UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form 10-K/A
| (Mark One) | ||
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the fiscal year ended December 30, 2003 | ||
o | 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 001-31904 | ||
Centerplate, Inc.
Delaware | 13-3870167 | |
| (State of incorporation) | (I.R.S. Employer Identification No.) | |
| 201 East Broad Street Spartanburg, South Carolina 29306 (Address of principal executive offices, including zip code) | (864) 598-8600 (Registrant’s telephone number, including area code) | |
http://www.centerplate.com
Volume Services America Holdings, Inc.
Securities of Centerplate, Inc. registered pursuant to Section 12(b) of the Act
| Title of Each Class | Name of Each Exchange on Which Registered | |
| Income Deposit Securities (representing shares of common stock and subordinated notes) | American Stock Exchange Toronto Stock Exchange |
Securities of Centerplate, Inc. registered pursuant to Section 12(g) of the Act: None
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. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants’ knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K/A or any amendment to this Form 10-K/A. þ
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o No þ
The aggregate market value of the Income Deposit Securities (IDSs) held by non-affiliates of Centerplate, Inc. as of December 30, 2003 was approximately $248,400,000. For purposes of this disclosure, IDSs held by persons who hold more than 5% of the outstanding IDSs and IDSs held by officers and directors of the registrant have been excluded because such persons may be deemed to be affiliates. This determination is not necessarily conclusive. Centerplate, Inc. did not have publicly traded securities as of the last business day of its most recently completed second fiscal quarter.
The number of shares of common stock of Centerplate, Inc. outstanding as of March 26, 2004 was 22,524,992.
DOCUMENTS INCORPORATED BY REFERENCE
None are incorporated in this Amendment No. 1 to the Annual Report on Form 10-K/A.
CENTERPLATE, INC. (FORMERLY VOLUME SERVICES AMERICA HOLDINGS, INC.)
EXPLANATORY NOTE
This Amendment No. 1 to our Annual Report on Form 10-K/A for the year ended December 30, 2003, is being filed to reflect changes to Item 8 as described below. In addition, minor changes were also made to Items 7 and 9A to reflect the resolution of the accounting treatment of our public securities. Unless otherwise noted and except for Note 2 to the consolidated financial statements, as to which the date is October 28, 2004, all information contained herein is as of March 26, 2004, when we filed our Annual Report on Form 10K, and does not reflect any events or changes in information that may have occurred subsequent to such date.
Following the completion of the initial public offering by Centerplate, Inc. (formerly Volume Services America Holdings, Inc., “Centerplate” or the “Company”) in December 2003, there have been continuing reviews of the accounting treatment of certain features of securities similar to the Company’s income deposit securities (“IDSs”). As a result of these reviews and discussions with the SEC, the Company has identified several revisions to its accounting for IDSs. The Company has incorporated relevant changes to its accounting treatment of its IDSs that are reflected in this Amendment No. 1 to Annual Report on Form 10-K/A as described below. In addition, as described below, the Company has revised Note 16 of the consolidated financial statements to report the results of operations of Centerplate (the parent holding company and issuer of the IDSs) separately from the results of operations of the subsidiaries that guarantee the subordinated notes included in its IDSs (the “combined guarantor subsidiaries”).
This Amendment No. 1 to Annual Report on Form 10-K/A amends “Item 8. Financial Statements and Supplemental Data” of the previously filed Annual Report on Form 10-K for the fiscal year ended December 30, 2003 (“Form 10-K”) as follows:
1. Consolidated Balance Sheets — In connection with the initial public offering (“IPO”), those investors who held stock prior to the IPO (the “Initial Equity Investors”) entered into an amended and restated stockholders agreement, which provides that, upon any post-offering sale of common stock by the Initial Equity Investors, at the option of the Initial Equity Investors, we will exchange a portion of their common stock for subordinated notes at an exchange rate of $9.30 principal amount of subordinated notes for each share of common stock (so that, after such exchange, the Initial Equity Investors will have shares of common stock and subordinated notes in the appropriate proportions to represent integral numbers of IDSs) (“the conversion option”). We have concluded that the portion of the Initial Equity Investor’s common stock exchangeable for subordinated debt should be classified on our consolidated balance sheet according to the guidance provided by Accounting Series Release No. 268 (FRR Section 211),Redeemable Preferred Stocks. Accordingly, we have reclassified $14.0 million between “Common stock with conversion option exchangeable for subordinated debt, net of discount” and “Accumulated Deficit” on the balance sheet as of December 30, 2003. This amount will be accreted to the face amount due of $14.4 million using the effective interest method over the Initial Equity Investors minimum required 180-day holding period.
2. Consolidated Balance Sheets — It has been determined that the conversion option is an embedded derivative in accordance with SFAS No. 133. This resulted in a reclassification of $2.7 million from “Accumulated Deficit” to “Liability for derivatives” as of December 30, 2003.
3. Consolidated Balance Sheets — It has been determined that the Company has two classes of common stock as a result of the conversion option. Accordingly, “Common Stock” has been segregated into the two classes, “Shares Outstanding with Conversion Option” and “Shares Outstanding without Conversion Option”.
4. Consolidated Statement of Stockholders’ Equity — The Statement of Stockholders’ Equity has been revised to reflect the two classes of common stock, the conversion option and the liability for the derivative.
5. Non-Guarantor Subsidiaries Financial Statements (see Note 16 in the “Notes to the Financial Statements”) — Changes as discussed in numbers 1-3 to the Consolidated Balance Sheet have been made as appropriate to the Company’s Consolidating Balance Sheet.
6. Non-Guarantor Subsidiaries Financial Statements (see Note 16 in the “Notes to the Financial Statements”) — Centerplate’s results had been consolidated with the combined guarantor subsidiaries of its subordinated notes in the previously reported financial statements. The Company has revised the consolidating financial statements where necessary to report Centerplate independently.
7. Notes to Consolidated Financial Statements — Notes discussing the accounting treatment of the Company’s IDSs and derivative financial instruments have been updated to reflect the changes as discussed above.
The Company has made no other significant changes to its financial statements other than those discussed above.
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CENTERPLATE, INC. (FORMERLY VOLUME SERVICES AMERICA HOLDINGS, INC.)
FISCAL YEAR 2003
ANNUAL REPORT
TABLE OF CONTENTS
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| General |
Management’s discussion and analysis is a review of our results of operations and our liquidity and capital resources. The following discussion should be read in conjunction with “Selected Financial Data” (which was previously filed on March 29, 2004 in our Form 10K) and the financial statements, including the related notes, appearing elsewhere in this report. The following data has been prepared in accordance with GAAP.
| Overview |
We believe that the ability to retain existing accounts and to win new accounts are the key drivers to maintaining and growing our net sales. Net sales historically have also increased when there has been an increase in the number of events or attendance at our facilities in connection with major league sports post-season and play-off games. Another key factor is our skill at controlling product costs, cash and labor during the events where we provide our services.
When renewing an existing contract or securing a new contract, we usually have to make a capital expenditure in our client’s facility and offer to pay the client a percentage of the net sales or profits in the form of a commission. Over the past three years, we have reinvested the cash flow generated by operating activities in order to renew or obtain contracts. We believe that these investments have provided a diversified account base of exclusive, long-term contracts. However, as a result of the changes to our capital structure (including refinancing the 1998 credit facility, entering into the 2003 credit facility, repurchasing the 1999 notes and completing our IPO) and the dividend and interest payments to our IDS holders, we may be limited in our ability to grow our business, and our related levels of growth capital expenditures, at rates as great as the relatively rapid growth that we experienced over the last several years. In particular, we may not be able to pursue future growth opportunities if borrowings under our 2003 credit facility or additional issuances of our IDSs or other securities are not available to us on favorable terms or at all.
Critical Accounting Policies
The preparation of financial statements in conformity with 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:
| • | Recoverability of Property and Equipment, Contract Rights, Cost in Excess of Net Assets Acquired (Goodwill) and Other Intangible Assets. As of December 30, 2003, net property and equipment of $52.8 million and net contract rights of $101.5 million were recorded. In accordance with 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 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 make assurances 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 |
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| 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 December 30, 2003, net goodwill of $46.5 million and other intangible assets (trademarks) of $17.3 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 impairment is Centerplate. In performing the annual goodwill assessment, we compare the fair value of Centerplate to its net asset carrying amount, including goodwill and trademarks. If the fair value of Centerplate exceeds the carrying amount, then it is determined that goodwill is not impaired. Should the carrying amount exceed the fair value, 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 make assurances 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 asset 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. | ||
| • | 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. 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 an 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. | |
| • | Accounting Treatment for IDSs, Common Stock Owned by Initial Equity Investors and Derivative Financial Instruments. Our IDSs include common stock and subordinated notes, the latter of which has three embedded derivative features. The embedded derivative features include a call option, a change of control put option, and a term-extending option on the notes. The call option allows us to repay the principal amount of the subordinated notes after the fifth anniversary of the issuance, provided that we also pay all of the interest that would have been paid during the initial 10-year term of the notes, discounted to the date of repayment at a risk-free rate. Under the change of control put option, the holders have the right to cause us to repay the subordinated notes at 101% of face value upon a change of control, as defined in the subordinated note agreement. The term-extending option allows us to unilaterally extend the term of the subordinated notes for two five-year periods at the end of the initial 10-year period provided that we are in compliance with the requirements of the indenture. We have accounted for these embedded derivatives in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133,Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted. Based on SFAS No. 133, as amended and interpreted, the call option and the change of control put option are required to be separately valued. As of December 30, |
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| 2003, these embedded derivatives were fair valued and determined to be insignificant. The term extending option was determined to not be separable from the underlying subordinated notes. Accordingly, it will not be separately accounted for in the current or future periods. |
| In connection with the IPO, those investors who held stock prior to the IPO (the “Initial Equity Investors”) entered into an amended and restated stockholders agreement, which provides that, upon any post-offering sale of common stock by the Initial Equity Investors, at the option of the Initial Equity Investors, we will exchange a portion of their common stock for subordinated notes at an exchange rate of $9.30 principal amount of subordinated notes for each share of common stock (so that, after such exchange, the Initial Equity Investors will have shares of common stock and subordinated notes in the appropriate proportions to represent integral numbers of IDSs). We have concluded that the portion of the Initial Equity Investor’s common stock exchangeable for subordinated debt should be classified on its consolidated balance sheet according to the guidance provided by Accounting Series Release No. 268 (FRR Section 211),Redeemable Preferred Stocks.Accordingly, we have recorded $14.0 million as “Common stock with conversion option exchangeable for subordinated debt, net of discount” on the balance sheet. This amount will be accreted to the face amount due of $14.4 million using the effective interest method over the life of the Initial Equity Investors minimum required 180-day holding period. In addition, we have determined that the option conveyed to the Initial Equity Investors to exchange common stock for subordinated debt in order to form IDSs is an embedded derivative in accordance with SFAS No. 133. The Company has recorded a liability for the fair value of this embedded derivative of approximately $2.7 million as of December 30, 2003. This option is fair-valued each reporting period with the change in the fair value recorded in interest expense in the accompanying consolidated statement of operations. |
| • | 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. | |
| We accounted for the issuance of IDS units in December 2003 by allocating the proceeds for each IDS unit to the underlying stock and subordinated notes based upon the relative fair values of each at that time. Accordingly, the portion of the aggregate IDSs outstanding that represents subordinated notes has been accounted for as long-term debt bearing a stated interest rate of 13.5% maturing on December 10, 2013. There can be no assurances that the Internal Revenue Service or the courts will not seek to challenge the treatment of these notes as debt or the amount of interest expense deducted, although to date we have not been notified that the notes should be treated as equity rather than debt for U.S. federal and state income tax purposes. Such reclassification would result in an additional tax liability and cause the Company to utilize at a faster rate more of its deferred tax assets than it otherwise would. |
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:
| • | seasonality of sporting and other events; | |
| • | unpredictability in the number, timing and type of new contracts; | |
| • | timing of contract expirations and special events; and | |
| • | level of attendance at the facilities which we serve. |
Business at the principal types of facilities we serve is seasonal in nature. MLB and minor league baseball related sales are concentrated in the second and third quarters, the majority of NFL related activity occurs in
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Set forth below are comparative net sales by quarter for fiscal 2003, 2002 and 2001, as well as operating income (loss) and net income (loss), on an actual and per share basis (in thousands, except per share data):
| 2003 | ||||||||||||||||||||
| Basic and | Basic and | |||||||||||||||||||
| Operating | Diluted Operating | Net | Diluted Earnings | |||||||||||||||||
| Income | Income (Loss) | Income | (Loss) Per | |||||||||||||||||
| Sales | (Loss) | Per Share(1) | (Loss) | Share(1) | ||||||||||||||||
| 1st Quarter | $ | 96,900 | $ | (4,715 | ) | $ | (0.35 | ) | $ | (6,545 | ) | $ | (0.48 | ) | ||||||
| 2nd Quarter | $ | 172,733 | $ | 10,460 | $ | 0.77 | $ | 2,876 | $ | 0.21 | ||||||||||
| 3rd Quarter | $ | 214,636 | $ | 16,583 | $ | 1.22 | $ | 10,674 | $ | 0.78 | ||||||||||
| 4th Quarter | $ | 131,788 | $ | (375 | ) | $ | (0.02 | ) | $ | (11,423 | ) | $ | (0.70 | ) | ||||||
| 2002 | ||||||||||||||||||||
| Basic and | Basic and | |||||||||||||||||||
| Operating | Diluted Operating | Net | Diluted Earnings | |||||||||||||||||
| Income | Income (Loss) | Income | (Loss) Per | |||||||||||||||||
| Sales | (Loss) | Per Share(1) | (Loss) | Share(1) | ||||||||||||||||
| 1st Quarter | $ | 87,840 | $ | (4,185 | ) | $ | (0.31 | ) | $ | (6,870 | ) | $ | (0.50 | ) | ||||||
| 2nd Quarter | $ | 166,421 | $ | 9,813 | $ | 0.72 | $ | 3,841 | $ | 0.28 | ||||||||||
| 3rd Quarter | $ | 195,100 | $ | 15,892 | $ | 1.17 | $ | 9,783 | $ | 0.72 | ||||||||||
| 4th Quarter | $ | 127,801 | $ | 1,975 | $ | 0.15 | $ | (2,258 | ) | $ | (0.17 | ) | ||||||||
| 2001 | ||||||||||||||||||||
| Basic and | Basic and | |||||||||||||||||||
| Operating | Diluted Operating | Net | Diluted Earnings | |||||||||||||||||
| Income | Income (Loss) | Income | (Loss) Per | |||||||||||||||||
| Sales | (Loss) | Per Share(1) | (Loss) | Share(1) | ||||||||||||||||
| 1st Quarter | $ | 83,194 | $ | (4,107 | ) | $ | (0.30 | ) | $ | (10,631 | ) | $ | (0.78 | ) | ||||||
| 2nd Quarter | $ | 157,646 | $ | 8,117 | $ | 0.60 | $ | 2,155 | $ | 0.16 | ||||||||||
| 3rd Quarter | $ | 177,559 | $ | 13,862 | $ | 1.02 | $ | 8,399 | $ | 0.62 | ||||||||||
| 4th Quarter | $ | 124,714 | $ | 1,283 | $ | 0.09 | $ | (3,523 | ) | $ | (0.26 | ) | ||||||||
| (1) | The basic and diluted operating income (loss) and basic and diluted earnings (loss) per share reflect a 40,920 (rounded to the nearest share) for one split of the common stock that was effected on December 2, 2003. |
Results of Operations
| Fiscal 2003 Compared to Fiscal 2002 |
Net sales. Net sales of $616.1 million for fiscal 2003 increased by $38.9 million or 6.7% from $577.2 million in fiscal 2002. The increase was primarily due to 17 new accounts (including contracts executed in fiscal 2002 where revenue was not fully annualized until fiscal 2003), which generated net sales of $37.1 million partially offset by 11 expired and/or terminated accounts, which decreased net sales by $7.8 million. Additionally, MLB related sales increased $14.3 million from the prior year period primarily attributable to an overall increase in attendance and per capita spending and also included an increase of approximately $4.4 million related to post-season games. The remaining decline in net sales was primarily due to decreased volume in various facilities where we provide our services.
