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 QUARTERLY PERIOD ENDED JULY 2, 2002 OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER: 333-79419
---------
VOLUME SERVICES AMERICA, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 57-0969174
-------- ----------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
201 EAST BROAD STREET, SPARTANBURG, SOUTH CAROLINA 29306
- -------------------------------------------------- -----------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (864) 598-8600
------------------
N/A
------------------------------
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities 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.
(X) YES ( ) NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the registrant's Common Stock, par value
$.01 per share, at August 15, 2002, was 100.
VOLUME SERVICES AMERICA, INC.
INDEX
PART I FINANCIAL INFORMATION...............................................1
Item 1. Financial Statements..............................................1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................17
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......21
PART II OTHER INFORMATION.................................................21
Item 6. Exhibits and Reports on Form 8-K..................................21
i
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JULY 2, 2002 AND JANUARY 1, 2002 (IN THOUSANDS, EXCEPT PER SHARE DATA)
- ----------------------------------------------------------------------
July 2, January 1,
ASSETS 2002 2002
---------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents $ 18,174 $ 15,142
Accounts receivable, less allowance for doubtful accounts of
$806 and $984 at July 2, 2002 and January 1, 2002,
respectively 20,365 18,386
Merchandise inventories 16,510 13,221
Prepaid expenses and other 2,525 2,469
Deferred tax asset 701 701
-------- --------
Total current assets 58,275 49,919
-------- --------
PROPERTY AND EQUIPMENT:
Leasehold improvements 49,027 47,548
Merchandising equipment 48,599 46,410
Vehicles and other equipment 8,954 8,426
Construction in process 554 176
-------- --------
Total 107,134 102,560
Less accumulated depreciation and amortization (49,912) (44,772)
-------- --------
Property and equipment, net 57,222 57,788
-------- --------
OTHER ASSETS:
Contract rights, net 96,603 80,680
Cost in excess of net assets acquired, net 46,457 46,457
Deferred financing costs, net 7,801 8,517
Trademarks, net 17,049 17,049
Deferred tax asset 489 32
Other 4,959 5,458
-------- --------
Total other assets 173,358 158,193
-------- --------
TOTAL ASSETS $288,855 $265,900
======== ========
1
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)(CONTINUED)
JULY 2, 2002 AND JANUARY 1, 2002
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- ----------------------------------------------------------------------
July 2, January 1,
LIABILITIES AND STOCKHOLDERS' DEFICIENCY 2002 2002
----------------- -----------------
CURRENT LIABILITIES:
Short-term note payable $ 0 $ 4,750
Current maturities of long-term debt 1,150 1,150
Current maturities of capital lease obligation - 267
Accounts payable 21,204 14,977
Accrued salaries and vacations 12,050 8,546
Liability for insurance 5,100 2,934
Accrued taxes, including income taxes 5,452 3,235
Accrued commissions and royalties 36,282 11,901
Accrued interest 3,882 3,847
Other 5,280 4,439
-------- --------
Total current liabilities 90,400 56,046
-------- --------
LONG TERM LIABILITIES:
Long-term debt 209,825 218,400
Liability for insurance 678 838
Other liabilities 876 876
-------- --------
Total long-term liabilities 211,379 220,114
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Common stock, $0.01 par value - authorized: 1,000 shares; issued:
526 shares; outstanding: 332 shares - -
Additional paid-in capital 67,058 66,852
Accumulated deficit (29,091) (26,062)
Accumulated other comprehensive loss (312) (471)
Treasury stock - at cost (194 shares) (49,500) (49,500)
Loans to related parties (1,079) (1,079)
-------- --------
Total stockholders' deficiency (12,924) (10,260)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $288,855 $265,900
======== ========
See notes to consolidated financial statements.
2
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(LOSS)(UNAUDITED)
THIRTEEN AND TWENTY-SIX WEEK PERIODS ENDED JULY 2, 2002 AND JULY 3, 2001
(In Thousands)
- ------------------------------------------------------------------------
Thirteen Weeks Ended Twenty-six Weeks Ended
------------------------------------------------------------------------
July 2, July 3, July 2, July 3,
2002 2001 2002 2001
---------------- ---------------- ---------------- ----------------
Net sales $ 166,421 $ 157,646 $ 254,261 $ 240,840
Cost of sales 134,696 127,448 209,078 198,018
Selling, general, and administrative 14,534 12,805 26,584 23,529
Depreciation and amortization 6,679 6,077 12,272 12,085
Contract related losses 699 3,199 699 3,199
--------- --------- --------- ---------
Operating income 9,813 8,117 5,628 4,009
Interest expense 5,175 6,006 10,532 12,551
Other income, net (34) (44) (1,418) (65)
--------- --------- --------- ---------
Income (loss) before income taxes 4,672 2,155 (3,486) (8,477)
Income tax provision (benefit) 831 -- (457) --
--------- --------- --------- ---------
Net income (loss) 3,841 2,155 (3,029) (8,477)
Other comprehensive gain (loss) - foreign currency
translation adjustment 173 149 159 (43)
--------- --------- --------- ---------
Comprehensive income (loss) $ 4,014 $ 2,304 $ (2,870) $ (8,520)
========= ========= ========== ==========
See notes to consolidated financial statements.
