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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 1, 2003 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 of (I.R.S. Employer
incorporation or organization) Identification No.)
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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
( ) YES (X) NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the registrant's Common Stock, par value
$0.01 per share, at August 15, 2003, was 100.
VOLUME SERVICES AMERICA, INC.
INDEX
PART I FINANCIAL INFORMATION..........................................................................................2
Item 1. Financial Statements.........................................................................................2
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................19
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................................27
Item 4. Controls and Procedures.....................................................................................28
PART II OTHER INFORMATION............................................................................................28
Item 6. Exhibits and Reports on Form 8-K.............................................................................28
-1-
PART I
FINANCIAL INFORMATION
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JULY 1, 2003 AND DECEMBER 31, 2002 (IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------------
July 1, December 31,
2003 2002
---------------- ----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 15,165 $ 10,374
Accounts receivable, less allowance for doubtful accounts of
$413 and $810 at July 1, 2003 and December 31, 2002,
respectively 21,463 16,488
Merchandise inventories 18,381 13,682
Prepaid expenses and other 3,899 2,354
Deferred tax asset 2,837 2,764
------------ ------------
Total current assets 61,745 45,662
------------ ------------
PROPERTY AND EQUIPMENT:
Leasehold improvements 49,481 49,452
Merchandising equipment 51,997 51,185
Vehicles and other equipment 9,291 8,625
Construction in process 310 295
------------ ------------
Total 111,079 109,557
Less accumulated depreciation and amortization (56,307) (53,498)
------------ ------------
Property and equipment, net 54,772 56,059
------------ ------------
OTHER ASSETS:
Contract rights, net 104,742 101,702
Cost in excess of net assets acquired 46,457 46,457
Deferred financing costs, net 6,371 7,086
Trademarks 17,049 17,049
Other 7,124 6,177
------------ ------------
Total other assets 181,743 178,471
------------ ------------
TOTAL ASSETS $ 298,260 $ 280,192
============ ============
-2-
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)(UNAUDITED)
JULY 1, 2003 AND DECEMBER 31, 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
- -------------------------------------------------------------------------------------------------------------------------------
July 1, December 31,
2003 2002
-------------- ------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current maturities of long-term debt 1,150 1,150
Accounts payable 20,593 14,798
Accrued salaries and vacations 11,851 8,683
Liability for insurance 2,984 4,441
Accrued taxes, including income taxes 5,800 3,890
Accrued commissions and royalties 24,021 13,627
Accrued interest 3,838 3,832
Other 6,381 6,057
--------- --------
Total current liabilities 76,618 56,478
--------- --------
LONG TERM LIABILITIES:
Long-term debt 224,175 224,250
Liability for insurance 3,898 2,001
Deferred income taxes 1,342 2,031
Other liabilities 700 700
--------- --------
Total long-term liabilities 230,115 228,982
--------- --------
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 67,321 67,417
Accumulated deficit (25,235) (21,566)
Accumulated other comprehensive gain (loss) 116 (444)
Treasury stock - at cost (194 shares) (49,500) (49,500)
Loans to related parties (1,175) (1,175)
--------- --------
Total stockholders' deficiency (8,473) (5,268)
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 298,260 $ 280,192
========= =========
See notes to consolidated financial statements.
-3-
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
THIRTEEN AND TWENTY-SIX WEEK PERIODS ENDED JULY 1, 2003 AND JULY 2, 2002
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- ------------------------------------------------------------------------------------------------------------------------------
Thirteen Weeks Ended Twenty-six Weeks Ended
--------------------------------------------------------------------------
July 1, July 2, July 1, July 2,
2003 2002 2003 2002
----------------- ----------------- ----------------- ----------------
Net sales $ 172,733 $ 166,421 $ 269,633 $ 254,261
Cost of sales 140,664 134,279 222,319 209,078
Selling, general, and administrative 14,177 14,951 27,552 26,584
Depreciation and amortization 6,895 6,679 13,370 12,272
Contract related losses 537 699 647 699
----------------- ----------------- ---------------- ---------------
Operating income 10,460 9,813 5,745 5,628
Interest expense 5,124 5,175 10,195 10,532
Other income, net (14) (34) (19) (1,418)
----------------- ----------------- ---------------- ---------------
Income (loss) before income taxes 5,350 4,672 (4,431) (3,486)
Income tax provision (benefit) 2,474 831 (762) (457)
----------------- ----------------- ---------------- ---------------
Net income (loss) 2,876 3,841 (3,669) (3,029)
Other comprehensive gain - foreign currency
translation adjustment 313 173 560 159
----------------- ----------------- ---------------- ---------------
Comprehensive income (loss) $ 3,189 $ 4,014 $ (3,109) $ (2,870)
================= ================= ================= ===============
Basic Net Income (Loss) per share $ 8,658.57 $ 11,569.60 $ (11,055.21) $ (9,121.89)
================= ================= ================= ===============
Diluted Net Income (Loss) per share $ 8,658.57 $ 11,569.60 $ (11,055.21) $ (9,121.89)
================= ================= ================= ===============
See notes to consolidated financial statements.
-4-
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY (UNAUDITED)
FOR THE PERIOD FROM DECEMBER 31, 2002 TO JULY 1, 2003
(IN THOUSANDS, EXCEPT SHARE DATA)
Accumulated
Additional Other Loans to
Common Common Paid-in Accumulated Comprehensive Treasury Related
Shares Stock Capital Deficit Gain (Loss) Stock Parties Total
BALANCE, DECEMBER 31, 2002 332 $- $ 67,417 $ (21,566) $ (444) $ (49,500) $(1,175) $(5,268)
Noncash compensation - - (96) - - - - (96)
Foreign currency translation - - - - 560 - 560
Net loss - - - (3,669) - - - (3,669)
--- --- -------- ---------- ----- --------- -------- -------
BALANCE, JULY 1, 2003 332 $- $ 67,321 $ (25,235) $ 116 $ (49,500) $(1,175) $(8,473)
=== === ======== ========== ===== ========= ======== =======
See notes to consolidated financial statements.
