SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 SEPTEMBER 30, 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
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(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
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N/A
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(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 October 30, 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.....................................................................................27
PART II OTHER INFORMATION............................................................................................28
Item 1. Legal Proceedings...........................................................................................28
Item 6. Exhibits and Reports on Form 8-K.............................................................................28
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PART I
FINANCIAL INFORMATION
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, 2003 AND DECEMBER 31, 2002 (IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
ASSETS 2003 2002
---------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents $ 27,205 $ 10,374
Accounts receivable, less allowance for doubtful accounts of
$377 and $810 at September 30, 2003 and December 31, 2002,
respectively 20,062 16,488
Merchandise inventories 18,236 13,682
Prepaid expenses and other 4,070 2,354
Deferred tax asset 2,750 2,764
------------ -------------
Total current assets 72,323 45,662
------------ -------------
PROPERTY AND EQUIPMENT:
Leasehold improvements 49,793 49,452
Merchandising equipment 54,136 51,185
Vehicles and other equipment 9,478 8,625
Construction in process 254 295
------------ -------------
Total 113,661 109,557
Less accumulated depreciation and amortization (59,864) (53,498)
------------ -------------
Property and equipment, net 53,797 56,059
------------ -------------
OTHER ASSETS:
Contract rights, net 103,583 101,702
Cost in excess of net assets acquired 46,457 46,457
Deferred financing costs, net 6,013 7,086
Trademarks 17,049 17,049
Other 7,297 6,177
------------ -------------
Total other assets 180,399 178,471
------------ -------------
TOTAL ASSETS $ 306,519 $ 280,192
============ =============
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VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)(UNAUDITED)
SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
- ------------------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) 2003 2002
------------------- -------------------
CURRENT LIABILITIES:
Current maturities of long-term debt 1,150 1,150
Accounts payable 21,299 14,798
Accrued salaries and vacations 15,372 8,683
Liability for insurance 2,936 4,441
Accrued taxes, including income taxes 7,533 3,890
Accrued commissions and royalties 25,554 13,627
Accrued interest 938 3,832
Other 7,077 6,057
--------- --------
Total current liabilities 81,859 56,478
--------- --------
LONG TERM LIABILITIES:
Long-term debt 213,388 224,250
Liability for insurance 5,705 2,001
Deferred income taxes 2,339 2,031
Other liabilities 950 700
--------- --------
Total long-term liabilities 222,382 228,982
--------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY):
Common stock, $0.01 par value - authorized: 1,000 shares; issued:
526 shares; outstanding: 332 shares - -
Additional paid-in capital 67,481 67,417
Accumulated deficit (14,561) (21,566)
Accumulated other comprehensive gain (loss) 100 (444)
Treasury stock - at cost (194 shares) (49,500) (49,500)
Loans to related parties (1,242) (1,175)
--------- --------
Total stockholders' equity (deficiency) 2,278 (5,268)
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $ 306,519 $ 280,192
========= =========
See notes to consolidated financial statements.
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VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
THIRTEEN AND THIRTY-NINE WEEK PERIODS ENDED SEPTEMBER 30, 2003 AND
OCTOBER 1, 2002
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- ------------------------------------------------------------------------------------------------------------------------------------
Thirteen Weeks Ended Thirty-nine Weeks Ended
------------------------------------- -----------------------------------
September 30, October 1, September 30, October 1,
2003 2002 2003 2002
----------------- ----------------- ----------------- ----------------
Net sales $ 214,636 $ 195,100 $ 484,269 $ 449,361
Cost of sales 173,378 156,459 395,697 365,537
Selling, general, and administrative 17,719 16,015 45,271 42,599
Depreciation and amortization 6,956 6,734 20,326 19,006
Contract related losses - - 647 699
--------------- --------------- ------------ ------------
Operating income 16,583 15,892 22,328 21,520
Interest expense 4,833 5,129 15,028 15,661
Other income, net (8) (28) (27) (1,446)
--------------- --------------- ------------ ------------
Income before income taxes 11,758 10,791 7,327 7,305
Income tax provision 1,084 1,008 322 551
--------------- --------------- ------------ ------------
Net income 10,674 9,783 7,005 6,754
Other comprehensive gain (loss) - foreign
currency translation adjustment (16) (152) 544 7
--------------- --------------- ------------ ------------
Comprehensive income $ 10,658 $ 9,631 $ 7,549 $ 6,761
================ =============== ============ ============
Basic Net Income per share $ 32,159.95 $ 29,466.29 $ 21,104.74 $ 20,344.40
================ =============== ============ ============
Diluted Net Income per share $ 32,159.95 $ 29,466.29 $ 21,104.74 $ 20,344.40
================ =============== ============ ============
See notes to consolidated financial statements.
