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May/June 2000

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Fall

Industry awaits fallout from

Safelite’s Chapter 11 Filing

by leslie shaver

Though the rumors had been flying for weeks, the auto glass industry was still not prepared for the earthquake that occurred on June 9 when Safelite Glass Corporation of Columbus, Ohio, its biggest retailer and one of its largest network administrators, filed for Chapter 11 bankruptcy. When the rubble cleared, auto glass suppliers, insurance
companies and independent glass shops were all rubbing their eyes wondering what led Safelite to make this announcement and what it would mean for their future.

Since its 1997 merger with Vistar, Safelite has had a love-hate relationship with independent auto glass shops. During this time, some shop owners have accused the auto glass colossus of everything from stealing its customers and employees to lowering the bar for safe auto glass replacement to dangerously low levels. Others say Safelite has brought them a ton of work they otherwise might not have had and that the company has lived up to its representations.

The news capped what has been a tumultuous year for the company. Last fall, Safelite took a direct hit as Allstate announced it would not renew its contract with the company. Then, as the year wound down, Safelite announced it was closing a number of its shops. As 2000 began, the ABC News newsmagazine 20/20 (see “Lights, Camera , Uh Oh,” AGRR magazine, Volume 2, 2000) accused one of the company’s installers of incorrectly installing a windshield.

The company announced that it had filed for Chapter 11 bankruptcy due in large part to excessive debt from the Vistar acquisition in 1997. According to sources close to the situation, Safelite decided to file for Chapter 11 after a debt-restructuring plan that the company offered to its banks and bondholders failed to gain unanimous approval.

The Chapter 11 petition called for those banks and bondholders to exchange their debt for a stake of ownership in Safelite. Approximately 80 percent of these lenders agreed to participate, and the company says it decided to file Chapter 11 as a voluntary mechanism to get consensus from those who did not agree to the plan. The company expects to emerge from the legal process in September.

“This is the first step in the process of reorganizing Safelite to preserve its value, while ensuring continued quality service for our customers,” said Safelite president and CEO John Barlow, in a statement prior to the filing. “We are a profitable company with sufficient cash flow to fund our operations, and this filing will help us emerge with a stronger balance sheet by reducing our debt.” (See related article, page 34.)

As a part of its damage control strategy, Safelite vice president of network operations, Bill Cogswell, sent a letter to independent glass shop owners in an attempt to allay their fears about doing work for the Safelite network. In the letter, Cogswell reminded independents that Safelite earned almost $45 million before taxes in its last fiscal year, was not going out of business, that its management team will remain in place and that it would be able to pay employees, current vendors and
suppliers.

The letter went on to tell independents that they would get paid before Safelite bills insurance or fleet companies. “You will be paid, and paid on time, and the checks will be good,” Cogswell said in the letter.

Furthermore, Cogswell warned independents that bills sent directly to insurance companies would be forwarded to Safelite and that they should not call insurance companies. “We have met with insurance companies and shared with them the court protection of independent shop payments,” he said in the letter. “They are aware of Safelite’s plans and have expressed their support.”

Finally, the letter gave owners explicit instructions of how—via the web or telephone—they could contact Safelite with questions or get information about a specific invoice.

 

“It Scares the Hell Out of Me”

In spite of Barlow’s assurances and Cogswell’s letter, a number of glass shop owners who are owed money by Safelite (none of whom wanted to be identified for this article) were understandably nervous about being paid.

The owner of a North Carolina glass shop was blunt in his concerns. “I have concerns about how we are going to be paid the next couple of months,” he said. “I thought they had plenty of cash and now they are filing for bankruptcy. If they are doing one out of every five windshields [in the country], like they say they do, they need to be turning a profit.”

Another shop owner in Arizona echoes these concerns. “A lot of questions come to mind,” he said. “We have a sizable amount of money out there with Safelite. The question is, ‘Will we get paid?’ If they reorganize, will they get everybody paid in full or will there be some concessions?”