Cost of sales. Cost of sales of $504.0 million for fiscal 2003 increased by $33.1 million from $470.9 million in fiscal 2002 due primarily to the higher sales volume. Cost of sales as a percentage of net sales increased by approximately 0.2% 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
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Selling, general and administrative expenses. Selling, general and administrative expenses of $59.6 million in fiscal 2003 increased by $4.3 million from $55.3 million in fiscal 2002. The increase was primarily associated with higher corporate overhead expenses of $4.3 million related to the addition of management positions during fiscal 2002 and to an increase in professional and legal fees. These additions to management were designed to increase and upgrade the senior-level management available to our clients. In addition, higher insurance costs of approximately $1.1 million were incurred; however; these costs were offset by savings in other cost categories.
Depreciation and amortization. Depreciation and amortization was $27.1 million for fiscal 2003, compared to $26.2 million in fiscal 2002. The increase was principally attributable to higher amortization expense primarily related to investments for the renewal and/or acquisition of certain contracts.
Transaction related expenses. Transaction related expenses of $2.6 million in fiscal 2003 include certain expenses related to executive compensation associated with our IPO of IDSs. The fiscal 2002 costs related primarily to the expenses incurred in connection with the structuring and evaluation of financing and recapitalization strategies.
Contract related losses. Contract related losses of $0.8 million recorded in fiscal 2003 reflected 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 $0.6 million for the write-down of contract rights and other assets for certain terminated contracts. In fiscal 2002, contract related losses of $0.7 million reflected an impairment charge for the write-down of contract rights.
Operating income. Operating income decreased approximately $1.5 million from fiscal 2002 due to the factors described above.
Interest expense. Interest expense of $32.8 million in fiscal 2003 included a $5.3 million non-cash charge for the early extinguishment of debt resulting from the refinancing of our 1998 credit facility and $7.2 million in expenses related to the repurchase of our 1999 notes. These interest expenses, which were precipitated by our IPO, contributed substantially to the net loss we reported for fiscal 2003. With the proceeds from the IPO and funds received under our 2003 credit facility, we repaid all outstanding borrowings under our 1998 credit facility and redeemed 87.75% of our $100 million in aggregate principal amount of the 1999 notes at a redemption price of approximately 108.1% of the aggregate principal amount of the 1999 notes plus accrued and unpaid interest. Excluding these charges, interest of $20.3 million decreased by $0.4 million from fiscal 2002 principally due to the refinancing of our 1998 credit facility.
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. This event was not repeated in 2003.
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 2004 and beyond. Accordingly, in fiscal 2003, we have eliminated the valuation allowance of approximately $0.9 million and recorded a tax benefit of $6.3 million in comparison to the recognition of a $0.2 million benefit in the prior year period. The effective tax rate for fiscal 2003 was significantly impacted by recognizing the tax benefits associated with approximately $2.1 million of prior and current year tax credits and the release of the valuation allowance of approximately $0.9 million. The benefit associated with the credits arose as we determined that we could obtain the credits without increasing the amount of taxes that were payable.
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Other comprehensive income — The foreign currency translation gain of $0.7 million in fiscal 2003 reflects the favorable Canadian dollar exchange rate versus the U.S. dollar at our Canadian operations.
| Fiscal 2002 Compared to Fiscal 2001 |
Net Sales. Net sales of $577.2 million during fiscal 2002 increased $34.1 million or approximately 6% from $543.1 million in fiscal 2001. Our sports facility accounts accounted for approximately $20.2 million of the increase, of which $10.5 million was related to NFL venues. Five additional NFL games were played in our clients’ facilities in fiscal 2002, including four games that had been postponed from fiscal 2001 due to the events of September 11, 2001, and Super Bowl XXXVI. Additionally, a slight increase of $0.8 million was generated in MLB venues due primarily to an increase in sales as a result of post-season activity, including the World Series. Sales in convention centers and other entertainment facilities increased $2.3 million and $6.2 million, respectively. In addition, newly acquired service contracts generated net sales of $4.6 million.
Cost of Sales. Cost of sales of $470.9 million for fiscal 2002 increased by $24.3 million from $446.6 million for fiscal 2001. The increase was due primarily to the increase in sales volume. Cost of sales as a percentage of net sales decreased by approximately 0.4% from fiscal 2001 to 81.6%. This decrease was due mainly to efficiencies associated with the greater sales volume.
Selling, General and Administrative Expenses. Selling, general and administrative expenses of $55.3 million increased approximately 0.7% as a percentage of net sales as compared to fiscal 2001. The increase was primarily the result of higher insurance costs due to dramatic price increases in the insurance market post September 11, 2001, higher corporate overhead expenses related to the addition of management positions and an increase in professional fees. With respect to the insurance increase, we obtained estimates for the casualty insurance program (workers’ compensation, general liability, and automobile liability policies) from multiple insurance companies at the end of 2001. Due to increased rates across the insurance market in the wake of September 11, 2001, and after reviewing the results of the estimates obtained along with an independent actuarial analysis, it was our assessment that a high deductible program was more cost effective than a guaranteed cost (zero deductible) program.
Depreciation and Amortization. Depreciation and amortization was $26.2 million in fiscal 2002 compared to $24.5 million in fiscal 2001. The increase was principally attributable to higher amortization expense related to investments for the renewal and/or acquisition of certain contracts, partially offset by a decline in amortization as a result of the discontinuation of goodwill and trademark amortization ($2.5 million) in accordance with SFAS No. 142.
Transaction Related Expenses. Acquisition related costs of $0.6 million were incurred in fiscal 2002 relating primarily to expenses incurred in connection with the structuring and evaluation of financing and recapitalization strategies, including proposals for securities offerings that preceded the proposed offering of IDSs and the related refinancing of the 1998 credit facility and 1999 notes. No such expenses were incurred in 2001.
Contract Related Losses. Contract related losses of $0.7 million in fiscal 2002 reflected an impairment charge related to a write-down of contract rights for one contract. In fiscal 2001, contract related losses of $4.8 million reflected an impairment charge of $2.3 million for equipment, leasehold improvements and location contracts with respect to certain contracts. Most of the $2.3 million impairment charge related to two of our clients which filed for Chapter 11 bankruptcy in 2001. Additionally, $2.5 million in other assets — chiefly long-term receivables related to one of those clients — was written off.
Operating Income. Operating income increased approximately $4.3 million in fiscal 2002 as compared to fiscal 2001 due to the factors described above.
Interest Expense. Interest expense decreased by $2.7 million from fiscal 2001 due primarily to lower interest rates on our variable rate debt.
Other Income, net. During fiscal 2002, Service America received approximately $1.4 million in connection with funds set aside to satisfy creditors pursuant to a plan of reorganization approved in 1993.
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Income Taxes. Management has evaluated the available evidence about future taxable income and other possible sources of realization of deferred tax assets, and, based on its best current estimates, believes taxable income or benefit will be realized in fiscal 2002 and beyond. Accordingly, in fiscal 2002 we have reduced the valuation allowance by $1.3 million and recorded a tax benefit of approximately $0.2 million in comparison to the recognition of a benefit of $0.4 million in fiscal 2001.
| Outlook |
The weak economy and related factors in the last several years have had an adverse impact on the levels of attendance at some sports events and in many convention center facilities we serve and on the levels of spending in the convention center facilities. Looking forward, we hope that economic conditions will improve, but we have no evidence that 2004 will be significantly different from 2003.
The events of September 11, 2001 caused a significant increase in our insurance costs related to the recreational facilities in which we provide services. Recently there has been some improvement in insurance rates, although insurance costs remain high for desirable coverage.
Liquidity and Capital Resources
For fiscal 2003, net cash provided by operating activities was $27.2 million compared to $38.6 million in fiscal 2002. The $11.4 million decline in cash provided was principally attributable to IPO related expenses, including $7.2 million for the repurchase of the 1999 notes, as discussed above, and $2.6 million in expenses related to executive compensation associated with the issuance of the IDSs. In addition, in fiscal 2002, approximately $1.4 million in funds was recovered by Service America, as discussed above.
Net cash used in investing activities was $23.3 million for fiscal 2003 compared to $45.0 million in fiscal 2002 reflecting a higher level of investment associated with renewals of existing contracts in the prior year period, including the renewal of our largest client.
Net cash provided by financing activities was $8.7 million in fiscal 2003 as compared to $1.7 million in fiscal 2002, the increase primarily reflecting the IPO. The proceeds of the term loans from our 2003 credit facility were combined with proceeds from the IPO and the combined funds of $341.7 were used to repay the outstanding balance under our 1998 credit facility of $116.8 million, repay $87.8 million of 1999 notes, establish cash reserves of $22.0 million for the benefit of the new lenders, repurchase the remaining 1999 notes, repurchase common stock from the investors in the amount of $71.4 million and pay fees and expenses in connection with the IPO, the 2003 credit facility and the notes thereunder.
For fiscal 2002, net cash provided by operating activities was $38.6 million as compared to $24.7 million in fiscal 2001. The $13.9 million increase was principally attributable to a $8.1 million increase in net income, mainly as the result of the $4.3 million improvement in operating income, $2.7 million decline in interest expense and the recovery of $1.4 million in funds by Service America, as discussed above. Additionally, our working capital decreased as compared to the prior year period chiefly due to higher accrued commissions, insurance and legal fees.
Net cash used in investing activities was $45.0 million in fiscal 2002 compared to $29.3 million in fiscal 2001, primarily reflecting a higher level of investment in contract rights and property and equipment associated with renewals of existing contracts in fiscal 2002.
Net cash provided by financing activities was $1.7 million in fiscal 2002 as compared to $5.0 million in fiscal 2001. As of December 31, 2002, $15.0 million in revolving loans were outstanding under our 1998 credit facility as compared to $12.8 million at the end of fiscal 2001; however, the increase in net borrowings was only
8
We are also often required to obtain performance bonds, bid bonds or letters of credit to secure our contractual obligations. As of December 30, 2003, we had requirements outstanding for performance bonds and letters of credit of $13.4 million and $20.3 million, respectively. Under the 2003 credit facility, we have an aggregate of $35.0 million available for letters of credit, subject to an overall borrowing limit of $50.0 million under that facility. As of December 30, 2003 we had approximately $25.7 million available to be borrowed under the revolving credit facility. At that date there were $4.0 million in outstanding borrowings and $20.3 million of outstanding undrawn letters of credit reducing availability. At December 31, 2002, $43.7 million was available to be borrowed under our 1998 credit facility. At that date, there were $15.0 million in outstanding borrowings and $16.3 million of outstanding, undrawn letters of credit reducing availability.
Our capital expenditures can be categorized into two types: maintenance and growth. Maintenance capital expenditures are associated with securing renewals of our existing contracts and maintaining those contracts following renewal. Growth capital expenditures are those made in connection with securing new contracts and maintaining those contracts during their initial term. In both cases, particularly for sports facilities, capital expenditures are often required in the form of contract acquisition fees or up-front or committed future capital investment to help finance facility construction or renovation. This expenditure typically takes the form of investment in leasehold improvements and food service equipment and grants to owners or operators of facilities. We provide our historical maintenance and growth capital expenditures for each of the five fiscal years ended December 30, 2003 in Item 6 “Selected Financial Data.” The amount of maintenance capital expenditures in fiscal 2002, a total of $31.2 million, increased significantly due to the renewal of several large long-term contracts. We have historically financed our capital expenditures with a combination of cash from operating activities and borrowings under the revolving line of credit of the credit facility.
We believe that the identification and separation of maintenance and growth capital expenditures are important factors in evaluating our business results. While we strive to maintain our present levels of net sales and EBITDA by securing renewals of our existing contracts, we cannot make assurances that we will maintain our present levels of net sales and EBITDA since we cannot predict the future financial requirements of our clients. Contracts may be renewed at significantly different commission rates, and thus levels of net sales and EBITDA, depending on the clients’ financial requirements at the time of renewal.
The amount of capital commitment required by us can vary significantly. The ability to make those expenditures is often an essential element of a successful bid on a new contract or renewal of an existing contract. The following table shows our net sales for fiscal 2003, which equaled $616.1 million, as allocated according to the expiration year of our contracts:
| Contracts Expiring in: | ||||||||||
| 2004 | 2005 | 2006 | 2007 | 2008 and After | ||||||
| (In millions) | ||||||||||
| $104.3 | $56.8 | $110.1 | $81.0 | $ | 260.2 | |||||
Commission and management fee rates vary significantly among contracts based primarily upon the amount of capital that we invest, the type of facility involved, the term of the contract and the services provided by us. In general, within each client category, the level of capital investment and commission are related, such that the greater the capital investment that we make, the lower the commission we pay to the client. Our profit sharing contracts generally provide that we are reimbursed each year for the amortization of our capital investments prior to determining profits under the contract.
At the end of the contract term, all capital investments that we have made typically remain the property of the client, but our contracts generally provide that the client must reimburse us for any undepreciated or unamortized capital investments or fees made pursuant to the terms of the contract if the contract is terminated early, other than due to our default.
9
We believe that cash flow from operating activities, together with borrowings available under the 2003 credit facility, will be sufficient to fund our currently anticipated capital investment requirements, interest and principal payment obligations, working capital requirements and anticipated dividend payments. In fiscal 2003, we made capital investments of $23.9 million. We are currently committed to fund aggregate capital investments of approximately $12.4 million, $1.7 million, $2.7 million and $0.3 million in 2004, 2005, 2006 and 2007, respectively. We expect that future maintenance capital expenditures will be financed through net cash provided by operating activities. We expect that future growth capital expenditures will be financed through borrowings under the revolving portion of our 2003 credit facility, issuances of additional IDSs or other securities of ours, net cash provided by operating activities or a combination of these alternatives.
| 2003 Credit Agreement |
On December 10, 2003, Volume Services America, Inc. (“VSA”), a subsidiary of Centerplate, entered into the 2003 credit facility under a credit agreement providing for $65,000,000 in fixed rate term loans and a $50,000,000 revolving portion. The term loans bear interest at a fixed rate of 7.24% and mature on June 10, 2008. The revolving portion of the 2003 credit facility allows VSA to borrow up to $50,000,000 and includes a sub-limit of $35,000,000 for letters of credit (which reduce availability under the revolving portion of the 2003 credit facility) and a sub-limit of $5,000,000 for swingline loans. Revolving loans must be repaid on the maturity date of the revolving portion of the 2003 credit facility and are subject to an annual clean-up period of thirty days. Swingline loans must be either repaid within five days or converted to revolving loans. The revolving portion of the 2003 credit facility is subject to an annual clean-up period of thirty days and matures on December 10, 2006. Borrowings under the revolving portion of the 2003 credit facility bear interest at floating rates based upon the interest rate option elected by VSA and its leverage ratio.
The credit agreement calls for mandatory prepayment of the loans under certain circumstances and optional prepayment without penalty. There are further provisions that limit VSA’s ability to make interest payments on the 2003 notes, make dividend payments and invest in capital expenditures. The credit agreement contains provisions that require VSA to comply with certain financial covenants, including a maximum net total leverage ratio, a maximum net senior leverage ratio and an interest coverage ratio. At December 30, 2003, VSA was in compliance with all covenants.
| Subordinated Notes Issued in 2003 |
During December 2003, in connection with our IPO, we issued $105,245,000 in aggregate principal amount of 13.50% Subordinated Notes (“2003 notes”). The 2003 notes mature on December 10, 2013 and are subject to extension by two successive five year terms at Centerplate’s option provided that certain financial conditions are met. Interest on the 2003 notes is payable on or about the 20th day of each month. The 2003 notes are unsecured, are subordinated to all of Centerplate’s existing and future senior indebtedness, and rank equally with all of Centerplate’s existing and future indebtedness. Furthermore, the debt is guaranteed by all of the wholly-owned subsidiaries of Centerplate.
