Centerplate 10Q 2005 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended September 27, 2005 or


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.

(Exact name of registrant as specified in its charter)


Delaware		13-3870167

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


201 East Broad Street, Spartanburg, South Carolina 29306		(864) 598-8600

(Address of principal executive offices, including zip code)		(Registrant’s telephone number, including area code)

http:www.centerplate.com
(Registrant’s URL)

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.


þ Yes		o No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).


þ Yes		o No

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares of common stock of Centerplate, Inc. outstanding as of November 4, 2005 was 22,524,992.

CENTERPLATE, INC.

INDEX


PART I FINANCIAL INFORMATION			2

Item 1. Financial Statements			2

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			25

Item 3. Quantitative and Qualitative Disclosures About Market Risk			38

Item 4. Controls and Procedures			38

PART II OTHER INFORMATION			39

Item 1. Legal Proceedings			39

Item 6. Exhibits			39
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

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PART I
FINANCIAL INFORMATION

Item 1. Financial Statements

CENTERPLATE, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 27, 2005 AND DECEMBER 28, 2004


	September 27,			December 28,
	2005			2004
	(In thousands, except share data)
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	71,231		$	24,777
Accounts receivable, less allowance for doubtful accounts of $1,124 and $495 at September 27, 2005 and December 28, 2004, respectively		26,643			21,876
Merchandise inventories		20,331			16,549
Prepaid expenses and other		3,689			3,315
Deferred tax asset		5,485			5,238


Total current assets		127,379			71,755


PROPERTY AND EQUIPMENT:
Leasehold improvements		42,843			43,635
Merchandising equipment		63,889			57,435
Vehicles and other equipment		15,452			11,532
Construction in process		872			32

Total		123,056			112,634
Less accumulated depreciation and amortization		(71,079	)		(64,412	)


Property and equipment, net		51,977			48,222


OTHER LONG-TERM ASSETS:	��
Contract rights, net		83,931			87,981
Restricted cash		8,512			8,420
Cost in excess of net assets acquired		41,142			41,142
Deferred financing costs, net		16,129			11,707
Trademarks		17,523			17,523
Deferred tax asset		9,398			8,259
Other		3,826			4,037


Total other long-term assets		180,461			179,069


TOTAL ASSETS	$	359,817		$	299,046

See notes to consolidated financial statements.

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CENTERPLATE, INC.

CONSOLIDATED BALANCE SHEETS (CONTINUED)(UNAUDITED)
SEPTEMBER 27, 2005 AND DECEMBER 28, 2004


	September 27,			December 28,
	2005			2004
	(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:
Current portion of long-term debt	$	1,075		$	—
Accounts payable		27,505			19,103
Accrued salaries and vacations		17,118			11,237
Liability for insurance		7,113			5,777
Accrued taxes, including income taxes		8,099			4,543
Accrued commissions and royalties		28,699			15,702
Liability for derivatives		5,632			4,655
Accrued interest		780			712
Accrued dividends		1,487			1,487
Advance deposits		5,175			3,737
Other		2,320			3,290

Total current liabilities		105,003			70,243


LONG-TERM LIABILITIES:
Long-term debt		211,401			170,245
Liability for insurance		6,509			5,681
Other liabilities		348			651


Total long-term liabilities		218,258			176,577


COMMITMENTS AND CONTINGENCIES

COMMON STOCK WITH CONVERSION OPTION, PAR VALUE $0.01, EXCHANGEABLE FOR SUBORDINATED DEBT, NET OF DISCOUNT		14,352			14,352


STOCKHOLDERS’ EQUITY:
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			185
issued: 21,531,152 shares with conversion option; outstanding: 4,060,997 shares with conversion option		215			215
Additional paid-in capital		218,331			218,331
Accumulated deficit		(76,266	)		(60,492	)
Accumulated other comprehensive income		679			575
Treasury stock — at cost (17,470,153 shares)		(120,940	)		(120,940	)


Total stockholders’ equity		22,204			37,874


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	359,817		$	299,046

See notes to consolidated financial statements.

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CENTERPLATE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THIRTEEN AND THIRTY-NINE WEEK PERIODS ENDED SEPTEMBER 27, 2005 AND SEPTEMBER 28, 2004


	Thirteen Weeks Ended						Thirty-nine Weeks Ended
	September 27,			September 28,			September 27,			September 28,
	2005			2004			2005			2004
	(In thousands, except share data)
Net sales	$	208,619		$	201,066		$	497,910		$	473,027

Cost of sales		166,297			161,933			401,738			384,626
Selling, general, and administrative		19,738			17,514			53,388			46,657
Depreciation and amortization		7,332			6,656			21,433			20,135
Contract related losses		280			—			280			121


Operating income		14,972			14,963			21,071			21,488
Interest expense		6,955			4,759			25,478			18,787
Other income, net		(322	)		(75	)		(627	)		(170	)


Income (loss) before income taxes		8,339			10,279			(3,780	)		2,871
Income tax provision (benefit)		3,827			4,546			(1,386	)		921


Net income (loss)		4,512			5,733			(2,394	)		1,950
Accretion of conversion option		—			—			—			(317	)

Net income (loss) available to common stock with or without the conversion option	$	4,512		$	5,733		$	(2,394	)	$	1,633


Basic Net Income (loss) per share with conversion option	$	0.20		$	0.25		$	(0.11	)	$	0.15

Diluted Net Income (loss) per share with conversion option	$	0.20		$	0.25		$	(0.11	)	$	0.15


Basic Net Income (loss) per share without conversion option	$	0.20		$	0.25		$	(0.11	)	$	0.07

Diluted Net Income (loss) per share without conversion option	$	0.20		$	0.25		$	(0.11	)	$	0.07


Weighted average shares outstanding with conversion option		4,060,997			4,060,997			4,060,997			4,060,997
Weighted average shares outstanding without conversion option		18,463,995			18,463,995			18,463,995			18,463,995

Total weighted average shares outstanding		22,524,992			22,524,992			22,524,992			22,524,992


Dividends declared per share	$	0.20		$	0.20		$	0.59		$	0.59

See notes to consolidated financial statements.

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CENTERPLATE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
FOR THE PERIOD FROM DECEMBER 28, 2004 TO SEPTEMBER 27, 2005 AND THE THIRTEEN AND THIRTY-NINE WEEKS
ENDED SEPTEMBER 27, 2005 AND SEPTEMBER 28, 2004


	Common		Common		Common		Common
	Shares		Stock		Shares		Stock							Accumulated
	without		without		with		with		Additional					Other
	Conversion		Conversion		Conversion		Conversion		Paid-in		Accumulated			Comprehensive		Treasury
	Option		Option		Option		Option		Capital		Deficit			Income		Stock			Total
	(In thousands, except share data)
BALANCE, DECEMBER 28, 2004		18,463,995	$	185		21,531,152	$	215	$	218,331	$	(60,492	)	$	575	$	(120,940	)	$	37,874
Foreign currency translation		—		—		—		—		—		—			104		—			104
Dividends declared		—		—		—		—		—		(13,380	)		—		—			(13,380	)
Net loss		—		—		—		—		—		(2,394	)		—		—			(2,394	)


BALANCE, SEPTEMBER 27, 2005		18,463,995	$	185		21,531,152	$	215	$	218,331	$	(76,266	)	$	679	$	(120,940	)	$	22,204


	Thirteen Weeks Ended				Thirty-nine Weeks Ended
	September 27,		September 28,		September 27,			September 28,
	2005		2004		2005			2004
Net income (loss)	$	4,512	$	5,733		(2,394	)		1,950

Other comprehensive income — foreign currency translation adjustment		263		252		104			143


Comprehensive income (loss)	$	4,775	$	5,985		(2,290	)		2,093

See notes to consolidated financial statements.

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CENTERPLATE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THIRTY-NINE WEEK PERIODS ENDED SEPTEMBER 27, 2005 AND SEPTEMBER 28, 2004


	Thirty-nine Weeks Ended
	September 27,			September 28,
	2005			2004
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(2,394	)	$	1,950
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		21,433			20,135
Amortization of deferred financing costs		2,825			1,433
Derivitive non-cash interest		977			1,142
Non-cash interest earned on restricted cash		(92	)		—
Contract related losses		280			121
Deferred tax change		(1,386	)		834
(Gain) loss on disposition of assets		(47	)		50
Other		104			143
(Increase)/decrease in assets and liabilities:
Accounts receivable		(4,767	)		(4,266	)
Merchandise inventories		(3,782	)		(4,097	)
Prepaid expenses		(374	)		55
Other assets		(95	)		(1,419	)
Accounts payable		5,132			2,479
Accrued salaries and vacations		5,881			4,741
Liability for insurance		2,164			2,626
Accrued commissions and royalties		14,265			10,468
Other liabilities		3,789			5,213


Net cash provided by operating activities		43,913			41,608


CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(11,857	)		(5,684	)
Proceeds from sale of property and equipment		456			809
Contract rights acquired		(8,994	)		(7,679	)
Return of unamortized capital investment		—			11,531
Restricted cash		—			13,628


Net cash provided by (used in) investing activities		(20,395	)		12,605

See notes to consolidated financial statements.