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VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)(UNAUDITED)
FOR THE PERIOD FROM DECEMBER 31, 2002 TO SEPTEMBER 30, 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 - - 64 - - - - 64
Loans to related parties - - - - - - (67) (67)
Foreign currency translation - - - - 544 - - 544
Net income - - - 7,005 - - - 7,005
--- --- -------- -------- ----- -------- -------- -------
BALANCE, SEPTEMBER 30, 2003 332 $ - $ 67,481 $(14,561) $ 100 $(49,500) $ (1,242) $ 2,278
=== === ======== ======== ===== ======== ======== =======
See notes to consolidated financial statements.
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VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THIRTY-NINE WEEK PERIODS ENDED SEPTEMBER 30, 2003 AND OCTOBER 1, 2002
(IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------------------
Thirty-nine Weeks Ended
---------------------------------------
September 30, October 1,
2003 2002
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,005 $ 6,754
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 20,326 19,006
Amortization of deferred financing costs 1,073 1,073
Contract related losses 647 699
Noncash compensation 64 478
Deferred tax change 322 551
Gain on disposition of assets (64) (39)
Other 544 7
Changes in assets and liabilities:
Decrease (increase) in assets:
Accounts receivable (3,405) 229
Merchandise inventories (4,554) (3,323)
Prepaid expenses (1,718) 136
Other assets (2,016) 37
Increase in liabilities:
Accounts payable 4,357 1,552
Accrued salaries and vacations 6,689 4,496
Liability for insurance 2,199 2,547
Accrued commissions and royalties 11,927 13,057
Other liabilities 2,019 728
------- -------
Net cash provided by operating activities 45,415 47,988
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (6,302) (7,622)
Proceeds from sale of property and equipment - 2,387
Contract rights acquired, net (13,497) (35,904)
------- -------
Net cash used in investing activities (19,799) (41,139)
------- -------
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VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)(UNAUDITED)
THIRTY-NINE WEEK PERIODS ENDED SEPTEMBER 30, 2003 AND OCTOBER 1, 2002
(IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------------------
Thirty-nine Weeks Ended
-------------------------------
September 30, October 1,
2003 2002
------------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments - revolving loans $ (10,000) $ (12,750)
Principal payments on long-term debt (862) (862)
Principal payments on capital lease obligations - (267)
Increase in bank overdrafts 2,144 2,348
Loans to related parties (67) -
--------- ---------
Net cash used in financing activities (8,785) (11,531)
--------- ---------
INCREASE (DECREASE) IN CASH 16,831 (4,682)
CASH AND CASH EQUIVALENTS:
Beginning of period 10,374 15,142
--------- ---------
End of period $ 27,205 $ 10,460
========= =========
See notes to consolidated financial statements.
