Centerplate (CVP) 10-Q 2006 Q1 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 April 4, 2006

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).

o Large accelerated filer þ Accelerated filer o Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes          þ No

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares of common stock of Centerplate, Inc. outstanding as of May 12, 2006 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	19
Item 3. Quantitative and Qualitative Disclosures About Market Risk	26
Item 4. Controls and Procedures	26
PART II OTHER INFORMATION	27
Item 1. Legal Proceedings	27
Item 6. Exhibits	27
EX-10.1: SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

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PART I
FINANCIAL INFORMATION

CENTERPLATE, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)
APRIL 4, 2006 AND JANUARY 3, 2006

	April 4,			January 3,
	2006			2006
	(In thousands, except share data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	31,449		$	41,410
Accounts receivable, less allowance for doubtful accounts of $1,117 and $1,049 at April 4, 2006 and January 3, 2006, respectively		23,469			23,459
Merchandise inventories		19,957			16,852
Prepaid expenses and other		5,682			3,141
Deferred tax asset		4,552			3,928
Total current assets		85,109			88,790
PROPERTY AND EQUIPMENT:
Leasehold improvements		41,764			41,969
Merchandising equipment		63,288			63,821
Vehicles and other equipment		16,655			16,493
Construction in process		72			218
Total		121,778			122,501
Less accumulated depreciation and amortization		(74,133	)		(72,776	)
Property and equipment, net		47,646			49,725
OTHER LONG-TERM ASSETS:
Contract rights, net		79,776			80,557
Restricted cash		8,710			8,616
Cost in excess of net assets acquired		41,142			41,142
Deferred financing costs, net		14,856			15,499
Trademarks		17,523			17,523
Deferred tax asset		17,184			13,116
Other		4,272			3,057
Total other long-term assets		183,463			179,510
TOTAL ASSETS	$	316,218		$	318,025

See notes to consolidated financial statements.

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CENTERPLATE, INC.

CONSOLIDATED BALANCE SHEETS (CONTINUED)(UNAUDITED)
APRIL 4, 2006 AND JANUARY 3, 2006

	April 4,			January 3,
	2006			2006
	(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt	$	2,075		$	1,075
Accounts payable		18,284			16,814
Accrued salaries and vacations		11,695			13,263
Liability for insurance		6,327			6,689
Accrued taxes, including income taxes		4,391			4,205
Accrued commissions and royalties		21,514			15,838
Liability for derivatives		4,217			4,615
Accrued interest		1,251			988
Accrued dividends		1,487			1,487
Advance deposits		4,226			2,588
Other		3,556			3,260
Total current liabilities		79,023			70,822
LONG-TERM LIABILITIES:
Long-term debt		210,595			210,864
Liability for insurance		6,255			5,874
Other liabilities		443			510
Total long-term liabilities		217,293			217,248
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		(92,978	)		(82,920	)
Accumulated other comprehensive income		737			732
Treasury stock — at cost (17,470,153 shares)		(120,940	)		(120,940	)
Total stockholders’ equity		5,550			15,603
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	316,218		$	318,025

See notes to consolidated financial statements.

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CENTERPLATE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THIRTEEN WEEK PERIODS ENDED APRIL 4, 2006 AND MARCH 29, 2005

	Thirteen Weeks Ended
	April 4,			March 29,
	2006			2005
	(In thousands, except share data)
Net sales	$	113,505		$	107,220
Cost of sales		95,660			89,031
Selling, general, and administrative		14,683			15,766
Depreciation and amortization		7,051			6,805
Contract related losses		100			—
Operating loss		(3,989	)		(4,382	)
Interest expense		6,539			5,400
Other income, net		(322	)		(86	)
Loss before income taxes		(10,206	)		(9,696	)
Income tax benefit		(4,608	)		(5,263	)
Net loss	$	(5,598	)	$	(4,433	)
Basic and Diluted Net Loss per share with and without conversion option	$	(0.25	)	$	(0.20	)
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
Dividends declared per share	$	0.20		$	0.20

See notes to consolidated financial statements.

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CENTERPLATE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS (UNAUDITED)
FOR THE PERIOD FROM JANUARY 3, 2006 TO APRIL 4, 2006 AND THE THIRTEEN WEEKS ENDED
APRIL 4, 2006 AND MARCH 29, 2005

	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, JANUARY 3, 2006		18,463,995	$	185		21,531,152	$	215	$	218,331	$	(82,920	)	$	732	$	(120,940	)	$	15,603
Foreign currency translation		—		—		—		—		—		—			5		—			5
Dividends declared		—		—		—		—		—		(4,460	)		—		—			(4,460	)
Net loss		—		—		—		—		—		(5,598	)		—		—			(5,598	)
BALANCE, APRIL 4, 2006		18,463,995	$	185		21,531,152	$	215	$	218,331	$	(92,978	)	$	737	$	(120,940	)	$	5,550

	Thirteen Weeks Ended
	April 4,			March 29
	2006			2005
Net loss	$	(5,598	)	$	(4,433	)
Other comprehensive income (loss) — foreign currency translation adjustment		5			(67	)
Comprehensive loss	$	(5,593	)	$	(4,500	)

See notes to consolidated financial statements.

