AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 16, 2003
REGISTRATION NO. 333-103169
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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VOLUME SERVICES AMERICA HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
<Table>
DELAWARE 5812 13-3870167
(Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</Table>
201 EAST BROAD STREET
SPARTANBURG, SOUTH CAROLINA 29306
(864) 598-8600
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
JANET L. STEINMAYER, ESQ.
GENERAL COUNSEL
VOLUME SERVICES AMERICA HOLDINGS, INC.
300 FIRST STAMFORD PLACE
STAMFORD, CONNECTICUT 06902
(203) 975-5900
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
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COPIES TO:
<Table>
RISE B. NORMAN, ESQ. DAVID J. GOLDSCHMIDT, ESQ.
SIMPSON THACHER & BARTLETT LLP SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
425 LEXINGTON AVENUE FOUR TIMES SQUARE
NEW YORK, NEW YORK 10017 NEW YORK, NEW YORK 10036
(212) 455-2000 (212) 735-3000
</Table>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] -------------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] -------------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] -------------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
<Table>
<Caption>
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
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Income Deposit Securities (IDSs)(2).........................
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Shares of Common Stock, par value $0.01 per share(3)........ $275,000,000 $25,300(4)
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% Subordinated Notes(5)...................................
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Subsidiary Guarantees of % Subordinated Notes(6)..........
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</Table>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933,
as amended.
(2) The IDSs represent shares of the common stock and $ aggregate
principal amount of % subordinated notes of Volume Services America
Holdings, Inc. ("VSAH"). Includes IDSs subject to the underwriters'
over-allotment option.
(3) Includes shares of VSAH's common stock subject to the underwriters'
over-allotment option.
(4) Previously paid.
(5) Includes $ million aggregate principal amount of VSAH's %
subordinated notes subject to the underwriters' over-allotment option.
(6) Pursuant to Rule 457(n) under the Securities Act of 1933, no separate fee
for the guarantees is payable.
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THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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TABLE OF ADDITIONAL REGISTRANT GUARANTORS
<Table>
<Caption>
STATE OR OTHER ADDRESS INCLUDING ZIP CODE,
EXACT NAME OF REGISTRANT JURISDICTION OF TELEPHONE NUMBER INCLUDING AREA
GUARANTOR AS SPECIFIED INCORPORATION OR I.R.S. EMPLOYER CODE, OF REGISTRANT GUARANTOR'S
IN ITS CHARTER ORGANIZATION IDENTIFICATION NUMBER PRINCIPAL EXECUTIVE OFFICES
------------------------ ---------------- --------------------- -------------------------------
Events Center Catering, Inc. Wyoming 57-1007720 201 East Broad Street
Spartanburg, SC 29306
(864) 598-8600
Service America Concessions Maryland 06-1182149 201 East Broad Street
Corporation Spartanburg, SC 29306
(864) 598-8600
Service America Corporation Delaware 13-1939453 201 East Broad Street
Spartanburg, SC 29306
(864) 598-8600
Service America Corporation of Wisconsin 39-1655756 201 East Broad Street
Wisconsin Spartanburg, SC 29306
(864) 598-8600
Servo-Kansas, Inc. Kansas 06-1238400 201 East Broad Street
Spartanburg, SC 29306
(864) 598-8600
SVM of Texas, Inc. Texas 75-1913406 201 East Broad Street
Spartanburg, SC 29306
(864) 598-8600
Volume Services, Inc. Delaware 36-2786575 201 East Broad Street
Spartanburg, SC 29306
(864) 598-8600
Volume Services, Inc. Kansas 57-0973901 201 East Broad Street
Spartanburg, SC 29306
(864) 598-8600
Volume Services America, Inc. Delaware 57-0969174 201 East Broad Street
Spartanburg, SC 29306
(864) 598-8600
</Table>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS DECLARED EFFECTIVE. THIS PROSPECTUS IS NOT
AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JULY 16, 2003
PROSPECTUS
INCOME DEPOSIT SECURITIES (IDSS)
VOLUME SERVICES AMERICA HOLDINGS, INC.
---------------------
We are selling IDSs representing shares of our common
stock and $ million aggregate principal amount of our
% subordinated notes. Each IDS initially represents:
- one share of our common stock; and
- $ aggregate principal amount of our % subordinated notes.
The ratio of common stock to principal amount of subordinated notes
represented by an IDS is subject to change in the event of a stock split,
recombination or reclassification of our common stock.
Holders of IDSs will have the right to separate the IDSs into the shares of
our common stock and subordinated notes represented thereby at any time after
the earlier of 180 days from the date of this prospectus or the occurrence of a
change of control. Similarly, any holder of shares of our common stock and
subordinated notes may, at any time, combine the applicable number of shares of
common stock and principal amount of subordinated notes to form IDSs. Separation
of all of the IDSs will occur automatically upon the occurrence of any
redemption of the subordinated notes or upon maturity of the subordinated notes.
Under specified circumstances, we will be required to defer interest
payments on our subordinated notes. Interest payments will not be deferred for
more than 24 months in the aggregate or at any time after the earlier of
, 2008 or the termination of our new credit facility. Deferred
interest on our subordinated notes will bear interest at an annual rate equal to
the stated rate of interest on the notes. Our subordinated notes mature on
, 2013, subject to our right to extend their maturity for two
additional successive five-year terms under specified circumstances.
This is the initial public offering of our IDSs, common stock and
subordinated notes. We anticipate that the public offering price will be between
$ and $ per IDS.
We have applied to list our IDSs on the American Stock Exchange under the
trading symbol "CVP" and on the Toronto Stock Exchange under the trading symbol
" ." We have applied to list our shares of common stock on the Toronto
Stock Exchange under the symbol "CVP." We do not intend to apply to list our
shares of common stock on any other exchange or our subordinated notes on any
exchange.
INVESTING IN OUR IDSS, AND THE SHARES OF OUR COMMON STOCK AND SUBORDINATED
NOTES REPRESENTED THEREBY, INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE
20.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<Table>
<Caption>
PER IDS TOTAL
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Public offering price(1).................................... $ $
Underwriting discount....................................... $ $
Proceeds to Volume Services America Holdings, Inc. (before
expenses)................................................. $ $
</Table>
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(1) The offering price in Canada is payable in Canadian dollars and is the
approximate equivalent of the U.S. dollar offering price based on the noon
buying rate on the date of this prospectus as quoted by the Federal Reserve
Bank of New York.
We have granted the underwriters an option to purchase up to
additional IDSs to cover over-allotments.
The underwriters expect to deliver the IDSs in book-entry form only through
the facilities of The Depository Trust Company to purchasers on or about
, 2003.
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CIBC WORLD MARKETS
, 2003
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
Summary..................................................... 1
Risk Factors................................................ 20
Cautionary Statement Regarding Forward-Looking Statements... 35
Use of Proceeds............................................. 36
Dividend Policy............................................. 37
Capitalization.............................................. 38
Dilution.................................................... 39
Selected Historical Financial Information................... 40
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 46
Business.................................................... 58
Management.................................................. 74
Principal Stockholders...................................... 83
Related Party Transactions.................................. 85
Description of Certain Indebtedness......................... 89
Description of IDSs......................................... 91
Description of Capital Stock................................ 96
Description of Subordinated Notes........................... 100
Shares Eligible for Future Sale............................. 138
Material U.S. Federal Income Tax Consequences............... 139
Certain ERISA Considerations................................ 148
Underwriting................................................ 150
Legal Matters............................................... 153
Experts..................................................... 153
Where You Can Find More Information......................... 153
Index to Consolidated Financial Statements.................. F-1
</Table>
SUMMARY
The following is a summary of the principal features of this offering of
IDSs and should be read together with the more detailed information and
financial data and statements contained elsewhere in this prospectus.
Throughout this prospectus, we refer to Volume Services America Holdings,
Inc., a Delaware corporation, as "VSAH," and, together with its consolidated
operations, as "we," "our" and "us," unless otherwise indicated. Any reference
to "VSA" refers to our wholly owned subsidiary, Volume Services America, Inc., a
Delaware corporation, and its consolidated operations, unless otherwise
indicated. We are a holding company and have no direct operations. Our principal
asset is the capital stock of VSA which will be pledged to the creditors under
the new credit facility, as described more fully below. On February 11, 2003, we
announced that we changed our tradename for our operating subsidiaries, Volume
Services, Inc. and Service America Corporation, from Volume Services America to
Centerplate.
In this prospectus, when we describe EBITDA as being generated by a
contract or group of contracts for the relevant period, we have calculated it by
allocating overhead and miscellaneous expenses to the relevant contract or group
of contracts proportionately based on net sales generated by that contract or
group of contracts for that same period. For additional information, see
"-- General Information About This Prospectus."
OUR COMPANY
OVERVIEW
We are a leading provider of food and beverage concessions, catering and
merchandise services for sports facilities, convention centers and other
entertainment facilities throughout the United States. 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 and are:
- the second largest provider to National Football League, or NFL,
facilities (10 teams);
- the third largest provider to Major League Baseball, or MLB, facilities
(7 teams (6 teams after the completion of the 2003 season));
- the largest provider to minor league baseball and spring training
facilities (27 teams); and
- one of the largest providers to major convention centers (those with
greater than approximately 300,000 square feet of exhibition space) (10
centers).
We have a large diversified client base. As of December 31, 2002, we served
129 facilities, with an average length of client relationship of over 15 years.
Some of our major accounts by client category include:
- Yankee Stadium in New York City;
- the Louisiana Superdome, home of the New Orleans Saints;
- the Seattle Mariners' Safeco Field;
- the National Trade Centre in Toronto, Canada's largest exhibit hall;
- the Vancouver Convention & Exhibition Centre; and
- the Los Angeles Zoo.
Our contracts are typically long-term and exclusive. From 1999 through
2002, contracts came up for renewal that generated, on average, approximately
14.8% of our net sales and approximately 11.5% of our EBITDA for each year.
During this period, we retained contracts up for renewal that generated, on
average, approximately 85.3% of our net sales and approximately 91.3% of our
EBITDA for each year, which together with the contracts that did not come up for
renewal resulted in us retaining contracts that generated, on average,
approximately 97.8% of our net sales and approximately 99.0% of our EBITDA for
each year. See Footnote (6) to "Selected Historical Financial Information" for a
reconciliation of EBITDA generated by these contracts to net income (loss).
1
OUR STRENGTHS
A Leading Market Position. Based on the number of facilities served, we
are one of the largest providers of food and beverage services to a variety of
sports facilities and to major convention centers in the United States.
Diversified Client Base. As of December 31, 2002, we provided services to
66 sports facilities, 31 convention centers and 32 other entertainment
facilities, representing approximately 65.9%, 21.8% and 12.3%, respectively, of
our net sales and approximately 70.6%, 17.9% and 11.5%, respectively, of our
EBITDA for fiscal 2002. See Footnote (6) to "Selected Historical Financial
Information" for a reconciliation of EBITDA generated by these facilities to net
income.
Exclusive, Long-Term Service Contracts. We typically provide services at
our clients' facilities pursuant to long-term contracts that grant us the
exclusive right to provide certain food and beverage products and services and,
under some contracts, merchandise products and other services within the
facility.
High Quality, Full Service Capabilities. We believe that our expertise in
catering and concession sales, coupled with our reputation for high-quality food
and beverage products and services, provide a competitive advantage when we bid
for contracts.
Experienced Management Team. We believe that the considerable experience
of our senior management and facility general managers in the recreational food
service industry, which refers to the portion of the food service industry in
which we do business, is of particular value in enabling us to evaluate the
risks and benefits associated with potential new contracts, contract structures,
product innovations and markets.
STRATEGIC DIRECTION AND GROWTH OPPORTUNITIES
Our industry position and experience have enabled us to effectively
evaluate and select opportunities for growth. Our strategy is to increase net
sales with existing clients, obtain new clients and expand into related markets.
We intend to accomplish these goals by:
Further Penetrating the Mid-Size Account Market. We believe that the most
promising area of future growth for us is in the mid-size account
market -- sporting and other recreational facilities, arenas, civic centers,
convention centers and amphitheatres in medium- to small-cities. We believe that
we have the opportunity to expand our presence in this market, and we plan to
focus our sales efforts there.
Extending Our Suite and Club-Level Seat Catering Services. We believe that
we are capable of providing the quality and service levels that our clients
expect for their suites and club-level seats at sports and other entertainment
facilities. We are actively seeking to be awarded the suite and club-level
service contracts for the facilities at which we provide concession services and
for prospective clients.
Building the Facilities Management Business. We believe that we can offer
efficiencies to our clients by providing food and beverage services and
facilities management services in the same facility. We intend to build on our
experience in facilities management and our expertise in operating and managing
food and beverage concession services in order to more effectively bid on new
facility management accounts.
Offering a Variety of Branded Products to Our Clients. We are pursuing a
strategy of offering a variety of high-quality, well-recognized branded products
to our clients, which involves working with prospective branded food and
beverage companies in order to make targeted use of branded products to increase
customer sales.
NEW CREDIT FACILITY
Concurrently with the closing of this offering, VSA will enter into a new
senior secured credit facility with a syndicate of financial institutions,
including CIBC World Markets Corp., as lead arranger and sole bookrunner. In
this document, we refer to this credit facility as the "new credit facility." We
expect that the new credit facility will be comprised of a revolving credit
facility in a total principal amount of up to $ million and a term facility
consisting of senior secured notes in an aggregate principal amount of $
million. We currently expect that the new credit facility will permit us to pay
interest and dividends
2
to IDS holders. However, the new credit facility will contain significant
restrictions on our ability to make interest and dividend payments to IDS
holders and on our subsidiaries' ability to make dividend and interest payments
to us. We expect that the revolving credit facility will have a year
maturity and the term facility will have a year maturity. See
"Description of Certain Indebtedness -- New Credit Facility."
TENDER OFFER AND CONSENT SOLICITATION
Concurrently with this offering, VSA will commence a tender offer and
consent solicitation with respect to all of its outstanding 11 1/4% senior
subordinated notes due 2009 for aggregate consideration of $ million. As of
April 1, 2003, $100 million of VSA's senior subordinated notes were outstanding.
The closing of this offering is conditioned upon the receipt of the consent of
at least a majority in aggregate principal amount of VSA's senior subordinated
notes outstanding. The consummation of the tender offer and consent solicitation
is conditioned upon the closing of this offering. The tender offer and consent
solicitation will be consummated on the terms described above. VSA will use a
portion of the net proceeds from this offering and borrowings under the new
credit facility to pay for its senior subordinated notes accepted for purchase
in the tender offer and consent solicitation.
OUR EXISTING EQUITY INVESTORS
BCP Volume L.P., BCP Offshore Volume L.P. and VSI Management Direct, L.P.,
affiliates of The Blackstone Group L.P., which we refer to as "Blackstone" in
this prospectus, and Recreational Services L.L.C., an affiliate of General
Electric Capital Corporation, which we refer to as "GE Capital" in this
prospectus, are the owners of all our outstanding common stock prior to this
offering. In this prospectus, we refer to these four owners as the "existing
equity investors." As discussed below, our existing equity investors will be
selling shares of their common stock to us for $ , which we will
purchase with a portion of the proceeds of this offering, or shares of
their common stock for $ if the over-allotment option is exercised in
full. If the underwriters do not exercise their over-allotment option in full,
upon any subsequent sale of common stock by the existing equity investors, we
will automatically exchange a portion of the common stock that is sold with the
purchasers of such common stock for our subordinated notes at an exchange rate
of $ principal amount of subordinated notes for each share. If the
underwriters exercise their over-allotment option in full, the existing equity
investors will retain no interest in us.
USE OF PROCEEDS
We estimate that we will receive net proceeds from this offering of
approximately $ million after deducting underwriting discounts and
commissions and other estimated offering expenses payable by us. We will use:
- $ million of net proceeds from this offering and borrowings under the
new credit facility to repurchase shares of our common stock from
the existing equity investors;
- $ million of net proceeds from this offering to make a capital
contribution to VSA. VSA will use those funds and borrowings under the
new credit facility to repay all outstanding borrowings under its
existing credit facility and purchase VSA's senior subordinated notes
that are validly tendered and not withdrawn in the tender offer and
consent solicitation;
- $1 million of net proceeds from this offering to pay certain members of
our senior management contingent bonuses described under
"Management -- Annual Bonus Plan;" and
- $1 million of net proceeds from this offering to pay Lawrence E. Honig,
our chief executive officer, the payment to which he is entitled under
the terms of his employment agreement with us. Mr. Honig will use the
after-tax proceeds from this payment to purchase IDSs in this offering in
an amount equal to approximately $570,000.
If the underwriters exercise their over-allotment option in full, we will
use all of the net proceeds we receive from the sale of additional IDSs under
the over-allotment option ($ million) to repurchase the existing equity
investors' remaining interest in us.
3
OUR CAPITAL STRUCTURE AFTER THIS OFFERING
The following chart reflects our capital structure immediately after this
offering:
(CAPITAL STRUCTURE CHART)
[CORPORATE STRUCTURE CHART SHOWING:
(1) the existing equity investors owning shares of common stock of
VSAH, representing a % ownership interest in VSAH; cross-reference to
footnote (1) of this page of the prospectus;
(2) the public owning IDSs ( shares of common stock and $
aggregate principal amount of subordinated notes), representing a %
ownership interest in VSAH; cross-reference to footnote (2) on this page of
the prospectus;
(3) VSAH owning 100% of Volume Services America, Inc. ("VSA"); cross-reference
to footnote (3) on this page of the prospectus;
(4) the bank syndicate extending the new credit facility to VSA; cross-reference
to footnote (4) on this page of the prospectus; and
(5) VSA owning 100% of each of Volume Services, Inc. ("VSI") and Service America
Corporation ("Service America").]
- ---------------
(1) Upon any subsequent sale of common stock by the existing equity investors,
we will automatically exchange a portion of the common stock that is sold
with the purchasers of such common stock for subordinated notes at an
exchange rate of $ principal amount of subordinated notes for each
share of common stock. If the underwriters exercise their over-allotment
option in full, the existing equity investors will retain no interest in us.
(2) The subordinated notes will be fully and unconditionally guaranteed, on an
unsecured subordinated basis, by each of our direct and indirect U.S. wholly
owned subsidiaries. See "Description of Subordinated Notes -- Guarantees."
(3) VSAH will guarantee on a senior secured basis the new credit facility and
pledge all outstanding shares of VSA's common stock to the creditors under
the new credit facility. See "Description of Certain Indebtedness -- New
Credit Facility -- Collateral."
(4) Immediately following the offering approximately $ million of borrowings
will be outstanding under the new credit facility.
MANAGEMENT'S EQUITY OWNERSHIP
Lawrence E. Honig, our chief executive officer, will receive a payment from
us of $1 million upon the closing of this offering under the terms of his
employment agreement with us. Mr. Honig will use his after-tax proceeds from
this payment to purchase IDSs in this offering in an amount equal to
approximately $570,000. Kenneth Frick, our executive vice president and chief
financial officer, and Janet Steinmayer, our executive vice president, general
counsel and secretary, own interests in some of the existing equity investors
and will receive cash distributions of approximately $ and
4
$ , respectively, upon our purchase of these existing equity investors'
shares of common stock. Mr. Frick and Ms. Steinmayer will use a portion of their
after-tax proceeds (and in the case of Ms. Steinmayer, after-loan repayment
proceeds) from these distributions to purchase IDSs in this offering in an
amount equal to approximately $ and $ , respectively. See
"Related Party Transactions -- Management Ownership and Transactions with
Management."
OUR CORPORATE INFORMATION
Our principal executive office is located at 201 East Broad Street,
Spartanburg, South Carolina 29306, and our telephone number is (864) 598-8600.
Our internet address is www.centerplate.com. www.centerplate.com is a textual
reference only, meaning that the information contained on the website is not
part of this prospectus and is not incorporated in this prospectus by reference.
5
THE OFFERING
SUMMARY OF THE IDSS
WHAT ARE IDSS?
We are offering IDSs. We anticipate that the initial public
offering price will be between $ and $ per IDS.
Each IDS initially represents:
- one share of our common stock; and
- $ aggregate principal amount of our % subordinated notes.
The ratio of common stock to principal amount of subordinated notes
represented by an IDS is subject to change in the event of a stock split,
recombination or reclassification of our common stock. For example, if we elect
to effect a two-for-one stock split, from and after the effective date of the
stock split, each IDS will represent two shares of common stock and the same
principal amount of subordinated notes as it previously represented. Likewise,
if we effect a recombination or reclassification of our common stock, each IDS
will thereafter represent the appropriate number of shares of common stock on a
recombined or reclassified basis, as applicable, and the same principal amount
of subordinated notes as it previously represented.
WHAT PAYMENTS CAN I EXPECT TO RECEIVE AS A HOLDER OF IDSS?
Assuming we make our scheduled interest payments and assuming we pay
dividends in the amount contemplated by the dividend policy described below, you
will receive in the aggregate approximately $ per year per IDS in dividends
and interest. We expect to make interest and dividend payments on or about the
15th day of each month to holders of record on the 1st day of each month.
You will be entitled to receive monthly interest payments at an annual rate
of % of the aggregate principal amount of subordinated notes represented by
your IDSs or approximately $ per IDS per year, subject to our obligation,
under specified circumstances, to defer interest payments on our subordinated
notes for no more than 24 months in the aggregate and no later than the earlier
of , 2008 or the termination of the new credit facility.
You will also receive monthly dividends on the shares of our common stock
represented by your IDSs, if and to the extent dividends are declared by our
board of directors and permitted by applicable law and the terms of the new
credit facility, the indenture governing our subordinated notes and any other
then outstanding indebtedness of ours. Specifically, the new credit facility and
the subordinated notes indenture both contain restrictions on our ability to
declare and pay dividends on our common stock. Upon the closing of this
offering, our board of directors is expected to adopt a dividend policy which
contemplates that, subject to applicable law and the terms of our then existing
indebtedness, initial annual dividends will be approximately $ per share of
our common stock. However, our board of directors may, in its discretion, modify
or repeal this dividend policy. We cannot assure you that we will pay dividends
at this level in the future or at all.
WILL MY RIGHTS AS A HOLDER OF IDSS BE ANY DIFFERENT THAN THE RIGHTS OF A
BENEFICIAL OWNER OF SEPARATELY HELD COMMON STOCK AND SUBORDINATED NOTES?
No. As a holder of IDSs you are the beneficial owner of the common stock
and subordinated notes represented by your IDSs. As such, through your broker or
other financial institution and DTC, you will have exactly the same rights,
privileges and preferences, including voting rights, rights to receive
distributions, rights and preferences in the event of a default under the
indenture governing our subordinated notes, ranking upon bankruptcy and rights
to receive communications and notices as a beneficial owner of separately held
common stock and subordinated notes, as applicable, would have through its
broker or other financial institution and DTC.
6
WILL THE IDSS BE LISTED ON AN EXCHANGE?
Yes. We have applied to list the IDSs on the American Stock Exchange under
the trading symbol "CVP" and on the Toronto Stock Exchange under the trading
symbol " ."
WILL THE SHARES OF OUR COMMON STOCK AND SUBORDINATED NOTES REPRESENTED BY THE
IDSS BE LISTED ON AN EXCHANGE?
We have applied to list the shares of our common stock represented by the
IDSs on the Toronto Stock Exchange under the trading symbol "CVP." We do not
anticipate that our common stock will be listed on any other exchange or that
our subordinated notes will be listed on any exchange. We currently do not
expect an active trading market for our common stock or subordinated notes to
develop. The shares of common stock and subordinated notes offered hereby will
be freely tradable without restriction or further registration under the
Securities Act, unless they are purchased by "affiliates" as that term is
defined in Rule 144 under the Securities Act of 1933.
IN WHAT FORM WILL IDSS AND THE SHARES OF OUR COMMON STOCK AND SUBORDINATED
NOTES REPRESENTED BY THE IDSS BE ISSUED?
The IDSs and the shares of our common stock and subordinated notes
represented by the IDSs will be issued in book-entry form only. This means that
you will not be a registered holder of IDSs or the securities represented by the
IDSs, and you will not receive a certificate for your IDSs or the securities
represented by your IDSs. You must rely on your broker or other financial
institution that will maintain your book-entry position to receive the benefits
and exercise the rights of a holder of IDSs.
CAN I SEPARATE MY IDSS INTO SHARES OF COMMON STOCK AND SUBORDINATED NOTES OR
RECOMBINE SHARES OF COMMON STOCK AND SUBORDINATED NOTES TO FORM IDSS?
Yes. Holders of IDSs may, at any time after the earlier of 180 days from
the date of original issuance or the occurrence of a change of control, through
their broker or other financial institution, separate the IDSs into the shares
of our common stock and subordinated notes represented thereby. Any holder of
shares of our common stock and subordinated notes may, at any time, through
their broker or other financial institution, combine the applicable number of
shares of common stock and principal amount of subordinated notes to form IDSs.
WILL MY IDSS AUTOMATICALLY SEPARATE INTO SHARES OF COMMON STOCK AND
SUBORDINATED NOTES UPON THE OCCURRENCE OF CERTAIN EVENTS?
Yes. Separation of all of the IDSs will occur automatically upon the
occurrence of any redemption, whether in whole or in part, of the subordinated
notes or upon the maturity of the subordinated notes.
WHAT WILL BE THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF AN INVESTMENT IN THE
IDSS?
The U.S. federal income tax consequences of the purchase, ownership and
disposition of IDSs in this offering are unclear. We believe the purchase of
IDSs in this offering should be treated as the purchase of shares of our common
stock and subordinated notes and, by purchasing IDSs, you will agree to such
treatment. You must allocate the purchase price of the IDSs between those shares
of common stock and subordinated notes in proportion to their respective initial
fair market values, which will establish your initial tax basis. The value
attributed to the shares of common stock and subordinated notes represented by
the IDSs will be established based on the fair market value of such shares of
common stock and subordinated notes. Assuming an estimated initial public
offering price of $ per IDS (the midpoint of the range set forth on the
cover page of this prospectus), we expect to report the initial fair market
value of each share of common stock as $ and the initial fair market value
of each $ aggregate principal amount of our subordinated notes as $ and,
by purchasing IDSs, you will agree to such allocation.
The subordinated notes should be treated as debt for U.S. federal income
tax purposes. If the subordinated notes were treated as equity rather than debt
for U.S. federal income tax purposes, then the stated interest on the
subordinated notes could be treated as a dividend, and interest on the
subordinated
7
notes would not be deductible by us for U.S. federal income tax purposes, which
could significantly reduce our future cash flow. In addition, payments on the
subordinated notes to foreign holders would be subject to U.S. federal
withholding taxes at rates of up to 30%. Payments to foreign holders would not
be grossed-up on account of any such taxes.
The U.S. federal income tax consequences to you of the subsequent issuance
of subordinated notes with original issue discount upon a subsequent offering by
us of IDSs or upon the issuance of subordinated notes following an automatic
exchange with purchasers of our common stock from the existing equity investors
are unclear. The indenture governing the subordinated notes will provide that,
in the event there is a subsequent issuance of subordinated notes with original
issue discount that are otherwise identical (other than issuance date) in all
material respects to the subordinated notes represented by the IDSs, each holder
of IDSs or separately held subordinated notes, as the case may be, agrees that a
portion of such holder's subordinated notes will be exchanged for a portion of
the subordinated notes acquired by the holders of such subsequently issued
subordinated notes. Consequently, immediately following such subsequent
issuance, each holder of subsequently issued subordinated notes, held either as
part of IDSs or separately, and each holder of existing subordinated notes, held
either as part of IDSs or separately, will own an inseparable unit composed of a
proportionate percentage of both the old subordinated notes and the newly issued
subordinated notes with original issue discount. The aggregate principal amount
of subordinated notes owned by each holder will not change as a result of such
subsequent issuance and exchange. Because a subsequent issuance will affect the
subordinated notes in the same manner, regardless of whether these subordinated
notes are held as part of IDSs or separately, the combination of subordinated
notes and shares of common stock to form IDSs, or the separation of IDSs, should
not affect your tax treatment.
We intend to take the position that any subsequent issuance of subordinated
notes with original issue discount will not result in a taxable exchange of your
subordinated notes for U.S. federal income tax purposes. However, we cannot
assure you that the Internal Revenue Service will not assert that such issuance
of subordinated notes with original issue discount should, regardless of whether
you hold your subordinated notes as part of IDSs or separately, be treated as a
taxable exchange of a portion of your subordinated notes for a portion of the
subordinated notes subsequently issued. In such case, however, you would not be
expected to realize any gain on the deemed exchange, and any loss realized would
be disallowed. Your initial tax basis in the subordinated notes deemed to have
been received in the exchange would be the fair market value of such
subordinated notes on the date of the deemed exchange (adjusted to reflect any
disallowed loss), and your holding period for such subordinated notes would
begin on the day after the deemed exchange.
Following any subsequent issuance of subordinated notes with original issue
discount, we (and our agents) will report any original issue discount on the
subsequently issued subordinated notes ratably among all holders of IDSs and
separately held subordinated notes, and each holder of IDSs and separately held
subordinated notes will, by purchasing IDSs, agree to report original issue
discount in a manner consistent with this approach. However, we cannot assure
you that the Internal Revenue Service will not assert that any original issue
discount should be reported only to the persons that initially acquired such
subsequently issued subordinated notes (and their transferees). In such case,
the Internal Revenue Service might further assert that, unless a holder can
establish that it is not a person that initially acquired such subsequently
issued subordinated notes (or a transferee thereof), all of the subordinated
notes held by such holder have original issue discount.
Because there is no statutory, judicial or administrative authority
directly addressing the tax treatment of the IDSs or instruments similar to the
IDSs, we urge you to consult your own tax advisor concerning the tax
consequences of an investment in the IDSs. For additional information, see
"Material U.S. Federal Income Tax Consequences."
8
SUMMARY OF THE COMMON STOCK
Issuer........................ Volume Services America Holdings, Inc.
Shares of common stock
represented by IDSs........... shares, or shares if the
underwriters' over-allotment option is
exercised in full.
Shares of common stock to be
outstanding following the
offering...................... shares, or shares if the
underwriters' over-allotment option is
exercised in full.
Voting rights................. Each outstanding share of our common stock will
carry one vote per share.
Dividends..................... You will receive monthly dividends on the
shares of our common stock if and to the extent
dividends are declared by our board of
directors and permitted by applicable law and
the terms of our then outstanding indebtedness.
Specifically, the new credit facility and the
subordinated notes indenture both contain
restrictions on our ability to declare and pay
dividends on our common stock. Upon the closing
of this offering, our board of directors is
expected to adopt a dividend policy which
contemplates that, subject to applicable law
and the terms of our then existing
indebtedness, initial annual dividends will be
approximately $ per share of our common
stock. However, our board of directors may, in
its discretion, modify or repeal this dividend
policy. We cannot assure that we will pay
dividends at this level in the future or at
all.
Dividend payment dates........ If declared and paid, dividends will be paid
monthly on the 15th day of each month.
Listing....................... We have applied to list our common stock on the
Toronto Stock Exchange under the trading symbol
"CVP." We do not anticipate that our common
stock will be listed on any other exchange and
we currently do not expect an active trading
market for our common stock to develop. These
securities will be freely tradable without
restriction or further registration under the
Securities Act, unless they are purchased by
"affiliates" as that term is defined in Rule
144 under the Securities Act of 1933.
SUMMARY OF THE SUBORDINATED NOTES
Issuer........................ Volume Services America Holdings, Inc.
Subordinated notes represented
by IDSs....................... $ million aggregate principal amount of %
subordinated notes, or $ million aggregate
principal amount if the underwriters'
over-allotment option is exercised in full.
Interest rate................. % per year.
Interest payment dates........ Interest will be paid monthly in arrears on the
15th day of each month, commencing ,
2003.
Interest deferral............. If and for as long as our ratio of Adjusted
EBITDA to fixed charges, as described under
"Description of Subordinated Notes -- Certain
Covenants," for the twelve-month period ended
9
on the last day of any fiscal quarter is at or
below and we are not in default under
our subordinated notes, we must defer interest
payments on our subordinated notes. Interest
payments will not be deferred for more than 24
months in the aggregate or at any time after
the earlier of , 2008 or the
termination of the new credit facility.
Deferred interest on our subordinated notes
will bear interest at an annual rate equal to
the stated rate of interest on the notes. At
the end of each interest deferral period, we
must pay all deferred interest and any interest
on deferred interest in full.
In the event that interest payments on the
subordinated notes are deferred, you would be
required to include accrued interest in your
income for U.S. federal income tax purposes
even if you do not receive any cash interest
payments.
Maturity date................. The subordinated notes will mature on
, 2013. We may extend the maturity of
our subordinated notes for two additional
successive five-year terms if, during the
twelve month period ending on the last day of
the fiscal quarter ending at least 45 days
before the end of the then-current term, our
fixed charge coverage ratio is equal to or
greater than to 1.00 and so long as we and
our subsidiaries are not in bankruptcy or
otherwise insolvent, we are not in default
under our subordinated notes or any of our
other outstanding indebtedness and there are no
overdue payments of interest on our
subordinated notes or any of our other
outstanding indebtedness.
Optional redemption........... We may redeem for cash all or part of the
subordinated notes at any time upon not less
than 30 nor more than 60 days' notice by mail
to the holders of subordinated notes, for a
price equal to 100% of the principal amount of
subordinated notes to be redeemed, plus a
make-whole premium, plus any accrued but unpaid
interest to but not including the redemption
date. If we redeem any subordinated notes,
there will be an automatic separation of IDSs.
Change of control............. Upon the occurrence of a change of control, as
defined under "Description of Subordinated
Notes -- Change of Control," each holder of
subordinated notes will have the right to
require us to repurchase that holder's
subordinated notes at a price equal to 101% of
the principal amount of the subordinated notes
being repurchased, plus any accrued but unpaid
interest to but not including the repurchase
date. In order to exercise that right, a holder
must separate its IDSs into the shares of
common stock and subordinated notes represented
thereby and hold the subordinated notes
separately.
Guarantees of subordinated
notes......................... The subordinated notes will be fully and
unconditionally guaranteed, on an unsecured
subordinated basis, by each of our direct and
indirect U.S. wholly owned subsidiaries
existing on the issue date of the subordinated
notes and all our future U.S. restricted
subsidiaries that incur indebtedness or issue
shares of preferred stock or certain capital
stock that is redeemable at the option of the
holder. The subordinated notes
10
will not be guaranteed by certain of our
subsidiaries which are either not wholly owned
or are organized outside of the United States.
The guarantees will be subordinated to the
guarantees issued by the subsidiary guarantors
under the new credit facility.
Subsequent issuances may
affect tax treatment.......... The indenture governing the subordinated notes
will provide that in the event we issue
additional subordinated notes having terms
identical to the subordinated notes (except for
the issuance date) in connection with the
issuance by us of additional IDSs, each holder
of IDSs or separately held subordinated notes,
as the case may be, agrees that a portion of
such holder's subordinated notes, whether held
as part of IDSs or separately, will be
exchanged for a portion of the subordinated
notes acquired by the holders of such
subsequently issued subordinated notes, and the
records of any record holders of subordinated
notes will be revised to reflect such
exchanges. Consequently, following each such
subsequent issuance and exchange, each holder
of IDSs or separately held subordinated notes,
as the case may be, will own subordinated notes
of each separate issuance in the same
proportion as each other holder. However, the
aggregate principal amount of subordinated
notes owned by each holder will not change as a
result of such subsequent issuance and
exchange. Any subsequent issuance of
subordinated notes by us may affect the tax
treatment of the IDSs and subordinated notes.
See "Material U.S. Federal Income Tax
Consequences -- Consequences to U.S.
Holders -- Subordinated Notes -- Additional
Issuances."
Ranking of subordinated notes
and guarantees................ The subordinated notes will be unsecured and
subordinated in right of payment to all of
VSAH's existing and future senior indebtedness,
including its guarantee under the new credit
facility. The subordinated notes will rank pari
passu in right of payment with all of VSAH's
indebtedness other than senior or secured
indebtedness. VSAH is a holding company and
derives all of its operating income and cash
flow from its subsidiaries.
The guarantees will be unsecured and will be
subordinated in right of payment to all
existing and future senior indebtedness of the
subsidiary guarantors, including all borrowings
of VSA and all guarantees of the other
subsidiary guarantors under the new credit
facility. The guarantees will rank pari passu
with all other indebtedness of the subsidiary
guarantors, including trade payables.
The indenture governing the subordinated notes
will permit VSAH and the subsidiary guarantors
to incur additional indebtedness, including
senior indebtedness, subject to specified
limitations. On a pro forma basis as of or for
the year ended December 31, 2002:
- VSAH would have had no senior or pari passu
indebtedness outstanding except for its
guarantee under the new credit facility, as
described below;
11
- VSA would have had $ million aggregate
principal amount of senior secured
indebtedness outstanding under the new credit
facility, which would have been guaranteed on
a senior secured basis by VSAH and the other
subsidiary guarantors;
- VSA and the other subsidiary guarantors would
have had $ million aggregate principal
amount of pari passu indebtedness
outstanding, other than the guarantees of the
subordinated notes; and
- the non-guarantor subsidiaries would have had
total liabilities, excluding liabilities owed
to us, of $1.4 million, total assets of these
subsidiaries would have accounted for 2.4% of
our assets and these subsidiaries would have
generated 5.2% of our net sales.
Restrictive covenants......... The indenture governing the subordinated notes
will contain covenants with respect to us and
our restricted subsidiaries that will restrict:
- the incurrence of additional indebtedness and
the issuance of preferred stock and certain
redeemable capital stock;
- the payment of dividends on, and redemption
of, capital stock;
- a number of other restricted payments,
including investments;
- specified sales of assets;
- specified transactions with affiliates;
- the creation of a number of liens; and
- consolidations, mergers and transfers of all
or substantially all of our assets.
The indenture will also prohibit certain
restrictions on distributions from our
restricted subsidiaries. However, there will be
no restriction in the indenture on VSAH's
incurring indebtedness in connection with the
issuance of additional IDSs so long as the
ratio of the aggregate principal amount of the
additional subordinated notes to the number of
the additional shares of common stock will not
exceed the equivalent ratio represented by the
then existing IDSs. In addition, all the
limitations and prohibitions described above
are subject to a number of other important
qualifications and exceptions described under
"Description of Subordinated Notes -- Certain
Covenants."
Listing....................... We do not anticipate that our subordinated
notes will be listed on any exchange.
12
RISK FACTORS
You should carefully consider the information under the heading "Risk
Factors" and all other information in this prospectus before investing in the
IDSs and the shares of our common stock and subordinated notes represented by
the IDSs.
GENERAL INFORMATION ABOUT THIS PROSPECTUS
Throughout this prospectus, unless otherwise noted, we have assumed:
- no exercise of the underwriters' over-allotment option;
- the purchase of 100% of VSA's senior subordinated notes in the tender
offer and consent solicitation for aggregate consideration of $
million;
- a % annual interest rate on the subordinated notes, which is subject to
change depending on market conditions; and
- an initial public offering of $ , comprised of $ allocated to
one share of common stock and $ allocated to one subordinated note.
All per share information in this prospectus assumes a -for-one
stock split.
In this prospectus, when we describe EBITDA as being generated by a
contract or group of contracts for the relevant period, we have calculated it by
allocating overhead and miscellaneous expenses to the relevant contract or group
of contracts proportionately based on net sales generated by that contract or
group of contracts for that same period. We believe that weighting important
contract, client and facility measurements according to their relative
contribution to EBITDA properly reflects the importance of those contracts,
clients and facilities to us. Further, we believe that capital requirements for
each contract are related to the EBITDA expected to be generated by that
contract.
Our average length of client relationships is calculated based on
continuous historical contract relationships with our existing clients, after
weighting each relevant contract by the EBITDA it generated in fiscal 2002. For
purposes of calculating our average length of client relationships, we count as
continuous relationships those cases in which a sports team at a facility we
serve moves to a new facility for which we obtain the relevant service contract.
In addition, our contracts' average remaining life is based on the average
period of time left to run before their scheduled expiration, after weighting
each contract by the EBITDA it generated in fiscal 2002. We also present our
contracts' simple average remaining life which is based on the average period of
time left to run before scheduled expiration.
For a reconciliation of consolidated EBITDA to net income (loss), see
"Selected Historical Financial Information." For a reconciliation of EBITDA
generated by a contract or group of contracts to net income (loss), see Footnote
(6) to "Selected Historical Financial Information."
In this prospectus, unless otherwise indicated, all references to dollars
are to U.S. dollars, and all references to GAAP are to U.S. generally accepted
accounting principles.
13
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth our summary consolidated financial
information derived from our audited consolidated financial statements for each
of the fiscal years ended December 29, 1998, December 28, 1999, January 2, 2001,
January 1, 2002 and December 31, 2002, of which the financial statements for
fiscal 2000, 2001 and 2002 are included elsewhere in this prospectus, and our
unaudited consolidated financial statements for the thirteen-week periods ended
April 2, 2002 and April 1, 2003, which are included elsewhere in this
prospectus.
The unaudited consolidated financial statements for the thirteen-week
periods ended April 2, 2002 and April 1, 2003 include all adjustments,
consisting of normal recurring adjustments, which, in our opinion, are necessary
for a fair presentation of the financial position and results of operations for
these periods. Operating results for the thirteen-week period ended April 1,
2003 are not necessarily indicative of the results that may be expected for the
fifty-two week fiscal year ending December 30, 2003, primarily due to the
seasonal nature of the business.
The information in the table below is only a summary and should be read
together with our audited consolidated financial statements for fiscal 2000,
2001 and 2002 and the related notes, our unaudited consolidated financial
statements for the thirteen-week periods ended April 1, 2003 and April 2, 2002
and the related notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," all as included elsewhere in this
prospectus. The figures in the table below reflect rounding adjustments.
<Table>
<Caption>
THIRTEEN
WEEKS ENDED
FISCAL(1) -------------------
------------------------------------------- APRIL 2, APRIL 1,
1998(2) 1999 2000 2001 2002 2002 2003
------- ------ ------ ------ ------ -------- --------
(IN MILLIONS, EXCEPT RATIOS)
STATEMENT OF OPERATIONS DATA:
Net sales.................................... $283.4 $431.5 $522.5 $543.1 $577.2 $87.8 $ 96.9
Net income (loss)(3)......................... $ (5.2) $ (5.6) $ (4.2) $ (3.6) $ 4.5 $(6.9) $ (6.5)
CASH FLOW DATA:
Net cash provided by (used in) operating
activities................................. $ 2.5 $ 16.1 $ 22.7 $ 24.7 $ 38.6 $ 0.1 $ (5.0)
Net cash used in investing activities........ $ (5.3) $(25.4) $(12.9) $(29.3) $(45.0) $(2.9) $(10.1)
Net cash provided by (used in) financing
activities................................. $ 6.3 $ 12.8 $ (7.3) $ 5.0 $ 1.7 $(0.6) $ 16.1
EBITDA:
Net income (loss)(3)......................... $ (5.2) $ (5.6) $ (4.2) $ (3.6) $ 4.5 $(6.9) $ (6.5)
Cumulative effect of change in accounting
principle, net of taxes(4)................. -- 0.2 -- -- -- -- --
Extraordinary loss on debt extinguishment,
net of taxes(5)............................ 1.5 0.9 -- -- -- -- --
------ ------ ------ ------ ------ ----- ------
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle.................................. (3.7) (4.5) (4.2) (3.6) 4.5 (6.9) (6.5)
Income tax provision (benefit)............... 1.5 (1.5) (1.3) (0.4) (0.2) (1.3) (3.2)
Income (loss) before income taxes............ (2.2) (6.1) (5.5) (4.0) 4.3 (8.2) (9.8)
Adjustments:
Interest expense........................... 11.3 23.0 26.6 23.4 20.7 5.4 5.1
Depreciation and amortization.............. 18.2 26.8 26.3 24.5 26.2 5.6 6.5
------ ------ ------ ------ ------ ----- ------
EBITDA(6).................................... $ 27.3 $ 43.7 $ 47.4 $ 43.9 $ 51.2 $ 2.8 $ 1.8
Unusual item included in EBITDA:
Return of bankruptcy funds to Service
America(7)............................... -- -- -- -- $ 1.4 $ 1.4 --
OTHER DATA:
Maintenance capital expenditures(8).......... $ 4.6 $ 4.9 $ 8.3 $ 12.7 $ 31.2 $ 2.6 $ 2.9
Growth capital expenditures(8)............... 14.2 21.4 5.6 16.7 16.4 0.3 7.2
------ ------ ------ ------ ------ ----- ------
Aggregate capital expenditures(8)............ $ 18.8 $ 26.3 $ 13.9 $ 29.4 $ 47.6 $ 2.9 $ 10.1
Ratio of earnings to fixed charges(9)........ -- -- -- -- 1.2 -- --
Deficiency in the coverage of earnings to
fixed charges(9)........................... $ (2.2) $ (6.1) $ (5.5) $ (4.0) $ -- $(8.2) $ (9.8)
</Table>
footnotes on next page
14
<Table>
<Caption>
APRIL 1, 2003
-----------------------------------
PRO FORMA
AS
ACTUAL ADJUSTMENTS ADJUSTED(10)
------ ----------- ------------
(IN MILLIONS)
BALANCE SHEET DATA:
Total current assets........................................ $ 52.5
Total current liabilities................................... $ 62.4
Working capital (deficiency)(11)............................ $ (9.9)
Total assets................................................ $291.4
Long-term debt (including current portion).................. $241.6
Total liabilities........................................... $303.0
</Table>
- ---------------
(1) We have adopted a 52-53 week period ending on the Tuesday closest to
December 31 as our fiscal year. The 1998, 1999, 2001 and 2002 fiscal years
consisted of 52 weeks, and fiscal year 2000 consisted of 53 weeks.
(2) We acquired Service America in 1998 and our results of operations for
fiscal 1998 include the results of operations for Service America from the
acquisition in August 1998.
(3) In accordance with Statement of Financial Accounting Standards No. 142, or
SFAS 142, effective January 2, 2002, we discontinued the amortization of
goodwill and trademarks and identified intangible assets which we believe
have indefinite lives. Adjusted net income (loss) to give effect to SFAS
142 would have been $(3.9) million for fiscal 1998, $(3.1) million for
fiscal 1999, $(1.8) million for fiscal 2000 and $(1.1) million for fiscal
2001.
(4) For fiscal 1999, we adopted the provisions of the American Institute of
Certified Public Accountants Statement of Position 98-5, Reporting on the
Costs of Start-up Activities, which requires that costs of start-up
activities be expensed as incurred. As a result, we recorded a charge of
$0.2 million reflecting the cumulative effect of a change in accounting
principle, net of taxes.
(5) For fiscal 1998, a $1.5 million extraordinary loss on debt extinguishment,
net of taxes resulted from refinancing our secured credit facility; for
fiscal 1999, a $0.9 million extraordinary loss on debt extinguishment
resulted from the early retirement of a portion of the secured credit
facility, net of taxes.
(6) EBITDA is not a measure in accordance with GAAP. EBITDA is not intended to
represent cash flows from operations as determined by GAAP and should not
be used as an alternative to income (loss) before taxes or net income as an
indicator of operating performance or to cash flows as a measure of
liquidity. We believe that EBITDA is an important measure of the cash
returned on our investment in capital expenditures under our contracts.
"Adjusted EBITDA," as defined in the indenture governing our subordinated
notes, is determined as EBITDA, as adjusted for transaction related
expenses, contract related losses, other non-cash charges, and the annual
management fee paid to affiliates of Blackstone and GE Capital, less any
non-cash credits. We present this discussion of Adjusted EBITDA because
covenants in the indenture governing our subordinated notes contain ratios
based on this measure. For example, our ability to incur additional debt
and make restricted payments requires a ratio of Adjusted EBITDA to fixed
charges of 2.0 to 1.0, except that we may incur certain debt and make
certain restricted payments without regard to the ratio, including our
ability to incur an unlimited amount of indebtedness in connection with the
issuance of additional IDSs so long as the ratio of the aggregate principal
amount of the additional subordinated notes to the number of the additional
shares of our common stock will not exceed the equivalent ratio represented
by the then existing IDSs.
footnotes continue on next page
15
On a historical basis, we made the following adjustments to EBITDA to
compute our Adjusted EBITDA:
<Table>
<Caption>
THIRTEEN WEEKS
ENDED
FISCAL(1) -------------------
--------------------------------------- APRIL 2, APRIL 1,
1998(2) 1999 2000 2001 2002 2002 2003
------- ----- ----- ----- ----- -------- --------
(IN MILLIONS)
EBITDA......................... $27.3 $43.7 $47.4 $43.9 $51.2 $2.8 $1.8
Adjustments:
Transaction related
expenses.................. 3.1 1.5 1.1 -- 0.6 -- --
Contract related losses...... 1.4 1.4 2.5 4.8 0.7 -- 0.1
Non-cash compensation........ -- -- 0.3 0.1 0.6 -- --
Management fees paid to
affiliates of Blackstone
and GE Capital............ 0.3 0.4 0.4 0.4 0.4 0.1 0.1
----- ----- ----- ----- ----- ---- ----
Adjusted EBITDA................ $32.1 $47.1 $51.7 $49.2 $53.5 $2.9 $2.0
===== ===== ===== ===== ===== ==== ====
Unusual item included in EBITDA
and Adjusted EBITDA:
Return of bankruptcy funds to
Service America (see note
7 below).................. -- -- -- -- $ 1.4 $1.4 --
Ratio of Adjusted EBITDA to
fixed charges................ 2.98 2.19 2.06 2.24 2.77 0.38 0.56
</Table>
For an explanation of the adjustments to EBITDA to calculate Adjusted
EBITDA, see Footnote (6) to "Selected Historical Financial Information."
For purposes of calculating the ratio of Adjusted EBITDA to fixed charges,
fixed charges includes interest expense (excluding amortization of deferred
financing fees) plus capitalized interest, the earned discount or yield
with respect to the sale of receivables and cash dividends on preferred
stock. On a pro forma basis, for the thirteen-week period ended April 1,
2003, our ratio of Adjusted EBITDA to fixed charges under the indenture
would have been to 1.0.
(7) During fiscal 2002, Service America received approximately $1.4 million
from funds previously set aside to satisfy creditors pursuant to a plan of
reorganization approved in 1993.
(8) The sum of maintenance and growth capital expenditures equals the sum of
contract rights acquired, net (purchase of contract rights) and the
purchase of property and equipment, net for the relevant periods as
displayed in the statement of cash flows, as follows:
<Table>
<Caption>
THIRTEEN WEEKS
ENDED
FISCAL(1) -------------------
------------------------------------- APRIL 2, APRIL 1,
1998 1999 2000 2001 2002 2002 2003
----- ----- ----- ----- ----- -------- --------
(IN MILLIONS)
Aggregate capital expenditures...... $18.8 $26.3 $13.9 $29.4 $47.6 $2.9 $10.1
Statement of cash flow data:
Contract rights acquired, net
(purchase of contract
rights)........................ 6.2 15.9 7.5 21.3 37.7 0.2 5.8
Purchase of property and
equipment, net................. 12.6 10.4 6.4 8.1 9.9 2.7 4.3
----- ----- ----- ----- ----- ---- -----
$18.8 $26.3 $13.9 $29.4 $47.6 $2.9 $10.1
===== ===== ===== ===== ===== ==== =====
</Table>
Maintenance capital expenditures are capital expenditures made to secure
renewals of our existing contracts and maintain these contracts following
renewal. Growth capital expenditures are those made to secure new contracts
and maintain these contracts during their initial term. Accordingly, growth
capital expenditures in any given year consist of up-front capital
investments in new contracts
footnotes continue on next page
16
and additional committed investments in existing contracts that have never
previously been renewed. We believe that the identification and separation
of maintenance and growth capital expenditures are important factors in
evaluating our financial results.
(9) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as income (loss) before income taxes, extraordinary
item and cumulative effect of change in accounting principle plus fixed
charges. Fixed charges include interest expense on all indebtedness,
amortization of deferred financing costs and one-third of rental expense on
operating leases, representing that portion of rental expense deemed to be
attributable to interest. Where earnings are inadequate to cover fixed
charges, the deficiency is reported.
(10) The pro forma as adjusted balance sheet data have been prepared assuming
the closing of this offering, the tender of 100% of VSA's senior
subordinated notes and completion of the bank refinancing, including
payment of related fees and expenses. The pro forma as adjusted balance
sheet data give effect to those transactions as if they had occurred on
April 1, 2003.
(11) Working capital represents total current assets less total current
liabilities.
17
INTEREST AND DIVIDEND PAYMENTS TO IDS HOLDERS
The following table shows our cash available before capital expenditures
and dividend payments for the twelve-month period ended April 1, 2003 on a pro
forma as adjusted basis assuming the closing of this offering, the use of
proceeds from this offering, the purchase of 100% of VSA's senior subordinated
notes in the tender offer and consent solicitation for an aggregate
consideration of $ million and completion of the bank refinancing, including
payment of related fees and expenses. The information in the table below assumes
that these transactions occurred on April 3, 2002 and reflects rounding
adjustments.