3
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY (UNAUDITED)
FOR THE PERIOD JANUARY 2, 2002 TO JULY 2, 2002
(In Thousands, Except Per Share Data)
Accumulated
Additional Other Loans to
Common Common Paid-in Accumulated Comprehensive Treasury Related
Shares Stock Capital Deficit Loss Stock Parties Total
BALANCE, JANUARY 1, 2002 332 $ - $66,852 $(26,062) $(471) $(49,500) $(1,079) $(10,260)
Noncash compensation - - 206 - - - - 206
Foreign currency translation - - - - 159 - 159
Net loss - - - (3,029) - - - (3,029)
----- ----- ------- ------- ------ ------- ------ -------
BALANCE, JULY 2, 2002 332 - $67,058 $(29,091) $ (312) $(49,500) $(1,079) $(12,924)
===== ===== ======= ======= ====== ======== ======= =========
See notes to consolidated financial statements.
4
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
TWENTY-SIX WEEK PERIODS ENDED JULY 2, 2002 AND JULY 3, 2001
(In Thousands)
Twenty-six Weeks Ended
---------------------------------------
---------------------------------------
July 2, July 3,
2002 2001
---------------- ----------------
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,029) $ (8,477)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 12,272 12,085
Amortization of deferred financing costs 716 716
Contract related losses 699 3,199
Noncash compensation 206 107
Deferred tax change (457) -
Gain on disposition of assets (10) (11)
Other 159 (43)
Changes in assets and liabilities:
Decrease (increase) in assets:
Accounts receivable (1,979) 382
Merchandise inventories (3,289) (4,505)
Prepaid expenses (56) 54
Other assets (232) (1,097)
Increase in liabilities:
Accounts payable 2,116 4,349
Accrued salaries and vacations 3,504 460
Liability for insurance 2,006 54
Other liabilities 27,474 17,741
------- -------
Net cash provided by operating activities 40,100 25,014
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (4,800) (4,361)
Proceeds from sale of property and equipment 10 49
Contract rights acquired, net (22,797) (9,133)
------- -------
Net cash used in investing activities (27,587) (13,445)
------- -------
5
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)(UNAUDITED)
TWENTY-SIX WEEK PERIODS ENDED JULY 2, 2002 AND JULY 3, 2001
(In Thousands)
Twenty-six Weeks Ended
-------------------------------------------
July 2, July 3,
2002 2001
----------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments - revolving loans $ (12,750) $ (3,500)
Principal payments on long-term debt (575) (575)
Principal payments on capital lease obligations (267) (110)
Increase in bank overdrafts 4,111 2,532
Loans to related parties - (35)
--------- ---------
Net cash used in financing activities (9,481) (1,688)
--------- ---------
INCREASE IN CASH 3,032 9,881
CASH AND CASH EQUIVALENTS:
Beginning of period 15,142 14,726
--------- ---------
End of period $ 18,174 $ 24,607
========= =========
See notes to consolidated financial statements.
6
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
TWENTY-SIX WEEK PERIODS ENDED JULY 2, 2002 AND JULY 3, 2001
- -----------------------------------------------------------
1. GENERAL
Volume Services America Holdings, Inc. ("Volume Holdings," and together
with its subsidiaries, the "Company") is a holding company, the principal
assets of which are the capital stock of its subsidiary, Volume Services
America, Inc. ("Volume Services America"). Volume Holdings' financial
information is therefore substantially the same as that of Volume Services
America. Volume Services America is also a holding company, the principal
assets of which are the capital stock of its subsidiaries, Volume
Services, Inc. ("Volume Services") and Service America Corporation
("Service America"). The Company is owned by its senior management,
Blackstone Capital Partners II Merchant Banking Fund, L.P. ("BCP II"), and
General Electric Capital Corporation ("GE Capital").
The accompanying financial statements of Volume Holdings have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission for interim financial reporting. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. However,
such information reflects all adjustments (consisting solely of normal
recurring adjustments) which are, in the opinion of management, necessary
for a fair statement of results for the interim periods.
The results of operations for the twenty-six week period ended July 2,
2002 are not necessarily indicative of the results to be expected for the
fifty-two week fiscal year ending December 31, 2002 due to the seasonal
aspects of the business. The accompanying consolidated financial
statements and notes thereto should be read in conjunction with the
audited financial statements and notes thereto for the year ended January
1, 2002 included in the Company's annual report on Form 10-K.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassifications - Certain amounts in 2001 have been reclassified, where
applicable, to conform to the financial statement presentation used in
2002.