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CENTERPLATE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THIRTEEN WEEK PERIODS ENDED APRIL 4, 2006 AND MARCH 29, 2005

	Thirteen Weeks Ended
	April 4,			March 29,
	2006			2005
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(5,598	)	$	(4,433	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		7,051			6,805
Amortization of deferred financing costs		643			382
Contract related losses		100			—
Non-cash interest earned on restricted cash		(94	)		—
Derivative non-cash interest		(398	)		(105	)
Deferred tax change		(4,692	)		(5,263	)
Loss on disposition of assets		(13	)		(1	)
Other		5			(67	)
(Increase)/decrease in assets and liabilities:
Accounts receivable		205			439
Merchandise inventories		(3,105	)		(1,329	)
Prepaid expenses		(2,541	)		(1,116	)
Other assets		(1,275	)		(2	)
Accounts payable		1,780			458
Accrued salaries and vacations		(1,568	)		1,373
Liability for insurance		19			523
Accrued commissions and royalties		5,603			(244	)
Other liabilities		2,316			(841	)
Net cash used in operating activities		(1,562	)		(3,421	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(1,235	)		(3,532	)
Proceeds from sale of property and equipment		17			329
Contract rights acquired		(3,218	)		(4,644	)
Restricted cash		—			(180	)
Net cash used in investing activities		(4,436	)		(8,027	)

See notes to consolidated financial statements.

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CENTERPLATE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)(UNAUDITED)
THIRTEEN WEEK PERIODS ENDED APRIL 4, 2006 AND MARCH 29, 2005

	Thirteen Weeks Ended
	April 4,			March 29,
	2006			2005
	(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings — revolving loans	$	1,000		$	18,750
Principal payments on long-term debt		(269	)		—
Payments of financing costs		—			(791	)
Decrease in bank overdrafts		(234	)		(1,693	)
Dividend payments		(4,460	)		(4,460	)
Net cash (used in) provided by financing activities		(3,963	)		11,806
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:		(9,961	)		358
CASH AND CASH EQUIVALENTS:
Beginning of period		41,410			24,777
End of period	$	31,449		$	25,135
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest Paid	$	6,032		$	5,189
Income taxes paid	$	2		$	10
SUPPLEMENTAL NON CASH FLOW INVESTING AND FINANCING ACTIVITIES:
Capital investment commitment	$	392		$	2,209
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)
THIRTEEN WEEK PERIODS ENDED APRIL 4, 2006 AND MARCH 29, 2005

1. GENERAL

     Centerplate, 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 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 13 week period ended April 4, 2006 are not necessarily indicative of the results to be expected for the 52 week fiscal year ending January 2, 2007 due to the seasonal aspects of the business. The accompanying consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the year ended January 3, 2006 included in the Company’s annual report on Form 10-K.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     There have not been any changes in our significant accounting policies disclosed in the 2005 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 April 4, 2006 in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, and determined that no impairment existed. There have been no events since April 4, 2006 that would cause the Company to have 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. Prior to that time, the Company had a premium-based insurance program for these programs. The Company self-insures its employee health plans. Management establishes a reserve for the high deductible insurance and self-insurance obligations considering a number of factors, including historical experience and an actuarial assessment of the liabilities for reported claims and claims incurred but not reported. The estimated liabilities for these programs, except for employee health insurance, are then discounted using rates between 4.37 percent and 4.38 percent at January 3, 2006 and 5.29 percent and 5.39 percent at April 4, 2006, to their present value based on expected loss payment patterns determined by experience. The total discounted high deductible liabilities recorded by the Company at January 3, 2006 and April 4, 2006 were $10,804,000 and $11,014,000, respectively. The related undiscounted amounts were $11,673,000 and $12,613,000, respectively.

     The employee health self-insurance liability is based on claims filed and estimates for claims incurred but not reported. The total liability recorded by the Company at January 3, 2006 and April 4,

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2006 was $1,594,000 and $1,447,000, respectively.

     Accounting Treatment for Income Deposit Securities (“IDSs”), Common Stock Owned by Initial Equity Investors and Derivative Financial Instruments —The Company’s IDSs include common stock and subordinated notes, the latter of which has three embedded derivative features. The embedded derivative features include a call option, a change of control put option, and a term-extending option on the notes. The call option allows the Company to repay the principal amount of the subordinated notes after the fifth anniversary of the issuance, provided that 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 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 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 April 4, 2006, the fair value of these embedded derivatives was determined to be insignificant. The term-extending option was determined to be inseparable from the underlying subordinated notes. Accordingly, it has not been separately accounted for in the accompanying consolidated financial statements.