-5-
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
TWENTY-SIX WEEK PERIODS ENDED JULY 1, 2003 AND JULY 2, 2002
(IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------
Twenty-six Weeks Ended
---------------------------------------
July 1, July 2,
2003 2002
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,669) $ (3,029)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 13,370 12,272
Amortization of deferred financing costs 715 716
Contract related losses 647 699
Noncash compensation (96) 206
Deferred tax change (762) (457)
Gain on disposition of assets (65) (10)
Other 560 159
Changes in assets and liabilities:
Increase in assets:
Accounts receivable (4,806) (1,979)
Merchandise inventories (4,699) (3,289)
Prepaid expenses (1,547) (56)
Other assets (1,628) (232)
Increase in liabilities:
Accounts payable 3,576 2,116
Accrued salaries and vacations 3,168 3,504
Liability for insurance 440 2,006
Accrued commissions and royalties 10,394 24,381
Other liabilities 2,240 3,093
--------- --------
Net cash provided by operating activities 17,838 40,100
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (4,710) (4,800)
Proceeds from sale of property and equipment - 10
Contract rights acquired, net (10,481) (22,797)
--------- --------
Net cash used in investing activities (15,191) (27,587)
--------- --------
-6-
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)(UNAUDITED)
TWENTY-SIX WEEK PERIODS ENDED JULY 1, 2003 AND JULY 2, 2002
(IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------
Twenty-six Weeks Ended
July 1, July 2,
2003 2002
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) - revolving loans $ 500 $(12,750)
Principal payments on long-term debt (575) (575)
Principal payments on capital lease obligations - (267)
Increase in bank overdrafts 2,219 4,111
-------- --------
Net cash provided by (used in) financing activities 2,144 (9,481)
-------- --------
INCREASE IN CASH 4,791 3,032
CASH AND CASH EQUIVALENTS:
Beginning of period 10,374 15,142
-------- --------
End of period $ 15,165 $ 18,174
======== ========
See notes to consolidated financial statements.
-7-
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
TWENTY-SIX WEEK PERIODS ENDED JULY 1, 2003 AND JULY 2, 2002
- --------------------------------------------------------------------------------
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 beneficially owned by
its senior management and entities affiliated with Blackstone Management
Associates II L.L.C. ("Blackstone") 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 1,
2003 are not necessarily indicative of the results to be expected for the
fifty-two week fiscal year ending December 30, 2003 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 December 31, 2002 included in the Company's
annual report on Form 10-K.
On February 11, 2003, the Company announced that it changed its
tradename for its operating subsidiaries, Volume Services and Service America,
from Volume Services America to Centerplate.
On February 13, 2003, Volume Holdings filed a registration statement on
Form S-1 (last amended July 16, 2003) in respect of a proposed initial public
offering of Income Deposit Securities ("IDSs"). The registration statement is
currently under review by the Securities and Exchange Commission. We cannot
assure you that the offering of IDSs will occur and we may elect not to proceed
with the offerings of IDSs due to changes in our business or strategic plans,
general economic and market conditions or any other factors.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COST IN EXCESS OF NET ASSETS ACQUIRED AND TRADEMARKS - The Company has
performed its annual impairment tests of goodwill and trademarks as of April 1,
2003 in accordance with Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, and determined that no impairment exists.
INSURANCE - At the beginning of fiscal 2002, the Company adopted a high
deductible insurance program for general liability, auto liability, and workers'
compensation risk. During the fiscal years 1999 through 2001, the Company
had a premium-based insurance program for general liability, automobile
liability and workers' compensation risk. Prior to fiscal 1999, the Company was
primarily self-insured for general liability, automobile liability and workers'
compensation risks, supplemented by stop-loss type insurance policies.
Management determines the estimate of the reserve for the deductible and self-
insurance considering a number of factors, including historical experience and
-8-
actuarial assessment of the liabilities for reported claims and claims incurred
but not reported. The self-insurance liabilities for estimated incurred losses
were discounted (using rates between 1.17 percent and 3.87 percent at July 1,
2003 and 1.32 percent and 3.83 percent at December 31, 2002), to their present
value based on expected loss payment patterns determined by experience. The
total discounted self-insurance liabilities recorded by the Company at July 1,
2003 and December 31, 2002 were $5,837,000 and $4,654,000, respectively. The
related undiscounted amounts were $6,209,000 and $4,955,000, respectively.
The Company became self-insured for employee health insurance in
December 1999. Prior to December 1999, the Company had a premium-based insurance
program. The employee health self-insurance liability is based on claims filed
and estimates for claims incurred but not reported. The total liability recorded
by the Company at July 1, 2003 and December 31, 2002 was $1,476,000 and
$1,222,000, respectively.
INCOME TAXES - The provision for income taxes includes federal, state
and foreign taxes currently payable, and the change in deferred tax assets and
liabilities. Deferred tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax basis of assets and liabilities. A valuation allowance is
established for deferred tax assets when it is more likely than not that the
benefits of such assets will not be realized.
Income taxes for the twenty-six weeks ended July 1, 2003 resulted in
the recognition of a tax benefit of approximately $0.8 million, in comparison to
the recognition of a tax benefit of $0.5 million in the prior year period.
Income taxes for the twenty-six weeks ended July 1, 2003 and July 2, 2002 are
calculated using the projected effective tax rate for fiscal 2003 and 2002,
respectively, which includes the reversal of approximately $0.9 million and
$0.8 million, respectively, of valuation allowances on deferred tax assets.
RECLASSIFICATIONS - Certain amounts in 2002 have been reclassified,
where applicable, to conform to the financial statement presentation used in
2003.
NEW ACCOUNTING STANDARDS - In June 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities. This statement
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No.
94-3, Liability Recognition for Certain Employees Termination Benefits and Other
Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)
and is effective for exit or disposal activities after December 31, 2002. The
implementation of this standard did not have a material effect on our financial
position or results of operations.
On November 25, 2002, the FASB issued Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, which elaborates on the
disclosures to be made by a guarantor about its obligations under certain
guarantees issued. It also clarifies that a guarantor is required to recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The Interpretation expands on
the accounting guidance of SFAS No. 5 Accounting for Contingencies, SFAS No. 57,
Related Party Disclosures, and SFAS No. 107, Disclosures about Fair Value of
Financial Instruments. The Interpretation also incorporates, without change, the
provisions of FASB Interpretation No. 34, Disclosure of Indirect Guarantees of
Indebtedness of Others, which it supersedes. The Interpretation does identify
several situations where the recognition of a liability at inception for a
guarantor's obligation is not required. The initial recognition and measurement
provisions of Interpretation 45 apply on a prospective basis to guarantees
issued or modified after December 31, 2002, regardless of the guarantor's fiscal
year-end. The disclosure requirements, initial recognition and initial
measurement provisions are currently effective and did not have a material
effect on our financial position or results of operations.