10
Contractual Commitments
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 December 30, 2003 are summarized below:
| Payments Due by Period | ||||||||||||||||||||
| Less Than | 1-3 | 4-5 | More Than | |||||||||||||||||
| Total | 1 Year | Years | Years | 5 Years | ||||||||||||||||
| (In millions) | ||||||||||||||||||||
| Long-term borrowings | $ | 186.5 | $ | 16.3 | $ | — | $ | 65.0 | $ | 105.2 | ||||||||||
| Interest for fixed rate debt | 162.8 | 19.1 | 57.2 | 30.5 | 56.0 | |||||||||||||||
| Insurance | 8.8 | 4.5 | 3.6 | 0.5 | 0.2 | |||||||||||||||
| Operating leases | 1.3 | 0.5 | 0.8 | — | — | |||||||||||||||
| Commissions and royalties | 38.4 | 8.3 | 17.1 | 6.1 | 6.9 | |||||||||||||||
| Capital Commitments(1) | 17.1 | 12.4 | 4.7 | — | — | |||||||||||||||
| Other long-term liabilities(2) | 0.7 | 0.5 | 0.1 | 0.1 | — | |||||||||||||||
| Total contractual obligations | $ | 415.6 | $ | 61.6 | $ | 83.5 | $ | 102.2 | $ | 168.3 | ||||||||||
| (1) | Represents capital commitments in connection with several long-term concession contracts. |
| (2) | Represents various long-term obligations reflected on the balance sheet. |
| Payments Due by Period | ||||||||||||||||||||
| Less Than | 1-3 | 4-5 | More Than | |||||||||||||||||
| Other Commercial Commitments | Total | 1 Year | Years | Years | 5 Years | |||||||||||||||
| (In millions) | ||||||||||||||||||||
| Letters of credit | $ | 20.3 | $ | 20.3 | $ | — | $ | — | $ | — | ||||||||||
We believe that our net cash provided by operating activities and borrowing capacity under the 2003 credit facility will be sufficient to enable us to fund our liquidity needs for the foreseeable future. Should we be unable to borrow under the 2003 credit facility, we would seek other sources of debt or equity funding. However, we cannot make assurances that we will be successful in obtaining alternate sources of funding in sufficient amounts or on acceptable terms.
New Accounting Standards
In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. The provisions of SFAS No. 143 require that asset retirement obligations that are identifiable upon acquisition and construction, and during the operating life of a long-lived asset, be recorded as a liability using the present value of the estimated cash flows. A corresponding amount would be capitalized as part of the asset’s carrying amount and amortized to expense over the asset’s useful life. We have adopted the provisions of SFAS No. 143 effective January 1, 2003. The adoption of this statement has not had and is not expected to have a material impact on our financial position, results of operations or cash flows.
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 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 statement 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
11
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 Accounting Principles Board (“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 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 (“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 ending after December 15, 2003, to those variable interest entities in which an enterprise holds a variable interest that 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. Certain provisions of FIN 46 were deferred until the period ending after March 15, 2004. The implementation of FIN 46 for provisions effective during 2003 did not have a material impact 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 statement 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. In October 2003, the FASB deferred the implementation of certain provisions of this standard indefinitely. The implementation of this standard did not have a material effect on our financial position or results of operations.
12
Cautionary Statement Regarding Forward-Looking Statements
Some of the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in this Annual Report on Form 10-K/A may include forward-looking statements which reflect our current views with respect to future events and financial performance. Statements which include the words “expect,” “intend,” “plan,” “believe,” “project,” “anticipate” and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the federal securities laws or otherwise.
All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in these statements or that could adversely affect the holders of our IDSs, 2003 notes and common stock. We believe that these factors include the following:
| • | We have substantial indebtedness, which could restrict our ability to pay interest and principal on our 2003 notes and to pay dividends with respect to shares of our common stock represented by the IDSs and impact our financing options and liquidity position. | |
| • | We may amend the terms of our 2003 credit facility, or we may enter into new agreements that govern our senior indebtedness, and the amended or new terms may significantly affect our ability to pay interest and dividends to IDS holders. | |
| • | We are subject to restrictive debt covenants and other requirements related to our outstanding debt that limit our business flexibility by imposing operating and financial restrictions on our operations. | |
| • | We are a holding company and rely on dividends, interest and other payments, advances and transfers of funds from our subsidiaries to meet our debt service and other obligations. | |
| • | Our interest expense may increase significantly and could cause our net income and distributable cash to decline significantly. | |
| • | We may not generate sufficient funds from operations to pay our indebtedness at maturity or upon the exercise by holders of their rights upon a change of control. | |
| • | The indenture governing our 2003 notes and our 2003 credit facility permit us to pay a significant portion of our free cash flow to stockholders in the form of dividends. Any amounts paid by us in the form of dividends will not be available in the future to satisfy our obligations under the 2003 notes. | |
| • | The realizable value of our assets upon liquidation may be insufficient to satisfy claims. | |
| • | Deferral of interest payments would have adverse tax consequences for holders of our 2003 notes and may adversely affect the trading price of the 2003 notes. | |
| • | Because of the subordinated nature of the 2003 notes, their holders may not be entitled to be paid in full, if at all, in a bankruptcy, liquidation or reorganization or similar proceeding. | |
| • | The guarantees of the 2003 notes by our subsidiaries may not be enforceable. | |
| • | Seasonality and variability of our businesses may cause volatility in the market value of our IDSs and may hinder our ability to make timely distributions on the IDSs. | |
| • | The U.S. federal income tax consequences of the purchase, ownership and disposition of IDSs are unclear. | |
| • | The Internal Revenue Service (IRS) may not view the interest rate on the 2003 notes as an arm’s length rate. | |
| • | The IRS might seek to recharacterize our subordinated notes as equity, which would cause our interest payments not to be deductible for tax purposes. This could create a significant tax liability for which we have not reserved. |
13
| • | Before our IPO there was no public market for our IDSs, shares of our common stock or 2003 notes. The price of the IDSs may fluctuate substantially, which could negatively affect IDS holders. | |
| • | Future sales or the possibility of future sales of a substantial amount of IDSs, shares of our common stock or our 2003 notes may depress the price of our outstanding IDSs and the shares of our common stock and our 2003 notes. | |
| • | Our restated certificate of incorporation and amended and restated by-laws and several other factors could limit another party’s ability to acquire us and deprive our investors of the opportunity to obtain a takeover premium for their securities. | |
| • | If attendance or the number of events held at our clients’ facilities decreases, our net sales and cash flow may significantly decline. | |
| • | The pricing and termination provisions of our contracts may constrain our ability to recover costs and to make a profit on our contracts. | |
| • | We have a history of losses and may experience losses in the future. | |
| • | We may not be able to recover our capital investments in clients’ facilities, which may significantly reduce our profits or cause losses. | |
| • | If the sports team tenant of a facility we serve relocates or the ownership of a facility we serve changes, we may lose the contract for that facility. | |
| • | If we were to lose any of our largest clients, our results of operations could be significantly harmed. | |
| • | A contraction of MLB that eliminates any of the teams playing in any of the facilities we serve would likely have a material adverse effect on our results of operations. | |
| • | We may not have sufficient funds available to make capital investments in clients’ facilities necessary to maintain these relationships and increased capital investments or commissions to renew such relationships may lower our operating results for such facilities. | |
| • | Our historical rapid growth rates may not be indicative of future results, given our new capital structure and dividend policy and our reliance on other financing sources. | |
| • | If labor or other operating costs increase, we may not be able to make a corresponding increase in the prices of our products and services and our profitability may decline significantly. | |
| • | We may incur significant liabilities or reputational harm if claims of illness or injury associated with our service of food and beverage to the public are brought against us. | |
| • | The loss of any of our liquor licenses or permits could adversely affect our ability to carry out our business. | |
| • | If one of our employees sells alcoholic beverages to an intoxicated or minor patron, we may be liable to third parties for the acts of the patron. | |
| • | If we fail to comply with applicable governmental regulations, we may become subject to lawsuits and other liabilities or restrictions on our operations which could significantly reduce our net sales and cash flow and undermine the growth of our business. | |
| • | We are subject to litigation, which, if determined adversely, could be material. | |
| • | We may be subject to significant environmental liabilities. | |
| • | We depend on a relatively small executive management team and the loss of any of them could adversely affect our business. | |
| • | We could incur significant liability for withdrawing from multi-employer pension plans. |
14
| • | If we fail to remain competitive within our industry, we will not be able to maintain our clients or obtain new clients, which would materially adversely affect our financial condition, results of operations and liquidity. | |
| • | An outbreak or escalation of any insurrection or armed conflict involving the United States or any other national or international calamity could significantly harm our business. | |
| • | A terrorist attack on any facility which we serve, particularly large sports facilities, could significantly harm or business, and our contracts do not provide for the recovery by us of our cost in the event of a terrorist attack on a facility. | |
| • | We may not be able to obtain insurance, or obtain insurance on commercially acceptable terms, which could result in a material adverse effect on our financial condition, results of operations or liquidity. | |
| • | Weaker economic conditions within the United States could adversely affect our business. | |
| • | Our net sales could decline if there were a labor stoppage affecting any of the sports teams at whose facilities we provide our services. |
Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
15
| Item 8. | Financial Statements and Supplementary Data |
CENTERPLATE, INC. (FORMERLY VOLUME SERVICES AMERICA HOLDINGS, INC.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | |||||
| F-2 | |||||
| F-3 | |||||
| F-5 | |||||
| F-6 | |||||
| F-7 | |||||
| F-9 | |||||
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
We have audited the accompanying consolidated balance sheets of Centerplate, Inc. (formerly Volume Services America Holdings, Inc.) and subsidiaries (the “Company”) as of December 31, 2002 and December 30, 2003, and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity (deficiency), and cash flows for each of the three years in the period ended December 30, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2002 and December 30, 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 30, 2003 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 3 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142,Goodwill and Other Intangible Assetsas of January 2, 2002.
As discussed in Note 2 to the consolidated financial statements, the Company has restated its 2003 financial statements.
/s/ Deloitte & Touche LLP
March 26, 2004 (except for Note 2, as to which the date is October 28, 2004)
F-2
CENTERPLATE, INC. (FORMERLY VOLUME SERVICES AMERICA HOLDINGS, INC.)
| December 30, | ||||||||||
| 2003 | ||||||||||
| December 31, | (As Restated — | |||||||||
| 2002 | See Note 2) | |||||||||
| (In thousands, | ||||||||||
| except share data) | ||||||||||
| ASSETS | ||||||||||
| CURRENT ASSETS: | ||||||||||
| Cash and cash equivalents | $ | 10,374 | $ | 22,929 | ||||||
| Restricted cash | — | 13,628 | ||||||||
| Accounts receivable, less allowance for doubtful accounts of $810 and $348 at December 31, 2002 and December 30, 2003, respectively | 16,488 | 17,737 | ||||||||
| Merchandise inventories | 13,682 | 14,865 | ||||||||
| Prepaid expenses and other | 2,354 | 3,322 | ||||||||
| Deferred tax asset | 2,764 | 4,121 | ||||||||
| Total current assets | 45,662 | 76,602 | ||||||||
| PROPERTY AND EQUIPMENT: | ||||||||||
| Leasehold improvements | 49,452 | 45,828 | ||||||||
| Merchandising equipment | 51,185 | 54,635 | ||||||||
| Vehicles and other equipment | 8,625 | 9,791 | ||||||||
| Construction in process | 295 | 168 | ||||||||
| Total | 109,557 | 110,422 | ||||||||
| Less accumulated depreciation and amortization | (53,498 | ) | (57,671 | ) | ||||||
| Property and equipment, net | 56,059 | 52,751 | ||||||||
| OTHER ASSETS: | ||||||||||
| Contract rights, net | 101,702 | 101,512 | ||||||||
| Restricted cash | — | 8,420 | ||||||||
| Cost in excess of net assets acquired | 46,457 | 46,457 | ||||||||
| Deferred financing costs, net | 7,086 | 13,017 | ||||||||
| Trademarks | 17,049 | 17,274 | ||||||||
| Deferred tax asset | — | 2,790 | ||||||||
| Other | 6,177 | 3,450 | ||||||||
| Total other assets | 178,471 | 192,920 | ||||||||
| TOTAL ASSETS | $ | 280,192 | $ | 322,273 | ||||||
F-3
CENTERPLATE, INC. (FORMERLY VOLUME SERVICES AMERICA HOLDINGS, INC.)
CONSOLIDATED BALANCE SHEETS — (Continued)
| December 30, | ||||||||||
| 2003 | ||||||||||
| December 31, | (As Restated — | |||||||||
| 2002 | See Note 2) | |||||||||
| (In thousands, | ||||||||||
| except share data) | ||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY) | ||||||||||
| CURRENT LIABILITIES: | ||||||||||
| Short-term note payable | $ | — | $ | 4,000 | ||||||
| Current maturities of long-term debt | 1,150 | 12,250 | ||||||||
| Accounts payable | 14,798 | 18,054 | ||||||||
| Accrued salaries and vacations | 8,683 | 11,297 | ||||||||
| Liability for insurance | 4,441 | 4,537 | ||||||||
| Accrued taxes, including income taxes | 3,890 | 3,947 | ||||||||
| Accrued commissions and royalties | 13,627 | 14,053 | ||||||||
| Liability for derivatives | — | 2,654 | ||||||||
| Accrued interest | 3,832 | 1,566 | ||||||||
| Accrued dividends | — | 1,982 | ||||||||
| Other | 6,057 | 5,082 | ||||||||
| Total current liabilities | 56,478 | 79,422 | ||||||||
| LONG-TERM LIABILITIES: | ||||||||||
| Long-term debt | 224,250 | 170,245 | ||||||||
| Deferred income taxes | 2,031 | — | ||||||||
| Liability for insurance | 2,001 | 4,245 | ||||||||
| Other liabilities | 700 | 699 | ||||||||
| Total long-term liabilities | 228,982 | 175,189 | ||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||||
| COMMON STOCK WITH CONVERSION OPTION, PAR VALUE $0.01, EXCHANGEABLE FOR SUBORDINATED DEBT, NET OF DISCOUNT | — | 14,035 | ||||||||
| STOCKHOLDERS’ EQUITY (DEFICIENCY): | ||||||||||
| Common stock, $0.01 par value — authorized: 100,000,000 shares; | ||||||||||
| issued: 18,463,995 shares without conversion option; outstanding: 18,463,995 shares without conversion option | — | 185 | ||||||||
| issued: 21,531,152 shares; outstanding: 13,612,829 and 4,060,997 shares at December 31, 2002 and December 30, 2003, respectively, with conversion option as of December 30, 2003 | 215 | 215 | ||||||||
| Additional paid-in capital | 67,202 | 218,598 | ||||||||
| Accumulated deficit | (21,566 | ) | (44,655 | ) | ||||||
| Accumulated other comprehensive income (loss) | (444 | ) | 224 | |||||||
| Treasury stock — at cost (7,918,323 and 17,470,153 shares at December 31, 2002 and December 30, 2003, respectively) | (49,500 | ) | (120,940 | ) | ||||||
| Loans to related parties | (1,175 | ) | — | |||||||
| Total stockholders’ equity (deficiency) | (5,268 | ) | 53,627 | |||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY) | $ | 280,192 | $ | 322,273 | ||||||
See notes to consolidated financial statements.
F-4
CENTERPLATE, INC. (FORMERLY VOLUME SERVICES AMERICA HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
| January 1, | December 31, | December 30, | ||||||||||
| 2002 | 2002 | 2003 | ||||||||||
| (In thousands, except per share data) | ||||||||||||
| Net sales | $ | 543,113 | $ | 577,162 | $ | 616,057 | ||||||
| Cost of sales | 446,596 | 470,929 | 503,986 | |||||||||
| Selling, general and administrative | 48,108 | 55,257 | 59,591 | |||||||||
| Depreciation and amortization | 24,492 | 26,185 | 27,119 | |||||||||
| Transaction related expenses | — | 597 | 2,577 | |||||||||
| Contract related losses | 4,762 | 699 | 831 | |||||||||
| Operating income | 19,155 | 23,495 | 21,953 | |||||||||
| Interest expense | 23,429 | 20,742 | 32,763 | |||||||||
| Other income, net | (242 | ) | (1,556 | ) | (55 | ) | ||||||
| Income (loss) before income taxes | (4,032 | ) | 4,309 | (10,755 | ) | |||||||
| Income tax benefit | (432 | ) | (187 | ) | (6,337 | ) | ||||||
| Net income (loss) | (3,600 | ) | 4,496 | (4,418 | ) | |||||||
| Other comprehensive income (loss) — foreign currency translation adjustment | (209 | ) | 27 | 668 | ||||||||
| Comprehensive income (loss) | $ | (3,809 | ) | $ | 4,523 | $ | (3,750 | ) | ||||
| Basic Net Income (Loss) per share | $ | (0.26 | ) | $ | 0.33 | $ | (0.31 | ) | ||||
| Diluted Net Income (Loss) per share | $ | (0.26 | ) | $ | 0.33 | $ | (0.31 | ) | ||||
| Weighted average shares outstanding | 13,612,829 | 13,612,829 | 14,263,164 | |||||||||
| Dividends declared per share | $ | — | $ | — | $ | 0.09 | ||||||
See notes to consolidated financial statements.
