholesale sales for the quarter ended October 2, 1999, fell 10.2% to $11.1
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 from lower margin truckload sales. 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 six months ended October 2, 1999, total Company sales increased $7.4
million, or 1.6% to $480.4 million from $473.0 million. Installation and related
services sales rose $11.6 million, or 2.6% to $458.1 million. The increase in
installation and related services sales resulted from 5.9% higher replacement
unit volumes, partially offset by lower pricing. Wholesale sales fell 15.7% to
$22.4 million for the reasons discussed above for the current quarter.
Gross Profit. Gross profit for the quarter ended October 2, 1999 increased 3.4%
to $62.4 million from $60.3 million for the same period of the prior year. Gross
profit margin remained constant at approximately 26% for both periods. 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. Offsetting the higher proportion of
network sales was an improved margin on network business.
For the six months ended October 2, 1999, gross profit was $128.8 million, a
decrease of $2.0 million, or 1.5% over the comparable period in fiscal year
1999. Gross profit rate declined to 26.8% in the first half of fiscal 2000, from
27.6% 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 quarter of that fiscal year, making comparisons with the current
six month period unfavorable. Installation costs per replacement unit were
similar between both periods.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.4 million, or 4.9% in the second quarter to
$50.7 million from $48.3 million in the prior year period. 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 quarter ended October 2, 1999, selling,
general and administrative expenses remained constant at approximately 21%
compared with the same period in the prior year, primarily for the reasons
described above.
For the six months ended October 2, 1999, selling, general and administrative
expenses increased $4.1 million or 4.3% to $99.9 million from $95.8 million in
the corresponding six months of fiscal 1999 for the same reasons discussed
above. As a percentage of sales for the six months ended October 2, 1999,
selling, general and administrative expenses rose to 20.8% from 20.3% in the
corresponding prior year period.
7
Restructuring Expenses. During the quarter ended October 3, 1998, Safelite
recorded $0.7 million in restructuring expenses and $2.6 million in one-time
integration costs. During the six months ended October 3, 1998, Safelite
recorded $4.2 million in restructuring expenses and $3.6 million in one-time
integration costs. These charges were a result of consolidation and integration
activities associated with the December 19, 1997 merger with Vistar.
Income Before Income Taxes. Income before income taxes increased to $0.3 million
in the quarter ended October 2, 1999 from a loss of $2.5 million in the same
quarter of the prior year. For the six months ended October 2, 1999, income
before income taxes increased to $6.1 million from $4.9 million in the six
months ended October 3, 1998. This improvement is due to the restructuring
charges and one-time integration costs included in income before income taxes in
the quarter and six months ended October 3, 1998, partially offset by higher
selling, general and administrative expenses.
Income Taxes. For the quarter and six month periods ended October 2, 1999 and
October 3, 1998, 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 (Loss). Net loss for the quarter ended October 2, 1999, was $0.5
million, an improvement of $1.8 million from the $2.3 million loss recorded in
the quarter ended October 3, 1998. For the six months ended October 2, 1999, net
income increased $0.7 million to $1.8 million, from $1.1 million in the six
months ended October 3, 1998.
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 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.
8
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 and remediation phases of the Year 2000 project are complete for
all critical systems. Implementation and testing of our various systems was
completed in October 1999. Remediation of systems and applications software has
been effected through outside consultants, "factory support", in-house staff and
in some cases by the replacement of software packages. Safelite has built an
isolated test environment where systems are being tested by resetting dates to
various points beyond the year 2000. All point of sale hardware has been
upgraded to be compliant. 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 have been substantially completed 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 completed
development of contingency plans to deal with Year 2000 issues in the event that
remediation efforts were unsuccessful. These plans will be communicated to the
appropriate parties before the end of November 1999 to address specific areas of
concern.
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 October 2, 1999, approximately $1.9 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.
9
Liquidity and Capital Resources
Net cash provided by operating activities for the six month period ended October
2, 1999 was $19.8 million, an increase in operating cash flows of $23.5 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.
Safelite's investing activities consist primarily of capital expenditures for
new and existing service center and warehouse locations, capacity and efficiency
upgrades to manufacturing facilities, as well as information technology
equipment. Capital expenditures totaled $9.6 million and $9.3 million for the
six months ended October 2, 1999, and October 3, 1998, respectively.
Safelite relies on internally generated funds and, to the extent necessary, on
borrowings under its revolving credit facility to meet its liquidity needs. As
of October 2, 1999, Safelite had long-term borrowings of $477.1 million and
availability under the revolving credit facility of $56.6 million.
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 factors Safelite's success in achievement of the actions referred to
below in "Subsequent Event" and 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 six months ended October 2, 1999 borrowing
levels.
Subsequent Event
Allstate Insurance Company (Allstate) has recently advised Safelite that it does
not intend to renew its Best Efforts Agreement with Safelite for autoglass
repair, replacement, and administrative services when that contract expires in
October 2000. Allstate has further advised Safelite that it intends to enter
into negotiations with Lynx Services from PPG to provide these services when the
current contract expires. During its fiscal year ended March 1999, Safelite's
Allstate revenues totaled approximately $120 million or 14% of Safelite's total
sales. The actual impact of this action by Allstate on Safelite's prospective
sales will be dependent on several factors, including the definitive contract
terms to be negotiated by Allstate with Lynx Services, and is therefore not
presently determinable. Although the Company currently believes that it will
retain a portion of its sales to Allstate, the Company expects that sales for
its fiscal year ended March 2001 will be reduced by a material amount.
Safelite is taking actions to reduce its overall cost structure in light of this
development with the Allstate business, which the Company obtained in connection
with the Vistar merger, as well as current industry and Company conditions
including soft pricing and lower unit volume levels. These actions include:
1. A market level review of service center locations to identify and close
those locations whose customers can be better serviced directly from the
Company's central telephone unit/dispatch command centers (DCC/CTUs)
in the market;
2. A consolidation of field based administrative functions; and
3. A reduction of corporate overhead spending.
The Company expects that it will record restructuring charges of between $25
million and $30 million in the quarter ended January 1, 2000 related to this
effort. These charges will consist primarily of reserves for severance and
closed location future rental payments. In addition, management continues to
review Safelite's cost structure to identify further potential cost savings for
which future restructuring accruals may be required. While management believes
that these actions will improve operating performance, there can be no
assurances regarding the timing within which these actions may have impact or
that these efforts will ultimately be successful.
10
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 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.
11
PART II.
Item 6. Exhibits and Reports on Form 8-K
1. Exhibits
Exhibit 27 -- Financial Data Schedule
2. Reports on Form 8-K
There were no reports on Form 8-K filed during the three
months ended October 2, 1999.
12