     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 approximately $14.4 million described further below.

     The Company has concluded that the portion of the Initial Equity Investors’ common stock exchangeable for subordinated debt as calculated above 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 April 4, 2006 and January 3, 2006, the Company has recorded approximately $14.4 million as “Common stock with conversion option exchangeable for subordinated debt” on the accompanying consolidated balance sheets. 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 approximately $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 fiscal 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

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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 $4.2 million as of April 4, 2006, a decrease of $0.4 million from January 3, 2006. Changes in the fair value are recorded in interest expense in the accompanying consolidated statement of operations.

     The common stock held by the Initial Equity Investors was initially treated as a separate class of common stock for presentation of earnings per share. 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 our Amended and Restated 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. In fiscal 2004, the deemed dividend of approximately $317,000 conveyed to the Initial Equity Investors discussed above requires a two class earnings per share calculation. Accordingly, the Company had shown separate earnings per share for the stock held by the Initial Equity Investors and the stock included in the IDSs. However, at April 4, 2006 and March 29, 2005, earnings per share for common stock with and without conversion rights were equal and therefore no separate presentation was required.

          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 were calculated 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 2, 2007, it will have an effective tax rate of approximately 215%. In the previous year, the Company estimated that its effective tax rate for the fiscal year ended January 3, 2006 would be 54%. The increase in the projected effective tax rate is primarily related to the benefit the Company will realize from the creation of federal tax credits which will exceed the projected book loss of the Company in fiscal 2006. The amount of federal tax credits the Company expects to generate is consistent with amounts created in previous years. For the thirteen weeks ended April 4, 2006, the estimated effective tax rate of 215% was not utilized due to the limitation on the income tax benefit recorded pursuant to the guidance provided by FIN 18“Accounting for Income Taxes in Interim Periods” (an interpretation of APB No. 28).

     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 13 weeks ended April 4, 2006, the Company deducted interest expense of approximately $3.7 million on the subordinated notes in determining 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 treated as equity for income tax purposes, the cumulative interest expense associated with the notes of approximately $32.9 million would not be deductible from taxable income. 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 $1,886,000 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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     Reclassifications– Certain amounts in 2005 have been reclassified , where applicable, to conform to the financial statement presentation used in 2006. In the Consolidated Statement of Cash Flows for the thirteen weeks ended April 4, 2006, the Company presented changes in restricted cash balances as an investing activity. The Company previously presented such changes as a financing activity. In the accompanying Consolidated Statements of Cash Flows for the 13 weeks ended March 29, 2005, the Company reclassified changes in restricted cash balances to be consistent with the 2006 presentation which resulted in a $0.2 million decrease to investing cash flows and a corresponding increase to financing cash flows from the amounts previously reported.

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”), 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 is responsible. In addition, the United States Environmental Protection Agency (the “EPA”), asserting authority under CERCLA, recently issued a unilateral administrative order concerning the same Illinois site naming approximately 75 entities as respondents, including the plaintiffs in the CERCLA lawsuit against Service America and the waste disposal business for which the plaintiffs allege Service America is responsible.

     In December 2004, Service America entered into a Settlement Agreement with Pharmacia and Solutia which settles and resolves 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. 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 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.

     On February 21, 2006, Service America received another letter from the DOJ regarding the potential DOJ claim. In the February 21 letter, the Justice Department urged all of the potentially responsible parties to reach agreement amongst themselves as to allocation of the government’s clean-up costs by April 1, 2006. Again, Service America immediately tendered the DOJ’s February 21, 2006 letter to counsel for Pharmacia in accordance with Pharmacia’s agreement to defend and indemnify Service America regarding the potential claim.

   As previously reported in the Company’s 2005 Annual Report on Form 10-K, in May 2003 a purported

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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 we serve alleging violations of local overtime wage, rest and meal period and related laws with respect to this employee and others purportedly similarly situated at any and all of the facilities we serve in California. The purported class action sought compensatory, special and punitive damages in unspecified amounts, penalties under the applicable local laws and injunctions against the alleged illegal acts. On December 8, 2005, the Company executed an agreement to settle this claim. The proposed settlement received preliminary court approval on February 27, 2006 but remains subject to final court approval. The final fairness hearing regarding the proposed settlement is scheduled for June 2006.

     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.Perezmakes substantially identical allegations to those inHolden.Consequently, the Company filed a Demurer and the case was stayed on November 9, 2004 pending the resolution ofHolden.In February 2006, the parties stipulated to add Celeste Perez as a named plaintiff in theHoldensuit and the Perez case was dismissed. Accordingly, Ms. Perez’ claim will now be resolved with theHoldencase.

          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 pending proceedings or contingencies will not have a material adverse effect on our financial condition or results of operations.