<Table>
<Caption>
TWELVE MONTHS ENDED
APRIL 1, 2003
-------------------------
PRO FORMA
ACTUAL ADJUSTMENTS AS ADJUSTED
------ ----------- -----------
(IN MILLIONS)
Net income............................................... $ 4.8
Income tax benefit....................................... (2.1)
Income before income taxes............................... 2.7
Additions:
Interest expense on the existing credit facility and
VSA's senior subordinated notes, including deferred
financing costs..................................... 20.5
Depreciation and amortization.......................... 27.1
----- -------- --------
EBITDA................................................... $50.2
Additions:
Transaction related expenses........................... $ 0.6
Contract related losses................................ 0.8
Non-cash compensation.................................. 0.6
Management fees paid to affiliates of Blackstone and GE
Capital(1).......................................... 0.4
----- -------- --------
Adjusted EBITDA as defined in the indenture governing our
subordinated notes..................................... $52.6
Deductions from Adjusted EBITDA:
Interest expense on new credit facility(2).............
Interest expense on subordinated notes represented by
IDSs................................................
Additional public company administrative expenses(3)...
Income tax expense(4)..................................
Cash available before capital expenditures and
dividend payments.................................
</Table>
- ---------------
(1) Management fees to Blackstone and GE Capital are paid quarterly in arrears.
These fees will cease upon the closing of this offering.
(2) Assumes % interest on $ million outstanding borrowings and a letter of
credit fee on a portion of the revolving credit facility reserved for the
letters of credit.
(3) Consist of Canadian audit fees, tax audit fees, director and officer
liability insurance, expenses relating to the annual stockholders' meeting,
printing expenses, investor relations expenses, additional filing fees,
additional trustee fees, registrar and transfer agent fees, directors' fees,
additional legal fees, listing fees and miscellaneous fees.
(4) Consists of additional federal and state taxes resulting from the
capitalization of our company after this offering.
18
Under the dividend policy our board of directors is expected to adopt upon
the closing of this offering, we would have used the cash available before
capital expenditures and dividend payments shown in the above table as follows:
<Table>
Average maintenance capital expenditures (fiscal 1998-fiscal
2002)..................................................... $
Dividends on shares of common stock.........................
-----
Remaining cash(1)......................................... $
=====
</Table>
- ---------------
(1) Includes $1.4 million of bankruptcy funds returned to Service America.
In the above table, we have used our average maintenance capital
expenditures from fiscal 1998 to fiscal 2002 because our actual maintenance
capital expenditures for fiscal 2002 of $31.2 million were unusually high due to
the capital we used to renew several long-term contracts with some of our
largest clients. We have also assumed that we would have funded growth capital
expenditures of $ through borrowings under the revolving line of credit
of the new credit facility. During the twelve-month period ended April 1, 2003,
we funded these growth capital expenditures through a combination of borrowings
under the revolving line of credit of the existing credit facility and cash
flows from operating activities.
Based on the foregoing, aggregate payments to IDS holders during the
twelve-month period ended April 1, 2003 would have been as follows:
<Table>
<Caption>
AGGREGATE PER IDS
--------- -------
Interest on subordinated notes represented by IDSs(1)....... $ $
Dividends on shares of common stock represented by
IDSs(2)...................................................
----- ----
Aggregate................................................. $ $
===== ====
</Table>
- ---------------
(1) Under specified circumstances, we will be required to defer interest
payments on our subordinated notes. Interest payments will not be deferred
for more than 24 months in the aggregate or at any time after the earlier of
, 2008 or the termination of our new credit facility. Deferred
interest on our subordinated notes will bear interest at an annual rate
equal to the stated rate of interest on the notes. At the end of each
interest deferral period, we must pay all deferred interest and any interest
on deferred interest in full.
(2) Dividends are payable if and to the extent they are declared by our board of
directors and permitted by applicable law and the terms of our then existing
indebtedness.
19
RISK FACTORS
An investment in the IDSs and the shares of our common stock and our
subordinated notes represented by the IDSs involves a number of risks. In
addition to the other information contained in this prospectus, prospective
investors should give careful consideration to the following factors.
RISKS RELATING TO OUR BUSINESS AND THE INDUSTRY
IF ATTENDANCE OR THE NUMBER OF EVENTS HELD AT OUR CLIENTS' FACILITIES
DECREASES, OUR NET SALES AND CASH FLOW MAY SIGNIFICANTLY DECLINE.
A decline in the number of events held, the level of attendance at these
events or the amount spent by each attendee at client facilities may cause a
significant decline in our net sales and cash flow. We rely on our clients to
schedule popular events at their facilities and to maximize attendance at these
events. The level of attendance and number of events held at client facilities
are affected by several factors, most of which are not within our control and
are extremely difficult to predict, including the following:
- maintenance and physical condition of the facility;
- poor performance by the sports teams using the facility;
- relocation or loss of a major sports team using a facility;
- ticket prices;
- changing consumer preferences for leisure time activities;
- inclement weather;
- scheduling of conventions, meetings and large catered events;
- construction of attractive alternative arenas, stadiums, convention
centers or other venues or facilities;
- labor stoppages; and
- weaker economic conditions.
Labor stoppages in professional sports can cause a significant decline in
our net sales and cash flow, especially in MLB which accounts for a significant
portion of our net sales and a majority of our cash flow generated by contracts
for sports facilities. For example, the labor stoppage which disrupted the 1995
MLB season caused a material decline in our net sales and cash flow. Had it not
been averted, a MLB strike in the 2002 season would likely have had a similar
negative effect on our financial performance for the period of the strike.
Furthermore, weak economic conditions in North America have caused event
sponsors and people attending events held at convention center facilities,
including those at which we operate, to cancel, reduce or postpone their use of
the facilities and/or have caused attendees at these facilities to reduce
spending on discretionary purchases, such as the products which we sell. As a
result, these weak economic conditions have adversely affected our net sales and
cash flow.
THE PRICING AND TERMINATION PROVISIONS OF OUR CONTRACTS MAY CONSTRAIN OUR
ABILITY TO RECOVER COSTS AND TO MAKE A PROFIT ON OUR CONTRACTS.
The amount of risk that we bear and our profit potential vary depending on
the type of contract under which we provide our services. Under profit and loss
and profit sharing contracts, which together account for substantially all our
net sales and cash flow, we bear all of the expenses of providing our services
and we bear all of the risk that net sales will be adequate to support our
operations. In addition, some profit and loss and profit sharing contracts
contain minimum guaranteed commissions or equivalent payments to the client,
regardless of the level of net sales at the facility or whether a profit is
generated. If net sales do not exceed costs under a contract, including
guaranteed commissions, we will experience losses. Beginning
20
in fiscal 2003, we expect that the EBITDA generated by our contract with our
largest client will decline as a result of higher commission rates which we
agreed to in connection with a renewal of the contract.
Under many of our contracts, we are obliged to comply with the instructions
of our clients in determining which products are sold at individual facilities,
and most of our contracts limit our ability to raise prices on the food,
beverages and merchandise sold within a particular facility without the client's
consent. The refusal by clients to permit the sale of some products at their
facilities, or the imposition by clients of maximum prices which are not
economically feasible for us, could materially adversely affect our results of
operations.
In addition, some of our contracts contain provisions allowing our clients
to terminate the contract without cause or with little or no notice, exclude
specified events or products from the scope of the contract or modify the terms
under which we may operate at specified events. If clients exercise these
rights, our net sales may decline significantly and our results of operations
could be adversely affected.
WE HAVE A HISTORY OF LOSSES AND MAY EXPERIENCE LOSSES IN THE FUTURE.
We have incurred significant losses in the past and we may incur losses in
the future. We incurred net losses of:
- $5.2 million in fiscal 1998;
- $5.6 million in fiscal 1999;
- $4.2 million in fiscal 2000; and
- $3.6 million in fiscal 2001.
We may not achieve profitability in the future or be able to generate cash
flow sufficient to make distributions or meet our interest and principal payment
obligations, including interest and dividend payments to IDS holders, and other
capital needs such as working capital for future growth and capital
expenditures.
WE MAY NOT BE ABLE TO RECOVER OUR CAPITAL INVESTMENTS IN CLIENTS' FACILITIES,
WHICH MAY SIGNIFICANTLY REDUCE OUR PROFITS OR CAUSE LOSSES.
When we enter into a new contract or renew an existing contract, we are
often required to pay substantial contract acquisition fees to the client or to
make capital investments in our clients' facilities that can be substantial. If
the contract is terminated early either by us or by the client or in the event
that a client becomes insolvent or files for bankruptcy, we may not be able to
recover our unamortized capital investment under that client's contract and will
have to recognize an operating loss or reduction from operating profit equal to
the unrecovered portion of our capitalized investment. This amount may be
substantial, depending on the remaining term of the contract and the size of the
capital investment. For example, for the year ended January 1, 2002, we recorded
contract related losses of approximately $1.1 million for the write-down of
property and equipment related to two of our clients which filed for
reorganization under Chapter 11 of the U.S. Bankruptcy Code and a receivable
reserve of $2.3 million related to one of those clients.
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.
Some of our sports facility contracts do not contain any protection for us
in the event that the sports team tenant of the facility moves to a new
facility. Changes in the ownership of a facility that we serve, or of a sports
team tenant of the facility, may make renewal of a contract less likely and may
result in disputes concerning the terms under which we provide our services at
the facility.
21
IF WE WERE TO LOSE ANY OF OUR LARGEST CLIENTS, OUR RESULTS OF OPERATIONS COULD
BE SIGNIFICANTLY HARMED.
Our net sales would significantly decline if we lost any of our largest
clients, representing a few key facilities. For fiscal 2002:
- our largest client accounted for approximately 8.6% of our net sales;
- our three largest clients together accounted for approximately 22.1% of
our net sales;
- our 10 largest clients together accounted for approximately 38.6% of our
net sales; and
- our 20 largest clients together accounted for approximately 52.2% of our
net sales.
A CONTRACTION OF MLB THAT ELIMINATES ANY OF THE TEAMS PLAYING IN ANY OF THE
FACILITIES SERVED BY US WOULD LIKELY HAVE A MATERIAL ADVERSE EFFECT ON OUR
RESULTS OF OPERATIONS.
In November 2001, MLB announced plans for a "contraction" to eliminate
three MLB teams beginning with the 2002 baseball season. No contraction occurred
in the 2002 baseball season, and the contract between MLB and its players' union
provides for no MLB team elimination by contraction through 2006. We do not have
sufficient information to assess the likelihood that any specific team would be
subject to contraction if a contraction were to occur. Press accounts at the
time contraction of MLB was first announced in 2001 indicated that, among
others, the Tampa Bay Devil Rays, the Minnesota Twins and the Montreal Expos
were possible targets. We currently have contracts with the Tampa Bay Devil Rays
and the Metrodome, home of the Minnesota Twins. If either or both of those teams
were to be eliminated by contraction without due compensation to us, it could
have a material adverse effect on us.
WE MAY NOT HAVE SUFFICIENT FUNDS AVAILABLE TO MAKE CAPITAL INVESTMENTS IN
CLIENTS' FACILITIES THAT ARE NECESSARY TO MAINTAIN THESE RELATIONSHIPS AND
INCREASED CAPITAL INVESTMENTS OR COMMISSIONS TO RENEW SUCH RELATIONSHIPS MAY
LOWER OUR OPERATING RESULTS FOR SUCH FACILITIES.
When we renew an existing contract, we are often required to pay
substantial contract acquisition fees to the client or to make substantial
investments in our client's facility to help finance facility construction or
renovation. The amount of these capital investments will vary, in some cases
materially, from year to year depending on the number and significance of
contracts up for renewal. For example, in 2003, three of our 20 largest
contracts will expire. In order to renew these contracts, we expect that we will
have to make significant capital expenditures. If we do not have sufficient
funds available to make attractive bids for new contracts or renew existing
contracts, our business will decline and our ability to make payments on the
IDSs will be weakened. Even with sufficient funding, any significantly higher
up-front capital expenditures for renewing facility contracts could, over the
course of those contracts, harm our results of operations as we incur greater
amortization expenses. Also, any significantly higher commissions payable to our
clients after renewing facility contracts, especially for our largest contracts,
could, over the course of the contract, lower our EBITDA. Such higher costs
could have a material adverse effect on our results of operations.
OUR HISTORICAL GROWTH RATES MAY NOT BE INDICATIVE OF FUTURE RESULTS, GIVEN OUR
NEW CAPITAL STRUCTURE AND DIVIDEND POLICY AND OUR RELIANCE ON OTHER FINANCING
SOURCES.
Our business has experienced relatively rapid growth over the last several
years, much of which has been financed from cash generated by our operations. In
the past, we have reinvested a significant portion of our cash earnings in the
growth of our business through bidding for new business, which often requires
substantial up-front cash payments. Following this offering, a substantial
portion of our cash earnings will be required to service our debt and maintain
our existing client base. In addition, we currently intend to distribute a
significant portion of any remaining cash earnings to our stockholders in the
form of monthly dividends. Our ability to continue to expand our business will
depend upon our future cash flow from operations after dividends and maintenance
capital expenditures. Because more cash will be distributed to our holders of
IDSs (or common stock and subordinated notes represented thereby) under our new
capital structure, we will be more dependent upon our ability to borrow funds
under our new credit facility and to
22
obtain other third-party financing, including through the sale of IDSs or other
securities, to fund our growth. We cannot assure you that such financing will be
available to us on favorable terms or at all. Thus, we do not believe that we
will be able to achieve the levels of growth we have experienced historically
due to our new capital structure, our new dividend policy and our resultant
reliance on third-party financing.
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.
Most of our contracts require us to obtain our clients' consent before
raising prices. As a result, we may not be able to offset any increases in our
wage or other operating costs through price changes. Any factors which increase
the wage rates that we have to pay in order to attract suitable employees,
including any tightening of the labor supply in any of the markets where we
operate, or any other factors that increase our operating costs, such as trends
affecting insurance premiums, may materially adversely affect our profitability.
In addition, our profitability could be materially adversely affected if we were
faced with cost increases for food, beverages, wages and equipment due to
general economic conditions, collective bargaining obligations, competitive
conditions or any combination of these.
WE COULD INCUR SIGNIFICANT LIABILITY FOR WITHDRAWING FROM MULTI-EMPLOYER
PENSION PLANS.
We operate at numerous facilities under collective bargaining agreements.
Under some of these agreements, we are obligated to contribute to multi-employer
pension plans. If any of our service contracts at these facilities were
terminated or not renewed, and the applicable multi-employer pension plan at
that time had unfunded vested benefits, we could be subject to withdrawal
liability to the multi-employer plan. We have not determined the extent of our
potential liability, if any, for any withdrawal in the future. We may be exposed
to material withdrawal liability under these circumstances. In addition, we
cannot predict with any certainty which, if any, groups of employees who are not
currently represented by labor unions may seek union representation in the
future, or the outcome of any re-negotiation of current collective bargaining
agreements.
WE MAY INCUR SIGNIFICANT LIABILITIES OR REPUTATIONAL HARM IF CLAIMS OF ILLNESS
OR INJURY ASSOCIATED WITH OUR SERVICE OF FOOD AND BEVERAGE TO THE PUBLIC ARE
BROUGHT AGAINST US.
Claims of illness or injury relating to food quality or handling are common
in the food service industry and from time to time, we are and may become in the
future subject to claims relating to:
- consumer product liability;
- product tampering;
- nutritional and health-related concerns; and
- federal, state, provincial and local food controls.
We may also be adversely affected by negative publicity resulting from the
filing of food quality or handling claims at one or more of the facilities we
serve. In addition, the level of product liability insurance coverage we
currently maintain may not be adequate to cover these claims. Any losses that we
may suffer from future liability claims, including the successful assertion
against us of one or a series of large claims in excess of our insurance
coverage, could materially adversely affect our results of operations.
Furthermore, adverse publicity could negatively impact our ability to renew
existing contracts or to obtain new clients.
THE LOSS OF ANY OF OUR LIQUOR LICENSES OR PERMITS COULD ADVERSELY AFFECT OUR
ABILITY TO CARRY OUT OUR BUSINESS.
We hold liquor licenses at many facilities at which we provide services and
are subject to licensing requirements with respect to the sale of alcoholic
beverages in the states and provinces in which we serve
23
such beverages. Failure to receive or retain, or the suspension of, liquor
licenses or permits would interrupt or terminate our ability to serve alcoholic
beverages at the applicable locations and, depending on the number of locations
or specific facilities affected, could have a material adverse effect on our
results of operations. Some of our contracts require us to pay liquidated
damages during any period in which our liquor license for the relevant facility
is suspended, and most contracts are subject to termination in the event that we
lose our liquor license for the relevant facility. Additional regulation
relating to liquor licenses may limit our activities in the future or
significantly increase the cost of compliance.
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.
We serve alcoholic beverages at many facilities and are subject to the
"dram-shop" statutes of the jurisdictions in which we serve alcoholic beverages.
"Dram-shop" statutes generally provide that serving alcohol to an intoxicated or
minor patron is a violation of law.
In most jurisdictions, 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. We cannot guarantee that those patrons will not be served or that
we will not be subject to liability for their acts. In addition, our liquor
liability insurance coverage may not be adequate to cover any potential
liability and insurance may not continue to be available on commercially
acceptable terms or at all.
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.
Our operations are subject to various governmental regulations, including
those governing:
- the service of food and alcoholic beverages;
- minimum wage regulations;
- employment;
- environmental protection; and
- human health and safety.
In addition, our facilities and products are subject to periodic inspection by
federal, state, provincial and local authorities.
If we fail to comply with applicable laws and regulations, we could be
subject to governmental and private civil remedies, including fines, damages,
injunctions, recalls or seizures, as well as potential criminal sanctions. This
could have a material adverse effect on our results of operations. We may not be
in compliance with all applicable laws and regulations and we may not be able to
comply with all future laws and regulations. Furthermore, additional federal or
state legislation, or changes in regulatory implementation, may limit our
activities in the future or significantly increase the cost of regulatory
compliance.
WE ARE SUBJECT TO LITIGATION, WHICH, IF DETERMINED ADVERSELY, COULD BE
MATERIAL.
We are, and may in the future be, subject to litigation which, if
determined adversely to us, could have a material adverse effect on our business
and financial condition. In May 2003 a purported class action was filed against
us in California state court 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 seeks compensatory, special and punitive damages in
unspecified amounts, penalties under the applicable local laws and injunctions
against the alleged illegal acts. While our evaluation of the allegations
continues, this case and any future cases which may be filed against us could
materially adversely affect us if we lose such cases and have to pay substantial
damages, or if we
24
settle such cases. In addition, this case and any future cases may materially
and adversely affect our operations by increasing our litigation costs and
insurance premiums and diverting our attention and resources to address such
actions.
WE MAY BE SUBJECT TO SIGNIFICANT ENVIRONMENTAL LIABILITIES.
Claims for environmental liabilities arising out of property contamination
have been asserted against us from time to time, and in some cases such claims
have been associated with businesses, including waste disposal and/or management
businesses, related to entities we acquired and have been based on conduct that
occurred prior to our acquisition of those entities. Recently, private
corporations asserted a claim under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, or "CERCLA," against us 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 purportedly
related to a predecessor for which we allegedly are responsible. In addition,
the United States Environmental Protection Agency, asserting authority under
CERCLA, recently issued a unilateral administrative order concerning the same
Illinois site naming approximately 75 entities as respondents, including the
plaintiffs in the CERCLA lawsuit against us and the waste disposal business for
which the plaintiffs allege we are responsible. Because these claims are in
their early stages, we cannot predict at this time whether we will eventually be
held liable at this site or whether such liability will be material.
Furthermore, additional environmental liabilities relating to any of our former
operations or any entities we have acquired could be identified and give rise to
claims against us involving significant losses.
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.
The recreational food service industry is highly fragmented and
competitive, with several national and international food service providers as
well as a large number of smaller independent businesses serving discrete local
and regional markets and competing in distinct areas. Those smaller companies
that lack a full-service capability (because, for example, they cannot cater for
luxury suites at stadiums and arenas) often bid for contracts in conjunction
with one of the other national or international food service companies that can
offer those services.
We compete primarily based on the following factors:
- the ability to make capital investments;
- commission or management fee structures;
- service innovation;
- quality and breadth of products and services; and
- reputation within the industry.
Some of our competitors may be prepared to accept less favorable financial
returns than we are when bidding for contracts. A number of our competitors also
have substantially greater financial and other resources than we do and some of
them may have higher retention rates than we do. Furthermore, the fact that we
have relatively more debt than some of our competitors could place us at a
competitive disadvantage. We also face competition from regional and local
service contractors, some of which are better established than we are within a
specific geographic region. Existing or potential clients may also elect to
"self operate" their food services, eliminating the opportunity for us to
compete for the account.
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.
An outbreak or escalation of any insurrection or armed conflict involving
the United States or any other national or international calamity could result
in a decrease in attendance or the number of events at
25
sports facilities, convention centers and other entertainment and recreational
facilities, including our clients' facilities, which could result in a
significant decline in our net sales and operating income. For example, the
events of September 11, 2001 had a significant negative impact on the attendance
at sports facilities and convention centers we serve. We estimate that the
impact of September 11, 2001 reduced our consolidated net sales by approximately
2% and our operating income by approximately 8% in fiscal 2001 from the level we
would have expected absent those conditions.
The situation in Iraq and the national and global responses to terrorist
attacks, many of which responses are still being formulated, including other
recent military, diplomatic and financial responses, and any possible reprisals
as a consequence of those actions, may materially adversely affect us in ways we
cannot predict at this time.
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 COSTS IN THE EVENT OF A TERRORIST ATTACK
ON A FACILITY.
A terrorist attack on any of the facilities which we serve, particularly
large sports facilities, could result in a decrease in attendance or the number
of events at these facilities generally, which could result in a significant
decline in our net sales and operating income. These material adverse effects
could be long-lived, which could curtail recovery of previously routine business
in the affected facility or in other facilities which we serve. If a sufficient
number or proportion of our facilities were affected, the result could
materially adversely affect our ability to make interest or dividend payments
with respect to the IDSs. While our contracts that require us to make payments
of required minimum commission or royalties generally provide for the suspension
of our obligations in the event of a facility being closed or a force majeure
event, including as a result of a terrorist attack, none of our contracts
specifically provides for the recovery by us of costs we have already incurred
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.
If we fail to obtain insurance on commercially acceptable terms or at all,
we may become subject to significant liabilities which could cause a significant
decline in our operating income. In addition, depending on the insurance
available in the market, we could be in default under a number of our contracts
which could cause those contracts to be terminated. Termination of those
contracts could cause a significant decline in our net sales and our operating
income.
The events of September 11, 2001 have caused a significant increase in our
insurance costs in connection with the recreational facilities where we provide
services. In addition, there is a current trend toward higher rates in the
insurance market. These costs may continue to increase significantly in the
future.
RISKS RELATING TO THE IDSS AND THE SHARES OF COMMON STOCK AND SUBORDINATED NOTES
REPRESENTED BY THE IDSS
WE HAVE SUBSTANTIAL INDEBTEDNESS, WHICH COULD RESTRICT OUR ABILITY TO PAY
INTEREST AND PRINCIPAL ON THE SUBORDINATED NOTES AND TO PAY DIVIDENDS WITH
RESPECT TO SHARES OF OUR COMMON STOCK REPRESENTED BY THE IDSS.
Our ability to make distributions, pay dividends or make other payments
will be subject to applicable law and contractual restrictions contained in the
instruments governing any indebtedness of ours and our subsidiaries, including
the new credit facility which we guarantee on a senior secured basis. The degree
to which we are leveraged on a consolidated basis could have important
consequences to the holders of the IDSs, including:
- our ability in the future to obtain additional financing for working
capital, capital expenditures or acquisitions may be limited;
26
- we may not be able to refinance our indebtedness on terms acceptable to
us or at all;
- a significant portion of our cash flow from operations is likely to be
dedicated to the payment of the principal of and interest on our
indebtedness, thereby reducing funds available for future operations,
capital expenditures and/or dividends on our common stock; and
- we may be more vulnerable to economic downturns and be limited in our
ability to withstand competitive pressures.
Under the indenture governing the subordinated notes, we are not subject to
any limits on the aggregate principal amount of additional subordinated notes
identical to the subordinated notes offered hereby (other than issuance date) we
may issue so long as we issue the new subordinated notes together with shares of
common stock such that the new subordinated notes and additional shares of
common stock will be in the appropriate proportion to represent IDSs. This means
that, under the indenture governing our subordinated notes, so long as we issue
equity in proportionate amounts, we can incur unlimited subordinated debt. The
new credit facility will, however, restrict our ability to incur debt beyond
certain amounts.
WE ARE SUBJECT TO RESTRICTIVE DEBT COVENANTS THAT LIMIT OUR BUSINESS
FLEXIBILITY BY IMPOSING OPERATING AND FINANCIAL RESTRICTIONS ON OUR
OPERATIONS.
The agreements governing our indebtedness impose significant operating and
financial restrictions on us. These restrictions prohibit or limit, among other
things:
- the incurrence of additional indebtedness and the issuance of preferred
stock and certain redeemable capital stock;
- the payment of dividends on, and purchase or redemption of, capital
stock;
- a number of other restricted payments, including investments;
- specified sales of assets:
- specified transactions with affiliates;
- the creation of a number of liens; and
- consolidations, mergers and transfers of all or substantially all of our
assets.
The terms of the new credit facility include other and more restrictive
covenants and prohibit us from prepaying our other indebtedness, including the
subordinated notes, while indebtedness under the new credit facility is
outstanding. The new credit facility also requires us to maintain specified
financial ratios and satisfy financial condition tests, including, without
limitation, the following: a maximum net leverage ratio, a minimum fixed charge
coverage ratio and a total debt to book capitalization ratio.
Our ability to comply with the ratios or tests may be affected by events
beyond our control, including prevailing economic, financial and industry
conditions. A breach of any of these covenants, ratios or tests could result in
a default under the new credit facility and/or the indenture. Certain events of
default under the new credit facility would prohibit us from making payments on
the subordinated notes, including payment of interest when due. In addition,
upon the occurrence of an event of default under the new credit facility, the
lenders could elect to declare all amounts outstanding under the new credit
facility, together with accrued interest, to be immediately due and payable. If
we were unable to repay those amounts, the lenders could proceed against the
security granted to them to secure that indebtedness. If the lenders accelerate
the payment of the indebtedness, our assets may not be sufficient to repay in
full this indebtedness and our other indebtedness, including the subordinated
notes.
27
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.
We are a holding company and conduct all of our operations through our
subsidiaries and currently have no significant assets other than the capital
stock of VSA, which will be pledged to the creditors under the new credit
facility which we guarantee. As a result, we will rely on dividends and other
payments or distributions from our subsidiaries to meet our debt service
obligations and enable us to pay dividends. The ability of our subsidiaries to
pay dividends or make other payments or distributions to us will depend on their
respective operating results and may be restricted by, among other things, the
laws of their jurisdiction of organization (which may limit the amount of funds
available for the payment of dividends), agreements of those subsidiaries, the
terms of the new credit facility and the covenants of any future outstanding
indebtedness we or our subsidiaries incur.
YOU MAY NOT RECEIVE THE LEVEL OF DIVIDENDS PROVIDED FOR IN THE DIVIDEND POLICY
OUR BOARD OF DIRECTORS IS EXPECTED TO ADOPT UPON THE CLOSING OF THIS OFFERING
OR ANY DIVIDENDS AT ALL.
Our board of directors may, in its discretion, amend or repeal the dividend
policy it is expected to adopt upon the closing of this offering. Our board of
directors may decrease the level of dividends provided for in this dividend
policy or entirely discontinue the payment of dividends. Future dividends with
respect to shares of our capital stock, if any, will depend on, among other
things, our results of operations, cash requirements, financial condition,
contractual restrictions, business opportunities, provisions of applicable law
and other factors that our board of directors may deem relevant. The new credit
facility contains significant restrictions on our ability to make dividend
payments.
In addition, our after-tax income available for dividend and interest
payments would be reduced if the subordinated notes were treated as equity
rather than debt for U.S. federal income tax purposes. In that event, the stated
interest on the subordinated notes could be treated as a dividend, and interest
on the subordinated notes would not be deductible by us for U.S. federal income
tax purposes. Our inability to deduct interest on the subordinated notes could
materially increase our taxable income and, thus, our U.S. federal and
applicable state income tax liability.
YOU WILL BE IMMEDIATELY DILUTED BY $ PER SHARE OF COMMON STOCK IF YOU
PURCHASE IDSS IN THIS OFFERING.
If you purchase IDSs in this offering, you will experience an immediate
dilution of $ per share of common stock represented by the IDSs which
exceeds the entire price allocated to each share of common stock represented by
the IDSs in this offering because there will be a net tangible book deficit for
each share of common stock outstanding immediately after this offering. Our net
tangible book deficiency as of April 1, 2003, after giving effect to this
offering, was approximately $ million, or $ per share of common stock.
OUR INTEREST EXPENSE MAY INCREASE SIGNIFICANTLY AND COULD CAUSE OUR NET INCOME
AND DISTRIBUTABLE CASH TO DECLINE SIGNIFICANTLY.
The new credit facility will be subject to periodic renewal or must
otherwise be refinanced. We may not be able to renew or refinance the new credit
facility, or if renewed or refinanced, the renewal or refinancing may occur on
less favorable terms. The new credit facility's revolving facility and 50% of
its term facility are made available at a floating rate of interest. In the
event of an increase in the base reference interest rates, our interest expense
will increase and could have a material adverse effect on our ability to make
cash dividend payments to our stockholders. Our ability to continue to expand
our business will, to a large extent, be dependent upon our ability to borrow
funds under our new credit facility and to obtain other third-party financing,
including through the sale of IDSs or any sale of securities. We cannot assure
you that such financing will be available to us on favorable terms or at all. We
do not believe that we will experience the levels of growth we have achieved in
the past.
28
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.
A significant portion of our cash flow from operations will be dedicated to
maintaining our client base and servicing our debt requirements. In addition, we
currently expect to distribute a significant portion of any remaining cash
earnings to our stockholders in the form of monthly dividends. Moreover, prior
to the maturity of our subordinated notes, we will not be required to make any
payments of principal on our subordinated notes. We may not generate sufficient
funds from operations to repay the principal amount of our indebtedness at
maturity or in case you exercise your right to require us to purchase your notes
upon a change of control. We may therefore need to refinance our debt or raise
additional capital. These alternatives may not be available to us when needed or
on satisfactory terms due to prevailing market conditions, a decline in our
business or restrictions contained in our senior debt obligations.
BECAUSE WE WILL USE A SIGNIFICANT PORTION OF THE PROCEEDS OF THIS OFFERING TO
PURCHASE SHARES OF COMMON STOCK FROM OUR EXISTING EQUITY INVESTORS, WE WILL
HAVE ONLY THE REMAINING PORTION OF THE PROCEEDS OF THIS OFFERING TO REPAY OUR
EXISTING DEBT AND FOR CORPORATE PURPOSES.
We will use a significant portion of the net proceeds from this offering to
purchase shares of common stock from our existing equity investors. The table
set forth below details the aggregate net proceeds to us from this offering, the
amount of the net proceeds that will be used to purchase shares of our common
stock from our existing equity investors and the net proceeds remaining after
such purchase, assuming no exercise of the over-allotment option and full
exercise of the over-allotment option. The net proceeds remaining after the
purchase do not give effect to the other uses of the net proceeds of this
offering detailed in "Use of Proceeds."
<Table>
<Caption>
AMOUNT OF NET
PROCEEDS TO PURCHASE
COMMON STOCK NET PROCEEDS
AGGREGATE NET FROM EXISTING REMAINING AFTER
PROCEEDS TO US EQUITY INVESTORS PURCHASE
-------------- -------------------- -----------------
No exercise of over-allotment
option.............................. $ $ $
Full exercise of over-allotment
option.............................. $ $ $
</Table>
As a result of these purchases from our existing equity investors, the
amount of net proceeds available to us will be less than if we had not
undertaken these purchases (but your voting and economic interest in us would be
less without these purchases). Therefore, we will not have these funds available
to us to repay our existing debt, and will therefore have to borrow more under
our new credit facility to repay the existing credit facility than we would have
had we not undertaken these purchases, or to fund our operations or to continue
to expand our business.
THE REALIZABLE VALUE OF OUR ASSETS UPON LIQUIDATION MAY BE INSUFFICIENT TO
SATISFY CLAIMS.
At April 1, 2003, our assets included intangible assets in the amount of
$175.4 million, representing approximately 60.2% of our total consolidated
assets and consisting primarily of contract rights. The value of these
intangible assets will continue to depend significantly upon the success of our
business as a going concern and the remaining terms of our contracts. Some of
our larger contracts contain change of control provisions, which may diminish
the realizable value of the contracts. As a result, in the event of a default on
our subordinated notes or any bankruptcy or dissolution of our company, the
realizable value of these assets may be substantially lower and may be
insufficient to satisfy the claims of our creditors.
DEFERRAL OF INTEREST PAYMENTS WOULD HAVE ADVERSE TAX CONSEQUENCES FOR YOU AND
MAY ADVERSELY AFFECT THE TRADING PRICE OF THE SUBORDINATED NOTES.
If interest payments on the subordinated notes are deferred, you will be
required to recognize interest income for U.S. federal income tax purposes in
respect of interest payments on the subordinated notes represented by the IDSs
or the subordinated notes, as the case may be, held by you before you receive
any cash payment of this interest. In addition, we will not pay you this cash if
you sell the IDSs or the
29
subordinated notes, as the case may be, before the end of any deferral period or
before the record date relating to interest payments that are to be paid.
If interest is deferred, the IDSs or the subordinated notes may trade at a
price that does not fully reflect the value of accrued but unpaid interest on
the subordinated notes. In addition, the requirement that we defer payments of
interest on the subordinated notes under certain circumstances may mean that the
market price for the IDSs or the subordinated notes may be more volatile than
other securities that do not have this requirement.
BECAUSE OF THE SUBORDINATED NATURE OF THE NOTES, HOLDERS OF OUR SUBORDINATED
NOTES MAY NOT BE ENTITLED TO BE PAID IN FULL, IF AT ALL, IN A BANKRUPTCY,
LIQUIDATION OR REORGANIZATION OR SIMILAR PROCEEDING.
As a result of the subordinated nature of our notes and related guarantees,
upon any distribution to our creditors or the creditors of the subsidiary
guarantors in bankruptcy, liquidation or reorganization or similar proceeding
relating to us or the subsidiary guarantors or our or their property, the
holders of our senior indebtedness and senior indebtedness of the subsidiary
guarantors will be entitled to be paid in full in cash before any payment may be
made with respect to our subordinated notes or the subsidiary guarantees.
In addition, neither a holder of our subordinated notes nor the trustee may
commence any enforcement action relating to the subsidiary guarantees of our
subordinated notes without the prior written consent of the holders of our
senior indebtedness for a period of up to 179 days from the date of the
occurrence of an event of default with respect to our subordinated notes.
In the event of a bankruptcy, liquidation or reorganization or similar
proceeding relating to us or the subsidiary guarantors, holders of our
subordinated notes will participate with all other holders of unsecured
indebtedness of ours or the subsidiary guarantors similarly subordinated in the
assets remaining after we and the subsidiary guarantors have paid all senior
indebtedness. In any of these cases, we and the subsidiary guarantors may not
have sufficient funds to pay all of our creditors, and holders of our
subordinated notes may receive less, ratably, than the holders of senior
indebtedness.
On a pro forma basis as of April 1, 2003, our subordinated notes would have
ranked junior to $ million of outstanding senior indebtedness on a
consolidated basis, all of which would have been secured, and the subsidiary
guarantees would have ranked pari passu with approximately $ million of
outstanding indebtedness of ours and the subsidiary guarantors, including trade
payables. In addition, as of April 1, 2003, on a pro forma basis, VSA would have
had the ability to borrow up to an additional amount of $ million under
the new credit facility, which would have been senior in right of payment to our
subordinated notes.
HOLDERS OF OUR SUBORDINATED NOTES WILL BE STRUCTURALLY SUBORDINATED TO THE
DEBT OF OUR NON-GUARANTOR SUBSIDIARIES.
Our present and future foreign subsidiaries and partially owned domestic
subsidiaries will not be guarantors of our subordinated notes. As a result, no
payments are required to be made to us from the assets of these subsidiaries.
In the event of bankruptcy, liquidation or reorganization of any of the
non-guarantor subsidiaries, holders of their indebtedness, including their trade
creditors, would generally be entitled to payment of their claims from the
assets of those subsidiaries before any assets are made available for
distribution to us for payment to you. As a result, our subordinated notes are
effectively subordinated to the indebtedness of the non-guarantor subsidiaries.
For fiscal 2002, our non-guarantor subsidiaries had net sales of $30.0
million, EBITDA of $0.9 million, assets of $6.4 million and liabilities of $8.7
million. See Footnote (6) to "Selected Historical Financial Information" for a
reconciliation of EBITDA generated by our non-guarantor subsidiaries to net
income.
30
THE GUARANTEES OF THE SUBORDINATED NOTES BY OUR SUBSIDIARIES MAY NOT BE
ENFORCEABLE.
Under federal bankruptcy law and comparable provisions of state fraudulent
transfer laws, a guarantee could be voided, or claims in respect of a guarantee
could be subordinated to all other debt of the guarantor, if, among other
things, the guarantor, at the time that it assumed the guarantee:
- issued the guarantee to delay, hinder or defraud present or future
creditors; or
- received less than reasonably equivalent value or fair consideration for
issuing the guarantee and, at the time it issued the guarantee:
- was insolvent or rendered insolvent by reason of issuing the guarantee
and the application of the proceeds of the guarantee;
- was engaged or about to engage in a business or a transaction for which
the guarantor's remaining unencumbered assets constituted unreasonably
small capital to carry on its business;
- intended to incur, or believed that it would incur, debts beyond its
ability to pay the debts as they mature; or
- was a defendant in an action for money damages, or had a judgment for
money damages docketed against it if, in either case, after final
judgment, the judgment is unsatisfied.
In addition, any payment by the guarantor under its guarantee could be
voided and required to be returned to the guarantor or to a fund for the benefit
of the creditors of the guarantor or the guarantee could be subordinated to
other debt of the guarantor.
The measures of insolvency for the purposes of fraudulent transfer laws
vary depending upon the law applied in any proceeding to determine whether a
fraudulent transfer has occurred. Generally, however, a person would be
considered insolvent if, at the time it incurred the debt:
- the sum of its debts, including contingent liabilities, was greater than
the fair saleable value of its assets;
- the present fair saleable value of its assets was less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and
mature; or
- it could not pay its debts as they become due.
We believe that immediately after the issuance of the subordinated notes
and the guarantees, we and each of the guarantors will be solvent, will have
sufficient capital to carry on our respective businesses and will be able to pay
our respective debts as they mature. However, we cannot be sure as to what
standard a court would apply in making these determinations or that a court
would reach the same conclusions with regard to these issues. Regardless of the
standard that the court uses, we cannot be sure that the issuance by the
subsidiary guarantors of the subsidiary guarantees would not be voided or the
subsidiary guarantees would not be subordinated to their other debt.
The guarantee of our subordinated notes by any subsidiary guarantor could
be subject to the claim that, since the guarantee was incurred for the benefit
of VSAH, and only indirectly for the benefit of the subsidiary guarantor, the
obligations of the subsidiary guarantor were incurred for less than fair
consideration. If such a claim were successful a court could void the
obligations of the subsidiary guarantor under the guarantee or subordinate these
obligations to the subsidiary guarantor's other debt or take action detrimental
to holders of the subordinated notes. If the guarantee of any subsidiary
guarantor were voided, our subordinated notes would be effectively subordinated
to the indebtedness of that subsidiary guarantor.
31
SEASONALITY AND VARIABILITY OF OUR BUSINESSES MAY CAUSE VOLATILITY IN THE
MARKET VALUE OF YOUR INVESTMENT AND MAY HINDER OUR ABILITY TO MAKE TIMELY
DISTRIBUTIONS ON THE IDSS.
Our business is seasonal in nature, and our net sales and operating results
vary significantly from quarter to quarter. This variability results from
several factors, including:
- seasonality of sporting and other events;
- unpredictability in the number, timing and type of new contracts;
- timing of contract expirations and special events; and
- level of attendance at facilities which we serve.
Consequently, results of operations for any particular quarter may not be
indicative of results of operations for future periods, which makes it difficult
to forecast our results for an entire year. This variability may cause
volatility in the market price of the IDSs.
In addition, the seasonality and variability of our business means that at
certain times of the year our cash receipts are significantly higher than at
other times. Given that we are required to make equal monthly interest payments
and expect to pay equal monthly dividends to IDS holders throughout the year,
there is a risk that we will experience cash shortages, which could hinder our
ability to make timely distributions to IDS holders.
THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF IDSS ARE UNCLEAR.
No statutory, judicial or administrative authority directly addresses the
treatment of the IDSs or instruments similar to the IDSs for U.S. federal income
tax purposes. As a result, the U.S. federal income tax consequences of the
purchase, ownership and disposition of IDSs are unclear. We intend to treat an
IDS as a unit representing shares of common stock and a subordinated note.
However, the Internal Revenue Service or the courts may take the position that
the subordinated notes are equity, which could adversely affect the amount,
timing and character of income, gain or loss in respect of your investment in
IDSs, materially increase our taxable income and, thus, our U.S. federal and
applicable state income tax liability, and, in the case of foreign holders,
could subject such holders to withholding or estate taxes with regard to the
subordinated notes in the same manner as they will be with regard to the common
stock. Payments to foreign holders would not be grossed-up for any such taxes.
For discussion of these tax related risks, see "Material U.S. Federal Income Tax
Consequences."
SUBSEQUENT ISSUANCES OF SUBORDINATED NOTES MAY ADVERSELY AFFECT YOUR TAX
TREATMENT.
The indenture governing our subordinated notes will provide that, in the
event there is a subsequent issuance of subordinated notes with original issue
discount that are otherwise identical (other than issuance date) to the
subordinated notes represented by the IDSs, each holder of IDSs or separately
held subordinated notes, as the case may be, agrees that a portion of such
holder's subordinated notes will be exchanged for a portion of the subordinated
notes acquired by the holders of such subsequently issued subordinated notes.
Consequently, immediately following such subsequent issuance, each holder of
subsequently issued subordinated notes, held either as part of IDSs or
separately, and each holder of existing subordinated notes, held either as part
of IDSs or separately, will own an inseparable unit composed of a proportionate
percentage of both the old subordinated notes and the newly issued subordinated
notes with original issue discount. Therefore, subsequent issuances of
subordinated notes pursuant to an IDS offering by us or following an automatic
exchange with purchasers of our common stock from the existing equity investors
may adversely affect your tax treatment by increasing the original issue
discount, if any, that you were previously accruing with respect to the
subordinated notes represented by your IDSs. However, because a subsequent
issuance will affect the subordinated notes in the same manner, regardless of
whether these subordinated notes are held as part of IDSs or separately, the
combination of subordinated notes and shares of common stock to form IDSs, or
the separation of IDSs,
32
should not affect your tax treatment. Because any newly issued subordinated
notes may be issued with original issue discount in amounts different from the
subordinated notes represented by the already existing IDSs, the Internal
Revenue Service may assert that you have exchanged a portion of your
subordinated notes, whether held as part of IDSs or separately, for the newly
issued subordinated notes in a taxable exchange for U.S. federal income tax
purposes. In such case, however, you would not be expected to realize any gain
on the deemed exchange, and any loss realized would be disallowed. We intend to
take the position that subsequent issuances will not result in a taxable
exchange of your subordinated notes for U.S. federal income tax purposes.
Following any subsequent issuance of subordinated notes with original issue
discount, we (and our agents) will report any original issue discount on the
subsequently issued notes ratably among all holders of IDSs and separately held
subordinated notes, and each holder of IDSs and separately held subordinated
notes will, by purchasing IDSs, agree to report original issue discount in a
manner consistent with this approach. However, there can be no assurance that
the Internal Revenue Service will not assert that any original issue discount
should be reported only to the persons that initially acquired such subsequently
issued notes (and their transferees). In such case, the Internal Revenue Service
might further assert that, unless a holder can establish that it is not a person
that initially acquired such subsequently issued subordinated notes (or a
transferee thereof), all of the subordinated notes held by such holder have
original issue discount. Any of these assertions by the Internal Revenue Service
could create significant uncertainties in the pricing of IDSs and subordinated
notes and could adversely affect the market for IDSs and subordinated notes.
For a discussion of these tax related risks, see "Material U.S. Federal
Income Tax Consequences."
BEFORE THIS OFFERING, THERE HAS NOT BEEN A PUBLIC MARKET FOR OUR IDSS, SHARES
OF OUR COMMON STOCK OR SUBORDINATED NOTES. THE PRICE OF THE IDSS MAY FLUCTUATE
SUBSTANTIALLY, WHICH COULD NEGATIVELY AFFECT IDS HOLDERS.
None of the IDSs, the shares of our common stock or subordinated notes has
a public market history. In addition, there has not been an active market in the
United States or in Canada for securities similar to the IDSs. We cannot assure
you that an active trading market for the IDSs will develop in the future, and
we currently do not expect that an active trading market for the shares of our
common stock will develop until the subordinated notes are redeemed or mature.
If the subordinated notes represented by your IDSs are redeemed or mature, the
IDSs will automatically separate and you will then hold the shares of our common
stock. We do not intend to list our subordinated notes on any securities
exchange.
The initial public offering price of the IDSs will be determined by
negotiations among us, the existing equity investors and the representatives of
the underwriters and may not be indicative of the market price of the IDSs after
the offering. Factors such as quarterly variations in our financial results,
announcements by us or others, developments affecting us, our clients and our
suppliers, general interest rate levels and general market volatility could
cause the market price of the IDSs to fluctuate significantly.
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 THE IDSS AND THE SHARES OF OUR COMMON STOCK AND OUR SUBORDINATED
NOTES.
Future sales or the availability for sale of substantial amounts of IDSs or
shares of our common stock or a significant principal amount of our subordinated
notes in the public market could adversely affect the prevailing market price of
the IDSs and the shares of our common stock and our subordinated notes and could
impair our ability to raise capital through future sales of our securities.
Our existing equity investors will own % of the outstanding shares of
our common stock if the underwriters do not exercise their over-allotment option
in full. A portion of these shares of common stock will automatically be
exchanged for subordinated notes upon sale by the existing equity investors,
which, together with the remaining shares of common stock, could be sold as IDSs
pursuant to an underwritten or
33
other registered offering under a registration rights agreement with us. Such
sales could cause a decline in the market price of the IDSs.
We may issue shares of our common stock and subordinated notes, which may
be in the form of IDSs, or other securities from time to time as consideration
for future acquisitions and investments. In the event any such acquisition or
investment is significant, the number of shares of our common stock and the
aggregate principal amount of subordinated notes, which may be in the form of
IDSs, or the number or aggregate principal amount, as the case may be, of other
securities that we may issue may in turn be significant. In addition, we may
also grant registration rights covering those IDSs, shares of our common stock,
subordinated notes or other securities in connection with any such acquisitions
and investments.
OUR RESTATED CERTIFICATE OF INCORPORATION AND AMENDED AND RESTATED BY-LAWS AND
SEVERAL OTHER FACTORS COULD LIMIT ANOTHER PARTY'S ABILITY TO ACQUIRE US AND
DEPRIVE OUR INVESTORS OF THE OPPORTUNITY TO OBTAIN A TAKEOVER PREMIUM FOR
THEIR SECURITIES.
A number of provisions in our restated certificate of incorporation and
amended and restated by-laws will make it difficult for another company to
acquire us and for you to receive any related takeover premium for your
securities. For example, our restated certificate of incorporation provides that
stockholders generally may not act by written consent and only stockholders
representing at least 25% in voting power may request that our board of
directors call a special meeting. In addition, our ability to merge or
consolidate with any other person or, directly or indirectly, sell all or
substantially all our assets is subject to the approval of a supermajority of
our directors. Our restated certificate of incorporation provides for a
classified board of directors and authorizes the issuance of preferred stock
without stockholder approval and upon such terms as the board of directors may
determine. The rights of the holders of shares of our common stock will be
subject to, and may be adversely affected by, the rights of holders of any class
or series of preferred stock that may be issued in the future.
34
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and elsewhere in this prospectus 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. We believe that these factors include the following:
- our high degree of leverage and significant debt service obligations;
- our history of net losses;
- the risk of decreases in the level of attendance at events held at the
facilities at which we provide our services and the level of spending on
the services that we provide at those events;
- the risk of labor stoppages affecting sports teams at whose facilities we
provide our services;
- the risk of sports facilities at which we provide services losing their
sports team tenants;
- the risk that we may not be able to retain existing clients or obtain new
clients;
- the highly competitive nature of the recreational food service industry;
- any future changes in management;
- the risk of weaker economic conditions within the United States;
- the risk of events similar to those of September 11, 2001 or an outbreak
or escalation of any insurrection or armed conflict involving the United
States or any other national or international calamity;
- the risk of increased litigation against us;
- general risks associated with the food service industry;
- any future changes in government regulation; and
- any changes in local government policies and practices regarding facility
construction, taxes and financing.
We undertake no obligation to publicly update or review any forward-looking
statement, whether as a result of new information, future developments or
otherwise.
35
USE OF PROCEEDS
We estimate that we will receive net proceeds from this offering of
approximately $ million after deducting underwriting discounts and
commissions and other estimated offering expenses payable by us. We will use:
- $ million of net proceeds from this offering and borrowings
under the new credit facility to repurchase % of the shares of our
common stock held by the existing equity investors before this offering;
- $ million of net proceeds from this offering and borrowings
under the new credit facility to make a capital contribution to VSA. VSA
will use those funds to repay outstanding borrowings under the old credit
facility and purchase VSA's senior subordinated notes that are validly
tendered and not withdrawn in the tender offer and consent solicitation;
- $1 million of the net proceeds from this offering to pay certain members
of our senior management the contingent bonuses described under
"Management -- Annual Bonus Plan;" and
- $1 million of the net proceeds from this offering to pay Lawrence E.
Honig, our chief executive officer, the payment to which he is entitled
under the terms of his employment agreement with us. Mr. Honig will use
the after-tax proceeds from this payment to purchase IDSs in this
offering in an amount equal to approximately $570,000.
If the underwriters exercise their over-allotment option in full, we will use
all the net proceeds we receive from the sale of additional IDSs under the
over-allotment option ($ ) to repurchase the existing equity investors'
remaining interest in us.
Borrowings under the existing revolving credit facility bear interest at a
variable rate, at our option, of either the U.S. Base Rate plus 200 points or
LIBOR plus 300 points and become due and payable on December 3, 2004. Borrowings
under the tranche B loan under the existing credit facility bear interest at a
variable rate, at our option, of either the U.S. Base Rate plus 275 points or
LIBOR plus 375 points and become due and payable on December 3, 2006. As of June
1, 2003, the borrowings under the existing revolving credit facility bore
interest at a weighted average rate of 5.26% and the borrowings under the
tranche B loan of the existing credit facility bore interest at a weighted
average rate of 5.14%. VSA's senior subordinated notes bear interest at 11 1/4%
per year and become due and payable on March 1, 2009.
The table below sets forth our estimate of the sources and uses of funds
required to effect the transactions described above. The estimated sources and
uses are based on an assumed closing date of .
<Table>
<Caption>
SOURCES
- ------- (IN MILLIONS)
New credit facility:
Term facility.................. $
Revolving facility.............
IDSs offered hereby..............
Cash.............................
--------
Total sources of funds
without exercise of the
over-allotment option..... $
========
IDSs offered hereby assuming
exercise in full of the
over-allotment option.......... $
--------
Total sources of funds
assuming exercise of the
over-allotment option in
full...................... $
========
</Table>
<Table>
<Caption>
USES
- ---- (IN MILLIONS)
Repurchase of common stock held
by existing equity
investors...................... $
Repayment of existing credit
facility:
Tranche B loan.................
Revolving facility.............
Purchase of VSA senior
subordinated notes in the
tender offer and consent
solicitation...................
Senior management contingent
bonuses........................
Payment to chief executive
officer pursuant to employment
agreement
Fees and expenses................
--------
Total uses of funds without
exercise of the
over-allotment option..... $
========
Additional proceeds to existing
equity investors assuming
exercise in full of the
over-allotment option.......... $
--------
Total uses of funds assuming
exercise of the
over-allotment option in
full...................... $
========
</Table>
36
DIVIDEND POLICY
Upon the closing of this offering, our board of directors is expected to
adopt a dividend policy pursuant to which, in the event and to the extent we
have any available cash for distribution to the holders of shares of our common
stock as of the end of any calendar month, and subject to applicable law, as
described below, and the terms of the new credit facility, the indenture
governing our subordinated notes and any other then outstanding indebtedness of
ours, our board of directors will declare cash dividends on our common stock
equal to $ per share, subject to adjustment. We will pay those dividends on
or about the 15th day of the subsequent month.
