July/August 2000

Business As
Usual? Part II

Meeting of Safelite’s Creditors Elicits Little Response

by Debra Levy

What if you held a meeting for more than 1,000 creditors and nobody came? That’s what happened when the United States Bankruptcy Trustee held its required meeting of Safelite’s creditors in Federal Bankruptcy Court last Friday in Wilmington, Delaware. The 341 meeting, so called because it is required under section 341 of Chapter 11 of the U.S. bankruptcy code, attracted just three: representatives for two creditors along with the Counsel for the creditors’ committee.

The meeting of creditors is prescribed under bankruptcy law as a chance for the U.S. Trustee and any creditors to question the debtor about the bankruptcy and its plans for the future. By law, each and every creditor, no matter the size, must be notified of the meeting in advance and have an opportunity to question the debtor, if they so desire.

The nation’s largest retailer of auto glass repair and replacement services, filed for bankruptcy under Chapter 11 on June. For nearly an hour, Joseph McMann, an attorney/advisor with the U.S. Trustee’s office asked a series of pointed questions of Safelite senior vice president and chief financial officer Douglas Herron.

McMann first asked Herron to explain the factors that forced his company to file bankruptcy. “The roots of our bankruptcy are in the dynamics of the marketplace,” he replied. “There has been significant price compression in the market, which began in 1998 ... Our acquisition of the number two player in the industry [Safelite acquired Vistar in 1998], created an entity with 24 percent of the market. The next largest player had eight percent. After that, the industry is very fragmented.

“There was perceived, if not real, message to the industry to get aggressive. A key component of that aggressiveness was price compression ... I don’t care what kind of business you’re in—tires, paper clips, whatever—that kind of price compression is difficult to handle,” said Herron.

“With the merger, we had expected our revenue to double,” he continued. “It did. We expected our profitability to double, so we doubled the debt on our balance sheet. Instead of the earnings doubling, they remained flat. We had too much debt for earnings. Our company can’t operate its way out of this condition. ... We had even forecasted $30-40 million in cost-savings mechanisms [from the merger] and these were realized.”

“If we were guilty of not having foresight, it was that none us of us foresaw the magnitude of the price competition we would be facing,” Herron added. In response to a question from McMann, Herron said that no one involved in the merger had been asked to forecast the effect of reduced pricing levels if they were to occur.

In response to a question about ongoing operations, Herron said that Safelite had 520 stores prior to the bankruptcy and that there will be additional closings or consolidations as business dictates. “We do 75 percent of our business by mobile service now,” he said “Doing more mobile is an important part of our strategy. It has been for years. As we continue to emphasize mobile service, we will have less need for bricks and mortar. Our customers are voting for mobile service.”

McMann then asked Herron to give an accounting of the number of employees Safelite has and their job classifications and location. In response to another question, Herron said his company has a union agreement in place at its manufacturing plant in Enfield, NC, and “three or four agreements in New York and Connecticut.”

When McMann also questioned Herron about the travel expenses of company CEO John Barlow. “I see here that Mr. Barlow spent $135,000 on travel this past year,” said McMann. “This is more than two times more than any other corporate officer. Why is that?” “One of his key things is to spend time in the field,” said Herron. “John is the heart and soul of our company. He is the key, so he spends a lot of time in the field.”

When McMann inquired about current litigation involving Safelite, Herron responded that he would not characterize any of it as significant.

McMann also questioned the agreement with the Blackstone Group, a financial advisory firm that was paid part of a $3.7 million “success” fee with regard to the bankruptcy less than four months before filing. The U.S. Trustee’s office has objected to the fee and arguments were due to be heard this week.

Herron was asked how his company has done since the filing “Our business has been remarkably stable,” he said. “In April, May and June, we met or exceeded our budget and have an $18.2 million EBITA for the three months. We are pleased.”

“I searched the internet a bit in preparation for this meeting,” said McMann, “and I am wondering if there was any noticeable effect on your business from the 20/20 story?” The ABC news show had run an expose about the unsafe auto glass installation practices earlier this year.

“No, it was about the industry in general, not us,” said Herron. “Our company was not named. Overall the impact on the industry was positive. The show demonstrated the importance of safe installations and training.” McMann asked why Allstate Insurance is not renewing its agreement with Safelite. “Why did you lose the business?” he asked.

“We really don’t know,” said Herron. When we asked for clarification, all they told us is that there were three important factors in the request for bid: price, customer satisfaction and ease of administration ... We were never told specifically, but we speculate it was price.”

Herron also said that the company has hired a consulting service to help it renegotiate and possibly reduce the cost of its warehouse leases. He also said that Safelite engaged Burton-Marsteller for help countering the 20/20 story and that Safelite “hadn’t engaged them yet, but had talked to them on the phone about the bankruptcy.” The mega-public relations firm employs 2,200 public relations staff and handles media and government relations, public affairs and crisis management.

Herron showed a bit of sense of humor at the end of his grilling. He rode down the elevator with those who had been in the hearing. “ I don’t quite know if saying ‘thank you for coming’ is appropriate” he chuckled as the doors opened and creditors and debtor went their separate ways.

 Debra Levy is the publisher of AGRR.

 

Tortorello, Kellman and O’Brien Stand to be Losers if Motions are Granted

A motion of objection has been filed by one of the three former Vistar executives to the motion made by Safelite Glass Corporation to end its contractual obligations to the three.

In a motion made before the 3rd District Federal Bankruptcy Court in Delaware on July 12, 2000, former employee Thomas O’Brien argues that Safelite should allow his contract to run its full course until completed in December 2000.
In a motion before the U.S. Bankruptcy Court in Delaware on June 27, Safelite had asked that it be allowed to reject the remainder of certain contracts it has with former Vistar CEO William (Bill) Tortorello, Jack Kellman (son of former Globe Glass and Mirror president Joseph Kellman) and Thomas O’Brien, former vice president of field operations for Vistar. Vistar had been created when Globe Glass & Mirror merged with Windshields America. Safelite subsequently merged with Vistar in December 1997.

Safelite estimates that Tortorello is still due approximately $376,928, excluding benefits, under terms of the agreement, which ends in December 2000.
Kellman’s Consulting Agreement was signed in July 1999 and calls for him to be paid $150,000 annually and to receive a bonus of $100,000 within 15 days of renewal of the Best Efforts Agreement between Allstate and Safelite, and an additional $50,000 if such an agreement occurs in 1999. Kellman was also due a bonus of $25,000 for every point (one percent) of compliance under the Allstate program in excess of an agreed-upon target. Safelite estimates Kellman is still due $312,000, exclusive of bonus and benefits, under the agreement which is also scheduled to end in December 2000.
O’Brien is still due approximately $188,462, excluding benefits, under the terms of his employment agreement with Vistar. O’Brien’s employment had been terminated in September 1998 and his employment contract required that Safelite make severance payments based on his annual salary of $350,000 and continuing until December 2000.

In his objection, O’Brien’s attorney argues that his clients’ “ability to be employed in the industry is somewhat restricted by the employment agreement.” He also says “Rejection of this contract will permit Mr. O’Brien to complete with Safelite in the industry utilizing any knowledge that Mr. O’Brien possesses and would give rise to claims under the Wage Payment and Collection Act.

At press time, Kellman had filed a limited objection to the motion, but withdrew it later. Tortorello had not filed similar objections.

AGRR

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