-9-
On December 31, 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure. SFAS No. 148 amends SFAS
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure provisions of
SFAS No. 123 and APB Opinion No. 28, Interim Financial Reporting, to require
disclosure in significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
SFAS No. 148 does not require companies to account for employee stock
options using the fair value method. SFAS No. 148's amendment of the transition
and annual disclosure requirements of SFAS No. 123 are effective for fiscal
years ending after December 15, 2002. The implementation of this standard did
not have a material effect on our financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51, Consolidated Financial Statements. This Interpretation applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest it acquired before February 1, 2003. This Interpretation may be applied
prospectively with a cumulative-effect adjustment as of the date on which it is
first applied or by restating previously issued financial statements for one or
more years with a cumulative-effect adjustment as of the beginning of the first
year restated. The interpretation did not have a material effect on our
financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. This statement amends and
clarifies financial accounting and reporting for derivative instruments
including certain derivatives embedded in other contracts. This statement is
effective for contracts entered into or modified after June 30, 2003. The
implementation of this standard on July 1, 2003 did not have a material effect
on our financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS
No. 150 establishes standards for classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period after June 15, 2003. The implementation of this standard is not expected
to have a material effect on our financial position or results of operations.
3. SELLING, GENERAL, AND ADMINISTRATIVE
Selling, general and administrative expenses for the twenty-six week
period ended July 1, 2003 include a payment of approximately $0.8 million
received as reimbursement for assets that were previously written-off in
connection with one of our clients that filed for Chapter 11 Bankruptcy during
2001.
4. CONTRACT RELATED LOSSES
Contract related losses for the twenty-six weeks ended July 1, 2003
reflect an impairment charge of approximately $0.2 million for the write-down of
property and equipment for a contract which has been assigned to a third-party,
and $0.4 million for the write-down of contract rights and other assets for
certain terminated contracts. For the twenty-six weeks ended July 2, 2002,
-10-
contract related losses of $0.7 million reflect an impairment charge for the
write-down of contract rights related to a terminated contract.
5. COMMITMENTS AND CONTINGENCIES
We are from time to time involved in various legal proceedings incidental
to the conduct of our business. In May 2003, a purported class action was filed
against us in the Superior Court of California for the County of Orange by a
former emmployee at one of the California stadiums we serve alleging violations
of local overtime wage, rest and meal period and related laws with respect to
this employee and others purportedly similarly situated at any and all of the
facilities we serve in California. The purported class action seeks
compensatory, special and punitive damages in unspecified amounts, penalties
under the applicable local laws and injunctions against the alleged illegal
acts. We are in the process of evaluating this case and, while our review is
preliminary, we believe that our business practices are, and were during the
period alleged, in compliance with the law. We intend to vigorously defend this
case and we have filed an answer to the complaint with the California state
court and have filed to seek removal of the case to the United States District
Court for the Central District of California. However, due to the early stage of
this case and our evalaution, we cannot predict the outcome of this case and, if
an ultimate ruling is made against us, whether such ruling would have a material
effect on us.
Except for the case described above, in our opinion, after considering a
number of factors, including, but not limited to, the current status of any
currently pending proceeding (including any settlement discussions), views of
retained counsel, the nature of the litigation, our prior experience and the
amounts that we have accrued for known contingencies, the ultimate disposition
of any currently pending proceeding will not have a material adverse effect on
our financial condition or results of operations.
-11-
6. NON-GUARANTOR SUBSIDIARIES FINANCIAL STATEMENTS
The senior subordinated notes are jointly and severally guaranteed by
Volume Holdings and all of the subsidiaries of Volume Service America, except
for certain non-wholly owned U.S. subsidiaries and one non-U.S. subsidiary. The
following table sets forth the condensed consolidating financial statements of
the Parent Company, Guarantor Subsidiaries (including Volume Services America,
the issuer) and Non-Guarantor Subsidiaries as of July 1, 2003 and December 31,
2002 (in the case of the balance sheets) and for the thirteen and twenty-six
week periods ended July 1, 2003 and July 2, 2002 (in the case of the statements
of operations and comprehensive income (loss)) and for the twenty-six week
periods ended July 1, 2003 and July 2, 2002 in the case of the statement of cash
flows.
CONSOLIDATING CONDENSED BALANCE SHEET, JULY 1, 2003 (IN THOUSANDS)
Issuer and
Combined Combined
Volume Guarantor Non-guarantor
Assets Holdings Subsidiaries Subsidiaries Eliminations Consolidated
Current assets:
Cash and cash equivalents $ - $ 15,009 $ 156 $ - $ 15,165
Accounts receivable - 18,601 2,862 - 21,463
Other current assets - 30,882 1,996 (7,761) 25,117
-------- -------- ------- ------- --------
Total current assets - 64,492 5,014 (7,761) 61,745
Property and equipment - 51,578 3,194 - 54,772
Contract rights, net - 104,067 675 - 104,742
Cost in excess of net assets acquired - 46,457 - - 46,457
Investment in subsidiaries (8,473) - - 8,473 -
Other assets - 30,533 11 - 30,544
-------- -------- ------- ------- --------
Total assets $ (8,473) $297,127 $ 8,894 $ 712 $298,260
======== ======== ======= ======= ========
Liabilities and Stockholders' Deficiency
Current liabilities:
Intercompany liabilities $ - $ - $ 7,761 $(7,761) $ -
Other current liabilities - 73,716 2,902 - 76,618
-------- -------- ------- ------- --------
Total current liabilities - 73,716 10,663 (7,761) 76,618
Long-term debt - 224,175 - - 224,175
Other liabilities - 5,940 - - 5,940
-------- -------- ------- ------- --------
Total liabilities - 303,831 10,663 (7,761) 306,733
-------- -------- ------- ------- --------
Stockholders' deficiency:
Common stock - - - - -
Additional paid-in capital 67,321 67,321 - (67,321) 67,321
Accumulated deficit (25,235) (23,350) (1,885) 25,235 (25,235)
Treasury stock and other (50,559) (50,675) 116 50,559 (50,559)
-------- -------- ------- ------- --------
Total stockholders' deficiency (8,473) (6,704) (1,769) 8,473 (8,473)
-------- -------- ------- ------- --------
Total liabilities and stockholders'
deficiency $ (8,473) $297,127 $ 8,894 $ 712 $298,260
========= ======== ======= ======= ========
-12-
Consolidating Condensed Statement of Operations and Comprehensive Income