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CENTERPLATE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)(UNAUDITED)
THIRTY-NINE WEEK PERIODS ENDED SEPTEMBER 27, 2005 AND SEPTEMBER 28, 2004


	Thirty-nine Weeks Ended
	September 27,			September 28,
	2005			2004
	(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments — revolving loans	$	—		$	(4,000	)
Principal payments on long-term debt		(269	)		—
Proceeds from long-term debt		107,500			—
Retirement of existing long-term borrowings		(65,000	)		—
Payments of financing costs		(7,247	)		(380	)
Payments of debt issuance costs		—			(267	)
Principal payments to redeem senior subordinated notes		—			(12,250	)
Dividend payments		(13,380	)		(13,875	)
Increase (decrease) in bank overdrafts		1,332			(617	)


Net cash provided by (used in) financing activities		22,936			(31,389	)


INCREASE IN CASH AND CASH EQUIVALENTS:		46,454			22,824

CASH AND CASH EQUIVALENTS:
Beginning of period		24,777			22,929


End of period	$	71,231		$	45,753


SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	21,608		$	17,226
Income taxes paid	$	13		$	8

SUPPLEMENTAL NON CASH FLOW INVESTING AND FINANCING ACTIVITIES:
Capital investment commitment	$	475		$	3,065
Cash due to Company for return of capital invested	$	—		$	5,000
Dividends declared and unpaid	$	1,487		$	1,487

See notes to consolidated financial statements.

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CENTERPLATE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THIRTY-NINE WEEK PERIODS ENDED SEPTEMBER 27, 2005 AND SEPTEMBER 28, 2004

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”).

The accompanying financial statements of Centerplate have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission for interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods.

The results of operations for the 39 week period ended September 27, 2005 are not necessarily indicative of the results to be expected for the 53 week fiscal year ending January 3, 2006 due to the seasonal aspects of the Company’s business. The accompanying consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the year ended December 28, 2004 included in the Company’s annual report on Form 10-K (“2004 Form 10-K”).

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

There have not been any changes in our significant accounting policies disclosed in the 2004 Form 10-K.

Cost in Excess of Net Assets Acquired and Trademarks —The Company performed its annual impairment tests of goodwill and trademarks as of March 29, 2005 in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, and determined that no impairment exists. There have been no events since March 29, 2005 that would require the Company to reassess the carrying value of these assets.

Insurance— At the beginning of fiscal 2002, the Company adopted a high deductible insurance program for general liability, auto liability and workers’compensation risk. Management establishes a reserve for its high deductible and employee health self-insurance programs considering a number of factors, including historic experience and an actuarial assessment of the liabilities for reported claims and claims incurred but not reported. The estimated liabilities for these programs, except for employee health insurance, are then discounted using rates between 2.18 percent and 4.02 percent at December 28, 2004 and 4.0 percent and 4.3 percent at September 27, 2005 to their present value based on expected loss payment patterns determined by experience. The total discounted liabilities for these programs recorded by the Company at December 28, 2004 and September 27, 2005 were $9,714,000 and $11,475,000, respectively. The related undiscounted amounts were $10,344,000 and $12,666,000, 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 liabilities recorded by the Company at December 28, 2004 and September 27, 2005 were $1,450,000 and $1,939,000, respectively.

- 8 -

Accounting Treatment for IDSs, Common Stock Owned by Initial Equity Investors and Derivative Financial Instruments —The Company’s income deposit securities (“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 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 September 27, 2005, these embedded derivatives were fair valued and determined to be insignificant. The term-extending option was determined to be inseparable from the underlying subordinated notes. Accordingly, it will not be separately accounted for in the current or future periods.

In connection with the initial public offering (“IPO”) in December 2003, those investors who held stock prior to the IPO (the “Initial Equity Investors”) entered into an Amended and Restated Stockholders Agreement on December 10, 2003 with the Company (“Amended 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 its 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). In order to determine the number of shares of common stock that the Initial Equity Investors could convert into subordinated debt, the Company divided the exchange rate of $9.30 by the original issue price of the IDSs of $15.00 at December 4, 2003 (the quotient equals 0.62). This quotient was then multiplied by the total number of shares owned by the Initial Equity Investors (4,060,997 shares) to determine the number of IDSs that the Initial Equity Investors would own after conversion (2,517,817 IDSs, each comprised of one share of stock and a subordinated note). The number of shares owned by the Initial Equity Investors before conversion (4,060,997) was subtracted from the number of shares they would own after conversion (2,517,817) to determine the number of shares of common stock to be converted into subordinated debt (1,543,180 shares) at the exchange rate of $9.30 per share resulting in the $14.4 million amount.

The Company has concluded that the portion of the Initial Equity Investors’ 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, at both September 27, 2005 and December 28, 2004, the Company has recorded $14.4 million as “Common stock with conversion option exchangeable for subordinated debt” on the balance sheet. Because the Initial Equity Investors were not allowed to convert any shares into subordinated notes during the first 180 days after the IPO, a discount (initially $0.4 million) was applied to the amount recorded as “Common stock with conversion option exchangeable for subordinated debt” during this 180 day period. This discount was 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. The accretion of approximately $317,000 in the 39 week period ended September 28, 2004 was a deemed dividend to the Initial Equity Investors. 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 $5.6 million as of September 27, 2005, an increase of $1.0 million from December 28, 2004. 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.

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The common stock held by the Initial Equity Investors has been treated as a separate class of common stock for presentation of earnings per share at September 27, 2005. Although the common stock held by the Initial Equity Investors is part of the same class of stock as the common stock included in the IDSs for purposes of Delaware corporate law, the right to convert that is granted in the Amended Stockholders Agreement as described above causes the stock held by the Initial Equity Investors to have features of a separate class of stock for accounting purposes. The deemed dividend as of September 28, 2004 of approximately $317,000 conveyed to the Initial Equity Investors discussed above requires a two class earnings per share calculation. Accordingly, the Company has shown separate earnings per share for the stock held by the Initial Equity Investors and the stock included in the IDSs.

Interest expense— For the 39 weeks ended September 27, 2005 and September 28, 2004, the change in the fair value of the Company’s derivatives of $1.0 million and $1.1 million, respectively, was recorded in interest expense. In addition, interest expense for the 2005 period includes $6.2 million in expenses related to the credit agreement entered into on April 1, 2005 (see Note 5). The $6.2 million includes a prepayment premium of approximately $4.6 million on the prior credit facility and a $1.6 million non-cash charge for the write-off of associated deferred financing costs. In the 2004 period, interest expense includes $1.2 million in expenses, including $0.3 million of amortization expense, related to the repurchase of the remaining 1999 senior subordinated notes under the Company’s 1999 indenture.

Income Taxes— The provision (benefit) for income taxes includes federal, state and foreign taxes currently payable, and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. A valuation allowance is established for deferred tax assets when it is more likely than not that the benefits of such assets will not be realized.

Income taxes for the 39 weeks ended September 27, 2005 and September 28, 2004 were calculated using the projected effective tax rate for fiscal 2005 and 2004, respectively, in accordance with SFAS No. 109 “Accounting for Income Taxes” and APB No. 28 “Interim Financial Reporting”. The Company estimates that in the fiscal year ending January 3, 2006, it will have an effective tax rate of approximately 37%. In the previous year, the Company estimated that its effective tax rate for the fiscal year ended December 28, 2004 would be 32%. The increase in the projected effective tax rate is primarily due to a reduction in the amount of federal tax credits generated.

The Company accounted for its 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 by the Company as long-term debt bearing a stated interest rate of 13.5% maturing on December 10, 2013. During the 39 weeks ended September 27, 2005, the Company deducted interest expense of approximately $10.7 million 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 approximately $25.7 million would not be deductible from taxable income. The additional tax due to the federal and state authorities for the 39 week period ending September 27, 2005 would be approximately $500,000 based on the Company’s opinion that it will be able to utilize net operating losses and tax credits to offset a portion of the tax liability. Since issuance of the IDS units in December 2003, the cumulative amount of additional tax due to the federal and state authorities would be approximately $4,100,000 based on the Company’s opinion that it will be able to utilize net operating losses and tax credits to offset a portion of the tax liability. Such reclassification, however, would also cause the Company to utilize at a faster rate more of its deferred tax assets than it otherwise would. The Company has not recorded a liability for any potential disallowance of this deduction.

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Earnings per Share —For the periods prior to our IPO in December 2003, basic and diluted earnings per share was calculated by dividing net income (loss) available to common shares by the weighted average common shares outstanding during the period. Following the completion of the IPO, the common stock held by the Initial Equity Investors has been treated as a separate class of common stock for presentation of earnings per share. Basic and diluted earnings per share without conversion option is calculated by dividing net income (loss) available to common stockholders with or without the conversion option by the weighted average common shares (includes both shares with and without the conversion option). Basic and diluted earnings per share with conversion option is calculated by dividing net income (loss) available to common stockholders with or without the conversion option by the weighted average common shares (includes both shares with and without the conversion option) plus the accretion of the conversion option divided by the weighted average shares outstanding with conversion option.