Insurance - At the beginning of fiscal 2002, the Company adopted a high
deductible insurance program for general liability, auto liability and
workers' compensation risk supplemented by stop-loss type insurance
policies. Prior to fiscal 2002, the Company had a premium based insurance
program for these risks. In fiscal 2002, management determined its year
end target estimate of the reserve for the deductible required considering
a number of factors, including historical experience and actuarial
assessment of past years. Actual results could differ from this estimate.
New Accounting Standards - In July 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 142 ("SFAS 142") "Goodwill and Other Intangible
Assets", which became effective for the Company on January 2, 2002. SFAS
142 requires, among other things, the discontinuance of goodwill and
trademarks amortization. In addition, the standard includes provisions for
the reclassification of certain existing recognized intangibles as
goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously
reported goodwill and the identification of reporting units for purposes
of assessing potential future impairments of goodwill. The Company has
adopted SFAS 142 and completed the required transitional impairment test
and found there to be no related impairments. In accordance with the
standard, the Company has discontinued the amortization of goodwill and
7
trademarks which was $1.2 million for the twenty-six weeks ended July 3,
2001. A reconciliation of net income (loss) to adjusted net income (loss)
is as follows:
Thirteen Weeks Ended Twenty Six Weeks Ended
-------------------- ----------------------
July 2, July 3, July 2, July 3,
2002 2001 2002 2001
--------- ---------- --------- -----------
(In thousands)
Reported net income (loss) $ 3,841 $ 2,155 $(3,029) $(8,477)
Goodwill amortization - 443 - 866
Trademark amortization - 171 - 343
--------- ---------- --------- -----------
Adjusted net income (loss) $ 3,841 $ 2,769 $(3,029) $(7,248)
--------- ---------- --------- -----------
--------- ---------- --------- -----------
In October 2001, the FASB issued SFAS No. 144 ("SFAS 144") "Accounting for
the Impairment or Disposal of Long-Lived Assets" which addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets. SFAS 144 superseded Statement of Financial Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". SFAS 144 became effective for the Company on
January 2, 2002. The adoption of SFAS 144 had no significant impact on the
Company's financial position or results of operation.
Contract Rights - During the twenty-six weeks ended July 2, 2002, the
Company entered into contracts to provide specified concession and other
services. Contract rights were purchased for approximately $25.1 million
and will be amortized over the lives of the agreements.
Income taxes - The Company's income tax expense of $.8 million for the
thirteen weeks ended July 2, 2002 reduces the tax benefit of $1.3 million
recorded in the first quarter 2002. The benefit for the twenty-six weeks
ended July 2, 2002 is calculated using the projected effective tax rate for
fiscal 2002 and takes into account the projected reversal of approximately
$.8 million of valuation allowances on deferred tax assets.
3. CONTRACT RELATED LOSSES
Contract related losses for the twenty-six weeks ended July 2, 2002
reflect an impairment charge of approximately $699,000 for the write-down
of contact rights. For the twenty-six weeks ended July 3, 2001, contract
related losses consist of approximately $900,000 for the write-down of
property and equipment and a receivable reserve of $2.3 million related to
two of the Company's customers which filed for reorganization under
Chapter 11 of the Bankruptcy Code.
4. COMMITMENTS AND CONTINGENCIES
The Company generates a significant portion of its cash flows from Major
League Baseball ("MLB") games during the third quarter of its fiscal year.
The MLB players union and MLB team owners are negotiating a new labor
contract, and the union has indicated its intention to strike if if an
agreement is not reached. Conceivably, the MLB team owners could take
action to lock out the players if negotiations are unsucessful, although
they have not indicated any intention to do so. If a strike or lock out
caused the cancellation of a substantial number of games, it could
materially adversely affect the Company's results of operations. In
addition, the MLB Commissioner on July 10, 2002 warned that one MLB team
was at risk of not making its payroll payments and a second team could
possibly become insolvent prior to the end of the 2002 MLB season. Should
either of these teams be clients of the Company and become insolvent, their
insolvency could conceivably have a material adverse effect on the
Company's future cash flows and the recoverability of its assets employed
at the venue.
8
We are from time to time involved in various legal proceedings incidental
to the conduct of our business. In the opinion of management, any liability
arising out of any currently pending proceeding will not have a material
adverse effect on our financial condition or results of operations.
5. NON-GUARANTOR SUBSIDIARIES FINANCIAL STATEMENTS
The Company's $100 million in 11 1/4% senior subordinated notes due 2009
are jointly and severally guaranteed by Volume Holdings and all of the
subsidiaries of Volume Services America (the "Guarantor Subsidiaries"),
except for certain non-wholly owned U.S. subsidiaries and one non-U.S.
subsidiary (together the "Non-Guarantor Subsidiaries"). The following table
sets forth the condensed consolidated financial statements of Volume
Holdings, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries as
of July 2, 2002 and January 1, 2002 (in the case of the balance sheets),
for the thirteen and twenty-six week periods ended, July 2, 2002 and July
3, 2001 (in the case of the statements of operations) and for the
twenty-six week periods ended, July 2, 2002 and July 3, 2001 (in the case
of the statement of cash flows).