In the meantime, the Arizona shop owner is hedging his bets by finding different ways to bill. “I am going to change the ways and places I bill because I don’t want to continue to grow the Safelite debt,” he said.

A Colorado shop owner has already developed a way to ensure that Safelite does not owe him money. “We purchase our glass from their warehouse,” he said. “Then we try to keep our purchases equal to what they owe us.”

A shop owner in Washington admitted his concerns were tempered by the size of his shop. “My shop is such a small shop that I don’t foresee that their bankruptcy would make that much of a difference,” he said. “They are not a network that I do dozens and dozens of jobs for a month.”

However, he is still a bit antsy. “They don’t owe me an amount that would scare me that much, but I am a bit concerned,” he said. “I would think the insurance companies would be more nervous because they are hiring Safelite for network jobs.”

In the long run, he thinks Safelite is big enough to right its ship. “They are monstrous and have been around for a few years, so I would think they could work through this.”

A South Carolina glass shop owner also has some concerns, though his are based on the belief that Safelite will pull through this bankruptcy. “It scares the hell out of me,” he said. “What if they declare bankruptcy and the law of the land allow them to pay their debts at 15 cents for every dollar? It will be tough for the glass manufacturer and the bank.”

Others worry about the anticipated recovery. If they reorganize successfully, with most of their debt paid off, “now there is a company with all these stores and resources, yet they don’t have the debt that incurred that stuff. A year from now we will have this monstrous company that has had a lot of their debt forgiven and will be in so far with insurance companies that the insurance industry can’t get rid of them. After all of this, I will wish they were up to their eyeballs in debt,” he said.

 

Business As Usual

Other shop owners are not as concerned, because they don’t deal with Safelite on a regular basis or they think the company will stay intact.

Typical of this group is a Connecticut shop owner who was told by his glass distributor that Safelite was filing Chapter 11. “It does not scare me because I know that companies like that reorganize all the time,” he said. “It did not really freak me out.” He went on to say that he would still accept jobs from Safelite.

A glass shop employee in California, that closely monitors the industry, also thinks Safelite’s Chapter 11 filing will not cause a problem for her shop. “Currently, they owe us nothing,” she said. “We checked that out right away. After reading their letter [to independent shop owners], I don’t think there will be a problem.”

Another shop owner in Texas says he will continue to do jobs for Safelite. “I don’t think they will go under,” he said. “I think they will be through this by September or October.

They are a direct competitor, but they do send us work,” he said. “If they went under it would just be another network picking up the
contract.”

 

The Boardroom View

Some insurance companies expressed as much concern about the Safelite Chapter 11 filing as their off-the-record colleagues on the retail side of the business, though their thoughts were conveyed more through actions than words.

The biggest noise coming from the insurance industry may have been heard out of Madison, Wis., where American Family terminated its contract with Safelite as a result of the Chapter 11 filing. “This was a business decision based on financial considerations and not service or claims processing,” the company said in a media statement. “In the coming weeks, we will explore alternatives for processing and settling claims.”

However, the company did say that until its “other procedures are finalized, all American Family glass claims will continue to be processed through Safelite.” In explaining this decision, the company said, “Safelite says it has taken all actions required to permit continuation of all payment of funds due to suppliers of essential goods and services. As a third party administrator of a number of insurance glass programs, Safelite has also ensured its ability to pay independent auto glass shops. The company has also negotiated credit facilities to assist in funding operations during the court process.”

The company said it had already “taken precautions regarding its contractual relationship with Safelite.” These changes included requiring Safelite to pay vendors before sending American Family invoices.

Other insurance companies did not take such drastic actions. State Farm plans to continue its relationship with Safelite as it always has. “They are not going out of business,” said State Farm spokesman Dave Hurst. “They are going through a reorganization. We don’t think the Chapter 11 process will affect Safelite’s ability to deliver the same quality of service to policyholders that they have in the past.”

Another major insurance provider, GEICO, refused to comment about Safelite’s situation while Nationwide has announced that it will continue business as usual.