- 11 -


	Thirteen Weeks Ended						Thirteen Weeks Ended
	September 27, 2005						September 28, 2004
	Income		Shares		Per Share		Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount		(Numerator)		(Denominator)		Amount
	(In thousands, except share data)
Net Income (Loss)	$	4,512					$	5,733
Accretion of conversion option		—						—

Net Income (Loss) available to common stock with or without the conversion option	$	4,512					$	5,733

Weighted Average Shares Outstanding with conversion option				4,060,997						4,060,997
Weighted Average Shares Outstanding without conversion option				18,463,995						18,463,995

Total Weighted Average Shares Outstanding				22,524,992						22,524,992

Basic Net Income (loss) per share with conversion option	$	4,512		22,524,992	$	0.20	$	5,733		22,524,992	$	0.25
Diluted Net Income (loss) per share with conversion option	$	4,512		22,524,992	$	0.20	$	5,733		22,524,992	$	0.25

Basic Net Income (loss) per share without conversion option	$	4,512		22,524,992	$	0.20	$	5,733		22,524,992	$	0.25
Diluted Net Income (loss) per share without conversion option	$	4,512		22,524,992	$	0.20	$	5,733		22,524,992	$	0.25


	Thirty-nine Weeks Ended								Thirty-nine Weeks Ended
	September 27, 2005								September 28, 2004
	Income			Shares		Per Share			Income			Shares		Per Share
	(Numerator)			(Denominator)		Amount			(Numerator)			(Denominator)		Amount
	(In thousands, except share data)
Net Income (Loss)	$	(2,394	)						$	1,950
Accretion of conversion option		—								(317	)

Net Income (Loss) available to common stock with or without the conversion option	$	(2,394	)						$	1,633

Weighted Average Shares Outstanding with conversion option					4,060,997								4,060,997
Weighted Average Shares Outstanding without conversion option					18,463,995								18,463,995

Total Weighted Average Shares Outstanding					22,524,992								22,524,992

Net Income (Loss) available to common stock with or without the conversion option									$	1,633			22,524,992	$	0.07
Accretion of conversion option									$	317			4,060,997	$	0.08

Basic Net Income (loss) per share with conversion option	$	(2,394	)		22,524,992	$	(0.11	)						$	0.15

Net Income (Loss) available to common stock with or without the conversion option									$	1,633			22,524,992	$	0.07
Accretion of conversion option									$	317			4,060,997	$	0.08

Diluted Net Income (loss) per share with conversion option	$	(2,394	)		22,524,992	$	(0.11	)						$	0.15

Basic Net Income (loss) per share without conversion option	$	(2,394	)		22,524,992	$	(0.11	)	$	1,633			22,524,992	$	0.07
Diluted Net Income (loss) per share without conversion option	$	(2,394	)		22,524,992	$	(0.11	)	$	1,633			22,524,992	$	0.07

Reclassifications– Certain amounts in 2004 have been reclassified to conform to the financial statement presentation used in 2005. In the Consolidated Statement of Cash Flows for the nine months ended September 27, 2005, the Company changed the classification of changes in restricted cash balances to present such changes as an investing activity. The Company previously presented such changes as a financing activity. In the accompanying Consolidated Statements of Cash Flows for the nine months ended September 28, 2004, the Company reclassified changes in restricted cash balances to be consistent

- 12 -

with the 2005 presentation which resulted in a $13.6 million increase to investing cash flows and a corresponding decrease to financing cash flows from the amounts previously reported.

New Accounting Standards— In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004),Share-Based Payment(“SFAS 123(R)”). SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. SFAS 123(R) is effective for public companies beginning with the first annual period that begins after June 15, 2005. The Company has reviewed SFAS 123(R) for any impact; however, since the Company does not have any benefit plans which include share-based payments, SFAS 123(R) will not have any impact on its consolidated financial position or consolidated results of operations.

3. COMMITMENTS AND CONTINGENCIES

The Company is from time to time involved in various legal proceedings incidental to the conduct of its business. As previously reported, two private corporations, Pharmacia Corp. (“Pharmacia”) and Solutia Inc. (“Solutia”), had asserted a claim in the United States District Court for the Southern District of Illinois (the “Court”) under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA”) against Service America, and other parties, 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 Service America allegedly was responsible. In addition, the United States Environmental Protection Agency (the “EPA”), asserting authority under CERCLA, had issued a unilateral administrative order concerning the same Illinois site naming approximately 75 entities as respondents, including the plaintiffs in the CERCLA lawsuit against Service America and the waste disposal business for which the plaintiffs alleged Service America was responsible.

In December 2004, Service America entered into a Settlement Agreement with Pharmacia and Solutia which settled and resolved all of Service America’s alleged liability regarding the Illinois site. On January 31, 2005, Service America, Pharmacia and Solutia filed a joint motion with the Court seeking approval of the Settlement Agreement, dismissing Service America from the case and granting Service America contribution protection to prevent any entity from asserting a contribution claim against Service America with respect to the Illinois site (the “Joint Motion”). No objection to the Joint Motion was filed. On March 8, 2005, the Court issued a Memorandum and Order related to the United States Supreme Court’s decision inCooper Industries, Inc. v. Aviall Services, 125 S.Ct. 577 (2004) (the “March 8 Order”). As part of the March 8 Order, the Court directed Pharmacia, Solutia and Service America to file a further brief with the Court, which they did, requesting that the Joint Motion be granted. The Joint Motion was granted and the Settlement Agreement was approved by the Court on June 9, 2005.

In August 2005, Service America received a letter from the United States Department of Justice (the “DOJ”) stating that the DOJ intended to file suit against approximately 30 entities, including, Pharmacia and Service America, on behalf of the EPA, seeking reimbursement for amounts that have been and that will be incurred in cleaning up the site in Illinois. In the same letter, the DOJ also expressed its hope to resolve this matter without any litigation and asked the parties to execute a tolling agreement through August 2006 to allow time for the parties to reach a resolution without litigation. Service America has tendered defense of the potential DOJ action to Pharmacia under the Settlement Agreement and Pharmacia has confirmed that it will defend and fully indemnify Service America against the potential DOJ claim.

As previously reported, in May 2003 a purported class action entitledHolden v. Volume Services America, Inc. et al.was filed against the Company in the Superior Court of California for the County of Orange by a former employee at one of the California stadiums the Company serves alleging violations of local rules relating to overtime wage, rest and meal period and related laws with respect to this employee and others purportedly similarly situated at any and all of the facilities the Company serves in California.

- 13 -

The Company 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. However, the class remains uncertified. The parties are currently attempting to resolve the matter through mediation. The Company intends to vigorously defend this case and continues to evaluate the claims made. At this point we cannot predict the outcome of the suit and, if an ultimate ruling is made against the Company, whether such ruling would have a material effect on the Company.

As previously reported, in August 2004, a second purported class action,Perez v. Volume Services Inc, d/b/a Centerplate,was filed in the Superior Court for Yolo County, California.Perez makes substantially identical allegations to those inHolden.Consequently, the Company demurred and the case was stayed on November 9, 2004 pending the resolution ofHolden.The Company intends to vigorously defend this case if it were permitted to proceed. Because it is stayed,Perezis dependent on Holden’s outcome; therefore, it is difficult at this point to predict the outcome ofPerez.

As previously reported, due to an administrative investigation entitledValentino S. Lopez v. Volume Services America (Centerplate), on April 29, 2005, the Company received a letter from the Equal Employment Opportunity Commission (the “EEOC”) indicating its determination that there was reasonable cause to believe that the Company had discriminated against certain minority employees at one facility in violation of Title VII of the Civil Rights Act of 1964, by failing to assign or promote them to higher paying positions or locations within the facility. As it is required to do, the EEOC attempted to conciliate this matter with the Company. Despite the EEOC’s preliminary finding of probable cause, on June 29, 2005, the EEOC issued a Notice of Rights notifying the parties that it was declining to sue the Company and that it was closing its file on the claim. The related private lawsuit that was commenced against Centerplate in March 2005 in federal court in the Southern District of NY, alleging similar claims, is still pending. On September 27, 2005, the plaintiff amended the complaint to add a second plaintiff alleging the same causes of action and adding similar alternative causes of action. The Company intends to defend itself vigorously against any remaining claims. However, at this point it remains difficult to assess the outcome of the private lawsuit.

In addition to the matters described above, there are various claims and pending legal actions against or directly involving Centerplate that are incidental to the conduct of our business. It is the opinion of management, after considering a number of factors, including but not limited to the current status of any pending proceeding (including any settlement discussions), the views of retained counsel, the nature of the litigation, prior experience and the amounts that have been accrued for known contingencies, that the ultimate disposition of any of these other pending proceedings or contingencies will not have a material adverse effect on our financial condition or results of operations.

4. DEMAND FOR REGISTRATION

Under the Registration Rights Agreement, dated December 10, 2003, between the Company and the Initial Equity Investors (the “Registration Rights Agreement”), the Company agreed to file a registration statement and undertake a public offering of the remaining interests of the Initial Equity Investors in the Company upon written demand from the Initial Equity Investors. In June 2004, the Initial Equity Investors exercised their demand registration rights. Although the offering has been delayed due to a variety of reasons, including soft market conditions, the Company intends to file a registration statement covering the interests of the Initial Equity Investors. The Company has agreed to pay all costs and expenses in connection with such registration, except underwriting discounts and commissions applicable to the securities sold. As of September 27, 2005, the Company had paid approximately $0.8 million in related costs which have been recorded as other long-term assets.