Thirteen Week Period Ended July 1, 2003 (in thousands)
Issuer and
Combined Combined
Volume Guarantor Non-guarantor
Holdings Subsidiaries Subsidiaries Eliminations Consolidated
Net sales $ - $ 162,048 $ 10,685 $ - $ 172,733
Cost of sales - 131,687 8,977 - 140,664
Selling, general, and administrative - 12,985 1,192 - 14,177
Depreciation and amortization - 6,714 181 - 6,895
Contract related losses - 537 - - 537
------- --------- -------- ------- ---------
Operating income - 10,125 335 - 10,460
Interest expense - 5,124 - 5,124
Other income, net - (12) (2) - (14)
------- --------- -------- ------- ---------
Income before income taxes - 5,013 337 - 5,350
Income tax provision - 2,474 - - 2,474
------- --------- -------- ------- ---------
Equity in loss of subsidiaries 2,876 - - (2,876) -
------- --------- -------- ------- ---------
Net income 2,876 2,539 337 (2,876) 2,876
Other comprehensive gain -
foreign currency translation adjustment - - 313 - 313
------- --------- -------- ------- ---------
Comprehensive income $ 2,876 $ 2,539 $ 650 $(2,876) $ 3,189
======= ========= ======== ======= =========
-13-
Consolidating Condensed Statement of Operations and Comprehensive Income (Loss)
Twenty-six Week Period Ended July 1, 2003 (in thousands)
Issuer and
Combined Combined
Volume Guarantor Non-guarantor
Holdings Subsidiaries Subsidiaries Eliminations Consolidated
Net sales $ - $252,704 $ 16,929 $ - $269,633
Cost of sales - 207,735 14,584 - 222,319
Selling, general, and administrative - 25,604 1,948 - 27,552
Depreciation and amortization - 13,000 370 - 13,370
Contract related losses - 647 - - 647
-------- -------- -------- ------- --------
Operating income - 5,718 27 - 5,745
Interest expense - 10,195 - 10,195
Other income, net - (14) (5) - (19)
-------- -------- -------- ------- --------
Income (loss) before income taxes - (4,463) 32 - (4,431)
Income tax benefit - (762) - - (762)
-------- -------- -------- ------- --------
Equity in loss of subsidiaries (3,669) - - 3,669 -
-------- -------- -------- ------- --------
Net income (loss) (3,669) (3,701) 32 3,669 (3,669)
Other comprehensive gain -
foreign currency translation adjustment - - 560 - 560
-------- -------- -------- ------- --------
Comprehensive income (loss) $ (3,669) $ (3,701) $ 592 $ 3,669 $ (3,109)
======== ======== ======== ======= ========
-14-
Consolidating Condensed Statement of Cash Flows
Twenty-six Week Period Ended July 1, 2003 (in thousands)
Issuer and
Combined Combined
Volume Guarantor Non-guarantor
Holdings Subsidiaries Subsidiaries Consolidated
Cash Flows Provided by Operating Activities $ - $ 17,707 $ 131 $ 17,838
--- -------- ----- --------
Cash Flows from Investing Activities:
Purchase of property and equipment, net - (4,511) (199) (4,710)
Contract rights acquired, net - (10,481) - (10,481)
--- -------- ----- --------
Net cash used in investing activities - (14,992) (199) (15,191)
--- -------- ----- --------
Cash Flows from Financing Activities:
Net borrowings - revolving loans - 500 - 500
Principal payments on long-term debt - (575) - (575)
Increase in bank overdrafts - 2,219 2,219
--- -------- ----- --------
Net cash provided by financing activities - 2,144 2,144
--- -------- ----- --------
Increase (decrease) in cash - 4,859 (68) 4,791
Cash and cash equivalents - beginning of period - 10,150 224 10,374
--- -------- ----- --------
Cash and cash equivalents - end of period $ - $ 15,009 $ 156 $ 15,165
=== ======== ===== ========
-15
CONSOLIDATING CONDENSED BALANCE SHEET, DECEMBER 31, 2002 (IN THOUSANDS)
Issuer
and
Combined Combined
Volume Guarantor Non-guarantor
Assets Holdings Subsidiaries Subsidiaries Eliminations Consolidated
Current assets:
Cash and cash equivalents $ $ 10,150 $ 224 $ $ 10,374
Accounts receivable 15,309 1,179 16,488
Other current assets 24,948 1,147 (7,295) 18,800
-------- --------- ------- -------- --------
Total current assets 50,407 2,550 (7,295) 45,662
Property and equipment 52,951 3,108 56,059
Contract rights, net 101,017 685 101,702
Cost in excess of net assets acquired 46,457 46,457
Investment in subsidiaries (5,268) 5,268
Other assets 30,290 22 30,312
-------- --------- ------- -------- --------
Total assets $ (5,268) $ 281,122 $ 6,365 $ (2,027) $280,192
======== ========= ======= ======== ========
Liabilities and Stockholders' Deficiency
Current liabilities:
Intercompany liabilities $ $ $ 7,295 $ (7,295) $
Other current liabilities 55,047 1,431 56,478
-------- --------- ------- -------- --------
Total current liabilities 55,047 8,726 (7,295) 56,478
Long-term debt 224,250 224,250
Other liabilities 4,732 4,732
-------- --------- ------- -------- --------
Total liabilities 284,029 8,726 (7,295) 285,460
-------- --------- ------- -------- --------
Stockholders' deficiency:
Common stock
Additional paid-in capital 67,417 67,417 (67,417) 67,417
Accumulated deficit (21,566) (19,649) (1,917) 21,566 (21,566)
Treasury stock and other (51,119) (50,675) (444) 51,119 (51,119)
-------- --------- ------- -------- --------
Total stockholders' deficiency (5,268) (2,907) (2,361) 5,268 (5,268)
-------- --------- ------- --------- --------
Total liabilities and stockholders'
deficiency $ (5,268) $ 281,122 $ 6,365 $ (2,027) $280,192
======== ========= ======= ======== ========
-16
Consolidating Condensed Statement of Operations and Comprehensive Income
Thirteen Week Period Ended July 2, 2002 (in thousands)
Issuer and
Combined Combined
Volume Guarantor Non-guarantor
Holdings Subsidiaries Subsidiaries Eliminations Consolidated
Net sales $ $157,568 $ 8,853 $ $166,421
Cost of sales 126,756 7,523 134,279
Selling, general, and administrative 14,102 849 14,951
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 adjustment - - 173 - 173
-------- -------- -------- --------- --------
Comprehensive income $ 3,841 $ 3,616 $ 398 $ (3,841) $ 4,014
======== ======== ======== ========= ========
Consolidating Condensed Statement of Operations and Comprehensive Income (Loss)
Twenty-six Week Period Ended July 2, 2002 (in thousands)
Issuer and
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)
Equity in loss 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)
========= ======== ======== ======== =========
-17-
Consolidating Condensed Statement of Cash Flows
Twenty-six Week Period Ended July 2, 2002 (in thousands)
Issuer and
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
=== ======== ===== ========
-18-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
The following discussion and analysis of our results of operations and
financial condition for the thirteen and twenty-six week periods ended July 1,
2003 and July 2, 2002 should be read in conjunction with our audited financial
statements, including the related notes, for the fiscal year ended December 31,
2002 included in our annual report on Form 10-K. Our discussion contains
forward-looking statements based on our current expectations that involve risks
and uncertainties, such as our plans, objectives, opinions, expectations,
anticipations and intentions. Actual results and the timing of events could
differ materially from those anticipated in those forward-looking statements as
a result of a number of factors, including those set forth under the Forward
Looking and Cautionary Statements and elsewhere in this quarterly report on Form
10-Q. The following data have been prepared in accordance with generally
accepted accounting principles in the United States of America ("U.S. GAAP").
