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The following is an excerpt from a 10-K SEC Filing, filed by SAFELITE GLASS CORP on 6/15/1999.
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SAFELITE GLASS CORP - 10-K - 19990615 - RESULTS_OF_OPERATIONS

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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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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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

16

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

17

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.

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