- 14 -

Pursuant to the terms of the Amended Stockholders Agreement, the Company anticipates that the underwriters in the proposed offering will exchange 1,543,180 shares of common stock for $14.4 million aggregate principal amount of subordinated notes. The Company anticipates that the underwriters in the proposed offering will then make 2,517,817 IDS units available for sale to the public, consisting of 2,517,817 shares of common stock purchased from the Initial Equity Investors and the $14.4 million aggregate principal amount of subordinated notes. The Company will be relieved of a liability (the obligation to convert shares into subordinated notes) and is also entitled to receive, from the proceeds of the offering, an amount equal to five months’ interest on the subordinated notes issued in the exchange. The Company is then required to deposit such amount (approximately $0.8 million) to fund the cash collateral account under the Credit Agreement.

5. CREDIT AGREEMENT

On April 1, 2005, the Company entered into a new credit agreement pursuant to which General Electric Capital Corporation (“GE Capital”) agreed to provide up to $215 million of senior secured financing. The financing is comprised of a $107.5 million term loan and a $107.5 million revolving credit facility (the “Credit Agreement”). The Credit Agreement bears interest at a floating rate equal to a margin over a defined prime rate of 1.25% for the term loan and 1.5% for the revolving credit facility or a percentage over the London Interbank Borrowing Rate (“LIBOR”) of 3.25% for the term loan and 3.5% for the revolving credit facility. The applicable margins for the revolving credit facility are subject to adjustment from 1.0% to 1.75% for loans based on a defined prime rate and from 3.0% to 3.75% for LIBOR loans based on our total leverage ratio. The proceeds of the term loan were used to repay the prior $65 million term loan, outstanding revolving loans of $23.25 million, as well as interest, related fees and expenses, including a prepayment premium of approximately $4.6 million on the term loan facility. The revolving portion of the Credit Agreement replaced the prior $50 million revolving credit facility and has a $35 million letter of credit sub-limit and a $10 million swing line loan sub-limit.

The Credit Agreement contains various financial covenants and other requirements affecting the payment of interest on the Company’s subordinated notes and dividends on its common stock, which are no more restrictive than those under the prior credit agreement. Under the Credit Agreement, the term loan facility matures sixty-six months from the date of closing, subject to quarterly amortization payments beginning on July 1, 2005. The availability of funding under the new revolving credit facility also depends on the satisfaction of various financial and other conditions, including restrictions in the indenture governing the subordinated notes. The revolving credit facility will mature sixty months from the date of closing, and is subject to an annual thirty-day pay down requirement, exclusive of letters of credit and certain specified levels of permitted acquisition and service contract-related revolving credit advances. Similar to the prior credit facility, the new term loan and the new revolving credit facility are secured by substantially all of the Company’s assets and rank senior to the subordinated notes. The Credit Agreement contains customary events of default.

Under the terms of the financing, the Company agreed to pay to GE Capital usual and customary closing, syndication and administrative fees and to pay all reasonable and documented out-of-pocket expenses incurred by GE Capital and its affiliates in connection with the commitment letter and related documentation and GE Capital’s due diligence. These fees and expenses amount to approximately $4.4 million for the current year, which include an annual administration fee of $0.1 million. In addition, the Company agreed to indemnify GE Capital and its affiliates against certain liabilities and expenses incurred by them in connection with the Credit Agreement and certain related matters.

GE Capital is the managing member of the holder of approximately 6.5% of our common stock and, through such holder, is a party to the Amended Stockholders Agreement and the Registration Rights Agreement. Affiliates of GE Capital hold $30.0 million in principal amount of the revolving portion of the Credit Agreement. Affiliates of The Blackstone Group, L.P. (“Blackstone”) hold approximately 11.5% of the Company’s common stock and are also parties to the Amended Stockholders Agreement and the Registration Rights Agreement. Blackstone holds approximately $8.0 million in principal amount of the

- 15 -

new term loan portion of the Credit Agreement. Affiliates of FMR Corp., which hold over 5% of our IDSs, hold approximately $6.4 million in principal amount of the term loan portion of the Credit Agreement.

6. EXECUTIVE EMPLOYMENT AGREEMENTS

On September 7, 2005, the board of directors of Centerplate announced that it had appointed Paul W. MacPhail, to serve as Chairman and Chief Executive Officer and Janet L. Steinmayer, to serve as President, Chief Operating Officer and a Director of Centerplate. Mr. MacPhail will receive an annual salary of $700,000 and will be eligible to receive an annual cash bonus targeted at fifty percent (50%) of his annual salary, as well as long-term incentive compensation pursuant to Centerplate’s Long-Term Performance Plan, based upon the achievement of certain performance goals over specified performance periods. Centerplate has also agreed to pay the costs of Mr. MacPhail’s relocation to Stamford, CT or Spartanburg, SC and to provide Mr. MacPhail with a company car.

Under Mr. MacPhail’s agreement with Centerplate, if Mr. MacPhail or Centerplate terminates his employment for any reason, he will refrain from working for a competitor or soliciting Centerplate employees for a competitor for two years from the date of termination. The agreement also provides that Mr. MacPhail will be entitled to two years’ base salary as severance if, as a result of a change in control, his position is eliminated or measurably diminished. A change in control will be deemed to occur if: (a) any “person” (as such term is used in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934) is or becomes the beneficial owner, directly or indirectly, of securities of Centerplate representing 51% or more of the combined voting power of the then outstanding securities of Centerplate; (b) there is a change in the composition of a majority of the board of directors of Centerplate within twelve months after any person is or becomes the beneficial owner, directly or indirectly, of securities of Centerplate representing 25% of the combined voting power of the then outstanding securities of Centerplate; or (c) there is a sale of substantially all of the assets of Centerplate and/or its operating subsidiaries.

Ms. Steinmayer’s annual salary was increased to $550,000 and she will be eligible to receive an annual cash bonus targeted at fifty percent (50%) of her annual salary, as well as long-term incentive compensation pursuant to the Long-Term Performance Plan, as previously disclosed. In appreciation of Ms. Steinmayer’s service as Acting Chief Executive Officer since April 2005, the board of directors also elected to award her a bonus of $100,000.

- 16 -

7. NON-GUARANTOR SUBSIDIARIES FINANCIAL STATEMENTS

The $105,245,000 in 13.5% subordinated notes is 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 following table sets forth the condensed consolidating financial statements of Centerplate as of September 27, 2005 and December 28, 2004 (in the case of the balance sheets) and for the 13 and 39 week periods ended September 27, 2005 and September 28, 2004 (in the case of the statements of operations and comprehensive income) and for the 39 week periods ended September 27, 2005 and September 28, 2004 (in the case of the statement of cash flows).

Consolidating Condensed Balance Sheet, September 27, 2005


				Guarantor			Non-guarantor
	Centerplate			Subsidiaries			Subsidiaries			Eliminations			Consolidated
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	198		$	69,789		$	1,244		$	—		$	71,231
Accounts receivable		—			24,173			2,470			—			26,643
Other current assets		13			28,072			1,420			—			29,505

Total current assets		211			122,034			5,134			—			127,379
Property and equipment, net		—			48,454			3,523			—			51,977
Contract rights, net		173			83,062			696			—			83,931
Cost in excess of net assets acquired		6,974			34,168			—			—			41,142
Intercompany receivable (payable)		139,999			(137,027	)		(2,972	)		—			—
Investment in subsidiaries		(6,587	)		—			—			6,587			—
Other assets		8,738			45,659			991			—			55,388


Total assets	$	149,508		$	196,350		$	7,372		$	6,587		$	359,817


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities	$	7,707		$	92,050		$	5,246		$	—		$	105,003
Long-term debt		105,245			106,156			—			—			211,401
Other liabilities		—			6,857			—			—			6,857

Total liabilities		112,952			205,063			5,246			—			323,261


Common stock with conversion option, par value $0.01 exchangeable for subordinated debt, net of discount		14,352			—			—			—			14,352
Stockholders’ equity (deficiency):
Common stock		400			—			—			—			400
Additional paid-in capital		218,331			—			—			—			218,331
Accumulated deficit		(76,266	)		(8,713	)		1,447			7,266			(76,266	)
Treasury stock and other		(120,261	)		—			679			(679	)		(120,261	)

Total stockholders’ equity (deficiency)		22,204			(8,713	)		2,126			6,587			22,204


Total liabilities and stockholders’ equity	$	149,508		$	196,350		$	7,372		$	6,587		$	359,817

- 17 -

Consolidating Condensed Statement of Operations and Comprehensive Income

Thirteen Week Period Ended September 27, 2005


				Guarantor			Non-guarantor
	Centerplate			Subsidiaries			Subsidiaries			Eliminations			Consolidated
	(In thousands)
Net sales	$	—		$	196,276		$	12,343		$	—		$	208,619

Cost of sales		—			155,995			10,302			—			166,297
Selling, general, and administrative		277			18,125			1,336			—			19,738
Depreciation and amortization		27			6,985			320			—			7,332
Transaction related expenses		—			280			—			—			280

Operating income (loss)		(304	)		14,891			385			—			14,972
Interest expense		4,333			2,622			—			—			6,955
Intercompany interest, net		(3,925	)		3,925			—			—			—
Other income, net		(1	)		(318	)		(3	)		—			(322	)