-7-
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THIRTY-NINE WEEK PERIODS ENDED SEPTEMBER 30, 2003 AND OCTOBER 1, 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 in the United States of America 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 thirty-nine week period ended
September 30, 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 August 26, 2003) in respect of a proposed initial public
offering ("IPO") of Income Deposit Securities ("IDSs"). The IDSs would represent
shares of common stock and subordinated notes of Volume Services America
Holdings, Inc. Concurrently with the closing of the IDSs, the Company plans to
enter into a new senior credit facility with a syndicate of financial
institutions. The new credit facility will be comprised of a secured revolving
credit facility and a term facility consisting of senior secured notes. The
Company expects to repay its existing senior credit facility and its
subordinated notes with the net proceeds. The Company commenced a tender offer
and consent solicitation on October 22, 2003 with respect to all its outstanding
$100.0 million aggregate principal amount of 11 1/4% senior subordinated notes
due 2009. The closing of this tender offer is conditional on the consummation of
the IDSs offering. Prior to an effective date of the IPO, the Company also plans
to split its common stock. 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 offering 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
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 and prior to fiscal 1999, the Company was
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primarily self-insured with stop-loss coverage. Management determines the
estimate of the reserve for the deductible and self-insurance considering a
number of factors, including historical experience and 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 1.15 percent and 3.96 percent at September 30, 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 September 30, 2003 and
December 31, 2002 were $7,287,000 and $4,654,000, respectively, which is
recorded in the accompanying consolidated financial statements. The related
undiscounted amounts were $7,810,000 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 September 30, 2003 and December 31, 2002 was $1,499,000 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 thirty-nine weeks ended September 30, 2003 and
October 1, 2002 resulted in tax expense of approximately $0.3 million and $0.6
million, respectively. Income taxes are calculated using the projected effective
tax rate for fiscal 2003 and 2002, respectively, which includes tax credit
generation and 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 Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("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 the Company's 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
-9-
measurement provisions are currently effective and did not have a material
effect on the Company's 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 the summary of 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. While SFAS No. 148 does not amend SFAS No. 123 to require companies
to account for employee stock options using the fair value method, the
disclosure provisions of SFAS No. 148 are applicable to all companies with
stock-based compensation, regardless of whether they account for that
compensation using the fair value method of SFAS No. 123 or the intrinsic value
method of APB Opinion No. 25, Accounting for Stock Issued to Employees. 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 the Company's
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 ("FIN 46"). This Interpretation
applies immediately to variable interest entities created after January 31,
2003. In October 2003, certain provisions of FIN 46 were amended. FIN 46, as
amended, applies to the first fiscal year or interim period beginning after
December 15, 2003, to those 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 Company will evaluate the
effect of this interpretation on its financial position and results of
operations after the FASB completes its deliberation.
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 the Company's 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 did not have a
material effect on the Company's financial position or results of operations.
-10-
3. CONTRACT RELATED LOSSES
Contract related losses for the thirty-nine weeks ended September 30,
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 thirty-nine weeks ended October
1, 2002, contract related losses of $0.7 million reflect an impairment charge
for the write-down of contract rights related to a terminated contract.
4. COMMITMENTS AND CONTINGENCIES
The Company is from time to time involved in various legal proceedings
incidental to the conduct of our business. In May 2003, a purported class action
entitled Holden v. Volume Services America, et al. was filed against the Company
in the Superior Court of California for the County of Orange by a former
employee at one of the California stadiums the Company serves 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 the Company serves in California. The Company has removed
the case to the United States District Court for the Central District of
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. The Company is in the process of
evaluating this case and, while the review is preliminary, management believes
that the Company's business practices are, and were during the period alleged,
in compliance with the law. The Company intends to vigorously defend this case.
However, due to the early stage of this case and the Company's evaluation,
management cannot predict the outcome of this case and, if an ultimate ruling is
made against the Company, whether such ruling would have a material effect on
the Company's financial condition and results of operations.
Except for the case described above, in management's 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 are 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.
5. SUBSEQUENT EVENTS
The Company commenced a tender offer and consent solicitation on
October 22, 2003 with respect to all of its outstanding $100.0 million aggregate
principal amount of 11 1/4% senior subordinated notes due 2009. The closing of
this tender offer is conditional on the consummation of the IDSs offering as
discussed in Note 1.
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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 Volume Holdings, Guarantor Subsidiaries (including Volume Services America,
the issuer) and Non-Guarantor Subsidiaries as of September 30, 2003 and December
31, 2002 (in the case of the balance sheets) and for the thirteen and
thirty-nine week periods ended September 30, 2003 and October 1, 2002 (in the
case of the statements of operations and comprehensive income) and for the
thirty-nine week periods ended September 30, 2003 and October 1, 2002 in the
case of the statement of cash flows.