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the financial statement date and reported amounts of revenues and
expenses, including amounts that are susceptible to change. Our critical
accounting policies include accounting methods and estimates underlying such
financial statement preparation, as well as judgments around uncertainties
affecting the application of those policies. In applying critical accounting
policies, materially different amounts or results could be reported under
different conditions or using different assumptions. We believe that our
critical accounting policies, involving significant estimates, uncertainties and
susceptibility to change, include the following:
o Recoverability of property and equipment, contract rights, cost in
excess of net assets acquired (goodwill) and other intangible assets.
As of July 1, 2003, net property and equipment of $54.8 million and
net contract rights of $104.7 million were recorded. In accordance
with Statement of Financial Accounting Standards (SFAS) No. 144, we
evaluate long-lived assets with definite lives for possible impairment
when an event occurs which would indicate that its carrying amount may
not be recoverable. The impairment analysis is made at the contract
level and evaluates the net property and equipment as well as the
carrying value of the contract rights related to that contract. The
undiscounted future cash flows are compared to the carrying value of
the related long-lived assets. If the undiscounted future cash flows
are lower than the carrying value, an impairment charge is recorded.
The amount of the impairment charge is equal to the difference between
the balance of the long-lived assets and the future discounted cash
flows related to the assets (using a rate based on our incremental
borrowing rate). As we base our estimates of undiscounted future cash
flows on past operating performance, including anticipated labor and
other cost increases, and prevailing market conditions, we cannot
assure you that our estimates are achievable. Different conditions or
assumptions, if significantly negative or unfavorable, could have a
material adverse effect on the outcome of our evaluation and our
financial condition or future results of operations. Events that would
trigger an evaluation at the contract level include the loss of a
tenant team, intent to cease operations at a facility due to contract
termination or other means, the bankruptcy of a client,
discontinuation of a sports league or a significant increase in
competition that could reduce the future profitability of the
contract, among others. As of July 1, 2003, net goodwill of $46.5
million and other intangible assets (trademarks) of $17.0 million were
recorded. In accordance with SFAS No. 142, on an annual basis, we test
our indefinite-lived intangible assets (goodwill
-19-
and trademarks) for impairment. Additionally, goodwill is tested
between annual tests if an event occurs or circumstances change that
would more likely than not reduce the fair value of a reporting unit
below its carrying amount. We have determined that the reporting unit
is the Company. In performing the annual goodwill assessment, we
compare the fair value of the Company to its carrying amount,
including these indefinite lived assets. If the fair value exceeds the
carrying amount, then it is determined that goodwill is not impaired.
Should the carrying amount exceed the fair value of the Company, then
we would need to perform the second step in the impairment test. Fair
value for these tests is determined based upon a discounted cash flow
model (using a rate based on our incremental borrowing rate). As we
base our estimates of cash flows on past operating performance,
including anticipated labor and other cost increases and prevailing
market conditions, we cannot assure you that our estimates are
achievable. Different conditions or assumptions, if significantly
negative or unfavorable, could have a material adverse effect on the
outcome of our evaluation and on our financial condition or future
results of operations. In performing the annual trademark assessment,
management compares the fair value of the intangible assets to its
carrying value. Fair value is determined based on a discounted cash
flow model (using a rate based on our incremental borrowing rate). If
the carrying amount of the intangible asset exceeds its fair value, an
impairment loss will be recognized for the excess amount. If the fair
value is greater than the carrying amount no further assessment is
performed. We have performed our annual assessments of goodwill and
trademarks on April 1, 2003 and determined that no impairment
exists.
o Insurance. We have a high deductible insurance program for general
liability, auto liability and workers' compensation risk. We are
required to estimate and accrue for the amount of losses that we
expect to incur and will ultimately have to pay for under the
deductible during the policy year. These amounts are recorded in cost
of sales and selling, general and administrative expenses on the
statement of operations and accrued liabilities and long-term
liabilities on the balance sheet. Our estimates consider a number of
factors, including historical experience and actuarial assessment of
the liabilities for reported claims and claims incurred but not
reported. While we use outside parties to assist us in making these
estimates, it is difficult to provide assurance that the actual
amounts may not be materially different than what we have recorded. In
addition we are self-insured for employee medical benefits and related
liabilities. Our liabilities are based on historical trends and claims
filed and are estimated for claims incurred but not reported. While
the liabilities represent management's best estimate, actual results
could differ significantly from those estimates.
o Deferred income taxes. We recognize deferred tax assets and
liabilities based on the expected future tax consequences of temporary
differences between the carrying amounts and the tax basis of assets
and liabilities. Our primary deferred tax assets relate to net
operating losses and credit carryovers. The realization of these
deferred tax assets depends upon our ability to generate future
income. If our results of operations are adversely affected, not all
of our deferred taxes, if any, may be realized.