If we have any remaining cash after the payment of dividends as
contemplated above, our board of directors will, in its sole discretion, decide
to use that cash to fund growth capital expenditures or acquisitions, repay
indebtedness, pay additional dividends or for general corporate purposes.
The indenture governing our subordinated notes restricts our ability to
declare and pay dividends on our common stock such that in the event our
Adjusted EBITDA, as defined in the indenture, per share for the twelve-month
period ended at the end of the month immediately prior to the month for which
dividends are paid is:
- higher than the fiscal 2002 level, the maximum aggregate amount of
dividends per share we may pay for such month may not exceed $ by
more than 1/12 of 90% of such difference per share;
- lower than the fiscal 2002 level by more than 2%, but by a percentage
less than or equal to 20%, the maximum aggregate amount of dividends per
share we may pay for such month will not exceed $ minus 1/12 of the
amount of such difference per share, excluding the initial 2%; and
- lower than the fiscal 2002 level by more than 20%, no dividends will be
payable for such month.
Our board of directors may, in its discretion, amend or repeal this
dividend policy. Our board of directors may decrease the level of dividends
provided for in this dividend policy or discontinue entirely the payment of
dividends.
Future dividends with respect to shares of our capital stock, if any, will
depend on, among other things, our results of operations, cash requirements,
financial condition, contractual restrictions, provisions of applicable law and
other factors that our board of directors may deem relevant. Under Delaware law,
our board of directors may declare dividends only to the extent of our "surplus"
(which is defined as total assets at fair market value minus total liabilities,
minus statutory capital), or if there is no surplus, out of our net profits for
the then current and/or immediately preceding fiscal years.
We have not paid dividends in the past.
37
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of April 1, 2003:
- on an actual basis; and
- on a pro forma as adjusted basis as if this offering, including the use
of proceeds from this offering, the repayment of all outstanding
borrowings under VSA's existing credit facility and the tender offer and
consent solicitation had occurred on that date and VSA had entered into
the new credit facility on that date. For purposes of this presentation,
we have assumed that 100% of VSA's senior subordinated notes are
purchased in the tender offer and consent solicitation for an aggregate
consideration of $ million.
<Table>
<Caption>
AS OF APRIL 1, 2003
--------------------------------------------------------------------------
PRO FORMA PRO FORMA AS
AS ADJUSTED ADJUSTED ASSUMING
ASSUMING NO FULL EXERCISE
EXERCISE OF THE OF THE
OVER-ALLOTMENT OVER-ALLOTMENT
ACTUAL ADJUSTMENTS OPTION ADJUSTMENTS OPTION
-------- ----------- --------------- ----------- -----------------
(IN THOUSANDS)
Cash and cash equivalents.... $ 11,301 $ $
======== ======== ========
Long-term debt, including
current portion
Current maturities of long-
term debt................ $ 4,650 $ $
Existing credit facility... 136,962 -- --
New credit facility........ --
11 1/4% senior subordinated
notes of VSA............. 100,000 -- --
% subordinated notes..... --
-------- -------- --------
Total long-term
debt.............. 241,612
Stockholders' deficiency
Common stock, $0.01 par
value per share --
authorized: shares;
issued: shares;
outstanding: shares.. -- -- --
Additional paid-in
capital.................. $ 67,417
Accumulated deficit........ (28,111)
Accumulated other
comprehensive loss....... (197)
Treasury stock(1).......... (49,500)
Loans to related parties... (1,175)
-------- -------- --------
Total stockholders'
deficiency........ (11,566)
-------- -------- --------
Total
capitalization... $230,046 $ $
======== ======== ========
</Table>
- ---------------
(1) The actual column represents shares at cost.
38
DILUTION
Dilution is the amount by which the portion of the offering price paid by
the purchasers of the IDSs to be sold in the offering that is allocated to our
shares of common stock represented by the IDSs exceeds the net tangible book
value or deficiency per share of our common stock after the offering. Net
tangible book value or deficiency per share of our common stock is determined at
any date by subtracting our total liabilities from the total book value of our
tangible assets and dividing the difference by the number of shares of common
stock deemed to be outstanding at that date.
Our net tangible book deficiency as of April 1, 2003 was approximately
$ million, or $ per share of common stock. After giving effect to our
receipt and intended use of approximately $ million of estimated net
proceeds (after deducting estimated underwriting discounts and commissions and
offering expenses) from our sale of IDSs in this offering, based on an assumed
initial public offering price of $ per IDS (the midpoint of the range
set forth on the cover page of this prospectus), our pro forma as adjusted net
tangible book deficiency as of April 1, 2003 would have been approximately
$ million, or $ per share of common stock. This represents an immediate
increase in net tangible book value of $ per share of our common stock to
existing stockholders and an immediate dilution of $ per share of our common
stock to new investors purchasing IDSs in this offering.
The following table illustrates this substantial and immediate dilution to
new investors:
<Table>
<Caption>
PER SHARE OF COMMON STOCK ASSUMING FULL
EXERCISE OF THE OVER-ALLOTMENT OPTION
PER SHARE OF OR THE FULL AUTOMATIC EXCHANGE OF THE
COMMON STOCK SHARES HELD BY THE EXISTING EQUITY INVESTORS
------------ --------------------------------------------
Portion of the assumed initial public
offering price of $ per IDS
allocated to one share of common
stock.............................. $ $
Net tangible book deficiency per
share as of April 1, 2003.......
Increase per share attributable to
cash payments made by investors
in this offering................
-------- --------
Decrease per share attributable to
net increase in indebtedness....
Pro forma as adjusted net tangible
book value after this offering..... $ $
-------- --------
Dilution in net tangible book value
per share to new investors......... $ $
======== ========
</Table>
The following table sets forth on a pro forma basis as of April 1, 2003:
- the total number of shares of our common stock owned by the existing
equity investors and to be owned by the new investors, as represented by
the IDSs to be sold in this offering;
- the total consideration paid by the existing equity investors and to be
paid by the new investors purchasing IDSs in this offering; and
- the average price per share of common stock paid by existing equity
investors and to be paid by new investors purchasing IDSs in this
offering:
<Table>
<Caption>
SHARES OF COMMON AVERAGE PRICE
STOCK PURCHASED TOTAL CONSIDERATION PER SHARE OF
----------------- -------------------- COMMON
NUMBER PERCENT AMOUNT PERCENT STOCK
------- ------- --------- -------- -------------
Existing equity investors........... % $ % $
New investors.......................
------- ----- -------- -----
Total..................... 100.0% $ 100.0%
======= ===== ======== =====
</Table>
39
SELECTED HISTORICAL FINANCIAL INFORMATION
The following table sets forth our selected consolidated financial
information derived from our audited consolidated financial statements for each
of the fiscal years ended December 29, 1998, December 28, 1999, January 2, 2001,
January 1, 2002 and December 31, 2002, of which the financial statements for
fiscal 2000, 2001 and 2002 are included elsewhere in this prospectus, and our
unaudited consolidated financial statements for the thirteen-week periods ended
April 2, 2002 and April 1, 2003, which are included elsewhere in this
prospectus.
The unaudited consolidated financial statements for the thirteen-week
periods ended April 2, 2002 and April 1, 2003 include all adjustments,
consisting of normal recurring adjustments, which, in our opinion, are necessary
for a fair presentation of the financial position and results of operations for
these periods. Operating results for the thirteen-week period ended April 1,
2003 are not necessarily indicative of the results that may be expected for the
fifty-two week fiscal year ending December 30, 2003, primarily due to the
seasonal nature of the business.
The information in the table below should be read together with our audited
consolidated financial statements for fiscal 2000, 2001 and 2002 and the related
notes, our unaudited consolidated financial statements for the thirteen-week
periods ended April 1, 2003 and April 2, 2002 and the related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," all as included elsewhere in this prospectus. The figures in the
table below reflect rounding adjustments.
<Table>
<Caption>
THIRTEEN WEEKS ENDED
FISCAL(1) -------------------------
------------------------------------------------------------------ APRIL 2, APRIL 1,
1998(2) 1999 2000 2001 2002 2002 2003
----------- ----------- ----------- ----------- ---------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS
DATA:
Net sales................. $ 283.4 $ 431.5 $ 522.5 $ 543.1 $ 577.2 $ 87.8 $ 96.9
Cost of sales............. 222.5 342.5 424.2 446.6 470.9 74.8 81.6
Selling, general and
administrative.......... 29.5 42.7 47.9 48.1 55.3 11.6 13.4
Depreciation and
amortization............ 18.2 26.8 26.3 24.5 26.2 5.6 6.5
Transaction related
expenses................ 3.1 1.5 1.1 -- 0.6 -- --
Contract related losses... 1.4 1.4 2.5 4.8 0.7 -- 0.1
----------- ----------- ----------- ----------- ---------- ----------- -----------
Operating income.......... 8.7 16.5 20.6 19.2 23.5 (4.2) (4.7)
Interest expense........ 11.3 23.0 26.6 23.4 20.7 5.4 5.1
Other income, net....... (0.4) (0.5) (0.5) (0.2) (1.5) (1.4) --
----------- ----------- ----------- ----------- ---------- ----------- -----------
Income (loss) before
income taxes............ (2.2) (6.1) (5.5) (4.0) 4.3 (8.2) (9.8)
Income tax provision
(benefit)............... 1.5 (1.5) (1.3) (0.4) (0.2) (1.3) (3.2)
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting
principle............... (3.7) (4.5) (4.2) (3.6) 4.5 (6.9) (6.5)
Extraordinary loss on debt
extinguishment, net of
taxes(3)................ (1.5) (0.9) -- -- -- -- --
Cumulative effect of
change in accounting
principle, net of
taxes(4)................ -- (0.2) -- -- -- -- --
----------- ----------- ----------- ----------- ---------- ----------- -----------
</Table>
40
<Table>
<Caption>
THIRTEEN WEEKS ENDED
FISCAL(1) -------------------------
------------------------------------------------------------------ APRIL 2, APRIL 1,
1998(2) 1999 2000 2001 2002 2002 2003
----------- ----------- ----------- ----------- ---------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Net income (loss)(5)...... (5.2) (5.6) (4.2) (3.6) 4.5 (6.9) (6.5)
Other comprehensive
loss -- foreign
translation
adjustment.............. (0.1) (0.1) (0.1) (0.2) -- -- 0.2
----------- ----------- ----------- ----------- ---------- ----------- -----------
Comprehensive income
(loss).................. $ (5.3) $ (5.8) $ (4.3) $ (3.8) $ 4.5 $ (6.9) $ (6.3)
=========== =========== =========== =========== ========== =========== ===========
PER SHARE DATA:
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting
principle, net of taxes:
Basic................... $ (8,807.23) $(12,220.03) $(12,708.54) $(10,844.55) $13,541.17 $(20,691.49) $(19,713.79)
Diluted................. $ (8,807.23) $(12,220.03) $(12,708.54) $(10,844.55) $13,541.17 $(20,691.49) $(19,713.79)
Net income (loss) per
share:
Basic................... $(12,340.32) $(15,273.67) $(12,708.54) $(10,844.55) $13,541.17 $(20,691.49) $(19,713.79)
Diluted................. $(12,340.32) $(15,273.67) $(12,708.54) $(10,844.55) $13,541.17 $(20,691.49) $(19,713.79)
CASH FLOW DATA:
Net cash provided by (used
in) operating
activities.............. $ 2.5 $ 16.1 $ 22.7 $ 24.7 $ 38.6 0.1 (5.0)
Net cash used in investing
activities.............. $ (5.3) $ (25.4) $ (12.9) $ (29.3) $ (45.0) $ (2.9) $ (10.1)
Net cash provided by (used
in) financing
activities.............. $ 6.3 $ 12.8 $ (7.3) $ 5.0 $ 1.7 $ (0.6) $ 16.1
EBITDA:
Net income (loss)(5)...... $ (5.2) $ (5.6) $ (4.2) $ (3.6) $ 4.5 $ (6.9) $ (6.5)
Cumulative effect of
change in accounting
principle, net of
taxes(4)................ -- 0.2 -- -- -- -- --
Extraordinary loss on debt
extinguishment, net of
taxes(3)................ 1.5 0.9 -- -- -- -- --
----------- ----------- ----------- ----------- ---------- ----------- -----------
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting
principle............... (3.7) (4.5) (4.2) (3.6) 4.5 (6.9) (6.5)
Income tax provision
(benefit)............... 1.5 (1.5) (1.3) (0.4) (0.2) (1.3) (3.2)
----------- ----------- ----------- ----------- ---------- ----------- -----------
Income (loss) before
income taxes............ $ (2.2) $ (6.1) $ (5.5) $ (4.0) $ 4.3 $ (8.2) $ (9.8)
Adjustments:
Interest expense........ 11.3 23.0 26.6 23.4 20.7 5.4 5.1
Depreciation and
amortization.......... 18.2 26.8 26.3 24.5 26.2 5.6 6.5
----------- ----------- ----------- ----------- ---------- ----------- -----------
EBITDA(6)................. $ 27.3 $ 43.7 $ 47.4 $ 43.9 $ 51.2 $ 2.8 $ 1.8
Unusual item included in
EBITDA:
Return of bankruptcy
funds to Service
America(7)............ -- -- -- -- 1.4 1.4 --
</Table>
41
<Table>
<Caption>
THIRTEEN WEEKS ENDED
FISCAL(1) -------------------------
------------------------------------------------------------------ APRIL 2, APRIL 1,
1998(2) 1999 2000 2001 2002 2002 2003
----------- ----------- ----------- ----------- ---------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE DATA)
OTHER DATA:
Maintenance capital
expenditures(8)......... $ 4.6 $ 4.9 $ 8.3 $ 12.7 $ 31.2 $ 2.6 $ 2.9
Growth capital
expenditures(8)......... 14.2 21.4 5.6 16.7 $ 16.4 $ 0.3 $ 7.2
----------- ----------- ----------- ----------- ---------- ----------- -----------
Aggregate capital
expenditures(8)......... $ 18.8 $ 26.3 $ 13.9 $ 29.4 $ 47.6 2.9 10.1
Ratio of earnings to fixed
charges(9).............. -- -- -- -- 1.2 -- --
Deficiency in the coverage
of earnings to fixed
charges(9).............. $ (2.2) $ (6.1) $ (5.5) $ (4.0) $ -- (8.2) (9.8)
</Table>
<Table>
<Caption>
DECEMBER 29, DECEMBER 28, JANUARY 2, JANUARY 1, DECEMBER 31, APRIL 2, APRIL 1,
1998 1999 2001 2002 2002 2002 2003
------------ ------------ ---------- ---------- ------------ -------- --------
(IN MILLIONS)
BALANCE SHEET DATA:
Total assets.................. $269.5 $278.6 $265.7 $265.9 $280.2 $258.8 $291.4
Long-term debt (including
current portion)............ $161.3 $224.0 $219.1 $224.6 $225.4 $255.7 $241.6
</Table>
- ---------------
(1) We have adopted a 52-53 week period ending on the Tuesday closest to
December 31 as our fiscal year. The 1998, 1999, 2001 and 2002 fiscal years
consisted of 52 weeks, and the 2000 fiscal year consisted of 53 weeks.
(2) We acquired Service America in 1998 and our results of operations for fiscal
1998 include the results of operations for Service America from the date of
the acquisition in August 1998.
(3) For fiscal 1998, a $1.5 million extraordinary loss on debt extinguishment,
net of taxes resulted from refinancing our secured credit facility; for
fiscal 1999, a $0.9 million extraordinary loss on debt extinguishment
resulted from the early retirement of a portion of the secured credit
facility, net of taxes.
(4) For fiscal 1999, we adopted the provisions of the American Institute of
Certified Public Accountants Statement of Position 98-5, Reporting on the
Costs of Start-up Activities, which requires that costs of start-up
activities be expensed as incurred. As a result, we recorded a charge of
$0.2 million reflecting the cumulative effect of a change in accounting
principle, net of taxes.
(5) In accordance with Statement of Financial Accounting Standards No. 142, or
SFAS 142, effective January 2, 2002, we discontinued the amortization of
goodwill and trademarks and identified intangible assets which we believe
have indefinite lives. Adjusted net income (loss) to give effect to SFAS 142
would have been $(3.9) million for fiscal 1998, $(3.1) million for fiscal
1999, $(1.8) million for fiscal 2000 and $(1.1) million for fiscal 2001.
(6) EBITDA is not a measure in accordance with GAAP. EBITDA is not intended to
represent cash flows from operations as determined by GAAP and should not be
used as an alternative to income (loss) before taxes or net income as an
indicator of operating performance or to cash flows as a measure of
liquidity. We believe that EBITDA is an important measure of the cash
returned on our investment in capital expenditures under our contracts.
42
The following table presents a reconciliation of EBITDA generated by groups
of contracts by category to consolidated EBITDA for fiscal 2002 (figures
reflect rounding adjustments). The reconciliation of consolidated EBITDA to
net income for fiscal 2002 is set forth in the selected table.
<Table>
<Caption>
PERCENT OF PERCENT OF PERCENT OF
CONSOLIDATED CONSOLIDATED CONSOLIDATED
EBITDA EBITDA EBITDA EBITDA EBITDA EBITDA
------ ------------ ------ ------------ ------ ------------
(DOLLARS IN MILLIONS)
EBITDA generated by:
Facility category
Sports facilities............ $36.2 70.6% -- -- -- --
Convention centers........... 9.1 17.9 -- -- -- --
Other entertainment
facilities................. 5.9 11.5 -- -- -- --
Contract category
Profit and loss.............. -- -- $44.9 87.6% -- --
Profit sharing............... -- -- 5.9 11.6 -- --
Management fee............... -- -- 0.4 0.8 -- --
Subsidiary category
Guarantor subsidiaries....... -- -- -- -- $50.3 98.2%
Non-guarantor subsidiaries... -- -- -- -- 0.9 1.8
----- ----- ----- ----- ----- -----
Consolidated EBITDA.............. $51.2 100.0% $51.2 100.0% $51.2 100.0%
===== ===== ===== ===== ===== =====
</Table>
The following table presents a reconciliation of EBITDA generated by our
contracts allocated according to their expiration date to consolidated
EBITDA for fiscal 2002 (figures reflect rounding adjustments). The
reconciliation of consolidated EBITDA to net income for fiscal 2002 is set
forth in the selected table.
<Table>
<Caption>
2008 AND
2003 2004 2005 2006 2007 AFTER
---- ---- ---- ---- ---- --------
(IN MILLIONS)
Annual EBITDA expiring............................ $ 4.8 $ 2.0 $ 6.5 $ 7.5 $ 8.8 $21.6
Aggregate EBITDA expiring......................... 4.8 6.8 13.3 20.8 29.6 51.2
Remaining EBITDA.................................. 46.4 44.4 37.9 30.4 21.6 0.0
----- ----- ----- ----- ----- -----
Consolidated EBITDA............................... $51.2 $51.2 $51.2 $51.2 $51.2 $51.2
===== ===== ===== ===== ===== =====
</Table>
The following table presents a reconciliation of EBITDA generated by groups
of contracts that were up for renewal and lost or retained to consolidated
EBITDA for fiscal 1999-2002 (figures reflect rounding adjustments). The
reconciliation of consolidated EBITDA to net income (loss) is set forth in
the selected table.
<Table>
<Caption>
1999 2000 2001 2002 TOTAL
---- ---- ---- ---- -----
(DOLLARS IN MILLIONS)
Consolidated EBITDA............................. $43.7 $47.4 $43.9 $51.2 $186.2
EBITDA generated by contracts up for renewal.... 2.4 6.6 2.1 10.3 21.4
EBITDA generated by contracts not up for
renewal....................................... 41.3 40.8 41.8 40.9 164.8
Percent of consolidated EBITDA up for renewal... 5.4% 13.9% 4.8% 20.1% 11.5%
EBITDA generated by contracts up for renewal
that were retained............................ $ 2.1 $ 5.6 $ 2.0 $ 9.9 $ 19.5
Percent of EBITDA generated by contracts up for
renewal that were retained.................... 87.0% 84.6% 96.4% 95.5% 91.3%
EBITDA generated by contracts up for renewal
that were lost................................ $ 0.3 $ 1.0 $ 0.1 $ 0.5 $ 1.9
Consolidated EBITDA retained.................... 43.4 46.4 43.8 50.8 184.4
Percent of consolidated EBITDA retained......... 99.3% 97.9% 99.8% 99.1% 99.0%
</Table>
"Adjusted EBITDA," as defined in the indenture governing our subordinated
notes, is determined as EBITDA, as adjusted for transaction related
expenses, contract related losses, other non-cash charges, and the annual
management fee paid to affiliates of the existing equity investors, less any
non-cash credits. We present this discussion of Adjusted EBITDA because
covenants in the indenture governing our subordinated notes contain ratios
based on this measure. For example, our ability to
43
incur additional debt and make restricted payments requires a ratio of Adjusted
EBITDA to fixed charges of 2.0 to 1.0, except that we may incur certain debt and
make certain restricted payments without regard to the ratio, including our
ability to incur an unlimited amount of indebtedness in connection with the
issuance of additional IDSs so long as the ratio of the aggregate principal
amount of the additional subordinated notes to the number of the additional
shares of our common stock will not exceed the equivalent ratio represented
by the then existing IDSs.
On a historical basis, we made the following adjustments to EBITDA to
compute Adjusted EBITDA:
<Table>
<Caption>
THIRTEEN WEEKS
ENDED
FISCAL(1) -------------------
-------------------------------------------- APRIL 2, APRIL 1,
1998(2) 1999 2000 2001 2002 2002 2003
------- ----- ----- ----- ---------- -------- --------
(IN MILLIONS)
EBITDA............................ $27.3 $43.7 $47.4 $43.9 $51.2 $ 2.8 $ 1.8
Adjustments:
Transaction related expenses.... 3.1 1.5 1.1 -- 0.6 -- --
Contract related losses......... 1.4 1.4 2.5 4.8 0.7 -- 0.1
Non-cash compensation........... -- -- 0.3 0.1 0.6 -- --
Management fees paid to
affiliates of Blackstone and
GE Capital................... 0.3 0.4 0.4 0.4 0.4 0.1 0.1
----- ----- ----- ----- ----- ----- -----
Adjusted EBITDA................... $32.1 $47.1 $51.7 $49.2 $53.5 $ 2.9 $ 2.0
===== ===== ===== ===== ===== ===== =====
Unusual item included in EBITDA
and Adjusted EBITDA:
Return of bankruptcy funds to
Service America (see note 7
below)....................... -- -- -- -- 1.4 1.4 --
Ratio of Adjusted EBITDA to fixed
charges......................... 2.98 2.19 2.06 2.24 2.77 0.56 0.38
</Table>
Explanations of the adjustments are listed below:
- Transaction related expenses include:
- for fiscal 1998, $3.1 million of cash severance expenses paid to
former employees and other expenses incurred in connection with the
elimination of redundant personnel and office functions resulting from
the business combination of Volume Services and Service America;
- for fiscal 1999, $1.5 million of cash expenses related to the
elimination of redundant office functions of the Service America
corporate office in connection with the business combination of Volume
Services and Service America;
- for fiscal 2000, $1.1 million of cash non-recurring corporate costs
consisting primarily of expenses incurred in connection with the
analysis of a potential recapitalization and strategic investment
opportunities; and
- for fiscal 2002, $0.6 million of acquisition related cash costs
relating primarily to expenses incurred in connection with the
structuring and evaluation of financing and recapitalization
strategies; and
- Contract related losses include:
- for fiscal 1998, $1.4 million of non-cash charges related to the
write-down to net realizable value of a contract that was terminated;
- for fiscal 1999, $1.4 million of non-cash charges related to the
write-down of impaired assets for certain contracts where the
estimated future cash flows from the contract were insufficient to
cover the carrying cost of the related long-lived assets;
- for fiscal 2000, $1.5 million of non-cash charges related to the
write-down of impaired assets for certain contracts where the
estimated future cash flows from the contract were insufficient to
cover the carrying cost of the related long-lived assets, $0.7 million
of non-cash charges
44
related to the write-off of assets related to litigation settlement and a
non-recurring $0.3 million cash expense in related legal fees;
- for fiscal 2001, $4.8 million of non-cash charges related to the
write-down of impaired assets for certain contracts where the
estimated future cash flows from the contract were insufficient to
cover the carrying cost of the related long-lived assets;
- for fiscal 2002, $0.7 million of non-cash charges related to the
write-down of impaired assets for a contract which was terminated; and
- for the thirteen weeks ended April 1, 2003, $0.1 million in non-cash
charges related to the write-down of impaired assets for a contract
which was terminated.
- Non-cash compensation expenses related to the revaluation of partnership
units purchased by certain members of our management financed with
nonrecourse loans include for fiscal 2000, 2001 and 2002, $0.3 million,
$0.1 million and $0.6 million, respectively.
- Management fees paid to affiliates of Blackstone and GE Capital include
for fiscal 1998, 1999, 2000, 2001 and 2002, $0.3 million, $0.4 million,
$0.4 million, $0.4 million and $0.4 million, respectively, and $0.1
million for each of the thirteen week periods ended April 2, 2002 and
April 1, 2003. The management fees are paid quarterly in arrears and will
cease upon the closing of this offering.
For purposes of calculating the ratio of Adjusted EBITDA to fixed charges,
fixed charges includes interest expense (excluding amortization of deferred
financing fees) plus capitalized interest, the earned discount or yield with
respect to the sale of receivables and cash dividends on preferred stock. On
a pro forma basis, for the thirteen-week period ended April 1, 2003, our
ratio of Adjusted EBITDA to fixed charges under the indenture would have
been to 1.0.
(7) During fiscal 2002, Service America received approximately $1.4 million from
funds previously set aside to satisfy creditors pursuant to a plan of
reorganization approved in 1993.
(8) The sum of maintenance and growth capital expenditures equals the sum of
contract rights acquired, net (purchase of contract rights) and the purchase
of property and equipment, net for the relevant periods as displayed in the
statement of cash flows, as follows:
<Table>
<Caption>
THIRTEEN WEEKS
ENDED
FISCAL(1) -------------------
------------------------------------- APRIL 2, APRIL 1,
1998 1999 2000 2001 2002 2002 2003
----- ----- ----- ----- ----- -------- --------
(IN MILLIONS)
Aggregate capital expenditures................. $18.8 $26.3 $13.9 $29.4 $47.6 $2.9 $10.1
Statement of cash flow data:
Contract rights acquired, net (purchase of
contract rights)........................... 6.2 15.9 7.5 21.3 37.7 0.2 5.8
Purchase of property and equipment, net...... 12.6 10.4 6.4 8.1 9.9 2.7 4.3
----- ----- ----- ----- ----- ---- -----
$18.8 $26.3 $13.9 $29.4 $47.6 $2.9 $10.1
===== ===== ===== ===== ===== ==== =====
</Table>
Maintenance capital expenditures are capital expenditures made to secure
renewals of our existing contracts and maintain these contracts following
renewal. Growth capital expenditures are those made to secure new contracts
and maintain these contracts during their initial term. Accordingly, growth
capital expenditures in any given year consist of up-front capital
investments in new contracts and additional committed investments in
existing contracts that have never previously been renewed. We believe that
the identification and separation of maintenance and growth capital
expenditures are important factors in evaluating our financial results.
While we strive to maintain our present level of EBITDA by securing renewals
of our existing contracts, we cannot assure you that we will maintain our
present level of EBITDA since we cannot predict the future financial
requirements of our clients. Contracts may be renewed at significantly
different commission rates and, thus, levels of EBITDA, depending on the
clients' financial requirements at the time of renewal. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
(9) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as income (loss) before income taxes, extraordinary item and
cumulative effect of change in accounting principle plus fixed charges.
Fixed charges include interest expense on all indebtedness, amortization of
deferred financing costs and one-third of rental expense on operating leases
representing that portion of rental expense deemed to be attributable to
interest. Where earnings are inadequate to cover fixed charges, the
deficiency is reported.
45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Management's discussion and analysis is a review of our results of
operations and our liquidity and capital resources. The following discussion
should be read in conjunction with "Selected Historical Financial Information"
and the financial statements, including the related notes, appearing elsewhere
in this prospectus. The following data have been prepared in accordance with
GAAP.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
financial statement date and reported amounts of revenues and expenses,
including amounts that are susceptible to change. Our critical accounting
policies include accounting methods and estimates underlying such financial
statement preparation, as well as judgments around uncertainties affecting the
application of those policies. In applying critical accounting policies,
materially different amounts or results could be reported under different
conditions or using different assumptions. We believe that our critical
accounting policies, involving significant estimates, uncertainties and
susceptibility to change, include the following:
- Recoverability of property and equipment, contract rights, cost in excess
of net assets acquired (goodwill) and other intangible assets. As of
April 1, 2003, net property and equipment of $57.5 million and net
contract rights of $103.9 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 are compared
to the carrying value of the related long-lived assets. If the
undiscounted future cash flows are lower than the carrying value, an
impairment charge is recorded. The amount of the impairment charge is
equal to the difference between the balance of the long-lived assets and
the future discounted cash flows related to the assets (using a rate
based on our incremental borrowing rate). As we base our estimates of
undiscounted future cash flows on past operating performance, including
anticipated labor and other cost increases, and prevailing market
conditions, we cannot assure you that our estimates are achievable.
Different conditions or assumptions, if significantly negative or
unfavorable, could have a material adverse effect on the outcome of our
evaluation and our financial condition or future results of operations.
Events that would trigger an evaluation at the contract level include the
loss of a tenant team, notice from the client indicating intent to
terminate the contract, 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 April 1,
2003, net goodwill of $46.5 million and other intangible assets
(trademarks) of $17.0 million were recorded. In accordance with SFAS No.
142, on an annual basis, we test our indefinite-lived intangible assets
(goodwill and trademarks) for impairment. Additionally, goodwill is
tested between annual tests if an event occurs or circumstances change
that would more likely than not reduce the fair value of a reporting unit
below its carrying amount. We have determined that the reporting unit is
VSAH. In performing the annual goodwill assessment, we compare the fair
value of VSAH to its carrying amount, including these indefinite-lived
assets. If the fair value of VSAH exceeds the carrying amount, then it is
determined that goodwill is not impaired. Should the carrying amount
exceed the fair value, then we would need to perform the second step in
the impairment test. Fair value for these tests is determined based upon
a discounted cash flow model, using a rate based on our incremental
borrowing rate. As we base our estimates of cash flows on past operating
performance, including anticipated labor and other cost increases and
prevailing market conditions, we cannot assure you
46
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.
- Insurance. We have a high deductible insurance program for general
liability, auto liability and workers' compensation risk. We are required
to estimate and accrue for the amount of losses that we expect to incur
and will ultimately have to pay for under the deductible during the
policy year. These amounts are recorded in cost of sales and selling,
general and administrative expenses on the statement of operations and
accrued liabilities and long-term liabilities on the balance sheet. Our
estimates consider a number of factors, including historical experience
and actuarial assessment of the liabilities for reported claims and
claims incurred but not reported. While we use outside parties to assist
us in making these estimates, it is difficult to provide assurance that
the actual amounts may not be materially different than what we have
recorded. In addition we are self-insured for employee medical benefits
and related liabilities. Our liabilities are based on historical trends
and claims filed and are estimated for claims incurred but not reported.
While the liabilities represent management's best estimate, actual
results could differ significantly from those estimates.
- Deferred income taxes. We recognize deferred tax assets and liabilities
based on the expected future tax consequences of temporary differences
between the carrying amounts and the tax basis of assets and liabilities.
Our primary deferred tax assets relate to net operating losses and credit
carryovers. The realization of these deferred tax assets depends upon our
ability to generate future income. If our results of operations are
adversely affected, not all of our deferred tax assets, if any, may be
realized.
SEASONALITY AND QUARTERLY RESULTS
Our net sales and operating results have varied, and are expected to
continue to vary, from quarter to quarter (a quarter is comprised of thirteen or
fourteen weeks), as a result of factors which include:
- seasonality of sporting and other events;
- unpredictability in the number, timing and type of new contracts;
- timing of contract expirations and special events; and
- level of attendance at the facilities which we serve.
Business at the principal types of facilities we serve is seasonal in
nature. MLB and minor league baseball related sales are concentrated in the
second and third quarters, the majority of NFL related activity occurs in the
fourth quarter and convention centers and arenas generally host fewer events
during the summer months. Results of operations for any particular quarter may
not be indicative of results of operations for future periods.
Set forth below are comparative net sales for the first quarter of fiscal
2003 and by quarter for fiscal 2002, 2001 and 2000, as well as operating income
(loss) and net income (loss), on an actual and per share basis (in thousands,
except per share data):
<Table>
<Caption>
2003
------------------------------------------------------------------------
BASIC AND
DILUTED OPERATING NET BASIC AND
OPERATING INCOME (LOSS) INCOME DILUTED EARNINGS
SALES INCOME (LOSS) PER SHARE (LOSS) (LOSS) PER SHARE
------- ------------- ----------------- ------- ----------------
1st Quarter..................... $96,900 $(4,715) $(14,201.81) $(6,545) $(19,713.79)
</Table>
47
<Table>
<Caption>
2002
-------------------------------------------------------------------------
BASIC AND
DILUTED OPERATING NET BASIC AND
OPERATING INCOME (LOSS) INCOME DILUTED EARNINGS
SALES INCOME (LOSS) PER SHARE (LOSS) (LOSS) PER SHARE
-------- ------------- ----------------- ------- ----------------
1st Quarter.................... $ 87,840 $(4,185) $(12,605.42) $(6,870) $(20,691.49)
2nd Quarter.................... $166,421 $ 9,813 $ 29,557.23 $ 3,841 $ 11,569.60
3rd Quarter.................... $195,100 $15,892 $ 47,867.47 $ 9,783 $ 29,466.29
4th Quarter.................... $127,801 $ 1,975 $ 5,948.80 $(2,258) $ (6,803.23)
</Table>
<Table>
<Caption>
2001
--------------------------------------------------------------------------
BASIC AND
DILUTED OPERATING NET BASIC AND
OPERATING INCOME (LOSS) INCOME DILUTED EARNINGS
SALES INCOME (LOSS) PER SHARE (LOSS) (LOSS) PER SHARE
-------- ------------- ----------------- -------- ----------------
1st Quarter.................... $ 83,194 $(4,107) $(12,370.48) $(10,631) $(32,021.07)
2nd Quarter.................... $157,646 $ 8,117 $ 24,448.80 $ 2,155 $ 6,487.58
3rd Quarter.................... $177,559 $13,862 $ 41,753.01 $ 8,399 $ 25,298.59
4th Quarter.................... $124,714 $ 1,283 $ 3,864.46 $ (3,523) $(10,609.65)
</Table>
<Table>
<Caption>
2000
-------------------------------------------------------------------------
BASIC AND
OPERATING DILUTED OPERATING NET BASIC AND
INCOME INCOME (LOSS) INCOME DILUTED EARNINGS
SALES (LOSS) PER SHARE (LOSS) (LOSS) PER SHARE
-------- ------------- ----------------- ------- ----------------
1st Quarter.................... $ 80,120 $(1,164) $ (3,506.02) $(7,842) $(23,620.48)
2nd Quarter.................... $143,637 $ 6,360 $ 19,156.63 $ 2,047 $ 6,164.44
3rd Quarter.................... $188,289 $14,934 $ 44,981.93 $ 6,184 $ 16,628.44
4th Quarter.................... $110,487 $ 454 $ 1,367.47 $(4,608) $(13,880.94)
</Table>
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED APRIL 1, 2003 COMPARED TO THE THIRTEEN WEEKS ENDED APRIL
2, 2002
Net Sales. Net sales of $96.9 million for the thirteen weeks ended April
1, 2003 increased by $9.1 million (approximately 10%) from $87.8 million in the
prior year period. The increase was primarily attributable to new accounts and
higher convention center sales. Convention center sales had been adversely
impacted by the events of September 11, 2001 during the first quarter of fiscal
2002.
Cost of Sales. Cost of sales of $81.7 million for the thirteen weeks ended
April 1, 2003 increased by $6.9 million from $74.8 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 1% from the prior year period
to 84%. The decline was mainly due to operating efficiencies, most notably in
cost of merchandise sold, achieved at certain facilities at which we operate.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses of $13.4 million in the thirteen weeks ended April 1,
2003 increased approximately 0.6% as a percentage of net sales from the prior
year period. The increase was primarily the result of higher corporate overhead
expenses related to the addition of management positions during fiscal 2002 and
approximately $0.2 million in non-recurring marketing and other expenses
associated with the change in the tradename for our operating subsidiaries from
Volume Services America to Centerplate. We anticipate the fiscal 2003 impact of
the additional employees will be an increase in corporate overhead of 0.2%, as a
percentage of net sales, as compared to fiscal 2002; however, as a result of the
additional management positions, we expect to achieve improvements in operating
income at the facilities at which we provide services.
Depreciation and Amortization. Depreciation and amortization was $6.5
million for the thirteen weeks ended April 1, 2003, compared to $5.6 million in
the prior year period. The increase was principally
48
attributable to higher amortization expense primarily related to investments
made beginning in the second quarter of fiscal 2002 for the renewal and/or
acquisition of certain contracts.
Contract Related Losses. Contract related losses of $0.1 million were
recorded in the thirteen weeks ended April 1, 2003 for a terminated contract. No
such charges were incurred in the prior year period.
Operating Loss. Operating loss increased approximately $0.5 million from
the prior year period due to the factors described above.
Interest Expense. Interest expense decreased by $0.3 million from the
prior year period principally due to lower interest rates on our variable rate
debt, which were partially offset by an increase in borrowings.
Other Income, Net. During the first quarter of fiscal 2002, Service
America received approximately $1.4 million in connection with funds previously
set aside to satisfy creditors pursuant to a plan of reorganization approved in
1993. Under the plan of reorganization, Service America was required to deposit
funds with a disbursing agent for the benefit of its creditors. Any funds which
remained unclaimed by its creditors after a period of two years from the date of
distribution were forfeited and all interest in those funds reverted back to
Service America. Counsel has advised that Service America has no obligation to
escheat such funds.
Income Taxes. We have evaluated the available evidence about future
taxable income and other sources of realization of deferred tax assets and based
on our best current estimates believe taxable income will be realized in fiscal
2003. Accordingly, in the thirteen weeks ended April 1, 2003, a tax benefit of
$3.2 million was recognized in comparison to the recognition of a $1.3 million
tax benefit in the prior year period.
FISCAL 2002 COMPARED TO FISCAL 2001
Net Sales. Net sales of $577.2 million during fiscal 2002 increased $34.1
million or approximately 6% from $543.1 million in fiscal 2001. Our sports
facility accounts accounted for approximately $20.2 million of the increase, of
which $10.5 million was related to NFL venues. Five additional NFL games were
played in our clients' facilities in fiscal 2002, including four games that had
been postponed from fiscal 2001 due to the events of September 11, 2001, and
Super Bowl XXXVI. Additionally, a slight increase of $0.8 million was generated
at MLB venues due primarily to an increase in sales as a result of post-season
activity, including the World Series. Sales at convention centers and other
entertainment facilities increased $2.3 million and $6.2 million, respectively.
In addition, newly acquired service contracts generated net sales of $4.6
million.
Cost of Sales. Cost of sales of $470.9 million for fiscal 2002 increased
by $24.3 million from $446.6 million for fiscal 2001. The increase was due
primarily to the increase in sales volume. Cost of sales as a percentage of net
sales decreased by approximately 0.4% from fiscal 2001 to 81.6%. This decrease
was due mainly to efficiencies associated with the greater sales volume.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses of $55.3 million increased approximately 0.7% as a
percentage of net sales as compared to fiscal 2001. The increase was primarily
the result of higher insurance costs due to dramatic price increases in the
insurance market post September 11, 2001, higher corporate overhead expenses
related to the addition of management positions and an increase in professional
fees. With respect to the insurance increase, we obtained estimates for the
casualty insurance program (workers' compensation, general liability, and
automobile liability policies) from multiple insurance companies at the end of
2001. Due to increased rates across the insurance market in the wake of
September 11, 2001, and after reviewing the results of the estimates obtained
along with an independent actuarial analysis, it was our assessment that a high
deductible program was more cost effective than a guaranteed cost (zero
deductible) program.
Depreciation and Amortization. Depreciation and amortization was $26.2
million in fiscal 2002 compared to $24.5 million in fiscal 2001. The increase
was principally attributable to higher amortization
49
expense related to investments for the renewal and/or acquisition of certain
contracts, partially offset by a decline in amortization as a result of the
discontinuation of goodwill and trademark amortization ($2.5 million) in
accordance with Statement of Financial Accounting Standards No. 142 Goodwill and
Other Intangible Assets.
Transaction Related Expenses. Acquisition related costs of $0.6 million
were incurred in fiscal 2002 relating primarily to expenses incurred in
connection with the structuring and evaluation of financing and recapitalization
strategies, including proposals for securities offerings that preceded the
proposed offering of IDSs and the related refinancing of the existing credit
facility and senior subordinated notes. No such expenses were incurred in 2001.
Contract Related Losses. Contract related losses of $0.7 million in fiscal
2002 reflected an impairment charge related to a write-down of contract rights
for one contract. In fiscal 2001, contract related losses of $4.8 million
reflected an impairment charge of $2.3 million for equipment, leasehold
improvements and location contracts with respect to certain contracts. Most of
the $2.3 million impairment charge related to two of our clients which filed for
Chapter 11 bankruptcy in 2001. Additionally, $2.5 million in other assets -
chiefly long-term receivables related to one of those clients -- was written
off.
Operating Income. Operating income increased approximately $4.3 million in
fiscal 2002 as compared to fiscal 2001 due to the factors described above.
Interest Expense. Interest expense decreased by $2.7 million from fiscal
2001 due primarily to lower interest rates on our variable rate debt.
Other Income, Net. During fiscal 2002, Service America received
approximately $1.4 million in connection with funds set aside to satisfy
creditors pursuant to a plan of reorganization approved in 1993. Under the plan
of reorganization, Service America was required to deposit funds with a
disbursing agent for the benefit of its creditors. Any funds which remained
unclaimed by its creditors after a period of two years from the date of
distribution were forfeited and all interest in those funds reverted back to
Service America. Counsel has advised that Service America has no obligation to
escheat such funds.
Income Taxes. Management has evaluated the available evidence about future
taxable income and other possible sources of realization of deferred tax assets,
and, based on its best current estimates, believes taxable income or benefit
will be realized in fiscal 2002 and beyond. Accordingly, in fiscal 2002 we have
reduced the valuation allowance by $1.3 million and recorded a tax benefit of
approximately $0.2 million in comparison to the recognition of a benefit of $0.4
million in fiscal 2001.
OUTLOOK
The continuing weak economy has had an adverse impact on the levels of
attendance at some sports and many convention center facilities we serve and on
the levels of spending at those convention center facilities. Looking forward,
we expect economic conditions to continue to be a challenge to growth and
profitability through the end of fiscal 2003.
The events of September 11, 2001 have caused a significant increase in our
insurance costs in connection with the recreational facilities where we provide
services. We expect that future insurance premiums will continue to increase and
certain coverages, such as terrorist acts coverage, will no longer be available
or will be meaningfully reduced.
FISCAL 2001 COMPARED TO FISCAL 2000
Net Sales. In fiscal 2001, net sales increased 3.9% or $20.6 million as
compared to fiscal 2000. The increase was primarily due to new accounts
(approximately 5%) and an increase in MLB related sales (approximately 3%). We
commenced operations at 17 new accounts during fiscal 2001 including one NFL
stadium and six minor league baseball facilities generating additional net sales
of $34.8 million. Partially offsetting this was the loss of $9.2 million in net
sales associated with the closure of several accounts. Our
50
increase in MLB related sales of $14.8 million was primarily driven by results
at three accounts where the tenant teams had highly successful seasons resulting
in higher attendance and per capita spending.
The increases were, in part, offset by a decline in NFL related sales of
$6.5 million due primarily to four fewer post season NFL games in fiscal 2001
and the postponement of four NFL games until fiscal 2002 as a result of the
September 11, 2001 terrorist attacks. Additionally, at two of the NFL facilities
we service, non-NFL related sales declined by approximately $4.9 million as a
result of fewer concerts and other ancillary events. Sales at our convention
center accounts, which were adversely impacted by the general economic slowdown
and the events of September 11, 2001, declined $9.8 million. We estimate that
the impact of September 11, 2001 directly reduced our consolidated net sales
approximately 2% in fiscal 2001 from the level we would have expected absent
such conditions.
Cost of Sales. Cost of sales as a percentage of net sales increased 1%
from fiscal 2000. The primary components of the increase were higher commission
costs associated with an increase in sales at accounts with higher commission
rates and a change in the sales mix to products with higher commission
structures at certain accounts.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, as a percentage of net sales, declined less than 1.0%
as a result of effective cost controls.
Depreciation and Amortization. Depreciation and amortization declined $1.8
million from fiscal 2000. The decrease was primarily due to a decline in
amortization which was the result of the expiration of the initial contract term
of certain service contracts.
Transaction Related Expenses. Non-recurring corporate costs of $1.1
million were incurred during fiscal 2000 relating primarily to expenses incurred
in connection with the analysis of a potential recapitalization and strategic
investment opportunities. No such expenses were incurred in 2001.
Contract Related Losses. Contract related losses of $4.8 million for
fiscal 2001 reflected an impairment charge of $2.3 million for equipment,
leasehold improvements and location contracts with respect to certain contracts
under which we intend to continue performing. Most of the $2.3 million
impairment charge related to two of our clients which filed for Chapter 11
bankruptcy. Additionally, we wrote off $2.5 million of other assets primarily
representing long-term receivables related to one of those clients. We are
currently still operating at the location; however, our ability to continue to
operate at this account depends on the final outcome of the bankruptcy
proceedings. We have approximately $600,000 in equipment and leasehold
improvements recorded for this location. We are unable to predict the ultimate
outcome or whether there will be additional losses related to this contract.
Contract related losses of $2.5 million in the prior year period included an
impairment charge of approximately $1.5 million relating to certain contracts
which we continue to perform and a $0.7 million charge for the write-off of a
client receivable and $0.3 million in related legal fees for a terminated
service contract.
Operating Income. Operating income declined by $1.4 million from fiscal
2000, primarily due to the factors discussed above. We estimate that the impact
of September 11, 2001, reduced our operating income approximately 8% in fiscal
2001 from the level we would have expected absent such conditions.
Interest Expense. Interest expense declined $3.1 million from fiscal 2000,
chiefly associated with lower interest rates on our adjustable rate debt.
LIQUIDITY AND CAPITAL RESOURCES
For the thirteen weeks ended April 1, 2003, net cash used in operating
activities was $5.0 million compared to net cash provided by operating
activities of $0.1 million in the prior year period. The $5.1 million decline in
cash provided from the prior year period was principally attributable to cash
used to fund working capital and other non-current assets and liabilities of
$4.8 million. The improvement in the convention center business discussed above
resulted in an increase in our accounts receivable, as a significant portion of
the sales resulted from an increase in catering sales where credit is granted to
our
51
customer versus the predominantly cash sales made at sports facilities. The
additional working capital increases are seasonal and are reflective of an
anticipated temporary increase in working capital.
Net cash used in investing activities was $10.1 million for the thirteen
weeks ended April 1, 2003 compared to $2.9 million in the prior year. Of this
$10.1 million, $6.6 million was the result of investment in contract rights and
property and equipment associated with service contracts acquired in the current
period.
Net cash provided by financing activities was $16.1 million in the thirteen
weeks ended April 1, 2003 as compared to net cash used in financing activities
of $0.6 million in the prior year period, primarily reflecting higher net
borrowings under our revolving credit facility to fund the higher level of
contract investment and working capital requirements in the current period. As
of April 1, 2003, we had approximately $31.5 million in outstanding revolving
and swingline loans as compared to $14.3 million as of April 2, 2002.
For fiscal 2002, net cash provided by operating activities was $38.6
million as compared to $24.7 million in fiscal 2001. The $13.9 million increase
was principally attributable to a $8.1 million increase in net income, mainly as
the result of the $4.3 million improvement in operating income, $2.7 million
decline in interest expense and the recovery of $1.4 million in funds by Service
America, as discussed above. Additionally, our working capital decreased as
compared to the prior year period chiefly due to higher accrued commissions,
insurance and legal fees.
Net cash used in investing activities was $45.0 million in fiscal 2002
compared to $29.3 million in fiscal 2001, primarily reflecting a higher level of
investment in contract rights and property and equipment associated with
renewals of existing contracts in fiscal 2002.
Net cash provided by financing activities was $1.7 million in fiscal 2002
as compared to $5.0 million in fiscal 2001. As of December 31, 2002, $15.0
million in revolving loans were outstanding under our revolving credit facility
as compared to $12.8 million at the end of fiscal 2001; however, the increase in
net borrowings was only $2.2 million in fiscal 2002 versus $6.8 million in
fiscal 2001. In addition, net cash provided by bank overdrafts increased by
approximately $1.4 million in fiscal 2002 as compared to fiscal 2001.
At December 31, 2002, $43.7 million was available to be borrowed under our
revolving credit facility. At that date, there were $15.0 million in outstanding
borrowings and $16.3 million of outstanding, undrawn letters of credit reducing
availability.
For fiscal 2001, net cash provided by operating activities was $24.7
million as compared to $22.7 million in fiscal 2000. The $2.0 million increase
was primarily due to lower interest costs and a decline in working capital
partially offset by a decrease in income from operations.
Net cash used in investing activities was $29.3 million in fiscal 2001
compared to $12.9 million in the prior year period. The $16.4 million increase
in cash used in investing activities primarily reflected a higher level of
investment in contract rights and property and equipment associated with new
accounts in fiscal 2001.
Net cash provided by financing activities was $5.0 million in fiscal 2001
as compared to $7.3 million used in financing activities in fiscal 2000. The
change primarily reflects net borrowings of $6.8 million under the old credit
facility used primarily to finance capital investments as compared to the $3.5
million in net repayments in fiscal 2000. Additionally, our bank overdraft
declined $0.5 million compared to $2.4 million in fiscal 2000.
We expect that the new credit facility will be comprised of a revolving
credit facility in an aggregate principal amount of up to $ million and
senior secured notes in an aggregate principal amount of million. We expect
that our revolving credit facility will have a -year maturity period and the
senior secured notes will have a -year maturity period. We expect to use
borrowings under the revolving credit facility for general corporate purposes,
including working capital, capital expenditures, payment of dividends and
letters of credit. Upon the closing of this offering, we expect to borrow
52
$ million under the new credit facility to repurchase shares of our common
stock held by the existing equity investors and to pay for a portion of VSA's
senior subordinated notes accepted for purchase in the tender offer and consent
solicitation, and $ million will be available for borrowing.
We expect that the new credit facility will require that we meet certain
financial tests, including, without limitation, the following tests: a maximum
net leverage ratio, a minimum fixed charge coverage ratio and a total debt to
book capitalization ratio. We also expect that our new credit facility will
contain customary covenants and restrictions, including, among others,
limitations or prohibitions on declaring dividends and other distributions,
redeeming and repurchasing our other indebtedness, loans and investments,
additional indebtedness, liens, sale-leaseback transactions, capital
expenditures, recapitalizations, mergers, acquisitions and asset sales and
transactions with affiliates.
We are also often required to obtain performance bonds, bid bonds or
letters of credit to secure our contractual obligations. As of April 1, 2003, we
had requirements outstanding for performance bonds and letters of credit of
$13.3 million and $16.2 million, respectively. Under the new credit facility, we
will have an aggregate of $ available for letters of credit, subject to
an overall borrowing limit of $ million under that facility.
Our capital expenditures can be categorized into two types: maintenance and
growth. Maintenance capital expenditures are associated with securing renewals
of our existing contracts and maintaining those contracts following renewal.
Growth capital expenditures are those made in connection with securing new
contracts and maintaining those contracts during their initial term. In both
cases, particularly for sports facilities, capital expenditures are often
required in the form of contract acquisition fees or up-front or committed
future capital investment to help finance facility construction or renovation.
This expenditure typically takes the form of investment in leasehold
improvements and food service equipment and grants to owners or operators of
facilities. We provide our historical maintenance and growth capital
expenditures for each of the five fiscal years ended December 31, 2002 in
"Selected Historical Financial Information." The amount of maintenance capital
expenditures in fiscal 2002, a total of $31.2 million, increased significantly
due to the renewal of several large long-term contracts. We have historically
financed our capital expenditures with a combination of cash from operating
activities and borrowings under the revolving line of credit of the existing
credit facility.
We believe that the identification and separation of maintenance and growth
capital expenditures are important factors in evaluating our business results.
While we strive to maintain our present level of EBITDA by securing renewals of
our existing contracts, we cannot assure you that we will maintain our present
level of EBITDA since we cannot predict the future financial requirements of our
clients. Contracts may be renewed at significantly different commission rates,
and thus levels of EBITDA, depending on the clients' financial requirements at
the time of renewal.