F-5
CENTERPLATE, INC. (FORMERLY VOLUME SERVICES AMERICA HOLDINGS, INC.)
| Common | Common | Common | Common | ||||||||||||||||||||||||||||||||||||||
| Shares | Stock | Shares | Stock | Accumulated | |||||||||||||||||||||||||||||||||||||
| Without | Without | With | With | Additional | Other | Loans to | |||||||||||||||||||||||||||||||||||
| Conversion | Conversion | Conversion | Conversion | Paid-in | Accumulated | Comprehensive | Treasury | Related | |||||||||||||||||||||||||||||||||
| Option | Option | Option | Option | Capital | Deficit | Income (Loss) | Stock | Parties | Total | ||||||||||||||||||||||||||||||||
| (In thousands, except share data) | |||||||||||||||||||||||||||||||||||||||||
| BALANCE, JANUARY 2, 2001 | — | $ | — | 21,531,152 | $ | 215 | $ | 66,539 | $ | (22,462 | ) | $ | (262 | ) | $ | (49,500 | ) | $ | (1,039 | ) | $ | (6,509 | ) | ||||||||||||||||||
| Noncash compensation | — | — | — | — | 98 | — | — | — | — | 98 | |||||||||||||||||||||||||||||||
| Loans to related parties | — | — | — | — | — | — | — | — | (40 | ) | (40 | ) | |||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | — | — | (209 | ) | — | — | (209 | ) | |||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (3,600 | ) | — | — | — | (3,600 | ) | |||||||||||||||||||||||||||||
| BALANCE, JANUARY 1, 2002 | — | — | 21,531,152 | 215 | 66,637 | (26,062 | ) | (471 | ) | (49,500 | ) | (1,079 | ) | (10,260 | ) | ||||||||||||||||||||||||||
| Noncash compensation | — | — | — | — | 565 | — | — | — | — | 565 | |||||||||||||||||||||||||||||||
| Loans to related parties | — | — | — | — | — | — | — | — | (96 | ) | (96 | ) | |||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | — | — | 27 | — | — | 27 | |||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 4,496 | — | — | — | 4,496 | |||||||||||||||||||||||||||||||
| BALANCE, DECEMBER 31, 2002 | — | — | 21,531,152 | 215 | 67,202 | (21,566 | ) | (444 | ) | (49,500 | ) | (1,175 | ) | (5,268 | ) | ||||||||||||||||||||||||||
| Proceeds from IDS issuance, net | 18,463,993 | 185 | — | — | 151,332 | — | — | — | 1,241 | 152,758 | |||||||||||||||||||||||||||||||
| Derivative liability (As Restated — See Note 2) | — | — | — | — | — | (2,654 | ) | — | — | — | (2,654 | ) | |||||||||||||||||||||||||||||
| Common stock, par value $0.01 exchangeable for subordinated debt, net of discount (As Restated — See Note 2) | — | — | — | — | — | (14,035 | ) | — | — | — | (14,035 | ) | |||||||||||||||||||||||||||||
| Repurchase of stock | — | — | — | — | — | — | — | (71,440 | ) | — | (71,440 | ) | |||||||||||||||||||||||||||||
| Noncash compensation | — | — | — | — | 64 | — | — | — | — | 64 | |||||||||||||||||||||||||||||||
| Loans to related parties | — | — | — | — | — | — | — | — | (66 | ) | (66 | ) | |||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | — | — | 668 | — | — | 668 | |||||||||||||||||||||||||||||||
| Dividends declared | — | — | — | — | — | (1,982 | ) | — | — | — | (1,982 | ) | |||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (4,418 | ) | — | — | — | (4,418 | ) | |||||||||||||||||||||||||||||
| BALANCE, DECEMBER 30, 2003 (As Restated — See Note 2 | 18,463,993 | $ | 185 | 21,531,152 | $ | 215 | $ | 218,598 | $ | (44,655 | ) | $ | 224 | $ | (120,940 | ) | $ | — | $ | 53,627 | |||||||||||||||||||||
See notes to consolidated financial statements.
F-6
CENTERPLATE, INC. (FORMERLY VOLUME SERVICES AMERICA HOLDINGS, INC.)
| Years Ended | ||||||||||||||||
| January 1, | December 31, | December 30, | ||||||||||||||
| 2002 | 2002 | 2003 | ||||||||||||||
| (In thousands) | ||||||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||
| Net income (loss) | $ | (3,600 | ) | $ | 4,496 | $ | (4,418 | ) | ||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||||
| Depreciation and amortization | 24,492 | 26,185 | 27,119 | |||||||||||||
| Amortization of deferred financing costs | 1,431 | 1,431 | 6,906 | |||||||||||||
| Contract related losses | 4,762 | 699 | 831 | |||||||||||||
| Noncash compensation | 98 | 565 | 64 | |||||||||||||
| Deferred tax change | (911 | ) | — | (6,178 | ) | |||||||||||
| (Gain) loss on disposition of assets | (37 | ) | 70 | (69 | ) | |||||||||||
| Other | (209 | ) | 27 | 668 | ||||||||||||
| Changes in assets and liabilities: | ||||||||||||||||
| Decrease (increase) in assets: | ||||||||||||||||
| Accounts receivable | 767 | 1,898 | (1,080 | ) | ||||||||||||
| Merchandise inventories | (1,697 | ) | (461 | ) | (1,183 | ) | ||||||||||
| Prepaid expenses | 55 | 115 | (970 | ) | ||||||||||||
| Other assets | (1,612 | ) | (1,920 | ) | 1,525 | |||||||||||
| Increase (decrease) in liabilities: | ||||||||||||||||
| Accounts payable | 593 | (1,147 | ) | 1,974 | ||||||||||||
| Accrued salaries and vacations | (161 | ) | 137 | 2,614 | ||||||||||||
| Liability for insurance | (358 | ) | 2,670 | 2,340 | ||||||||||||
| Accrued commissions and royalties | (431 | ) | 1,726 | 426 | ||||||||||||
| Other liabilities | 1,557 | 2,082 | (3,410 | ) | ||||||||||||
| Net cash provided by operating activities | 24,739 | 38,573 | 27,159 | |||||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
| Purchase of property and equipment | (8,052 | ) | (9,901 | ) | (7,904 | ) | ||||||||||
| Proceeds from sale of property and equipment | 139 | 2,515 | 585 | |||||||||||||
| Purchase of contract rights | (21,367 | ) | (37,660 | ) | (16,029 | ) | ||||||||||
| Net cash used in investing activities | (29,280 | ) | (45,046 | ) | (23,348 | ) | ||||||||||
F-7
CENTERPLATE, INC. (FORMERLY VOLUME SERVICES AMERICA HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)
| Years Ended | ||||||||||||||
| January 1, | December 31, | December 30, | ||||||||||||
| 2002 | 2002 | 2003 | ||||||||||||
| (In thousands) | ||||||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||
| Net borrowings (repayments) — revolving loans | $ | 6,750 | $ | 2,250 | $ | (11,000 | ) | |||||||
| Principal payments on long-term debt | (1,150 | ) | (1,150 | ) | (110,400 | ) | ||||||||
| Proceeds from issuance of long-term debt | — | — | 65,000 | |||||||||||
| Proceeds from issuance of stock, net | — | — | 151,517 | |||||||||||
| Proceeds from issuance of subordinated notes | — | — | 105,245 | |||||||||||
| Payment of existing subordinated notes | — | — | (87,750 | ) | ||||||||||
| Repurchase of stock | — | — | (71,440 | ) | ||||||||||
| Proceeds from loans to related parties | — | — | 1,241 | |||||||||||
| Payments of debt issuance costs | — | — | (12,837 | ) | ||||||||||
| Restricted cash | — | — | (22,048 | ) | ||||||||||
| Principal payments on capital lease obligations | (149 | ) | (267 | ) | — | |||||||||
| Increase (decrease) in bank overdrafts | (454 | ) | 968 | 1,282 | ||||||||||
| Loans to related parties | (40 | ) | (96 | ) | (66 | ) | ||||||||
| Net cash provided by financing activities | 4,957 | 1,705 | 8,744 | |||||||||||
| INCREASE (DECREASE) IN CASH | 416 | (4,768 | ) | 12,555 | ||||||||||
| CASH AND CASH EQUIVALENTS: | ||||||||||||||
| Beginning of year | 14,726 | 15,142 | 10,374 | |||||||||||
| End of year | $ | 15,142 | $ | 10,374 | $ | 22,929 | ||||||||
| SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||||||||
| Interest paid | $ | 22,155 | $ | 18,493 | $ | 35,029 | ||||||||
| Income taxes paid | $ | 696 | $ | 188 | $ | 125 | ||||||||
| SUPPLEMENTAL NON CASH FLOW FINANCING ACTIVITY: | ||||||||||||||
| Dividends declared and unpaid | $ | — | $ | — | $ | 1,982 | ||||||||
See notes to consolidated financial statements.
F-8
CENTERPLATE, INC. (FORMERLY VOLUME SERVICES AMERICA HOLDINGS, INC.)
| 1. | General |
Centerplate, Inc. (formerly Volume Services America Holdings, Inc.) (“Centerplate” 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 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”).
On February 11, 2003, the Company announced that it changed the trade name for its operating businesses from Volume Services America to Centerplate and on October 13, 2004, the securityholders of the Company approved a resolution to change the Company’s legal name from Volume Services America Holdings, Inc. to Centerplate, Inc.
On December 1, 2003, the Board of Directors authorized and the Company effected on December 2, 2003 a 40,920 (rounded to the nearest share) for 1 split of the common stock. Share and per share amounts for all years presented give effect to this stock split.
On December 4, 2003, Centerplate’s registration statement on Form S-1 in respect of a proposed initial public offering (“IPO”) of Income Deposit Securities (“IDSs”) was declared effective by the Securities and Exchange Commission. Each IDS represents one share of common stock and a 13.5% subordinated note with a $5.70 principal amount and the proceeds were allocated to the underlying stock or subordinated notes based upon the relative fair values of each. Trading of the IDSs began on the American Stock Exchange on December 5, 2003 and on the Toronto Stock Exchange on December 8, 2003. On December 10, 2003, the IPO transaction closed and the Company simultaneously entered into a new senior credit facility (see2003 Credit Agreement, Note 5). From the IPO transaction, the Company raised approximately $251,800,000 on December 10, 2003 and an additional $25,200,000 on December 16, 2003 in connection with the underwriters over-allotment option. With the proceeds from the IPO and the new senior credit facility, the Company repaid its existing senior credit facility, repaid $87,750,000 of its $100,000,000 11.25% senior subordinated notes due 2009, repurchased common stock held by existing equity investors, established certain restricted cash and other cash accounts and paid related fees and expenses.
The Company is in the business of providing specified concession services, including catering and novelty merchandise items at stadiums, sports arenas, convention centers and other entertainment facilities at various locations in the United States and Canada. At December 30, 2003, the Company had 129 contracts to provide these services which were generally obtained through competitive bids. In most instances, the Company has the right to provide these services in a particular location for a period of several years, with the duration of time often a function of the required investment in facilities or other financial considerations. The contracts vary in length generally from 1 to 20 years. Certain of the contracts contain renewal clauses.
| 2. | Restatement of Financial Statements |
Following the completion of the initial public offering by Centerplate in December 2003, there have been continuing reviews of the accounting treatment of certain features of securities similar to the Company’s IDSs. As a result of these reviews and discussions with the SEC, the Company has identified several revisions to its accounting for IDSs. The Company has incorporated relevant changes to its accounting for IDSs and restated its financial statements as of and for the period ended December 30, 2003. In addition, as described in Note 16, the Company has revised its consolidating financial statements to report the results of operations of Centerplate (the parent holding company and issuer of the IDSs) separately from the results of operations of the subsidiaries that guarantee the subordinated notes included in its IDSs (the “combined guarantor subsidiaries”).
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Consolidated Balance Sheets — In connection with the IPO, those investors who held stock prior to the IPO (the “Initial Equity Investors”) entered into an amended and restated stockholders agreement, which provides that, upon any post-offering sale of common stock by the Initial Equity Investors, at the option of the Initial Equity Investors, the Company will exchange a portion of their common stock for subordinated notes at an exchange, rate of $9.30 principal amount of subordinated notes for each share of common stock (so that, after such exchange, the Initial Equity Investors will have shares of common stock and subordinated notes in the appropriate proportions to represent integral numbers of IDSs) (“the conversion option”). The Company has concluded that the portion of the Initial Equity Investor’s common stock exchangeable for subordinated debt should be classified on the consolidated balance sheet according to the guidance provided by Accounting Series Release No. 268 (FRR Section 211),Redeemable Preferred Stocks. Accordingly, The Company has reclassified $14.0 million between “Common stock with conversion option exchangeable for subordinated debt, net of discount” and “Accumulated Deficit” on the balance sheet as of December 30, 2003. This amount will be accreted to the face amount due of $14.4 million using the effective interest method over the Initial Equity Investors minimum required 180-day holding period.
In addition, it has been determined that the conversion option is an embedded derivative in accordance with SFAS No. 133. This resulted in a reclassification of $2.7 million from “Accumulated Deficit” to “Liability for derivatives” as of December 30, 2003.
The Company has two classes of common stock as a result of the conversion option. Accordingly, “Common Stock” has been segregated into the two classes, “Shares Outstanding with Conversion Option” and “Shares Outstanding without Conversion Option”.
Consolidated Statement of Stockholders’ Equity — The Statement of Stockholders’ Equity has been revised to reflect the two classes of common stock, the conversion option and the liability for the derivative as discussed above.
Non-Guarantor Subsidiaries Financial Statements — (see Note 16) — Changes as discussed above to the Consolidated Balance Sheet have been made as appropriate to the Company’s Consolidating Balance Sheet. In addition, Centerplate’s results had been consolidated with the combined guarantor subsidiaries of its subordinated notes in the previous statements. The Company has revised the consolidating financial statements where necessary to report Centerplate independently.
A summary of the significant effects on the Consolidated Balance Sheet as of December 30, 2003 is as follows:
| Originally | ||||||||
| Reported | Restated | |||||||
| (In thousands) | ||||||||
| Consolidated Balance Sheet: | ||||||||
| Liability for derivatives | $ | — | $ | 2,654 | ||||
| Common Stock, Par Value $0.01, Exchangeable for Subordinated Debt, net of discount | $ | — | $ | 14,035 | ||||
| Accumulated Deficit | $ | (27,966 | ) | $ | (44,655 | ) | ||
| Total Stockholder’s Equity | $ | 70,316 | $ | 53,627 | ||||
| 3. | Summary of Significant Accounting Policies |
Principles of Consolidation — The consolidated financial statements include the accounts of Centerplate, and its wholly owned subsidiary, Volume Services America, and its wholly owned subsidiaries, Volume Services and Service America. All significant intercompany transactions have been eliminated.
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fiscal Year — The Company has adopted a 52-53 week period ending on the Tuesday closest to December 31 as its fiscal year end. The 2001, 2002 and 2003 fiscal years consisted of 52 weeks.
Cash and Cash Equivalents — The Company considers temporary cash investments purchased with an original maturity of three months or less to be cash equivalents.
Restricted Cash — Restricted cash consists of approximately $13,600,000 recorded in current assets set aside to retire $12,250,000 in senior subordinated notes during 2004 plus accrued interest (See Note 5). In addition, approximately $8,400,000 is recorded in other assets representing five months of interest on the Company’s subordinated notes, plus $2,500,000. In addition, beginning in December 2004 the Company must restrict $60,000 per month for the life of the 2003 Credit Agreement. Such funds are restricted from the Company’s use until term loans have been repaid.