CONSOLIDATING CONDENSED BALANCE SHEET, SEPTEMBER 30, 2003 (IN THOUSANDS)
Issuer and
Combined Combined
Volume Guarantor Non-guarantor
Assets Holdings Subsidiaries Subsidiaries Eliminations Consolidated
Current assets:
Cash and cash equivalents $ - $ 26,913 $ 292 $ - $ 27,205
Accounts receivable - 17,848 2,214 - 20,062
Other current assets - 30,124 1,788 (6,856) 25,056
------- -------- ------- -------- --------
Total current assets - 74,885 4,294 (6,856) 72,323
Property and equipment - 50,615 3,182 - 53,797
Contract rights, net - 102,956 627 - 103,583
Cost in excess of net assets acquired - 46,457 - - 46,457
Investment in subsidiaries 2,278 - - (2,278) -
Other assets - 30,346 13 - 30,359
------- -------- ------- -------- --------
Total assets $ 2,278 $305,259 $ 8,116 $ (9,134) $306,519
======= ======== ======= ======== ========
Liabilities and Stockholders' Equity (Deficiency)
Current liabilities:
Intercompany liabilities $ - $ - $ 6,856 $ (6,856) $ -
Other current liabilities - 78,981 2,878 - 81,859
------- -------- ------- -------- --------
Total current liabilities - 78,981 9,734 (6,856) 81,859
Long-term debt - 213,388 - - 213,388
Other liabilities - 8,994 - - 8,994
------- -------- ------- -------- --------
Total liabilities - 301,363 9,734 (6,856) 304,241
------- -------- ------- -------- --------
Stockholders' equity (deficiency):
Common stock - - - - -
Additional paid-in capital 67,481 67,481 - (67,481) 67,481
Accumulated deficit (14,561) (12,843) (1,718) 14,561 (14,561)
Treasury stock and other (50,642) (50,742) 100 50,642 (50,642)
------- -------- ------- -------- --------
Total stockholders' equity (deficiency) 2,278 3,896 (1,618) (2,278) 2,278
------- -------- ------- -------- --------
Total liabilities and stockholders'
equity (deficiency) $ 2,278 $305,259 $ 8,116 $(9,134) $306,519
======= ======== ======= ======== ========
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Consolidating Condensed Statement of Operations and Comprehensive Income
Thirteen Week Period Ended September 30, 2003 (in thousands)
Issuer and
Combined Combined
Volume Guarantor Non-guarantor
Holdings Subsidiaries Subsidiaries Eliminations Consolidated
Net sales $ - $ 204,468 $ 10,168 $ - $ 214,636
Cost of sales - 164,624 8,754 - 173,378
Selling, general, and administrative - 16,694 1,025 - 17,719
Depreciation and amortization - 6,733 223 - 6,956
Contract related losses - - -
--------- -------- ---------
Operating income - 16,417 166 - 16,583
Interest expense - 4,833 - 4,833
Other income, net - (7) (1) - (8)
--------- --------- ---------
Income before income taxes - 11,591 167 - 11,758
Income tax provision - 1,084 - - 1,084
Equity in earnings of subsidiaries 10,674 - - (10,674) -
--------- ---------- ---------- --------- ---------
Net income 10,674 10,507 167 (10,674) 10,674
Other comprehensive loss -
foreign currency translation adjustment - - (16) - (16)
---------- ----------- ----------- ---------- ----------
Comprehensive income $ 10,674 $ 10,507 $ 151 $ (10,674) $ 10,658
========== ============ =========== ========== ===========
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Consolidating Condensed Statement of Operations and Comprehensive Income
Thirty-nine Week Period Ended September 30, 2003 (in thousands)
Issuer and
Combined Combined
Volume Guarantor Non-guarantor
Holdings Subsidiaries Subsidiaries Eliminations Consolidated
Net sales $ - $457,172 $ 27,097 $ - $484,269
Cost of sales - 372,359 23,338 - 395,697
Selling, general, and administrative - 42,298 2,973 - 45,271
Depreciation and amortization - 19,733 593 - 20,326
Contract related losses - 647 - - 647
-------- -------- --------
Operating income - 22,135 193 - 22,328
Interest expense - 15,028 - 15,028
Other income, net - (21) (6) - (27)
-------- -------- --------
Income before income taxes - 7,128 199 - 7,327
Income tax provision - 322 - - 322
Equity in earnings of subsidiaries 7,005 - - (7,005) -
------- -------- -------- ------- --------
Net income 7,005 6,806 199 (7,005) 7,005
Other comprehensive gain -
foreign currency translation adjustment - - 544 - 544
------- -------- -------- ------- --------
Comprehensive income $ 7,005 $ 6,806 $ 743 $(7,005) $ 7,549
======= ======== ======== ======== ========