Consolidating Condensed Balance Sheet, July 2, 2002 (in thousands)
Combined Combined
Parent Guarantor Non-guarantor
Assets Company Subsidiaries Subsidiaries Eliminations Consolidated
Current assets:
Cash and cash equivalents $ - $ 17,971 $ 203 $ - 18,174
Accounts receivable - 18,717 1,648 - 20,365
Other current assets - 25,343 1,508 (7,115) 19,736
-------- -------- ------- ------ -------
Total current assets - 62,031 3,359 (7,115) 58,275
Property and equipment, net - 53,784 3,438 - 57,222
Contract rights, net - 96,192 411 - 96,603
Cost in excess of net assets
acquired, net - 46,457 - - 46,457
Investment in subsidiaries (12,924) - - 12,924 -
Other assets - 30,276 22 - 30,298
-------- -------- ------ ------ ------
Total assets $(12,924) $288,740 $7,230 $5,809 $288,855
========= ======== ====== ====== ========
Liabilities and Stockholders'
Deficiency
Current liabilities:
Intercompany liabilities $ - $ - $7,115 $(7,115) $ -
Other current liabilities - 88,198 2,202 - 90,400
-------- ------- ------ ------- -------
Total current liabilities - 88,198 9,317 (7,115) 90,400
Long-term debt - 209,825 - - 209,825
Other liabilities - 1,554 - - 1,554
-------- ------- ------ ------- -------
Total liabilities - 299,577 9,317 (7,115) 301,779
-------- ------- ------ ------- -------
Stockholders' deficiency:
Common stock - - - - -
Additional paid-in capital 67,058 67,058 - (67,058) 67,058
Accumulated deficit (29,091) (27,316) (1,775) 29,091 (29,091)
Treasury stock and other (50,891) (50,579) (312) 50,891 (50,891)
-------- ------- ------ ------- -------
Total stockholders' deficiency (12,924) (10,837) (2,087) 12,924 (12,924)
-------- ------- ------ ------- -------
Total liabilities and stockholders'
deficiency $(12,924) $288,740 $ 7,230 $ 5,809 $ 288,855
========= ======== ======= ======= =========
9
Consolidating Condensed Statement of Operations and Comprehensive Income
Thirteen Week Period Ended July 2, 2002 (in thousands)
Combined Combined
Volume Guarantor Non-guarantor
Holdings Subsidiaries Subsidiaries Eliminations Consolidated
Net sales $ $157,568 $ 8,853 $ $ 166,421
Cost of sales 127,173 7,523 134,696
Selling, general, and administrative 13,685 849 14,534
Depreciation and amortization 6,437 242 6,679
Contract related losses 699 - 699
------- ------ -------
Operating income 9,574 239 9,813
Interest expense 5,160 15 5,175
Other income, net (33) (1) (34)
------- ------ -------
Income before income taxes 4,447 225 4,672
Income tax provision 831 - 831
------- ------ -------
Equity in earnings of subsidiaries 3,841 - - (3,841) -
------ ------- ------ ------ -------
Net income 3,841 3,616 225 (3,841) 3,841
Other comprehensive gain -
foreign currency translation - - 173 - 173
adjustment ------ ------- ------ ------ -------
Comprehensive income $ 3,841 $ 3,616 $ 398 $(3,841) $4,014
======= ======= ===== ======= ======
10
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
TWENTY-SIX WEEK PERIOD ENDED JULY 2, 2002 (IN THOUSANDS)
COMBINED COMBINED
VOLUME GUARANTOR NON-GUARANTOR
HOLDINGS SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Net sales $ $239,626 $ 14,635 $ $254,261
Cost of sales 196,435 12,643 209,078
Selling, general, and administrative 25,187 1,397 26,584
Depreciation and amortization 11,808 464 12,272
Contract related losses 699 - 699
------- ------- -------
Operating income 5,497 131 5,628
Interest expense 10,517 15 10,532
Other income, net (1,417) (1) (1,418)
------- ------- -------
Income (loss) before income taxes (3,603) 117 (3,486)
Income tax benefit (457) - (457)
Loss in earnings of subsidiaries (3,029) - - 3,029 -
-------- -------- ------- ------ -------
Net income (loss) (3,029) (3,146) 117 3,029 (3,029)
Other comprehensive gain -
foreign currency translation
adjustment - - 159 - 159
--------- -------- ------- ------ -------
Comprehensive income (loss) $ (3,029) $(3,146) $ 276 $3,029 $(2,870)
========= ======== ======= ====== =======
11
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
TWENTY-SIX WEEK PERIOD ENDED JULY 2, 2002 (IN THOUSANDS)
COMBINED COMBINED
VOLUME GUARANTOR NON-GUARANTOR
HOLDINGS SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
Cash Flows Provided by Operating Activities $ - $ 39,590 $ 510 $ 40,100
------- -------- ------- --------
Cash Flows from Investing Activities:
Purchase of property and equipment, net - (4,327) (473) (4,800)
Proceeds from sale of property, plant and
equipment 10 10
Contract rights acquired, net - (22,797) - (22,797)
------- -------- ------- --------