The amount of capital commitment required by us can vary significantly. The
ability to make those expenditures is often an essential element of a successful
bid on a new contract or renewal of an existing contract. The following table
shows our EBITDA for fiscal 2002, which equalled $51.2 million, as allocated
according to the expiration year of our contracts:
<Table>
<Caption>
CONTRACTS EXPIRING IN:
- -------------------------------------------------
2003 2004 2005 2006 2007 2008 AND AFTER
- ---- ---- ---- ---- ---- --------------
(IN MILLIONS)
$4.8 $2.0 $6.5 $7.5 $8.8 $21.6
</Table>
See Footnote (6) to "Selected Historical Financial Information" for a
reconciliation of EBITDA generated by these contracts to net income.
Commission and management fee rates vary significantly among contracts
based primarily upon the amount of capital that we invest, the type of facility
involved, the term of the contract and the services provided by us. In general,
within each client category, the level of capital investment and commission are
related, such that the greater the capital investment that we make, the lower
the commission we pay to
53
the client. Our profit sharing contracts generally provide that we are
reimbursed each year for the amortization of our capital investments prior to
determining profits under the contract.
At the end of the contract term, all capital investments that we have made
typically remain the property of the client, but our contracts generally provide
that the client must reimburse us for any undepreciated or unamortized capital
investments or fees made pursuant to the terms of the contract if the contract
is terminated early, other than due to our default.
We believe that cash flow from operating activities, together with
borrowings available under the new credit facility, will be sufficient to fund
our currently anticipated capital investment requirements, interest and
principal payment obligations, working capital requirements and anticipated
dividend payments. In fiscal 2002 we made capital investments of $45.0 million,
net of $2.3 million in reimbursement of book value under a contract that was
terminated early. We have already committed approximately $12.7 million for
growth capital expenditures in fiscal 2003. We are currently committed to fund
aggregate capital investments of approximately $18.8 million and $1.8 million in
2003 and 2004, respectively. We expect that future maintenance capital
expenditures will be financed through net cash provided by operating activities.
We expect that future growth capital expenditures will be financed through
borrowings under our new revolving credit facility, issuances of additional IDSs
or other securities of ours, net cash provided by operating activities, other
third party financing or a combination of these alternatives. We expect that as
a result of the changes to both our capital structure (including the repayment
of all outstanding borrowings under VSA's existing credit facility, VSA's
entering into a new credit facility, the repurchase of VSA's senior subordinated
notes and issuance of the IDSs offered hereby) and our dividend policy discussed
under "Dividend Policy," we may be limited in our ability to grow EBITDA, and
our related levels of growth capital expenditures, at rates as great as the
relatively rapid EBITDA growth that we have experienced over the last several
years. In particular, we may not be able to pursue future growth opportunities
if third-party financing, including borrowings under our new credit facility or
issuances by us of IDSs or other securities, is not available to us on favorable
terms or at all.
CONTRACTUAL COMMITMENTS
We have future obligations for debt repayments, future minimum rental and
similar commitments under non-cancelable operating leases as well as contingent
obligations related to outstanding letters of credit. These obligations as of
April 1, 2003, without giving effect to this offering and the related
transactions, are summarized below:
<Table>
<Caption>
LESS THAN 1-3 4-5 MORE THAN
TOTAL 1 YEAR YEARS YEARS 5 YEARS
------ --------- ------ ----- ---------
(IN MILLIONS)
Long-term borrowings.................... $241.6 $ 4.4 $137.2 $ -- $100.0
Operating leases........................ 1.4 0.6 0.8 -- --
Commissions and royalties(1)............ 34.3 6.2 17.1 4.6 6.4
Other long-term obligations(2).......... 16.9 11.3 5.3 0.3 --
------ ----- ------ ---- ------
Total contractual obligations........... $294.2 $22.5 $160.4 $4.9 $106.4
====== ===== ====== ==== ======
</Table>
- ---------------
(1) We had minimum guaranteed commission and royalty expenses of $10.2 million
in fiscal 2000, $7.0 million in fiscal 2001 and $7.6 million in fiscal 2002
and aggregate commission and royalty expenses of $168.7 million in fiscal
2000, $183.3 million in fiscal 2001 and $192.4 million in fiscal 2002.
(2) Represents capital commitments in connection with several long-term
concession contracts.
<Table>
<Caption>
PAYMENTS DUE BY PERIOD
-------------------------------------
LESS THAN 1-3 4-5 MORE THAN
OTHER COMMERCIAL COMMITMENTS TOTAL 1 YEAR YEARS YEARS 5 YEARS
- ---------------------------- ----- --------- ----- ----- ---------
Letters of credit......................... $16.3 $16.3 $ -- $ -- $ --
</Table>
54
On a pro forma basis after giving effect to this offering, the expected use
of proceeds and the new credit facility, we believe that our net cash provided
by operating activities and borrowing capacity under the new credit facility
will be sufficient to enable us to fund our liquidity needs for the foreseeable
future. Should we be unable to borrow under the new credit facility, we would
seek other sources of debt or equity funding. However, we cannot assure you that
we will be successful in obtaining alternate sources of funding in sufficient
amounts or on acceptable terms.
MANAGEMENT BONUSES
Pursuant to our bonus plan, in February 2003 we paid a total of
approximately $1 million to our general managers and senior management
personnel, expensed as cost of sales, with respect to our financial performance
in fiscal 2002. This amount was the aggregate bonus amount available for bonuses
regardless of the participants. As discussed under "Management -- Director and
Executive Compensation -- Compensation of Executive Officers" and "-- Annual
Bonus Plan," bonuses payable to our named executive officers of $400,000 earned
for fiscal year 2002 financial performance were forfeited in exchange for a
commitment that we pay to them contingent bonuses of up to $1 million in the
aggregate upon our successful refinancing or similar transaction, currently
anticipated to occur pursuant to this offering, but not limited to this
offering. By forfeiting these bonuses, the named executive officers' share of
the original $1 million aggregate bonus amount inured to the benefit of the
general managers and senior management personnel. Had the named executive
officers not forfeited these bonuses, there would have been no increase in the
amount of bonus expense included in cost of sales. These contingent bonuses will
be paid with the proceeds of this offering and expensed as cost of sales when
paid. Subject to the determination of our chief executive officer, our board of
directors and our compensation committee to be implemented after this offering,
we anticipate that, excluding the contingent bonuses, under the bonus plan in
effect for 2003, the aggregate bonus amount to be expensed in 2003 is comparable
to the amount expensed in 2002 for similar performance, including the payments
to the named executive officers that were forfeited in 2002.
NEW ACCOUNTING STANDARDS
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
First, SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that statement, SFAS No. 64,
Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements. Because of the
rescission of SFAS No. 4, the gains and losses from the extinguishment of debt
are no longer required to be classified as extraordinary items. SFAS No. 64
amended SFAS No. 4 and is no longer needed because SFAS No. 4 is rescinded.
Second, SFAS No. 145 rescinds SFAS No. 44, Accounting for Intangible Assets of
Motor Carriers. This statement was originally issued to establish accounting
requirements for the effects of transition to the provisions of the Motor
Carrier Act of 1980. As those transitions are complete, SFAS No. 44 is no longer
needed. Third, SFAS No. 145 amends SFAS No. 13, Accounting for Leases, to
require sale-leaseback accounting for certain lease modifications that have
economic effects that are similar to sale-leaseback transactions. The amendment
of SFAS No. 13 is effective for transactions occurring after May 15, 2002. There
has been no impact on us due to the amendment of SFAS No. 13. Lastly, SFAS No.
145 makes various technical corrections to existing pronouncements that are not
substantive in nature. The implementation of this standard did not have a
material effect on our financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for
Certain Employees Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring) and is effective for exit
or disposal activities after December 31, 2002. The implementation of this
standard did not have a material effect on our financial position or results of
operations.
55
On November 25, 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, which elaborates on the disclosures to be
made by a guarantor about its obligations under certain guarantees issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The Interpretation expands on the accounting guidance of
SFAS No. 5, Accounting for Contingencies, SFAS No. 57, Related Party
Disclosures, and SFAS No. 107, Disclosures about Fair Value of Financial
Instruments. The Interpretation also incorporates, without change, the
provisions of FASB Interpretation No. 34, Disclosure of Indirect Guarantees of
Indebtedness of Others, which it supersedes. The Interpretation does identify
several situations where the recognition of a liability at inception for a
guarantor's obligation is not required. The initial recognition and measurement
provisions of Interpretation No. 45 apply on a prospective basis to guarantees
issued or modified after December 31, 2002, regardless of the guarantor's fiscal
year-end. The disclosures are effective for financial statements of interim or
annual periods ending after December 15, 2002. Adoption of this Interpretation
did not have a material effect on our financial position or results of
operations.
On December 31, 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation -- Transition and Disclosure. SFAS No. 148 amends SFAS
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure provisions of
SFAS No. 123 and APB Opinion No. 28, Interim Financial Reporting, to require
disclosure in the summary of significant accounting policies of the effects of
an entity's accounting policy with respect to stock-based employee compensation
on reported net income and earnings per share in annual and interim financial
statements. While SFAS No. 148 does not amend SFAS No. 123 to require companies
to account for employee stock options using the fair value method, the
disclosure provisions of SFAS No. 148 are applicable to all companies with
stock-based employee compensation, regardless of whether they account for that
compensation using the fair value method of SFAS No. 123 or the intrinsic value
method of APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS
No. 148's amendment of the transition and annual disclosure requirements of SFAS
No. 123 are effective for fiscal years ending after December 15, 2002. The
implementation of this standard did not have a material effect on our financial
position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51, Consolidated Financial Statements. This Interpretation applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. This Interpretation may be
applied prospectively with a cumulative-effect adjustment as of the date on
which it is first applied or by restating previously issued financial statements
for one or more years with a cumulative-effect adjustment as of the beginning of
the first year restated. Adoption of this Interpretation did not have a material
effect on our financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies financial accounting and reporting for derivative instruments
including certain derivatives embedded in other contracts. This statement is
effective for contracts entered into or modified after June 30, 2003. The
implementation of this standard is not expected to have a material effect on our
financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
establishes standards for classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. This statement
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
after June 15, 2003. The implementation of this standard is not expected to have
a material effect on our financial position or results of operations.
56
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
<Table>
<Caption>
FAIR VALUE
2003 2004 2005 2006 THEREAFTER TOTAL 4/1/03
------ ------ ------ ------ ---------- ------ ----------
(DOLLARS IN MILLIONS)
Long-term debt:
Variable rate................... $ 4.3 $ 29.1 $ 1.2 $107.0 $ -- $141.6 $141.6
Average interest rate........... 5.26% 5.26% 5.26% 5.26% 5.26%
Fixed rate...................... $ -- $ -- $ -- $ -- $100.0 $100.0 $ 95.0
Average interest rate........... 11.25% 11.25% 11.25% 11.25% 11.25%
</Table>
As of April 1, 2003, we had $110,113,000 in term loans outstanding.
Installments of the loan are due in consecutive quarterly installments on the
last day of each fiscal quarter with 25% of the following annual amounts being
paid on each installment date; $1,150,000 in each year from 2003 through 2005
and $106,950,000 due in 2006. As of April 1, 2003, we also had $28,000,000
outstanding in revolving loans on our revolving credit facility of our existing
credit facility which matures on December 3, 2004 and $3,500,000 in swingline
loans due during the second fiscal quarter of 2003. The weighted average
variable rates are based on implied forward rates in the yield curve at the
reporting date. VSA also has senior subordinated notes outstanding in an
aggregate principal amount of $100,000,000. These senior subordinated notes
mature on March 1, 2009.
As of April 1, 2003, on a pro forma as adjusted basis after giving effect
to this offering, including the use of proceeds from this offering, the
repayment of all outstanding borrowings under VSA's existing credit facility,
the tender offer and consent solicitation and the borrowings under the new
credit facility, as if those transactions had occurred on that date and VSA had
entered into the new credit facility on that date, we would have had $
million of fixed rate long-term debt, consisting of $ million of the
subordinated notes represented by the IDSs and $ million of term loans, and
$ million in variable rate long-term debt, consisting of $ million of
term loans and up to $ million of the revolving credit facility. For
additional information regarding the variable interest rates under the new
credit facility, See "Description of Certain Indebtedness -- New Credit
Facility."
57
BUSINESS
OVERVIEW
We are a leading provider of food and beverage concessions, catering and
merchandise services for sports facilities, convention centers and other
entertainment facilities throughout the United States. 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 and are:
- the second largest provider to NFL facilities (10 teams);
- the third largest provider to MLB facilities (7 teams (6 teams after the
completion of the 2003 season));
- the largest provider to minor league baseball and spring training
facilities (27 teams); and
- one of the largest providers to major convention centers (those with
greater than approximately 300,000 square feet of exhibition space) (10
centers).
We have a large diversified client base. As of December 31, 2002, we served
129 facilities, with an average length of client relationship of over 15 years.
Some of our major accounts by client category include:
- Yankee Stadium in New York City, representing approximately 8.6% of our
net sales;
- the Louisiana Superdome, home of the New Orleans Saints, representing
approximately 3.5% of our net sales;
- the Seattle Mariners' Safeco Field, representing approximately 5.3% of
our net sales;
- the National Trade Centre in Toronto, Canada's largest exhibit hall,
representing approximately 0.7% of our net sales;
- the Vancouver Convention & Exhibition Centre, representing approximately
1.1% of our net sales; and
- the Los Angeles Zoo, representing approximately 1.3% of our net sales.
Our contracts are typically long-term and exclusive. From 1999 through
2002, contracts came up for renewal that generated, on average, approximately
14.8% of our net sales and approximately 11.5% of our EBITDA for each year.
During this period, we retained contracts up for renewal that generated, on
average, approximately 85.3% of our net sales and approximately 91.3% of our
EBITDA for each year, which together with the contracts that did not come up for
renewal resulted in us retaining contracts that generated, on average,
approximately 97.8% of our net sales and approximately 99.0% of our EBITDA for
each year. See Footnote (6) to "Selected Historical Financial Information" for a
reconciliation of EBITDA generated by these contracts to net income (loss).
We have provided our services to several of the highest profile sporting
and other events, including:
- 23 World Series events;
- three U.S. Presidential Inaugural Balls;
- nine Super Bowls, including the 2003 Super Bowl at Qualcomm Stadium;
- two NCAA Final Four Men's Basketball Tournaments; and
- ten World Cup Soccer games.
OUR STRENGTHS
We believe that our competitive strengths should enable us to maintain our
high retention rate and to secure attractive new contracts. The following is a
list of new contracts we have been awarded or begun
58
serving since the beginning of 1999 for major league (NFL, MLB, NBA and NHL)
sports facilities and major convention centers:
- Louisiana Superdome, home of the New Orleans Saints;
- Denver Broncos' INVESCO Field at Mile High Stadium;
- The Coliseum, home of the Tennessee Titans;
- Seattle Mariners' Safeco Field;
- Minnesota Wild's Xcel Energy Center;
- San Francisco Giants' Pacific Bell Park;
- Dallas Convention Center; and
- new Washington Convention Center.
Our strengths include the following:
A LEADING MARKET POSITION. Based on the number of facilities served, we
are one of the largest providers of food and beverage services to a variety of
sports facilities and to major convention centers in the United States. We
believe that our position as one of the market leaders increases the likelihood
that we will be able to renew existing contracts and be invited to bid for new
contracts to supply food and beverage services to recreational facilities.
Furthermore, relative to smaller competitors, we benefit from our ability to
make significant capital investments in clients' facilities, which has become an
important competitive factor in the bidding process for contracts to serve
certain facilities, particularly sports facilities.
DIVERSIFIED CLIENT BASE. We provide services at 129 facilities located
across the United States and into Canada. The breakdown of facilities that we
serve by primary client category is as follows: 66 sports facilities, 31
convention centers and 32 other entertainment facilities, generating
approximately 65.9%, 21.8% and 12.3%, respectively, of our net sales and
approximately 70.6%, 17.9% and 11.5%, respectively, of our EBITDA for fiscal
2002. See Footnote (6) to "Selected Historical Financial Information" for a
reconciliation of EBITDA generated by these facilities to net income. Within
sports facilities, our client base is further diversified and includes contracts
to provide services at ten NFL, seven MLB, two NBA, one NHL and 27 minor league
baseball and spring training facilities.
EXCLUSIVE, LONG-TERM SERVICE CONTRACTS WITH HIGH RETENTION RATE. We
typically provide services at our clients' facilities pursuant to long-term
contracts that grant us the exclusive right to provide certain food and beverage
products and services and, under some contracts, merchandise products and other
services within the facility. As of December 31, 2002, our contracts had an
overall average, weighted by EBITDA generated by each contract, of approximately
6.9 years left to run before their scheduled expirations, representing
approximately 8.4, 3.3 and 3.9 years for sports facilities, convention centers
and other entertainment facilities, respectively. The non-weighted average was
approximately 4.2 years left to run on our overall contracts, representing
approximately 5.5, 2.8, and 2.8 years for sports facilities, convention centers
and other entertainment facilities, respectively.
We typically renegotiate contracts for extension several months and, in
some cases, years prior to their expiration. From 1999 through 2002, contracts
came up for renewal that generated, on average, approximately 14.8% of our net
sales and approximately 11.5% of our EBITDA for each year. During this period,
we retained contracts up for renewal that generated, on average, approximately
85.3% of our net sales and approximately 91.3% of our EBITDA for each year,
which together with the contracts that did not come up for renewal resulted in
us retaining contracts that generated, on average, approximately 97.8% of our
net sales and approximately 99.0% of our EBITDA for each year. See Footnote (6)
to "Selected Historical Financial Information" for a reconciliation of EBITDA
generated by these contracts to net income (loss). As of December 31, 2002, we
had been providing services to our clients' facilities for an average of
approximately 15.6 years. Four of our major accounts -- Yankee Stadium in New
York City, home of the Yankees, Qualcomm Stadium in San Diego, home of the
Padres (until the end of the 2003 season) and the Chargers, Arrowhead Stadium in
Kansas City, home of the Chiefs, and Kaufmann Field in Kansas City, home of the
Royals -- have been our accounts for more than 30 years.
59
The following chart shows the number of our contracts scheduled to expire
in the next three years, by year and by primary facility category, and the
percentage of fiscal 2002 net sales attributable to the contracts expiring in
each year.
<Table>
<Caption>
2003 2004 2005
----- ----- -----
Facility Category
Sports facilities...................................... 6 6 5
Convention centers..................................... 5 4 8
Other entertainment facilities......................... 13 3 8
----- ----- -----
Total number of contracts................................... 24 13 21
===== ===== =====
Percentage of fiscal 2002 net sales......................... 12.2% 11.0% 10.9%
</Table>
HIGH-QUALITY, FULL SERVICE CAPABILITIES. We believe that our expertise in
catering and concession services, coupled with our reputation for high-quality
food and beverage products and services and responsiveness to client needs,
provide a competitive advantage when we bid for contracts. Our full service
capability is particularly important given the trend in new sports facilities
toward providing more premium seating and luxury suites that require
high-quality catering services. We also believe that our expertise in designing
and assisting in the planning of appealing and efficient food service
facilities, including food courts, kitchens and permanent and portable
concession stands, increases net sales and enhances our ability to obtain and
retain clients. For example, we believe that our recognized reputation for
service and food, combined with our innovative service offerings, were important
factors in obtaining a contract extension at the San Diego Convention Center in
2001.
EXPERIENCED MANAGEMENT TEAM. Our chief executive officer and our six most
senior vice presidents have an average of approximately 15 years of experience
in the recreational food service industry. Our facility general managers have an
average of approximately 10 years of experience as general managers with our
company. We believe that this experience is of particular value in enabling us
to evaluate the risks and benefits associated with potential new contracts,
contract structures, product innovations and markets.
STRATEGIC DIRECTION AND GROWTH OPPORTUNITIES
Our goal is to strengthen and broaden our position as a leading provider of
food and beverage concessions, catering and merchandise services for sports,
convention and other recreational facilities. Our industry position and
experience have enabled us to effectively evaluate and select opportunities for
growth. Our strategies are designed to continue to improve the level of service
to our existing clients and their fans and guests, to attract new clients on the
strength of our reputation for quality products and services and to work
responsively with our clients to expand into related markets. We intend to
accomplish these goals by:
FURTHER PENETRATING THE MID-SIZE ACCOUNT MARKET. We believe that we have
greater potential to grow by obtaining new clients in the mid-size account
market than in the major-league or large-city professional sports account
markets, where we believe growth opportunities are more limited. Generally, the
mid-size account market includes sporting and other recreational facilities,
arenas, civic centers, convention centers and amphitheatres in medium- to
small-cities. Part of this growth opportunity stems from the existence of more
potential clients in the mid-size account category as compared to the major-
league and large-city professional sports account category. Furthermore, we
believe that the client service and types of contractual arrangements we offer
will be attractive to the owners and operators of these kinds of facilities. We
expect to involve our local general managers, who have first-hand experience
with operational issues and local communities, in our sales efforts in this
market.
EXTENDING OUR SUITE AND CLUB-LEVEL CATERING SERVICES. Our experience is
typically that cost savings and service efficiencies often result when one
supplier, rather than separate suppliers, provides all the required concession
services and suite and club-level catering services for a single facility.
Although we provide suite and club-level catering at some of the sports
facilities where we provide concessions -- for
60
example, Yankee Stadium, Safeco Field and ALLTEL Stadium -- we do not provide
catering services at all of them. We believe that we are capable of providing
the quality and service levels that our clients expect for their suites and
club-level seats, and we are actively seeking to be awarded the suite and club-
level service contracts in the facilities in which we currently have only the
concession rights as well as for prospective clients. In connection with this
goal, we have appointed a vice president of catering and hired a corporate chef
to reinforce and codify our expertise and commitment in this area.
BUILDING OUR FACILITIES MANAGEMENT BUSINESS. We currently have two
facility management accounts, and we desire to expand this area of our business.
We believe that we can offer efficiencies to our clients by providing food and
beverage services and facility management services in the same facility. Toward
this end, we intend to build on our experience in facilities management and our
expertise in operating and managing food and beverage concession services in
order to more effectively bid on new facility management accounts.
OFFERING A VARIETY OF BRANDED PRODUCTS TO OUR CLIENTS. We are pursuing a
strategy of offering a variety of high-quality, well-recognized branded products
to our clients. Through our experience, we have learned that the careful
management of prices, costs and consumer brand promotion and recognition can
generate additional customer sales for the benefit of our clients and us. Toward
this end, we have entered into and are seeking to enter into additional
promotional and preferential pricing arrangements with owners of various branded
products which would allow us to offer our clients competitively-priced products
which have the brand recognition that should help generate additional customer
sales.
CLIENTS AND SERVICES
OVERVIEW
We provide a number of services to our clients. Our principal services
include food and beverage concession and catering services at sports and other
entertainment facilities, small- to large-scale banquet catering and food court
operations at convention centers and in-facility restaurants and catering across
the range of facilities that we serve.
We also provide merchandise and program sales services at many of the
sports facilities that we serve. We are responsible for all personnel, inventory
control, purchasing and food preparation requirements in connection with the
provision of 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, and its suites and premium seats. Currently, we provide facility
management services at two arenas.
We believe that we have built strong relationships with many of our
clients. We often work closely with clients in designing or renovating the
portion of the facilities where we provide our services. By using our in-house
capabilities in conjunction with outside consultants, we have designed
state-of-the-art concessions and restaurant facilities in, among other
facilities, INVESCO Field at Mile High Stadium, home of the Denver Broncos, and
Pacific Bell Park, home of the San Francisco Giants.
We also provide for our clients a dedicated central staff for equipment
placement and construction design. Our design and construction capabilities are
being used in a number of new and existing client facilities where we and the
client believe there is an opportunity for additional revenue growth through
better design.
We assist some of our clients in marketing their facilities, as our net
sales are directly affected by the number and quality of events attracted to
these facilities. We also seek to build relationships with event sponsors in
order to facilitate referrals of recurring events, such as annual trade shows.
For fiscal 2002:
- our largest client, Yankee Stadium in New York City, accounted for
approximately 8.6% of our net sales;
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- our three largest clients together accounted for approximately 22.1% of
our net sales;
- our 10 largest clients together accounted for approximately 38.6% of our
net sales; and
- our 20 largest clients together accounted for approximately 52.2% of our
net sales.
SPORTS FACILITIES
We currently have contracts to provide services, including food and
beverage concessions and, in some cases, the selling of merchandise, at 66
sports facilities, including stadiums and arenas throughout the United States
and into Canada. We also provide catering services for premium seating, luxury
suites and in-stadium restaurants at 40 of these facilities. These facilities
host sports teams as well as other forms of entertainment, such as concerts and
other large civic events. These facilities may also host conventions, trade
shows and meetings. The stadiums and arenas at which we provide our services
seat from 7,500 to 102,000 persons and typically host sporting events such as
NFL and college football games, MLB or minor league baseball games, NBA and
college basketball games, NHL and minor league hockey games, concerts, ice shows
and circuses. For fiscal 2002, sports facility contracts accounted for
approximately 65.9% of our net sales and approximately 70.6% of our EBITDA. See
Footnote (6) to "Selected Historical Financial Information" for a reconciliation
of EBITDA generated by these contracts to net income.
Concession-style sales of food and beverages represent the majority of our
business at sports facilities. Catering for luxury suites, premium concession
services for premium seating and in-stadium restaurants are currently
responsible for a significantly smaller portion of net sales at sports
facilities, but have been gaining importance due to the general growth of
premium seating as a proportion of total stadium and arena seating and to the
general increase in demand for a variety of food and beverage offerings. Also,
premium seating is important to our clients because of the significant net sales
generated for those clients by purchasers of luxury seats and suites.
Consequently, the ability to provide catering is an important factor when
competing for contracts, and we expect it to become more important in the
future. In addition to the provision of food and beverage catering and
concession services, we sell team-licensed and other merchandise during events
at 17 of these facilities. For example, we provide a wide range of merchandise
services, including in-stadium stores and roving vendors, at almost all of the
MLB facilities that we serve.
Our contracts for sports facilities are typically for terms ranging from
five to 20 years. As of December 31, 2002, the existing sports facility
contracts had a per contract EBITDA weighted average remaining life of
approximately 8.4 years or a non-weighted average of approximately 5.5 years. In
general, stadium and arena contracts require a larger up-front or committed
future capital investment than contracts for convention centers and other
entertainment facilities and typically have a longer contract term. In addition,
some sports facility contracts require greater capital investment than others,
and we typically receive a more favorable commission structure at facilities
where we have made larger capital investments.
62
The following chart lists all our major league sports facility tenants as
of December 31, 2002:
<Table>
<Caption>
LENGTH OF
SEATING CAPACITY RELATIONSHIP
FACILITY NAME LOCATION SPORTS TEAM TENANT (SPORT) (YEARS)
- ------------- -------- ------------------ ---------------- ------------
ALLTEL Stadium Florida Jacksonville, FL Jacksonville Jaguars 73,000(NFL) 7.9
Arrowhead Stadium Kansas City, MO Kansas City Chiefs 79,000(NFL) 31.1
FedEx Field Landover, MD Washington Redskins 80,000(NFL) 5.8
HHH Metrodome Minneapolis, MN Minnesota Vikings 64,000(NFL) 21.3
Minnesota Twins 44,000(MLB) 21.3
INVESCO Field at Mile High
Stadium Denver, CO Denver Broncos 76,000(NFL) 2.3
Kaufmann Field Kansas City, MO Kansas City Royals 40,600(MLB) 31.1
Louisiana Superdome New Orleans, LA New Orleans Saints 70,054(NFL) 4.1
New Orleans Arena New Orleans, LA New Orleans Hornets 18,500(NBA) 4.1(1)
Pacific Bell Park San Francisco,
CA San Francisco Giants 42,000(MLB) 10.1(2)
Palace of Auburn Hills Auburn Hills, MI Detroit Pistons 21,000(NBA) 14.7
Qualcomm Stadium San Diego, CA San Diego Chargers 71,400(NFL) 36.0
San Diego Padres 60,750(MLB) 36.0(3)
RCA Dome Indianapolis, IN Indianapolis Colts 60,000(NFL) 20.1
Safeco Field Seattle, WA Seattle Mariners 47,145(MLB) 5.3(4)
San Francisco Stadium at
Candlestick Point San Francisco, CA San Francisco 49ers 68,000(NFL) 10.1
The Coliseum Nashville, TN Tennessee Titans 68,500(NFL) 4.3
Tropicana Field St. Petersburg, FL Tampa Bay Devil Rays 48,500(MLB) 5.1
Xcel Energy Center St. Paul, MN Minnesota Wild 18,064(NHL) 2.5
Yankee Stadium New York, NY New York Yankees 55,000(MLB) 39.1
</Table>
- ---------------
(1) Represents length of relationship with respect to the New Orleans Arena. The
New Orleans Hornets' 2002-2003 season is its first at the arena.
(2) Includes length of client relationship with the San Francisco Giants with
respect to its former stadium, known first as Candlestick Park (1993-1999)
and later as 3COM Park (1999-2000).
(3) Our relationship with the San Diego Padres will end after the current
season, when the team moves to a new stadium.
(4) Includes length of client relationship prior to the opening of the stadium,
during which time we helped design, plan and procure numerous food beverage
outlets and equipment. The stadium opened after the all-star break during
the 1999 MLB season.
CONVENTION CENTERS
Based on the number of facilities served, we are one of the largest
providers of food and beverage services to major convention centers -- those
with greater than approximately 300,000 square feet of exhibition space -- in
the United States. We have contracts to provide services to 31 convention
centers, including 10 major convention centers such as the San Diego Convention
Center, the Jacob K. Javits Convention Center in New York City and the National
Trade Centre in Toronto. For fiscal 2002, convention center contracts accounted
for approximately 21.8% of our net sales and approximately 17.9% of our EBITDA.
See Footnote (6) to "Selected Historical Financial Information" for a
reconciliation of EBITDA generated by these contracts to net income.
63
The services that we provide at convention centers typically include:
- catering services;
- providing food court operations;
- assisting in planning events; and
- marketing clients' facilities.
Catering services consist primarily of providing large-scale banquet
services to functions held in the facilities' ballrooms and banquet halls. We
are equipped to tailor our services for small groups to groups of several
thousand persons at the facility. To cater meals at certain facilities for
larger groups, we may draw, as needed, on the services of chefs, event managers
and other employees throughout the region in which the facility is located. At
trade shows and consumer exhibitions, we frequently provide smaller-scale
catering services to meetings, exhibitions and trade show booths. In operating
food courts at convention centers, we typically provide concession sales
services from several different locations, which sell a variety of specialty
foods and beverages, including nationally-branded, franchised food and beverage
products.
Our contracts with convention centers are typically for terms ranging from
two to five years. As of December 31, 2002, the existing convention center
contracts had a per contract EBITDA weighted average remaining life of
approximately 3.3 years or a non-weighted average of approximately 2.8 years. In
general, convention center contracts are for a shorter contract term than
contracts for sports facilities, but typically require less up-front or
committed future capital investment. We typically receive a more favorable
commission structure at facilities where we have made larger capital
investments.
The following chart lists alphabetically our top eight contracts within the
convention center category in terms of the fiscal 2002 EBITDA generated by those
contracts:
<Table>
<Caption>
LENGTH OF
SIZE (APPROX. RELATIONSHIP
FACILITY NAME LOCATION SQ. FT.)(1) (YEARS)
- ------------- -------- ------------- ------------
Colorado Convention Center................ Denver, CO 300,000 13.3
Fresno Convention Center.................. Fresno, CA 148,000 21.1
Jacob K. Javits Center.................... New York, NY 814,400 16.3
Kentucky Fair & Expo Center............... Louisville, KY 1,068,050 19.9
Northern Kentucky Convention Center....... Covington, KY 65,000 4.3
Ontario Convention Center................. Ontario, CA 70,000 5.5
San Diego Convention Center............... San Diego, CA 616,363 10.1
San Jose Convention Center................ San Jose, CA 200,000 14.3
</Table>
- ---------------
(1) Source: Tradeshow Week's Major Exhibit Hall Directory 2002.
OTHER ENTERTAINMENT FACILITIES
We have contracts to provide a wide range of services to 32 other
entertainment facilities located throughout the United States. Such facilities
include horse racing tracks, music amphitheaters, motor speedways, skiing
facilities and zoos.
While the services that we provide can vary widely depending on the type of
facility concerned, we primarily provide concession services at zoos and music
amphitheaters, high-end concession services at music amphitheaters, and
in-facility restaurants, concession services, food court operations and catering
services at horse racing tracks. For fiscal 2002, contracts to serve these other
entertainment facilities accounted for approximately 12.3% of our net sales and
approximately 11.5% of our EBITDA. See Footnote (6) to "Selected Historical
Financial Information" for a reconciliation of EBITDA generated by these
contracts to net income.
64
The duration, level of capital investment required and commission or
management fee structure of the contracts for these other entertainment
facilities vary from facility to facility. We typically receive a more favorable
commission structure at facilities where we have made larger capital
investments. As of December 31, 2002, our contracts to serve these other
entertainment facilities had a per contract EBITDA weighted average remaining
life of approximately 3.9 years or a non-weighted average of approximately 2.8
years.
The following chart lists alphabetically our top six contracts within the
other entertainment facilities category in terms of the fiscal 2002 EBITDA
generated by those contracts:
<Table>
<Caption>
LENGTH OF
RELATIONSHIP
FACILITY NAME LOCATION VENUE TYPE (YEARS)
- ------------- -------- ---------- ------------
Alpine Valley..................... Madison, WI Amphitheater 12.4
Los Angeles Zoo................... Los Angeles, CA Zoo 5.5
National Hot Rod Association
(Atlanta Dragway, Gateway
International Raceway,
Indianapolis Raceway Park and Motor
National Trail Raceway Park).... GA, FL, IN, CA Speedways 5.3
New York Racing Association
(Belmont Park and Aqueduct
Racetracks and Saratoga Race
Course)......................... NY Horse Tracks 7.5
Sea Life Park..................... Honolulu, HI Park 28.3
Verizon Wireless Amphitheatre..... Irvine, CA Amphitheater 21.2(1)
</Table>
--------------------
(1) Our relationship with the Verizon Wireless Amphitheatre will end in
November 2004.
CLIENT CONTRACTS
We typically enter into one of three types of contracts with our clients:
- profit and loss contracts;
- profit sharing contracts; and
- management fee contracts.
Each of our contracts falls into one of these three categories; however, any
particular contract may contain elements of any of the other types as well as
other features unique to that contract.
We draw on our substantial operational and financial experience in
attempting to structure contracts to our benefit, including a mix of up-front
fees, required capital investment and ongoing commissions to our customers. We
try to include contract terms that we believe will achieve our preferred rate of
return and cash-flow. For example, some of our contracts contain a guarantee of
performance by the client for levels of minimum attendance and/or levels of net
sales. Also, many of our contracts have step-scale commission rates, reducing
the effect of potential decreases in cash-flow. In addition, most of our
contracts require our client to return to us any unamortized capital investment
and any up-front fees, if the contract is cancelled before its scheduled
termination, other than due to breach by us.
PROFIT AND LOSS CONTRACTS
Under profit and loss contracts, we receive all of the net sales and bear
all of the expenses from the provision of services at a facility. These expenses
include commissions paid to the client, which are typically calculated as a
fixed or variable percentage of various categories of sales. While we benefit
from greater upside potential with profit and loss contracts, as we are entitled
to retain all profits from the provision of our services at a facility after
paying expenses, including commissions to the client, we are
65
responsible for all associated costs and therefore we are also responsible for
any losses incurred. See "Risk Factors -- Risks Relating to Our Business and the
Industry -- The pricing and termination provisions of our contracts may
constrain our ability to recover costs and to make a profit on our contracts."
We consequently bear greater risk with a profit and loss contract than with a
profit sharing or management fee contract. In order to achieve our anticipated
level of profitability on a profit and loss contract, we must carefully control
our operating expenses and obtain price increases commensurate with our cost
increases. As of December 31, 2002, we served 101 facilities under profit and
loss contracts. For fiscal 2002, profit and loss contracts accounted for
approximately 77.2% of our net sales and approximately 87.6% of our EBITDA. See
Footnote (6) to "Selected Historical Financial Information" for a reconciliation
of EBITDA generated by these contracts to net income.
Some of our profit and loss contracts contain minimum guaranteed
commissions or equivalent payments to the client in connection with our right to
provide services within the particular facility, regardless of the level of
sales at the facility or whether a profit is being generated at the facility.
These guaranteed payments are often structured as a fixed dollar amount,
frequently increasing over the life of the contract, or as a fixed per capita
amount, generally on an escalating scale based on event attendance or per capita
spending levels.
PROFIT SHARING CONTRACTS
Profit sharing contracts are generally profit and loss contracts with the
feature that the commission paid to the client is in whole or in part a
specified percentage of the profits generated by our concessions operation at
the relevant facility. In calculating profit for those purposes, expenses
include commissions payable to the client that are not based on profits. These
commissions are typically calculated as a fixed or variable percentage of
various categories of sales. In addition, under certain profit sharing
contracts, we receive a fixed fee prior to the determination of profits under
the contract. As of December 31, 2002, we served 27 facilities under profit
sharing contracts. For fiscal 2002, profit sharing contracts accounted for
approximately 22.3% of our net sales and approximately 11.6% of our EBITDA. See
Footnote (6) to "Selected Historical Financial Information" for a reconciliation
of EBITDA generated by these contracts to net income.
MANAGEMENT FEE CONTRACTS
Under our management fee contract, we receive a management fee, calculated
as a fixed dollar amount and/or a fixed or variable percentage of various
categories of sales. In addition, our management fee contract entitles us to
receive incentive fees based upon our performance under the contract, as
measured by factors such as net sales or operating costs. We are reimbursed for
all of our on-site expenses under these contracts. The benefit of this type of
contract is that we do not bear the risks associated with the provision of our
services at the facility. However, as a result of this reduced risk, we also
have reduced upside potential, as we are entitled to receive only a management
fee, and any incentive fees provided for in the contract, and do not share in
any profits. As of December 31, 2002, we served one facility under a management
fee contract. For fiscal 2002, management fee contracts accounted for
approximately 0.5% of our net sales and approximately 0.8% of our EBITDA. See
Footnote (6) to "Selected Historical Financial Information" for a reconciliation
of EBITDA generated by these contracts to net income.
ADDITIONAL CONTRACT FEATURES
Although the contracts generally fall within one of the three types
discussed above, we often include in our contracts a variety of ways to meet our
needs and the needs of a particular client. These features include:
- step-scale commissions, in which our commission payment to a client will
vary according to sales performance;
66
- minimum attendance thresholds, in which a client will refund a portion of
the commissions that it receives from us if a minimum attendance level is
not reached at the facility; and
- merchandise inventory guarantees, under which we return certain unsold
inventory to the client without charge to us.
These features represent our efforts to tailor our contracts to best suit a
particular client opportunity and reflect our experience with comparable
facilities, sensitivity analyses of economic assumptions, competitor analyses
and general market research.
Most of our contracts limit our ability to raise prices on the food,
beverages and merchandise we sell within the particular facility without the
client's consent. However, some of the contracts contain pricing restrictions
that allow us to raise our prices without the client's consent if we are able to
demonstrate that prices on similar items at specified benchmark facilities have
increased.
The length of contracts that we enter into with clients varies. Contracts
in connection with sports facilities generally require the highest capital
investments but have correspondingly longer terms, typically five to 20 years.
Convention center contracts generally require lower capital investments and have
usual terms of two to five years. While our contracts are generally terminable
only in limited circumstances, some of our contracts give the client the right
to terminate the contract with or without cause on little or no notice. However,
most of our contracts require our client to return to us any unamortized capital
investment and any up-front fees, if the contract is cancelled before its
scheduled termination, other than due to breach by us.
HISTORY
We, including our subsidiaries and their predecessors, have been in
operation for over 35 years. We were formed on November 21, 1995 under the laws
of the State of Delaware. In August 1998, through our wholly owned subsidiary,
VSA, the parent company of VSI, then one of the leading suppliers of food and
beverage services to sports facilities in the United States, we acquired Service
America, then one of the leading suppliers of food and beverage services to
convention centers in the United States. This acquisition allowed us to enter
the convention center market with a significant presence in major convention
centers and resulted in us having a substantially more diversified client base
and revenue stream business.
GROWTH IN THE INDUSTRY
Sports facilities. Growth in the sports facilities category of the
recreational food service industry in recent years has come primarily from new
facility construction, increased per capita spending on new facilities and
premium seating. During the 1990s, a substantial number of NFL, MLB, NBA and NHL
facilities were built, stemming in part from the addition of 19 new major league
franchises during that period. According to Street & Smith's Sports Business
Journal of March 11-17, 2002, between 1999 and 2001, 49 sports facilities and
1,819 luxury suites at sports facilities were constructed. This building trend
continued in 2002, with an estimated $7.8 billion (in total project cost) of
sports facilities under construction, according to Street & Smith's Sports
Business Journal of March 4-10, 2002.
Newer sports facilities, whether as a result of new construction or
refurbishing, tend to experience higher levels of per capita spending on food,
beverages and merchandise by attendees of events at those facilities, because
newer facilities typically have more points of sale for concessions and more
premium seating, full-service restaurants, sports clubs and retail shops as
compared to older facilities. Current and near-future facility construction
results from planning commenced several years ago. Based on available data,
management believes that the growth for stadiums and arenas for major league
sports teams and in major cities may be slowing. However, according to Street &
Smith's Sports Business Journal of May 28-June 3, 2001, growth is strong for
college and minor league sports venues.
67
The following graph shows the historical attendance at NFL, MLB, NBA and
NHL events in the United States between 1996 and 2001:
U.S. MAJOR PROFESSIONAL SPORT ATTENDANCE(1)
[BAR GRAPH]
<Table>
<Caption>
THOUSANDS
---------
1996........................................................ 117,270
1997........................................................ 121,443
1998........................................................ 128,793
1999........................................................ 121,694
2000........................................................ 133,347
2001........................................................ 134,909
</Table>
- ---------------
(1) Source: PricewaterhouseCoopers' Global Entertainment and Media Outlook:
2002-2006 and PricewaterhouseCoopers' Global Entertainment and Media
Outlook: 2001-2005
Convention centers. In recent years there has also been a significant
expansion of existing and construction of new convention centers, which has
created new opportunities for food service providers. According to Tradeweek's
Major Exhibit Hall Directory of 1995 and 2002, the total exhibit space in U.S.
and Canadian exhibit halls increased approximately 23% from 1991 (54.8 million
square feet) through 2001 (67.6 million square feet). Although, according to the
same source, the expansion appears to be slowing, a total of 87 new and expanded
facilities totaling 12.2 million square feet of exhibit space are planned for
completion by 2010. This growth is attributed in part to two primary forces:
- the increasing number and size of conventions and trade shows; and
- user demand for more specialized or purpose-built facilities and the need
for more advanced telecommunication and technological infrastructure.
According to Tradeshow Week 200's analysis of April 2002 (which represents
the 200 largest U.S. tradeshows), overall professional attendance at tradeshows
increased approximately 10% from 1991 (3.9 million) through 2001 (4.3 million).
However, recent weak economic conditions and the events of September 11, 2001
have caused a decline in attendance at many convention center facilities we
serve, and this decline may continue in the future.
Other entertainment facilities. We believe that the market for other
entertainment facilities will develop in the next several years in a manner
consistent with the development of sports and sports-related facilities. We
believe that if we are to obtain growth in this segment, such growth will have
to come by obtaining contracts for businesses that are now held by competitors
or provided internally by potential clients.
68
SALES AND MARKETING
Our chief executive officer determines the direction of our sales and
marketing efforts, aided by a senior vice president -- sales administration, who
heads their implementation and coordinates the efforts of two vice
presidents -- sales.
Our primary sales goal is to secure renewals of existing contracts and the
addition of new contracts. To this end, we utilize an internal tracking system,
trade publications and other industry sources, including our on-site general
managers, to identify information about both new and expiring contracts in the
recreational food service industry.
As a result of many years of experience in the industry, we have developed
relationships with a wide variety of participants in the industry, including:
the general managers of public and private facilities; league and team owners;
event sponsors; and a network of consultants whom facility owners often hire to
formulate bid specifications.
In addition, members of our management team maintain memberships in various
industry trade associations. Substantially all of our clients and potential
clients in publicly controlled facilities are members of these trade groups.
COMPETITION
COMPETITORS
The recreational food service industry is highly fragmented and
competitive, with several national and international food service providers as
well as a large number of smaller independent businesses serving discrete local
and regional markets and competing in distinct areas. Those companies that lack
a full-service capability because, for example, they cannot cater to luxury
suites at stadiums and arenas, often bid for contracts in conjunction with one
of the other national or international food service companies that can offer
such services.
We compete for contracts against a variety of food service providers.
However, our major competitors are other national and international food service
providers, including ARAMARK Corporation (which includes Fine Host Corporation),
Delaware North Corporation, Compass Group plc and Levy Restaurants (which is
partially owned by Compass Group plc). We also face competition from regional
and local service contractors, some of which are better established within a
specific geographic region. Existing or potential clients may also elect to
"self operate" their food services, eliminating the opportunity for us to
compete for the account.
We compete primarily to provide concession, catering and other related
services at recreational facilities. Our competitors often operate more
narrowly, for example, in catering only, or more broadly, e.g., in food services
in other kinds of facilities and in other services altogether.
We compete for facility management contracts with Spectacor Management
Group (which is a joint venture between ARAMARK Corporation and Hyatt Hotels
Inc.) and Global Spectrum, which together manage most privately-managed
facilities. In addition, many facilities are managed internally, either by the
facility owner or by the owner of the team that plays at the facility or by
local service providers.
COMPETITION FOR CONTRACTS
Contracts are generally gained and renewed through a competitive bidding
process. We selectively bid on contracts to provide services at both privately
owned and publicly controlled facilities. The privately negotiated transactions
are generally competitive in nature, with several other large national
competitors submitting proposals. Contracts for publicly controlled facilities
are generally awarded pursuant to a request-for-proposal process. Successful
bidding on contracts for such publicly controlled facilities often
69
requires a long-term effort focused on building relationships in the community
in which the venue is located. We compete primarily on the following factors:
- the ability to make capital investments;
- reputation within the industry;
- commission or management fee structure;
- service innovation; and
- quality and breadth of products and services.
Some of our competitors may be prepared to accept less favorable financial
returns than we are when bidding for contracts. A number of our competitors also
have substantially greater financial and other resources.
We do not believe that the debt level contemplated by this offering will
have a material effect on our ability to compete. We currently operate with a
debt level that is similar to those contemplated by this offering, and we have
not encountered competitive difficulties because of our existing debt
obligations. However, economic downturns and other future events could make it
more difficult for us to withstand competitive pressures from any of our
competitors which do not have comparable levels of indebtedness.
SUPPLIERS
To supply our operations, we have a national distribution contract with
SYSCO Corporation as well as contracts with the manufacturers of many of the
products that are distributed by SYSCO. We do not believe that we are
substantially dependent on our contact with SYSCO. We believe that if the SYSCO
contract were terminated or not renewed, we could obtain alternative
distribution services of these products from the national competitors of SYSCO,
such as US Foodservice and independent distributors that have entered into a
national alliance such as Distributor Marketing Alliance and Uni-Pro, or from
the network of local suppliers discussed below from which we are currently
purchasing our food, beverage and disposable non-alcoholic products.
We also have a number of national purchasing programs with major product
suppliers that enable us to receive discounted pricing on certain items. The
purchase of other items, the most significant of which are alcoholic beverages
that must, by law, be purchased in-state, is handled on a local basis.
In instances where a contract with a particular client requires us to use a
specific branded product for which we do not have a purchasing program or
distribution contract, or which results in our bearing additional costs, the
client will typically be required to pay any excess cost associated with the use
of the brand name product through reduced commission rates for such products.
We generally purchase any equipment that we require directly from the
manufacturer. We typically obtain several bids when filling our food service
equipment requirements.
Additionally, we have a number of local, regional and national
subcontractors who provide food, beverages or other services at our and our
client's behest, and from whom we collect a portion of revenue, depending upon
contractual arrangements with the subcontractor and the client.
CONTROLS
Since a large portion of our business is transacted in cash, principally
food and beverage concessions and food court operation sales, we have stringent
inventory and cash controls in place. We typically record inventory levels
before and after each event to determine if the sales recorded match the decline
in inventory. The process is typically completed within hours of conclusion of
the event and any discrepancy can generally be traced to either specific points
of sale or control processes set up throughout the facility. We also run yield
reports on food supplies on a monthly basis to determine if there is any
significant difference between inventory and sales.
70
EMPLOYEES
As of December 31, 2002, we had approximately 1,600 full-time employees. Of
these, approximately 500 provide on-site administrative support and supervision
at the facilities we serve, approximately 1,000 provide a variety of services
(for example, food preparation, warehousing and merchandise sales) at those
facilities, and approximately 100 provide management and staff support at the
corporate and regional levels. During fiscal 2002, we had approximately 27,000
employees who were part-time or hired on an event-by-event basis. The number of
part-time employees at any point in time varies significantly due to the
seasonal nature of the business.
As of December 31, 2002, approximately 39.6% of our employees, including
full and part-time employees, were covered by collective bargaining agreements
with several different unions. We have not experienced any significant
interruptions or curtailments of operations due to disputes with our employees,
and we consider our labor relations to be good. We have hired, and expect to
continue to hire, a large number of qualified, temporary workers at particular
events.
SEASONALITY OF OPERATIONS
Our sales and operating results have varied, and are expected to continue
to vary, from quarter to quarter, as a result of factors that include:
- seasonality of sporting and other events;
- unpredictability in the number, timing and type of new contracts;
- timing of contract expirations and special events; and
- level of attendance at the facilities which we serve.
Business at the principal types of facilities that we serve is seasonal in
nature. MLB and minor league baseball-related sales are concentrated in the
second and third quarters, the majority of NFL-related activity occurs in the
fourth quarter and convention centers and arenas generally host fewer events
during the summer months. Consequently, our results of operations for the first
quarter are typically substantially lower than in other quarters, and results of
operations for the third quarter are typically higher than in other quarters.
REGULATORY MATTERS
Our operations are subject to various governmental regulations, such as
those governing:
- the service of food and alcoholic beverages;
- minimum wage regulations;
- employment;
- environmental protection; and
- human health and safety.
In addition, our facilities and products are subject to periodic inspection
by federal, state, provincial and local authorities. The cost of regulatory
compliance is subject to additions to or changes in federal, state or provincial
legislation, or changes in regulatory implementation. If we fail to comply with
applicable laws, we could be subject to civil remedies, including fines,
injunctions, recalls, or seizures, as well as potential criminal sanctions.
The U.S. Food and Drug Administration, or the FDA, regulates and inspects
our kitchens in the United States. Every U.S. commercial kitchen must meet the
FDA's minimum standards relating to the handling, preparation and delivery of
food, including requirements relating to the temperature of food, the
cleanliness of the kitchen and the hygiene of its personnel. The Canadian Food
Inspection Agency regulates food safety in Canada, applying similar standards to
those required by the FDA. We are also subject to various state, provincial,
local and federal laws regarding the disposition of property and leftover
71
foodstuffs. The cost of compliance with FDA regulations is subject to additions
to or changes in FDA regulations.
We serve alcoholic beverages at many facilities, and are subject to the
"dram-shop" statutes of the states and provinces in which we serve alcoholic
beverages. "Dram-shop" statutes generally provide that serving alcohol to an
intoxicated or minor patron is a violation of law. In most states and provinces,
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. We sponsor
regular training programs in cooperation with state and provincial authorities
to minimize the likelihood of serving alcoholic beverages to intoxicated or
minor patrons, and we maintain general liability insurance that includes liquor
liability coverage.
We are also subject to licensing with respect to the sale of alcoholic
beverages in the states and provinces in which we serve alcoholic beverages.
Failure to receive or retain, or the suspension of, liquor licenses or permits
would interrupt or terminate our ability to serve alcoholic beverages at those
locations. A few of our contracts require us to pay liquidated damages during
any period in which our liquor license for the relevant facility is suspended
and most contracts are subject to termination in the event that we lose our
liquor license for the relevant facility.
ENVIRONMENTAL MATTERS
Laws and regulations concerning the discharge of pollutants into the air
and water, the handling and disposal of hazardous materials, the investigation
and remediation of property contamination and other aspects of environmental
protection are in effect wherever we operate. Our current operations do not
involve material costs to comply with such laws and regulations; and they have
not given rise to, and are not expected to give rise to, material liabilities
under these laws and regulations for investigation or remediation of
contamination.
Claims for environmental liabilities arising out of property contamination
have been asserted against us and our predecessors from time to time, and in
some cases such claims have been associated with businesses, including waste
disposal and/or management businesses, related to entities we acquired and have
been based on conduct that occurred prior to our acquisition of those entities.