-14-
Consolidating Condensed Statement of Cash Flows
Thirty-nine Week Period Ended September 30, 2003 (in thousands)
Issuer and
Combined Combined
Volume Guarantor Non-guarantor
Holdings Subsidiaries Subsidiaries Consolidated
Cash Flows Provided by Operating Activities $ - $ 44,944 $ 471 $ 45,415
--- -------- ----- --------
Cash Flows from Investing Activities:
Purchase of property and equipment, net - (5,899) (403) (6,302)
Contract rights acquired, net - (13,497) - (13,497)
--- -------- ----- --------
Net cash used in investing activities - (19,396) (403) (19,799)
--- -------- ----- --------
Cash Flows from Financing Activities:
Net repayments - revolving loans - (10,000) - (10,000)
Principal payments on long-term debt - (862) - (862)
Increase in bank overdrafts - 2,144 2,144
Loans to related parties - (67) - (67)
--- -------- ----- --------
Net cash used in financing activities - (8,785) (8,785)
--- -------- ----- --------
Increase in cash - 16,763 68 16,831
Cash and cash equivalents - beginning of period - 10,150 224 10,374
--- -------- ----- --------
Cash and cash equivalents - end of period $ - $ 26,913 $ 292 $ 27,205
=== ======== ===== ========
-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 (Loss)
Thirteen Week Period Ended October 1, 2002 (in thousands)
Combined Combined
Volume Guarantor Non-guarantor
Holdings Subsidiaries Subsidiaries Eliminations Consolidated
Net sales $ $186,674 $ 8,426 $ $195,100
Cost of sales 149,211 7,248 156,459
Selling, general, and administrative 15,129 886 16,015
Depreciation and amortization 6,483 251 6,734
-------- ------- --------
Operating income 15,851 41 15,892
Interest expense 5,129 5,129
Other income, net (28) (28)
-------- ------- --------
Income before income taxes 10,750 41 10,791
Income tax provision 1,008 - 1,008
Equity in earnings of subsidiaries 9,783 - - (9,783) -
-------- -------- ------- -------- --------
Net income 9,783 9,742 41 (9,783) 9,783
Other comprehensive loss -
foreign currency translation adjustment - - (152) - (152)
-------- -------- ------- -------- --------
Comprehensive income (loss) $ 9,783 $ 9,742 $ (111) $ (9,783) $ 9,631
======== ======== ======= ======== ========
Consolidating Condensed Statement of Operations and Comprehensive Income
Thirty-nine Week Period Ended October 1, 2002 (in thousands)
Combined Combined
Volume Guarantor Non-guarantor
Holdings Subsidiaries Subsidiaries Eliminations Consolidated
Net sales $ $426,300 $23,061 $ $449,361
Cost of sales 345,646 19,891 365,537
Selling, general, and administrative 40,316 2,283 42,599
Depreciation and amortization 18,291 715 19,006
Contract related losses 699 - 699
-------- ------- --------
Operating income 21,348 172 21,520
Interest expense 15,646 15 15,661
Other income, net (1,445) (1) (1,446)
-------- ------- --------
Income before income taxes 7,147 158 7,305
Income tax provision 551 - 551
Loss in earnings of subsidiaries 6,754 - - (6,754) -
------- -------- ------- ------- --------
Net income 6,754 6,596 158 (6,754) 6,754
Other comprehensive gain -
foreign currency translation adjustment - - 7 - 7
------- -------- ------- ------- --------
Comprehensive income $ 6,754 $ 6,596 $ 165 $(6,754) $ 6,761
======= ======== ======= ======= ========
-17-
Consolidating Condensed Statement of Cash Flows
Thirty-nine Week Period Ended October 1, 2002 (in thousands)
Combined Combined
Volume Guarantor Non-guarantor
Holdings Subsidiaries Subsidiaries Consolidated
Cash Flows Provided by Operating Activities $ - $ 47,331 $ 657 $ 47,988
--- -------- ----- --------
Cash Flows from Investing Activities:
Purchase of property and equipment, net - (7,018) (604) (7,622)
Proceeds from sale of property, plant and equipment 2,387 2,387
Contract rights acquired, net - (35,904) - (35,904)
--- -------- ----- --------
Net cash used in investing activities - (40,535) (604) (41,139)
--- -------- ----- --------
Cash Flows from Financing Activities:
Net repayments - revolving loans - (12,750) - (12,750)
Principal payments on long-term debt - (862) - (862)
Principal payments on capital lease obligations - (267) - (267)
Increase in bank overdrafts - 2,348 2,348
--- -------- ----- --------
Net cash used in financing activities - (11,531) (11,531)