Revenue Recognition — The Company typically enters into one of three types of contracts: 1) profit and loss contracts, 2) profit sharing contracts, and 3) management fee contracts. Under profit and loss and profit-sharing contracts, revenue from food and beverage concessions and catering contract food services is recognized as net sales when the services are provided. Management fee contracts provide the Company with a fixed fee or a fixed fee plus an incentive fee and the Company bears no profit or loss risk. Fees received for management fee contracts are included in net sales when earned.
Merchandise Inventories — Merchandise inventories consist of food, beverage, team and other merchandise. Inventory is valued at the lower of cost or market, determined on the first-in, first-out basis. Merchandise inventory is net of reserve of $227,000 and $151,000, respectively, as of December 31, 2002 and December 30, 2003.
Depreciation — Property and equipment is stated at cost and is depreciated on the straight-line method over the lesser of the estimated useful life of the asset or the term of the contract at the site where such property and equipment is located. Following are the estimated useful lives of the property and equipment:
| • | Leasehold improvements — 10 years — limited by the lease term or contract term, if applicable | |
| • | Merchandising equipment — 5 to 10 years — limited by the contract term, if applicable | |
| • | Vehicles and other equipment — 2 to 10 years — limited by the contract term, if applicable |
Contract Rights — Contract rights, net of accumulated amortization, consist primarily of certain direct incremental costs incurred by the Company in obtaining or renewing contracts with clients and the adjustment to fair value of contract rights acquired in the acquisitions of Volume Services in 1995 and Service America in 1998. These costs are amortized over the contract life of each such contract, including optional renewal periods where the option to renew rests solely with the Company and they intend to exercise that option. Accumulated amortization was approximately $34,396,000 at December 31, 2002 and $47,838,000 at December 30, 2003. Amortization expense for fiscal 2004 through 2008 is estimated to be approximately $14,334,000, $13,870,000, $12,221,000, $11,224,000, and $6,679,000, respectively.
Cost in Excess of Net Assets Acquired and Trademarks — During fiscal 2003, the Company incurred approximately $225,000 of costs associated with the change of its trade name to Centerplate. Such costs were included in Trademarks and are subject to the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”.
As of January 2, 2002, the Company adopted SFAS No. 142. With the adoption of SFAS No. 142, cost in excess of net assets acquired (goodwill) and trademarks were no longer subject to amortization, rather they are subject to at least an annual assessment for impairment by applying a fair value based test. The Company completed the impairment tests required by SFAS No. 142 including the annual impairment test on July 2, 2002 and April 1, 2003, which did not result in an impairment charge. Accumulated amortization for goodwill and trademarks were approximately $6,748,000 and $3,551,000, respectively at December 31, 2002 and
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 30, 2003. Goodwill and trademark amortization (pre-tax) was approximately $2,458,000 in fiscal 2001. Had SFAS No. 142 been in effect for the fiscal year ended January 1, 2002, the adjusted net income (loss) would have been as follows:
| Fiscal Year Ended | |||||||||||||
| January 1, | December 31, | December 30, | |||||||||||
| 2002 | 2002 | 2003 | |||||||||||
| (In thousands, except per share data) | |||||||||||||
| Reported net income (loss) | $ | (3,600 | ) | $ | 4,496 | $ | (4,418 | ) | |||||
| Goodwill amortization | 1,771 | — | — | ||||||||||
| Trademark amortization | 687 | — | — | ||||||||||
| Adjusted net income (loss) | $ | (1,142 | ) | $ | 4,496 | $ | (4,418 | ) | |||||
Basic net loss per share: | |||||||||||||
| Reported net income (loss) | $ | (0.26 | ) | $ | 0.33 | $ | (0.31 | ) | |||||
| Goodwill amortization | 0.13 | — | — | ||||||||||
| Trademark amortization | 0.05 | — | — | ||||||||||
| Adjusted net income (loss) | $ | (0.08 | ) | $ | 0.33 | $ | (0.31 | ) | |||||
Diluted net loss per share: | |||||||||||||
| Reported net income (loss) | $ | (0.26 | ) | $ | 0.33 | $ | (0.31 | ) | |||||
| Goodwill amortization | 0.13 | — | — | ||||||||||
| Trademark amortization | 0.05 | — | — | ||||||||||
| Adjusted net income (loss) | $ | (0.08 | ) | $ | 0.33 | $ | (0.31 | ) | |||||
Deferred Financing Costs — Deferred financing costs are being amortized as interest expense over the life of the respective debt using the effective interest method. Accumulated amortization was $5,923,000 at December 31, 2002. As a result of the Company’s new credit facility and the repurchase of the Company’s existing subordinated notes, at December 30, 2003 all existing deferred financing costs had been written-off except for approximately $301,000 (net of accumulated amortization of approximately $462,000) associated with the untendered subordinated notes (see Note 5). The Company incurred approximately $12,837,000 in deferred financing cost associated with the IDSs issuance and new credit facility in fiscal 2003. At December 30, 2003, accumulated amortization of the deferred financing costs on the IDSs was approximately $121,000.
Impairment of Long-Lived Assets and Contract Losses — In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company reviews long-lived assets and contract assets for impairment whenever events or changes in circumstances indicate that the book value of the asset group may not be recoverable. Accordingly, the Company estimates the future undiscounted cash flows expected to result from the use of the asset group and their eventual disposition. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset group, an impairment loss is recognized. Measurement of an impairment loss for long-lived assets, such as property, and certain identifiable intangibles, is based on the estimated fair value of the asset determined by future discounted net cash flows.
Accounting Treatment for IDSs, Common Stock Owned by Initial Equity Investors and Derivative Financial Instruments. The Company’s IDSs include common stock and subordinated notes, the latter of which has three embedded derivative features. The embedded derivative features include a call option, a change of control put option, and a term-extending option on the notes. The call option allows the Company to repay the principal amount of the subordinated notes after the fifth anniversary of the issuance, provided that
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the Company also pays all of the interest that would have been paid during the initial 10-year term of the notes, discounted to the date of repayment at a risk-free rate. Under the change of control put option, the holders have the right to cause the Company to repay the subordinated notes at 101% of face value upon a change of control, as defined in the subordinated note agreement. The term-extending option allows the Company to unilaterally extend the term of the subordinated notes for two five-year periods at the end of the initial 10-year period provided that it is in compliance with the requirements of the indenture. The Company has accounted for these embedded derivatives in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133,Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted. Based on SFAS No. 133, as amended and interpreted, the call option and the change of control put option are required to be separately valued. As of December 30, 2003, these embedded derivatives were fair valued and determined to be insignificant. The term extending option was determined to not be separable from the underlying subordinated notes. Accordingly, it will not be separately accounted for in the current or future periods.
In connection with the IPO, those investors who held stock prior to the IPO (the “Initial Equity Investors”) entered into an amended and restated stockholders agreement, which provides that, upon any post-offering sale of common stock by the Initial Equity Investors, at the option of the Initial Equity Investors, the Company will exchange a portion of it’s common stock for subordinated notes at an exchange rate of $9.30 principal amount of subordinate notes for each share of common stock (so that, after such exchange, the Initial Equity Investors will have shares of common stock and subordinated notes in the appropriate proportions to represent integral numbers of IDSs). The Company has concluded that the portion of the Initial Equity Investor’s common stock exchangeable for subordinated debt should be classified on its consolidated balance sheet according to the guidance provided by Accounting Series Release No. 268 (FRR Section 211),Redeemable Preferred Stocks. Accordingly, the Company has recorded $14.0 million as “Common stock with conversion option exchangeable for subordinated debt, net of discount” on the balance sheet. This amount will be accreted to the face amount due of $14.4 million using the effective interest method over the Initial Equity Investors minimum required 180-day holding period. In addition, the Company has determined that the option conveyed to the Initial Equity Investors to exchange common stock for subordinated debt in order to form IDSs is an embedded derivative in accordance with Paragraph 12 of SFAS No. 133. The Company has recorded a liability for the fair value of this embedded derivative of approximately $2.7 million as of December 30, 2003. This option is fair-valued each reporting period with the change in the fair value recorded in interest expense in the accompanying consolidated statement of operations.
Insurance — At the beginning of fiscal 2002, the Company adopted a high deductible insurance program for general liability, auto liability, and workers’compensation risk. From 1999 through 2001, the Company had been a premium-based insurance program for general liability, automobile liability and workers’ compensation risk. Management establishes a reserve for the deductible and self-insurance considering a number of factors, including historical experience and an 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 1.32 percent and 3.83 percent at December 31, 2002 and 1.46 percent and 4.29 percent at December 30, 2003), to their present value based on expected loss payment patterns determined by experience. The total discounted self-insurance liabilities recorded by the Company at December 31, 2002 and December 30, 2003 were $4,654,000 and $7,734,000, respectively. The related undiscounted amounts were $4,955,000 and $8,232,000, respectively.
The employee health self-insurance liability is based on claims filed and not paid and estimates for claims incurred but not reported. The total liability recorded by the Company at December 31, 2002 and December 30, 2003 was $1,222,000 and $1,319,000, respectively.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Cash Overdrafts — The Company has included in accounts payable on the accompanying consolidated balance sheets cash overdrafts totaling approximately $7,582,000 and $8,864,000 at December 31, 2002 and December 30, 2003, respectively.
Dividends — The Company’s board of directors approved a dividend of $0.088 per share of common stock payable in January 2004. The total liability recorded as of December 30, 2003 was approximately $1,982,000.
Foreign Currency — The balance sheet and results of operations of the Company’s Canadian subsidiary (a subsidiary of Service America) are measured using the local currency as the functional currency. Assets and liabilities have been translated into United States dollars at the rates of exchange at the balance sheet date. Revenues and expenses are translated into United States dollars at the average rate during the period. The exchange gains and losses arising on transactions are charged to income as incurred. Translation gains and losses arising from the use of differing exchange rates from year to year are included in accumulated other comprehensive income (loss).
Transaction Related Expenses — Transaction related expenses in fiscal year 2002 consist primarily of expenses incurred in connection with the structuring and evaluation of financing and recapitalization strategies. Transaction related expenses in fiscal 2003 include certain expenses related to executive compensation associated with the IPO (see Note 5).
Interest — Interest expense for fiscal 2003 includes a non-cash charge of approximately $5.3 million for the early extinguishment of debt resulting from the refinancing of the Company’s credit agreement and $7.2 million in expenses related to the repurchase of our existing high yield notes.
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.
Segment Reporting — The combined operations of the Company, consisting of contracts to provide concession services, including catering and novelty merchandise items at stadiums, sports arenas, convention centers and other entertainment facilities, comprise one reportable segment.
Reclassifications — Certain amounts in 2001 and 2002 have been reclassified, where applicable, to conform to the financial statement presentation used in 2003.
Noncash Compensation — The Company has elected to follow the accounting provisions of Accounting Principles Board Opinion (“APB”) No. 25,Accounting for Stock Issued to Employees for Stock-Based Compensation. The Company has accounted for existing stock-based compensation relating to the non-recourse loans using the fair value method and applied the disclosure provisions of SFAS No. 148 “Accounting for Stock-Based Compensation — Transition and Disclosure” (see new Accounting Standards). As of December 30, 2003, all non-recourse loans have been repaid.
| New Accounting Standards |
In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143,“Accounting for Asset Retirement Obligations. The provisions of SFAS No. 143 require that asset retirement obligations that are identifiable upon acquisition and construction, and during the operating life of a long-lived asset, be recorded as a liability using the present value of the estimated cash flows. A corresponding amount would be capitalized as part of the asset’s carrying amount and amortized to expense over the asset’s useful life. The Company adopted the provisions of SFAS No. 143 effective January 1, 2003. The adoption of this statement
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
has not had and is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
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 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 statement 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 No. 45 apply on a prospective basis to guarantees issued or modified after December 31, 2002, regardless of the guarantor’s fiscal year-end. The disclosures are effective for financial statements of interim or annual periods ending after December 15, 2002. 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 Accounting Principles Board (“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 ending after December 15, 2003, to those variable interest entities in which an enterprise holds a variable interest that 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. Certain provisions of FIN 46 were deferred until the period ending after March 15, 2004. The
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
implementation of FIN 46 for provisions effective during 2003 did not have a material impact on the Company’s 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 statement 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. In October 2003, the FASB deferred the implementation of certain provisions of this standard indefinitely. The implementation of this standard did not have a material effect on the Company’s financial position or results of operations.
| 4. | Significant Risks and Uncertainties |
Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s most significant financial statement estimates include the estimate of the recoverability of contract rights and related assets, potential litigation claims and settlements, the liability for self-insured claims, the valuation allowance for deferred tax assets and the allowance for doubtful accounts. Actual results could differ from those estimates.
Certain Risk Concentrations — Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of cash equivalents, short-term investments and accounts receivable. The Company places its cash equivalents and short-term investments with high-credit qualified financial institutions and, by practice, limits the amount of credit exposure to any one financial institution.
Concentrations of credit risk with respect to accounts receivable are limited due to many customers comprising the Company’s customer base and their dispersion across different geographic areas. For the fiscal years ended January 1, 2002, December 31, 2002 and December 30, 2003, the Company had one contract that accounted for approximately 10.0 percent, 8.6 percent, and 10.2 percent of net sales, respectively.
The Company is in the process of renegotiating one of its major contracts. While the Company believes the new terms proposed for the agreement are favorable to the Company, the new agreement would result in a return to the Company of a substantial capital investment initially made to obtain the contract. The Company would need to reinvest the amount of the capital investment returned in other, new contracts. While the Company believes it will be able to reinvest these amounts successfully, if the Company were unable to do so reasonably promptly, it could have a material adverse impact on our financial results.
The Company’s revenues and earnings are dependent on various factors such as attendance levels and the number of games played by the professional sports teams which are tenants at facilities serviced by the Company, which can be favorably impacted if the teams qualify for post-season play, or adversely affected if there are stoppages such as strikes by players of the teams.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 5. | Debt |
Long-term debt consists of the following:
| 2002 | 2003 | |||||||
| (In thousands) | ||||||||
| Term B borrowings — 1998 Credit Agreement | $ | 110,400 | $ | — | ||||
| Revolving loans — 1998 Credit Agreement | 15,000 | — | ||||||
| VSA subordinated notes — Issued in 1999 | 100,000 | 12,250 | ||||||
| Term Loans — 2003 Credit Agreement | — | 65,000 | ||||||
| Revolving loans — 2003 Credit Agreement | — | 4,000 | ||||||
| VSAH subordinated notes — Issued in 2003 | — | 105,245 | ||||||
| 225,400 | 186,495 | |||||||
| Less — current portion of long-term debt | (1,150 | ) | (16,250 | ) | ||||
| Total long-term debt | $ | 224,250 | $ | 170,245 | ||||
1998 Credit Agreement — On December 3, 1998, Volume Services America (the “Borrower”) entered into a credit agreement, which provided for $160,000,000 in term loans, consisting of $40,000,000 of Tranche A term loans (“Term Loan A”) and $120,000,000 of Tranche B term loans (“Term Loan B” and together with Term Loan A, the “Term Loans”) and a $75,000,000 revolving credit facility (the “Revolving Credit Facility”). At December 31, 2002, $15,000,000 in Revolving Loans were outstanding under the Revolving Credit Facility, and approximately $16,277,000 of letters of credit were outstanding but undrawn. Borrowings under the Term Loans were used to repay in full all outstanding indebtedness of Volume Services and Service America under their then existing credit facilities and to pay fees and expenses incurred in connection with the acquisition of Service America and the credit agreement. Borrowings under the credit facility were secured by substantially all the assets of Centerplate and the majority of its subsidiaries, including Volume Services and Service America. On March 4, 1999, the $40,000,000 of Term A borrowings and $5,000,000 of Term B borrowings were repaid with the proceeds from the Senior Subordinated Notes Issued in 1999 discussed below. During fiscal 2003, loans outstanding under the 1998 Credit Agreement were repaid with the proceeds from the IPO and the new credit agreement.