Several such claims were resolved during the 1990s in bankruptcy proceedings
involving some of our predecessors. More recently, private corporations asserted
a claim under CERCLA against us 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 we
allegedly are responsible. In addition, the United States Environmental
Protection Agency, asserting authority under CERCLA, recently issued a
unilateral administrative order concerning the same Illinois site naming
approximately 75 entities as respondents, including the plaintiffs in the CERCLA
lawsuit against us and the waste disposal business for which the plaintiffs
allege we are responsible. We believe that we have valid defenses (including
discharge in bankruptcy related to certain bankruptcy proceedings filed in the
1990s) to any claimed liability at this site and further believe that our
potential liability, if any, is not likely to be significant. However, because
these claims are in their early stages, we cannot predict at this time whether
we will eventually be held liable at this site or whether such liability will be
material. Furthermore, additional environmental liabilities relating to any of
our former operations or any entities we have acquired could be identified and
give rise to claims against us involving significant losses.
PROPERTIES
We lease our corporate headquarters of approximately 20,000 square feet in
Spartanburg, South Carolina and approximately 3,500 square feet in Stamford,
Connecticut.
We currently provide our services at 129 client facilities, all of which
are owned or leased by our clients. The contracts with our clients generally
permit us to use certain areas within the facility to perform our administrative
functions and fulfill our warehousing needs, as well as provide food and
beverage services.
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INTELLECTUAL PROPERTY
We have the trademarks, trade names and licenses that are necessary for the
operation of our business as we currently conduct it. We do not consider our
trademarks, trade names or licenses to be material to the operation of our
business.
LITIGATION
We are from time to time involved in various legal proceedings incidental
to the conduct of our business. In May 2003, a purported class action was filed
against us in the Superior Court of California for the County of Orange by a
former employee at one of the California stadiums we serve alleging violations
of local overtime wage, rest and meal period and related laws with respect to
this employee and others purportedly similarly situated at any and all of the
facilities we serve in California. The purported class action seeks
compensatory, special and punitive damages in unspecified amounts, penalties
under the applicable local laws and injunctions against the alleged illegal
acts. We are in the process of evaluating this case and, while our review is
preliminary, we believe that our business practices are, and were during the
period alleged, in compliance with the law. We intend to vigorously defend this
case and we have filed an answer to the complaint with the California state
court and have filed to seek removal of the case to the United States District
Court for the Central District of California. However, due to the early stage of
this case and our evaluation, we cannot predict the outcome of this case and, if
an ultimate ruling is made against us, whether such ruling would have a material
effect on us.
Except for the case described above, in our opinion, after considering a
number of factors, including, but not limited to, the current status of any
currently pending proceeding (including any settlement discussions), views of
retained counsel, the nature of the litigation, our prior experience and the
amounts that we have accrued for known contingencies, the ultimate disposition
of any currently pending proceeding will not have a material adverse effect on
our financial condition or results of operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and positions of our current
directors and executive officers, as well as our nominees for our board of
directors pending closing of this offering, and their ages as of July 1, 2003.
Prior to the closing of this offering, we expect to restructure our board
of directors and appoint Felix P. Chee, Paul Hornung, Michael A. Wadsworth and
David M. Williams as directors, subject to the closing of this offering, and
Lawrence E. Honig as chairman of the board. Messrs. Chee, Hornung, Wadsworth and
Williams have consented to serve as directors. David Blitzer and Howard A.
Lipson intend to resign as directors upon the closing of this offering. See "--
Composition of the Board After the Offering" below.
<Table>
<Caption>
NAME AGE POSITION
- ---- --- --------
John T. Dee................. 64 Chairman of the Board
Lawrence E. Honig........... 55 Chief Executive Officer and Director
David Blitzer............... 33 Director
Howard A. Lipson............ 39 Director
Peter F. Wallace............ 28 Director
Felix P. Chee............... 56 Director nominee
Paul Hornung................ 67 Director nominee
Michael A. Wadsworth........ 60 Director nominee
David M. Williams........... 61 Director nominee
Kenneth R. Frick............ 47 Executive Vice President and Chief Financial Officer
Janet L. Steinmayer......... 48 Executive Vice President, General Counsel and Secretary
</Table>
John T. Dee (New York, New York) is chairman of our board of directors. Mr.
Dee has served as the chairman of our board since August 1998 and as a director
of Service America since January 1993. (Service America filed for bankruptcy
protection in October 1992 and emerged from bankruptcy in June 1993). He has
been chairman of the board of Service America since January 1997. From August
1998 to April 2002, Mr. Dee served as our chief executive officer. He also
served as president and chief executive officer of Service America from January
1993 to April 2002 and as a consultant to Service America from November 1992 to
January 1993. From 1989 to 1992, Mr. Dee was president of Top Food Services,
Inc., a company engaged in the food service business. From 1980 to 1989, he was
group president at ARAMARK Corporation with responsibility for ARAMARK
Corporation's recreational food service and public restaurant operations. From
1979 to 1980, he held senior positions, including president, at Sportservice
Corporation, and was responsible for concessions and merchandise operations at
airports, theaters, stadiums, arenas and racetracks. From 1968 to 1979, he held
various positions at ARAMARK Corporation, including vice president-sales and
president of the Leisure Services Group, a division of ARAMARK Corporation
engaged in the recreational food service industry.
Lawrence E. Honig (Spartanburg, South Carolina) has served as our chief
executive officer and director since April 2002. From February 2000 until April
2001, Mr. Honig served as managing director at eHatchery LLC, an early-stage
facilitator for internet-based start-up companies. From January 1998 to July
1999, Mr. Honig was chairman, president and chief executive officer of Edison
Brothers Stores, Inc., a specialty retailer, also serving as a director from
September 1997 to March 1999 (Edison Brothers Stores, Inc. filed for bankruptcy
protection in March 1999). He has previously served as president and chief
executive officer of Federated Systems Group, a division of Federated Department
Stores. From 1982 to 1992, Mr. Honig was executive vice president and then vice
chairman and a member of the board of The May Department Stores Company.
Previously, he was a principal of McKinsey & Company, Inc., an international
consulting firm.
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David Blitzer (New York, New York) is a member of our board of directors.
Since January 2000, Mr. Blitzer has been a senior managing director of
Blackstone, a global investment and advisory firm, which he joined in 1991. He
has been one of our directors since 1995.
Howard A. Lipson (Chappaqua, New York) is a member of our board of
directors. Mr. Lipson is a senior managing director of Blackstone, which he
joined in April 1988. He has been one of our directors since December 1995.
Prior to joining Blackstone, Mr. Lipson was a member of the Mergers and
Acquisitions Group of Salomon Brothers Inc. He currently serves on the board of
directors of Allied Waste Industries, Inc., Mega Bloks Inc., Columbia House
Holdings Inc., and Universal City Development Partners, Ltd. and is a member of
the Advisory Committee of Graham Packaging Holdings Company.
Peter F. Wallace (New York, New York) is a member of our board of
directors. Mr. Wallace is an associate at Blackstone, which he joined in July
1997 as an analyst and became an associate in January 2001. He has been one of
our directors since October 1999.
Felix P. Chee (Oakville, Ontario) is a nominee to our board of directors.
Mr. Chee has been vice president of business affairs at the University of
Toronto since October 2001. From 1997 to 2001 Mr. Chee held the positions of
executive vice president and chief investment officer at Manulife Financial,
senior vice president, corporate finance at Ontario Hydro Corporation and senior
investment officer of the International Finance Corporation of the World Bank
Group. Mr. Chee has acted as director for the Manulife Bank of Canada and as a
member of the board of Governors for York University. Mr. Chee currently is a
director of McLelland and Stewart Limited, The University of Toronto Press
Limited, The University of Toronto Innovation Foundation, MaRS and the
University of Toronto Asset Management Corporation. He is also a director of the
Heart and Stroke Foundation of Ontario.
Paul Hornung (Louisville, Kentucky) is a nominee to our board of directors.
Mr. Hornung is the president of Paul Hornung Enterprises and Paul Hornung Real
Estate, Inc. He is also the owner of Golden Foods/Golden Brands soybean refinery
and a part owner of the Lyles Mall Shopping Center and Americana Apartments. Mr.
Hornung has over 30 years of experience in radio and television, including
owning and producing "The Paul Hornung Sports Showcase," which was a national
cable television show from 1988 to 2001. Mr. Hornung also works for Westwood One
as a radio analyst for Notre Dame Football. Mr. Hornung was a professional
football player in the NFL, playing for the Green Bay Packers from 1957 to 1967,
and won the Heisman Trophy in 1956. He is also a member of the board of
directors of ESPN Classic.
Michael A. Wadsworth (Toronto, Ontario) is a nominee to our board of
directors. Mr. Wadsworth has been a member of the Stitt Feld Handy Group, an
international advisory firm in conflict resolution, since 2000. From 1995 until
2000 he served as director of athletics at the University of Notre Dame and from
1989 until 1994 he served as Canadian ambassador to Ireland. He has performed
senior executive roles in industry internationally, the most recent of which was
as senior vice president, U.S. Operations at Crown Life Insurance Co. He
practiced law as a trial and appellate counsel in Canada until 1981. He has been
a director of Jordan Telecommunication Products and AFM Hospitality Corporation
and is currently a director of CHC Helicopter Corporation. He has also served as
a director of a number of charitable and public service organizations.
David M. Williams (Toronto, Ontario) is a nominee to our board of
directors. Mr. Williams has served as the president and chief executive officer
of the Ontario Workplace Safety & Insurance Board from 1998 until June 2003.
Prior to that he held the position of executive vice president at George Weston
Limited and has held numerous positions with Loblaw Companies Ltd., including
executive vice president, chief financial officer and president of National
Grocers Ltd. Mr. Williams is a director of the Toronto Hydro Corp. and Toronto
Hydro Energy Services Inc. He is also a trustee for the Canadian Apartment
Properties Real Estate Investment Trust (CAP REIT). He is a former member of the
board of governors for the Electronic Commerce Council of Canada. Mr. Williams
is a certified general accountant.
Kenneth R. Frick (Campobello, South Carolina) is our executive vice
president and chief financial officer. Mr. Frick has served as our chief
financial officer since August 1998 and as chief financial officer
75
of Volume Services since December 1995. He served as our vice president from
August 1998 to December 2000, when he became executive vice president. Mr. Frick
has 18 years of experience in the recreational food service industry, 14 of them
with Volume Services. Prior to becoming chief financial officer of Volume
Services in 1995, Mr. Frick was the controller for Volume Services for two
years, and for seven years was assistant controller and Southeast Regional
Controller of Volume Services. Mr. Frick is a certified public accountant.
Janet L. Steinmayer (Old Greenwich, Connecticut) is our executive vice
president, general counsel and secretary. Ms. Steinmayer has been our general
counsel and secretary since August 1998. She served as our vice president from
August 1998 to December 2000, when she became executive vice president. Ms.
Steinmayer has been corporate vice president, general counsel and secretary of
Service America since November 1993. From 1992 to 1993, she was senior vice
president -- external affairs and general counsel of Trans World Airlines, Inc.,
or TWA (TWA filed for bankruptcy protection in January 1992). From April 1990 to
1991, she served as vice president -- law, deputy general counsel and corporate
secretary at TWA. Ms. Steinmayer was a partner at the Connecticut law firm of
Levett, Rockwood & Sanders, P.C. from 1988 to 1990.
COMPOSITION OF THE BOARD AFTER THE OFFERING
Prior to the closing of the offering, we intend to appoint Messrs. Chee,
Hornung, Wadsworth and Williams to our board of directors and each of them has
consented to so serve. Their appointment will be subject to the closing of the
offering. In addition, we expect that Messrs. Blitzer and Lipson will resign as
directors and that Mr. Honig will be appointed chairman of our board.
Pursuant to our restated certificate of incorporation, our board of
directors will be divided into three classes. The members of each class will
serve for a staggered, three-year term. Upon the expiration of the term of a
class of directors, directors in that class will be elected for three-year terms
at the annual meeting of stockholders in the year in which their term expires.
We currently anticipate that the classes will be comprised as follows:
- Class I directors. John T. Dee, Paul Hornung and David M. Williams will
be Class I directors whose terms will expire at the 2004 annual meeting
of stockholders;
- Class II directors. Lawrence E. Honig and Michael A. Wadsworth will be
Class II directors whose terms will expire at the 2005 annual meeting of
stockholders; and
- Class III directors. Felix P. Chee and Peter F. Wallace will be Class III
directors whose terms will expire at the 2006 annual meeting of
stockholders.
Any additional directorships resulting from an increase in the number of
directors will be distributed among the three classes so that, as nearly as
possible, each class will consist of one-third of our directors. This
classification of our board of directors may have the effect of delaying or
preventing changes in control of the company.
COMMITTEES OF THE BOARD
The standing committees of our board of directors will consist of an audit
committee, a compensation committee and a corporate governance committee.
Audit Committee
The principal duties and responsibilities of our audit committee will be as
follows:
- to monitor our financial reporting process and internal control
system;
- to appoint and replace our independent outside auditors from time to
time, determine their compensation and other terms of engagement and
oversee their work;
- to oversee the performance of our internal audit function; and
76
- to oversee our compliance with legal, ethical and regulatory
matters.
The audit committee will have the power to investigate any matter brought
to its attention within the scope of its duties. It will also have the authority
to retain counsel and advisors to fulfill its responsibilities and duties.
We plan to appoint two members to the audit committee within three months
following this offering and the third member within 12 months following this
offering.
Compensation Committee
The principal duties and responsibilities of the compensation committee
will be as follows:
- to provide oversight on the development and implementation of the
compensation policies, strategies, plans and programs for our key
employees and outside directors and disclosure relating to these
matters;
- to review and approve the compensation of our chief executive
officer and the other executive officers of us and our subsidiaries;
and
- to provide oversight concerning selection of officers, management
succession planning, performance of individual executives and
related matters.
The members of the compensation committee will be selected within three
months after this offering.
Corporate Governance Committee
The principal duties and responsibilities of the corporate governance
committee will be as follows:
- to establish criteria for board and committee membership and
recommend to our board of directors proposed nominees for election
to the board of directors and for membership on committees of the
board of directors;
- to make recommendations regarding proposals submitted by our
shareholders; and
- to make recommendations to our board of directors regarding
corporate governance matters and practices.
The members of the committee on corporate governance will be selected
within three months after this offering.
DIRECTOR AND EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Initial compensation for our directors who are not also employed by us or
our subsidiaries will be $30,000 per director per year and $1,000 per director
for attending meetings in person ($500 if by telephone) of the board of
directors and $500 per director for attending committee meetings of the board of
directors in person ($250 if by telephone). A committee chair will receive an
additional $500 for attending a committee meeting in person ($250 if by
telephone). Directors will also be reimbursed for out-of-pocket expenses for
attending board and committee meetings.
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COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth information with respect to the compensation
of our chief executive officer and the named executive officers for services in
all capacities for us in the years indicated:
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
ANNUAL COMPENSATION
-------------------------------------
OTHER ANNUAL ALL OTHER
YEAR SALARY BONUS(1) COMPENSATION(2) COMPENSATION(3)
---- -------- -------- --------------- ---------------
Lawrence E. Honig................. 2002 $315,000 -- -- $ 52,331(5)
Chief Executive Officer(4)
John T. Dee....................... 2002 $465,000 $ 43,500 -- $120,173(6)
Chief Executive Officer 2001 $465,000 $133,580 -- $107,983
and Chairman(4) 2000 $465,000 $187,700 -- $ 5,912
Kenneth R. Frick.................. 2002 $225,000 -- -- $ 10,798(7)
Executive Vice President and 2001 $214,558 $ 58,070 -- $ 8,538
Chief Financial Officer 2000 $204,750 $ 88,200 -- $ 2,370
Janet L. Steinmayer............... 2002 $278,654 -- -- $ 890(8)
Executive Vice President, 2001 $237,751 $ 61,140 -- $ 261
General Counsel and Secretary 2000 $247,000 $ 94,700 -- $ 236
</Table>
- ---------------
(1) Bonuses are made pursuant to VSA's bonus plan for general managers and
senior management personnel. Under the plan, the payment of the executive
officers' bonuses for 2002 was contingent on VSA's financial performance in
2002. The bonus amounts paid to each named executive officer do not reflect
the full amount of the annual bonus that each named executive officer would
have received as a 2002 bonus payment. At our board of directors' request,
the named executive officers agreed to forfeit all or a portion of their
2002 bonus in exchange for a commitment that we will pay bonuses (the sum of
which, in the aggregate, will not exceed $1,000,000) upon our successful
refinancing or other similar transaction, currently anticipated to occur
pursuant to this offering, but not limited to this offering. If such
refinancing or other similar transaction is not completed, these contingent
bonuses will not be paid. Mr. Dee forfeited $106,500 out of a possible
$150,000 declared by our board; Mr. Honig forfeited $150,000, the full
amount declared by our board; Mr. Frick forfeited $69,750, the full amount
declared by our board; and Ms. Steinmayer forfeited $73,750, the full amount
declared by our board. For additional information, see "-- Annual Bonus
Plan."
(2) Perquisites and other personal benefits did not exceed the lesser of $50,000
or 10% of the total salary and bonus of any named executive officer for the
years shown.
(3) Service America has historically maintained split dollar life insurance
policies for certain of its named executive officers and other executives.
In light of recent changes in the law, Service America has determined not to
pay the premiums due for 2003 and is taking appropriate actions to provide
alternatives to these arrangements.
(4) On April 15, 2002, Mr. Dee resigned as chief executive officer. On April 15,
2002, Lawrence E. Honig entered into an employment agreement with us to
serve as chief executive officer. His annual base salary is $450,000.
(5) Amount includes $49,822 in relocation benefits and $2,509 in insurance
premiums.
(6) Amount includes $117,423 in insurance premiums, including $13,400 in split
dollar life insurance premiums, and $2,750 in VSA's contributions under its
401(k) plan.
(7) Amount includes $2,750 in VSA's contributions under its 401(k) plan and
$8,047 in insurance premiums.
(8) Amount includes $890 in insurance premiums.
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MANAGEMENT EMPLOYMENT AND SEVERANCE AGREEMENTS
We have entered into the following agreements with our directors and
executive officers:
Agreement with Mr. Honig. On April 15, 2002, VSAH entered into an
employment agreement with Mr. Honig. The agreement provides that Mr. Honig will
be employed by VSAH as Chief Executive Officer until April 14, 2004, subject to
automatic one-year extensions of the term of his agreement and his employment
with VSAH, unless earlier terminated. The agreement may be terminated by either
party at any time for any reason, provided that Mr. Honig gives us 60 days
advance written notice of his resignation, or by us for cause or by Mr. Honig
for good reason. As defined in the agreement, a termination for cause includes
termination by us due to breach of the agreement by Mr. Honig after notice and
without cure, willful misconduct by Mr. Honig and the commission of a felony by
Mr. Honig. Termination by Mr. Honig for good reason includes termination due to
breach of the agreement by us. Mr. Honig's base salary under the agreement is
$450,000, subject to increases at the discretion of the board. Mr. Honig is also
eligible to earn an annual bonus pursuant to our bonus plan, targeted to be at
least 50% of Mr. Honig's base salary.
Mr. Honig is also entitled to participate in all employee benefits plans
maintained by us, except the split dollar life insurance program, and other
benefits. In the case of termination by VSAH without cause or by Mr. Honig for
good reason, Mr. Honig will receive his annual base salary and continued
benefits for the longer of (x) the date of his termination through April 15,
2004 or (y) one year following the date of his termination, plus any accrued but
unpaid bonus amounts. During and for two years after Mr. Honig's employment, Mr.
Honig has agreed that, without our written consent, he will not:
- carry on, be engaged in, or have any financial interest in any business
that competes with our business; or
- solicit any person who was employed by us during the 12 months preceding
such solicitation.
Under the terms of the agreement, Mr. Honig was to be granted options to
purchase a number of shares of our common stock pursuant to a long-term equity
incentive plan that was to be implemented within 180 days after the date of the
agreement. In the event of certain corporate transactions such as this offering,
we had guaranteed that these options would have a value equal to $1 million.
Because we never implemented a long-term equity incentive plan and therefore
never granted Mr. Honig these options, we have amended the agreement to provide
that we will pay him the $1 million guaranteed option value to which he was
originally entitled.
Agreement with Mr. Dee. On May 1, 2002, VSAH entered into an amended
employment agreement with Mr. Dee. The agreement provides that Mr. Dee will be
employed by us at an annual base salary of $465,000 through August 24, 2003 and
then at an annual base salary of $232,500 through August 24, 2005, subject to
earlier termination by us for or without cause, or by Mr. Dee for or without
good reason. As defined in the agreement, a termination for cause includes
termination by us due to breach of the agreement and willful misconduct by Mr.
Dee, and termination for good reason includes termination due to breach of the
agreement by us. Mr. Dee is entitled to a bonus at the discretion of our board
of directors and to participate in any executive bonus plan and all employee
benefit plans maintained by us. The agreement provides for severance pay in the
case of a termination by us without cause or by Mr. Dee for good reason in an
amount equal to Mr. Dee's annual base salary for the balance of the term of
employment, and ancillary employee benefits. During and for two years after Mr.
Dee's employment, Mr. Dee has agreed that, without our written consent, he will
not:
- be engaged, in any capacity, in any business that competes with our
business; or
- solicit any person who was employed by us during the 12 months preceding
such solicitation.
Agreement with Mr. Frick. On November 17, 1995, VSI entered into an
employment agreement with Mr. Frick. The agreement provides that Mr. Frick will
be employed by VSI as Chief Financial Officer until he resigns or is dismissed
by VSI for or without cause. We may terminate the agreement for cause if, among
other things, Mr. Frick commits a felony, is grossly negligent in the
performance of his
79
duties or breaches any material provision of the agreement. Mr. Frick's annual
base salary under the contract is $225,000, subject to annual review by VSI's
chief executive officer. Mr. Frick is also entitled to receive an annual bonus
pursuant to any management incentive compensation plan established by VSI. In
the case of termination of employment due to resignation, Mr. Frick will receive
his salary up to the 30th day following his resignation and any accrued but
unpaid bonus amounts. In the case of termination without cause by VSI, Mr. Frick
will receive a one-time payment of two times his annual base salary plus any
accrued but unpaid bonus amounts. During and for two years after his employment,
Mr. Frick has agreed not to:
- solicit employees of VSI to cease such employment without the written
consent of VSI; or
- have any involvement in any capacity in any contract concessions business
similar to that of VSI in those states in the United States in which VSI
does business and over which Mr. Frick has had supervisory
responsibility.
Agreement with Ms. Steinmayer. On September 29, 1998, VSAH entered into an
employment agreement with Ms. Steinmayer. The agreement provides that Ms.
Steinmayer will be employed by VSAH as Vice President, General Counsel and
Secretary at an annual base salary of $210,000, plus $250 per hour for each hour
that she works in excess of 24 hours per week, until the agreement is terminated
by VSAH for or without cause, or by Ms. Steinmayer with or without good reason.
As defined in the agreement, a termination for cause includes termination by us
due to breach of the agreement and willful misconduct by Ms. Steinmayer, and
termination for good reason includes termination due to breach of the agreement
by us and termination by Ms. Steinmayer within six months of a change of control
of VSAH. Ms. Steinmayer is entitled to an annual bonus at the discretion of our
board of directors and to participate in any executive bonus plan and all
employee benefits plans maintained by us. In the case of a termination by VSAH
without cause or by Ms. Steinmayer for good reason, Ms. Steinmayer will receive
a one-time payment of an amount equal to two times her annual compensation in
the one-year period prior to the date of termination, plus ancillary employee
benefits. During and for two years after Ms. Steinmayer's employment, she has
agreed that, without our prior written consent, she will not:
- have any involvement in any enterprise which provides food services, as
defined in the agreement, in any of the states in the United States in
which we operate; or
- solicit any of our employees to leave their employment.
SAVINGS PLAN
We sponsor the Volume Services America Retirement and Savings 401(k) Plan,
a tax-qualified plan in which our employees who have reached age 21 and have
completed one year of service are eligible to participate. The following
employees are not eligible to participate in our 401(k) plan:
- employees covered by a collective bargaining agreement;
- nonresident aliens; and
- leased employees.
Subject to applicable limits imposed on tax-qualified plans, participants
in our 401(k) plan may elect to make pre-tax contributions of up to 16% of their
compensation each year. We make matching contributions equal to 25% of a
participant's contributions, up to the first 6% of the participant's earnings.
Our 401(k) plan also allows us, in the discretion of our board of directors, to
make additional matching contributions of up to a total of 50% of a
participant's contributions, up to the first 6% of the participant's earnings.
Participants become 100% vested with respect to matching contributions after two
years of service with us.
80
DEFERRED COMPENSATION PLAN
We also sponsor the Volume Services America Deferred Compensation Plan, a
non-tax-qualified plan in which employees may participate if such employees are:
- members of a select group of highly compensated or management employees;
or
- selected by the plan's administrative committee as participants.
Our Deferred Compensation Plan allows participants to elect to make pre-tax
deferrals of a portion of their annual base salary and bonuses, subject to
maximum and minimum percentage or dollar amount limitations determined by the
plan's administrative committee, the members of which are selected by our board
of directors. The Deferred Compensation Plan allows us, in the discretion of the
administrative committee, to make matching contributions with respect to
participants who elect to defer a portion of their annual base salary. A
participant's deferrals and matching contributions, if any, are credited to a
bookkeeping account and accrue earnings and losses as if held in certain
investments selected by the participant. Our Deferred Compensation Plan is
unfunded, and participants are unsecured general creditors of VSA as to their
accounts.
ANNUAL BONUS PLAN
We maintain a bonus plan whereby general managers and senior management
personnel qualify for incentive payments in the event that we exceed certain
financial performance targets, based on attaining specified levels of EBITDA,
determined on an annual basis.
Each year, we will establish a target level of EBITDA for the company as a
whole and for each area, region and unit. Employees will be eligible to earn a
percentage of their base salary, which percentage is set by us and varies by
management level, if these target levels of EBITDA are met or exceeded.
Employees with responsibilities that relate to the company as a whole will have
their bonuses determined based solely on the target EBITDA for the company,
while employees with regional responsibilities will have their bonuses
determined based in part on the target EBITDA level for their area or region.
Individual awards are paid to participants in lump sums as soon as practicable
after the end of the fiscal year, subject to withholding of applicable federal,
state and local taxes. Our CEO and board of directors have the right to adjust
or eliminate any incentive payment that would otherwise be earned under the
bonus plan based on such factors as they may determine in their sole discretion.
Our CEO and board of directors may also amend or cancel the bonus plan at any
time for any reason.
In February 2003, our CEO, with the approval of the board of directors,
authorized bonus amounts for fiscal year 2002 for most of our management and
contingent bonuses for certain members of our senior management. The bonus
amounts are contingent upon the successful refinancing or other similar
extraordinary transaction of us, currently anticipated to occur through this
offering, but a successful refinancing or other similar transaction is not
limited to this offering. There is no time limit on when the refinancing or
similar transaction must occur, but the bonuses are contingent on such
successful refinancing or transaction and will be paid from the proceeds of such
refinancing or similar transaction. Under the contingent bonus arrangement, the
following individuals are eligible to receive the following amounts, provided
that the aggregate amount of bonuses payable under these 2002 contingent bonuses
would be no greater than $1 million: Mr. Honig: $375,000; Mr. Dee: $266,250; Mr.
Frick: $174,375; and Ms. Steinmayer: $184,375.
LONG-TERM INCENTIVE PLAN
Our executive officers and other senior employees to be identified by the
compensation committee of our board of directors (the "compensation committee")
will be eligible to participate in our Long-Term Incentive Plan (the "LTIP").
The purpose of the LTIP will be to strengthen the mutuality of interests between
the LTIP participants and holders of IDSs. The LTIP will be administered by our
compensation committee, which shall have the power to, among other things,
determine (1) those individuals who will participate in the LTIP, (2) the level
of participation of each participant in the
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incentive pool, (3) the conditions that must be satisfied in order for the
participants to vest in their allocated incentive pool amounts (including
establishing specified performance targets that must be achieved in order for
the pool to be created and amounts to be allocated to the participants) and (4)
other conditions that the participants must satisfy in order to receive payment
of their allocated amounts. Under the LTIP, the maximum amount (in dollars or
value, if payments are made in property) that any one participant can receive in
respect of a three-year period is $2 million. The LTIP is an unfunded plan.
Under the LTIP, participants will be eligible to receive certain amounts,
initially credited to accounts created for them on our books and records as a
percentage of an incentive pool. The incentive pool will be established if and
to the extent that the amount by which the aggregate annual per IDS
distributions, which includes both interest and dividend payments (the
"Distributions per IDS"), exceed a minimum per IDS distributable cash threshold
amount (determined without regard to distributions under the LTIP) (the "Base
Distributions per IDS") and achieve a target per IDS distributable cash
threshold amount (the "Target Distributions per IDS") for each of fiscal 2004,
2005 and 2006. Generally, the amounts credited to the participants' accounts
will be paid at the end of this multi-year performance period in the form of
IDSs and/or cash, in the compensation committee's discretion.
Currently, the Base Distributions per IDS target is anticipated to be set
at $1.20 per IDS and the Target Distributions per IDS is anticipated to be set
at $1.275 per IDS. If the Target Distributions per IDS is achieved for fiscal
2004, then the compensation committee will establish a reserve for the incentive
pool. The amount of the incentive pool reserve will equal 20% of the aggregate
Distributions per IDS in excess of the aggregate Base Distributions per IDS.
Also, for fiscal 2004, it will be recommended to the compensation committee that
the incentive pool be allocated among the named executive officers and other
senior employees as follows:
<Table>
<Caption>
PERCENTAGE OF INCENTIVE POOL
PARTICIPANT ALLOCATED TO PARTICIPANT
- ----------- ----------------------------
Lawrence E. Honig............................ 25.0%
John T. Dee.................................. 15.0%
Kenneth R. Frick............................. 12.5%
Janet L. Steinmayer.......................... 12.5%
Other senior employees....................... 35.0%
-----
Total.............................. 100.0%
</Table>
The compensation committee also has the power to amend or terminate the
LTIP at any time, which includes the power to adjust the Distributions per IDS
targets and/or amounts to be allocated to participants in respect of each fiscal
year occurring during the applicable performance period.
We intend for the LTIP to be a performance-based compensation arrangement
within the meaning of Section 162(m) of the Internal Revenue Code, in order to
ensure the full deductibility of all payments made under the LTIP to our
executive officers and other senior employees whose compensation could otherwise
be subject to the limitations on deductibility under Section 162(m).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation levels of our executive officers are currently determined
by our CEO and our board of directors. After completion of this offering, our
board of directors will form a compensation committee which will determine
executive officer compensation as described under "-- Committees of the Board."
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PRINCIPAL STOCKHOLDERS
The following table shows information regarding the beneficial ownership of
shares of our common stock before and after the completion of this offering and
shows the number of and percentage owned by:
- each person who is known by us to own beneficially more than 5% of either
class of our capital stock;
- each member of our board of directors;
- each of our named executive officers; and
- all members of our board of directors and our executive officers as a
group.
Except as indicated in the footnotes to this table, each person has sole
voting and investment power with respect to all shares attributable to such
person.
<Table>
<Caption>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED OWNED
AFTER THIS AFTER THIS
OFFERING OFFERING
SHARES BENEFICIALLY ASSUMING NO ASSUMING FULL
OWNED EXERCISE OF THE EXERCISE OF THE
PRIOR TO THIS OVER-ALLOTMENT OVER-ALLOTMENT
OFFERING OPTION OPTION
------------------- ---------------- ----------------
NAME OF BENEFICIAL OWNER NUMBER % NUMBER % NUMBER %
- ------------------------ ------- ----- ------ --- ------ ---
Blackstone(1)............................................... 63.7%
GE Capital(2)............................................... 36.3%
Kenneth R. Frick(1)(3)(4)................................... 4.2%
David Blitzer(1)............................................ -- --
John T. Dee(3)(4)........................................... -- --
Lawrence E. Honig(3)(4)..................................... -- --
Howard A. Lipson(1)......................................... -- --
Janet L. Steinmayer(3)(4)................................... -- --
Peter F. Wallace(5)......................................... -- --
All directors and executive officers as a group (7
persons).................................................. 4.2%
</Table>
- ---------------
(1) Blackstone affiliates currently own shares of our common stock as
follows: (a) shares owned by BCP Volume L.P., for which Blackstone
Capital Partners II Merchant Banking Fund L.P. is the general partner and
exercises sole voting and investment power with respect to its shares; (b)
shares owned by BCP Offshore Volume L.P., for which Blackstone Offshore
Capital Partners II L.P. is the general partner and exercises sole voting
and investment power with respect to its shares; and (c) shares owned
by VSI Management Direct L.P., for which VSI Management I L.L.C. is the
general partner and exercises sole voting and investment power with respect
to its shares.
With respect to Blackstone Capital Partners II Merchant Banking Fund L.P.
and Blackstone Offshore Capital Partners II L.P., Blackstone Management
Associates II L.L.C. is the general partner and investment general partner,
respectively, and thus exercises sole voting and investment power with
respect to these two entities. With respect to VSI Management I L.L.C.,
Blackstone Management Associates II L.L.C. is one of two managing members,
along with Kenneth R. Frick, our executive vice president and chief
financial officer, and thus exercises shared voting and investment power
with respect to this entity. Messrs. Peter G. Peterson and Stephen A.
Schwarzman are the founding members of Blackstone and, as such, may also be
deemed to share beneficial ownership of the shares held or controlled by
each of these entities. Messrs. David Blitzer and Howard A. Lipson, both
directors of VSAH, are members of Blackstone Management Associates II
L.L.C., which has sole or shared voting and investment power over the shares
held or controlled by Blackstone and as such may be deemed to share
beneficial ownership of the shares held or controlled by Blackstone. Each of
these
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individuals disclaims beneficial ownership of such shares. The address of
each Blackstone entity or individual is c/o The Blackstone Group L.P., 345
Park Avenue, New York, New York 10154.
(2) The shares are owned by Recreational Services L.L.C., which is a limited
liability company, the managing member of which is GE Capital. GE Capital
exercises sole voting and investment power with respect to its shares. The
address of this stockholder is 201 High Ridge Road, Stamford, Connecticut
06927.
(3) The address of this stockholder is c/o Volume Services, Inc., 201 East Broad
Street, Spartanburg, South Carolina 29306.
(4) See "Related Party Transactions -- Management Ownership and Transactions
with Management."
(5) Mr. Peter F. Wallace is an employee of Blackstone, but does not have voting
or investment power over the shares beneficially owned by Blackstone.
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RELATED PARTY TRANSACTIONS
BLACKSTONE
Repurchase of Existing Equity Interests with Proceeds from this
Offering. BCP Volume, BCP Offshore Volume and VSI Management Direct are
affiliates of Blackstone and will distribute to their general and limited
partners the proceeds they receive from this offering in connection with our
repurchase of the shares of our common stock held by the existing equity
investors. In connection with our repurchase, Blackstone will receive $ of
the proceeds from this offering (or $ if the over-allotment option is
exercised in full), including proceeds which will ultimately be distributed to
certain members of management in connection with their direct or indirect
interests in these three Blackstone-affiliated partnerships, as described below
under "-- Management Ownership and Transactions with Management." David Blitzer
and Howard A. Lipson, two members of our board of directors, may receive or be
deemed to have received a portion of these proceeds by virtue of their
affiliation with Blackstone.
Annual Fees. Blackstone provides administrative and management functions
to us through a monitoring agreement. We paid management fees of $250,000 to BMP
II, an affiliate of Blackstone Management Associates II, in each of fiscal 2000,
2001 and 2002 and $62,500 in the thirteen-week period ended April 1, 2003. The
fees payable to BMP II have been accounted for as an expense. We will cease
paying these fees upon the closing of this offering.
Additional Agreement. We and Blackstone will enter into an agreement
pursuant to which, to the extent not prohibited by law, rule, regulation
(including rules of any applicable securities exchange), if we do not have any
director affiliated with the existing equity investors, then an individual
selected by Blackstone Capital Partner II Merchant Banking Fund L.P. or any
affiliate it designates will have the right to attend as a non-voting observer
all meetings of our board of directors, receive all information provided to our
directors and consult with us with respect to any matters as that individual may
deem appropriate, so long as that individual is acceptable to our board of
directors acting reasonably and so long as Blackstone and that individual have
executed a non-disclosure and market stand-off agreement.
Amendment and Restatement of Stockholders Agreement and Registration Rights
Agreement. See "-- Amendment and Restatement of Stockholders Agreement" and
"-- Registration Rights."
GE CAPITAL
Repurchase of Existing Equity Interests with Proceeds from this
Offering. Recreational Services is an affiliate of GE Capital and will
distribute to its members the proceeds it receives from this offering in
connection with our repurchase of the shares of our common stock held by the
existing equity investors. In connection with our repurchase, GE Capital will
receive $ of the proceeds from this offering (or $ if the over-allotment
option is exercised in full).
Annual Fees. GE Capital provides administrative and management functions
to us through a monitoring agreement. We paid management fees of $167,000 to GE
Capital in each of fiscal 2000, 2001 and 2002 and $41,750 in the thirteen-week
period ended April 1, 2003. The fees payable to GE Capital have been accounted
for as an expense. We will cease paying these fees upon the closing of this
offering.
Tax Indemnity Agreement. Service America ceased being a member of the
General Electric Company consolidated group, or the GE Consolidated Group, for
federal income tax purposes by reason of its acquisition by us in 1998.
Accordingly, Service America and GE Capital in January 1997 entered into a tax
indemnity agreement. Under this agreement:
- GE Capital agreed to indemnify Service America for, and became entitled
to any refund of, all consolidated or combined federal, state and local
income taxes payable while Service America was a member of the GE
Consolidated Group; and
85
- as authorized by the consolidated return Treasury Regulations, the GE
Consolidated Group became entitled to re-attribute to itself the portion
of Service America's net operating losses that did not exceed the amount
of "disallowed losses," as defined in those regulations, which GE Capital
realized in connection with the recapitalization of Service America
effected in January 1997 by GE Capital and some members of Service
America's management.
Leasing Services. GE Capital and its affiliates provided us leasing and
financing services during 2001 on arms'-length terms. Payments to GE Capital and
its affiliates during 2002, net of discounts earned, were approximately $95,000.
We also leased equipment from GE Capital under a capital lease. Payments to GE
Capital under this lease were approximately $267,000 in 2002. The lease expired
as of December 31, 2002.
Amendment and Restatement of Stockholders Agreement and Registration Rights
Agreement. See "-- Amendment and Restatement of Stockholders Agreement" and
"-- Registration Rights."
MANAGEMENT OWNERSHIP AND TRANSACTIONS WITH MANAGEMENT
John T. Dee, Kenneth R. Frick and Janet L. Steinmayer hold indirect
ownership interests in us through their limited partnership interests in VSI
Management Direct and VSI Management II, which holds a limited partnership
interest in each of BCP Volume and BCP Offshore Volume. Before this offering,
VSI Management Direct owned a 4.2% ownership interest in us, and VSI Management
II's limited partnership interests represented a right to receive 7% of
distributions from each of BCP Volume and BCP Offshore Volume. VSI Management
II's limited partnership interests in BCP Volume and BCP Offshore Volume also
represented the right, under specified circumstances, to receive up to 15% of
the aggregate distributions from these partnerships. Before this offering:
- Mr. Dee owned a 6.7% limited partnership interest in VSI Management
Direct and a 7.4% limited partnership interest in VSI Management II;
- Mr. Frick owned a 6.3% limited partnership interest in VSI Management
Direct, a 9.2% limited partnership interest in VSI Management II and a
98% limited liability company interest in VSI Management I, which owns a
1% general partnership interest in each of VSI Management Direct and VSI
Management II; and
- Ms. Steinmayer owned a 3.5% limited partnership interest in VSI
Management Direct and a 3.8% limited partnership interest in VSI
Management II.
During 1999, 2000 and 2001, VSA loaned approximately $1,383,400 to VSI
Management Direct and VSI Management II. These loans are payable on demand and
accrue interest at a floating, long-term applicable federal rate, compounding
monthly. The average interest charged in 2002 was 5.25% and the rate as of June
1, 2003 was 4.56%. As of April 1, 2003, approximately $1,175,000 remained
outstanding under these loans. VSI Management Direct and VSI Management II used
the proceeds from these loans principally to repurchase certain of their
outstanding limited partnership interests from some former members of
management.
VSI Management Direct and VSI Management II also made loans to certain
members of the then-current management team of VSA to enable them to purchase
limited partnership interests in those partnerships. Mr. Dee and Ms. Steinmayer
are the only current executive officers who received such loans. Mr. Dee
borrowed $384,696 and Ms. Steinmayer borrowed $200,363 in January-February 2000.
Each loan matures ten years from the date the loan was made unless payment is
otherwise accelerated. Interest on these loans accrues annually at a floating,
long-term applicable federal rate, compounding monthly. The average interest
charged in 2002 was 5.25% and the rate as of June 1, 2003 was 4.56%. As of April
1, 2003, Mr. Dee and Ms. Steinmayer had outstanding loans from the partnerships
in the amounts of $384,696 and $200,363, respectively. Interest on these loans
has been paid as it accrued.
Upon the closing of this offering, BCP Volume, BCP Offshore Volume, VSI
Management Direct and VSI Management II will distribute to their limited
partners the proceeds they receive, directly or
86
indirectly, from this offering in connection with our repurchase of the shares
of our common stock held by the existing equity investors. In connection with
this offering, Messrs. Dee and Frick and Ms. Steinmayer will receive $ ,
$ and $ , respectively, of the proceeds from this offering (or $ ,
$ and $ , respectively, if the over-allotment option is exercised in
full). Mr. Dee and Ms. Steinmayer are then required, by the terms of their loans
with VSI Management Direct and VSI Management II, to use these funds to repay
those loans. VSI Management Direct and VSI Management II will in turn use those
funds to repay their borrowings under their loans with VSA. Mr. Frick and Ms.
Steinmayer have agreed to use a portion of any funds remaining after payment of
necessary taxes and, in Ms. Steinmayer's case, after repayment of her loans from
VSI Management Direct and VSI Management II to purchase IDSs in the offering in
an amount equal to approximately $ and $ , respectively.
Lawrence E. Honig has agreed to use the after-tax proceeds of the $1
million payment he will receive from us upon consummation of this offering (see
"Management -- Director and Executive Compensation -- Management Employment and
Severance Agreements") to purchase IDSs in the offering in an amount equal to
approximately $570,000.
In addition to the transactions with management described above, Mr. Honig
borrowed $200,000 from VSA in April 2002 as a bridge loan on the sale of his
previous residence. This amount was repaid in full on July 30, 2002.
AMENDMENT AND RESTATEMENT OF STOCKHOLDERS AGREEMENT
We and the existing equity investors will enter into an amendment and
restatement of our stockholders agreement concurrently with the completion of
this offering which will provide that:
- we will use a portion of the proceeds of this offering to repurchase from
the existing equity investors their shares of common stock such that the
existing equity investors will be left holding common stock representing
approximately % of the voting power upon completion of the offering;
- if the over-allotment option is exercised, we will use the proceeds to
repurchase from the existing equity investors additional shares of common
stock (or if the over-allotment option is exercised in full, their
remaining shares of common stock); and
- if the over-allotment option is not exercised, upon any post-offering
sale of common stock by the existing equity investors, we will
automatically exchange a portion of the common stock with the purchasers
for subordinated notes at an exchange rate of $ principal amount of
subordinated notes for each share of common stock.
The amendment and restatement of our stockholders agreement will otherwise
replace all the terms of the existing stockholders agreement.
REGISTRATION RIGHTS
We will enter into a registration rights agreement with the existing equity
investors and Messrs. Honig and Frick and Ms. Steinmayer pursuant to which:
- the existing equity investors, if the over-allotment option is not
exercised in full, will collectively have three demand registration
rights relating to the shares of our common stock (which include
automatic exchange rights upon transfer into subordinated notes) or IDSs
held by the existing equity investors, subject to the requirement that
the securities, including any piggyback securities, covered by each
demand registration have an aggregate public offering price of at least
$10 million; provided that an existing equity investor must beneficially
own more than 1% of our outstanding shares of common stock to initiate a
demand for registration; and
- the existing equity investors, if the over-allotment option is not
exercised in full, and Messrs. Honig and Frick and Ms. Steinmayer will
have an unlimited number of piggyback registration rights relating to the
shares of our common stock (which include automatic exchange rights upon
transfer into subordinated notes) or IDSs held by each of them.
87
If the existing equity investors exercise their demand registration rights,
we will file a registration statement or prospectus and undertake an offering in
the United States and Canada, as requested by the existing equity investors. The
registration rights are transferable by the existing equity investors and
Messrs. Honig and Frick and Ms. Steinmayer. We have agreed to pay all costs and
expenses in connection with each such registration, except underwriting
discounts and commissions applicable to the securities sold, and to indemnify
the existing equity investors and Messrs. Honig and Frick and Ms. Steinmayer
against certain liabilities, including liabilities under the Securities Act of
1933 and any Canadian securities laws.
INDEMNIFICATION AND INSURANCE
For a description of our limitation on liability and indemnification of,
and provision of insurance covering, our directors and executive officers, see
"Description of Capital Stock -- Anti-Takeover Effects of Various Provisions of
Delaware Law and Our Restated Certificate of Incorporation and Amended and
Restated By-laws -- Our Restated Certificate of Incorporation and Amended and
Restated By-laws -- Limitations on Liability and Indemnification of Officers and
Directors."
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DESCRIPTION OF CERTAIN INDEBTEDNESS
NEW CREDIT FACILITY
Concurrently with the closing of this offering, VSA will enter into a new
credit facility with a syndicate of financial institutions and CIBC World
Markets Corp., as lead arranger and sole bookrunner. We and the subsidiaries of
VSA will guarantee the new credit facility on a senior secured basis.
The new credit facility will be available in two tranches. The tranche A
facility will be comprised of a revolving credit facility in a total principal
amount of up to $ million, including a subfacility in the aggregate amount of
$ that will permit us to obtain advance financing on specific terms to cover
potential shortfalls from other debt commitments. We refer to this subfacility
as our "swingline" subfacility. The tranche B facility will be comprised of
senior secured notes in an aggregate principal amount of $ million.
We expect that the tranche A facility will mature years after the closing
of this offering and the tranche B facility will mature years after the
closing of this offering.
We expect that the new credit facility will have several features similar
to credit facilities of this nature, including but not limited to:
Interest Rate and Fees. We expect that borrowings will bear interest, at
our option, for the tranche A facility at either (a) U.S. Base Rate plus the
applicable margin, as defined below or (b) adjusted LIBOR plus the applicable
margin. Under the contemplated swingline subfacility, advances will be provided
by banks for up to five business days as U.S. base rate loans. We expect that a
portion of the tranche B term loan will bear interest at a floating rate similar
to the tranche A facility and the remainder of the tranche B term loan will bear
interest at a rate per annum equal to the sum of the U.S. Treasury rate
corresponding to the weighted average life of the term loan which will be fixed
as of the closing date plus a spread to be determined.
The applicable margin for the tranche A facility will be .
We also expect the new credit facility will provide payment to the lenders
of a commitment fee on any unused commitments under the tranche A facility equal
to % per year.
Mandatory Prepayments. We expect that the new credit facility will require
us to prepay outstanding loans under the tranche B facility with, subject to
certain conditions and exceptions, % of the net cash proceeds received by
us from any loss, damage, destruction or condemnation of or any sale, transfer
or other disposition of any assets, % of the net cash proceeds form the
incurrence of any indebtedness by us and % of the net proceeds of any
issuance or sale of equity by us.
Voluntary Prepayments. We expect that the new credit facility will provide
for voluntary prepayments of the tranche A and tranche B loans, subject to
certain conditions and restrictions.
Covenants. We expect that the new credit facility will require that we
meet certain financial tests, including, without limitation, the following
tests: a maximum net leverage ratio, a minimum fixed charge coverage ratio and a
total debt to book capitalization ratio.
We also expect that our new credit facility will contain customary
covenants and restrictions, including, among others, limitations or prohibitions
on declaring dividends and other distributions, redeeming and repurchasing our
other indebtedness, loans and investments, additional indebtedness, liens,
sale-leaseback transactions, capital expenditures, recapitalizations, mergers,
acquisitions and asset sales and transactions with affiliates.
Collateral. We expect to give to the administrative agent on behalf of
each lender collateral consisting of, without limitation, a pledge of
substantially all of the personal property of VSAH and its domestic
subsidiaries, including a pledge of our intercompany debt, 100% of the capital
stock of our domestic subsidiaries and 65% of the capital stock of certain of
our foreign subsidiaries, in each case subject to exceptions to be agreed upon.
89
Events of Default. We expect that our new credit facility will specify
certain customary events of default, entitling the lenders thereunder to
accelerate the payment of amounts owed and to exercise other remedies, including
foreclosing on the collateral. Upon the occurrence and continuance of an event
of default, each Tranche A lender shall purchase a participation in any
outstanding swingline loan in an amount equal to such lender's applicable
percentage of the unpaid amount together with accrued interest thereon.
VSA 11 1/4% SENIOR SUBORDINATED NOTES DUE 2009
As of April 1, 2003, VSA had $100 million aggregate principal amount of
11 1/4% senior subordinated notes due 2009 outstanding. The closing of the
tender offer and consent solicitation is a condition to this offering. See
"Summary -- Tender Offer and Consent Solicitation."
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DESCRIPTION OF IDSS
GENERAL
We are selling IDSs in this offering. Each IDS initially
represents:
- one share of our common stock; and
- $ aggregate principal amount of our % subordinated notes.
The ratio of common stock to principal amount of subordinated notes
represented by an IDS is subject to change in the event of a stock split,
recombination or reclassification of our common stock. For example, if we elect
to effect a two-for-one stock split, from and after the effective date of the
stock split, each IDS will represent two shares of common stock and the same
principal amount of subordinated notes as it previously represented. Likewise,
if we effect a recombination or reclassification of our common stock, each IDS
will thereafter represent the appropriate number of shares of common stock on a
recombined or reclassified basis, as applicable, and the same principal amount
of subordinated notes as it previously represented.
Holders of IDSs are at all times the beneficial owners of the common stock
and subordinated notes represented by such IDSs and, through their broker or
other financial institution and DTC, will have exactly the same rights,
privileges and preferences, including voting rights, rights to receive
distributions, rights and preferences in the event of a default under the
indenture governing the subordinated notes, ranking upon bankruptcy and rights
to receive communications and notices as a beneficial owner of separately held
common stock and subordinated notes, as applicable, would have through its
broker or other financial institution and DTC.
The IDSs will be available in book-entry form only. As discussed below
under "-- Book-Entry Settlement and Clearance," a nominee of the book-entry
clearing system will be the sole registered holder of the IDSs. That means you
will not be a registered holder of IDSs or be entitled to receive a certificate
evidencing your IDSs. You must rely on the procedures used by your broker or
other financial institution that will maintain your book-entry position to
receive the benefits and exercise the rights of a holder of IDSs that are
described below. You should consult with your broker or financial institution to
find out what those procedures are.
VOLUNTARY SEPARATION AND RECOMBINATION
At any time after the earlier of 180 days following the date of this
prospectus or the occurrence of a change of control, IDS holders may separate
their IDSs into the securities represented by those IDSs. Similarly, any holder
of shares of our common stock and subordinated notes may, at any time, through
their broker or other financial institution, combine the applicable number of
shares of common stock and principal amount of subordinated notes to form IDSs.
AUTOMATIC SEPARATION
Upon the occurrence of any of the following, the IDSs will be automatically
separated into the shares of common stock and subordinated notes represented
thereby:
- exercise by us of our right to redeem all or a portion of the
subordinated notes, which may be represented by IDSs at the time of such
redemption;
- the date on which principal on the subordinated notes becomes due and
payable, whether at the stated maturity date or upon acceleration
thereof; or
- if DTC is unwilling or unable to continue as securities depository with
respect to the IDSs or ceases to be a registered clearing agency under
the Securities Exchange Act of 1934 and we are unable to find a successor
depositary.
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BOOK-ENTRY SETTLEMENT AND CLEARANCE
The Depository Trust Company, known as DTC, will act as securities
depository for the IDSs, and the subordinated notes and shares of common stock
represented by the IDSs, or the "securities." The subordinated notes and the
shares of our common stock represented by the IDSs will be represented by one or
more global notes and global stock certificates. The global notes and global
stock certificates will be issued in fully-registered form in the name of DTC's
nominee, Cede & Co.