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4. NON-GUARANTOR SUBSIDIARIES FINANCIAL STATEMENTS

     The $105,245,000 in 13.5% subordinated notes are jointly and severally guaranteed by each of Centerplate’s direct and indirect wholly owned subsidiaries, except for certain non-wholly owned U.S. subsidiaries and one non-U.S. subsidiary. The following table sets forth the condensed consolidating financial statements of Centerplate as of April 4, 2006 and January 3, 2006 (in the case of the balance sheets) and for the 13 week periods ended April 4, 2006 and March 29, 2005 (in the case of the statements of operations and statement of cash flows).

Consolidating Condensed Balance Sheet, April 4, 2006

				Guarantor			Non-guarantor
	Centerplate			Subsidiaries			Subsidiaries			Eliminations			Consolidated
	(In thousands)
	ASSETS
Current assets:
Cash and cash equivalents	$	202		$	29,437		$	1,810		$	—		$	31,449
Accounts receivable		—			21,554			1,915			—			23,469
Other current assets		41			28,601			1,549			—			30,191
Total current assets		243			79,592			5,274			—			85,109
Property and equipment, net		—			44,473			3,173			—			47,646
Contract rights, net		123			79,054			599			—			79,776
Cost in excess of net assets acquired		6,974			34,168			—			—			41,142
Intercompany receivable (payable)		130,049			(127,100	)		(2,949	)		—			—
Investment in subsidiaries		(14,096	)		—			—			14,096			—
Other assets		8,371			53,227			947			—			62,545
Total assets	$	131,664		$	163,414		$	7,044		$	14,096		$	316,218
	LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)
Current liabilities	$	6,517		$	69,057		$	3,449		$	—		$	79,023
Long-term debt		105,245			105,350			—			—			210,595
Other liabilities		—			6,698			—			—			6,698
Total liabilities		111,762			181,105			3,449			—			296,316
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 earnings (deficit)		(92,978	)		(17,691	)		2,858			14,833			(92,978	)
Treasury stock and other		(120,203	)		—			737			(737	)		(120,203	)
Total stockholders’ equity (deficiency)		5,550			(17,691	)		3,595			14,096			5,550
Total liabilities and stockholders’ equity	$	131,664		$	163,414		$	7,044		$	14,096		$	316,218

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Consolidating Condensed Statement of Operations and Comprehensive Income (Loss)

Thirteen Week Period Ended April 4, 2006

				Guarantor			Non-guarantor
	Centerplate			Subsidiaries			Subsidiaries			Eliminations		Consolidated
							(In thousands)
Net sales	$	—		$	101,803		$	11,702		$	—	$	113,505
Cost of sales		—			85,862			9,798			—		95,660
Selling, general, and administrative		656			12,906			1,121			—		14,683
Depreciation and amortization		24			6,687			340			—		7,051
Contract related losses		—			100			—			—		100
Operating income (loss)		(680	)		(3,752	)		443			—		(3,989	)
Interest expense		3,641			2,898			—			—		6,539
Intercompany interest, net		(3,925	)		3,925			—			—		—
Other income, net		(2	)		(312	)		(8	)		—		(322	)
Income (loss) before income taxes		(394	)		(10,263	)		451			—		(10,206	)
Income tax benefit		(150	)		(4,458	)		—			—		(4,608	)
Equity in loss of subsidiaries		(5,354	)		—			—			5,354		—
Net income (loss)		(5,598	)		(5,805	)		451			5,354		(5,598	)
Other comprehensive income — foreign currency translation adjustment		—			—			5			—		5
Comprehensive income (loss)	$	(5,598	)	$	(5,805	)	$	456		$	5,354	$	(5,593	)

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Consolidating Condensed Statement of Cash Flows

Thirteen Week Period Ended April 4, 2006

				Guarantor			Non-guarantor
	Centerplate			Subsidiaries			Subsidiaries			Consolidated
	(In thousands)
Cash Flows Provided by (Used in) Operating Activities	$	(162	)	$	(2,579	)	$	1,179		$	(1,562	)
Cash Flows from Investing Activities:
Purchase of property and equipment		—			(1,227	)		(8	)		(1,235	)
Proceeds from sale of property and equipment		—			17			—			17
Contract rights acquired		—			(3,218	)		—			(3,218	)
Net cash used in investing activities		—			(4,428	)		(8	)		(4,436	)
Cash Flows from Financing Activities:
Net borrowings — revolving loans		—			1,000			—			1,000
Principal payments on long-term debt		—			(269	)		—			(269	)
Decrease in bank overdrafts		—			(234	)		—			(234	)
Dividend payments		(4,460	)		—			—			(4,460	)
Change in intercompany, net		4,625			(3,665	)		(960	)		—
Net cash provided by (used in) financing activities		165			(3,168	)		(960	)		(3,963	)
Increase (decrease) in cash		3			(10,175	)		211			(9,961	)
Cash and cash equivalents — beginning of period		199			39,612			1,599			41,410
Cash and cash equivalents — end of period	$	202		$	29,437		$	1,810		$	31,449

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Consolidating Condensed Balance Sheet, January 3, 2006