Senior Subordinated Notes Issued in 1999 — On March 4, 1999, Volume Services America completed a private placement of 11.25% Senior Subordinated Notes in the aggregate principal amount of $100 million. On September 30, 1999, the Company exchanged the Senior Subordinated Notes for notes which were registered under the Securities Act of 1933. The notes were to mature on March 1, 2009 and interest was payable on March 1 and September 1 of each year, beginning on September 1, 1999. Such notes were unsecured, were subordinated to all the existing debt and any future debt of Volume Services America, ranked equally with all of the other Senior Subordinated debt of Volume Services America, and senior to all of Volume Services America’s existing and subordinated debt. Furthermore, the debt was guaranteed by Centerplate and all of the subsidiaries of Volume Services America, except for certain non-wholly owned U.S. subsidiaries and one non-U.S. subsidiary. As of December 30, 2003, $87,750,000 of the senior subordinated notes were repaid with the proceeds of the IPO and the credit agreement with the remaining $12,250,000 balance repaid on March 1, 2004 at a price equal to 105.625% of the principal amount plus accrued interest. As of December 30, 2003, approximately $13.6 million in proceeds from the IPO were set aside to pay such redemption price plus accrued interest. Such amount was recorded in current assets as restricted cash.
The proceeds of the notes were used to (i) repay $40,000,000 of Term A Borrowings and $5,000,000 of Term B Borrowings, (ii) fund the repurchase by Centerplate of 7,918,323 shares of Centerplate’s common stock for $49,500,000 and the repayment by Centerplate of a $500,000 note in favor of GE Capital and
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(iii) pay fees and expenses incurred in connection with the notes and the consent from lenders to an amendment to the Credit Agreement.
2003 Credit Agreement — On December 10, 2003, Volume Services America (the “Borrower”) entered into a senior secured credit agreement which provided for $65,000,000 in fixed rate term loans and a $50,000,000 revolving credit facility (“the Revolving Credit Facility”). The term loans bear interest at a fixed rate of 7.24% and mature on June 10, 2008. The Revolving Credit Facility allows the Company to borrow up to $50,000,000 and includes a sub-limit of $35,000,000 for letters of credit which reduce availability under the Revolving Credit Facility and a sub-limit of $5,000,000 for Swingline Loans. Under the Swingline sub-limit, advances will be provided for up to five business days and with respect to any loans not repaid prior to the fifth business day, they will automatically convert to a Revolver loan. Revolving Loans must be repaid at the Revolving Credit Facility maturity date and are subject to an annual clean-up period. During the annual clean-up period the revolving credit exposure is reduced to zero during at least one consecutive thirty day period beginning during fiscal 2004. The credit agreement provides that any letter of credit amounts outstanding as of the commencement of the annual clean-up period are permitted to remain outstanding during the annual clean-up period. The Revolving Credit Facility will mature on December 10, 2006. At December 30, 2003, $4,000,000 in Revolving Loans were outstanding under the Revolving Credit Facility, and approximately $20,250,000 of letters of credit were outstanding but undrawn. Borrowings under the Revolving Credit Facility bear interest at floating rates based upon the interest rate option elected by the Company subject to adjustment based on the Company’s leverage ratio. The weighted average interest rate at December 30, 2003 was 5.29% for the Revolving Credit Facility.
The credit agreement calls for mandatory prepayment of the loans under certain circumstances and optional prepayment without penalty. There are further provisions that limit the ability of the Company to make interest payment on the Subordinated Notes Issued in 2003 and dividend payments if it is not in compliance with certain financial covenants, including a maximum total leverage ratio, a maximum senior leverage ratio and an interest coverage ratio. At December 30, 2003, the Company was in compliance with all covenants. The credit agreement also contains provisions that limit the Company’s capital expenditures.
Subordinated Notes Issued in 2003 — During December 2003, as part of the IPO, Centerplate issued $105,245,000 in 13.50% Subordinated Notes. The notes mature on December 10, 2013 and are subject to extension by two successive five year terms at the Company’s option provided that certain financial conditions are met. Interest on the notes is payable on the twentieth day of each month. Such notes are unsecured, are subordinated to all the existing and any future senior indebtedness of the Company, and rank equally with all existing and future indebtedness of the Company. Furthermore, the debt is guaranteed by all of the subsidiaries of Centerplate, except for certain non-wholly owned U.S. subsidiaries and one non-U.S. subsidiary.
Use of Proceeds — The proceeds of the term loans and notes issued in 2003 were combined with proceeds from the IPO and were used to (i) repay $116,828,000 outstanding under the 1998 Credit Agreement, (ii) repay $87,750,000 of Senior Subordinated Notes issued in 1999, (iii) establish cash reserves of $22,048,000 for the benefit of the new lenders and to repurchase the remaining Senior Subordinated Notes issued in 1999, (iv) repurchase common stock from the investors in the amount of $71,440,000 and (v) pay fees and expenses incurred in connection with the initial public offering, the 2003 Credit Agreement and the notes issued in 2003.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Aggregate annual maturities of long-term debt at December 30, 2003 are as follows (in thousands):
| 2004 | $ | 16,250 | ||
| 2005 | — | |||
| 2006 | — | |||
| 2007 | — | |||
| 2008 | 65,000 | |||
| Thereafter | 105,245 | |||
| Total | $ | 186,495 | ||
| 6. | Income Taxes |
| 2002 | 2003 | ||||||||
| (In thousands) | |||||||||
| Deferred tax liabilities: | |||||||||
| Intangibles (goodwill, contract rights and trademarks) | $ | (5,853 | ) | $ | (5,298 | ) | |||
| Differences between book and tax basis of property | (858 | ) | (1,569 | ) | |||||
| Other | (1,115 | ) | (875 | ) | |||||
| (7,826 | ) | (7,742 | ) | ||||||
| Deferred tax assets: | |||||||||
| Bad debt reserves | 158 | 108 | |||||||
| Inventory reserves | 91 | 60 | |||||||
| Other reserves and accrued liabilities | 4,441 | 3,963 | |||||||
| General business and AMT credit carryforwards | 3,020 | 5,167 | |||||||
| Accrued compensation and vacation | 1,205 | 2,314 | |||||||
| Net operating loss carryforward | 586 | 3,041 | |||||||
| 9,501 | 14,653 | ||||||||
| Valuation allowance | (942 | ) | — | ||||||
| 8,559 | 14,653 | ||||||||
| Net deferred tax asset | $ | 733 | $ | 6,911 | |||||
| Net deferred tax asset is recognized as follows in the accompanying 2002 and 2003 consolidated balance sheets: | |||||||||
| Current deferred tax asset | $ | 2,764 | $ | 4,121 | |||||
| Noncurrent deferred tax asset (liability) | (2,031 | ) | 2,790 | ||||||
| Net deferred tax asset | $ | 733 | $ | 6,911 | |||||
At December 30, 2003, the Company has approximately $19,723,000 of federal net operating loss carryforwards, $13,000,000 of which are from the acquisition of Service America and will reduce goodwill when utilized. These carryforwards expire in various periods between 2004 and 2023. The Company’s future ability to utilize its net operating loss carryforward is limited to some extent by Section 382 of the Internal Revenue Code of 1986, as amended. At December 30, 2003, the Company has approximately $6,848,000 of federal tax credit carryforwards, $1,712,000 which are from the acquisition of Service America and will reduce goodwill when utilized. These carryforwards expire in various periods between 2004 and 2023. In addition, the
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company has approximately $663,000 of Canadian net operating loss carryforwards. These carryforwards expire in various periods ending between 2003 and 2010.
At December 30, 2003, the Company did not have a valuation allowance related to the deferred tax assets associated with certain net operating loss and credit carryforwards. Management believes that, based on a number of factors, the available objective evidence creates sufficient certainty regarding the realizability of these net operating losses and credit carryovers. Management eliminated the valuation allowance in fiscal 2003 since they believe that it is more likely than not that all of the net deferred tax assets will be realized. The amount of net deferred tax assets considered realizable, however, could be reduced in the near term based on changing conditions.
The components of the benefit for income taxes on income (loss) are as follows:
| Fiscal Year Ended | ||||||||||||
| January 1, | December 31, | December 30, | ||||||||||
| 2002 | 2002 | 2003 | ||||||||||
| (In thousands) | ||||||||||||
| Current provision (benefit) | $ | 478 | $ | (187 | ) | $ | (159 | ) | ||||
| Deferred benefit | (910 | ) | — | (6,178 | ) | |||||||
| Total benefit for income taxes | $ | (432 | ) | $ | (187 | ) | $ | (6,337 | ) | |||
A reconciliation of the provision for income taxes on continuing operations to the federal statutory rate follows:
| Fiscal Year Ended | |||||||||||||
| January 1, | December 31, | December 30, | |||||||||||
| 2002 | 2002 | 2003 | |||||||||||
| Statutory rate | (34 | )% | 34 | % | (34 | )% | |||||||
| Differences: | |||||||||||||
| State income taxes | 11 | 2 | (4 | ) | |||||||||
| Nondeductible expenses (meals and entertainment) | 2 | 2 | 1 | ||||||||||
| Adjustment to valuation allowance | 56 | (31 | ) | (9 | ) | ||||||||
| Goodwill | 13 | — | — | ||||||||||
| Federal tax credits | (56 | ) | (5 | ) | (13 | ) | |||||||
| Reserve for tax audit | — | (9 | ) | — | |||||||||
| Nondeductible compensation | 1 | 4 | — | ||||||||||
| Other | (4 | ) | (1 | ) | — | ||||||||
| Total benefit for income taxes | (11 | )% | (4 | )% | (59 | )% | |||||||
The Company has accounted for its issuance of IDS units in December 2003 as representing shares of common stock and the 2003 Subordinated Notes (see Note 5), by allocating the proceeds for each IDS unit to the underlying stock or Subordinated Note based upon the relative fair values of each. Accordingly, the portion of the aggregate IDSs outstanding that represents Subordinated Notes has been accounted for by the Company as long-term debt bearing a stated interest rate of 13.5% maturing on December 10, 2013. During the year ended December 30, 2003, the Company has deducted interest expense of approximately $829,000 on the Subordinated Notes from taxable income for U.S. federal and state income tax purposes. There can be no assurances that the Internal Revenue Service or the courts will not seek to challenge the treatment of these notes as debt or the amount of interest expense deducted, although to date the Company has not been notified that the notes should be treated as equity rather than debt for U.S. federal and state income tax purposes. If the notes were reclassified as equity the cumulative interest expense associated with the notes of approxi-
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
mately $829,000 would not be deductible from taxable income. The additional tax due to the federal and state authorities would be zero based on the Company’s estimate that it will generate a tax loss for the year ended December 30, 2003. The Company has not recorded a liability for the potential disallowance of this deduction.
| 7. | Equity Transactions |
Loans to Related Parties — Loans to VSI Management Direct L.P. and another partnership which holds a direct and an indirect ownership interest, respectively, in the Company were outstanding at December 31, 2002. The loans were used to fund the repurchase of partnership interests from former members of management of the Company. Accordingly, these amounts were included as a reduction to stockholders’ equity at December 31, 2002. In December 2003, these loans were repaid.
Noncash Compensation — During fiscal 2000, certain management employees purchased units in the two partnerships described above. These purchases were financed with nonrecourse loans. The terms of the purchase agreements are such that the issuance of these units is a variable plan, which requires the Company to revalue the units at each measurement date for changes in the fair value of the units. The related compensation expense is recorded in selling, general, and administrative expenses in the statement of operations and comprehensive income (loss) for fiscal years 2001, 2002 and 2003. As of December 30, 2003, all non-recourse loans have been repaid.
| 8. | Fair Value of Financial Instruments |
The estimated fair value of financial instruments and related underlying assumptions are as follows:
Long-Term Debt — The Company estimates that the carrying value at December 31, 2002 approximates the fair value of the 1998 Term Loans and 1998 Revolving Credit Facility based upon the variable rate of interest and frequent repricing. The Company estimates the fair value of the 1999 Senior Subordinated Notes to be approximately $95,000,000 (book value $100,000,000) and $12,900,000 (book value $12,250,000) at December 31, 2002 and December 30, 2003, respectively, based on third-party quotations for the same or similar issues. In December 2003, in connection with the IPO and the refinancing of the 1998 Credit Agreement (see Note 5), the Company issued new subordinated notes in the amount of $105,245,000 bearing a fixed interest rate of 13.5% and new term loans in the amount of $65,000,000 bearing a fixed interest rate of 7.24%. The Company believes that the market value approximates the carrying cost at December 30, 2003 due to the nearness of the date of issue to the Company’s fiscal year end. The table presents principal cash flows and related average rates as of December 30, 2003:
| Fair Value | ||||||||||||||||||||||||||||||||||
| 2004 | 2005 | 2006 | 2007 | 2008 | Thereafter | Total | 12/30/03 | |||||||||||||||||||||||||||
| (In millions) | ||||||||||||||||||||||||||||||||||
| Variable rate debt | $ | 4.0 | — | — | — | — | — | $ | 4.0 | $ | 4.0 | |||||||||||||||||||||||
| Average interest rate | 5.29 | % | ||||||||||||||||||||||||||||||||
| Fixed rate debt: | ||||||||||||||||||||||||||||||||||
| Represented by IDSs | — | — | — | — | — | $ | 105.2 | $ | 105.2 | $ | 105.2 | |||||||||||||||||||||||
| Average interest rate | 13.50 | % | ||||||||||||||||||||||||||||||||
| Term loans | — | — | — | — | $ | 65.0 | — | $ | 65.0 | $ | 65.0 | |||||||||||||||||||||||
| Average interest rate | 7.24 | % | ||||||||||||||||||||||||||||||||
| Remaining 1999 notes | $ | 12.3 | — | — | — | — | — | $ | 12.3 | $ | 12.9 | |||||||||||||||||||||||
| Average interest rate | 11.25 | % | ||||||||||||||||||||||||||||||||
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Derivative Financial Instruments — The Company considers all relevant information, including data received from specialists and derivative financial instrument models to determine the fair value of derivative financial instruments.
Current Assets and Current Liabilities — The Company estimates the carrying value of current assets and liabilities to approximate their fair value based upon the nature of the financial instruments and their relatively short duration.
| 9. | Commitments and Contingencies |
Leases and Client Contracts — The Company operates primarily at its clients’ premises pursuant to written contracts. The length of a contract generally ranges from 1 to 20 years. Certain of these client contracts provide for payment by the Company to the client for both fixed and variable commissions and royalties. Aggregate commission and royalty expense under these agreements was $183,324,000, $192,499,000 and $208,637,000 for fiscal years 2001, 2002, and 2003, respectively. Minimum guaranteed commission and royalty expense was approximately $7,016,000, $7,625,000 and $7,818,000 for fiscal years 2001, 2002, and 2003, respectively.
The Company leases a number of real properties and other equipment under varying lease terms which are noncancelable. In addition, the Company has numerous month-to-month leases. Rent expense was approximately $961,000, $1,112,000 and $1,151,000 in fiscal 2001, fiscal 2002, and fiscal 2003, respectively.
Future minimum commitments for all operating leases and minimum commissions and royalties due under client contracts are as follows:
| Commissions | ||||||||
| Operating | and | |||||||
| Year | Leases | Royalties | ||||||
| (In thousands) | ||||||||
| 2004 | $ | 526 | $ | 8,266 | ||||
| 2005 | 435 | 7,995 | ||||||
| 2006 | 260 | 5,869 | ||||||
| 2007 | 66 | 3,269 | ||||||
| 2008 | 12 | 3,113 | ||||||
| Thereafter | — | 9,864 | ||||||
| Total | $ | 1,299 | $ | 38,376 | ||||
Employment Contracts — The Company has employment agreements and arrangements with its executive officers and certain management personnel. The agreements generally continue until terminated by the executive or the Company, and provide for severance payments under certain circumstances. The agreements include a covenant against competition with the Company, which extends for a period of time after termination for any reason. As of December 30, 2003, if all of the employees under contract were to be terminated by the Company without good cause (as defined) under these contracts, the Company’s liability would be approximately $5.1 million.
Commitments — Pursuant to its contracts with various clients, the Company is committed to spend approximately $12.4 million during 2004 and $1.7 million during 2005 for equipment improvements and location contract rights.
At December 30, 2003, the Company has $8,927,000 of letters of credit collateralizing the Company’s performance and other bonds, and $9,733,000 in letters of credit collateralizing the self-insurance reserves of the Company, and $1,550,000 in other letters of credit.