Income (loss) before income taxes		(711	)		8,662			388			—			8,339
Income tax provision		141			3,686			—			—			3,827
Equity in earnings of subsidiaries		5,364			—			—			(5,364	)		—

Net income		4,512			4,976			388			(5,364	)		4,512
Other comprehensive income — foreign currency translation adjustment		—			—			263			—			263


Comprehensive income	$	4,512		$	4,976		$	651		$	(5,364	)	$	4,775

- 18 -

Consolidating Condensed Statement of Operations and Comprehensive Income (Loss)

Thirty-nine Week Period Ended September 27, 2005


				Guarantor			Non-guarantor
	Centerplate			Subsidiaries			Subsidiaries			Eliminations		Consolidated
	(In thousands)
Net sales	$	—		$	463,561		$	34,349		$	—	$	497,910

Cost of sales		—			373,059			28,679			—		401,738
Selling, general, and administrative		824			48,949			3,615			—		53,388
Depreciation and amortization		80			20,436			917			—		21,433
Contract related losses		—			280			—			—		280

Operating income (loss)		(904	)		20,837			1,138			—		21,071
Interest expense		12,533			12,945			—			—		25,478
Intercompany interest, net		(11,775	)		11,775			—			—		—
Other income, net		(3	)		(614	)		(10	)		—		(627	)

Income (loss) before income taxes		(1,659	)		(3,269	)		1,148			—		(3,780	)
Income tax benefit		(245	)		(1,141	)		—			—		(1,386	)
Equity in earnings of subsidiaries		(980	)		—			—			980		—

Net income (loss)		(2,394	)		(2,128	)		1,148			980		(2,394	)
Other comprehensive income — foreign currency translation adjustment		—			—			104			—		104


Comprehensive income (loss)	$	(2,394	)	$	(2,128	)	$	1,252		$	980	$	(2,290	)

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Consolidating Condensed Statement of Cash Flows

Thirty-nine Week Period Ended September 27, 2005


				Guarantor			Non-guarantor
	Centerplate			Subsidiaries			Subsidiaries				Consolidated
	(In thousands)
Cash Flows Provided by Operating Activities	$	483		$	39,550		$	3,880			$	43,913

										��
Cash Flows from Investing Activities:
Purchase of property and equipment		—			(11,183	)		(674	)			(11,857	)
Proceeds from sale of property and equipment		—			456			—				456
Contract rights acquired		—			(8,994	)		—				(8,994	)

Net cash used in investing activities		—			(19,721	)		(674	)			(20,395	)


Cash Flows from Financing Activities:
Proceeds from long-term borrowings		—			107,500			—				107,500
Retirement of existing long-term borrowings		—			(65,000	)		—				(65,000	)
Payments of financing costs		—			(7,247	)		—				(7,247	)
Principal payments on long-term debt		—			(269	)		—				(269	)
Dividend payments		(13,380	)		—			—				(13,380	)
Increase in bank overdrafts		—			1,332			—				1,332
Change in intercompany, net		12,900			(10,498	)		(2,402	)			—


Net cash provided by (used in) financing activities		(480	)		25,818			(2,402	)			22,936


Increase in cash		3			45,647			804				46,454

Cash and cash equivalents — beginning of period		195			24,142			440				24,777


Cash and cash equivalents — end of period	$	198		$	69,789		$	1,244			$	71,231

- 20 -

Consolidating Condensed Balance Sheet, December 28, 2004


				Guarantor			Non-guarantor
	Centerplate			Subsidiaries			Subsidiaries			Eliminations			Consolidated
	(In thousands)
Assets
Current assets:
Cash and cash equivalents	$	195		$	24,142		$	440		$	—		$	24,777
Accounts receivable		—			19,840			2,036			—			21,876
Other current assets		7			23,724			1,371			—			25,102

Total current assets		202			67,706			3,847			—			71,755
Property and equipment, net		—			44,591			3,631			—			48,222
Contract rights, net		253			86,908			820			—			87,981
Cost in excess of net assets acquired		6,974			34,168			—			—			41,142
Intercompany receivable (payable)		152,899			(147,525	)		(5,374	)		—			—
Investment in subsidiaries		(5,712	)		—			—			5,712			—
Other assets		9,462			39,567			917			—			49,946


Total assets	$	164,078		$	125,415		$	3,841		$	5,712		$	299,046


Liabilities and Stockholders’ Equity

Current liabilities	$	6,607		$	60,669		$	2,967		$	—		$	70,243
Long-term debt		105,245			65,000			—			—			170,245
Other liabilities		—			6,332			—			—			6,332

Total liabilities		111,852			132,001			2,967			—			246,820


Common stock with conversion option, par value $0.01, exchangeable for subordinated debt, net of discount		14,352			—			—			—			14,352


Stockholders’ equity (deficiency):
Common stock		400			—			—			—			400
Additional paid-in capital		218,331			—			—			—			218,331
Accumulated deficit		(60,492	)		(6,586	)		299			6,287			(60,492	)
Treasury stock and other		(120,365	)		—			575			(575	)		(120,365	)

Total stockholders’ equity (deficiency)		37,874			(6,586	)		874			5,712			37,874


Total liabilities and stockholders’ equity	$	164,078		$	125,415		$	3,841		$	5,712		$	299,046

- 21 -

Consolidating Condensed Statement of Operations and Comprehensive Income
Thirteen Week Period Ended September 28, 2004


				Guarantor			Non-guarantor
	Centerplate			Subsidiaries			Subsidiaries		Eliminations			Consolidated
	(In thousands)
Net sales	$	—		$	191,319		$	9,747	$	—		$	201,066

Cost of sales		—			153,767			8,166		—			161,933
Selling, general, and administrative		637			15,915			962		—			17,514
Depreciation and amortization		27			6,369			260		—			6,656
Contract related losses		—			—			—		—			—

Operating income (loss)		(664	)		15,268			359		—			14,963
Interest expense		3,240			1,519			—		—			4,759
Intercompany interest		(3,705	)		3,705			—		—			—
Other income, net		(2	)		(73	)		—		—			(75	)

Income (loss) before income taxes		(197	)		10,117			359		—			10,279
Income tax provision		421			4,125			—		—			4,546
Equity in earnings of subsidiaries		6,351			—			—		(6,351	)		—

Net income		5,733			5,992			359		(6,351	)		5,733
Accretion of conversion option		—			—			—		—			—

Net income available to common stock with or without the conversion option		5,733			5,992			359		(6,351	)		5,733


Net income		5,733			5,992			359		(6,351	)		5,733
Other comprehensive income — foreign currency translation adjustment		—			—			252		—			252


Comprehensive income	$	5,733		$	5,992		$	611	$	(6,351	)	$	5,985

- 22 -

Consolidating Condensed Statement of Operations and Comprehensive Income
Thirty-nine Week Period Ended September 28, 2004


				Guarantor			Non-guarantor
	Centerplate			Subsidiaries			Subsidiaries			Eliminations			Consolidated
	(In thousands)
Net sales	$	—		$	444,602		$	28,425		$	—		$	473,027

Cost of sales		—			360,739			23,887			—			384,626
Selling, general, and administrative		803			42,862			2,992			—			46,657
Depreciation and amortization		82			19,297			756			—			20,135
Contract related losses		—			121			—			—			121

Operating income (loss)		(885	)		21,583			790			—			21,488
Interest expense		12,698			6,089			—			—			18,787
Intercompany interest		(11,687	)		11,687			—			—			—
Other income, net		(3	)		(165	)		(2	)		—			(170	)

Income (loss) before income taxes		(1,893	)		3,972			792			—			2,871
Income tax provision		360			561			—			—			921
Equity in earnings of subsidiaries		4,203			—			—			(4,203	)		—

Net income		1,950			3,411			792			(4,203	)		1,950
Accretion of conversion option		(317	)		—			—			—			(317	)

Net income available to common stock with or without the conversion option		1,633			3,411			792			(4,203	)		1,633


Net income		1,950			3,411			792			(4,203	)		1,950
Other comprehensive income — foreign currency translation adjustment		—			—			143			—			143


Comprehensive income	$	1,950		$	3,411		$	935		$	(4,203	)	$	2,093

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Consolidating Condensed Statement of Cash Flows

Thirty-nine Week Period Ended September 28, 2004


				Guarantor			Non-guarantor
	Centerplate			Subsidiaries			Subsidiaries			Consolidated
	(In thousands)
Cash Flows Provided by (Used in) Operating Activities	$	(99	)	$	37,655		$	4,052		$	41,608


Cash Flows from Investing Activities:
Purchase of property and equipment, net		—			(5,129	)		(555	)		(5,684	)
Proceeds from sale of property and equipment		—			722			87			809
Contract rights acquired, net		—			(7,679	)		—			(7,679	)
Return of unamortized capital investment		—			11,531			—			11,531
Restricted cash		—			13,628			—			13,628


Net cash provided by (used in) investing activities		—			13,073			(468	)		12,605


Cash Flows from Financing Activities:
Net repayments — revolving loans		—			(4,000	)		—			(4,000	)
Payments of financing costs		(163	)		(217	)		—			(380	)
Payments of debt issuance costs		(267	)		—			—			(267	)
Principal payments to redeem senior subordinated notes		—			(12,250	)		—			(12,250	)
Dividend payments		(13,875	)		—			—			(13,875	)
Decrease in bank overdrafts		—			(617	)		—			(617	)
Change in intercompany, net		14,407			(10,813	)		(3,594	)		—


Net cash provided by (used in) financing activities		102			(27,897	)		(3,594	)		(31,389	)


Increase (decrease) in cash		3			22,831			(10	)		22,824

Cash and cash equivalents — beginning of period		192			22,504			233			22,929


Cash and cash equivalents — end of period	$	195		$	45,335		$	223		$	45,753

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

The following discussion and analysis of our results of operations and financial condition for the 39 weeks ended September 27, 2005 and September 28, 2004 should be read in conjunction with our audited financial statements, including the related notes, for the fiscal year ended December 28, 2004 included in our 2004 Form 10-K. The financial data has been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States.