SEASONALITY AND QUARTERLY RESULTS
Our net sales and operating results have varied and are expected to
continue to vary, from quarter to quarter (a quarter is comprised of thirteen
or fourteen weeks), as a result of factors which include:
o seasonality of sporting and other events;
-20-
o the unpredictability in the number, timing and type of new contracts;
o the timing of contract expirations and special events; and
o the level of attendance at the facilities we serve.
Business at the principal types of facilities we serve is seasonal in
nature, with Major League Baseball ("MLB") and minor league baseball related
sales concentrated in the second and third quarter, the majority of National
Football League ("NFL") related 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 and second quarters of 2003, fiscal 2002 and fiscal 2001:
2003 2002 2001
---- ---- ----
1st Quarter $ 96,900 $ 87,840 $ 83,194
2nd Quarter $172,733 $166,421 $157,646
3rd Quarter $195,100 $177,559
4th Quarter $127,801 $124,714
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED JULY 1, 2003 COMPARED TO THE THIRTEEN WEEKS ENDED JULY 2,
2002
Net sales - Net sales of $172.7 million for the thirteen weeks ended
July 1, 2003 increased by $6.3 million (approximately 4%) from $166.4 million in
the prior year period. The increase was primarily due to new accounts, which
generated approximately $11.4 million in net sales, partially offset by expired
and/or terminated accounts ($3.7 million). Additionally, net sales at two
facilities increased $4.5 million mainly as a result of post-season National
Hockey League ("NHL") activity and the addition of a tenant National Basketball
Association ("NBA") team. Partially offsetting these improvements were declines
in aggregate net sales of $7.7 million at our convention center facilities and
in MLB and minor league baseball related net sales primarily attributable to
overall lower attendance due in part to unfavorable weather conditions in
various parts of the United States, particularly in the northeast.
Cost of sales - Cost of sales of $140.7 million for the thirteen weeks
ended July 1, 2003 increased by $6.4 million from $134.3 million in the prior
year period due primarily to the increase in sales volume. Cost of sales as a
percentage of net sales increased by approximately 0.7% from the prior year
period to 81%. The increase was due, in part, to higher commissions as a
percentage of net sales (approximately 0.4% increase) resulting primarily from
higher commission rates paid to our largest client in connection with the
renewal of that client's contract and a change in the sales mix to client
facilities with higher commission rates. Additionally, product costs as a
percentage of sales increased approximately 0.4% over the prior year period
resulting mainly from the initial start-up costs related to the opening of new
facilities.
Selling, general and administrative expenses - Selling, general and
administrative expenses of $14.2 million in the thirteen weeks ended July 1,
2003 decreased $0.8 million or approximately 0.8% as a percentage of net sales
from the prior year period. The decrease was due, in part, to a payment of
approximately $0.8 million received as reimbursement for assets that were
written-off in connection with one of our clients that filed for Chapter 11
Bankruptcy during 2001. In addition, efficiencies achieved at certain operating
-21-
facilities resulted in a decline of operating costs recorded in selling,
general, and administrative expenses of $0.8 million. Offsetting these savings
were higher corporate overhead expenses related to the addition of management
positions during fiscal 2002. We anticipate the fiscal 2003 impact of these
changes and others will be an increase in overhead costs of approximately 0.5%,
as a percentage of net sales, as compared to fiscal 2002. However, as a result
of the additional management positions, we expect to achieve improvements in
operating income at the facilities at which we provide services.
Depreciation and amortization - Depreciation and amortization was $6.9
million for the thirteen weeks ended July 1, 2003, compared to $6.7 million in
the prior year period. The increase was principally attributable to higher
amortization expense primarily related to investments made beginning in the
second quarter of fiscal 2002 for the renewal and/or acquisition of certain
contracts.
Contract related losses - Contract related losses of $0.5 million
recorded in the thirteen weeks ended July 1, 2003 reflect an impairment charge
of approximately $0.2 million for the write-down of property and equipment for a
contract which has been assigned to a third-party and $0.3 million for the
write-down of contract rights for a terminated contract. In the prior year
period, contract related losses of $0.7 million reflect an impairment charge for
the write-down of contract rights.
Operating income - Operating income increased approximately $0.6
million from the prior year period due to the factors described above.
Income taxes - Income tax expense for the thirteen weeks ended July 1,
2003 was approximately $2.5 million, in comparison to tax expense of $0.8
million in the prior year period. During the current period, we changed our
estimate of the effective tax rate for fiscal 2003 from approximately 33% to
16.8% due to the consideration of greater than previously anticipated tax credit
generation. Consequently, the expense recognized in the current thirteen week
period includes a change in our estimate to the tax provision for the entire
twenty-six week period ended July 1, 2003. Income taxes for the thirteen weeks
ended July 1, 2003 and July 2, 2002 are calculated using the projected effective
tax rate for fiscal 2003 and 2002, respectively, which includes the reversal of
approximately $0.9 million and $0.8 million, respectively, of valuation
allowances on deferred tax assets.
TWENTY-SIX WEEKS ENDED JULY 1, 2003 COMPARED TO THE TWENTY-SIX WEEKS ENDED JULY
2, 2002
Net sales - Net sales of $269.6 million for the twenty-six weeks ended
July 1, 2003 increased by $15.3 million (approximately 6%) from $254.3 million
in the prior year period. The increase was primarily due to new accounts, which
generated net sales of $16.6 million (approximately 6%) partially offset by
expired and/or terminated accounts of $6.5 million. Additionally, NHL playoff
activity and the addition of an NBA tenant team resulted in a $4.4 million
increase in net sales at two facilities. Partially offsetting these improvements
was a decline in MLB and minor league baseball related net sales of $4.4
million. This was primarily attributable to overall lower attendance due, in
part, to unfavorable weather conditions in various parts of the United States,
particularly the northeast. The remaining improvement in net sales was primarily
due to increased volume at various facilities where we provide our services.
Cost of sales - Cost of sales of $222.3 million for the twenty-six
weeks ended July 1, 2003 increased by $13.2 million from $209.1 million in the
prior year period due primarily to the increase in sales volume. Cost of sales
as a percentage of net sales increased by approximately 0.3% from the prior year
period. The increase was due in part to higher commissions as a percentage of
net sales. This resulted primarily from higher commission rates paid to our
largest client in connection with the renewal of that client's contract and a
change in the sales mix to client facilities with higher commission rates. These
increases were partially offset by lower product and payroll costs resulting
from efficiencies achieved at certain operating facilities at which we operate.