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of December 30, 2003, the Company has long-term insurance liabilities and other long-term liabilities of approximately $4,245,000 and $699,000, respectively, which were estimated to become payable as follows:
| 2005 | 2006 | 2007 | 2008 | 2009 | Thereafter | Total | ||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||
| Insurance | 755 | 1,575 | 1,210 | 252 | 204 | 249 | 4,245 | |||||||||||||||||||||
| Other | 484 | 116 | 50 | 50 | — | — | 699 | |||||||||||||||||||||
| Total | $ | 1,239 | $ | 1,691 | $ | 1,260 | $ | 302 | $ | 204 | $ | 249 | $ | 4,944 | ||||||||||||||
Contingencies — On April 20, 2001 one of the Company’s customers filed for Chapter 11 bankruptcy. The Company had approximately $3.2 million of receivables and leasehold improvements recorded at the time of the filings relating to this customer. In fiscal 2001, the Company wrote-off $2.5 million of other assets primarily representing long-term receivables. In 2002, the Company filed a bankruptcy claim in the amount of $3.2 million. In fiscal 2003, the Company received a settlement payment for approximately $0.8 million. Such amount was recorded in selling, general and administrative expenses.
Litigation — 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 entitledHolden v. Volume Services America, Inc. 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 had removed the case to the United States District Court for the Central District of California, but in November 2003 the court remanded the case back to the California Superior Court. 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. 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 adverse effect on our financial position or results of operations.
Laws and regulations concerning the discharge of pollutants into the air and water, the handling and disposal of hazardous materials, the investigation and remediation of property contamination and other aspects of environmental protection are in effect in all locations in which the Company operates. The Company’s current operations do not involve material costs to comply with such laws and regulations, and they have not given rise to, and are not expected to give rise to, material liabilities under these laws and regulations for investigation or remediation of contamination.
Claims for environmental liabilities arising out of property contamination have been asserted against the Company and the Company’s predecessors from time to time, and in some cases such claims have been associated with businesses, including waste-disposal and waste-management businesses, related to entities we acquired and have been based on conduct that occurred prior to the Company’s acquisition of those entities. Several such claims were resolved during the 1990s in bankruptcy proceedings involving some of the Company’s predecessors. More recently, private corporations asserted a claim under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) against the Company for contribution to address past and future remediation costs at a site in Illinois. The site allegedly was used by, among others, a waste disposal business related to a predecessor for which the Company allegedly is responsible. In addition, the United States Environmental Protection Agency, asserting authority under CERCLA, recently issued a unilateral administrative order concerning the same Illinois site naming approximately 75 entities as respondents, including the plaintiffs in the CERCLA lawsuit against us and the waste disposal business for which the plaintiffs allege the Company is responsible. Management believes that the Company has a valid
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
defense (including discharge in bankruptcy related to certain bankruptcy proceedings filed in the 1990s) to any claimed liability at this site and further believes that the Company’s potential liability, if any, is not likely to be significant. However, because these claims are in their early stages, management cannot predict at this time whether the Company will eventually be held liable at this site or whether such liability will be material. Furthermore, additional environmental liabilities relating to any of the Company’s former operations or any entities the Company has acquired could be identified and give rise to claims against the Company involving significant losses.
There are also other various claims and pending legal actions against or indirectly involving the Company. It is the opinion of management, after considering a number of factors, including, but not limited to, the current status of the litigation (including any settlement discussions), views of retained counsel, the nature of the litigation, the prior experience of the Company, and the amounts which the Company has accrued for known contingencies, that the ultimate disposition of these matters will not materially affect the financial position or future results of operations of the Company.
| 10. | Related Party Transactions |
Management Fees — Certain administrative and management functions were provided to the Company by the Blackstone Group and GE Capital through monitoring agreements. The Company paid Blackstone Management Partners II L.P., an affiliate of Blackstone, a fee of $250,000 in fiscal years 2001 and 2002 and $236,000 in fiscal 2003. GE Capital was paid management fees of $167,000 in fiscal years 2001 and 2002 and $158,000 in fiscal 2003. Such amounts are included in selling, general and administrative expenses. These fees were ceased upon the closing of the IPO.
Blackstone Group was paid an $875,000 arrangers fee in connection with the IPO. A portion of this amount was capitalized on the Company’s balance sheet as deferred financing costs with the remainder charged to Additional Paid in Capital, based on the relative fair value of each component of the IDSs (See Note 1).
Leasing Services — GE Capital and its affiliates provide leasing and financing services to the Company. Payments to GE Capital and its affiliates for fiscal years 2001, 2002 and 2003 for such services, net of discounts earned, were approximately $95,000, $75,000 and $47,000, respectively, and are included in selling, general and administrative expenses.
Annual Bonus Plan — The Company maintains a discretionary annual bonus plan subject to the board of directors’ approval whereby general managers and senior management personnel qualify for bonus payments in the event that the Company has exceeded certain financial performance targets determined on an annual basis.
Long Term Incentive Compensation — In connection with its IPO, the Company adopted a Long Term Incentive Plan (the “LTIP”) designed to strengthen the mutuality of interests between executives and security holders. Under the LTIP, the Compensation Committee determines who is eligible to participate in the LTIP, the level of participation of each individual in the incentive pool and the conditions that must be satisfied for an individual to vest in their allocated incentive pool amount. LTIP payouts may be in cash or shares of common stock. The Compensation Committee has the power to amend or terminate the LTIP at any time. No awards have been vested, accrued or granted under the LTIP.
| 11. | Retirement Plan |
The Volume Services America 401(k) defined contribution plan covers substantially all Volume Services America employees. Employees may contribute up to 50 percent of their eligible earnings and the Company will match 25 percent of employee contributions up to the first 6 percent of employee compensation, with an additional discretionary match up to 50 percent as determined by the board of directors. The Company’s
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
contributions to the plan were approximately $397,000 in fiscal 2001, $313,000 in fiscal 2002 and $314,000 in fiscal 2003.
Multi-Employer Pension Plans — Certain of the Company’s union employees are covered by multi-employer defined benefit pension plans administered by unions. Under the Employee Retirement Income Security Act (“ERISA”), as amended, an employer upon withdrawal from a multi-employer pension plan is required to continue funding its proportionate share of the plan’s unfunded vested benefits. Amounts charged to expense and contributed to the plans were not material for the periods presented.
| 12. | Contract Related Losses |
During fiscal years 2001 and 2002, several contracts which the Company intends to continue operating were identified as impaired, as the future undiscounted cash flows of each of these contracts was estimated to be insufficient to recover the related carrying value of the property and equipment and contract rights associated with each contract. As such, the carrying values of these contracts were written down to the Company’s estimate of fair value based on the present value of the discounted future cash flows. In fiscal 2001, the Company wrote down approximately $2.3 million of property and equipment and contract rights. In addition, the Company recorded an impairment charge of approximately $2.5 million for the write down of other assets. In fiscal 2002, the Company wrote down approximately $0.7 million in contract rights related to a certain contract. In fiscal 2003, the Company wrote down approximately $0.6 million of contract rights and other assets for certain contracts that have been terminated and approximately $0.2 million for the write-down of property and equipment for a contract which has been assigned to a third party.
| 13. | Other Income |
During fiscal 2002, Service America, received approximately $1.4 million from 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. These funds were recorded in Other income, net.
| 14. | Executive Employment Agreements |
Effective April 15, 2002 the Company entered into an Executive Employment Agreement (the “Agreement”) with its Chief Executive Officer, Lawrence E. Honig. The Agreement provides that Mr. Honig would be employed as the Company’s Chief Executive Officer until April 14, 2004, subject to automatic one-year extensions of the term of the Agreement and his employment with the Company, unless earlier terminated. The Agreement may be terminated by either party at any time for any reason, provided that Mr. Honig gives the Company 60 days advance written notice of his resignation. The agreement also may be terminated by the Company for cause or by Mr. Honig for good reason. Mr. Honig’s base salary under the agreement is $450,000, subject to increases at the discretion of the Board of Directors. Mr. Honig is eligible to earn a bonus pursuant to the Company’s annual bonus plan, targeted to be at least 50% of his base salary. Mr. Honig is also entitled to participate in all employee benefits plans maintained by the Company. In the case of termination of his employment by the Company without cause or by Mr. Honig for good reason, Mr. Honig will receive his annual base salary and continued benefits for one year following the date of his termination, plus any accrued but unpaid bonus amounts.
Under the terms of the agreement, Mr. Honig was to be granted options on 3% of the Company’s common stock pursuant to a long-term equity incentive plan that was to be implemented within 180 days after the date of the Agreement. In the event of certain corporate transactions, such as the IPO, the Company had guaranteed that these options would have a value equal to $1 million. Because the Company did not
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
implement a long-term equity incentive plan and therefore did not grant Mr. Honig these options, the Company amended the Agreement to provide that he would be paid the $1 million guaranteed option value to which he was originally entitled upon the closing of the IPO. Such amount was paid on December 10, 2003 in connection with the closing of the IPO.
| 15. | Quarterly Results of Operations (Unaudited) |
Quarterly operating results for the years ended December 31, 2002 and December 30, 2003 are as follows:
| First | Second | Third | Fourth | |||||||||||||||||
| Quarter | Quarter | Quarter | Quarter | Total | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
Year Ended December 31, 2002 | ||||||||||||||||||||
| Net sales | $ | 87,840 | $ | 166,421 | $ | 195,100 | $ | 127,801 | $ | 577,162 | ||||||||||
| Cost of sales | 74,799 | 134,279 | 156,459 | 105,392 | 470,929 | |||||||||||||||
| Gross profit | 13,041 | 32,142 | 38,641 | 22,409 | 106,233 | |||||||||||||||
| Selling, general, and administrative | 11,633 | 14,951 | 16,015 | 12,658 | 55,257 | |||||||||||||||
| Depreciation and amortization | 5,593 | 6,679 | 6,734 | 7,179 | 26,185 | |||||||||||||||
| Transaction related expenses | — | — | — | 597 | 597 | |||||||||||||||
| Contract related losses | — | 699 | — | — | 699 | |||||||||||||||
| Operating income (loss) | (4,185 | ) | 9,813 | 15,892 | 1,975 | 23,495 | ||||||||||||||
| Interest expense, net | 5,357 | 5,175 | 5,129 | 5,081 | 20,742 | |||||||||||||||
| Other income, net | (1,384 | ) | (34 | ) | (28 | ) | (110 | ) | (1,556 | ) | ||||||||||
| Income (loss) before income taxes | (8,158 | ) | 4,672 | 10,791 | (2,996 | ) | 4,309 | |||||||||||||
| Income tax provision (benefit) | (1,288 | ) | 831 | 1,008 | (738 | ) | (187 | ) | ||||||||||||
| Net income (loss) | $ | (6,870 | ) | $ | 3,841 | $ | 9,783 | $ | (2,258 | ) | $ | 4,496 | ||||||||
| First | Second | Third | Fourth | |||||||||||||||||
| Quarter | Quarter | Quarter | Quarter | Total | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
Year Ended December 30, 2003 | ||||||||||||||||||||
| Net sales | $ | 96,900 | $ | 172,733 | $ | 214,636 | $ | 131,788 | $ | 616,057 | ||||||||||
| Cost of sales | 81,655 | 140,664 | 173,378 | 108,289 | 503,986 | |||||||||||||||
| Gross profit | 15,245 | 32,069 | 41,258 | 23,499 | 112,071 | |||||||||||||||
| Selling, general, and administrative | 13,375 | 14,177 | 17,719 | 14,320 | 59,591 | |||||||||||||||
| Depreciation and amortization | 6,475 | 6,895 | 6,956 | 6,793 | 27,119 | |||||||||||||||
| Transaction related expenses | — | — | — | 2,577 | 2,577 | |||||||||||||||
| Contract related losses | 110 | 537 | — | 184 | 831 | |||||||||||||||
| Operating income (loss) | (4,715 | ) | 10,460 | 16,583 | (375 | ) | 21,953 | |||||||||||||
| Interest expense, net | 5,071 | 5,124 | 4,833 | 17,735 | 32,763 | |||||||||||||||
| Other income, net | (5 | ) | (14 | ) | (8 | ) | (28 | ) | (55 | ) | ||||||||||
| Income (loss) before income taxes | (9,781 | ) | 5,350 | 11,758 | (18,082 | ) | (10,755 | ) | ||||||||||||
| Income tax provision (benefit) | (3,236 | ) | 2,474 | 1,084 | (6,659 | ) | (6,337 | ) | ||||||||||||
| Net income (loss) | $ | (6,545 | ) | $ | 2,876 | $ | 10,674 | $ | (11,423 | ) | $ | (4,418 | ) | |||||||
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Certain amounts in the quarter ended July 2, 2002 have been reclassified from the presentation as filed in the Company’s report on Form 10-Q with the Securities & Exchange Commission for that quarterly period to conform to the financial statement presentation used for the year ended December 31, 2002. The reclassification from cost of sales to selling, general and administrative expenses in the second quarter of fiscal 2002 was $417,000.
| 16. | Non-Guarantor Subsidiaries Financial Statements |
The $105,245,000 in 13.5% Subordinated Notes are jointly and severally guaranteed by each of Centerplate’s direct and indirect wholly owned subsidiaries, except for certain non-wholly owned U.S. subsidiaries and one non-U.S. subsidiary. The redeemed $100,000,000 in 11 1/4 Senior Subordinated Notes were jointly guaranteed by Centerplate and all of the subsidiaries of Volume Services America, except for certain non-wholly owned U.S. subsidiary and one non-U.S. subsidiary. The following table sets forth the condensed consolidating financial statements of Centerplate as of and for the periods ended December 30, 2002 and December 31, 2003 (in the case of the balance sheet) and for the years ended January 1, 2002, December 31, 2002 and December 30, 2003 (in the case of the statement of operations and the cash flows). The Company has restated its consolidating financial statements to report the results of operations of Centerplate separately from the results of operations of the subsidiaries that guarantee the subordinated notes included in its IDSs (“the combined guarantor subsidiaries”).