				Guarantor			Non-guarantor
	Centerplate			Subsidiaries			Subsidiaries			Eliminations			Consolidated
							(In thousands)
	ASSETS
Current assets:
Cash and cash equivalents	$	199		$	39,612		$	1,599		$	—		$	41,410
Accounts receivable		—			21,861			1,598			—			23,459
Other current assets		7			22,471			1,443			—			23,921
Total current assets		206			83,944			4,640			—			88,790
Property and equipment, net		—			46,269			3,456			—			49,725
Contract rights, net		147			79,758			652			—			80,557
Cost in excess of net assets acquired		6,974			34,168			—			—			41,142
Intercompany receivable (payable)		134,674			(130,765	)		(3,909	)		—			—
Investment in subsidiaries		(8,747	)		—			—			8,747			—
Other assets		8,511			48,316			984			—			57,811
Total assets	$	141,765		$	161,690		$	5,823		$	8,747		$	318,025
	LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)
Current liabilities	$	6,565		$	61,573		$	2,684		$	—		$	70,822
Long-term debt		105,245			105,619			—			—			210,864
Other liabilities		—			6,384			—			—			6,384
Total liabilities		111,810			173,576			2,684			—			288,070
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 earnings (deficit)		(82,920	)		(11,886	)		2,407			9,479			(82,920	)
Treasury stock and other		(120,208	)		—			732			(732	)		(120,208	)
Total stockholders’ equity (deficiency)		15,603			(11,886	)		3,139			8,747			15,603
Total liabilities and stockholders’ equity	$	141,765		$	161,690		$	5,823		$	8,747		$	318,025

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Consolidating Condensed Statement of Operations and Comprehensive Loss

Thirteen Week Period March 29, 2005

				Guarantor			Non-guarantor
	Centerplate			Subsidiaries			Subsidiaries			Eliminations		Consolidated
	(In thousands)
Net sales	$	—		$	97,203		$	10,017		$	—	$	107,220
Cost of sales		—			80,282			8,749			—		89,031
Selling, general, and administrative		255			14,399			1,112			—		15,766
Depreciation and amortization		27			6,486			292			—		6,805
Operating loss		(282	)		(3,964	)		(136	)		—		(4,382	)
Interest expense		3,746			1,654			—			—		5,400
Intercompany interest, net		(3,925	)		3,925			—			—		—
Other income, net		—			(82	)		(4	)		—		(86	)
Loss before income taxes		(103	)		(9,461	)		(132	)		—		(9,696	)
Income tax benefit		(45	)		(5,218	)		—			—		(5,263	)
Equity in loss of subsidiaries		(4,375	)		—			—			4,375		—
Net loss		(4,433	)		(4,243	)		(132	)		4,375		(4,433	)
Other comprehensive loss — foreign currency translation adjustment		—			—			(67	)		—		(67	)
Comprehensive loss	$	(4,433	)	$	(4,243	)	$	(199	)	$	4,375	$	(4,500	)

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Consolidating Condensed Statement of Cash Flows

Thirteen Week Period Ended March 29, 2005

				Guarantor			Non-guarantor
	Centerplate			Subsidiaries			Subsidiaries			Consolidated
	(In thousands)
Cash Flows Provided by (Used in) Operating Activities	$	218		$	(4,254	)	$	615		$	(3,421	)
Cash Flows from Investing Activities:
Purchase of property and equipment		—			(3,338	)		(194	)		(3,532	)
Proceeds from sale of property and equipment		—			329			—			329
Contract rights acquired		—			(4,644	)		—			(4,644	)
Restricted cash		—			(180	)		—			(180	)
Net cash used in investing activities		—			(7,833	)		(194	)		(8,027	)
Cash Flows from Financing Activities:
Net borrowings — revolving loans		—			18,750			—			18,750
Payments of financing costs		(38	)		(753	)		—			(791	)
Decrease in bank overdrafts		—			(1,693	)		—			(1,693	)
Dividend payments		(4,460	)					—			(4,460	)
Change in intercompany, net		4,281			(3,757	)		(524	)		—
Net cash provided by (used in) financing activities		(217	)		12,547			(524	)		11,806
Increase (decrease) in cash		1			460			(103	)		358
Cash and cash equivalents — beginning of period		195			24,142			440			24,777
Cash and cash equivalents — end of period	$	196		$	24,602		$	337		$	25,135

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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 13 weeks ended April 4, 2006 and March 29, 2005 should be read in conjunction with our audited financial statements, including the related notes, included in our annual report on Form 10-K for the year ended January 3, 2006. The financial data has been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”).

Overview

     We are a leading provider of food and related services, including concessions, catering and merchandise services in sports facilities, convention centers and other entertainment facilities. As a part of our food services business, we also provide facility management services at a small number of accounts. We operate 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 believe that the ability to retain existing accounts and to win new accounts are the key drivers to maintaining and growing our net sales. Net sales historically have also increased when there has been an increase in the number of events or attendance at our facilities in connection with major league sports post-season and playoff games. Another key factor is our skill at controlling product costs, cash and labor during the events where we provide our services.