Overview

We are a leading provider of food and beverage concessions, catering and merchandise services in sports facilities, convention centers and other entertainment facilities throughout the United States and in Canada. Based on the number of facilities served, we are one of the largest providers of food and beverage services to a variety of recreational facilities in the United States.

We provide a number of services to our clients. Our principal services include food and beverage concession and catering services in sports and other entertainment facilities; small- to large-scale banquet catering and food court operations in convention centers; and in-facility restaurants and catering across the range of facilities that we serve. In operating food courts in our facilities, we typically provide concession services from several different locations that sell a variety of specialty foods and beverages, including nationally branded, franchised food and beverage products. We also provide merchandise and program sales services in many of the sports facilities we serve. We are responsible for all personnel, inventory control, purchasing, and food preparation where we provide these services.

In addition, we provide full facility management services, which can include a variety of services such as event planning and marketing, maintenance, ticket distribution, program printing, advertising and licensing rights for the facility, its suites and premium seats. Currently, we provide facility management services in four facilities.

We believe that the ability to retain existing accounts and to obtain new accounts are the key components to maintaining and growing our net sales. Our net sales historically have also increased when there has been an increase in the number of events or attendance at facilities in which we provide services 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 generally are required to make a capital expenditure in our client’s facility and offer to pay the client a percentage of the net sales or profits associated with such facility in the form of a commission. Prior to our IPO, we have reinvested the majority of 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 in connection with our IPO and the dividend and interest payments to our IDS holders, we were limited in our ability to grow our business, and our related levels of growth capital expenditures, at rates as great as we experienced prior to our IPO. Consequently, we decided to seek new senior credit financing, as described later in this item, to permit us to make the growth and maintenance capital expenditures, and investments in our infrastructure, that we believe will help strengthen our financial position.

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

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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 and Other Intangible Assets.As of September 27, 2005, net property and equipment of $52.0 million and net contract rights of $83.9 million were recorded. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, we evaluate long-lived assets with definite lives for possible impairment when an event occurs which would indicate that its carrying amount may not be recoverable. The impairment analysis is made at the contract level and evaluates the net property and equipment as well as the 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 recorded amount of the long-lived assets and their estimated fair value which is based on 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 operations. Events that would trigger an evaluation at the contract level include the loss of a tenant team, intent to cease operations at a facility due to contract termination or other means, the bankruptcy of a client, discontinuation of a sports league or a significant increase in competition that could reduce the future profitability of the contract, among others. As of September 27, 2005, indefinite-lived assets included cost in excess of net assets acquired of $41.1 million and other intangible assets (trademarks) of $17.5 million. In accordance with SFAS No. 142, on an annual basis, we test our indefinite-lived intangible assets for impairment. Additionally, cost in excess of net assets acquired 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 cost in excess of net assets acquired for impairment is Centerplate. In performing the annual cost in excess of net assets acquired assessment, we compare the fair value of Centerplate to its net asset carrying amount, including cost in excess of net assets acquired and trademarks. If the fair value of Centerplate exceeds the carrying amount, then it is determined that cost in excess of net assets acquired 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 impairment. 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 as of March 29, 2005 and determined that no impairment exists.

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	•		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 historic 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 historic 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 income deposit securities (“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 it is 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 September 27, 2005, these embedded derivatives were fair valued and determined to be insignificant. The term-extending option was determined to be inseparable from the underlying subordinated notes. Accordingly, it will not be separately accounted for in the current or future periods.

			In connection with the initial public offering (“IPO”) in December 2003, those investors who held stock prior to the IPO (the “Initial Equity Investors”) entered into an Amended and Restated Stockholders Agreement on December 10, 2003 with the Company (“Amended 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 its 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). In order to determine the number of shares of common stock that the Initial Equity Investors could convert into subordinated debt, the Company divided the exchange rate of $9.30 by the original issue price of the IDSs of $15.00 at December 4, 2003 (the quotient equals 0.62). This quotient was then multiplied by the total number of shares owned by the Initial Equity Investors (4,060,997 shares) to determine the number of IDSs that the Initial Equity Investors would own after conversion (2,517,817 IDSs, each comprised of one share of stock and a subordinated note). The number of shares owned by the Initial Equity Investors before conversion (4,060,997) was subtracted from the number of shares they would own after conversion (2,517,817) to determine the number of shares of common stock to be converted into subordinated debt (1,543,180 shares) at the exchange rate of $9.30 per share resulting in the $14.4 million amount.

			The Company has concluded that the portion of the Initial Equity Investors’ common stock exchangeable for subordinated debt

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			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, at both September 27, 2005 and December 28, 2004, the Company has recorded $14.4 million as “Common stock with conversion option exchangeable for subordinated debt” on the balance sheet. Because the Initial Equity Investors were not allowed to convert any shares into subordinated notes during the first 180 days after the IPO, a discount (initially $0.4 million) was applied to the amount recorded as “Common stock with conversion option exchangeable for subordinated debt” during this 180 day period. This discount was 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. The accretion of approximately $317,000 in the 39 week period ended September 28, 2004 was a deemed dividend to the Initial Equity Investors. 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 $5.6 million as of September 27, 2005, an increase of $1.0 million from December 28, 2004. 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.

			The common stock held by the Initial Equity Investors has been treated as a separate class of common stock for presentation of earnings per share at September 27, 2005. Although the common stock held by the Initial Equity Investors is part of the same class of stock as the common stock included in the IDSs for purposes of Delaware corporate law, the right to convert that is granted in the Amended Stockholders Agreement as described above causes the stock held by the Initial Equity Investors to have features of a separate class of stock for accounting purposes. The deemed dividend as of September 28, 2004 of approximately $317,000 conveyed to the Initial Equity Investors discussed above requires a two class earnings per share calculation. Accordingly, the Company has shown separate earnings per share for the stock held by the Initial Equity Investors and the stock included in the IDSs.

	•		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.

The Company 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 by the Company 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 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. 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 13 or 14 weeks), as a result of factors which include:

•

seasonality and variations in scheduling of sporting and other events;

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	•		unpredictability in the number, timing and type of new contracts;

	•		timing of contract expirations and special events; and

	•		levels of attendance at the facilities we serve.

Business at the principal types of facilities we serve is seasonal in nature. Major League Baseball (“MLB”) and minor league baseball related sales are concentrated in the second and third quarters, the majority of National Football League (“NFL”) related activity occurs in the fourth quarter and convention centers and arenas generally host fewer events during the summer months. Results of operations for any particular quarter may not be indicative of results of operations for future periods. In addition, our need for capital varies significantly from quarter to quarter based on the timing of contract renewals and the contract bidding process.

Set forth below are comparative net sales by quarter (in thousands) for the first, second and third quarters of 2005, fiscal 2004, and fiscal 2003:


	2005		2004		2003
1^st Quarter	$	107,220	$	98,236	$	96,900

2^nd Quarter	$	182,071	$	173,725	$	172,733

3^rd Quarter	$	208,619	$	201,066	$	214,636

4^th Quarter		—	$	134,127	$	131,788

Results of Operations

Thirteen Weeks Ended September 27, 2005 Compared to the 13 Weeks Ended September 28, 2004

Net sales —Net sales of $208.6 million for the 13 weeks ended September 27, 2005 increased by $7.5 million, or approximately 3.8%, from $201.1 million in the prior year period. The increase was principally attributable to sales at new accounts (those that were opened subsequent to September 28, 2004) of $11.0 million partially offset by the termination of some of the Company’s contracts which accounted for a decline of $4.6 million. Also contributing to the increase were higher sales at our convention centers (approximately $3.0 million) due to an increase in the number of events held in these facilities. Net sales at all other facilities contributed an additional $2.4 million. These improvements were offset by a decline in MLB related sales of $1.9 million primarily due to a decline in attendance at one of the Company’s venues compared to the prior year period. In addition, NFL related sales declined by $2.4 million because of fewer non-NFL events at those venues including the cancellation of events at the Louisiana Superdome because of damage caused by Hurricane Katrina.

Cost of sales —Cost of sales of $166.3 million for the 13 weeks ended September 27, 2005 increased by approximately $4.4 million, or approximately 2.7%, from $161.9 million in the prior year period, primarily due to higher net sales. As a percentage of net sales, cost of sales improved by approximately 0.8% from the prior year period. This was primarily due to a decline in the commissions and royalties (as a percentage of sales) paid to our clients due in large part to a lower concentration of sales at our profit sharing contracts. Typically, an increase in sales at these contracts results in an increase in commissions as a percentage of sales, as a result of the profits returned to our clients through commission payments. Conversely, a decline in sales at these accounts, as experienced during the current period, results in a drop in commissions as a percentage of sales.