-22-
Selling, general and administrative expenses - Selling, general and
administrative expenses of $27.6 million in the twenty-six weeks ended July 1,
2003 declined approximately 0.3% as a percentage of net sales from the prior
year period. The decrease was due, in part, to a payment of approximately $0.8
million received as reimbursement for assets that were previously written-off in
connection with one of our clients that filed for Chapter 11 Bankruptcy during
2001. In addition, efficiencies achieved at certain operating facilities
resulted in a decline of operating costs recorded in selling, general and
administrative expenses. These improvements were partially offset by higher
corporate overhead expenses related to the addition of management positions
during fiscal 2002 and approximately $0.4 million in non-recurring marketing and
other expenses associated with the change in the tradename for our operating
subsidiaries from Volume Services America to Centerplate. In fiscal 2003, we
anticipate an increase in corporate overhead of 0.5%, as a percentage of net
sales, as compared to fiscal 2002, primarily due to the addition of the
management positions. However, as a result, we expect to achieve improvements in
operating income at the facilities at which we provide services.
Depreciation and amortization - Depreciation and amortization was $13.4
million for the twenty-six weeks ended July 1, 2003, compared to $12.3 million
in the prior year period. The increase was principally attributable to higher
amortization expense primarily related to investments made beginning in the
second quarter of fiscal 2002 for the renewal and/or acquisition of certain
contracts.
Contract related losses -Contract related losses of $0.6 million
recorded in the twenty-six weeks ended July 1, 2003 reflect an impairment charge
of approximately $0.2 million for the write-down of property and equipment for a
contract which has been assigned to a third-party, and $0.4 million for the
write-down of contract rights and other assets for certain terminated contracts.
In the prior year period, contract related losses of $0.7 million reflect an
impairment charge for the write-down of contract rights.
Operating income - Operating income increased approximately $0.1
million from the prior year period due to the factors described above.
Interest expense - Interest expense decreased by $0.3 million from the
prior year period principally due to lower interest rates on the Company's
variable rate debt, which were partially offset by an increase in borrowings.
Other income, net - During the first quarter of fiscal 2002, Service
America received approximately $1.4 million in connection with funds previously
set aside to satisfy creditors pursuant to a plan of reorganization approved in
1993. Under the plan of reorganization, Service America 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
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 - We have evaluated the available evidence about future
taxable income and other possible sources of realization of deferred tax assets
and based on our best current estimates believe that taxable income will be
realized in fiscal 2003. Accordingly, in the twenty-six weeks ended July 1,
2003, a tax benefit of $0.8 million was recognized in comparison to the
recognition of a $0.5 million tax benefit in the prior year period. As noted
above, we changed our estimate of the effective tax rate for fiscal 2003 during
the thirteen-week period ended July 1, 2003 from approximately 33% to 16.8%.
LIQUIDITY AND CAPITAL RESOURCES
For the twenty-six weeks ended July 1, 2003, net cash provided by
operating activities was $17.8 million compared to $40.1 million in the prior
year period. The $22.3 million decline in cash provided from the prior year
-23-
period was principally attributable to an increase in working capital in the
current period. This primarily related to the timing of commission and royalty
payments to our clients and the one-time receipt of approximately $1.4 million
received in fiscal 2002 in connection with funds previously set aside to satisfy
creditors pursuant to a plan of reorganization approved in 1993, as discussed
above.
Net cash used in investing activities was $15.2 million for the
twenty-six weeks ended July 1, 2003 compared to $27.6 million in the prior year
period reflecting a higher level of investment associated with renewals of
existing contracts, including the renewal of the company's largest client, in
the prior year period.
Net cash provided by financing activities was $2.1 million in the
twenty-six weeks ended July 1, 2003 as compared to net cash used in financing
activities of $9.5 million in the prior year period. The increase was
principally due to higher net borrowings under our revolving credit facility to
fund contract investment and working capital requirements in the current period.
As of July 1, 2003, we had approximately $15.5 million in outstanding revolving
loans as compared to no outstanding balances at July 2, 2002.
We are also required to obtain performance bonds, bid bonds or letters
of credit to secure our contractual obligations. As of July 1, 2003, we had
requirements outstanding for performance bonds and letters of credit of $13.4
million and $19.3 million, respectively.
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
net capital investments of $27.2 million in fiscal 2003, of which $15.2 million
has been invested to date. At July 1, 2003, $40.2 million of our $75.0 million
revolving credit facility was available to be borrowed, after taking into
account of $19.3 million of outstanding, undrawn letters of credit which reduce
availability.
If we proceed with the offering of Income Deposit Securities ("IDSs")
(as discussed in our Form 10-K for the year ended December 31, 2002), we intend
for Volume Services America to enter into a new credit facility to refinance its
existing credit facility and to undertake a tender offer and consent
solicitation for all its outstanding 11 1/4% senior subordinated notes due 2009.
We also expect Volume Holdings to repurchase shares of Volume Holdings'
outstanding common stock from its existing shareholders and to pay management
bonuses and the amount to which the Chief Executive Officer is due under his
employment contract. We cannot assure you that the offering of IDSs or any of
the above transactions will occur and we may elect not to proceed with the
offering of IDSs or any or all of the above transactions due to changes in our
business or strategic plans, general economic and market conditions or any
other factors.
We have future obligations for debt repayments, future minimum rental,
and similar commitments under non-cancelable operating leases as well as
contingent obligations related to outstanding letters of credit. These
obligations as of July 1, 2003 are summarized in the tables below:
-24-
CONTRACTUAL COMMITMENTS Payments due by period
(in millions)
Less than More than
Contractual Obligations Total 1 year 1-3 years 4-5 years 5 years
- ----------------------- ----- ------ --------- --------- --------
Long-term borrowings $225.3 $1.2 $124.1 - $100.0
Operating leases 1.3 0.5 0.8 - -
Commissions and royalties 40.8 8.1 20.0 5.2 7.5
Other long-term obligations(1) 14.3 8.7 5.3 .3 -
Total Contractual Obligations $281.7 $17.9 $150.8 $5.5 $107.5
(1) Represents capital commitments in connection with several long-term
concession contracts.