     When renewing an existing contract or securing a new contract, we usually have to make a capital expenditure in our client’s facility and offer to pay the client a percentage of the net sales or profits in the form of a commission. Historically, we have reinvested the cash flow generated by operating activities in order to renew or obtain contracts. We believe that these investments have provided a diversified account base of exclusive, long-term contracts. However, as a result of the changes to our capital structure in 2003 including 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 the relatively rapid growth that we experienced prior to our IPO. Consequently, we obtained new senior credit financing in 2005 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. In addition, in 2005 we also invested in our strategic initiatives, including culinary excellence, speed of service, branded concepts and design initiatives, in order to differentiate ourselves in the market and ultimately strengthen our financial position by operating more profitably. In 2006, we will continue to focus on these strategic initiatives while keeping our overhead expenses flat as compared to fiscal 2005.

Critical Accounting Policies

     The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement date and reported amounts of revenues and expenses, including amounts that are susceptible to change. Our critical accounting policies include accounting methods and estimates underlying such financial statement preparation, as well as judgments around uncertainties affecting the application of those policies. In applying critical accounting policies, materially different amounts or results could be reported under different conditions or using different assumptions. We believe that our critical accounting policies, involving significant estimates, uncertainties and susceptibility to change, include the following:

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• Recoverability of Property and Equipment, Contract Rights, Cost in Excess of Net Assets Acquired and Other Intangible Assets.As of April 4, 2006, net property and equipment of $47.6 million and net contract rights of $79.8 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 carrying value (or net book value) of the long-lived assets and the future discounted cash flows related to the assets (using a rate based on our incremental borrowing rate). As we base our estimates of undiscounted future cash flows on past operating performance, including anticipated labor and other cost increases, and prevailing market conditions, we cannot make assurances that our estimates are achievable. Different conditions or assumptions, if significantly negative or unfavorable, could have a material adverse effect on the outcome of our evaluation and our financial condition or future results of 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, and the discontinuation of a sports league or a significant increase in competition that could reduce the future profitability of the contract, among others.

     As of April 4, 2006, cost in excess of net assets acquired of $41.1 million and other intangible assets (trademarks) of $17.5 million were recorded. In accordance with SFAS No. 142, on an annual basis, we test our indefinite-lived intangible assets (cost in excess of net assets acquired and trademarks) 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 cost in excess of net assets acquired. 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 performed our annual assessments of cost in excess of net assets acquired and trademarks on April 4, 2006 and determined that no impairment exists. Additionally, no factors were noted since April 4, 2006 that would cause us to re-evaluate this assessment.

• 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

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administrative expenses on the statement of operations and accrued liabilities and long-term liabilities on the balance sheet. Our estimates consider a number of factors, including historical experience and an actuarial assessment of the liabilities for reported claims and claims incurred but not reported. We discount our estimated liabilities to their present value based on expected loss patterns determined by experience. While we use outside parties to assist us in making these estimates, we cannot provide assurance that the actual amounts will not be materially different than what we have recorded. In addition, we are self-insured for employee medical benefits and related liabilities. Our liabilities are based on historical trends and claims filed and are estimated for claims incurred but not reported. While the liabilities represent management’s best estimate, actual results could differ significantly from those estimates.

• Accounting Treatment for Income Deposit Securities (“IDS s”), Common Stock Owned by Initial Equity Investors and Derivative Financial Instruments.The Company’s IDSs include common stock and subordinated notes, the latter of which has three embedded derivative features. The embedded derivative features include a call option, a change of control put option, and a term-extending option on the notes. The call option allows the Company to repay the principal amount of the subordinated notes after the fifth anniversary of the issuance, provided that 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 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 April 4, 2006, the fair value of these embedded derivatives was determined to be insignificant. The term-extending option was determined to be inseparable from the underlying subordinated notes. Accordingly, it has not been separately accounted for in the accompanying consolidated financial statements.

     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 approximately $14.4 million described further below.

     The Company has concluded that the portion of the Initial Equity Investors’ common stock exchangeable for subordinated debt as calculated above should be classified on its consolidated

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balance sheet according to the guidance provided by Accounting Series Release No. 268 (FRR Section 211), “Redeemable Preferred Stocks”. Accordingly, at both April 4, 2006 and January 3, 2006, the Company has recorded approximately $14.4 million as “Common stock with conversion option exchangeable for subordinated debt” on the accompanying consolidated balance sheets. 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 approximately $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 fiscal 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 $4.2 million as of April 4, 2006, a decrease of $0.4 million from January 3, 2006. 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 was initially treated as a separate class of common stock for presentation of earnings per share. 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 our Amended and Restated 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. In fiscal 2004, the deemed dividend of approximately $317,000 conveyed to the Initial Equity Investors discussed above required a two class earnings per share calculation. Accordingly, the Company had shown separate earnings per share for the stock held by the Initial Equity Investors and the stock included in the IDSs. However, at April 4, 2006 and March 29, 2005, earnings per share for common stock with and without conversion rights were equal and therefore no separate presentation was required.