Net cash used in investing activities - (27,114) (473) (27,587)
------- -------- ------- --------
Cash Flows from Financing Activities:
Net repayments - revolving loans - (12,750) - (12,750)
Principal payments on long-term debt - (575) - (575)
Principal payments on capital lease
obligations - (267) - (267)
Increase in bank overdrafts - 4,111 - 4,111
------- -------- ------- --------
Net cash used in financing activities - (9,481) - (9,481)
------- -------- ------- --------
Increase in cash - 2,995 37 3,032
Cash and cash equivalents - beginning of period - 14,976 166 15,142
------- -------- ------- --------
Cash and cash equivalents - end of period $ - $17,971 $ 203 $ 18,174
======== ======== ======= ========
12
Consolidating Condensed Balance Sheet, January 1, 2002 (in thousands)
Combined Combined
Parent Guarantor Non-guarantor
Assets Company Subsidiaries Subsidiaries Eliminations Consolidated
Current assets:
Cash and cash equivalents $ $ 14,976 $ 166 $ $ 15,142
Accounts receivable 16,471 1,915 18,386
Other current assets 23,667 1,028 (8,304) 16,391
-------- -------- ------- ------- --------
Total current assets 55,114 3,109 (8,304) 49,919
Property and equipment, net 54,607 3,181 57,788
Contract rights, net 79,890 790 80,680
Cost in excess of net assets
acquired, net 46,457 46,457
Investment in subsidiaries (10,260) 10,260
Other assets 31,050 6 31,056
-------- -------- ------- ------- --------
Total assets $(10,260) $ 267,118 $ 7,086 $ 1,956 $265,900
========= ========= ======= ======= ========
Liabilities and Stockholders'
Deficiency
Current liabilities:
Intercompany liabilities $ $ $ 8,304 $(8,304) $
Other current liabilities 54,901 1,145 56,046
--------- -------- ------- ------- --------
Total current liabilities 54,901 9,449 (8,304) 56,046
Long-term debt 218,400 218,400
Other liabilities 1,714 1,714
-------- -------- ------- ------- --------
Total liabilities 275,015 9,449 (8,304) 276,160
-------- -------- ------- ------- --------
Stockholders' deficiency:
Common stock
Additional paid-in capital 66,852 66,852 (66,852) 66,852
Accumulated deficit (26,062) (24,170) (1,892) 26,062 (26,062)
Treasury stock and other (51,050) (50,579) (471) 51,050 (51,050)
-------- -------- ------- ------- --------
Total stockholders'
deficiency (10,260) (7,897) (2,363) 10,260 (10,260)
-------- -------- ------- ------- --------
Total liabilities and stockholders'
deficiency $(10,260) $267,118 $ 7,086 $ 1,956 $265,900
========= ======== ======== ======= ========
13
Consolidating Condensed Statement of Operations and Comprehensive Income
Thirteen Week Period Ended July 3, 2001 (in thousands)
Combined Combined
Volume Guarantor Non-guarantor
Holdings Subsidiaries Subsidiaries Eliminations Consolidated
Net sales $ - $151,924 $ 5,722 $ - $157,646
Cost of sales 122,598 4,850 127,448
Selling, general, and
administrative 12,826 (21) 12,805
Depreciation and amortization 6,047 30 6,077
Contract related losses - 3,199 - - 3,199
------- -------- ------- ------- -------
Operating income 7,254 863 8,117
Interest expense 5,968 38 6,006
Other income, net - (35) (9) - (44)
------- -------- ------- ------- -------
Income before income taxes 1,321 834 2,155
Equity in earnings of subsidiaries 2,155 - - (2,155) -
------- -------- ------- ------- -------
Net income 2,155 1,321 834 (2,155) 2,155
Other comprehensive gain -
foreign currency translation
adjustment - - 149 - 149
------- -------- ------- ------- -------
Comprehensive income $ 2,155 $ 1,321 $ 983 $(2,155) $ 2,304
======= ======== ======= ======= =======
14
Consolidating Condensed Statement of Operations and Comprehensive Income (Loss)
Twenty-six Week Period Ended July 3, 2001 (in thousands)
Combined Combined
Volume Guarantor Non-guarantor
Holdings Subsidiaries Subsidiaries Eliminations Consolidated
Net sales $ - $228,597 $12,243 $ - $240,840
Cost of sales 187,057 10,961 198,018
Selling, general, and
administrative 22,757 772 23,529
Depreciation and amortization 11,698 387 12,085
Contract related losses - 3,199 - - 3,199
-------- -------- -------- -------- --------
Operating income 3,886 123 4,009
Interest expense 12,551 - 12,551
Other income, net - (46) (19) - (65)
-------- -------- -------- -------- --------
Income (loss) before income taxes (8,619) 142 (8,477)
Loss in earnings of subsidiaries (8,477) - - 8,477 -
-------- -------- -------- -------- --------
Net income (loss) (8,477) (8,619) 142 8,477 (8,477)
Other comprehensive loss -
foreign currency translation
adjustment - - (43) - (43)