Book-entry procedures. If you intend to purchase IDSs in the manner
provided by this prospectus you must do so through the DTC system or through
direct and indirect participants, including The Canadian Depository for
Securities Limited, known as CDS. The participant that you purchase through will
receive a credit for the applicable security on DTC's records. If you purchase
IDSs in Canada you will hold the interest in the IDSs through your registered
dealer which is a CDS participant and through the DTC participant account
maintained by CDS. The ownership interest of each actual purchaser of the
applicable security, who we refer to as a "beneficial owner," is to be recorded
on the participant's records. Beneficial owners will not receive written
confirmation from DTC of their purchases, but beneficial owners are expected to
receive written confirmations providing details of their purchase and sale
transactions, as well as periodic statements of their holdings, from the DTC or
CDS participant through which the beneficial owner entered into their purchase
and sale transactions.
All interests in the securities will be subject to the operations and
procedures of DTC and CDS. We provide the following summaries of those
operations solely for your convenience. The operations and procedures of each
settlement system may be changed at any time. We are not responsible for those
procedures and operations.
DTC has advised us as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of the New York State Banking Law, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "clearing agency" registered under Section 17A of the
Securities Exchange Act of 1934. DTC was created to hold securities for its
participants and to facilitate the clearance and settlement of securities
transactions between its participants through electronic book-entry changes to
the accounts of its participants. DTC's participants include securities brokers
and dealers, including the underwriters, banks and trust companies, clearing
corporations and other organizations. Indirect access to DTC's system is also
available to others such as banks, brokers, dealers and trust companies. These
indirect participants clear through or maintain a custodial relationship with a
DTC participant, either directly or indirectly. The rules that apply to DTC and
its participants are on file with the SEC.
To facilitate subsequent transfers, all securities deposited by direct
participants with DTC are registered in the name of DTC's nominee, Cede & Co.
The deposit of securities with DTC and their registration in the name of Cede &
Co. effect no change in beneficial ownership. DTC has no knowledge of the actual
beneficial owners of the securities. DTC's records reflect only the identity of
the direct participants to whose accounts such securities are credited, which
may or may not be the beneficial owners. The participants will remain
responsible for keeping account of their holdings on behalf of their customers.
Transfers of ownership interests in the securities are to be accomplished
by entries made on the books of participants acting on behalf of beneficial
owners. Beneficial owners will not receive certificates representing their
ownership interests in the applicable security except in the event that use of
the book-entry system for the securities is discontinued.
Cross-market transfers between DTC participants, on the one hand, and CDS
participants, on the other hand, will be effected within DTC through the DTC
participant that is acting as depositary for CDS. To deliver or receive an
interest in securities held in a CDS account, an investor must send transfer
instructions to CDS under the rules and procedures of that system and within the
established deadlines of that system. If the transaction meets its settlement
requirements, CDS will send instructions to its DTC
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depositary to take action to effect final settlement by delivering or receiving
interests in the securities in DTC and making or receiving payment under normal
procedures for same-day funds settlement applicable to DTC. CDS participants may
not deliver instructions directly to the DTC depositary that is acting for CDS.
Separation and combination. Holders of IDSs may, at any time after 180
days from the date of original issuance, through their broker or other financial
institution, separate their IDSs into the shares of common stock and
subordinated notes represented thereby. Similarly, any holder of shares of our
common stock and subordinated notes may, at any time after 180 days from the
date of original issuance, through their broker or other financial institution,
combine the applicable number of shares of common stock and principal amount of
subordinated notes to form IDSs.
In addition, the IDSs will be automatically separated into the shares of
common stock and subordinated notes represented thereby upon the occurrence of
the following:
- with respect to any holder of IDSs, exercise by such holder of its right
to cause us to repurchase the subordinated notes represented by that
holder's IDSs in connection with a change of control of VSAH ,
- exercise by us of our right to redeem all or a portion of the
subordinated notes, which may be represented by IDSs at the time of such
redemption,
- the date on which principal on the subordinated notes becomes due and
payable, whether at the stated maturity date or upon acceleration
thereof, or
- if DTC is unwilling or unable to continue as securities depository with
respect to the IDSs or ceases to be a registered clearing agency under
the Securities Exchange Act of 1934 and we are unable to find a successor
depositary.
Any voluntary or automatic separation of IDSs and any subsequent
combination of IDSs from subordinated notes and common stock are to be
accomplished by entries made by the DTC participants acting on behalf of
beneficial owners. In any such case, the participant's account through which a
separation or combination is effected, will be credited and debited for the
applicable securities on DTC's records.
A holder of IDSs is entitled to reimbursement by us of fees that constitute
DTC charges incurred directly by such holder in connection with the voluntary
separation or recombination of the IDSs. We have been informed by DTC that the
current fee per transaction per participant account for any separation or
recombination is $9.50. Depending on the arrangements between a holder and his
or her brokerage firm, and the brokerage arrangements with the DTC participant,
these fees may or may not be passed directly on to the holder. In order to
receive reimbursement of these DTC-related fees, the holder must provide written
notice to us within thirty days following the date of voluntary separation or
recombination, accompanied by written evidence of such fees directly incurred by
such holder, such as the holder's brokerage statement or other written evidence
reasonably acceptable to us. Within ten business days following the receipt of
such written request and evidence, we will send a check for the amount of such
fees to the holder.
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants, and by
participants to beneficial owners will be governed by arrangements among them,
subject to any statutory or regulatory requirements as may be in effect from
time to time.
Neither DTC nor Cede & Co. will consent or vote with respect to the
securities. Under its usual procedures, DTC would mail an omnibus proxy to
participants as soon as possible after the record date. The omnibus proxy
assigns Cede & Co.'s consenting or voting rights to those direct participants to
whose accounts the securities are credited on the record date.
We and the transfer agent and registrar will make any payments on the
securities to DTC. DTC's practice is to credit direct participants' accounts on
the payment date in accordance with their respective
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holdings shown on DTC's records unless DTC has reason to believe that it will
not receive payment on the payment date. Payments by participants to beneficial
owners will be governed by standing instructions and customary practices, as is
the case with securities held for the accounts of customers in bearer form or
registered in"street name," and will be the responsibility of such participant
and not of DTC, us or the transfer agent and registrar, subject to any statutory
or regulatory requirements as may be in effect from time to time.
We or the transfer agent and registrar will be responsible for the payment
of all amounts to DTC. DTC will be responsible for the disbursement of those
payments to its participants, and the participants will be responsible for
disbursements of those payments to beneficial owners. However, for Canadian
purposes, as a DTC participant, CDS is responsible only for the disbursement of
payments received to its participants. CDS participants are in turn responsible
for the disbursement of these payments to beneficial holders in Canada.
DTC may discontinue providing its service as securities depository with
respect to the IDSs, the shares of our common stock or our subordinated notes at
any time by giving reasonable notice to us or the transfer agent and registrar.
If DTC discontinues providing its service as securities depository with respect
to the IDSs and we are unable to obtain a successor securities depository, you
will automatically take a position in the component securities. If DTC
discontinues providing its service as securities depository with respect to the
shares of our common stock and/or our subordinated notes and we are unable to
obtain a successor securities depository, we will print and deliver to you
certificates for the securities that have been discontinued and you will
automatically take a position in any securities still subject to the depository
arrangement.
Also, in case we decide to discontinue use of the system of book-entry
transfers through DTC (or a successor securities depository) we will print and
deliver to you certificates for the various certificates of common stock and
subordinated notes you may own.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that we believe to be reliable, including DTC.
Neither we nor the trustee nor the underwriters will have any
responsibility or obligation to participants, or the persons for whom they act
as nominees, with respect to:
- the accuracy of the records of DTC, its nominee or any participant or any
record of beneficial ownership interest in the securities on DTC's books,
or
- any payments to, or the providing of notice, to participants or
beneficial owners.
Procedures relating to subsequent issuances. The indenture governing our
subordinated notes will provide that, in the event there is a subsequent
issuance of subordinated notes having terms identical to the subordinated notes
represented by the IDSs except for the issuance date, if we determine that such
new subordinated notes need to have a separate CUSIP number, each holder of
subordinated notes or IDSs (as the case may be) agrees that a portion of such
holder's subordinated notes (whether held directly in book-entry form, or held
as part of IDSs) will be exchanged for a portion of the subordinated notes
acquired by the holders of such subsequently issued subordinated notes.
Consequently, following each such subsequent issuance and exchange, each holder
of subordinated notes or IDSs (as the case may be) will own subordinated notes
of each separate issuance in the same proportion as each other holder.
Immediately following any exchange resulting from a subsequent offering, a new
CUSIP number will be assigned to represent an inseparable unit consisting of the
subordinated notes outstanding prior to the subsequent issuance and the
subordinated notes issued in the subsequent issuance. Accordingly, the
subordinated notes issued in the original offering cannot be separated from the
subordinated notes issued in any subsequent offering. In addition, immediately
following any exchange resulting from a subsequent offering, the IDSs will
consist of the inseparable unit described above representing the proportionate
principal amounts of each issuance of subordinated notes (but with the same
aggregate principal amount as the subordinated notes (or inseparable unit)
represented by the IDSs immediately prior to such subsequent issuance and
exchange) and the common stock. All accounts of DTC participants with a position
in the securities will be automatically revised to reflect the new CUSIP
numbers.
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Most subsequent issuances of subordinated notes, including subsequent
issuances of subordinated notes which have original issue discount and all
subsequent issuances six months after the date of this offering, may require
trades on the American Stock Exchange and the Toronto Stock Exchange to settle
up to 24 hours after the date such trades would settle absent such subsequent
issuance or settle for cash, consistent with such exchange's practices for the
date of such issuance. The American Stock Exchange and the Toronto Stock
Exchange have informed us that they will broadcast any such alternate settlement
procedures in advance of any relevant trading day, consistent with their
established procedures. Based upon these discussions, we do not believe that any
settlement delays or cash settlement procedures, if any, associated with
subsequent issuances, will have a significant impact on the IDS trading market.
IDS TRANSFER AGENT
The Bank of New York is the IDS transfer agent.
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DESCRIPTION OF CAPITAL STOCK
The following is a description of the terms of our restated certificate of
incorporation and amended and restated by-laws, copies of the forms of which
have been filed with the Commission as exhibits to the registration statement of
which this prospectus is part. The following summary is qualified in its
entirety by the provisions of our restated certificate of incorporation and
amended and restated by-laws and the applicable provisions of the General
Corporation Law of the State of Delaware, or DGCL.
AUTHORIZED CAPITALIZATION
Our authorized capital stock consists of:
- shares of common stock, par value $0.01 per share; and
- shares of preferred stock, par value $0.01 per share.
After this offering, there will be shares of our common stock and
no shares of our preferred stock outstanding.
COMMON STOCK
All outstanding shares of common stock are, and all shares of common stock
to be outstanding upon completion of this offering of IDSs will be, validly
issued, fully paid and nonassessable.
Dividends. Holders of shares of our common stock will be entitled to
receive such dividends and other distributions in cash, stock or property of
ours as may be declared by our board of directors from time to time out of our
assets or funds legally available for dividends or other distributions.
Rights Upon Liquidation. In the event of our voluntary or involuntary
liquidation, dissolution or winding up, holders of shares of our common stock
will be entitled to share equally in our assets remaining after payment of all
debts and other liabilities, subject to the liquidation preference of any
outstanding preferred stock.
Voting Rights. Shares of our common stock carry one vote per share.
Holders of shares of our common stock have no cumulative voting rights.
Other Rights. Holders of shares of our common stock have no preemptive
rights. The holders of common stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of preferred
stock that we may designate and issue in the future.
PREFERRED STOCK
Our board of directors has the authority to issue shares of preferred stock
from time to time on terms that it may determine, to divide shares of preferred
stock into one or more series and to fix the designations, voting powers,
preferences and relative participating, optional or other special rights of each
series, and the qualifications, limitations or restrictions of each series, to
the fullest extent permitted by the DGCL. The issuance of shares of preferred
stock could have the effect of decreasing the market price of the IDSs and our
shares of common stock, impeding or delaying a possible takeover and adversely
affecting the voting and other rights of the holders of shares of our common
stock.
ANTI-TAKEOVER EFFECTS OF VARIOUS PROVISIONS OF DELAWARE LAW AND OUR RESTATED
CERTIFICATE OF INCORPORATION AND AMENDED AND RESTATED BY-LAWS
Provisions of the DGCL, our restated certificate of incorporation and
amended and restated by-laws contain provisions that may have some anti-takeover
effects and may delay, defer or prevent a tender offer or takeover attempt that
a stockholder might consider in its best interest, including those attempts that
might result in a premium over the market price for the shares held by
stockholders.
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Delaware Anti-Takeover Statute
We are subject to Section 203 of the DGCL. Subject to specific exceptions,
Section 203 prohibits a publicly held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the time the person became an interested stockholder, unless:
- the business combination, or the transaction in which the stockholder
became an interested stockholder, is approved by our board of directors
prior to the time the interested stockholder attained that status;
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding those shares owned by persons who
are directors and also officers and by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
- at or after the time a person became an interested stockholder, the
business combination is approved by our board of directors and authorized
at an annual or special meeting of stockholders by the affirmative vote
of at least two-thirds of the outstanding voting stock that is not owned
by the interested stockholder.
"Business combinations" include mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
various exceptions, in general an "interested stockholder" is a person who,
together with his or her affiliates and associates, owns, or within three years
did own, 15% or more of the shares of the corporation's outstanding voting
stock. These restrictions could prohibit or delay the accomplishment of mergers
or other takeover or change in control attempts with respect to us and,
therefore, may discourage attempts to acquire us.
The provisions of Section 203 of the DGCL will not apply to BCP Volume, BCP
Offshore Volume, Recreational Services or their respective current affiliates
and associates, even if they would otherwise constitute "interested
stockholders" under Section 203 of the DGCL.
Our Restated Certificate of Incorporation and Amended and Restated By-laws
In addition, provisions of our restated certificate of incorporation and
amended and restated by-laws, which are summarized in the following paragraphs,
may have an anti-takeover effect.
Classified Board of Directors. Our restated certificate of incorporation
provides that our board of directors be divided into three classes of directors,
as nearly equal in size as is practicable, serving staggered three-year terms.
Quorum Requirements; Removal of Directors. Our restated certificate of
incorporation provides for a minimum quorum of one-third in voting power of the
outstanding shares of our capital stock entitled to vote, except that a minimum
quorum of a majority in voting power of the outstanding shares of our capital
stock entitled to vote is necessary to hold a vote for any director in a
contested election, the removal of a director or the filling of a vacancy on our
board of directors. Directors may be removed only for cause by the affirmative
vote of at least a majority in voting power of the outstanding shares of our
capital stock entitled to vote generally in the election of directors.
No Cumulative Voting. The DGCL provides that stockholders are denied the
right to cumulate votes in the election of directors unless our certificate of
incorporation provides otherwise. Our restated certificate of incorporation does
not expressly address cumulative voting.
No Stockholder Action by Written Consent; Calling of Special Meeting of
Stockholders. Our restated certificate of incorporation prohibits stockholder
action by written consent. It and our amended and restated by-laws also provide
that special meetings of our stockholders may be called only by (1) our board of
directors or the chairman of our board of directors pursuant to a resolution
approved by our board
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of directors or (2) our board of directors upon a request by holders of at least
25% in voting power of all the outstanding shares entitled to vote at that
meeting.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. Our amended and restated by-laws provide that stockholders seeking
to bring business before or to nominate candidates for election as directors at
an annual meeting of stockholders must provide timely notice of their proposal
in writing to the corporate secretary. To be timely, a stockholder's notice must
be delivered or mailed and received at our principal executive offices not less
than 90 nor more than 120 days in advance of the anniversary date of the
immediately preceding annual meeting of stockholders. Our amended and restated
by-laws also specify requirements as to the form and content of a stockholder's
notice. These provisions may impede stockholders' ability to bring matters
before an annual meeting of stockholders or make nominations for directors at an
annual meeting of stockholders. Stockholder nominations for the election of
directors at a special meeting must be received by our corporate secretary by
the later of 10 days following the day on which notice of the date of the
special meeting was mailed or public disclosure of the date of the special
meeting was made or 90 days prior to the date that meeting is proposed to be
held.
Limitations on Liability and Indemnification of Officers and
Directors. The DGCL authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breaches of directors' fiduciary duties as directors. Our restated
certificate of incorporation includes a provision that eliminates the personal
liability of directors for monetary damages for actions taken as a director,
except for liability:
- for breach of duty of loyalty;
- for acts or omissions not in good faith or involving intentional
misconduct or knowing violation of law;
- under Section 174 of the DGCL (unlawful dividends or stock repurchases);
or
- for transactions from which the director derived improper personal
benefit.
Our restated certificate of incorporation and amended and restated by-laws
provide that we must indemnify and advance expenses to our directors and
officers to the fullest extent authorized by the DGCL. We are also expressly
authorized to, and do, carry directors' and officers' insurance for our
directors, officers and certain employees for some liabilities. We believe that
these indemnification provisions and insurance are useful to attract and retain
qualified directors and executive officers.
The limitation of liability and indemnification provisions in our restated
certificate of incorporation and amended and restated by-laws may discourage
stockholders from bringing a lawsuit against directors for breach of their
fiduciary duty. These provisions may also have the effect of reducing the
likelihood of derivative litigation against directors and officers, even though
such an action, if successful, might otherwise benefit us and our stockholders.
In addition, your investment may be adversely affected to the extent that, in a
class action or direct suit, we pay the costs of settlement and damage awards
against directors and officers pursuant to these indemnification provisions.
There is currently no pending material litigation or proceeding involving
any of our directors, officers or employees for which indemnification is sought.
Authorized but Unissued Shares. Our authorized but unissued shares of
common stock and preferred stock will be available for future issuance without
your approval. We may use additional shares for a variety of corporate purposes,
including future public offerings to raise additional capital, corporate
acquisitions and employee benefit plans. The existence of authorized but
unissued shares of common stock and preferred stock could render more difficult
or discourage an attempt to obtain control of us by means of a proxy contest,
tender offer, merger or otherwise.
Supermajority Provisions. The DGCL provides generally that the affirmative
vote of a majority in voting power of the outstanding shares entitled to vote is
required to amend a corporation's certificate of incorporation, unless the
certificate of incorporation requires a greater percentage. Our restated
certificate
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of incorporation provides that the following provisions in the restated
certificate of incorporation may be amended only by a vote of two-thirds or more
in voting power of all the outstanding shares of our capital stock entitled to
vote:
- the prohibition on stockholder action by written consent;
- the ability to call a special meeting of stockholders being vested solely
in (1) our board of directors and the chairman of our board of directors
and (2) our board of directors upon a request by holders of at least 25%
in voting power of all the outstanding shares entitled to vote at that
meeting;
- the provisions relating to the classification of our board of directors;
- the provisions relating to the size of our board of directors;
- the provisions relating to the quorum requirements for stockholder action
and the removal of directors;
- the limitation on the liability of our directors to us and our
stockholders;
- the obligation to indemnify and advance expenses to the directors and
officers to the fullest extent authorized by the DGCL;
- the provisions granting authority to our board of directors to amend or
repeal our by-laws without a stockholder vote, as described in more
detail in the next succeeding paragraph; and
- the supermajority voting requirements listed above.
In addition, our restated certificate of incorporation grants our board of
directors the authority to amend and repeal our by-laws without a stockholder
vote in any manner not inconsistent with the laws of the State of Delaware or
our restated certificate of incorporation.
Our restated certificate of incorporation provides that our amended and
restated by-laws may be amended by stockholders representing no less than
two-thirds of the voting power of all the outstanding shares of our capital
stock entitled to vote.
Our restated certificate of incorporation provides that the affirmative
vote of two-thirds of our directors is necessary to approve any merger, any sale
of all or substantially all of our assets, any liquidation of our company or our
filing of a voluntary petition in bankruptcy.
LISTING
We have applied to list the shares of our common stock represented by the
IDSs on the Toronto Stock Exchange under the trading symbol "CVP."
TRANSFER AGENT AND REGISTRAR
The Bank of New York is the transfer agent and registrar for our shares of
common stock.
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DESCRIPTION OF SUBORDINATED NOTES
The following is a description of the terms of the indenture under which
our subordinated notes will be issued, a copy of the form of which has been
filed with the Commission as an exhibit to the registration statement of which
this prospectus is a part. We refer to VSAH as the "Company" in this
"Description of Subordinated Notes" section.
GENERAL
The subordinated notes are to be issued under an indenture, to be dated as
of , 2003 (the "Indenture"), among us, the subsidiary guarantors and
The Bank of New York, as Trustee (the "Trustee").
The following description is a summary of the material provisions of the
Indenture and the subordinated notes. It does not purport to be complete. We
urge you to read the Indenture because it, and not this description, defines
your rights as a holder of these subordinated notes. A copy of the Indenture
will be available upon request from the Company. This description is subject to,
and is qualified in its entirety by reference to, all the provisions of the
Indenture, including the definitions of certain terms therein and those terms
made a part thereof by the Trust Indenture Act of 1939, as amended. Capitalized
terms used in this "Description of Subordinated Notes" section and not otherwise
defined have the meanings set forth in the section "-- Certain Definitions."
The Indenture will provide for the issuance of an unlimited aggregate
principal amount of additional subordinated notes of the same series, having
identical terms and conditions to the subordinated notes offered hereby or as
part of a separate series (the "Additional Notes"), subject to compliance with
the covenants contained in the Indenture. Additional Notes may be part of the
same series as the subordinated notes offered hereby and will vote on all
matters with the subordinated notes offered hereby or may be issued as part of a
separate series. Only Additional Notes of the same series as the subordinated
notes offered hereby may be included in future offerings of IDSs.
The Notes will be issued only in fully-registered form, without coupons
represented by one or more global notes which will be registered in the name of
Cede & Co., the nominee of DTC. See "Description of IDSs -- Book-Entry
Settlement and Clearance."
TERMS OF THE NOTES
The Notes will be unsecured subordinated obligations of the Company and
will mature on , 2013. The Company may extend the maturity of the
Notes for two additional successive five-year terms if, during the twelve-month
period ending on the last day of the fiscal quarter ending at least 45 days
prior to the end of the then-current term, our Fixed Charge Coverage Ratio is
equal to or greater than to 1.00 and provided that:
(i) no Event of Default (including certain events of bankruptcy,
insolvency or reorganization of the Company or a Significant Subsidiary)
has occurred and is continuing with respect to the Notes;
(ii) no Event of Default has occurred and is continuing with respect
to any other Indebtedness of the Company; and
(iii) there is no interest due but unpaid on the Notes or any other
Indebtedness of the Company, other than trade payables up to an aggregate
amount of $ .
Within 30 days prior to the maturity of the Notes, the Company will use its
reasonable efforts to list or quote the outstanding shares of its common stock
on the securities exchange(s) or automated securities quotation system(s), if
any, on which the IDSs will then be listed or quoted, in addition to any other
securities exchange on which the common stock is then listed.
The Notes will bear interest at a rate per year of % from ,
or from the most recent date to which interest has been paid or provided
for, payable monthly on the 15th day of each month to
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Holders of record at the close of business on the 1st day of each month,
commencing , 2003, provided that if any such day is not a Business
Day, such day shall be the next Business Day.
If and for so long as the Company's Fixed Charge Coverage Ratio for the
twelve-month period ended on the last day of any fiscal quarter is at or below
, the Company must defer interest payments on the Notes, as long as no
Event of Default (including certain events of bankruptcy, insolvency or
reorganization of the Company or a Significant Subsidiary) has occurred and is
continuing with respect to the Notes.
Interest payments on the Notes will not be deferred for more than 24 months
in the aggregate or at any time after the earlier of:
(i) , 2008; or
(ii) the termination of the new credit facility (including giving effect to
any replacements, restructurings, repayments, refundings, refinancings thereto
or other restructurings of all or any portion of Indebtedness under such
facility).
Deferred interest on the Notes will bear interest at a rate per year equal
to the stated rate of interest on the Notes. At the end of each interest
deferral period, the Company must pay all deferred interest on the Notes and any
interest on deferred interest in full. During any interest deferral period, the
Company will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, make any Restricted Payment.
OPTIONAL REDEMPTION
The Company may redeem the Notes, at its option, at any time in whole and
from time to time in part, for cash, at a "make-whole" redemption price equal to
the greater of (1) the aggregate principal amount being redeemed or (2) the sum
of the present values of the remaining scheduled payments to the scheduled
maturity of the subordinated notes (assuming no subsequent extension thereof) of
the principal and interest (other than accrued interest) on the notes being
redeemed, discounted to the redemption date on a monthly basis (assuming a
360-day year consisting of twelve 30-day months) at the Treasury Rate plus
basis points, plus accrued and unpaid interest to but not including the
redemption date.
"Treasury Rate" means, for any redemption date, the rate per annum equal to
the monthly equivalent yield to maturity of the Comparable Treasury Issue,
assuming a price for the Comparable Treasury Issue (expressed as a percentage of
its principal amount) equal to the Comparable Treasury Price for the redemption
date.
"Comparable Treasury Issue" means the United States Treasury security
selected by an Independent Investment Banker as having a maturity comparable to
the remaining term of the notes being redeemed (assuming no subsequent extension
thereof) that would be utilized, at the time of selection and in accordance with
customary financial practice, in pricing new issues of corporate notes of
comparable maturity to the remaining term of such notes.
"Independent Investment Banker" means one of the Reference Treasury Dealers
appointed by the Company.
"Comparable Treasury Price" means, for any redemption date, (1) the average
of the bid and asked prices for the Comparable Treasury Issue (expressed in each
case as a percentage of its principal amount) on the third business day
preceding the redemption date, as set forth in the daily statistical release (or
any successor release) published by the Federal Reserve Bank of New York and
designated "Composite 3:30 p.m. Quotations for U.S. Government Securities" or
(2) if that release (or any successor release) is not published or does not
contain those prices on that business day, (A) the average of the Reference
Treasury Dealer Quotations for the redemption date, after excluding the highest
and lowest Reference Treasury Dealer Quotations for that redemption date, or (B)
if we obtain fewer than four Reference Treasury Dealer Quotations, the average
of all the Reference Treasury Dealer Quotations obtained.
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"Reference Treasury Dealer Quotations" means, for each Reference Treasury
Dealer and any redemption date, the average, as determined by the trustee, of
the bid and asked prices for the Comparable Treasury Issue (expressed in each
case as a percentage of its principal amount) quoted in writing to the trustee
by the Reference Treasury Dealer at 5:00 p.m. New York City time on the third
business day preceding the redemption date for the relevant series of notes
being redeemed.
"Reference Treasury Dealer" means (1) each of and , and
in each case, their respective successors; provided, however, that if either of
them ceases to be a primary U.S. Government securities dealer in New York City,
we will appoint another primary U.S. Government securities dealer as a
substitute and (2) any other U.S. Government securities dealers that we select.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the date of redemption to each holder of the Notes to be
redeemed. Unless we default in payment of the redemption price, on and after the
date of redemption, interest will cease to accrue on such Notes or the portions
called for redemption.
Any exercise by the Company of its option to redeem the Notes, in whole or
in part, will result in an automatic separation of the IDSs.
Selection. In the case of any partial redemption, selection of the Notes
for redemption will be made by the Trustee in compliance with the requirements
of the principal national securities exchange, if any, on which such Notes of
any series are listed, or if such Notes of such series are not so listed, on a
pro rata basis, by lot or by such other method as the Trustee shall deem fair
and appropriate (and in such manner as complies with the applicable legal
requirements). If the Notes are to be redeemed in part only, the notice of
redemption shall state the portion of the principal amount thereof to be
redeemed. New Notes in principal amount equal to the unredeemed portion thereof
will be issued in the name of the Holders thereof upon cancellation of the
original Notes. On and after the Redemption Date, interest will cease to accrue
on Notes or portions thereof called for redemption, so long as the Company has
deposited with the Trustee funds (in U.S. dollars) sufficient to pay the
principal of, plus accrued and unpaid interest (if any) on, the Notes to be
redeemed. No Note will be redeemed in part unless all other Notes are also
redeemed in part on a pro rata basis.
RANKING
The Indebtedness evidenced by the Notes will be unsecured subordinated
Indebtedness of the Company, will be subordinated in right of payment, as set
forth in the Indenture, to all existing and future Senior Indebtedness of the
Company and will rank pari passu in right of payment with all existing and
future Pari Passu Indebtedness of the Company. The Notes will also be
effectively subordinated to any Secured Indebtedness of the Company to the
extent of the value of the assets securing such Indebtedness. However, payment
from the money or the proceeds of U.S. Government Obligations held in any
defeasance trust described under "-- Defeasance" below is not subordinated to
any Senior Indebtedness or subject to the restrictions described herein.
The indebtedness evidenced by each Guarantee will be unsecured subordinated
indebtedness of the applicable Guarantor, will be subordinated in right of
payment, as set forth in the Indenture, to all existing and future Senior
Indebtedness of such Guarantor and will rank pari passu in right of payment with
all existing and future Pari Passu Indebtedness of such Guarantor. The
Guarantees will also be effectively subordinated to any Secured Indebtedness of
the applicable Guarantor to the extent of the value of the assets securing such
Indebtedness.
As of April 1, 2003, on a pro forma basis, (i) the Company would have had
no Senior Indebtedness outstanding except for its guarantees under the Credit
Agreement, (ii) the Company would have had no Pari Passu Indebtedness
outstanding other than the Notes, (iii) the Guarantors would have had no Senior
Indebtedness outstanding except for their guarantees under the Credit Agreement,
all of which would have been secured indebtedness, (iv) the Guarantors would
have had $ million aggregate principal amount of Pari Passu Indebtedness
outstanding other than the Guarantees and (v) the Non-Guarantor
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Subsidiaries would have had total liabilities, excluding liabilities owed to us,
of $1.4 million. Although the Indenture will contain limitations on the amount
of additional Indebtedness which the Company, the Guarantors and the
Non-Guarantor Subsidiaries may Incur, under certain circumstances the amount of
such Indebtedness could be substantial and, in any case, such Indebtedness may
be Senior Indebtedness. See "-- Limitations on Incurrence of Indebtedness and
Issuance of Disqualified Stock and Preferred Stock" below.
As a holding company, the Company has no operations and, therefore, is
dependent on the cash flow of its subsidiaries and other entities to meet its
own obligations, including the payment of interest and principal obligations on
the Notes when due. As of December 31, 2002, on a pro forma basis the total
liabilities of the Company's subsidiaries were approximately $ million,
including trade payables. Although the Indenture will limit the Incurrence of
Indebtedness by and the issuance of Preferred Stock of certain of the Company's
subsidiaries, such limitation is subject to a number of significant
qualifications.
"Senior Indebtedness" with respect to the Company or any Guarantor means
the Bank Indebtedness and all indebtedness of the Company or such Guarantor,
including interest thereon (including interest accruing on or after the filing
of any petition in bankruptcy or for reorganization relating to the Company or
any Subsidiary of the Company whether or not a claim for post-filing interest is
allowed in such proceeding) and other amounts (including fees, expenses,
reimbursement obligations under letters of credit and indemnities) owing in
respect thereof, whether outstanding on the Issue Date or thereafter Incurred,
unless in the instrument creating or evidencing the same or pursuant to which
the same is outstanding it is provided that such obligations are not superior in
right of payment to the Notes or such Guarantor's Guarantee, as applicable;
provided, however, that Senior Indebtedness shall not include, as applicable,
(i) any obligation of the Company to any Subsidiary of the Company or of such
Guarantor to the Company or any other Subsidiary of the Company, (ii) any
liability for Federal, state, local or other taxes owed or owing by the Company
or such Guarantor, (iii) any accounts payable or other liability to trade
creditors arising in the ordinary course of business (including guarantees
thereof or instruments evidencing such liabilities), (iv) any Indebtedness or
obligation of the Company or such Guarantor which is Pari Passu Indebtedness,
(v) any obligations with respect to any Capital Stock, and (vi) any Indebtedness
Incurred in violation of the Indenture.
Only Senior Indebtedness or Secured Indebtedness of the Company or a
Guarantor will rank senior to the Notes or the relevant Guarantee in accordance
with the provisions of the Indenture. The Notes and each Guarantee will in all
respects rank pari passu with all other Pari Passu Indebtedness of the Company
and the relevant Guarantor, respectively.
The Company may not pay principal of, premium (if any) or interest on, the
Notes or make any deposit pursuant to the provisions described under
"-- Defeasance" below and may not otherwise purchase, redeem or otherwise retire
any Notes (except that Holders may receive and retain (a) Permitted Junior
Securities and (b) payments made from the trust described under "-- Defeasance"
below so long as, on the date or dates the respective amounts were paid into the
trust, such payments were made with respect to the Notes without violating the
subordination provisions described herein) (collectively, "pay the Notes") if
(i) a default in the payment of the principal of, premium, if any, or interest
on any Designated Senior Indebtedness occurs and is continuing or any other
amount owing in respect of any Designated Senior Indebtedness is not paid when
due, or (ii) any other default on Designated Senior Indebtedness occurs and the
maturity of such Designated Senior Indebtedness is accelerated in accordance
with its terms unless, in either case, the default has been cured or waived and
any such acceleration has been rescinded or such Designated Senior Indebtedness
has been paid in full. However, the Company may pay the Notes without regard to
the foregoing if the Company and the Trustee receive written notice approving
such payment from the Representative of the Designated Senior Indebtedness with
respect to which either of the events set forth in clause (i) or (ii) of the
immediately preceding sentence has occurred and is continuing. During the
continuance of any default (other than a default described in clause (i) or (ii)
of the second preceding sentence) with respect to any Designated Senior
Indebtedness pursuant to which the maturity thereof may be accelerated
immediately without further notice (except such notice as may be required to
effect such acceleration) or upon the expiration of any applicable grace
103
periods, the Company may not pay the Notes for a period (a "Payment Blockage
Period") commencing upon the receipt by the Trustee (with a copy to the Company)
of written notice (a "Blockage Notice") of such default from the Representative
of the Designated Senior Indebtedness specifying an election to effect a Payment
Blockage Period and ending 179 days thereafter (or earlier if such Payment
Blockage Period is terminated (i) by written notice to the Trustee and the
Company from the Person or Persons who gave such Blockage Notice, (ii) by
repayment in full of such Designated Senior Indebtedness or (iii) because the
default giving rise to such Blockage Notice is no longer continuing).
Notwithstanding the provisions described in the immediately preceding sentence
(but subject to the provisions contained in the first sentence of this paragraph
and in the succeeding paragraph), unless the holders of such Designated Senior
Indebtedness or the Representative of such holders have accelerated the maturity
of such Designated Senior Indebtedness, the Company may resume payments on the
Notes after the end of such Payment Blockage Period. Not more than one Blockage
Notice may be given in any consecutive 360-day period, irrespective of the
number of defaults with respect to Designated Senior Indebtedness during such
period. However, if any Blockage Notice within such 360-day period is given by
or on behalf of any holders of Designated Senior Indebtedness other than the
Bank Indebtedness, the Representative of the Bank Indebtedness may give one
additional Blockage Notice within such period. In no event, however, may the
total number of days during which any Payment Blockage Period or Periods is in
effect exceed 179 days in the aggregate during any 360 consecutive day period.
For purposes of this provision, no default or event of default that existed or
was continuing on the date of the commencement of any Payment Blockage Period
with respect to the Designated Senior Indebtedness initiating such Payment
Blockage Period shall be, or be made, the basis of the commencement of a
subsequent Payment Blockage Period by the Representative of such Designated
Senior Indebtedness, whether or not within a period of 360 consecutive days,
unless such default or event of default shall have been cured or waived for a
period of not less than 90 consecutive days.
Upon any payment or distribution of the assets of the Company upon a total
or partial liquidation or dissolution or reorganization of or similar proceeding
relating to the Company or its property, the holders of Senior Indebtedness will
be entitled to receive payment in full of the Senior Indebtedness before the
Noteholders are entitled to receive any payment, and until the Senior
Indebtedness is paid in full, any payment or distribution to which Noteholders
would be entitled but for the subordination provisions of the Indenture will be
made to holders of the Senior Indebtedness as their interests may appear (except
that Holders of Notes may receive and retain (i) Permitted Junior Securities,
and (ii) payments made from the trust described under "-- Defeasance" so long
as, on the date or dates the respective amounts were paid into the trust, such
payments were made with respect to the Notes without violating the subordination
provisions described herein). If a distribution is made to Noteholders that due
to the subordination provisions of the Indenture should not have been made to
them, such Noteholders are required to hold it in trust for the holders of
Senior Indebtedness and pay it over to them as their interests may appear.
After the occurrence of an Event of Default, the Company or the Trustee
shall promptly notify the holders of the Designated Senior Indebtedness (or
their Representative) of such occurrence. If any Designated Senior Indebtedness
is outstanding, the Company may not pay the Notes until five Business Days after
such holders or the Representative of the Designated Senior Indebtedness receive
notice of such occurrence and, thereafter, may pay the Notes only if the
subordination provisions of the Indenture otherwise permit payment at that time.
By reason of such subordination provisions contained in the Indenture, in
the event of insolvency, creditors of the Company who are holders of Senior
Indebtedness may recover more, ratably, than the Noteholders.
The Indenture will contain substantially similar subordination provisions
relating to each Guarantor's obligations under its Guarantee.
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GUARANTEES
Each of the Company's direct and indirect Wholly Owned Subsidiaries
organized under the laws of any state of the United States of America on the
Issue Date and certain future Subsidiaries of the Company (as described below),
as primary obligors and not merely as sureties, will jointly and severally
irrevocably and unconditionally guarantee on an unsecured subordinated basis the
performance and punctual payment when due, whether at Stated Maturity, by
acceleration or otherwise, of all obligations of the Company under the Indenture
and the Notes, whether for payment of principal of, premium, if any, or interest
on the Notes, expenses, indemnification or otherwise (all such obligations
guaranteed by such Guarantors being herein called the "Guaranteed Obligations").
Such Guarantors will agree to pay, in addition to the amount stated above, any
and all expenses (including reasonable counsel fees and expenses) Incurred by
the Trustee or the Holders in enforcing any rights under the Guarantees. Each
Guarantee will be limited in amount to an amount not to exceed the maximum
amount that can be guaranteed by the applicable Guarantor without rendering the
Guarantee, as it relates to such Guarantor, voidable under applicable law
relating to fraudulent conveyance or fraudulent transfer or similar laws
affecting the rights of creditors generally. After the Issue Date, the Company
will cause each Restricted Subsidiary organized under the laws of the United
States of America or any state or territory thereof that Incurs Indebtedness or
issues shares of Disqualified Stock or Preferred Stock to execute and deliver to
the Trustee a supplemental indenture pursuant to which such Restricted
Subsidiary will guarantee, payment of the Notes. See "-- Certain
Covenants -- Future Guarantors" below.
Each Guarantee is a continuing guarantee and shall (i) remain in full force
and effect until payment in full of all the Guaranteed Obligations, (ii) be
binding upon each such Guarantor and its successors, and (iii) inure to the
benefit of and be enforceable by the Trustee, the Holders and their successors,
transferees and assigns.
GUARANTEE FOREBEARANCE PERIODS
As long as any Designated Senior Indebtedness is outstanding, for a period
(a "Forebearance Period") beginning on the date of the occurrence of an Event of
Default and ending on the earliest of (x) 179 days after the commencement of
such period, (y) the date on which such Event of Default and any other Event of
Default that occurred during the Forebearance Period, shall cease to exist or
(z) the date the holders of Designated Senior Indebtedness accelerate the
Designated Senior Indebtedness or begin to exercise their rights with respect to
collateral therefor, no Holder of the Notes or the Trustee shall, without the
prior written consent of the Representative of the Designated Senior
Indebtedness, commence any action, suit or proceeding to enforce any claims,
rights, demands, causes of action, liabilities, or suits, of any kind
whatsoever, whether known or unknown, that have been, could have been, or in the
future might be asserted by the Holders of the Notes based upon, arising out of,
or in any way relating to, the Guarantees of the Notes (each, an "Enforcement
Action"); provided that upon the termination of a Forebearance Period, no Holder
may take any Enforcement Action until the earlier of (x) five Business Days
after such Holders of the Notes, or the Trustee acting on their behalf, shall
have given prior written notice to the Representative of the Designated Senior
Indebtedness of their intention to accelerate and exercise any other remedies,
which notice may be given no earlier than 15 Business Days prior to the end of
the Forebearance Period, and shall be effective no earlier than the later of (i)
five Business Days after the date such notice is given, or (ii) the first
Business Day immediately following the end of the Forebearance Period or (y) the
date on which the holders of Designated Senior Indebtedness have accelerated the
Designated Senior Indebtedness; provided, further, that no Forebearance Period
may commence during the pendency of, or within 179 days after termination of,
any other Forebearance Period and in no event shall a Forebearance Period extend
beyond 179 days from the date of the occurrence of any Event of Default and
there must be a 181 consecutive day period in each 360 consecutive day period
during which no Forebearance Period is in effect. No single Event of Default may
serve as the basis for more than one Forebearance Period, other than an Event of
Default that has been cured or waived or otherwise ceased to exist for a period
of 90 consecutive days; no Event of Default in existence on the commencement of
a Forebearance Period shall serve as the basis for any subsequent
105
Forebearance Period, whether or not within a period of 360 consecutive days,
unless such Event of Default shall have been cured or waived or otherwise ceased
to exist for a period of 90 consecutive days; and during any 360-day period
there shall not be more than one Forebearance Period.
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each, a "Change of
Control"), each Holder will have the right to require the Company to repurchase
all or any part of such Holder's Notes of any series at a purchase price in cash
equal to 101% of the principal amount thereof, plus accrued and unpaid interest,
if any, to but not including the date of repurchase (subject to the right of
Holders of record on the relevant record date to receive interest due on the
relevant interest payment date): (i) the sale, lease or transfer, in one or a
series of related transactions, of all or substantially all of the Company's
assets to any person or group (as such term is used in Section 13(d)(3) of the
Exchange Act), (ii) the adoption of a plan relating to the liquidation or
dissolution of the Company, (iii) the acquisition by any person or group (as
such term is used in Section 13(d)(3) of the Exchange Act) of a direct or
indirect interest in more than 50% of the ownership of the Company, or the
voting power of the voting stock of the Company, by way of purchase, merger or
consolidation or otherwise (other than a creation of a holding company that does
not involve a change in the beneficial ownership of the Company as a result of
such transaction), (iv) the merger or consolidation of the Company with or into
another Person or the merger of another Person into the Company with the effect
that immediately after such transaction the stockholders of the Company
immediately prior to such transaction hold, directly or indirectly, less than
50% of the total voting power of all securities generally entitled to vote in
the election of directors, managers, or trustees of the Person surviving such
merger or consolidation, in each case other than creation of a holding company
that does not involve a change in the beneficial ownership of the Company as a
result of such transaction or (v) the first day on which a majority of the
members of the Board of Directors of the Company are not Continuing Directors.
In order to exercise this repurchase right, a Holder must separate its IDSs into
the shares of common stock and Notes represented thereby.
In the event that at the time of such Change of Control the terms of the
Bank Indebtedness restrict or prohibit the repurchase of Notes of any series
pursuant to this covenant, then prior to the mailing of the notice to Holders
provided for in the immediately following paragraph but in any event within 30
days following any Change of Control, the Company shall (i) repay in full all
Bank Indebtedness or offer to repay in full all Bank Indebtedness and repay the
Bank Indebtedness of each lender who has accepted such offer or (ii) obtain the
requisite consent under the agreements governing the Bank Indebtedness to permit
the repurchase of the Notes as provided for in the immediately following
paragraph.
Within 30 days following any Change of Control, unless the Company has
exercised its right to redeem the Notes as described under "-- Optional
Redemption", the Company shall mail a notice (a "Change of Control Offer") to
each Holder with a copy to the Trustee stating: (1) that a Change of Control has
occurred and that such Holder has the right to require the Company to purchase
such Holder's Notes of such series at a purchase price in cash equal to 101% of
the principal amount thereof, plus accrued and unpaid interest, if any, to but
not including the date of repurchase (subject to the right of Holders of record
on a record date to receive interest on the relevant interest payment date); (2)
the circumstances and relevant facts and financial information regarding such
Change of Control; (3) the repurchase date (which shall be no earlier than 30
days nor later than 60 days from the date such notice is mailed); and (4) the
instructions determined by the Company, consistent with this covenant, that a
Holder must follow in order to have its Notes purchased.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and the applicable Canadian securities laws
and any other securities laws or regulations in
106
connection with the repurchase of Notes pursuant to this covenant. To the extent
that the provisions of any securities laws or regulations conflict with
provisions of this covenant, the Company will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under the Indenture by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
us, the existing equity investors and the underwriters. Our management has no
present intention to engage in a transaction involving a Change of Control,
although it is possible that we would decide to do so in the future. Subject to
the limitations discussed below, we could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Indenture, but that
could increase the amount of indebtedness outstanding at such time or otherwise
affect our capital structure or credit ratings.
The occurrence of events which would constitute a Change of Control would
constitute a default under the new credit facility. Future Senior Indebtedness
of the Company may contain prohibitions on certain events which would constitute
a Change of Control or require such Senior Indebtedness to be repurchased upon a
Change of Control. The Bank Indebtedness prohibits any purchase by the Company
of the Notes. Moreover, the exercise by the Holders of their right to require
the Company to repurchase the Notes could cause a default under other Senior
Indebtedness, even if the Change of Control itself does not, due to the
financial effect of such repurchase on the Company. Finally, the Company's
ability to pay cash to the Holders upon a repurchase may be limited by the
Company's then existing financial resources. There can be no assurance that
sufficient funds will be available when necessary to make any required
repurchases.
The definition of Change of Control includes a phrase relating to the sale,
lease or transfer of "all or substantially all" the assets of the Company and
its Subsidiaries taken as a whole. Although there is a developing body of case
law interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
Holder of Notes to require the Company to repurchase such Notes as a result of a
sale, lease or transfer of less than all of the assets of the Company and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
COVENANTS RELATING TO IDSS
Recombination of Notes and Common Stock into IDSs. The Indenture will
provide that as long as any Notes are outstanding, any Holder of Notes and
shares of common stock may, at any time and from time to time, recombine these
securities to form IDSs.
Procedures Relating to Subsequent Issuance. The Indenture will provide
that, in the event there is a subsequent issuance of Notes, each Holder of
subsequently issued Notes, held either as part of IDSs or separately, and each
Holder of old Notes, held either as part of IDSs or separately, will own a
proportionate percentage of both the old Notes and the subsequently issued
Notes. However, the aggregate principal amount of Notes owned by each Holder
will not change as a result of such subsequent issuance. Any subsequent issuance
of Notes by us may affect the tax treatment of the Notes and IDSs. See "Material
U.S. Federal Income Tax Consequences -- Consequences to U.S.
Holders -- Subordinated Notes -- Additional Issuances."
CERTAIN COVENANTS
The Indenture will contain the following material covenants:
Limitations on Incurrence of Indebtedness and Issuance of Disqualified
Stock and Preferred Stock. The Indenture will provide that (i) the Company will
not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, Incur any Indebtedness (including Acquired Indebtedness) or issue
any shares of Disqualified Stock and (ii) the Company will not permit any of its
Restricted Subsidiaries to issue any shares of Preferred Stock; provided,
however, that the Company and any Guarantor may Incur Indebtedness (including
Acquired Indebtedness) or issue shares of Disqualified Stock and any Guarantor
107
may issue shares of Preferred Stock if the Fixed Charge Coverage Ratio of the
Company for the most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which such
additional Indebtedness is Incurred or such Disqualified Stock or Preferred
Stock is issued would have been at least 2.00 to 1.00 determined on a pro forma
basis (including a pro forma application of the net proceeds therefrom), as if
the additional Indebtedness had been Incurred, or the Disqualified Stock or
Preferred Stock had been issued, as the case may be, and the application of
proceeds therefrom had occurred at the beginning of such four-quarter period.
The foregoing limitations will not apply to:
(a) the Incurrence by the Company or its Restricted Subsidiaries of
Indebtedness under the Credit Agreement and the issuance and creation of
letters of credit and bankers' acceptances thereunder (with letters of
credit and bankers' acceptances being deemed to have a principal amount
equal to the face amount thereof) up to an aggregate principal amount of
$ million outstanding at any one time;
(b) the Incurrence by the Company and the Guarantors of Indebtedness
represented by the Notes (not including any Additional Notes) and the
Guarantees, as applicable;
(c) Indebtedness existing on the Issue Date (other than Indebtedness
described in clauses (a) and (b));
(d) Indebtedness (including Capitalized Lease Obligations) Incurred by
the Company or any of its Restricted Subsidiaries, to finance the purchase,
lease or improvement of property (real or personal) or equipment (whether
through the direct purchase of assets or the Capital Stock of any Person
owning such assets) in an aggregate principal amount which, when aggregated
with the principal amount of all other Indebtedness then outstanding and
Incurred pursuant to this clause (d) and all Refinancing Indebtedness (as
defined below) Incurred to refund, refinance or replace any Indebtedness
Incurred pursuant to this clause (d), does not exceed the greater of 7.5%
of Total Assets at the time of Incurrence or $10.0 million;
(e) Indebtedness Incurred by the Company or any of its Restricted
Subsidiaries constituting reimbursement obligations with respect to letters
of credit issued in the ordinary course of business, including without
limitation letters of credit in respect of workers' compensation claims,
health, disability or other employee benefits or property, casualty or
liability insurance or self-insurance, or with respect to agreements to
provide services, or other Indebtedness with respect to reimbursement type
obligations regarding workers' compensation claims; provided, however, that
upon the drawing of such letters of credit, such obligations are reimbursed
within 30 days following such drawing;
(f) Indebtedness arising from agreements of the Company or a
Restricted Subsidiary providing for indemnification, adjustment of purchase
price or similar obligations, in each case, Incurred in connection with the
disposition of any business, assets or a Subsidiary of the Company in
accordance with the terms of the Indenture, other than guarantees of
Indebtedness Incurred by any Person acquiring all or any portion of such
business, assets or Subsidiary for the purpose of financing such
acquisition;
(g) Indebtedness of the Company to a Restricted Subsidiary of the
Company; provided that any such Indebtedness is subordinated in right of
payment to the Notes; provided further that any subsequent issuance or
transfer of any Capital Stock or any other event which results in any such
Restricted Subsidiary ceasing to be a Restricted Subsidiary of the Company
or any other subsequent transfer of any such Indebtedness (except to the
Company or another Restricted Subsidiary) shall be deemed, in each case to
be an Incurrence of such Indebtedness;
(h) shares of Preferred Stock of a Restricted Subsidiary issued to the
Company or another Restricted Subsidiary of the Company; provided that any
subsequent issuance or transfer of any Capital Stock or any other event
which results in any such Restricted Subsidiary ceasing to be a Restricted
Subsidiary or any other subsequent transfer of any such shares of Preferred
Stock (except
108
to the Company or another Restricted Subsidiary of the Company) shall be
deemed, in each case, to be an issuance of shares of Preferred Stock;
(i) Indebtedness of a Restricted Subsidiary to the Company or another
Restricted Subsidiary of the Company; provided that (i) any such
Indebtedness is made pursuant to an intercompany note and (ii) if a
Guarantor Incurs such Indebtedness to a Restricted Subsidiary that is not a
Guarantor such Indebtedness is subordinated in right of payment to the
Guarantee of such Guarantor; provided further that any subsequent issuance
or transfer of any Capital Stock or any other event which results in any
Restricted Subsidiary lending such Indebtedness ceasing to be a Restricted
Subsidiary or any other subsequent transfer of any such Indebtedness
(except to the Company or another Restricted Subsidiary of the Company)
shall be deemed, in each case, to be an Incurrence of such Indebtedness;
(j) Hedging Obligations that are incurred in the ordinary course of
business (1) for the purpose of fixing or hedging interest rate risk with
respect to any Indebtedness that is permitted by the terms of the Indenture
to be outstanding, (2) for the purpose of fixing or hedging currency
exchange rate risk with respect to any currency exchanges or (3) for the
purpose of fixing or hedging commodity price risk with respect to any
commodity purchases;
(k) obligations in respect of performance, bid and surety bonds and
completion guarantees provided by the Company or any Restricted Subsidiary
in the ordinary course of business;
(l) Indebtedness or Disqualified Stock of the Company and any
Restricted Subsidiary not otherwise permitted hereunder in an aggregate
principal amount, which when aggregated with the principal amount or
liquidation preference of all other Indebtedness and Disqualified Stock
then outstanding and Incurred pursuant to this clause (1), does not exceed
$25.0 million at any one time outstanding; provided, however, that
Indebtedness of Foreign Subsidiaries, which when aggregated with the
principal amount of all other Indebtedness of Foreign Subsidiaries then
outstanding and Incurred pursuant to this clause (l), does not exceed $10.0
million (or the equivalent thereof in any other currency) at any one time
outstanding (it being understood that any Indebtedness Incurred under this
clause (l) shall cease to be deemed Incurred or outstanding for purposes of
this clause (l) but shall be deemed to be Incurred for purposes of the
first paragraph of this covenant from and after the first date on which the
Company could have Incurred such Indebtedness under the first paragraph of
this covenant without reliance upon this clause (l));
(m) any guarantee by the Company or a Guarantor of Indebtedness or
other obligations of the Company or any of its Restricted Subsidiaries so
long as the Incurrence of such Indebtedness Incurred by the Company or such
Restricted Subsidiary is permitted under the terms of the Indenture;
provided that if such Indebtedness is by its express terms subordinated in
right of payment to the Notes or the Guarantee of such Restricted
Subsidiary, as applicable, any such guarantee of such Guarantor with
respect to such Indebtedness shall be subordinated in right of payment to
such Guarantor's Guarantee with respect to the Notes substantially to the
same extent as such Indebtedness is subordinated to the Notes or the
Guarantee of such Restricted Subsidiary, as applicable;
(n) the Incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness which serves to refund or refinance any
Indebtedness Incurred as permitted under the first paragraph of this
covenant and clauses (b) and (c) above, or any Indebtedness issued to so
refund or refinance such Indebtedness (subject to the following proviso,
"Refinancing Indebtedness") prior to its respective maturity; provided,
however, that such Refinancing Indebtedness:
(i) has a Weighted Average Life to Maturity at the time such
Refinancing Indebtedness is Incurred which is not less than the
remaining Weighted Average Life to Maturity of the Indebtedness being
refunded or refinanced;
(ii) has a Stated Maturity which is no earlier than the Stated
Maturity of the Indebtedness being refunded or refinanced;
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(iii) to the extent such Refinancing Indebtedness refinances
Indebtedness pari passu with the Notes or the obligations of the
Subsidiaries that are obligors under the intercompany note, as
applicable, is pari passu with the Notes or the obligations of such
Subsidiaries under the intercompany note, as applicable;
(iv) is Incurred in an aggregate principal amount (or if issued
with original issue discount, an aggregate issue price) that is equal to
or less than the aggregate principal amount (or if issued with original
issue discount, the aggregate accreted value) then outstanding of the
Indebtedness being refinanced plus premium and fees Incurred in
connection with such refinancing; and
(v) shall not include (x) Indebtedness of a Restricted Subsidiary
that is not a Guarantor that refinances Indebtedness of the Company or
(y) Indebtedness of the Company or a Restricted Subsidiary that
refinances Indebtedness of an Unrestricted Subsidiary;
and provided further that subclauses (i) and (ii) of this clause (n)
will not apply to any refunding or refinancing of any Senior
Indebtedness;
(o) Indebtedness or Disqualified Stock of Persons that are acquired by
the Company or any of its Restricted Subsidiaries or merged into a
Restricted Subsidiary in accordance with the terms of the Indenture;
provided, however, that such Indebtedness or Disqualified Stock is not
Incurred in contemplation of such acquisition or merger or to provide all
or a portion of the funds or credit support required to consummate such
acquisition or merger; provided further, however, that after giving effect
to such acquisition and the Incurrence of such Indebtedness either (i) the
Company would be permitted to Incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in
the first sentence of this covenant or (ii) the Fixed Charge Coverage Ratio
would be greater than immediately prior to such acquisition;
(p) Contribution Indebtedness; and
(q) Indebtedness represented by (i) the IDSs or outstanding upon the
separation of any IDS into the securities represented thereby, (ii) the
issuance of Additional Notes or other Pari Passu Indebtedness evidenced by
a different series of notes in connection with the issuance of shares of
common stock of the Company or (iii) the exchange of shares of our common
stock for Additional Notes pursuant to the amended and restated
stockholders agreement, provided that the ratio of the aggregate principal
amount of such Additional Notes or other Pari Passu Indebtedness to the
number of such additional shares shall not exceed the equivalent ratio with
respect to the IDSs outstanding prior to such issuance, and, in each case
the related Guarantees.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of permitted Indebtedness described in clauses (a) through (q) above
or is entitled to be Incurred pursuant to the first paragraph of this covenant,
the Company shall, in its sole discretion, classify or reclassify such item of
Indebtedness in any manner that complies with this covenant and such item of
Indebtedness will be treated as having been Incurred pursuant to only one of
such clauses or pursuant to the first paragraph hereof. Accrual of interest, the
accretion of accreted value and the payment of interest in the form of
additional Indebtedness will not be deemed to be an Incurrence of Indebtedness
for purposes of this covenant.