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Selling, general and administrative expenses —Selling, general and administrative expenses (“SG&A”) were $19.7 million for the 13 weeks ended September 27, 2005 compared to $17.5 million in the prior year period. As a percentage of net sales, SG&A costs increased approximately 0.8% from the prior year period. This was principally attributable to higher overhead costs, one component of SG&A, of approximately $0.6 million due in part to increased investments in our strategic initiatives and higher legal costs. For fiscal 2005, we currently expect total increased overhead costs of approximately $3.3 million over fiscal 2004. In addition, the increase was also partially attributable to higher other operating expenses at our facilities due in part to increased cash management costs related to the Company’s commitment to improve sales through the enhancement of credit card capabilities at certain facilities.

Depreciation and amortization— Depreciation and amortization was $7.3 million for the 13 weeks ended September 27, 2005, compared to $6.7 million in the prior year period. The increase was principally attributable to higher depreciation and amortization associated with investments for new contracts and the renewal of existing contracts made subsequent to the prior year period.

Contract related losses— Contract related losses consisting of a non-cash charge for the write-off of certain assets associated with a terminated contract of $0.3 million were recorded in the 13 weeks ended September 27, 2005.

Interest expense —Interest expense was $7.0 million for the thirteen weeks ended September 27, 2005, compared to $4.8 million in the prior year period. The increase was principally attributable to higher interest costs and related fees of $1.1 million, relating to increases in the term loan and revolver availability under our Credit Agreement entered into on April 1, 2005. Also included in interest expense for the period ended September 27, 2005 is a non-cash charge of $0.5 million related to the change in the fair value of our derivatives, as compared to $0.6 million credit in the prior year period.

Income taxes— Income taxes for the 13 weeks ended September 27, 2005 and September 28, 2004 were calculated using the projected effective tax rate for fiscal 2005 and 2004, respectively. We estimate that in the fiscal year ending January 3, 2006, we will have an effective tax rate of approximately 37%. In the prior year period, we estimated that our effective tax rate for the fiscal year ended December 28, 2004 would be 32%. The increase in the projected effective tax rate is primarily due to a reduction in the amount of federal tax credits generated.

Thirty-nine Weeks Ended September 27, 2005 Compared to the 39 Weeks Ended September 28, 2004

Net sales —Net sales of $497.9 million for the 39 weeks ended September 27, 2005 increased by $24.9 million, or approximately 5.3% from $473.0 million in the prior year period. The increase was primarily attributable to new accounts, which generated $22.5 million in net sales, and higher sales at convention centers of $14.6 million. Contributing to the improvement were higher NFL related sales (approximately $3.3 million), due primarily to Super Bowl XXXIX, and four additional NFL games (because of scheduling, four games from the 2004-2005 NFL season were played in our fiscal 2005). This was partially offset by the cancellation of events at the Louisiana Superdome because of damage caused by Hurricane Katrina and a decline in net sales of $4.8 million at our only NHL contract as a result of the NHL lock-out. In addition, the termination of some of the Company’s contracts accounted for a decline in net sales of $9.9 million. The remaining decline in net sales of $0.8 million was primarily due to fewer events in various entertainment facilities where we provide our services.

Cost of sales —Cost of sales of $401.7 million for the 39 weeks ended September 27, 2005 increased by approximately $17.1 million from $384.6 million in the prior year period due primarily to the increase in sales volume. Cost of sales as a percentage of net sales declined by approximately 0.6% from the prior year period. The decline was mainly due to lower commissions and royalties paid to our clients primarily as a result of lower concentration in sales at our profit sharing contracts, as discussed above.

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Selling, general and administrative expenses —SG&A expenses were $53.4 million in the 39 weeks ended September 27, 2005 as compared to $46.7 million in the prior year. As a percentage of net sales, SG&A costs were 10.7% in the fiscal 2005 period, a 0.8% increase from the prior year period. The increase was principally attributable to higher overhead costs, one component of SG&A, of approximately $2.8 million due in part to increased investments in our strategic initiatives and higher legal costs. For fiscal 2005, we currently expect total increased overhead costs of approximately $3.3 million over fiscal 2004. In addition, the increase was also partially attributable to higher other operating expenses at our facilities due in part to increased cash management costs related to the Company’s commitment to improve sales through the enhancement of credit card capabilities at certain facilities.

Depreciation and amortization— Depreciation and amortization was $21.4 million for the 39 weeks ended September 27, 2005, compared to $20.1 million in the prior year period. The increase was principally attributable to higher depreciation and amortization associated with investments for new contracts and the renewal of existing contracts made subsequent to the prior year period. Partially offsetting the increase was lower amortization expense resulting from the return to us in fiscal 2004 of a portion of the capital invested to acquire certain client contracts.

Contract related losses— Contract related losses recorded in the 39 weeks ended September 27, 2005, represents a $0.3 million non-cash charge for the write-off of certain assets associated with a terminated contract as compared to $0.1 million in the prior year period.

Interest expense —Interest expense was $25.5 million for the thirty-nine weeks ended September 27, 2005, compared to $18.8 million in the prior year period. The primary reason for the increase is $6.2 million in expenses related to the refinancing of our senior credit facility on April 1, 2005. The $6.2 million includes a prepayment premium of approximately $4.6 million on the prior credit facility and $1.6 million for the write-off of deferred financing costs. The prior year period contained $1.2 million in expenses, of which $0.3 million was amortization expense, related to the repurchase of senior subordinated notes under our 1999 indenture. Excluding these non-recurring interest charges, cash interest expense increased approximately $1.8 million as compared to the prior year period due primarily to an increase in the term loan and revolver availability under the new credit facility. Also included in interest expense for the period ended September 27, 2005 and September 28, 2004 is a non-cash charge of $1.0 million and $1.1 million respectively, related to the change in the fair value of our derivatives.

Income taxes— Income taxes for the 39 weeks ended September 27, 2005 and September 28, 2004 were calculated using the projected effective tax rate for fiscal 2005 and 2004, respectively. We estimate that in the fiscal year ending January 3, 2006, we will have an effective tax rate of approximately 37%. In the prior year period, we estimated that our effective tax rate for the fiscal year ended December 28, 2004 would be 32%. The increase in the projected effective tax rate is primarily due to a reduction in the amount of federal tax credits generated.

Liquidity and Capital Resources

For the 39 weeks ended September 27, 2005, net cash provided by operating activities was $43.9 million compared to $41.6 million in the prior year period. The $2.3 million increase was principally attributable to a $6.4 million improvement in working capital (including other assets and liabilities), which fluctuates from quarter to quarter as a result of the number and timing of events at the facilities we serve, partially offset by an increase in the net loss which was primarily due to a $5.5 million increase in cash interest expense as discussed above.

Net cash used in investing activities was $20.4 million for the 39 weeks ended September 27, 2005, as compared to net cash provided by investing activities of $12.6 million in the prior year period. The higher level of investment in the 2005 period reflects an increase in capital expenditures to acquire new accounts (approximately $4.8 million) and to extend existing contracts as well as make significant improvements in our

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infrastructure (approximately $2.8 million). In addition, the prior year period reflects the receipt of approximately $11.5 million from current clients who exercised the right to return the unamortized portion of our capital investment made to acquire the contract. The prior year period also reflects the use of $13.6 million in restricted cash set aside from the proceeds of the IPO completed in December 2003 for the repayment of $12.3 million in senior subordinated notes issued in 1999 at a price equal to 105.625% of the principal amount plus accrued interest.

Net cash provided by financing activities was $22.9 million in the 39 weeks ended September 27, 2005 as compared to net cash used in financing activities of $31.4 million in the prior year period. The 2005 period reflects the refinancing of our prior credit facility, with $107.5 million in proceeds from the Credit Agreement being offset by the payment of $7.2 million in associated financing costs and the repayment of $65.0 million under the prior credit facility. The 2004 period reflects the repayment of $12.3 million in senior subordinated notes issued in 1999, as discussed above, and includes the payment of $4.0 million in revolver borrowings. In the 39 weeks ended September 27, 2005 and September 28, 2004, dividend payments of $13.4 million and $13.9 million, respectively, were paid.

At both September 27, 2005 and September 28, 2004, we had no outstanding revolver loans. We are also required to obtain performance bonds, bid bonds or letters of credit to secure some of our contractual obligations. As of September 27, 2005, we had requirements outstanding for performance bonds and letters of credit of $14.0 million and $20.9 million, respectively. Under our current credit facility, we have an aggregate of $35 million available for letters of credit, subject to an overall borrowing limit of $107.5 million under the facility. As of September 27, 2005 we had approximately $86.6 million available to be borrowed.

Future Liquidity and Capital Resources

When we issued our IDSs in December 2003, we identified middle market facilities that are currently served by regional and local providers, or are “self-operated,” as the most likely area for new accounts. These facilities require relatively modest capital investment. While this market continues to offer us opportunities that we aggressively bid on, a significant new trend in our business is the reemergence of large-stadium development. Within the last year, a number of major league sports teams have announced their intentions to build or obtain new stadiums. The most notable recent example is the planned construction of a new Yankee Stadium, which is expected to open in 2009. At the time of our offering, we also indicated our intention to pursue a strategy of extending our catering services and offering a variety of branded products to our customers. At this juncture, we believe it is even more important for Centerplate to invest to develop and enhance branded and service product offerings (both internally developed and developed with outside parties) to differentiate us in our competitive market.