-------- -------- -------- -------- --------
Comprehensive income (loss) $ (8,477) $ (8,619) $ 99 $ 8,477 $ (8,520)
======== ======== ======== ======== ========
15
Consolidating Condensed Statement of Cash Flows
Twenty-six Week Period Ended July 3, 2001 (in thousands)
Combined Combined
Volume Guarantor Non-guarantor
Holdings Subsidiaries Subsidiaries Consolidated
Cash Flows from Operating Activities $ - $ 25,348 $ (334) $ 25,014
-------- ------- ------ --------
Cash Flows from Investing Activities:
Purchase of property and equipment, net - (4,338) (23) (4,361)
Proceeds from sale of property and equipment - 49 - 49
Contract rights acquired, net - (9,133) - (9,133)
-------- ------- ------ --------
Net cash used in investing activities - (13,422) (23) (13,445)
-------- ------- ------ --------
Cash Flows from Financing Activities:
Principal payments on long-term debt - (575) - (575)
Net repayments - revolving loans - (3,500) - (3,500)
Principal payments on capital lease
obligations - (110) - (110)
Increase in bank overdrafts - 2,532 - 2,532
Increase in loans to related parties - (35) - (35)
-------- ------- ------ --------
Net cash used in financing activities - (1,688) - (1,688)
-------- ------- ------ --------
Increase (decrease) in cash - 10,238 (357) 9,881
Cash and cash equivalents - beginning
of period - 14,158 568 14,726
-------- ------- ------ --------
Cash and cash equivalents - end of period $ - $24,396 $ 211 $ 24,607
======== ======= ====== ========
****************
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
SEASONALITY AND QUARTERLY RESULTS
The Company's sales and operating results have varied and are expected to
continue to vary, from quarter to quarter, as a result of factors that include:
o seasonal patterns within the industry;
o the unpredictability in the number, timing and type of new contracts;
o the timing of contract expirations and events; and
o the level of attendance at the facilities that we serve.
Business at the principal types of facilities that we serve is seasonal in
nature, with MLB and minor league baseball sales concentrated in the second and
third quarter, the majority of National Football League ("NFL") activity
occurring in the fourth quarter and convention centers and arenas generally
hosting fewer events during the summer months. Results of operations for any
particular quarter may not be indicative of results of operations for future
periods.
Set forth below are comparative net sales by quarter (in thousands) for the
first two quarters of fiscal 2002, fiscal 2001 and fiscal 2000:
2002 2001 2000
---- ---- ----
1st Quarter $87,840 $ 83,194 $ 80,120
2nd Quarter $166,421 $157,646 $143,637
3rd Quarter - $177,559 $188,289
4th Quarter - $124,714 $110,487
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED JULY 2, 2002 COMPARED TO THIRTEEN WEEKS ENDED JULY 3, 2001
Net Sales - For the thirteen weeks ended July 2, 2002, the Company's net sales
increased $8.8 million or 5.6% to $166.4 million compared to $157.6 million for
the thirteen weeks ended July 3, 2001. The increased sales were principally
attributable to $5.1 million in sales from newly acquired service contracts and
an increase in sales at the Company's convention center accounts of $3.6
million, primarily due to the expansion of one major facility.
Cost of sales - During the thirteen weeks ended July 2, 2002, cost of sales
increased to $134.7 million from $127.4 million for the comparable period last
year. The related increase of $7.3 million is primarily attributable to the
higher level of sales. As a percentage of net sales, these costs increased to
80.9% versus 80.8% for the same period of the prior year. The slight increase
was primarily the result of higher personnel costs related to an increase in
insurance and workers' compensation partially offset by a decline, as a
percentage of net sales, in cost of goods sold as a result of significant
savings achieved at certain accounts.
Selling, general and administrative expenses - Selling, general and
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administrative expenses of $14.5 million for the thirteen weeks ended July 2,
2002 increased approximately 0.6% as a percentage of net sales from the prior
year period. The increase was primarily the result of higher insurance costs due
to dramatic price increases in the insurance market post September 11, 2001,
higher corporate overhead expenses related to the addition of management
positions and an increase in professional fees.