• 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 and the future tax benefits of net operating loss carryforwards and tax credits. 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 and we do not generate taxable income, not all of our deferred tax assets, if any, may be realized.

     We accounted for the issuance of IDS units in December 2003 by allocating the proceeds for each IDS unit to the underlying stock and subordinated notes based upon the relative fair values of each at that time. Accordingly, the portion of the aggregate IDSs outstanding that represents subordinated notes has been accounted for as long-term debt bearing a stated interest rate of 13.5% maturing on December 10, 2013. There can be no assurances that the Internal Revenue Service or the courts will not seek to challenge the treatment of these notes as debt or the amount of interest expense deducted, although to date 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 Centerplate to utilize at a faster rate more of its deferred tax assets than it otherwise would.

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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;

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

• timing of contract expirations and special events; and

• level of attendance at the facilities which we serve.

     Business at the principal types of facilities we serve is seasonal in nature. 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 quarter of 2006, fiscal 2005, and fiscal 2004:

	2006		2005		2004
1st Quarter	$	113,505	$	107,220	$	98,236
2nd Quarter		—	$	182,071	$	173,725
3rd Quarter		—	$	208,619	$	201,066
4th Quarter		—	$	145,202	$	134,127

Results of Operations

Thirteen Weeks Ended April 4, 2006 Compared to the 13 Weeks Ended March 29, 2005

     Net sales —Net sales of $113.5 million for the 13 weeks ended April 4, 2006 increased by $6.3 million, or approximately 5.9%, from $107.2 million in the prior year period. The increase was primarily due to higher sales at our convention centers and arenas of $7.1 million and $6.5 million, respectively. The improvement at the convention centers was partially due to an increase in the number of events held at these facilities while arenas were positively impacted by the resolution of the NHL lock-out and college basketball tournaments held at a number of our facilities. All other facilities contributed an additional $1.8 million to net sales. Partially offsetting the improvement was a decline in sales of $5.6 million at our NFL facilities primarily as a result of four fewer NFL games played (because of scheduling, four regular season games from the 2004-2005 NFL season were played in the first quarter of fiscal 2005 as compared to none in the 2006 period). In addition, the Louisiana Superdome was closed and the New Orleans Arena was open on a limited basis in the wake of Hurricane Katrina causing a $3.5 million decline in sales.

     Cost of sales –Cost of sales of $95.7 million for the 13 weeks ended April 4, 2006 increased by approximately $6.7 million from $89.0 million in the prior year period due in part to the higher sales volume. As a percentage of net sales, cost of sales increased by approximately 1.3% from the prior year period mainly as a result of an increase in the commissions and royalties paid to our clients.

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The increase was primarily attributable to a shift in the sales mix reflecting a higher concentration of sales in our profit sharing accounts, where higher commissions are typically paid. The increase was partially offset by improved product costs related to a change in the sales mix and savings at certain accounts.

     Selling, general and administrative expenses –Selling, general and administrative expenses were $14.7 million in the 13 weeks ended April 4, 2006 as compared to $15.8 million in the prior year period, a decline of approximately $1.1 million. As a percentage of net sales, selling, general and administrative costs declined approximately 1.8% from the prior year period. The improvement was due to lower overhead costs of approximately $0.8 million primarily attributable to non-recurring costs incurred in the prior year period. Also contributing to the lower selling, general, and administrative expenses was a decline in other operating expenses due to operating efficiencies achieved at certain facilities.

     Depreciation and amortization– Depreciation and amortization was $7.1 million for the 13 weeks ended April 4, 2006, compared to $6.8 million in the prior year period. The increase was principally attributable to investments made in contract acquisitions and renewals.

     Contract related losses– For the 13 weeks ended April 4, 2006, we wrote-off $0.1 million in contract rights for a terminated contract.

     Operating loss –Operating loss declined approximately $0.4 million from the prior year period due to the factors described above.

     Interest expense –Interest expense was $6.5 million for the thirteen weeks ended April 4, 2006, compared to $5.4 million in the prior year period. The $1.1 million increase is principally attributable to higher interest expense for the term loan and revolver availability under the credit agreement entered into on April 1, 2005.

     Income taxes– We estimate that in the fiscal year ending January 2, 2007, we will have an effective tax rate of approximately 215%. In the prior year period, we estimated that our effective tax rate for the fiscal year ended January 3, 2006 would be 54%. The increase in the projected effective tax rate is primarily related to the benefit the Company will realize from the creation of federal tax credits which will exceed the projected book loss of the Company in fiscal 2006. The amount of federal tax credits the Company expects to generate is consistent with amounts created in previous years. For the 13 weeks ended April 4, 2006, the estimated effective tax rate of 215% was not utilized due to the limitation on the income tax benefit recorded pursuant to the guidance provided by FIN 18 “Accounting for Income Taxes in Interim Periods” (an interpretation of APB No. 28).