--- -------- ----- --------
Increase (decrease) in cash - (4,735) 53 (4,682)
Cash and cash equivalents - beginning of period - 14,976 166 15,142
--- -------- ----- --------
Cash and cash equivalents - end of period $ - $ 10,241 $ 219 $ 10,460
=== ======== ===== ========
-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 thirty-nine week periods ended
September 30, 2003 and October 1, 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 September 30, 2003, net property and equipment of
$53.8 million and net contract rights of $103.6 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 from a contract 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
September 30, 2003, goodwill of $46.5 million and other
-19-
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 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 for
testing the goodwill for impairments is the Company. In
performing the annual goodwill assessment, we compare the fair
value of the Company to its net asset carrying amount, including
goodwill and trademarks. 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 to determine the amount of the goodwill write-off. 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 tax assets, 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:
-20-
o seasonality of sporting and other events;
o unpredictability in the number, timing and type of new contracts;
o timing of contract expirations and special events; and
o level of attendance at the facilities which we serve.
Business at the principal types of facilities we serve is seasonal in
nature. Major League Baseball ("MLB") and minor league baseball related sales
are concentrated in the second and third quarter, the majority of National
Football League ("NFL") related activity occurs in the fourth quarter and
convention centers and arenas generally host 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 through third 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 $214,636 $195,100 $177,559
4th Quarter $127,801 $124,714
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED SEPTEMBER 30, 2003 COMPARED TO THE THIRTEEN WEEKS ENDED
OCTOBER 1, 2002
Net sales - Net sales of $214.6 million for the thirteen weeks ended
September 30, 2003 increased by $19.5 million or 10% from $195.1 million in the
prior year period. The higher sales were due in part to an increase in MLB
related sales which improved $12.0 million from the prior year period primarily
attributable to an overall increase in attendance and per capita spending and
two post-season games as compared to no post-season games in the prior year
period. In addition, new accounts generated approximately $10.2 million in net
sales, partially offset by expired and/or terminated accounts, which decreased
sales by $4.2 million. NFL related net sales also increased $2.0 million over
the prior year period due mainly to an increase in per capita spending.
Cost of sales - Cost of sales of $173.4 million for the thirteen weeks
ended September 30, 2003 increased by $16.9 million from $156.5 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 0.6% from the prior year period to
approximately 81%. The increase was primarily the result of higher commission
costs mainly attributable to the 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,
higher payroll expenses (0.3% increase) were incurred in the period primarily
associated with the initial start-up costs related to the opening of new
facilities. However, the increase was offset by reductions in product costs as a
percentage of sales (0.4% decline) during the period due to efficiencies
achieved at certain facilities we operate.
Selling, general and administrative expenses - Selling, general and
administrative expenses of $17.7 million in the thirteen weeks ended September
30, 2003 increased $1.7 million or 0.1% as a percentage of net sales from the
-21-
prior year period. The increase was due to higher corporate overhead expenses
related to the addition of management positions during fiscal 2002. These were
partially offset by efficiencies achieved at certain facilities at which we
operate that resulted in a decline, as a percentage of net sales, in selling,
general and administrative expenses.