| Consolidating Condensed Statement of Operations and Comprehensive Loss, Year Ended January 1, 2002 |
| Combined | Combined | |||||||||||||||||||
| Guarantor | Non-guarantor | |||||||||||||||||||
| Centerplate | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Net sales | $ | — | $ | 518,714 | $ | 24,399 | $ | — | $ | 543,113 | ||||||||||
| Cost of sales | — | 424,623 | 21,973 | — | 446,596 | |||||||||||||||
| Selling, general, and administrative | — | 46,503 | 1,605 | — | 48,108 | |||||||||||||||
| Depreciation and amortization | — | 23,678 | 814 | — | 24,492 | |||||||||||||||
| Transaction related expenses | — | — | — | — | — | |||||||||||||||
| Contract related losses | — | 4,762 | — | — | 4,762 | |||||||||||||||
| Operating income | — | 19,148 | 7 | — | 19,155 | |||||||||||||||
| Interest expense | — | 23,429 | — | — | 23,429 | |||||||||||||||
| Other income, net | — | (213 | ) | (29 | ) | — | (242 | ) | ||||||||||||
| Income (loss) before income taxes | — | (4,068 | ) | 36 | — | (4,032 | ) | |||||||||||||
| Income tax benefit | — | (432 | ) | — | — | (432 | ) | |||||||||||||
| Loss in earnings of subsidiaries | (3,600 | ) | — | — | 3,600 | — | ||||||||||||||
| Net income (loss) | (3,600 | ) | (3,636 | ) | 36 | 3,600 | (3,600 | ) | ||||||||||||
| Other comprehensive loss foreign currency | — | — | (209 | ) | — | (209 | ) | |||||||||||||
| Comprehensive loss | $ | (3,600 | ) | $ | (3,636 | ) | $ | (173 | ) | $ | 3,600 | $ | (3,809 | ) | ||||||
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Consolidating Condensed Statement of Cash Flows, Year Ended January 1, 2002 |
| Combined | Combined | |||||||||||||||||
| Guarantor | Non-guarantor | |||||||||||||||||
| Centerplate | Subsidiaries | Subsidiaries | Consolidated | |||||||||||||||
| (In thousands) | ||||||||||||||||||
| Cash flows from operating activities | $ | — | $ | 24,874 | $ | (135 | ) | $ | 24,739 | |||||||||
| Cash flows from investing activities: | ||||||||||||||||||
| Purchase of property and equipment | — | (7,785 | ) | (267 | ) | (8,052 | ) | |||||||||||
| Proceeds from sale of property, plant and equipment | — | 139 | — | 139 | ||||||||||||||
| Purchase of contract rights | — | (21,367 | ) | — | (21,367 | ) | ||||||||||||
| Net cash used in investing activities | — | (29,013 | ) | (267 | ) | (29,280 | ) | |||||||||||
| Cash flows from financing activities: | ||||||||||||||||||
| Net borrowings — revolving loans | — | 6,750 | — | 6,750 | ||||||||||||||
| Principal payments on long-term debt | — | (1,150 | ) | — | (1,150 | ) | ||||||||||||
| Principal payments on capital lease obligations | — | (149 | ) | — | (149 | ) | ||||||||||||
| Decrease in bank overdrafts | — | (454 | ) | — | (454 | ) | ||||||||||||
| Increase in loans to related parties | — | (40 | ) | — | (40 | ) | ||||||||||||
| Net cash provided by financing activities | — | 4,957 | — | 4,957 | ||||||||||||||
| Increase (decrease) in cash | — | 818 | (402 | ) | 416 | |||||||||||||
| Cash and cash equivalents: | ||||||||||||||||||
| Beginning of year | — | 14,158 | 568 | 14,726 | ||||||||||||||
| End of year | $ | — | $ | 14,976 | $ | 166 | $ | 15,142 | ||||||||||
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Consolidating Condensed Balance Sheet, December 31, 2002 |
| Combined | Combined | |||||||||||||||||||||
| Guarantor | Non-guarantor | |||||||||||||||||||||
| Centerplate | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||
| ASSETS | ||||||||||||||||||||||
| 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, net | — | 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 | 215 | 215 | — | (215 | ) | 215 | ||||||||||||||||
| Additional paid-in capital | 67,202 | 67,202 | — | (67,202 | ) | 67,202 | ||||||||||||||||
| 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 | ||||||||||
F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Consolidating Condensed Statement of Operations and Comprehensive Income, Year Ended December 31, 2002 |
| Combined | Combined | |||||||||||||||||||
| Guarantor | Non-guarantor | |||||||||||||||||||
| Centerplate | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Net sales | $ | — | $ | 547,188 | $ | 29,974 | $ | — | $ | 577,162 | ||||||||||
| Cost of sales | — | 444,767 | 26,162 | — | 470,929 | |||||||||||||||
| Selling, general, and administrative | — | 52,369 | 2,888 | — | 55,257 | |||||||||||||||
| Depreciation and amortization | — | 25,209 | 976 | — | 26,185 | |||||||||||||||
| Transaction related expenses | — | 597 | — | — | 597 | |||||||||||||||
| Contract related losses | — | 699 | — | — | 699 | |||||||||||||||
| Operating income (loss) | — | 23,547 | (52 | ) | — | 23,495 | ||||||||||||||
| Interest expense | — | 20,727 | 15 | — | 20,742 | |||||||||||||||
| Other income, net | — | (1,553 | ) | (3 | ) | — | (1,556 | ) | ||||||||||||
| Income (loss) before income taxes | — | 4,373 | (64 | ) | — | 4,309 | ||||||||||||||
| Income tax benefit | — | (148 | ) | (39 | ) | — | (187 | ) | ||||||||||||
| Equity in earnings of subsidiaries | 4,496 | — | — | (4,496 | ) | — | ||||||||||||||
| Net income (loss) | 4,496 | 4,521 | (25 | ) | (4,496 | ) | 4,496 | |||||||||||||
| Other comprehensive income foreign currency | — | — | 27 | — | 27 | |||||||||||||||
| Comprehensive income | $ | 4,496 | $ | 4,521 | $ | 2 | $ | (4,496 | ) | $ | 4,523 | |||||||||
F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Consolidating Condensed Statement of Cash Flows, Year Ended December 31, 2002 |
| Combined | Combined | |||||||||||||||||
| Guarantor | Non-guarantor | |||||||||||||||||
| Centerplate | Subsidiaries | Subsidiaries | Consolidated | |||||||||||||||
| (In thousands) | ||||||||||||||||||
| Cash flows from operating activities | $ | — | $ | 37,906 | $ | 667 | $ | 38,573 | ||||||||||
| Cash flows from investing activities: | ||||||||||||||||||
| Purchase of property and equipment | — | (9,292 | ) | (609 | ) | (9,901 | ) | |||||||||||
| Proceeds from sale of property, plant and equipment | — | 2,515 | — | 2,515 | ||||||||||||||
| Purchase of contract rights | — | (37,660 | ) | — | (37,660 | ) | ||||||||||||
| Net cash used in investing activities | — | (44,437 | ) | (609 | ) | (45,046 | ) | |||||||||||
| Cash flows from financing activities: | ||||||||||||||||||
| Net borrowings — revolving loans | — | 2,250 | — | 2,250 | ||||||||||||||
| Principal payments on long-term debt | — | (1,150 | ) | — | (1,150 | ) | ||||||||||||
| Principal payments on capital lease obligations | — | (267 | ) | — | (267 | ) | ||||||||||||
| Increase in bank overdrafts | — | 968 | — | 968 | ||||||||||||||
| Increase in loans to related parties | — | (96 | ) | — | (96 | ) | ||||||||||||
| Net cash provided by financing activities | — | 1,705 | — | 1,705 | ||||||||||||||
| Increase (decrease) in cash | — | (4,826 | ) | 58 | (4,768 | ) | ||||||||||||
| Cash and cash equivalents: | ||||||||||||||||||
| Beginning of year | — | 14,976 | 166 | 15,142 | ||||||||||||||
| End of year | $ | — | $ | 10,150 | $ | 224 | $ | 10,374 | ||||||||||
F-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Consolidating Condensed Balance Sheet, December 30, 2003 |
| Combined | Combined | |||||||||||||||||||||
| Guarantor | Non-guarantor | |||||||||||||||||||||
| Centerplate | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||
| ASSETS | ||||||||||||||||||||||
| Current assets: | ||||||||||||||||||||||
| Cash and cash equivalents | $ | 192 | $ | 22,504 | $ | 233 | $ | — | $ | 22,929 | ||||||||||||
| Restricted cash | — | 13,628 | — | — | 13,628 | |||||||||||||||||
| Accounts receivable | — | 15,619 | 2,118 | — | 17,737 | |||||||||||||||||
| Other current assets | — | 20,722 | 1,586 | — | 22,308 | |||||||||||||||||
| Total current assets | 192 | 72,473 | 3,937 | — | 76,602 | |||||||||||||||||
| Property and equipment | — | 49,240 | 3,511 | — | 52,751 | |||||||||||||||||
| Contract rights, net | 362 | 100,209 | 941 | — | 101,512 | |||||||||||||||||
| Cost in excess of net assets acquired, net | 6,974 | 39,483 | — | — | 46,457 | |||||||||||||||||
| Intercompany receivable (payable) | 172,222 | (164,951 | ) | (7,271 | ) | — | — | |||||||||||||||
| Investment in subsidiaries | (10,523 | ) | — | — | 10,523 | — | ||||||||||||||||
| Other assets | 11,322 | 33,617 | 12 | — | 44,951 | |||||||||||||||||
| Total assets | $ | 180,549 | $ | 130,071 | $ | 1,130 | $ | 10,523 | $ | 322,273 | ||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY) | ||||||||||||||||||||||
| Current liabilities | $ | 5,388 | $ | 72,454 | $ | 1,580 | $ | — | $ | 79,422 | ||||||||||||
| Long-term debt | 105,245 | 65,000 | — | — | 170,245 | |||||||||||||||||
| Other liabilities | 2,254 | 2,690 | — | — | 4,944 | |||||||||||||||||
| Total liabilities | 112,887 | 140,144 | 1,580 | — | 254,611 | |||||||||||||||||
| Common stock with conversion option, par value $0.01 exchangeable for subordinated debt, net of discount | 14,035 | — | — | — | 14,035 | |||||||||||||||||
| Stockholders’ equity (deficiency): | ||||||||||||||||||||||
| Common stock | 400 | — | — | — | 400 | |||||||||||||||||
| Additional paid-in capital | 218,598 | — | — | — | 218,598 | |||||||||||||||||
| Accumulated deficit | (44,655 | ) | (10,073 | ) | (674 | ) | 10,747 | (44,655 | ) | |||||||||||||
| Treasury stock and other | (120,716 | ) | — | 224 | (224 | ) | (120,716 | ) | ||||||||||||||
| Total stockholders’ equity (deficiency) | 53,627 | (10,073 | ) | (450 | ) | 10,523 | 53,627 | |||||||||||||||
| Total liabilities and stockholders’ equity (deficiency) | $ | 180,549 | $ | 130,071 | $ | 1,130 | $ | 10,523 | $ | 322,273 | ||||||||||||
F-32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Consolidating Condensed Statement of Operations and Comprehensive Income (Loss), Year Ended December 30, 2003 |
| Combined | Combined | |||||||||||||||||||
| Guarantor | Non-guarantor | |||||||||||||||||||
| Centerplate | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Net sales | $ | — | $ | 579,329 | $ | 36,728 | — | $ | 616,057 | |||||||||||
| Cost of sales | — | 472,706 | 31,280 | — | 503,986 | |||||||||||||||
| Selling, general, and administrative | 57 | 55,653 | 3,881 | — | 59,591 | |||||||||||||||
| Depreciation and amortization | 116 | 26,192 | 811 | — | 27,119 | |||||||||||||||
| Transaction related expenses | — | 2,577 | — | — | 2,577 | |||||||||||||||
| Contract related losses | — | 647 | 184 | — | 831 | |||||||||||||||
| Operating income (loss) | (173 | ) | 21,554 | 572 | — | 21,953 | ||||||||||||||
| Interest expense | 42 | 32,721 | — | — | 32,763 | |||||||||||||||
| Other income, net | (4 | ) | (43 | ) | (8 | ) | — | (55 | ) | |||||||||||
| Income (loss) before income taxes | (211 | ) | (11,124 | ) | 580 | — | (10,755 | ) | ||||||||||||
| Income tax provision (benefit) | 586 | (6,927 | ) | 4 | — | (6,337 | ) | |||||||||||||
| Equity in earnings of subsidiaries | (3,621 | ) | — | — | 3,621 | — | ||||||||||||||
| Net income (loss) | (4,418 | ) | (4,197 | ) | 576 | 3,621 | (4,418 | ) | ||||||||||||
| Other comprehensive income foreign currency | — | — | 668 | — | 668 | |||||||||||||||
| Comprehensive income (loss) | $ | (4,418 | ) | $ | (4,197 | ) | $ | 1,244 | $ | 3,621 | $ | (3,750 | ) | |||||||
F-33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Consolidating Condensed Statement of Cash Flows, Year Ended December 30, 2003 |
| Combined | Combined | |||||||||||||||||
| Guarantor | Non-guarantor | |||||||||||||||||
| Centerplate | Subsidiaries | Subsidiaries | Consolidated | |||||||||||||||
| (In thousands) | ||||||||||||||||||
| Cash flows from operating activities | $ | 852 | $ | 24,877 | $ | 1,430 | $ | 27,159 | ||||||||||
| Cash flows from investing activities: | ||||||||||||||||||
| Purchase of property and equipment | — | (6,507 | ) | (1,397 | ) | (7,904 | ) | |||||||||||
| Proceeds from sale of property, plant and equipment | — | 585 | — | 585 | ||||||||||||||
| Purchase of contract rights | — | (16,029 | ) | — | (16,029 | ) | ||||||||||||
| Net cash used in investing activities | — | (21,951 | ) | (1,397 | ) | (23,348 | ) | |||||||||||
| Cash flows from financing activities: | ||||||||||||||||||
| Net repayments — revolving loans | — | (11,000 | ) | — | (11,000 | ) | ||||||||||||
| Principal payments on long-term debt | — | (110,400 | ) | — | (110,400 | ) | ||||||||||||
| Proceeds from issuance of long-term debt | — | 65,000 | — | 65,000 | ||||||||||||||
| Proceeds from issuance of stock, net | 151,517 | — | — | 151,517 | ||||||||||||||
| Proceeds from issuance of subordinated notes | 105,245 | — | — | 105,245 | ||||||||||||||
| Payment of existing subordinated notes | — | (87,750 | ) | — | (87,750 | ) | ||||||||||||
| Repurchase of common stock | (71,440 | ) | — | — | (71,440 | ) | ||||||||||||
| Proceeds from loans to related parties | 1,241 | — | — | 1,241 | ||||||||||||||
| Payment of debt issuance costs | (11,417 | ) | (1,420 | ) | — | (12,837 | ) | |||||||||||
| Restricted cash | — | (22,048 | ) | — | (22,048 | ) | ||||||||||||
| Increase in bank overdrafts | — | 1,282 | — | 1,282 | ||||||||||||||
| Loans to related parties | (66 | ) | — | — | (66 | ) | ||||||||||||
| Change in intercompany, net | (175,928 | ) | 175,952 | (24 | ) | — | ||||||||||||
| Net cash provided by financing activities | (848 | ) | 9,616 | (24 | ) | 8,744 | ||||||||||||
| Increase (decrease) in cash | 4 | 12,542 | 9 | 12,555 | ||||||||||||||
| Cash and cash equivalents: | ||||||||||||||||||
| Beginning of year | 188 | 9,962 | 224 | 10,374 | ||||||||||||||
| End of year | $ | 192 | $ | 22,504 | $ | 233 | $ | 22,929 | ||||||||||
F-34
| Item 9A. | Internal Control over Financial Reporting |
Evaluation of disclosure controls and procedures. As a result of clarifications in the accounting for IDSs, we have determined that the portion of the stock owned by the Initial Equity Investors exchangeable for subordinated notes should be treated as mezzanine equity and that the option to effect such an exchange represents a derivative that should be recorded at fair value on our balance sheet. We have determined that we must also reflect two classes of stock on our financial statements as a result of the Initial Equity Investors’ option to effect such an exchange and make other related changes. These changes in accounting treatment and certain related matters are reflected in this Amendment No. 1 to Annual Report on Form 10-K/A.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our report under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 30, 2003. Based upon that evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures provided reasonable assurance that the disclosure controls and procedures are effective to accomplish their objectives.
Changes in internal control over financial reporting. There was no change in our internal control over financial reporting that occurred during the fourth fiscal quarter of 2003 covered by this Amendment No. 1 to Annual Report on Form 10-K/A that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. However this amendment does reflect the recent resolution of the issues surrounding the accounting for IDSs as described above.
PART IV
| Item 15. | Exhibits, Financial Statement Schedules, and Reports on Form 8-K |
(a) The following documents are filed as a part of this report:
1. Financial Statements: See Index to Consolidated Financial Statements under Item 8 on Page F-1 of this report.
2. Financial Statement Schedules: None.
3. Exhibits
The following exhibits are filed herewith.
| Exhibit | ||||
| Number | Exhibit Title | |||
| 31 | .1 | Certification of Principal Executive Officer of Centerplate, Inc., pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 31 | .2 | Certification of Principal Financial Officer of Centerplate, Inc., pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 32 | .1 | Certification of Principal Executive Officer of Centerplate, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| 32 | .2 | Certification of Principal Financial Officer of Centerplate, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized, on December , 2004.
| CENTERPLATE, INC. | |
| (FORMERLY VOLUME SERVICES AMERICA HOLDINGS, INC.) | |
| By: /s/ LAWRENCE E. HONIG |
| Name: Lawrence E. Honig |
| Title: | Chief Executive Officer and Chairman of the Board of Directors |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the date indicated.
| Name | Title | Date | ||||
| /s/ LAWRENCE E. HONIG Lawrence E. Honig | Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) | December , 2004 | ||||
| /s/ KENNETH R. FRICK Kenneth R. Frick | Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) | December , 2004 | ||||
| /s/ FELIX P. CHEE Felix P. Chee | Director | December , 2004 | ||||
| /s/ SUE LING GIN Sue Ling Gin | Director | December , 2004 | ||||
| /s/ ALFRED POE Alfred Poe | Director | December , 2004 | ||||
| /s/ PETER WALLACE Peter Wallace | Director | December , 2004 | ||||
| /s/ DAVID M. WILLIAMS David M. Williams | Director | December , 2004 | ||||
| /s/ GLENN ZANDER Glenn Zander | Director | December , 2004 | ||||
17