Payments due by period
(in millions)
Less than More than
Other Commercial Commitments Total 1 year 1-3 years 4-5 years 5 years
- ---------------------------- ----- ------ --------- --------- -------
Letters of credit $19.3 $19.3 $ - $ - $ -
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") recently issued
several statements of Financial Accounting Standards ("SFAS"). The statements
relevant to our line of business and their impact on the Company are as follows:
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability
Recognition for Certain Employees Termination Benefits and Other Costs to Exit
an Activity (Including Certain Costs Incurred in a Restructuring) and is
effective for exit or disposal activities after December 31, 2002. The
implementation of this standard did not have a material effect on our financial
position or results of operations.
On November 25, 2002, the FASB issued Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, which elaborates on the
disclosures to be made by a guarantor about its obligations under certain
guarantees issued. It also clarifies that a guarantor is required to recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The Interpretation expands on
the accounting guidance of SFAS No. 5 Accounting for Contingencies, SFAS No. 57,
Related Party Disclosures, and SFAS No. 107, Disclosures about Fair Value of
Financial Instruments. The Interpretation also incorporates, without change, the
provisions of FASB Interpretation No. 34, Disclosure of Indirect Guarantees of
-25-
Indebtedness of Others, which it supersedes. The Interpretation does identify
several situations where the recognition of a liability at inception for a
guarantor's obligation is not required. The initial recognition and measurement
provisions of Interpretation 45 apply on a prospective basis to guarantees
issued or modified after December 31, 2002, regardless of the guarantor's fiscal
year-end. The disclosure requirements, initial recognition and initial
measurement provisions are currently effective and did not have a material
effect on our financial position or results of operations.
On December 31, 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure. SFAS No. 148 amends SFAS
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure provisions of
SFAS No. 123 and APB Opinion No. 28, Interim Financial Reporting, to require
disclosure in significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
SFAS No. 148 does not require companies to account for employee stock options
using the fair value method. SFAS No. 148's amendment of the transition and
annual disclosure requirements of SFAS No. 123 are effective for fiscal years
ending after December 15, 2002. The implementation of this standard did not have
a material effect on our financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51, Consolidated Financial Statements. This Interpretation applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
data. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest it acquired before February 1, 2003. This Interpretation may be applied
prospectively with a cumulative-effect adjustment as of the date on which it is
first applied or by restating previously issued financial statements for one or
more years with a cumulative-effect adjustment as of the beginning of the first
year restated. The interpretation did not have a material effect on our
financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. This statement amends and
clarifies financial accounting and reporting for derivative instruments
including certain derivatives embedded in other contracts. This statement is
effective for contracts entered into or modified after June 30, 2003. The
implementation of this standard on July 1, 2003 did not have a material effect
on our financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS
No. 150 establishes standards for classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period after June 15, 2003. The implementation of this standard is not expected
to have a material effect on our financial position or results of operations.
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:
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o our high degree of leverage and significant debt service obligations;
o our history of net losses;
o the risk of decreases in 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 these 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 the risk that we may not be able to retain existing clients or obtain
new clients;
o the highly competitive nature of the recreational food service
industry;
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 or an
outbreak or escalation of any insurrection or armed conflict involving
the United States or any other national or international calamity;
o the risk of increased litigation against us;
o general risks associated with the food service industry;
o any future changes in government regulation; and
o any changes in local government policies and practices regarding
facility construction, taxes and financing.
We undertake no obligation to publicly update or review any
forward-looking statement, whether as a result of new information, future
developments or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk - We are exposed to interest rate volatility with
regard to existing 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
variable rate borrowings as of July 1, 2003 would cause a change in annual
interest expense of approximately $1.3 million. Volume Services America's
11 1/4% senior subordinated notes due 2009 are fixed interest rate debt
obligations.
As of July 1, 2003, there have been no material changes in the
quantitative and qualitative disclosures about market risk from the information
presented in our Form 10-K for the year ended December 31, 2002.
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ITEM 4. CONTROLS AND PROCEDURES.
Under the supervision and with the participation of our management,
including the Chief Executive Officer and Chief Financial Officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as of July 1, 2003 and, based on their evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that these
controls and procedures are effective. There were no significant changes in our
internal controls or in other factors that have occured during the period
covered by this report that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
Disclosure controls and procedures are our controls and other
procedures that are designed to ensure that all material information required to
be disclosed by us in the reports that we file or submit under the Exchange Act
is effectively recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by us
in the reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are from time to time involved in various legal proceedings incidental
to the conduct of our business. In May 2003, a purported class action was filed
against us in the Superior Court of California for the County of Orange by a
former emmployee at one of the California stadiums we serve alleging violations
of local overtime wage, rest and meal period and related laws with respect to
this employee and others purportedly similarly situated at any and all of the
facilities we serve in California. The purported class action seeks
compensatory, special and punitive damages in unspecified amounts, penalties
under the applicable local laws and injunctions against the alleged illegal
acts. We are in the process of evaluating this case and, while our review is
preliminary, we believe that our business practices are, and were during the
period alleged, in compliance with the law. We intend to vigorously defend this
case and we have filed an answer to the complaint with the California state
court and have filed to seek removal of the case to the United States District
Court for the Central District of California. However, due to the early stage of
this case and our evalaution, we cannot predict the outcome of this case and, if
an ultimate ruling is made against us, whether such ruling would have a material
effect on us.
Except for the case described above, in our opinion, after considering a
number of factors, including, but not limited to, the current status of any
currently pending proceeding (including any settlement discussions), views of
retained counsel, the nature of the litigation, our prior experience and the
amounts that we have accrued for known contingencies, the ultimate disposition
of any currently pending proceeding will not have a material adverse effect on
our financial condition or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Section 302 Certification of Chief Executive Officer
31.2 Section 302 Certification of Chief Financial Officer
32.1 Section 906 Certification of Chief Executive Officer
32.2 Section 906 Certification of Chief Financial Officer
(b) Reports on Form 8-K:
None.
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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, 2003.
VOLUME SERVICES AMERICA, INC.
By: /s/ Kenneth R. Frick
-----------------------------------
Name: Kenneth R. Frick
Title: Executive Vice President and Chief
Financial Officer
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INDEX TO EXHIBITS
Exhibit Number Description
31.1 Section 302 Certificate of Chief Executive Officer
31.2 Section 302 Certificate of Chief Financial Officer
32.1 Section 906 Certificate of Chief Executive Officer
32.2 Section 906 Certificate of Chief Financial Officer
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