Depreciation and amortization - For the thirteen weeks ended July 2, 2002,
depreciation and amortization was $6.7 million as compared to $6.1 million the
prior year period. The increase was principally attributable to higher
amortization expense related to investments for the renewal and/or
acquisition of certain contracts, partially offset by a decline in amortization
as a result of the discontinuation of goodwill and trademark amortization ($0.6
million) in accordance with Statement of Financial Accounting Standards No. 142
"Goodwill and Other Intangible Assets".
Contract related losses - For the thirteen weeks ended July 2, 2002, contract
related losses of $0.7 million reflect an impairment charge for the write-down
of contact rights. In the prior year period, contract related losses reflect an
impairment charge of $0.9 million and a receivable reserve of $2.3 million
related to two of the Company's customers which filed for reorganization under
Chapter 11 of the Bankruptcy Code.
Operating income - Operating income increased approximately $1.7 million from
the prior year period primarily due to the factors discussed above.
Interest expense - Interest expense declined $0.8 million from the prior year
period chiefly as a consequence of lower interest rates on the Company's
adjustable rate debt.
Income taxes - Management has evaluated the available evidence about future
taxable income and other possible sources of realization of deferred tax assets
and based on its best current estimates believes that taxable income or benefit
will be realized in fiscal 2002. For the thirteen weeks ended July 2, 2002, it
has recognized a tax provision of approximately $0.8 million to reduce the
benefit of $1.3 million recorded in the first quarter 2002, in comparison to the
recognition of no tax expense or benefit in the prior year period.
TWENTY-SIX WEEKS ENDED JULY 2, 2002 COMPARED TO TWENTY-SIX WEEKS ENDED JULY 3,
2001
Net Sales - Net sales of $254.3 million for the twenty-six weeks ended July 2,
2002 increased $13.5 million (approximately 6%) from $240.8 million in the prior
year period. The increase was attributable in part to $8.8 million in sales from
newly acquired service contracts and a $3.6 million increase in sales at the
Company's convention center accounts, primarily as the result of the expansion
of one major venue. In addition, NFL sales increased approximately $2.6 million
as a result of five NFL games played during the period including four games
which were postponed due to the events of September 11, 2001 and Super Bowl
XXXVI. In the prior year period, two NFL playoff games were played at facilities
served by the Company. Partially offsetting these improvements was the closure
of certain contracts which accounted for a $4.1 decline in net sales.
Cost of sales - The Company's cost of sales as a percentage of net sales
remained constant at 82.2% in both the current and prior year periods.
Selling, general and administrative expenses - Selling, general and
administrative expenses of $26.6 million increased approximately 0.7% as a
percentage of net sales from the prior year period, primarily as a result of
higher insurance costs, an increase in corporate overhead expenses due to the
addition of management positions and an increase in professional fees.
Depreciation and amortization - Depreciation and amortization of $12.3 million
for the thirteen weeks ended July 2, 2002 increased $0.2 million from the prior
year period. The increase was primarily due to higher amortization associated
with investments for the renewal and/or acquisition of certain service
contracts. The increase was partially offset by the discontinuation of goodwill
and trademark amortization ($1.2 million) in accordance with Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets"
which became effective for the Company on January 2, 2002.
18
Contract related losses - For the twenty-six weeks ended July 2, 2002, contract
related losses of $0.7 million reflect an impairment charge related to the
write-down of contract rights. In the prior year period, contract related losses
reflect an impairment charge of $0.9 million and a receivable reserve of $2.3
million related to two of the Company's customers which filed for reorganization
under Chapter 11 of the Bankruptcy Code.
Operating income - Operating income increased approximately $1.6 million from
the prior year period primarily due to the factors discussed above.
Interest expense - Interest expense declined $2.0 million from the prior year
period chiefly as a consequence of lower interest rates on the Company's
adjustable rate debt.
Other income - Service America received approximately $1.4 million in connection
with funds set aside to satisfy creditors pursuant to a plan of reorganization
approved in 1993. Under the plan of reorganization, the company was required to
deposit funds with a disbursing agent for the benefit of its creditors. Any
funds which remained unclaimed by its creditors after a period of two years from
the date of any distribution were forfeited and all interest in those funds
reverted back to Service America. Counsel has advised that Service America has
no obligation to escheat such funds.
Income taxes - Management has evaluated the available evidence about future
taxable income and other possible sources of realization of deferred tax assets
and based on its best current estimates believes taxable income or benefit will
be realized in fiscal 2002. Accordingly in the twenty-six weeks ended July 2,
2002, it has recognized a tax benefit of approximately $0.5 million, in
comparison to the recognition of no tax expense or benefit in the prior year
period.