Glass supplier PPG Industries of Pittsburgh, Pa., which is owed $3,014,875.75 from Safelite, also declined comment for this article.

 

Where to Now?

Shop owners speculated that Safelite’s announcement may force them to raise prices on both retail and wholesale levels, which could also bump up prices throughout the industry. The impetus for this theory is that one of the reasons Safelite declared bankruptcy is because its prices were too low for it to pay off its debt. If this is the case, it may be forced to raise prices in the future.

However, Barlow’s statement that the company made $45 million may derail this train of thought.

Another glass shop owner said Safelite’s bankruptcy statement might help him compete locally with the auto glass giant. “I see it as an opportunity to gain customers,” said the independent in North Carolina. “I will tell customers ‘when we offer a lifetime guarantee, we are not filing bankruptcy,’” he said. Despite guarantees from Safelite, many glass shop owners carry the same level of uncertainty when it comes to Safelite. Maybe the Colorado shop owner expressed this feeling best when he said, “It will be kind of interesting to see what happens with them [Safelite].”

 

Leslie Shaver serves as a contributing editor of AGRR magazine.

 

The Major Creditors

 Safelite estimates that it has more than 1,000 unsecured creditors and listed assets of $559.2 million and liabilities of $591.4 million. Chief among the unsecured creditors named are:

1. State Street Bank and Trust, Boston, Mass. $155,000,000.00

2. PPG Industries, Pittsburgh, Pa.— $3,014,875.75

3. Dupont, headquartered in Wilmington, Del.— $1,943,992.52

4. Glass Depot/Harmon Viracon (All owned by Apogee Enterprises, Minneapolis, Minn.)— $1,933,933.10

5. Sika Corporation, Kansas City, Mo.— $1,824,691.38

6. Visteon Glass, headquartered in Michigan— $1,685,494.03

7. AFG Industries, Kingsport, Tenn.— $1,042,093.53

8. Mygrant Glass, San Francisco, Calif.— $847,423.41

9. Creative Extruded Products, Tripp City, Ohio— $626,685.31

10. Pilkington LOF, Toledo, Ohio— $397,102.27

11. PSC Trading TN, Los Angeles, Calif.— $333,071.40

12. Convoy Integrated, Bedford Park, Ill.— $324,725.57

13. Sommer and Maca, Chicago, Ill.— $253,603.90

14. Binswanger Glass, Memphis, Tenn.— $232,495.33

15. Autover, Philadelphia, Pa.— $219,788.76

16. Town of Enfield, N.C.— $216,063.78

17. Triumph Auto, Kingston— $212,392.42

18. Auto Glass Specialists, Madison, Wis.— $203,214.47

19. Cottondale Wood Products, Tuscaloosa, Ala.— $138,075.38

20. Waste Management, Atlanta, Ga.— $123,512.71

While most names on the list are familiar suppliers of auto glass products and services, a few are not. Safelite owns a plant in Enfield, N.C., and listed the town as a large creditor. Cottondale Wood Products is an Alabama supplier of wood pallets.

Safelite filed voluntarily under Chapter 11 in an effort to reorganize and restructure its debts. The company says it has funds available for all unsecured creditors. “No one is going to be impaired,” CEO John Barlow told AGRR magazine. “We have 100 percent of the money to pay everyone off. We want to knock down our rent on dark stores and restructure our debt, that’s all,” he said. Dark stores are stores where Safelite has a lease but is no longer operating a shop. Barlow said Safelite plans to pay its subcontractors for work even before it bills insurance companies or fleet companies for that work, and that business should continue as usual.

But others disagree. In an address before the Virginia Glass Association yesterday at its biennial convention, attorney Chuck Lloyd said that nothing is certain until a plan is approved by the courts. Lloyd said that shops doing work for Safelite would be well-advised to consult their attorneys and accountants and to remember the distinction between work where the insured or insurance company is the customer and work done through the SGC network. The SGC network is part of the bankruptcy and companies need to assess how much risk they wish to take.

AGRR

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