Depreciation and amortization - Depreciation and amortization was $7.0
million for the thirteen weeks ended September 30, 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.
Operating income - Operating income increased approximately $0.7
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.
Income taxes - Income tax expense for the thirteen weeks ended
September 30, 2003 was approximately $1.1 million, in comparison to $1.0 million
in the prior year period. During the current period, we changed our estimate of
the effective tax rate for fiscal 2003 from approximately 16.8% to 4.4% due to
the consideration of greater than previously anticipated tax credit generation
from a prior year. Consequently, the expense recognized in the current period
includes a change in our estimate to the tax provision for the entire
thirty-nine week period ended September 30, 2003. Income taxes for the thirteen
weeks ended September 30, 2003 and October 1, 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.
THIRTY-NINE WEEKS ENDED SEPTEMBER 30, 2003 COMPARED TO THE THIRTY-NINE WEEKS
ENDED OCTOBER 1, 2002
Net sales - Net sales of $484.3 million for the thirty-nine weeks ended
September 30, 2003 increased by $34.9 million or 8% from $449.4 million in the
prior year period. The increase was primarily due to new accounts, which
generated net sales of $23.5 million partially offset by expired and/or
terminated accounts, which decreased net sales by $10.7 million. Additionally,
MLB related sales increased $9.1 million from the prior year period primarily
attributable to an overall increase in attendance and per capita spending and
two post-season games as compared to no post-season games in the prior year
period. Furthermore, net sales at arenas increased $4.6 million, primarily as a
result of National Hockey League playoff activity and the addition of a National
Basketball Association tenant team at an existing client facility. 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 $395.7 million for the thirty-nine
weeks ended September 30, 2003 increased by $30.2 million from $365.5 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 0.4% from the
prior year period. The increase was primarily the result of higher commission
costs related to 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 costs as a percentage of net sales resulting
from efficiencies achieved at certain operating facilities at which we operate.
Selling, general and administrative expenses - Selling, general and
administrative expenses of $45.3 million in the thirty-nine weeks ended
September 30, 2003 declined approximately 0.2% as a percentage of net sales from
the prior year period. The decrease was due, in part, to approximately $0.8
million received in 2003 as reimbursement for assets that were previously
written-off in connection with one of our clients that filed for Chapter 11
-22-
bankruptcy during 2001. In addition, efficiencies achieved at certain operating
facilities resulted in a decline 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 of these new positions, we expect to achieve
improvements in operating income at the facilities at which we provide services.
Depreciation and amortization - Depreciation and amortization was $20.3
million for the thirty-nine weeks ended September 30, 2003, compared to $19.0
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 thirty-nine weeks ended September 30, 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 $0.8
million from the prior year period due to the factors described above.
Interest expense - Interest expense decreased by $0.6 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. Service America does not believe that it has any 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. In the thirty-nine weeks ended September 30, 2003, we
have recorded a tax provision of $0.3 million in comparison to tax provision of
$0.6 million 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
September 30, 2003 from approximately 16.8% to 4.4%.
LIQUIDITY AND CAPITAL RESOURCES
For the thirty-nine weeks ended September 30, 2003, net cash provided
by operating activities was $45.4 million compared to $48.0 million in the prior
year period. The $2.6 million decline in cash provided from the prior year
period was principally attributable to an increase in working capital in the
current period. This primarily related to the timing and number of events at the
facilities we serve resulting in higher accounts receivable and merchandise
inventories recorded at September 30, 2003.
Net cash used in investing activities was $19.8 million for the
thirty-nine weeks ended September 30, 2003 compared to $41.1 million in the
prior year period reflecting a higher level of investment associated with
-23-
renewals of existing contracts, including the renewal of the company's largest
client, in the prior year period.
Net cash used in financing activities was $8.8 million in the
thirty-nine weeks ended September 30, 2003 as compared to $11.5 million in the
prior year period. The decrease was principally due to lower net repayments of
borrowings under our revolving credit facility to fund contract investment and
working capital requirements in the current period. As of September 30, 2003, we
had approximately $5.0 million in outstanding revolving loans as compared to no
outstanding balances at October 1, 2002.