Liquidity and Capital Resources

     For the 13 weeks ended April 4, 2006, net cash used in operating activities was $1.6 million compared to $3.4 million in the prior year period. The decline was primarily due to fluctuations in working capital which varies from quarter to quarter as a result of the timing and number of events at the facilities we serve.

     Net cash used in investing activities was $4.4 million for the 13 weeks ended April 4, 2006, as compared to $8.0 million in the prior year period. The lower level of investment in the 2006 period primarily reflects a decrease in capital expenditures to acquire new accounts (approximately $1.3 million) and to extend existing contracts (approximately $2.4 million).

Net cash used in financing activities was $4.0 million in the 13 weeks ended April 4, 2006 as compared to net cash provided by financing activities of $11.8 million in the prior year period. The difference is primarily due to lower revolver borrowings ($17.8 million) as a result of higher cash available in 2006.

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     We are also often required to obtain performance bonds, bid bonds or letters of credit to secure our contractual obligations. As of April 4, 2006, we had requirements outstanding for performance bonds and letters of credit of $13.8 million and $20.9 million, respectively. Under the credit facility, we have an aggregate of $35.0 million available for letters of credit, subject to an overall borrowing limit of $107.5 million under the facility. As of April 4, 2006, we had approximately $85.6 million available to be borrowed under the revolving credit facility. At that date there were $1.0 million in outstanding borrowings and $20.9 million of outstanding, undrawn letters of credit reducing availability.

     Sports teams and municipalities have spearheaded efforts to develop new large stadiums. In order to bid successfully on these projects, however, we will need to be able to commit to making relatively large capital expenditures. For these and other projects, we will also need to demonstrate our ability to provide competitive product and service offerings. We intend to address this through the further enhancement of our strategic initiatives, including culinary excellence and design, as well as through the continued development of our branded product and speed of service initiatives, all designed to help differentiate us in our market. This in turn will require investment in these initiatives and in the management infrastructure that will enable us to manage our business more efficiently.

     We believe that cash flow from operating activities, together with borrowings available under the revolving credit facility, will be sufficient to fund our currently anticipated capital investment requirements, interest, dividend payments and working capital requirements. We anticipate total capital investments of approximately $32 million to $42 million in fiscal 2006, of which $4.4 million has been spent to date in investments primarily associated with the renewal and/or acquisition of contracts. The primary driver of the increase in capital investments is the amount of net sales up for renewal. In 2006, 24.1% of our net sales or $154.9 million are up for renewal. Consequently, we anticipate making higher than average capital expenditures on commitments in order to renew these contracts. As a result of the anticipated contract renewals, our borrowings may increase in 2006.

     In addition, while the declaration of dividends is at the sole discretion of our board of directors, we expect to pay dividends on our common stock at the same rate as fiscal 2005 (approximately $17.8 million, of which $4.5 million was paid as of April 4, 2006).

     Cautionary Statement Regarding Forward-looking Statements

     Some of the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in this 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. Some of these factors are discussed under “Risk Factors” in our Annual Report on Form 10-K for the year ended January 3, 2006.

  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.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

     Interest rate risk –We are exposed to interest rate volatility with regard to our revolving credit facility borrowings and term loan. As of April 4, 2006, we had $1.0 million in outstanding revolver borrowings and a $106.4 million balance on our term loan. A change in interest rate of one percent on these borrowings would cause a change in the annual interest expense of $1.1 million. We monitor the variable interest rates and will, if we deem necessary, consider interest rate hedging strategies to minimize our exposure to interest rate risk. We will not enter into hedging contracts for trading purposes. While our subordinated notes are fixed interest-rate debt obligations, fluctuating interest rates could result in material changes to the fair values of the embedded derivatives.

     Market risk –Changing market conditions that influence stock prices could have an impact on the value of our liability for derivatives. As of April 4, 2006, a gain of $0.4 million has been recorded to our consolidated statement of operations to record changes in the fair value of 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 April 4, 2006, 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 Form 10-K for the year ended January 3, 2006.

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 reports 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 April 4, 2006. 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

     There has been no material change to the disclosure in our Annual Report on Form 10-K for the year ended January 3, 2006. See Note 3 in the Notes to the Consolidated Financial Statements.

Item 1A. – Risk Factors

     There has been no material change to the disclosure in our Annual Report on Form 10-K for the year ended January 3, 2006.

Item 6. Exhibits

              (a) Exhibits:

10.1	Second Amendment, dated as of March 1, 2006, to Employment Agreement dated September 29, 1998 between VSI Acquisition II Corporation (a/k/a Centerplate, Inc.) and Janet L. Steinmayer.
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 May 12, 2006.

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

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