While our prior credit facility provided us with a basis to make new capital investments, we concluded that increasing our access to capital would allow us to benefit from the trend of large-stadium development and to take advantage of other opportunities to strengthen our business. Given that the IDS market has not developed as expected, we believe that among the funding opportunities that were available to us, considering our capital structure, the senior credit market offered the most attractive terms for meeting these needs.

Accordingly, on April 1, 2005, we entered into the Credit Agreement pursuant to which GE Capital agreed to provide up to $215 million of senior secured financing. The financing is comprised of a $107.5 million term loan and a $107.5 million revolving credit facility. The Credit Agreement bears interest at a floating rate equal to a margin over a defined prime rate of 1.25% for the term loan and 1.5% for the revolving credit facility or a percentage over the London Interbank Borrowing Rate (“LIBOR”) of 3.25% for the term loan and 3.5% for the revolving credit facility. The applicable margins for the revolving credit facility are subject to adjustment (from 1.0% to 1.75% for loans based on a defined prime rate and from 3.0% to 3.75% for LIBOR loans based on our total leverage ratio). The proceeds of the term loan were used to repay a prior $65 million term loan, outstanding revolving loans of $23.25 million, as well as interest, related fees and expenses, including a prepayment premium of approximately $4.6 million on the

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term loan facility. The revolving portion of the Credit Agreement replaced the prior $50 million revolving credit facility and has a $35 million letter of credit sub-limit and a $10 million swing line loan sub-limit.

The Credit Agreement contains various financial covenants and other requirements affecting the payment of interest on our subordinated notes and dividends on our common stock, which are no more restrictive than those under the prior credit agreement. Under the Credit Agreement, the term loan matures sixty-six months from the date of closing, subject to quarterly amortization payments beginning on July 1, 2005. The availability of funding under the revolving credit facility also depends on the satisfaction of various financial and other conditions, including restrictions in the indenture governing the subordinated notes. The new revolving credit facility will mature sixty months from April 1, 2005, and is subject to an annual thirty-day pay down requirement, exclusive of letters of credit and certain specified levels of permitted acquisition and service contract related revolving credit advances. Similar to the prior credit facility, the new term loan and the new revolving credit facility are secured by substantially all of the Company’s assets and rank senior to the subordinated notes. The Credit Agreement contains customary events of default.

We believe that cash flow from operating activities, together with borrowings available under the new revolving credit facility, will be sufficient to fund our currently anticipated capital investment requirements, interest, dividend payments and working capital requirements. We anticipate total capital investments of approximately $25-$30 million in fiscal 2005, of which $20.9 million has been spent to date in investments primarily associated with the renewal and/or acquisition of contracts. In addition, we expect to pay dividends on our common stock of approximately $17.8 million, of which $13.4 million was paid as of September 27, 2005.

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We have future obligations for debt repayments, future minimum rental and similar commitments under non-cancelable operating leases. These obligations as of September 27, 2005 are summarized in the following tables:

Contractual Commitments


	Payments due by period
	(in millions)
Contractual Obligations	Total		Less than 1 year		1-3 years		4-5 years		More than 5 years
Long—term borrowings	$	212.5	$	1.1	$	3.2	$	2.2	$	206.0

Interest for fixed rate debt (1)		116.4		14.2		42.6		28.4		31.2

Insurance		13.6		7.1		4.5		1.5		0.5

Operating leases		1.6		0.7		0.9		—		—

Commissions and royalties		44.8		7.8		14.6		7.0		15.4

Capital commitments (2)		6.8		3.4		3.4		—		—

Other long-term obligations (3)		0.3		0.1		0.2		—		—


Total Contractual Obligations	$	396.0	$	34.4	$	69.4	$	39.1	$	253.1


(1)		Represents interest on our fixed rate subordinated notes.

(2)		Represents capital commitments in connection with several long-term concession contracts.

(3)		Represents various long-term obligations reflected on the balance sheet.

In addition, we have contingent obligations related to outstanding letters of credit. These contingent obligations as of September 27, 2005 are summarized below:


	Payments due by period
	(in millions)
Other Commercial Commitments	Total		Less than 1 year		1-3 years		4-5 years		More than 5 years
Letters of credit	$	20.9	$	20.9	$	—	$	—	$	—

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Hurricane Katrina

Four of the venues at which we operate have been impacted by Hurricane Katrina. Of these, two venues remain closed: the New Orleans Arena and the Louisiana Superdome. We maintain property and business interruption insurance to cover loss of property and income due to events such as this hurricane. We have recorded a loss for the deductible under the insurance policy for the New Orleans Arena and the Louisiana Superdome and established a receivable for the cost of personal property destroyed (primarily inventory and supplies) by the hurricane and ensuing flood waters. Recoveries under our business interruption insurance will be recorded when the amount has been received from the insurance carrier. Based on current reports, the New Orleans Arena and Louisiana Superdome are not expected to reopen until the middle of 2006. Income from these facilities will be diminished until they reopen and attendance returns to levels experienced prior to the hurricane. Notwithstanding the foregoing, we do not believe that the loss of income from the New Orleans Arena and Louisiana Superdome will have a material adverse effect on our business.

New Accounting Standards

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment”(“SFAS 123(R)”). SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. SFAS 123(R) is effective for public companies beginning with the first annual period that begins after June 15, 2005. The Company has reviewed SFAS 123(R) for any impact; however, since the Company does not have any benefit plans which include share-based payments, SFAS 123(R) will not have any impact on its consolidated financial position or consolidated results of operations.

Forward-Looking and Cautionary Statements

Some of the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Business” and elsewhere in this Quarterly Report on Form 10-Q 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, subordinated 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 subordinated notes and to pay dividends with respect to shares of our common stock represented by the IDSs, limit our financing options and affect our liquidity position.

•		We may amend the terms of our credit facility, or we may enter into new agreements that govern our senior indebtedness, and the amended or new terms may significantly restrict 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 limits our business flexibility by imposing operating and financial restrictions.

•		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.

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•		Our interest expense could increase significantly as a result of rising interest rates or greater borrowings 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.

•		Our current credit facility and the indenture governing our subordinated notes permit us to pay a significant portion of our free cash flow to stockholders in the form of dividends. Any amounts we pay in the form of dividends will not be available in the future to satisfy our obligations under the subordinated 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 subordinated notes and may adversely affect the trading price of the IDSs or any separate trading prices of the subordinated notes.

•		Because of the subordinated nature of the subordinated 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 subordinated 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 subordinated 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.

•		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 subordinated notes may depress the price of our outstanding IDSs and the shares of our common stock and our subordinated notes.

•		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.

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•		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 or to obtain new accounts.

•		An increase in capital investments or commissions to renew client relationships may lower our operating results for such facilities.

•		Our historical rapid growth rates may not be indicative of future results, given the limitations set under our current 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 could incur costs defending against claims involving violations of wage and hour laws.

•		We may incur significant liabilities or reputational harm if claims of illness or injury associated with our service of food and beverages to the public are brought against us.

•		The loss of any of our liquor licenses or permits would 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 potential 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.

•		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.

•		Our net sales could decline if there were a labor stoppage affecting any of the sports teams at whose facilities we provide our services.

•		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.

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•		A terrorist attack on any facility which we serve, particularly large sports facilities, could significantly harm our 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.

•		Weak economic conditions within the United States could adversely affect our business.

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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk .

Interest rate risk –We are exposed to interest rate volatility with regard to our outstanding revolving credit facility borrowings and $107.5 million term loan. As of September 27, 2005, we have no outstanding borrowings on the revolver. A change in interest rates of one percent on the term loan borrowings as of September 27, 2005 would cause a change in annual interest expense of approximately $1.1 million. We monitor the variable interest rates and will, if we deem it necessary, recommend interest rate hedging strategies to minimize our exposure to interest rate risk. We will not enter into hedging contracts for trading purposes.

Our subordinated notes are fixed interest rate debt obligations; however, fluctuating interest rates could result in material changes to the fair values of the embedded derivatives which would affect our reported interest expense.

Market risk –Changing market conditions that influence stock prices could have an impact on the value of our liability for derivatives. As of September 27, 2005, a charge of $1.0 million has been recorded to our consolidated statement of operations to mark to market our derivatives. A $1.00 fluctuation in the price of our IDS units would result in an approximate $0.7 million change in our liability for derivatives.

As of September 27, 2005, there have been no material changes, except as discussed above, in the quantitative and qualitative disclosures about market risk from the information presented in our 2004 Form 10-K.

Item 4. Controls and Procedures.

Evaluation of disclosure controls and procedures.

We maintain disclosure controls and procedures 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 SEC 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 the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 27, 2005. 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.

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PART II

OTHER INFORMATION

Item 1. – Legal Proceedings

See Note 3 to financial statements.

Item 6. Exhibits

	31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 7, 2005.


	Centerplate, Inc.
	By:	/s/ Kenneth R. Frick
	Name:	Kenneth R. Frick
	Title:	Chief Financial Officer

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Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. junior Avg

Centerplate (CVP) Inactive 10-Q2005 Q3 Quarterly report

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