We are also required to obtain performance bonds, bid bonds or letters
of credit to secure our contractual obligations. As of September 30, 2003, we
had requirements outstanding for performance bonds and letters of credit
aggregating $13.9 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 $28.7 million in fiscal 2003, of which $19.6 million
has been invested to date. At September 30, 2003, $50.7 million of our $75.0
million revolving credit facility was available to be borrowed, after taking
into account $19.3 million of outstanding, undrawn letters of credit which
reduce availability.
If we proceed with the offering of IDSs (as discussed in our Form 10-K
for the year ended December 31, 2002 and our registration statement on Form
S-1), we intend for Volume Services America to enter into a new credit facility
to refinance its existing credit facility. We have undertaken a tender offer and
consent solicitation on October 22, 2003 for all our outstanding 11 1/4% senior
subordinated notes due 2009. We also expect Volume Holdings to repurchase shares
of its outstanding common stock from existing shareholders and to pay management
bonuses and the amount due to the Chief Executive Officer under his employment
contract, all as described in our registration statement on Form S-1. 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 and future minimum
commitments for commission and royalties, as well as contingent obligations
related to outstanding letters of credit. These obligations as of September 30,
2003 are summarized in the tables below:
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 $214.5 $1.2 $113.3 - $100.0
Operating leases 1.3 0.5 0.8 - -
Commissions and royalties 38.9 8.3 18.7 4.9 7.0
Other long-term obligations(1) 14.2 6.7 7.2 0.3 -
------ ----- ------ ----- ------
Total Contractual Obligations $268.9 $16.7 $140.0 $5.2 $107.0
====== ===== ====== ===== ======
(1) Represents capital commitments in connection with several long-term
concession contracts.
-24-
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 the Company's
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 the Company's 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 the summary of 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. While SFAS No. 148 does not amend SFAS No. 123 to require companies
to account for employee stock options using the fair value method, the
disclosure provisions of SFAS No. 148 are applicable to all companies with
stock-based compensation, regardless of whether they account for that
compensation using the fair value method of SFAS No. 123 or the intrinsic value
method of APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No.
148's amendment of the transition and annual disclosure requirements of SFAS No.
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123 are effective for fiscal years ending after December 15, 2002. The
implementation of this standard did not have a material effect on the Company's
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 ("FIN 46"). This Interpretation
applies immediately to variable interest entities created after January 31,
2003. In October 2003, certain provisions of FIN 46 were amended. FIN 46, as
amended, applies to the first fiscal year or interim period beginning after
December 15, 2003, to those 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 Company will evaluate the
effect of this interpretation on the Company's financial position or results of
operations after the FASB completes its deliberation.
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 the Company's 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 did not have a
material effect on the Company's 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:
o our high degree of leverage and significant debt service obligations;
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 those 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;
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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 general risks associated with the food service industry;
o the risk of increased litigation against us;
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 September 30, 2003, would cause a change in
annual interest expense of approximately $1.1 million. Volume Services America's
11 1/4% senior subordinated notes due 2009 are fixed interest rate debt
obligations.
As of September 30, 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.
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 September 30, 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 occurred 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 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.
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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
entitled Holden v. Volume Services America, et al. was filed against us in the
Superior Court of California for the County of Orange by a former employee 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. We have removed the case to the United States District Court for
the Central District of 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 the review is
preliminary, we believe that the our business practices are, and were during the
period alleged, in compliance with the law. We intend to vigorously defend this
case. However, due to the early stage of this case and our evaluation, 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 our financial condition and
results of operations.
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 are 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:
10.1 Separation Agreement between Volume Services America
Holdings, Inc.and John T. Dee, dated as of August 29, 2003.
Incorporated by reference to Exhibit 10.1 of the
registrant's Form 8-K, filed on September 2, 2003.
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: On September 2, 2003, Volume Services
America filed a Form 8-K under Item 5 (Other Events) disclosing
the separation agreement between Holdings and John T. Dee.
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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 October 30, 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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