Limitation on Restricted Payments. The Indenture will provide that the
Company will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly:
(i) declare or pay any dividend or make any distribution on account of
the Company's or any of its Restricted Subsidiaries' Equity Interests,
including any payment made in connection with any merger or consolidation
involving the Company (other than (A) dividends or distributions by the
Company payable solely in Equity Interests (other than Disqualified Stock)
of the Company or (B) dividends or distributions by a Restricted Subsidiary
so long as, in the case of any dividend or distribution payable on or in
respect of any class or series of securities issued by a Restricted
Subsidiary other than a Wholly Owned Restricted Subsidiary, the Company or
a Restricted
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Subsidiary receives at least its pro rata share of such dividend or
distribution in accordance with its Equity Interests in such class or
series of securities);
(ii) purchase or otherwise acquire or retire for value any Equity
Interests of the Company or any Restricted Subsidiary; or
(iii) make any Restricted Investment (all such payments and other
actions set forth in this clause (iii) and in clauses (i) and (ii) above
being collectively referred to as "Restricted Payments"),
unless, at the time of such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(b) immediately after giving effect to such transaction on a pro
forma basis, the Company could Incur $1.00 of additional Indebtedness
under the provisions of the first paragraph of "-- Limitations on
Incurrence of Indebtedness and Issuance of Disqualified Stock and
Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of
all other Restricted Payments made by the Company and its Restricted
Subsidiaries after the Issue Date (including Restricted Payments
permitted by clauses (1), (4), (5) and (7) of the next succeeding
paragraph, but excluding all other Restricted Payments permitted by the
next succeeding paragraph), is less than the sum of, without
duplication:
(i) 50% of the Consolidated Net Income of the Company for the
period (taken as one accounting period) from the fiscal quarter that
first begins after the Issue Date to the end of the Company's most
recently ended fiscal quarter for which internal financial statements
are available at the time of such Restricted Payment (or, in the case
such Consolidated Net Income for such period is a deficit, minus 100%
of such deficit), plus
(ii) 100% of the aggregate net proceeds, including cash and the
Fair Market Value (as determined in accordance with the next
succeeding sentence) of property other than cash, received by the
Company since the Issue Date from the issue or sale of Equity
Interests of the Company (excluding Refunding Capital Stock (as
defined below), Designated Preferred Stock, Excluded Contributions
and Disqualified Stock), including Equity Interests issued upon
conversion of Indebtedness or upon exercise of warrants or options
(other than an issuance or sale to a Subsidiary of the Company or an
employee stock ownership plan or trust established by the Company or
any of its Subsidiaries), plus
(iii) 100% of the aggregate amount of contributions to the
capital of the Company received in cash and the Fair Market Value (as
determined in accordance with the next succeeding sentence) of
property other than cash since the Issue Date (other than Excluded
Contributions, Refunding Capital Stock, Designated Preferred Stock
and Disqualified Stock), plus
(iv) 100% of the aggregate amount received in cash and the Fair
Market Value (as determined in accordance with the next succeeding
sentence) of property other than cash received from (A) the sale or
other disposition (other than to the Company or a Restricted
Subsidiary) of Restricted Investments made by the Company and its
Restricted Subsidiaries and from repurchases and redemptions of such
Restricted Investments from the Company and its Restricted
Subsidiaries by any Person (other than the Company or any of its
Subsidiaries) and from repayments of loans or advances which
constituted Restricted Investments, (B) the sale (other than to the
Company or a Subsidiary) of the Capital Stock of an Unrestricted
Subsidiary or (C) a distribution or dividend from an Unrestricted
Subsidiary, plus
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(v) in the event any Unrestricted Subsidiary has been
redesignated as a Restricted Subsidiary or has been merged,
consolidated or amalgamated with or into, or transfers or conveys its
assets to, or is liquidated into, the Company or a Restricted
Subsidiary, the Fair Market Value (as determined in good faith by the
Board of Directors) of the Investment of the Company in such
Unrestricted Subsidiary at the time of such redesignation,
combination or transfer (or of the assets transferred or conveyed, as
applicable), after deducting any Indebtedness associated with the
Unrestricted Subsidiary so designated or combined or any Indebtedness
associated with the assets so transferred or conveyed, not to exceed,
in the case of any Unrestricted Subsidiary, the amount of Investments
previously made by the Company or any Restricted Subsidiary in such
Unrestricted Subsidiary, which amount was included in the calculation
of the amount of Restricted Payments.
The Fair Market Value of property other than cash covered by clauses (ii),
(iii) and (iv) above shall be determined in good faith by the Company and (A) in
the event of property with a Fair Market Value in excess of $2.5 million, shall
be set forth in an Officers' Certificate or (B) in the event of property with a
Fair Market Value in excess of $10.0 million, shall be set forth in a resolution
approved by at least a majority of the Board of Directors.
The foregoing provisions will not prohibit:
(1) the payment of any dividend or distribution within 60 days after
the date of declaration thereof, if at the date of declaration such payment
would have complied with the provisions of the Indenture;
(2) (a) the repurchase, retirement or other acquisition of any Equity
Interests ("Retired Capital Stock") or Subordinated Indebtedness of the
Company in exchange for, or out of the proceeds of the substantially
concurrent sale of, Equity Interests of the Company or contributions to the
equity capital of the Company (other than any Disqualified Stock or any
Equity Interests sold to a Subsidiary of the Company or to an employee
stock ownership plan or any trust established by the Company or any of its
Subsidiaries) (collectively, including any such contributions, "Refunding
Capital Stock") and (b) the declaration and payment of accrued dividends on
the Retired Capital Stock out of the proceeds of the substantially
concurrent sale (other than to a Subsidiary of the Company or to an
employee stock ownership plan or any trust established by the Company or
any of its Subsidiaries) of Refunding Capital Stock;
(3) (a) the repurchase, retirement or other acquisition for value of
Equity Interests of the Company held, directly or indirectly, by any
future, present or former employee, director or consultant of the Company
or any Subsidiary of the Company or any entity in which any of the
foregoing has a beneficial or economic ownership interest pursuant to any
management equity plan or stock option plan or any other management or
employee benefit or incentive plan or agreement or any other agreement
pursuant to which stock is held for the benefit of such persons or (b) the
payment of any dividend or distribution to VSI Management Direct L.P., VSI
Management II L.P., BCP Volume L.P. or BCP Offshore Volume L.P. or any
entity in which any of the foregoing has a beneficial or economic ownership
interest pursuant to any management equity plan or stock option plan or any
other management or employee benefit or incentive plan or agreement or any
other agreement pursuant to which stock is held for the benefit of such
persons to effect the repurchase, retirement or other acquisition for value
of their Equity Interests held, directly or indirectly, by any future,
present or former employee, director or consultant of the Company or any
Subsidiary of the Company or any entity in which any of the foregoing has a
beneficial or economic ownership interest; provided, however, that, in each
case, the aggregate amounts paid under this clause (3) do not exceed $4.0
million in any calendar year (with unused amounts in any calendar year
being permitted to be carried over for the two succeeding calendar years);
provided further, however, that such amount in any calendar year may be
increased by an amount not to exceed (I) the cash proceeds received by the
Company or any of its Restricted Subsidiaries from the sale of Equity
Interests of the Company (other than Disqualified Stock) to members of
management, directors or consultants of the Company
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and its Restricted Subsidiaries or to VSI Management Direct L.P., BCP
Volume L.P. and BCP Offshore Volume L.P. for the direct or indirect account
of members of management, directors or consultants of the Company and its
Restricted Subsidiaries that occurs after the Issue Date (provided that the
amount of such cash proceeds utilized for any such repurchase, retirement,
other acquisition or dividend will not increase the amount available for
Restricted Payments under clause (iii)(c) of the first paragraph of this
covenant) plus (II) the cash proceeds of key man life insurance policies
received by the Company and its Restricted Subsidiaries after the Issue
Date (provided that the Company may elect to apply all or any portion of
the aggregate increase contemplated by clauses (I) and (II) above in any
single calendar year);
(4) the declaration and payment of dividends or distributions to
holders of any class or series of Disqualified Stock of the Company or any
of its Restricted Subsidiaries issued or incurred in accordance with the
covenant entitled "-- Limitation on Incurrence of Indebtedness and Issuance
of Disqualified Stock and Preferred Stock;"
(5) the declaration and payment of dividends or distributions to
holders of any class or series of Designated Preferred Stock issued after
the Issue Date; provided, however, that (A) for the most recently ended
four full fiscal quarters for which internal financial statements are
available immediately preceding the date of issuance of such Designated
Preferred Stock, after giving effect to such issuance (and the payment of
dividends or distributions) on a pro forma basis, the Company would have
had a Fixed Charge Coverage Ratio of at least 2.25 to 1.00 and (B) the
aggregate amount of dividends declared and paid pursuant to this clause (5)
does not exceed the net cash proceeds received by the Company from the sale
of Designated Preferred Stock issued after the Issue Date;
(6) Investments in Unrestricted Subsidiaries having an aggregate Fair
Market Value, taken together with all other Investments made pursuant to
this clause (6) that are at that time outstanding, not to exceed $35.0
million (with the Fair Market Value of each Investment being measured at
the time made and without giving effect to subsequent changes in value);
(7) the payment of dividends on the shares of the Company's common
stock represented by outstanding IDSs or on shares of the Company's common
stock outstanding upon separation of any IDS into the securities
represented thereby or issued in connection with the issuance of Additional
Notes or other Pari Passu Indebtedness evidenced by a different series of
notes, the payment of dividends on the shares of the Company's common stock
up to an aggregate amount equal to % per year of the net proceeds
received by the Company from the issuance of shares of its common stock,
provided, however, in the event the Company's Adjusted EBITDA per share for
the 12 month period ended immediately prior to any dividend payment date:
- increases above the fiscal 2002 level, the maximum aggregate amount
of dividends per share the Company may pay in such month may not
exceed $ by more than 1/12 of 90% of such difference per share;
- decreases by more than 2%, but by a percentage less than or equal to
20%, of the fiscal 2002 level, the maximum aggregate amount of
dividends per share the Company may pay in such month shall not
exceed $ minus 1/12 of the amount of such decrease per share,
excluding the initial 2%; and
- decreases by more 20% of the fiscal 2002 level, no dividends will be
payable in such month.
(8) Investments that are made with Excluded Contributions;
(9) other Restricted Payments in an aggregate amount not to exceed $20
million;
(10) repurchases of Equity Interests deemed to occur upon exercise of
stock options if such Equity Interests represent a portion of the exercise
price of such options; and
113
(11) the exchange of the shares of our common stock for Additional
Notes pursuant to the amended and restated stockholders agreement;
provided, however, that at the time of, and after giving effect to, any
Restricted Payment permitted under clauses (4), (5), (6), (7) and (9), no
Default or Event of Default shall have occurred and be continuing or would occur
as a consequence thereof; provided further, however, that for purposes of
determining the aggregate amount expended for Restricted Payments in accordance
with clause (iii)(c) of the first paragraph of this covenant, only the amounts
expended under clauses (1), (4), (5) and (7) shall be included.
As of the Issue Date, all of the Company's Subsidiaries will be Restricted
Subsidiaries. The Company will not permit any Unrestricted Subsidiary to become
a Restricted Subsidiary except pursuant to the definition of "Unrestricted
Subsidiary." For purposes of designating any Restricted Subsidiary as an
Unrestricted Subsidiary, all outstanding Investments by the Company and its
Restricted Subsidiaries (except to the extent repaid) in the Subsidiary so
designated will be deemed to be Restricted Payments in an amount determined as
set forth in the last sentence of the definition of "Investments." Such
designation will only be permitted if a Restricted Payment in such amount would
be permitted at such time (whether pursuant to the first paragraph of this
covenant or under clause (6), (8) or (9)) and if such Subsidiary otherwise meets
the definition of an Unrestricted Subsidiary.
Dividend and Other Payment Restrictions Affecting Subsidiaries. The
Indenture will provide that the Company will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any consensual encumbrance or consensual
restriction on the ability of any Restricted Subsidiary to:
(a) (i) pay dividends or make any other distributions to the Company
or any of its Restricted Subsidiaries (1) on its Capital Stock or (2) with
respect to any other interest or participation in, or measured by, its
profits, or (ii) pay any Indebtedness owed to the Company or any of its
Restricted Subsidiaries;
(b) make loans or advances to the Company or any of its Restricted
Subsidiaries; or
(c) sell, lease or transfer any of its properties or assets to the
Company or any of its Restricted Subsidiaries except in each case for such
encumbrances or restrictions existing under or by reason of:
(1) contractual encumbrances or restrictions in effect on the Issue
Date, including pursuant to the Credit Agreement and the other Senior
Credit Documents;
(2) the Indenture and the Notes;
(3) applicable law or any applicable rule, regulation or order;
(4) any agreement or other instrument relating to Indebtedness of a
Person acquired by the Company or any Restricted Subsidiary which was in
existence at the time of such acquisition (but not created in
contemplation thereof or to provide all or any portion of the funds or
credit support utilized to consummate such acquisition), which
encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired;
(5) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement entered into for the sale or disposition of all
or substantially all the Capital Stock or assets of such Restricted
Subsidiary pending the closing of such sale or disposition;
(6) Secured Indebtedness otherwise permitted to be Incurred
pursuant to the covenants described under "-- Limitations on Incurrence
of Indebtedness and Issuance of Disqualified Stock and Preferred Stock"
and "-- Liens" that limit the right of the debtor to dispose of the
assets securing such Indebtedness;
114
(7) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of
business;
(8) customary provisions in joint venture agreements and other
similar agreements entered into in the ordinary course of business;
(9) customary provisions contained in leases, agreements to provide
services and other similar agreements entered into in the ordinary
course of business that impose restrictions of the type described in
clause (c) above;
(10) other Indebtedness of Restricted Subsidiaries permitted to be
Incurred subsequent to the Issue Date pursuant to clause (l) of the
second paragraph of the covenant described under "-- Limitations on
Incurrence of Indebtedness and Issuance of Disqualified Stock and
Preferred Stock;" or
(11) any encumbrances or restrictions of the type referred to in
clauses (a), (b) and (c) above imposed by any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements
or refinancings of the contracts, instruments or obligations referred to
in clauses (1) through (10) above; provided that such amendments,
modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings are, in the good faith judgment
of the Board of Directors, no more restrictive with respect to such
dividend and other payment restrictions than those contained in the
dividend or other payment restrictions prior to such amendment,
modification, restatement, renewal, increase, supplement, refunding,
replacement or refinancing.
Asset Sales. The Indenture will provide that the Company will not, and
will not permit any of its Restricted Subsidiaries to, cause or make an Asset
Sale, unless (x) the Company, or its Restricted Subsidiaries, as the case may
be, receives consideration at the time of such Asset Sale at least equal to the
Fair Market Value (as determined in good faith by the Company) of the assets
sold or otherwise disposed of and (y) except in the case of a Permitted Asset
Swap, at least 75% of the consideration therefor received by the Company, or
such Restricted Subsidiary, as the case may be, is in the form of Cash
Equivalents; provided that the amount of:
(a) any liabilities (as shown on the Company's or such Restricted
Subsidiary's most recent balance sheet or in the notes thereto) of the
Company or any Restricted Subsidiary (other than liabilities that are by
their terms subordinated to the Notes) that are assumed by the transferee
of any such assets;
(b) any notes or other obligations or other securities received by the
Company or such Restricted Subsidiary from such transferee that are
converted by the Company or such Restricted Subsidiary into cash within 180
days of the receipt thereof (to the extent of the cash received); and
(c) any Designated Noncash Consideration received by the Company or
any of its Restricted Subsidiaries in such Asset Sale having an aggregate
Fair Market Value, taken together with all other Designated Noncash
Consideration received pursuant to this clause (c) that is at that time
outstanding, not to exceed the greater of 7.5% of Total Assets or $10.0
million (with the Fair Market Value of each item of Designated Noncash
Consideration being measured at the time received and without giving effect
to subsequent changes in value)
shall be deemed to be Cash Equivalents for the purposes of this provision.
Within 365 days after the Company's or any Restricted Subsidiary's receipt
of the Net Proceeds of any Asset Sale, the Company or such Restricted Subsidiary
may apply the Net Proceeds from such Asset Sale, at its option:
(i) to permanently reduce Obligations under the Credit Agreement (and,
in the case of revolving Obligations, to correspondingly reduce commitments
with respect thereto) or other Senior Indebtedness or Pari Passu
Indebtedness (provided that if the Company shall so reduce Obligations
115
under Pari Passu Indebtedness, it will equally and ratably reduce
Obligations under the Notes by making an offer (in accordance with the
procedures set forth below for an Asset Sale Offer) to all Holders to
purchase at a purchase price equal to 100% of the principal amount thereof,
plus accrued and unpaid interest, if any, the pro rata principal amount of
Notes) or Indebtedness of a Restricted Subsidiary, in each case other than
Indebtedness owed to the Company or an Affiliate of the Company;
(ii) to an investment in any one or more businesses, capital
expenditures or acquisitions of other assets in each case used or useful in
a Similar Business; and/or
(iii) to make an investment in properties or assets that replace the
properties and assets that are the subject of such Asset Sale.
Pending the final application of any such Net Proceeds, the Company or such
Restricted Subsidiary may temporarily reduce Indebtedness under a revolving
credit facility, if any, or otherwise invest such Net Proceeds in Cash
Equivalents or Investment Grade Securities. The Indenture will provide that any
Net Proceeds from any Asset Sale that are not applied as provided and within the
time period set forth in the first sentence of this paragraph will be deemed to
constitute "Excess Proceeds". When the aggregate amount of Excess Proceeds
exceeds $15.0 million, the Company shall make an offer to all Holders of Notes
(an "Asset Sale Offer") to purchase the maximum principal amount of Notes that
may be purchased out of the Excess Proceeds at an offer price in cash in an
amount equal to 100% of the principal amount thereof, plus accrued and unpaid
interest, if any, to but not including the date fixed for the closing of such
offer, in accordance with the procedures set forth in the Indenture. The Company
will commence an Asset Sale Offer with respect to Excess Proceeds within ten
Business Days after the date that Excess Proceeds exceed $15.0 million by
mailing the notice required pursuant to the terms of the Indenture, with a copy
to the Trustee. To the extent that the aggregate amount of Notes tendered
pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company
may use any remaining Excess Proceeds for general corporate purposes. If the
aggregate principal amount of Notes surrendered by Holders thereof exceeds the
amount of Excess Proceeds, the Trustee shall select the Notes to be purchased in
the manner described below. Upon completion of any such Asset Sale Offer, the
amount of Excess Proceeds shall be reset at zero.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and the applicable Canadian securities laws and any other
securities laws and regulations to the extent such laws or regulations are
applicable in connection with the repurchase of the Notes pursuant to an Asset
Sale Offer. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the Indenture, the Company will
comply with the applicable securities laws and regulations and shall not be
deemed to have breached its obligations described in the Indenture by virtue
thereof.
If more Notes are tendered pursuant to an Asset Sale Offer than the Company
is required to purchase, selection of such Notes for purchase will be made by
the Trustee in compliance with the requirements of the principal national
securities exchange, if any, on which such Notes are listed, or if such Notes
are not so listed, on a pro rata basis, by lot or by such other method as the
Trustee shall deem fair and appropriate (and in such manner as complies with
applicable legal requirements).
Notices of an Asset Sale Offer shall be mailed by first class mail, postage
prepaid, at least 30 but not more than 60 days before the purchase date to each
Holder of Notes at such Holder's registered address. If any Note is to be
purchased in part only, any notice of purchase that relates to such Note shall
state the portion of the principal amount thereof that has been or is to be
purchased.
A new Note in principal amount equal to the unpurchased portion of any Note
purchased in part will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after the purchase date unless the
Company defaults in payment of the purchase price, interest shall cease to
accrue on Notes or portions thereof purchased.
Transactions with Affiliates. The Indenture will provide that the Company
will not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, make any payment to, or sell, lease, transfer or
116
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction or
series of transactions, contract, agreement, understanding, loan, advance or
guarantee with, or for the benefit of, any Affiliate of the Company (each of the
foregoing, an "Affiliate Transaction") involving aggregate consideration in
excess of $2.5 million, unless:
(a) such Affiliate Transaction is on terms that are not materially
less favorable to the Company or the relevant Restricted Subsidiary than
those that could have been obtained in a comparable transaction by the
Company or such Restricted Subsidiary with an unrelated Person; and
(b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of $10.0
million, the Company delivers to the Trustee a resolution adopted by the
majority of the Board of Directors of the Company, approving such Affiliate
Transaction and set forth in an Officers' Certificate certifying that such
Affiliate Transaction complies with clause (a) above.
The foregoing provisions will not apply to the following:
(i) transactions between or among the Company and/or any of its
Restricted Subsidiaries;
(ii) Permitted Investments and Restricted Payments permitted by the
provisions of the Indenture described above under the covenant
"-- Limitation on Restricted Payments;"
(iii) the payment of reasonable and customary fees paid to, and
indemnity provided on behalf of, officers, directors, employees or
consultants of the Company or any Restricted Subsidiary;
(iv) transactions in which the Company or any of its Restricted
Subsidiaries, as the case may be, delivers to the Trustee a letter from an
Independent Financial Advisor stating that such transaction is fair to the
Company or such Restricted Subsidiary from a financial point of view or
meets the requirements of clause (a) of the preceding paragraph;
(v) payments or loans to employees or consultants in the ordinary
course of business which are approved by a majority of the Board of
Directors of the Company in good faith;
(vi) any agreement as in effect as of the Issue Date or any amendment
thereto (so long as any such amendment is not disadvantageous to the
holders of the Notes in any material respect) or any transaction
contemplated thereby;
(vii) the existence of, or the performance by the Company or any of
its Restricted Subsidiaries of its obligations under the terms of, any
stockholders agreement (including any registration rights agreement or
purchase agreement related thereto) to which it is a party as of the Issue
Date and any similar agreements which it may enter into thereafter;
provided, however, that the existence of, or the performance by the Company
or any of its Restricted Subsidiaries of its obligations under any future
amendment to any such existing agreement or under any similar agreement
entered into after the Issue Date shall only be permitted by this clause
(vii) to the extent that the terms of any such amendment or new agreement
are not otherwise disadvantageous to the Holders of the Notes in any
material respect;
(viii) transactions with customers, clients, suppliers or purchasers
or sellers of goods or services, in each case in the ordinary course of
business and otherwise in compliance with the terms of the Indenture, which
are fair to the Company and its Restricted Subsidiaries in the reasonable
determination of the Board of Directors or the senior management of the
Company, or are on terms at least as favorable as might reasonably have
been obtained at such time from an unaffiliated party; and
(ix) the issuance of Capital Stock (other than Disqualified Stock) of
the Company or IDSs in respect of the Company's securities (including such
securities represented thereby) or Additional Notes or other Pari Passu
Indebtedness evidenced by a different series of notes or shares of the
Company's Capital Stock to any Permitted Holder.
Liens. The Indenture will provide that the Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, create,
Incur or suffer to exist any Lien on any asset or
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property of the Company or such Restricted Subsidiary, or any income or profits
therefrom, or assign or convey any right to receive income therefrom, that
secures any obligations of the Company or any of its Subsidiaries (other than
Senior Indebtedness) unless the Notes are equally and ratably secured with (or
on a senior basis to, in the case of obligations subordinated in right of
payment to the Notes) the obligations so secured or until such time as such
obligations are no longer secured by a Lien. The preceding sentence will not
require the Company or any Restricted Subsidiary to secure the Notes if the Lien
consists of a Permitted Lien.
The Indenture will provide that no Guarantor will directly or indirectly
create, Incur or suffer to exist any Lien on any asset or property of such
Guarantor or any income or profits therefrom, or assign or convey any right to
receive income therefrom, that secures any obligation of such Guarantor (other
than Senior Indebtedness of such Guarantor) unless the Guarantee of such
Guarantor is equally and ratably secured with (or on a senior basis to, in the
case of obligations subordinated on right of payment to such Guarantor's
Guarantee) the obligations so secured or until such time as such obligations are
no longer secured by a Lien. The preceding sentence will not require any
Guarantor to secure its Guarantee if the Lien consists of a Permitted Lien.
Reports and Other Information. The Indenture will provide that
notwithstanding that the Company may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act or otherwise report on
an annual and quarterly basis on forms provided for such annual and quarterly
reporting pursuant to rules and regulations promulgated by the Commission, the
Company will file with the Commission (and provide the Trustee and Holders with
copies thereof, without cost to each Holder, within 15 days after it files them
with the Commission), documents and reports that are specified in Sections 13
and 15(d) of the Exchange Act within the time periods specified therein;
provided, however, the Company shall not be so obligated to file such documents
and other reports with the Commission if the Commission does not permit such
filing, in which event the Company will make available such information to
prospective purchasers of Notes, in addition to providing such information to
the Trustee and the Holders, in each case within 15 days after the time the
Company would be required to file such information with the Commission if it
were subject to Section 13 or 15(d) of the Exchange Act.
Future Guarantors. The Indenture will provide that the Company will cause
each Restricted Subsidiary organized under the laws of the United States of
America or any state or territory thereof that Incurs Indebtedness or issues
shares of Disqualified Stock or Preferred Stock to execute and deliver to the
Trustee a supplemental indenture pursuant to which such Subsidiary will
guarantee payment of the Notes. Each Guarantee will be limited to an amount not
to exceed the maximum amount that can be guaranteed by that Subsidiary without
rendering the Guarantee, as it relates to such Subsidiary, voidable under
applicable law relating to fraudulent conveyance or fraudulent transfer or
similar laws affecting the rights of creditors generally.
MERGER, CONSOLIDATION, OR SALE OF ALL OR SUBSTANTIALLY ALL ASSETS
The Indenture will provide that the Company may not consolidate or merge
with or into or wind up into (whether or not the Company is the surviving
corporation), or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of its properties or assets in one or more related
transactions, to any Person unless (i) the Company is the surviving corporation
or the Person formed by or surviving any such consolidation or merger (if other
than the Company) or to which such sale, assignment, transfer, lease, conveyance
or other disposition will have been made is a corporation, partnership or
limited liability company organized or existing under the laws of the United
States, any state thereof, the District of Columbia, or any territory thereof
(the Company or such Person, as the case may be, being herein called the
"Successor Company"); (ii) the Successor Company (if other than the Company)
expressly assumes all the obligations of the Company under the Indenture and the
Notes pursuant to a supplemental indenture or other documents or instruments in
form reasonably satisfactory to the Trustee; (iii) immediately after giving
effect to such transaction (and treating any Indebtedness which becomes an
obligation of the Successor Company or any of its Restricted Subsidiaries as a
result of such transaction as having been Incurred by the Successor Company or
such Restricted Subsidiary at the time of such
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transaction) no Default or Event of Default shall have occurred and be
continuing; (iv) immediately after giving pro forma effect to such transaction,
as if such transaction had occurred at the beginning of the applicable
four-quarter period, either (A) the Successor Company would be permitted to
Incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test set forth in the first sentence of the covenant described
under "-- Limitations on Incurrence of Indebtedness and Issuance of Disqualified
Stock and Preferred Stock" or (B) the Fixed Charge Coverage Ratio for the
Successor Company and its Restricted Subsidiaries would be greater than or equal
to such ratio for the Company and its Restricted Subsidiaries immediately prior
to such transaction; (v) each Guarantor, unless it is the other party to the
transactions described above, shall have by supplemental indenture confirmed
that its Guarantee shall apply to the Successor Company's obligations under the
Indenture and the Notes; and (vi) the Company shall have delivered to the
Trustee an Officers' Certificate and an Opinion of Counsel, each stating that
such consolidation, merger or transfer and such supplemental indenture (if any)
comply with the Indenture. The Successor Company will succeed to, and be
substituted for, the Company under the Indenture and the Notes. Notwithstanding
the foregoing clauses (iii) and (iv), (a) any Restricted Subsidiary may
consolidate with, merge into or transfer all or part of its properties and
assets to the Company or to another Restricted Subsidiary and (b) the Company
may merge with an Affiliate incorporated solely for the purpose of
reincorporating the Company in another state of the United States so long as the
amount of Indebtedness of the Company and its Restricted Subsidiaries is not
increased thereby.
The Indenture will further provide that, subject to certain limitations
described in the Indenture governing release of a Guarantee upon the sale or
disposition of a Guarantor, each Guarantor will not, and the Company will not
permit a Guarantor to, consolidate or merge with or into or wind up into
(whether or not such Guarantor is the surviving corporation), or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions to, any Person unless
(i) such Guarantor is the surviving corporation or the Person formed by or
surviving any such consolidation or merger (if other than such Guarantor) or to
which such sale, assignment, transfer, lease, conveyance or other disposition
will have been made is a corporation, partnership or limited liability company
organized or existing under the laws of the United States, any state thereof,
the District of Columbia, or any territory thereof (such Guarantor or such
Person, as the case may be, being herein called the "Successor Guarantor"); (ii)
the Successor Guarantor (if other than such Guarantor) expressly assumes all the
obligations of such Guarantor under the Indenture and such Guarantor's Guarantee
pursuant to a supplemental indenture or other documents or instruments in form
reasonably satisfactory to the Trustee; (iii) immediately after giving effect to
such transaction (and treating any Indebtedness which becomes an obligation of
the Successor Guarantor or any of its Subsidiaries as a result of such
transaction as having been Incurred by the Successor Guarantor or such
Subsidiary at the time of such transaction) no Default or Event of Default shall
have occurred and be continuing; and (iv) the Guarantor shall have delivered or
caused to be delivered to the Trustee an Officers' Certificate and an Opinion of
Counsel, each stating that such consolidation, merger or transfer and such
supplemental indenture (if any) comply with the Indenture. Subject to certain
limitations described in the Indenture, the Successor Guarantor will succeed to,
and be substituted for, such Guarantor under the Indenture and such Guarantor's
Guarantee. Notwithstanding the foregoing clause (iii), a Guarantor may merge
with an Affiliate incorporated solely for the purpose of reincorporating such
Guarantor in another state of the United States so long as the amount of
Indebtedness of the Guarantor is not increased thereby.
DEFAULTS
An Event of Default will be defined in the Indenture as (i) a default in
any payment of interest on any Note when due, whether or not prohibited by the
provisions described under "-- Ranking" above, continued for 30 days, subject to
the interest deferral provisions contained in the Indenture, (ii) a default in
the payment of principal or premium, if any, of any Note when due at its Stated
Maturity, upon optional redemption, upon required repurchase, upon declaration
or otherwise, whether or not such payment is prohibited by the provisions
described under "-- Ranking" above, (iii) the failure by the Company to comply
with its obligations under the covenant described under "-- Merger,
Consolidation or
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Sale of All or Substantially All Assets" above, (iv) the failure by the Company
to comply for 30 days after notice with any of its obligations under the
covenants described under "-- Change of Control" or "-- Certain Covenants" above
(in each case, other than a failure to purchase Notes), (v) the failure by the
Company to comply for 60 days after notice with its other agreements contained
in the Notes or the Indenture, (vi) the failure by the Company or any
Significant Subsidiary to pay any Indebtedness (other than Indebtedness owing to
the Company or a Restricted Subsidiary) within any applicable grace period after
final maturity or the acceleration of any such Indebtedness by the holders
thereof because of a default if the total amount of such Indebtedness unpaid or
accelerated exceeds $15.0 million or its foreign currency equivalent (the "cross
acceleration provision"), (vii) certain events of bankruptcy, insolvency or
reorganization of the Company or a Significant Subsidiary (the "bankruptcy
provisions"), (viii) the rendering of any judgment or decree for the payment of
money (other than judgments which are covered by enforceable insurance policies
issued by solvent carriers) in excess of $15.0 million or its foreign currency
equivalent against the Company or a Significant Subsidiary if (A) an enforcement
proceeding thereon is commenced and not discharged or stayed within days
thereafter or (B) such judgment or decree remains outstanding for a period of 60
days following such judgment and is not discharged, waived or stayed (the
"judgment default provision") or (ix) any Guarantee ceases to be in full force
and effect, except as contemplated by the terms thereof, or any Guarantor denies
or disaffirms its obligations under the Indenture or any Guarantee and the
Default continues for 10 days.
The foregoing will constitute Events of Default whatever the reason for any
such Event of Default and whether it is voluntary or involuntary or is effected
by operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body.
However, a default under clause (iv) or (v) will not constitute an Event of
Default until the Trustee or the Holders of 25% in principal amount of the
outstanding Notes notify the Company of the default and the Company does not
cure such default within the time specified in clauses (iv) and (v) hereof after
receipt of such notice.
Subject to the provisions regarding any Forebearance Period, if an Event of
Default (other than a Default relating to certain events of bankruptcy,
insolvency or reorganization of the Company) occurs and is continuing, the
Trustee or the Holders of at least 25% in principal amount of the outstanding
Notes by notice to the Company may declare the principal of, premium, if any,
and accrued but unpaid interest on all the Notes to be due and payable. Upon
such a declaration, such principal, premium and interest will be due and payable
immediately. If an Event of Default relating to certain events of bankruptcy,
insolvency or reorganization of the Company occurs, the principal of, premium,
if any, and interest on all the Notes will become immediately due and payable
without any declaration or other act on the part of the Trustee or any Holders.
Under certain circumstances, the Holders of a majority in principal amount of
the outstanding Notes may rescind any such acceleration with respect to the
Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders unless such Holders
have offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no Holder may pursue any
remedy with respect to the Indenture or the Notes unless (i) such Holder has
previously given the Trustee notice that an Event of Default is continuing, (ii)
Holders of at least 25% in principal amount of the outstanding Notes have
requested the Trustee to pursue the remedy, (iii) such Holders have offered the
Trustee reasonable security or indemnity against any loss, liability or expense,
(iv) the Trustee has not complied with such request within 60 days after the
receipt of the request and the offer of security or indemnity, and (v) the
Holders of a majority in principal amount of the outstanding Notes have not
given the Trustee a direction inconsistent with such request within such 60-day
period. Subject to certain restrictions, the Holders of a majority in principal
amount of the outstanding Notes are given the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or of exercising any trust or power conferred on the Trustee. The Trustee,
however, may refuse to follow any direction that conflicts with law or the
Indenture or that the Trustee determines is unduly prejudicial to
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the rights of any other Holder or that would involve the Trustee in personal
liability. Prior to taking any action under the Indenture, the Trustee will be
entitled to indemnification satisfactory to it in its sole discretion against
all losses and expenses caused by taking or not taking such action.
The Indenture will provide that if a Default occurs and is continuing and
is actually known to the Trustee, the Trustee must mail to each Holder notice of
the Default within the earlier of 90 days after it occurs or 30 days after it is
actually known to a Trust Officer or written notice of it is received by the
Trustee. Except in the case of a Default in the payment of principal of,
premium, if any, or interest on any Note, the Trustee may withhold notice if and
so long as a committee of its Trust Officers in good faith determines that
withholding notice is in the interests of the Noteholders. In addition, the
Company is required to deliver, to the Trustee, within 120 days after the end of
each fiscal year, a certificate indicating whether the signers thereof know of
any Default that occurred during the previous year. The Company also is required
to deliver to the Trustee, within 30 days after the occurrence thereof, written
notice of any event which would constitute certain Defaults, their status and
what action the Company is taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the
consent of the Holders of a majority in principal amount of the Notes then
outstanding of all series affected by such amendment and any past default or
compliance with any provisions may be waived with the consent of the Holders of
a majority in principal amount of the Notes of all series affected by such
amendment then outstanding. However, without the consent of each Holder of an
outstanding Note affected, no amendment may, among other things, (i) reduce the
amount of Notes whose Holders must consent to an amendment, (ii) reduce the rate
of or extend the time for payment of interest on any Note, (iii) reduce the
principal of or extend the Stated Maturity of any Note, (iv) reduce the premium
payable upon the redemption of any Note or change the time at which any Note may
be redeemed as described under "Optional Redemption" above, (v) make any Note
payable in money other than that stated in the Note, (vi) make any change to the
subordination provisions of the Indenture that adversely affects the rights of
any Holder, (vii) impair the right of any Holder to receive payment of principal
of, premium, if any, and interest on such Holder's Notes on or after the due
dates therefor or to institute suit for the enforcement of any payment on or
with respect to such Holder's Notes, (viii) make any change in the amendment
provisions which require each Holder's consent or in the waiver provisions or
(ix) modify the Guarantees in any manner adverse to the Holders.
Without the consent of any Holder, the Company and Trustee may amend the
Indenture to cure any ambiguity, omission, defect or inconsistency, to provide
for the assumption by a successor corporation, partnership or limited liability
company of the obligations of the Company under the Indenture, to provide for
uncertificated Notes in addition to or in place of certificated Notes (provided
that the uncertificated Notes are issued in registered form for purposes of
Section 163(f) of the Internal Revenue Code, or in a manner such that the
uncertificated Notes are described in Section 163(f)(2)(B) of the Internal
Revenue Code), to add Guarantees with respect to the Notes, to secure the Notes,
to add to the covenants of the Company for the benefit of the Holders or to
surrender any right or power conferred upon the Company, to make any change that
does not adversely affect the rights of any Holder, to comply with any
requirement of the SEC in connection with the qualification of the Indenture
under the Trust Indenture Act of 1939 or to make certain changes to the
Indenture to provide for the issuance of Additional Notes. However, no amendment
may be made to the subordination provisions of the Indenture that adversely
affects the rights of any holder of Senior Indebtedness then outstanding unless
the holders of such Senior Indebtedness (or any group or representative thereof
authorized to give a consent) consent to such change.
The consent of the Noteholders is not necessary under the Indenture to
approve the particular form of any proposed amendment. It is sufficient if such
consent approves the substance of the proposed amendment.
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After an amendment under the Indenture becomes effective, the Company is
required to mail to Noteholders a notice briefly describing such amendment.
However, the failure to give such notice to all Noteholders, or any defect
therein, will not impair or affect the validity of the amendment.
DEFEASANCE
The Company at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. The Company at any time may terminate its obligations under the covenants
described under "Certain Covenants," the operation of the cross acceleration
provision, the bankruptcy provisions with respect to Subsidiaries and the
judgment default provision described under "-- Defaults" above and the
limitations contained in clause (iv) of the first paragraph under "Merger,
Consolidation or Sale of All or Substantially All Assets" above ("covenant
defeasance"). If the Company exercises its legal defeasance option or its
covenant defeasance option, each Guarantor will be released from all of its
obligations with respect to its Guarantee.
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto. If the Company exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (iv), (vi), (vii) with respect only to
Significant Subsidiaries or (viii) with respect only to Significant Subsidiaries
under "-- Defaults" above or because of the failure of the Company to comply
with clause (iv) of the first paragraph under "-- Merger, Consolidation or Sale
of All or Substantially All Assets" above.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal, premium (if any) and
interest on the Notes to redemption or maturity, as the case may be, and must
comply with certain other conditions, including delivery to the Trustee of an
Opinion of Counsel to the effect that holders of the Notes will not recognize
income, gain or loss for U.S. federal or Canadian income tax purposes as a
result of such deposit and defeasance and will be subject to U.S. federal or
Canadian income tax on the same amount and in the same manner and at the same
times as would have been the case if such deposit and defeasance had not
occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or the Canada Customs
and Revenue Agency or other change in applicable U.S. federal or Canadian income
tax law).
CONCERNING THE TRUSTEE
The Bank of New York is to be the Trustee under the Indenture.
GOVERNING LAW
The Indenture will provide that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means, with respect to any specified Person:
(i) Indebtedness of any other Person existing at the time such other
Person is merged with or into or became a Restricted Subsidiary of such
specified Person; and
(ii) Indebtedness secured by a Lien encumbering any asset acquired by
such specified Person,
in each case, other than Indebtedness Incurred as consideration in, in
contemplation of, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
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transactions pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary or was otherwise acquired by such Person, or such asset was acquired
by such person, as applicable.
"Adjusted EBITDA" means, with respect to any Person for any period, the
Consolidated Net Income of such Person for such period plus, without
duplication:
(i) provision for taxes based on income or profits of such Person for
such period deducted in computing Consolidated Net Income, plus
(ii) Consolidated Interest Expense of such Person for such period to
the extent the same was deducted in computing Consolidated Net Income, plus
(iii) Consolidated Depreciation and Amortization Expense of such
Person for such period to the extent such Consolidated Depreciation and
Amortization Expense was deducted in computing Consolidated Net Income,
plus
(iv) any non-recurring fees, expenses or charges related to any
Securities Offering, Permitted Investment, acquisition or Indebtedness
permitted to be Incurred by the Indenture (in each case, whether or not
successful), deducted in such period in computing Consolidated Net Income,
plus
(v) the amount of any nonrecurring charges related to client contract
terminations or one-time severance costs incurred in connection with
acquisitions deducted in such period in computing Consolidated Net Income,
plus
(vi) any other noncash charges reducing Consolidated Net Income for
such period (excluding any such charge which requires an accrual of, or
cash reserve for, anticipated cash charges for any future period), plus
(vii) the amount of annual management, monitoring, consulting and
advisory fees and related expenses paid to Blackstone and GE Capital
deducted in such period in computing Consolidated Net Income in an amount
not to exceed $1.5 million during any fiscal year,
less, without duplication,
(viii) noncash items increasing Consolidated Net Income of such Person
for such period (excluding any items which represent the reversal of any
accrual of, or cash reserve for, anticipated cash charges in any prior
period).
Notwithstanding the foregoing, the provision for taxes based on the income
or profits of, and the depreciation and amortization of, a Subsidiary of the
Company shall be added to Consolidated Net Income to compute Adjusted EBITDA
only to the extent (and in the same proportion) that the Net Income of such
Subsidiary was included in calculating Consolidated Net Income and only if a
corresponding amount would be permitted at the date of determination to be paid
as a dividend to the Company by such Subsidiary without prior approval (that has
not been obtained), pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to such Subsidiary or its stockholders.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling", "controlled by"
and "under common control with"), as used with respect to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise. For purposes of the
provisions described under "-- Certain Covenants -- Transactions with
Affiliates" and "-- Certain Covenants -- Asset Sales" only, "Affiliate" shall
also mean any beneficial owner of shares representing 10% or more of the total
voting power of the Voting Stock (on a fully diluted basis) of the Company or of
rights or warrants to purchase such Voting Stock (whether or not currently
exercisable) and any Person who would be an Affiliate of any such beneficial
owner pursuant to the first sentence hereof.
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"Asset Sale" means:
(i) the sale, conveyance, transfer or other disposition (whether in a
single transaction or a series of related transactions) of property or
assets (including by way of a Sale/Leaseback Transaction) of the Company or
any Restricted Subsidiary (each referred to in this definition as a
"disposition"); or
(ii) the issuance or sale of Equity Interests of any Restricted
Subsidiary (other than to the Company or another Restricted
Subsidiary)(whether in a single transaction or a series of related
transactions),
in each case other than:
(a) a disposition of Cash Equivalents or Investment Grade
Securities or obsolete or worn out equipment in the ordinary course of
business;
(b) the disposition of all or substantially all of the assets of
the Company in a manner permitted pursuant to the provisions described
above under "-- Merger, Consolidation or Sale of All or Substantially
All Assets" or any disposition that constitutes a Change of Control;
(c) any Restricted Payment or Permitted Investment that is
permitted to be made, and is made, under the covenant described above
under "-- Limitation on Restricted Payments;"
(d) any disposition of assets with an aggregate Fair Market Value
of less than $2.0 million;
(e) any disposition of property or assets by a Restricted
Subsidiary to the Company or by the Company or a Restricted Subsidiary
to a Restricted Subsidiary;
(f) any exchange of like property pursuant to Section 1031 of the
Internal Revenue Code of 1986, as amended, for use in a Similar
Business;
(g) sales of assets received by the Company upon the foreclosure on
a Lien;
(h) any sale of Equity Interests in, or Indebtedness or other
securities of, an Unrestricted Subsidiary; and
(i) sales of inventory in the ordinary course of business
consistent with past practices and sales of equipment upon termination
of a contract with a client entered into in the ordinary course of
business pursuant to the terms of such contract.
"Bank Indebtedness" means any and all amounts payable under or in respect
of the Credit Agreement, the other Senior Credit Documents and any Refinancing
Indebtedness with respect thereto, as amended from time to time, including
principal, premium (if any), interest (including interest accruing on or after
the filing of any petition in bankruptcy or for reorganization relating to the
Company whether or not a claim for post-filing interest is allowed in such
proceedings), fees, charges, expenses, reimbursement obligations, guarantees and
all other amounts payable thereunder or in respect thereof.
"Blackstone" means Blackstone Capital Partners II Merchant Banking Fund
L.P. and its Affiliates.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means a day other than a Saturday, Sunday or other day on
which banking institutions in New York State are authorized or required by law
to close.
"Capitalized Lease Obligation" means, at the time any determination thereof
is to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized and reflected as a liability on
a balance sheet (excluding the footnotes thereto) in accordance with GAAP.
"Capital Stock" means:
(i) in the case of a corporation, corporate stock, including, without
limitation, corporate stock represented by IDSs and corporate stock
outstanding upon the separation of IDSs into the securities represented
thereby;
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(ii) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock;
(iii) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited); and
(iv) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"Cash Equivalents" means:
(i) U.S. dollars and foreign currency exchanged into U.S. dollars
within 180 days;
(ii) securities issued or directly and fully guaranteed or insured by
the United States government or any agency or instrumentality thereof;
(iii) certificates of deposit, time deposits and eurodollar time
deposits with maturities of one year or less from the date of acquisition,
bankers' acceptances with maturities not exceeding one year and overnight
bank deposits, in each case with any commercial bank having capital and
surplus in excess of $500.0 million and whose long-term debt is rated "A"
or the equivalent thereof by Moody's or S&P;
(iv) repurchase obligations for underlying securities of the types
described in clauses (ii) and (iii) above entered into with any financial
institution meeting the qualifications specified in clause (iii) above;
(v) commercial paper issued by a corporation (other than an Affiliate
of the Company) rated at least "A-2" or the equivalent thereof by Moody's
or S&P and in each case maturing within one year after the date of
acquisition;
(vi) investment funds investing at least 95% of their assets in
securities of the types described in clauses (i) through (v) above;
(vii) readily marketable direct obligations issued by any state of the
United States of America or any political subdivision thereof having one of
the two highest rating categories obtainable from either Moody's or S&P;
and
(viii) Indebtedness or preferred stock issued by Persons with a rating
of "A" or higher from S&P or "A-2" or higher from Moody's.
"Company" means Volume Services America Holdings, Inc. until a successor
replaces it and, thereafter, means the successor and, for purposes of any
provision contained in the Indenture and required by the Trust Indenture Act,
each other obligor on the Notes.
"Consolidated Depreciation and Amortization Expense" means with respect to
any Person for any period, the total amount of depreciation and amortization
expense of such Person and its Restricted Subsidiaries for such period on a
consolidated basis and otherwise determined in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum, without duplication, of: (i) consolidated interest expense of
such Person and its Restricted Subsidiaries for such period, to the extent such
expense was deducted in computing Consolidated Net Income (including
amortization of original issue discount, the interest component of Capitalized
Lease Obligations (or any financing lease which has substantially the same
economic effect as a Capitalized Lease Obligation) and net payments and receipts
(if any) pursuant to Hedging Obligations and excluding amortization of deferred
financing fees), (ii) consolidated capitalized interest of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued and (iii) the
earned discount or yield with respect to the sale of receivables.
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"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis; provided, however, that:
(i) any net after-tax extraordinary gains or losses (less all fees and
expenses relating thereto) shall be excluded;
(ii) any increase in amortization or depreciation resulting from
purchase accounting in relation to any acquisition that is consummated
after the Issue Date, net of taxes, shall be excluded;
(iii) the Net Income for such period shall not include the cumulative
effect of a change in accounting principles during such period;
(iv) any net after-tax income or loss from discontinued operations and
any net after-tax gains or losses on disposal of discontinued operations
shall be excluded;
(v) any net after-tax gains or losses (less all fees and expenses
relating thereto) attributable to asset dispositions other than in the
ordinary course of business (as determined in good faith by the Board of
Directors) shall be excluded;
(vi) the Net Income for such period of any Person that is not a
Subsidiary of such Person, or is an Unrestricted Subsidiary, or that is
accounted for by the equity method of accounting, shall be included only to
the extent of the amount of dividends or distributions or other payments
paid in cash (or to the extent converted into cash) to the referent Person
or a Restricted Subsidiary thereof in respect of such period; and
(vii) the Net Income for such period of any Restricted Subsidiary
shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by such Restricted Subsidiary of its Net
Income is not at the date of determination permitted without any prior
governmental approval (which has not been obtained) or, directly or
indirectly, by the operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Restricted Subsidiary or its stockholders,
unless such restrictions with respect to the payment of dividends or in
similar distributions have been legally waived; provided that the net loss
of any such Restricted Subsidiary shall be included.