LIQUIDITY AND CAPITAL RESOURCES
For the twenty-six weeks ended July 2, 2002, net cash provided by operating
activities was $40.1 million compared to net cash provided by operating
activities of $25.0 million in the prior year period. The $15.1 million increase
from the prior year period was principally attributable to a decrease of $5.4
million in net losses mainly as the result of the $1.6 million improvement in
operating income, a $2.1 million decline in interest expense and the recovery of
$1.4 million in funds by Service America Corporation, as discussed above.
Additionally, the Company's liabilities increased as compared to the prior year
period chiefly due to timing and higher accrued commissions and other
contractual obligations related to the Company's MLB clients.
Net cash used in investing activities was $27.6 million in the twenty-six weeks
ended July 2, 2002 compared to $13.4 million in the prior year period which
primarily reflects a higher level of investment in contract rights and property
and equipment associated with renewals of existing contracts in the current
period.
For the twenty-six weeks ended July 2, 2002, net cash used in financing
activities was $9.5 million as compared to $1.7 million in the prior year
period, primarily reflecting higher net repayments of funds borrowed under the
Company's revolving credit facility.
FUTURE LIQUIDITY AND CAPITAL RESOURCES
We believe that cash flow from operating activities, together with borrowings
available under the revolving credit facility, will be sufficient to fund our
currently anticipated capital investment requirements, interest and principal
payment obligations and working capital requirements. We anticipate total
capital investments of $48.2 million in fiscal 2002. At July 2, 2002, $60.5
million of the Company's $75.0 million revolving credit facility was available
to be borrowed with $14.5 million of outstanding, undrawn letters of credit
reducing availability.
OUTLOOK
The Company generates a significant portion of its cash flows from MLB games
during the third quarter of its fiscal year. The MLB players union and MLB team
19
owners are negotiating a new labor contract, and the union has indicated its
intention to strike if an agreement is not reached. Conceivably, the MLB team
owners could take action to lock out the players if the negotiations are
unsuccessful, although they have not indicated any intention to do so. If a
strike or lock out caused the cancellation of a substantial number of games, it
could materially adversely affect the Company's results of operations. In
addition, the MLB Commissioner on July 10, 2002 warned that one MLB team was at
risk of not making its payroll payments and a second team could possibly become
insolvent prior to the end of the 2002 MLB season. Should either of these teams
be clients of the Company and become insolvent, their insolvency could
conceivably have a material adverse effect on the Company's future cash flows
and the recoverability of its assets employed at the venue.
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 142 ("SFAS 142") "Goodwill and
Other Intangible Assets", which became effective for the Company on January 2,
2002. SFAS 142 requires, among other things, the discontinuance of goodwill and
trademarks amortization. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. The Company has adopted SFAS 142 and completed the
required transitional impairment test and found there to be no related
impairments. In accordance with the standard, the Company has discontinued the
amortization of goodwill and trademarks which was $1.2 million for the
twenty-six weeks ended July 3, 2001.
In October 2001, the FASB issued SFAS No. 144 ("SFAS 144") "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS 144 superseded Statement of Financial Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". SFAS 144 became effective for the Company on January 2, 2002. The adoption
of SFAS 144 had no significant impact on the Company's financial position or
results of operation.
FORWARD LOOKING AND CAUTIONARY STATEMENTS
Except for the historical information and discussions contained herein,
statements contained in this Form 10-Q may constitute "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements involve a number of risks, uncertainties and other
factors that could cause actual results to differ materially, including, among
other things:
o our high degree of leverage and significant debt service obligations;
o our history of net losses;
o the level of attendance at events held at the facilities at which we
provide our services and the level of spending on the services that we
provide at such events;
o the risk of labor stoppages affecting sports teams at whose facilities
we provide our services;
o the risk of sports facilities at which we provide services losing their
sports team tenants;
o our ability to retain existing clients or obtain new clients;
o the highly competitive nature of the recreational food service
industry;
o actions taken by our suppliers over which we have no control;
o any future changes in management;
o the risk of weaker economic conditions within the United States;
o the risk of events similar to those of September 11, 2001;
20
o general risks associated with the food industry;
o any future changes in government regulation; and
o any changes in local government policies and practices regarding
facility construction, taxes and financing.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk - We are exposed to interest rate volatility with regard to
existing issuances of variable rate debt. The Company's financial instruments
with market risk exposure consist of its term loans and revolving credit
facility borrowings. A change in interest rates of one percent on the
outstanding borrowings as of July 2, 2002 would cause a change in annual
interest expense of approximately $1.1 million. The Company's Senior
Subordinated Notes are fixed interest rate debt obligations.
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: None.
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on August 15, 2002.
VOLUME SERVICES AMERICA, INC.
By: /s/ Kenneth R. Frick
-------------------------------
Name: Kenneth R. Frick
Title: Executive Vice President and Chief
Financial Officer
22