Notwithstanding the foregoing, for the purpose of the covenant described
under "-- Limitation on Restricted Payments" only, there shall be excluded from
Consolidated Net Income any dividends, repayments of loans or advances or other
transfers of assets from Unrestricted Subsidiaries to the Company or a
Restricted Subsidiary to the extent such dividends, repayments or transfers
increase the amount of Restricted Payments permitted under such covenant
pursuant to clauses (c)(iv) and (v) thereof.
"Continuing Directors" means, as of any date of determination, any member
of the Company's Board of Directors who:
(i) was a member of the Company's Board of Directors on the date of
the Indenture; or
(ii) was nominated for election or elected to the Board of Directors
with the affirmative vote of at least a majority of the Continuing
Directors who were members of the Company's Board of Directors at the time
of the nomination or election.
"Contribution Indebtedness" means Indebtedness of the Company in an
aggregate principal amount not greater than the amount of all Specified Cash
Contributions, provided that such Contribution Indebtedness (i) has a Stated
Maturity later than the Stated Maturity of the Notes, (ii) is Incurred
substantially concurrently with such Specified Cash Contributions, and (iii) is
so designated as Contribution Indebtedness pursuant to an Officers' Certificate
on the Incurrence date thereof.
"Credit Agreement" means the credit agreement dated as of , as
amended, restated, supplemented, waived, replaced, restructured, repaid,
increased, refunded, refinanced or otherwise modified
126
from time to time, including any agreement extending the maturity thereof or
otherwise restructuring all or any portion of the Indebtedness under such
agreement (except to the extent that any such amendment, restatement,
supplement, waiver, replacement, refunding, refinancing or other modification
thereto would be prohibited by the terms of the Indenture, unless otherwise
agreed to by the Holders of at least a majority in aggregate principal amount of
Notes at the time outstanding), among the Company, the Subsidiaries of the
Company named therein, the financial institutions named therein and The Canadian
Imperial Bank of Commerce, as Administrative Agent.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Noncash Consideration" means the Fair Market Value of noncash
consideration received by the Company or one of its Restricted Subsidiaries in
connection with an Asset Sale that is so designated as Designated Noncash
Consideration pursuant to an Officers' Certificate, setting forth the basis of
such valuation, less the amount of Cash Equivalents received in connection with
a subsequent sale of such Designated Noncash Consideration.
"Designated Preferred Stock" means Preferred Stock of the Company (other
than Disqualified Stock) that is issued for cash (other than to a Subsidiary of
the Company or an employee stock ownership plan or trust established by the
Company or any of its Subsidiaries) and is so designated as Designated Preferred
Stock, pursuant to an Officers' Certificate, on the issuance date thereof, the
cash proceeds of which are excluded from the calculation set forth in clause (c)
of the covenant described under "-- Limitation on Restricted Payments."
"Designated Senior Indebtedness" means (i) the Bank Indebtedness and (ii)
any other Senior Indebtedness of the Company.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
of such Person which, by its terms (or by the terms of any security into which
it is convertible or for which it is redeemable or exchangeable), or upon the
happening of any event;
(i) matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise;
(ii) is convertible or exchangeable for Indebtedness or Disqualified
Stock; or
(iii) is redeemable at the option of the holder thereof, in whole or
in part, in each case prior to the first anniversary of the maturity date
of the Notes;
provided, however, that only the portion of Capital Stock which so matures or is
mandatorily redeemable, is so convertible or exchangeable or is so redeemable at
the option of the holder thereof prior to such first anniversary shall be deemed
to be Disqualified Stock; provided further, however, that if such Capital Stock
is issued to any employee or to any plan for the benefit of employees of the
Company or its Subsidiaries or by any such plan to such employees, such Capital
Stock shall not constitute Disqualified Stock solely because it may be required
to be repurchased by the Company in order to satisfy applicable statutory or
regulatory obligations or as a result of such employee's termination, death or
disability. Notwithstanding anything contrary herein, the Company's common stock
that is exchangeable into Additional Notes upon transfer pursuant to the amended
and restated stockholders agreement shall not be Disqualified Stock.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Excluded Contributions" means the net cash proceeds received by the
Company after the Issue Date from (i) contributions to its common equity capital
and (ii) the sale (other than to a Subsidiary of the Company or to any Company
or Subsidiary management equity plan or stock option plan or any other
management or employee benefit plan or agreement) of Capital Stock (other than
Disqualified Stock and Designated Preferred Stock) of the Company, in each case
designated as Excluded Contributions pursuant to an Officers' Certificate
executed by an Officer of the Company, the cash proceeds of which are
127
excluded from the calculation set forth in clause (c) of the first paragraph of
the "-- Limitation on Restricted Payments" covenant.
"Fair Market Value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction.
"Fixed Charge Coverage Ratio" means, with respect to any Person for any
period, the ratio of Adjusted EBITDA of such Person for such period to the Fixed
Charges of such Person for such period. In the event that the Company or any of
its Restricted Subsidiaries Incurs or redeems any Indebtedness (other than in
the case of revolving credit borrowings, in which case interest expense shall be
computed based upon the average daily balance of such Indebtedness during the
applicable period) or issues or redeems Preferred Stock subsequent to the
commencement of the period for which the Fixed Charge Coverage Ratio is being
calculated but prior to the event for which the calculation of the Fixed Charge
Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge Coverage
Ratio shall be calculated giving pro forma effect to such Incurrence or
redemption of Indebtedness, or such issuance or redemption of Preferred Stock,
as if the same had occurred at the beginning of the applicable four-quarter
period.
For purposes of making the computation referred to above, Investments,
acquisitions, dispositions, mergers, consolidations and discontinued operations
(as determined in accordance with GAAP), in each case with respect to an
operating unit of a business, that have been made by the Company or any of its
Restricted Subsidiaries during the four-quarter reference period or subsequent
to such reference period and on or prior to or simultaneously with the
Calculation Date shall be calculated on a pro forma basis assuming that all such
Investments, acquisitions, dispositions, discontinued operations, mergers and
consolidations (and the reduction of any associated fixed charge obligations and
the change in Adjusted EBITDA resulting therefrom) had occurred on the first day
of the four-quarter reference period. If since the beginning of such period any
Person (that subsequently became a Restricted Subsidiary or was merged with or
into the Company or any Restricted Subsidiary since the beginning of such
period) shall have made any Investment, acquisition, disposition, discontinued
operation, merger or consolidation, in each case with respect to an operating
unit of a business, that would have required adjustment pursuant to this
definition, then the Fixed Charge Coverage Ratio shall be calculated giving pro
forma effect thereto for such period as if such Investment, acquisition,
disposition, discontinued operation, merger or consolidation had occurred at the
beginning of the applicable four-quarter period.
For purposes of this definition, whenever pro forma effect is to be given
to any transaction, the pro forma calculations shall be made in good faith by a
responsible financial or accounting officer of the Company. If any Indebtedness
bears a floating rate of interest and is being given pro forma effect, the
interest on such Indebtedness shall be calculated as if the rate in effect on
the Calculation Date had been the applicable rate for the entire period (taking
into account any Hedging Obligations applicable to such Indebtedness if such
Hedging Obligation has a remaining term in excess of 12 months). Interest on a
Capitalized Lease Obligation shall be deemed to accrue at an interest rate
reasonably determined by a responsible financial or accounting officer of the
Company to be the rate of interest implicit in such Capitalized Lease Obligation
in accordance with GAAP.
For purposes of making the computation referred to above, interest on any
Indebtedness under a revolving credit facility computed on a pro forma basis
shall be computed based upon the average daily balance of such Indebtedness
during the applicable period. Interest on Indebtedness that may optionally be
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rate, shall be deemed to have been
based upon the rate actually chosen, or, if none, then based upon such optional
rate chosen as the Company may designate. Any such pro forma calculation may
include adjustments appropriate, in the reasonable determination of the Company
as set forth in an Officers' Certificate, to reflect operating expense
reductions reasonably expected to result from any acquisition or merger.
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"Fixed Charges" means, with respect to any Person for any period, the sum
of (i) Consolidated Interest Expense of such Person for such period and (ii) all
cash dividend payments (excluding items eliminated in consolidation) on any
series of Preferred Stock or Disqualified Stock of such Person and its
Subsidiaries.
"Foreign Subsidiary" means a Restricted Subsidiary not organized or
existing under the laws of the United States of America or any state or
territory thereof.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issue Date. For the purposes of the
Indenture, the term "consolidated" with respect to any Person shall mean such
Person consolidated with its Restricted Subsidiaries, and shall not include any
Unrestricted Subsidiary, but the interest of such Person in an Unrestricted
Subsidiary will be accounted for as an Investment.
"GE Capital" means General Electric Capital Corporation and its Affiliates.
"guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness or other obligations.
"Guarantee" means any guarantee of the obligations of the Company under the
Indenture and the Notes by any Person in accordance with the provisions of the
Indenture.
"Guarantor" means any Person that Incurs a Guarantee; provided that upon
the release or discharge of such Person from its Guarantee in accordance with
the Indenture, such Person ceases to be a Guarantor.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) currency exchange, interest rate or commodity swap
agreements, currency exchange, interest rate or commodity cap agreements and
currency exchange, interest rate or commodity collar agreements and (ii) other
agreements or arrangements designed to protect such Person against fluctuations
in currency exchange, interest rates or commodity prices.
"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the Registrar's books.
"IDS" means the Company's Income Deposit Securities, whether currently
outstanding or as may be issued from time to time.
"Incur" means issue, assume, guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be incurred by such
person at the time it becomes a Subsidiary.
"Indebtedness" means, with respect to any Person:
(i) the principal and premium (if any) of any indebtedness of such
Person, whether or not contingent:
(a) in respect of borrowed money;
(b) evidenced by bonds, notes, debentures or similar instruments or
letters of credit or bankers' acceptances (or, without duplication,
reimbursement agreements in respect thereof);
(c) representing the deferred and unpaid purchase price of any
property, except any such balance that constitutes a trade payable or
similar obligation to a trade creditor due within six months from the
date on which it is Incurred, in each case Incurred in the ordinary
course of
129
business, which purchase price is due more than six months after the
date of placing the property in service or taking delivery and title
thereto;
(d) in respect of Capitalized Lease Obligations; or
(e) representing any Hedging Obligations,
if and to the extent that any of the foregoing Indebtedness (other than
letters of credit and Hedging Obligations) would appear as a liability on a
balance sheet (excluding the footnotes thereto) of such Person prepared in
accordance with GAAP;
(ii) to the extent not otherwise included, any obligation of such
Person to be liable for, or to pay, as obligor, guarantor or otherwise, on
the Indebtedness of another Person (other than by endorsement of negotiable
instruments for collection in the ordinary course of business); and
(iii) to the extent not otherwise included, Indebtedness of another
Person secured by a Lien on any asset owned by such Person (whether or not
such Indebtedness is assumed by such Person); provided, however, that the
amount of such Indebtedness will be the lesser of (a) the Fair Market Value
of such asset at such date of determination and (b) the amount of such
Indebtedness of such other Person;
provided, further, that any obligation of the Company or any Restricted
Subsidiary in respect of (i) minimum guaranteed commissions, or other
similar payments, to clients, minimum returns to clients or stop loss
limits in favor of clients or (ii) indemnification obligations to clients,
in each case pursuant to contracts to provide services to clients entered
into in the ordinary course of business shall be deemed not to constitute
Indebtedness.
"Independent Financial Advisor" means an accounting, appraisal or
investment banking firm or consultant to Persons engaged in a similar business
of nationally recognized standing that is, in the good faith determination of
the Company, qualified to perform the task for which it has been engaged.
"Investment Grade Securities" means:
(i) securities issued or directly and fully guaranteed or insured by
the United States government or any agency or instrumentality thereof
(other than Cash Equivalents);
(ii) debt securities or debt instruments with a rating of BBB- or
higher by S&P or Baa3 or higher by Moody's or the equivalent of such rating
by such rating organization, or if no rating of S&P or Moody's then exists,
the equivalent of such rating by any other nationally recognized securities
rating agency, but excluding any debt securities or instruments
constituting loans or advances among the Company and its Subsidiaries; and
(iii) investments in any fund that invests exclusively in investments
of the type described in clauses (i) and (ii) which fund may also hold
immaterial amounts of cash pending investment and/or distribution.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the form of loans (including
guarantees), advances or capital contributions (excluding accounts receivable,
trade credit and advances to customers and commission, travel and similar
advances to officers, employees and consultants made in the ordinary course of
business), purchases or other acquisitions for consideration (including
agreements providing for the adjustment of purchase price) of Indebtedness,
Equity Interests or other securities issued by any other Person and investments
that are required by GAAP to be classified on the balance sheet of the Company
in the same manner as the other investments included in this definition to the
extent such transactions involve the transfer of cash or other property.
For purposes of the definition of "Unrestricted Subsidiary" and the
covenant described under "-- Limitation on Restricted Payments:"
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(i) "Investments" shall include the portion (proportionate to the
Company's equity interest in such Subsidiary) of the Fair Market Value of
the net assets of a Subsidiary of the Company at the time that such
Subsidiary is designated an Unrestricted Subsidiary; provided, however,
that upon a redesignation of such Subsidiary as a Restricted Subsidiary,
the Company shall be deemed to continue to have a permanent "Investment" in
an Unrestricted Subsidiary equal to an amount (if positive) equal to (x)
the Company's "Investment" in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the Fair Market Value of the net assets of
such Subsidiary at the time of such redesignation; and
(ii) any property transferred to or from an Unrestricted Subsidiary
shall be valued at its Fair Market Value at the time of such transfer, in
each case as determined in good faith by the Board of Directors.
"Issue Date" means the date on which any Notes are originally issued.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction);
provided that in no event shall an operating lease be deemed to constitute a
Lien.
"Management Group" means the group consisting of the directors, executive
officers and other personnel of the Company on the Issue Date.
"Moody's" means Moody's Investors Service, Inc.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of Preferred Stock dividends.
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received in respect of or upon the sale or other
disposition of any Designated Noncash Consideration received in any Asset Sale
and any cash payments received by way of deferred payment of principal pursuant
to a note or installment receivable or otherwise, but only as and when received,
but excluding the assumption by the acquiring person of Indebtedness relating to
the disposed assets or other considerations received in any other noncash form),
net of the direct costs relating to such Asset Sale and the sale or disposition
of such Designated Noncash Consideration (including, without limitation, legal,
accounting and investment banking fees, and brokerage and sales commissions),
and any relocation expenses Incurred as a result thereof, taxes paid or payable
as a result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements related thereto), amounts required
to be applied to the repayment of principal, premium (if any) and interest on
Indebtedness required (other than pursuant to clause (i) of the second paragraph
of the covenant described under "-- Asset Sales") to be paid as a result of such
transaction, and any deduction of appropriate amounts to be provided by the
Company as a reserve in accordance with GAAP against any liabilities associated
with the asset disposed of in such transaction and retained by the Company after
such sale or other disposition thereof, including, without limitation, pension
and other post-employment benefit liabilities and liabilities related to
environmental matters or against any indemnification obligations associated with
such transaction.
"Notes" means the % subordinated notes of the Company, including any
Additional Notes unless expressly provided otherwise.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements (including, without limitation, reimbursement
obligations with respect to letters of credit and bankers' acceptances), damages
and other liabilities payable under the documentation governing any
Indebtedness; provided that Obligations with respect to the Notes shall not
include fees or indemnifications in favor of the Trustee and other third parties
other than the Holders of the Notes.
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"Officer" means the Chairman of the Board, the President, any Executive
Vice President, Senior Vice President or Vice President, the Treasurer or the
Secretary of the Company.
"Officers' Certificate" means a certificate signed on behalf of the Company
by two Officers of the Company, one of whom must be the principal executive
officer, the principal financial officer, the treasurer or the principal
accounting officer of the Company that meets the requirements set forth in the
Indenture.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Pari Passu Indebtedness" means (i) with respect to the Company, the Notes
and any other Indebtedness of the Company, other than Senior Indebtedness or
Secured Indebtedness of the Company and (ii) with respect to any Guarantor, its
Guarantee and any other Indebtedness of such Guarantor, other than Senior
Indebtedness or Secured Indebtedness of such Guarantor.
"Permitted Asset Swap" means any one or more transactions in which the
Company or any Restricted Subsidiary exchanges assets for consideration
consisting of (i) assets used or useful in a Similar Business and (ii) any cash
or Cash Equivalents, provided that such cash or Cash Equivalents will be
considered Net Proceeds from an Asset Sale.
"Permitted Holders" means Blackstone, GE Capital and the Management Group.
"Permitted Investments" means:
(i) any Investment in the Company or any Restricted Subsidiary;
(ii) any Investment in Cash Equivalents or Investment Grade
Securities;
(iii) any Investment by the Company or any Restricted Subsidiary of
the Company in a Person that is primarily engaged in a Similar Business if
as a result of such Investment (a) such Person becomes a Restricted
Subsidiary or (b) such Person, in one transaction or a series of related
transactions, is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is liquidated
into, the Company or a Restricted Subsidiary;
(iv) any Investment in securities or other assets not constituting
Cash Equivalents and received in connection with an Asset Sale made
pursuant to the provisions of "-- Asset Sales" or any other disposition of
assets not constituting an Asset Sale;
(v) any Investment existing on the Issue Date;
(vi) advances to employees not in excess of $5.0 million outstanding
at any one time in the aggregate;
(vii) any Investment acquired by the Company or any of its Restricted
Subsidiaries (a) in exchange for any other Investment or accounts
receivable held by the Company or any such Restricted Subsidiary in
connection with or as a result of a bankruptcy, workout, reorganization or
recapitalization of the issuer of such other Investment or accounts
receivable or (b) as a result of a foreclosure by the Company or any of its
Restricted Subsidiaries with respect to any secured Investment or other
transfer of title with respect to any secured Investment in default;
(viii) Hedging Obligations permitted under clause (j) of the
"-- Limitations on Incurrence of Indebtedness and Issuance of Disqualified
Stock and Preferred Stock" covenant;
(ix) additional Investments having an aggregate Fair Market Value,
taken together with all other Investments made pursuant to this clause (ix)
that are at that time outstanding, not to exceed the greater of 7.5% of
Total Assets or $10.0 million at the time of such Investment (with the Fair
Market Value of each Investment being measured at the time made and without
giving effect to subsequent changes in value);
(x) loans and advances to officers, directors and employees for
business-related travel expenses, moving expenses and other similar
expenses, in each case Incurred in the ordinary course of business;
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(xi) Investments the payment for which consists of Equity Interests of
the Company (other than Disqualified Stock); provided, however, that such
Equity Interests will not increase the amount available for Restricted
Payments under clause (c) of the "-- Limitation on Restricted Payments"
covenant;
(xii) any transaction to the extent it constitutes an Investment that
is permitted by and made in accordance with the provisions of the second
paragraph of the covenant described under "-- Transactions with Affiliates"
(except transactions described in clauses (ii), (iii) and (vi) of such
paragraph);
(xiii) Investments consisting of the licensing or contribution of
intellectual property pursuant to joint marketing arrangements with other
Persons;
(xiv) Guarantees issued in accordance with "Limitations on Incurrence
of Indebtedness and Issuance of Disqualified Stock and Preferred Stock;"
(xv) any Investment by Restricted Subsidiaries in other Restricted
Subsidiaries and Investments by Subsidiaries that are not Restricted
Subsidiaries in other Subsidiaries that are not Restricted Subsidiaries;
(xvi) Investments consisting of purchases and acquisitions of
inventory, supplies, materials and equipment or purchases of contract
rights or licenses or leases of intellectual property, in each case in the
ordinary course of business;
(xvii) loans and advances to VSI Management Direct LP, VSI Management
II L.P., Recreational Services, LLC, current or former management personnel
of the Company and/or any entity in which any current or former management
personnel of the Company has a beneficial or economic interest pursuant to
any management equity plan or stock option plan or any other management or
employee benefit or incentive plan or agreement or any other agreement
pursuant to which stock is held for the benefit of such persons not to
exceed $7.5 million in aggregate principal amount at any time outstanding,
the proceeds of which will be used to purchase or redeem, directly or
indirectly, shares of Capital Stock of the Company or to purchase limited
partnership interests in VSI Management Direct LP, VSI Management II L.P.
or Recreational Services, LLC; and
(xviii) loans to clients made in connection with entering into,
renegotiating, renewing or amending contracts to provide services not to
exceed $15.0 million in any fiscal year or $30.0 million in aggregate
amount at any time outstanding.
"Permitted Junior Securities" shall mean debt or equity securities of the
Company or any successor corporation issued pursuant to a plan of reorganization
or readjustment of the Company that are subordinated to the payment of all
then-outstanding Senior Indebtedness of the Company at least to the same extent
that the Notes are subordinated to the payment of all Senior Indebtedness of the
Company on the Issue Date, so long as to the extent that any Senior Indebtedness
of the Company outstanding on the date of consummation of any such plan of
reorganization or readjustment is not paid in full in cash on such date, either
(a) the holders of any such Senior Indebtedness not so paid in full in cash have
consented to the terms of such plan of reorganization or readjustment or (b)
such holders receive securities which constitute Senior Indebtedness and which
have been determined by the relevant court to constitute satisfaction in full in
cash of any Senior Indebtedness not paid in full in cash.
"Permitted Liens" means, with respect to any Person:
(a) pledges or deposits by such Person under workmen's compensation
laws, unemployment insurance laws or similar legislation, or good faith
deposits in connection with bids, tenders, contracts (other than for the
payment of Indebtedness) or leases to which such Person is a party, or
deposits to secure public or statutory obligations of such Person or
deposits of cash or United States government bonds to secure surety or
appeal bonds to which such Person is a party, or deposits as security for
contested taxes or import duties or for the payment of rent, in each case
Incurred in the ordinary course of business;
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(b) Liens imposed by law, such as carriers', warehousemen's and
mechanics' Liens, in each case for sums not yet due or being contested in
good faith by appropriate proceedings or other Liens arising out of
judgments or awards against such Person with respect to which such Person
shall then be proceeding with an appeal or other proceedings for review;
(c) Liens for taxes, assessments or other governmental charges not yet
due or payable or subject to penalties for nonpayment or which are being
contested in good faith by appropriate proceedings;
(d) Liens in favor of issuers of performance and surety bonds or bid
bonds or completion guarantees or with respect to other regulatory
requirements or letters of credit issued pursuant to the request of and for
the account of such Person in the ordinary course of its business;
(e) minor survey exceptions, minor encumbrances, easements or
reservations of, or rights of others for, licenses, rights-of-way, sewers,
electric lines, telegraph and telephone lines and other similar purposes,
or zoning or other restrictions as to the use of real properties or Liens
incidental to the conduct of the business of such Person or to the
ownership of its properties which were not Incurred in connection with
Indebtedness and which do not in the aggregate materially adversely affect
the value of said properties or materially impair their use in the
operation of the business of such Person;
(f) Liens securing Indebtedness permitted to be incurred pursuant to
clause (d) of the second paragraph of the covenant described under
"-- Limitations on Incurrence of Indebtedness and Issuance of Disqualified
Stock and Preferred Stock;"
(g) Liens to secure Indebtedness permitted pursuant to clause (a) of
the second paragraph of the covenant described under "-- Limitations on
Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred
Stock;"
(h) Liens existing on the Issue Date;
(i) Liens on property or shares of stock of a Person at the time such
Person becomes a Subsidiary; provided, however, such Liens are not created
or Incurred in connection with, or in contemplation of, such other Person
becoming such a Subsidiary; provided further, however, that such Liens may
not extend to any other property owned by the Company or any Restricted
Subsidiary;
(j) Liens on property at the time the Company or a Restricted
Subsidiary acquired the property, including any acquisition by means of a
merger or consolidation with or into the Company or any Restricted
Subsidiary; provided further, however, that such Liens are not created or
Incurred in connection with, or in contemplation of, such acquisition;
provided further, however, that the Liens may not extend to any other
property owned by the Company or any Restricted Subsidiary;
(k) Liens securing Indebtedness or other obligations of a Restricted
Subsidiary owing to the Company or another Restricted Subsidiary permitted
to be incurred in accordance with the covenant described under
"-- Limitations on Incurrence of Indebtedness and Issuance of Disqualified
Stock and Preferred Stock;"
(l) Liens securing Hedging Obligations so long as the related
Indebtedness is, and is permitted to be under the Indenture, secured by a
Lien on the same property securing such Hedging Obligations;
(m) Liens on specific items of inventory or other goods and proceeds
of any Person securing such Person's obligations in respect of bankers'
acceptances, issued or created for the account of such Person to facilitate
the purchase, shipment or storage of such inventory or other goods;
(n) leases and subleases of real property which do not materially
interfere with the ordinary conduct of the business of the Company or any
of its Restricted Subsidiaries;
(o) Liens arising from Uniform Commercial Code financing statement
filings regarding operating leases entered into by the Company and its
Restricted Subsidiaries in the ordinary course of business;
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(p) Liens in favor of the Company;
(q) Liens on equipment of the Company granted in the ordinary course
of business to the Company's client at which such equipment is located;
(r) Liens encumbering deposits made in the ordinary course of business
to secure obligations arising from statutory, regulatory, contractual or
warranty requirements, including rights of offset and set-off;
(s) Liens on the Equity Interests of Unrestricted Subsidiaries
securing obligations of Unrestricted Subsidiaries not otherwise prohibited
by the Indenture;
(t) Liens to secure Indebtedness permitted by clause (l) of the second
paragraph of the covenant described under "-- Limitations on Incurrence of
Indebtedness and Issuance of Disqualified Stock and Preferred Stock;" and
(u) Liens to secure any refinancing, refunding, extension, renewal or
replacement (or successive refinancings, refundings, extensions, renewals
or replacements) as a whole, or in part, of any Indebtedness secured by any
Lien referred to in the foregoing clauses (f), (g), (h), (i), (j), (k), (l)
and (t); provided, however, that (x) such new Lien shall be limited to all
or part of the same property that secured the original Lien (plus
improvements on such property) and (y) the Indebtedness secured by such
Lien at such time is not increased to any amount greater than the sum of
(A) the outstanding principal amount or, if greater, committed amount of
the Indebtedness described under clauses (f), (g), (h), (i), (j), (k), (l)
or (t) at the time the original Lien became a Permitted Lien under the
Indenture and (B) an amount necessary to pay any fees and expenses,
including premiums, related to such refinancing, refunding, extension,
renewal or replacement.
"Person" means any individual, corporation, partnership, business trust,
limited liability company, joint venture, association, joint-stock company,
trust, unincorporated organization, government or any agency or political
subdivision thereof or any other entity.
"Preferred Stock" means any Equity Interest with preferential right of
payment of dividends or upon liquidation, dissolution, or winding up.
"Representative" means the trustee, agent or representative (if any) for an
issue of Senior Indebtedness.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired by the Company or a Restricted Subsidiary whereby
the Company or a Restricted Subsidiary transfers such property to a Person and
the Company or such Restricted Subsidiary leases it from such Person, other than
leases between the Company and a Wholly Owned Subsidiary or between Wholly Owned
Subsidiaries.
"Secured Indebtedness" means any Indebtedness of the Company or any
Subsidiary secured by a Lien.
"Securities Offering" means any public or private sale of IDSs or common
stock or Preferred Stock of the Company or VSA (other than Disqualified Stock),
other than (i) public offerings with respect to IDSs or the Company's Common
Stock registered on Form S-8 (or the Canadian equivalent) and (ii) any such
public or private sale that constitutes an Excluded Contribution.
"S&P" means Standard and Poor's Ratings Group.
"Senior Credit Documents" means the collective reference to the Credit
Agreement, the notes issued pursuant thereto and the guarantees thereof, and the
collateral documents relating thereto.
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"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Similar Business" means a business, the majority of whose revenues are
derived from the provision of food, beverage, catering, merchandise, management
or other services at stadiums, convention centers, ball parks, concert halls,
theaters, seaports, airports, golf courses, arenas, racetracks, parks, malls,
zoos, bandstands, or other recreational venues, or the activities of the Company
and its Subsidiaries as of the Issue Date or any business or activity that is
reasonably similar thereto or a reasonable extension, development or expansion
thereof or ancillary thereto, including, without limitation, investing in sports
teams.
"Specified Cash Contributions" means the aggregate amount of cash
contributions (other than Excluded Contributions) made to the capital of the
Company which are designated as "Specified Cash Contributions" pursuant to an
Officers' Certificate.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).
"Subsidiary" means, with respect to any Person:
(i) any corporation, association or other business entity (other than
a partnership, joint venture or limited liability company) of which more
than 50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time of
determination owned or controlled, directly or indirectly, by such Person
or one or more of the other Subsidiaries of that Person or a combination
thereof; and
(ii) any partnership, joint venture or limited liability company of
which (x) more than 50% of the capital accounts, distribution rights, total
equity and voting interests or general and limited partnership interests,
as applicable, are owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person or a
combination thereof, whether in the form of membership, general, special or
limited partnership interests or otherwise and (y) such Person or any
Wholly Owned Restricted Subsidiary of such Person is a controlling general
partner or otherwise controls such entity.
"Total Assets" means the total consolidated assets of the Company and its
Restricted Subsidiaries, as shown on the most recent balance sheet of the
Company.
"Trustee" means the party named as such in the Indenture until a successor
replaces it and, thereafter, means the successor, and if at any time there is
more than one such party, "Trustee" as used with respect to the securities of
any series shall mean the trustee with respect to securities of that series.
"Trust Officer" means (i) any officer within the corporate trust department
of the Trustee, including any vice president, assistant vice president,
assistant secretary, assistant treasurer, trust officer or any other officer of
the Trustee who customarily performs functions similar to those performed by the
Persons who at the time shall be such officers, respectively, or to whom any
corporate trust matter is referred because of such person's knowledge of and
familiarity with the particular subject and (ii) who shall have direct
responsibility for the administration of the Indenture.
"Unrestricted Subsidiary" means:
(i) any Subsidiary of the Company that at the time of determination
shall be designated an Unrestricted Subsidiary by the Board of Directors in
the manner provided below; and
(ii) any Subsidiary of an Unrestricted Subsidiary. The Board of
Directors may designate any Subsidiary of the Company (including any newly
acquired or newly formed Subsidiary of the
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Company) to be an Unrestricted Subsidiary unless such Subsidiary or any of
its Subsidiaries owns any Equity Interests or Indebtedness of, or owns or
holds any Lien on any property of, the Company or any other Subsidiary of
the Company that is not a Subsidiary of the Subsidiary to be so designated;
provided, however, that the Subsidiary to be so designated and its
Subsidiaries do not at the time of designation have and do not thereafter
Incur any Indebtedness pursuant to which the lender has recourse to any of
the assets of the Company or any of its Restricted Subsidiaries; provided
further, however, that either (a) the Subsidiary to be so designated has
total consolidated assets of $1,000 or less or (b) if such Subsidiary has
consolidated assets greater than $1,000, then such designation would be
permitted under the covenant entitled "-- Limitation on Restricted
Payments."
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided, however, that immediately after giving effect
to such designation (x)(1) the Company could Incur $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test described under
"-- Limitations on Incurrence of Indebtedness and Issuance of Disqualified Stock
and Preferred Stock" or (2) the Fixed Charge Coverage Ratio for the Company and
its Restricted Subsidiaries would be greater than such ratio for the Company and
its Restricted Subsidiaries immediately prior to such designation, in each case
on a pro forma basis taking into account such designation and (y) no Default
shall have occurred and be continuing. Any such designation by the Board of
Directors shall be evidenced to the Trustee by promptly filing with the Trustee
a copy of the resolution of the Board of Directors giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
or Disqualified Stock, as the case may be, at any date, the quotient obtained by
dividing (i) the sum of the products of the number of years from the date of
determination to the date of each successive scheduled principal payment of such
Indebtedness or redemption or similar payment with respect to such Disqualified
Stock multiplied by the amount of such payment, by (ii) the sum of all such
payments.
"Wholly Owned Restricted Subsidiary" is any Wholly Owned Subsidiary that is
a Restricted Subsidiary.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
100% of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person and one or
more Wholly Owned Subsidiaries of such Person.
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SHARES ELIGIBLE FOR FUTURE SALE
Future sales or the availability for sale of substantial amounts of IDSs or
shares of our common stock or a significant principal amount of our subordinated
notes in the public market could adversely affect prevailing market prices and
could impair our ability to raise capital through future sales of our
securities. Upon completion of this offering, we will have IDSs
outstanding, in respect of in the aggregate shares of our common stock
and $ million aggregate principal amount of our subordinated notes. All of
these IDSs and securities represented thereby will be freely tradable without
restriction or further registration under the Securities Act or securities
legislation in all the provinces of Canada, unless the IDSs or securities
represented thereby are purchased by "affiliates" as that term is defined in
Rule 144 under the Securities Act of 1933. Upon completion of this offering, the
existing equity investors will own shares of common stock representing an
aggregate % ownership interest in us after the offering, or 0% if the
underwriters' over-allotment option is exercised in full. If the underwriters do
not exercise their over-allotment option in full, upon any subsequent sale of
common stock by the existing equity investors, we will automatically exchange a
portion of the common stock with the purchasers for subordinated notes at an
exchange rate of $ for each share of common stock. The existing equity
investors will have demand and piggyback registration rights for their shares of
common stock (which include automatic exchange rights upon transfer into
subordinated notes), which may be sold in the form of IDSs. In addition, certain
members of management will have piggyback registration rights for their IDSs.
See "Related Party Transactions -- Registration Rights." Collectively, they have
agreed to purchase IDSs in this offering, or IDSs if the
underwriters' over-allotment option is exercised in full. Registration rights
may not be exercised during the lock-up period.
We may issue shares of our common stock or subordinated notes, which may be
in the form of IDSs, or other securities from time to time as consideration for
future acquisitions and investments. In the event any such acquisition or
investment is significant, the number of shares of our common stock or
subordinated notes, which may be in the form of IDSs, or other securities that
we may issue may in turn be significant. In addition, we may also grant
registration rights covering those shares of our common stock or subordinated
notes and IDSs, if applicable, or other securities in connection with any such
acquisitions and investments.
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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Simpson Thacher & Bartlett LLP, the following summary is
an accurate discussion of the material U.S. federal income tax consequences of
the ownership of IDSs as of the date hereof by U.S. Holders (as defined below)
and Non-U.S. Holders (as defined below). Except where noted, it deals only with
IDSs held as capital assets by holders who acquired IDSs upon their original
issuance at their initial offering price and does not deal with special
situations, such as those of:
- dealers in securities or currencies,
- financial institutions,
- regulated investment companies,
- real estate investment trusts,
- tax-exempt entities,
- insurance companies,
- persons holding IDSs, subordinated notes or common stock as a part of a
hedging, integrated, conversion or constructive sale transaction or a
straddle,
- traders in securities that elect to use a mark-to-market method of
accounting for their securities holdings,
- persons liable for alternative minimum tax,
- investors in pass-through entities or
- U.S. Holders (as defined below) of IDSs whose "functional currency" is
not the U.S. dollar.
Furthermore, the discussion below is based upon the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury regulations
promulgated thereunder and administrative and judicial interpretations thereof,
all as of the date hereof, and such authorities may be repealed, revoked,
modified or subject to differing interpretations, possibly on a retroactive
basis, so as to result in U.S. federal income tax consequences different from
those discussed below.
A "U.S. Holder" of an IDS means a holder that is for U.S. federal income
tax purposes:
- an individual citizen or resident of the United States,
- a corporation created or organized in or under the laws of the United
States or any political subdivision thereof,
- an estate the income of which is subject to U.S. federal income taxation
regardless of its source, or
- a trust if it (1) is subject to the primary supervision of a court within
the United States and one or more U.S. persons have the authority to
control all substantial decisions of the trust or (2) has a valid
election in effect under applicable U.S. Treasury regulations to be
treated as a U.S. person.
If a partnership or other entity or arrangement treated as a partnership
for U.S. federal income tax purposes holds IDSs, the tax treatment of a partner
will generally depend upon the status of the partner and the activities of the
partnership. If you are a partner of a partnership holding IDSs, you should
consult your own tax advisors.
No statutory, administrative or judicial authority directly addresses the
treatment of IDSs or instruments similar to IDSs for U.S. federal income tax
purposes. As a result, we cannot assure you that the Internal Revenue Service
("IRS") or the courts will agree with the tax consequences described herein. A
different treatment from that assumed below could adversely affect the amount,
timing and character of income, gain or loss in respect of an investment in the
IDSs, and, in the case of foreign holders, could subject such holders to U.S.
federal withholding or estate taxes with regard to the subordinated notes in the
same manner as they will be with regard to the common stock. Payments to foreign
holders would not
139
be grossed-up for any such taxes. In addition, a different treatment could
result in the loss by us of all or part of the deduction for interest paid on
the subordinated notes. IF YOU ARE CONSIDERING THE PURCHASE OF IDSS, YOU SHOULD
CONSULT YOUR OWN TAX ADVISORS CONCERNING THE PARTICULAR U.S. FEDERAL INCOME TAX
CONSEQUENCES TO YOU OF THE OWNERSHIP OF IDSS, AS WELL AS ANY CONSEQUENCES TO YOU
ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION.
CONSEQUENCES TO U.S. HOLDERS
IDSS
ALLOCATION OF PURCHASE PRICE
We believe that your acquisition of IDSs should be treated as an
acquisition of the shares of our common stock and the subordinated notes
represented by the IDSs and, by purchasing IDSs, you will agree to such
treatment. If such treatment is not respected, the acquisition of IDSs may be
treated as an acquisition of only our stock, in which case the subordinated
notes would be treated as equity rather than debt for U.S. federal income tax
purposes. See "-- Subordinated Notes -- Characterization of Subordinated Notes."
The remainder of this discussion assumes that the acquisition of IDSs will be
treated as an acquisition of shares of our common stock and subordinated notes.
The purchase price of each IDS will be allocated between the shares of
common stock and subordinated notes in proportion to their respective fair
market values at the time of purchase. Such allocation will establish your
initial tax basis in the shares of common stock and the subordinated notes. We
will report the initial fair market value of each share of common stock as
$ and the initial fair market value of each subordinated note as $ , and
by purchasing IDSs, you will agree to such allocation. If this allocation is not
respected, it is possible that the subordinated note will be treated as having
been issued with original issue discount or amortizable bond premium. You
generally would have to include original issue discount in income in advance of
the receipt of cash attributable to that income, and would be able to elect to
amortize bond premium over the remaining term of the subordinated note. The
remainder of this discussion assumes that this allocation of the purchase price
will be respected.
SEPARATION AND RECOMBINATION
If you separate your IDSs into the shares of common stock and subordinated
notes represented thereby or recombine the applicable number of shares of common
stock and principal amount of subordinated notes to form IDSs, you generally
will not recognize gain or loss upon the separation or recombination into IDSs.
You will continue to take into account items of income or deduction otherwise
includible or deductible, respectively, with respect to the shares of common
stock and the subordinated notes, and your tax basis in the shares of common
stock and the subordinated notes will not be affected by the separation or
recombination.
SUBORDINATED NOTES
CHARACTERIZATION OF SUBORDINATED NOTES
Our counsel, Simpson Thacher & Bartlett LLP, is of the opinion that the
subordinated notes should be treated as debt for U.S. federal income tax
purposes, and based upon that opinion, we believe that the subordinated notes
should be so treated. The lead underwriters have also received an opinion from
their counsel, Skadden, Arps, Slate, Meagher & Flom LLP, that the subordinated
notes should be treated as debt for U.S. federal income tax purposes. Such
opinions are subject to various assumptions, representations and determinations,
and as discussed in more detail in the following paragraphs, such opinions are
not binding on the IRS or the courts, which could disagree. We and, by acquiring
subordinated notes, directly or in the form of an IDS, each holder agrees to
treat the subordinated notes as our indebtedness for all tax purposes. Assuming
such treatment is respected, stated interest on the subordinated notes will
generally be taxable to you as ordinary income at the time it is paid or accrued
in accordance with your method of accounting for U.S. federal income tax
purposes.
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The determination of whether an instrument is treated as debt or equity for
U.S. federal income tax purposes is based on the facts and circumstances. There
is no clear statutory definition of debt and its characterization is governed by
principles developed in case law, which analyzes numerous factors that are
intended to identify the economic substance of the investor's interest in the
corporation. Accordingly, neither we nor the counsel referred to above can
conclude with certainty that the subordinated notes will be treated as debt for
U.S. federal income tax purposes. Our determination that the subordinated notes
should be treated as debt for U.S. federal income tax purposes, and the opinions
of counsel to this effect referred to above, rely upon certain representations
and determinations by us, the lead underwriters and an independent appraisal
firm relating to, among other things, the economic, creditor rights and other
terms of the subordinated notes, our overall capital structure, including our
debt to equity ratio after giving effect to the offering, and our ability to
meet our debt obligations based on our projected financial performance.
The consequences to U.S. Holders and Non-U.S. Holders described below
assumes the subordinated notes will be respected as debt. However, no ruling on
this issue has been requested from the IRS and thus, there can be no assurance
that such a position would be sustained if challenged by the IRS.
If the subordinated notes were treated as equity rather than debt for U.S.
federal income tax purposes, then the stated interest on the subordinated notes
would be treated as a dividend to the extent paid out of current or accumulated
earnings and profits (as determined under U.S. federal income tax principles),
and interest on the subordinated notes would not be deductible by us for U.S.
federal income tax purposes. In addition, as discussed below under
"-- Consequences to Non-U.S. Holders -- Common Stock," Non-U.S. Holders could be
subject to withholding or estate taxes with regard to the subordinated notes in
the same manner as they will be with regard to the common stock. Our inability
to deduct interest on the subordinated notes could materially increase our
taxable income and, thus, our U.S. federal income tax liability. This would
reduce our after-tax income available for interest and dividend payments and
could significantly reduce our future cash flow, thereby affecting our ability
to make payments on the subordinated notes and the common stock.
Additionally, there can be no assurance that the IRS will not challenge the
determination that the interest rate on the subordinated notes represents an
arm's length rate and, if successful, any excess amount over arm's length would
not be deductible and could be recharacterized as a dividend payment instead of
an interest payment for U.S. federal income tax purposes to the extent paid out
of current or accumulated earnings and profits (as determined under U.S. federal
income tax principles). In such case, our taxable income and, thus, our U.S.
federal income tax liability could be materially increased. In addition, as
discussed below under "-- Consequences to Non-U.S. Holders -- Common Stock,"
Non-U.S. Holders could be subject to withholding or estate taxes with regard to
the subordinated notes in the same manner as they will be with regard to the
common stock. If the interest rate were determined to be less than the arm's
length rate, the subordinated notes could be treated as issued with original
issue discount, which you would be required to include in income over the term
of the subordinated notes.
SALE, EXCHANGE OR RETIREMENT OF SUBORDINATED NOTES
Upon the sale, exchange, retirement or other disposition of an IDS, you
will be treated as having sold, exchanged, retired or disposed of the
subordinated note constituting the IDS. Upon the sale, exchange, retirement or
other disposition of a subordinated note, you will recognize gain or loss equal
to the difference between the portion of the proceeds allocable to your
subordinated note (less an amount equal to any accrued and unpaid interest which
will be treated as a payment of interest for U.S. federal income tax purposes)
and your adjusted tax basis in the subordinated note. As described above under
"-- Consequences to U.S. Holders -- IDSs -- Allocation of Purchase Price," your
tax basis in a subordinated note generally will be the portion of the purchase
price of your IDSs allocable to the subordinated note. Such gain or loss will
generally be capital gain or loss. Capital gains of individuals derived in
respect of capital assets held for more than one year are eligible for reduced
rates of taxation. The deductibility of capital losses is subject to
limitations.
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DEFERRAL OF INTEREST
Under applicable Treasury regulations, a "remote" contingency that stated
interest will not be timely paid will be ignored in determining whether a debt
instrument is issued with original issue discount, referred to as OID. Although
there is no authority directly on point, based on our detailed financial
forecasts, we believe that the likelihood of deferral of interest payments on
the subordinated notes is remote within the meaning of the Treasury regulations.
Based on the foregoing, we believe that, although the matter is not free from
doubt because of the lack of direct authority, the subordinated notes will not
be considered to be issued with OID at the time of their original issuance.
Accordingly, stated interest on the subordinated notes will generally be
included in the gross income of a U.S. Holder as ordinary interest income at the
time accrued or received, in accordance with such U.S. Holder's method of
accounting for U.S. federal income tax purposes.
Under the Treasury regulations, if deferral of any payment of interest were
determined not to be "remote," or if the interest payment deferral actually
occurred, the subordinated notes would be treated as issued with OID at the time
of issuance or at the time of such occurrence, as the case may be. Then, all
stated interest on the subordinated notes would thereafter be treated as OID as
long as the subordinated notes remained outstanding. In such event:
- all of a U.S. Holder's taxable interest income relating to the
subordinated notes would constitute OID that would have to be included in
income on an economic accrual basis, possibly before the receipt of the
cash attributable to the interest, regardless of such U.S. Holder's
method of tax accounting;
- actual payments of stated interest would not be reported as taxable
income;
- any amount of OID included in your gross income (whether or not during a
deferral period) with respect to the subordinated notes would increase
your tax basis in such notes; and
- the amount of payments in respect of such accrued OID would reduce your
tax basis in such subordinated notes.
Consequently, during a deferral period, a U.S. Holder would be required to
include OID in gross income even though we would not make any actual cash
payments on the subordinated notes.
No rulings or other interpretations have been issued by the IRS which have
addressed the meaning of the term "remote" as used in the Treasury regulations,
and it is possible that the IRS could take a position contrary to the
interpretation in this prospectus.
ADDITIONAL ISSUANCES
As described under "Description of IDSs -- Voluntary Separation and
Recombination," you may separate your IDSs into the shares of common stock and
subordinated notes represented thereby or combine the applicable number of
shares of common stock and principal amount of subordinated notes to form IDSs.
Additionally, shares of our common stock and subordinated notes we subsequently
issue can be combined to form IDSs. Such subsequently issued subordinated notes
may be issued with OID. The U.S. federal income tax consequences to you of the
subsequent issuance of subordinated notes with OID upon a subsequent offering by
us of IDSs or upon the issuance of subordinated notes following an automatic
exchange with purchasers of our common stock from the existing equity investors
are unclear. The indenture governing the subordinated notes will provide that,
in the event there is a subsequent issuance of subordinated notes with OID that
are otherwise identical (other than issuance date) in all material respects to
the subordinated notes represented by the IDSs, each holder of subordinated
notes or IDSs, as the case may be, agrees that a portion of such holder's notes
will be exchanged for a portion of the subordinated notes acquired by the
holders of such subsequently issued subordinated notes. Consequently,
immediately following such subsequent issuance, each holder of subsequently
issued notes, either directly or in the form of IDSs, and each holder of
existing subordinated notes, either directly or in the form of IDSs, will own an
inseparable unit composed of a proportionate percentage of both the old
142
subordinated notes and the newly issued subordinated notes with OID. Because a
subsequent issuance will affect the subordinated notes in the same manner,
regardless of whether these subordinated notes are held as part of IDSs or
directly, the combination of subordinated notes and shares of common stock to
form IDSs, or the separation of IDSs, should not affect your tax treatment. We
intend to take the position that any subsequent issuance of subordinated notes
with OID will not result in a taxable exchange of your subordinated notes for
U.S. federal income tax purposes, but there can be no assurance that the IRS
will not assert that such issuance of subordinated notes with OID should be
treated as a taxable exchange of a portion of your subordinated notes, whether
held directly or in the form of IDSs, for a portion of the subordinated notes
subsequently issued. In such case, however, you would not be expected to realize
any gain on the deemed exchange, and any loss realized would be disallowed. Your
initial tax basis in the subordinated notes deemed to have been received in the
exchange would be the fair market value of such subordinated notes on the date
of the deemed exchange (adjusted to reflect any disallowed loss), and your
holding period for such subordinated notes would begin on the day after the
deemed exchange.
Regardless of whether a subsequent issuance of subordinated notes with OID
results in a taxable exchange, such issuance may increase the OID, if any, that
you were previously accruing with respect to the subordinated notes. Following
any subsequent issuance of subordinated notes with OID, we (and our agents) will
report any OID on the subsequently issued notes ratably among all holders of
subordinated notes and IDSs, and each holder of subordinated notes and IDSs
will, by purchasing IDSs, agree to report OID in a manner consistent with this
approach. This may result in such holders reporting more interest income over
the term of the subordinated notes than they would have reported had no such
subsequent issuance occurred, and any such additional interest income will be
reflected as an increase in the tax basis of the subordinated notes, which will
generally result in a capital loss (or reduced capital gain) upon a sale,
exchange or retirement of the subordinated notes. However, there can be no
assurance that the IRS will not assert that any OID should be reported only to
the persons that initially acquired such subsequently issued notes (and their
transferees). In such case, the IRS might further assert that, unless a holder
can establish that it is not such a person (or a transferee thereof), all of the
subordinated notes held by such holder have OID. Any of these assertions by the
IRS could create significant uncertainties in the pricing of IDSs and
subordinated notes and could adversely affect the market for IDSs and
subordinated notes. You would be required to include any OID in income as
ordinary income as it accrues, in advance of the receipt of cash attributable to
such income.
Due to the complexity and uncertainty surrounding the U.S. federal income
tax treatment of subsequent issuances and exchanges of subordinated notes,
prospective investors are urged to consult their tax advisors regarding the
applicable tax consequences to them in light of their particular circumstances.
COMMON STOCK
DIVIDENDS
The gross amount of dividends paid to you will be treated as dividend
income to you to the extent paid out of current or accumulated earnings and
profits (as determined under U.S. federal income tax principles). Such income
will be includable in your gross income as ordinary income on the day received
by you. To the extent, if any, that the amounts of dividends paid to you exceed
our current and accumulated earnings and profits, it will be treated as a
tax-free return of your tax basis in the shares of common stock and thereafter
as capital gain. Pursuant to recently enacted legislation, if you are an
individual, dividends that we pay to you through 2008 will be subject to tax at
long-term capital gain rates, provided certain holding period and other
requirements are satisfied.
TAXATION OF CAPITAL GAINS
Upon the sale, exchange, retirement or other disposition of IDSs, you will
be treated as having sold, exchanged, retired or disposed of the shares of
common stock constituting the IDSs. Upon the sale, exchange, retirement or other
disposition of shares of our common stock, you will recognize capital gain or
loss in an amount equal to the difference between the portion of the proceeds
allocable to your shares of
143
common stock and your tax basis in the shares of common stock. As described
above under "-- Consequences to U.S. Holders -- IDSs -- Allocation of Purchase
Price," your tax basis in the shares of common stock generally will be the
portion of the purchase price of your IDSs allocable to the shares of common
stock. As discussed above, capital gains of individuals derived with respect to
capital assets held for more than one year are eligible for reduced rates of
taxation. The deductibility of capital losses is subject to limitations.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to payments of
principal, interest and dividends paid on an IDS and to the proceeds of sale of
an IDS paid to a U.S. Holder other than certain exempt recipients (such as
corporations). A backup withholding tax will apply to such payments if you fail
to provide a taxpayer identification number or certification of other exempt
status or fail to report in full dividend and interest income.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against your U.S. federal income tax liability provided the
required information is furnished to the IRS.
CONSEQUENCES TO NON-U.S. HOLDERS
The following discussion applies only to Non-U.S. Holders. A "Non-U.S.
Holder" is a holder, other than an entity or arrangement classified as a
partnership for U.S. federal income tax purposes, that is not a U.S. Holder.
Special rules may apply to certain Non-U.S. Holders, such as:
- U.S. expatriates,
- "controlled foreign corporations,"
- "passive foreign investment companies,"
- "foreign personal holding companies,"
- corporations that accumulate earnings to avoid U.S. federal income tax,
and
- investors in pass-through entities that are subject to special treatment
under the Code.
Such Non-U.S. Holders should consult their own tax advisors to determine the
U.S. federal, state, local and other tax consequences that may be relevant to
them.
SUBORDINATED NOTES
CHARACTERIZATION OF SUBORDINATED NOTES
As discussed above under "-- Consequences to U.S. Holders -- Subordinated
Notes -- Characterization of Subordinated Notes," we believe the subordinated
notes should be treated as debt for U.S. federal income tax purposes. However,
no ruling on this issue has been requested from the IRS and thus there can be no
assurance that such a position would be sustained if challenged by the IRS. If
the subordinated notes were treated as equity rather than debt for U.S. federal
income tax purposes, then the subordinated notes would be treated in the same
manner as shares of common stock as described below under "-- Consequences to
Non-U.S. Holders -- Common Stock -- Dividends," and payments on the subordinated
notes would be subject to U.S. federal withholding taxes. Payments to Non-U.S.
Holders would not be grossed-up on account of any such taxes. The remainder of
this discussion assumes the characterization of the subordinated notes as debt
for U.S. federal income tax purposes will be respected.
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U.S. FEDERAL WITHHOLDING TAX
Subject to the discussion below concerning backup withholding, no
withholding of U.S. federal income tax should be required with respect to the
payment of principal or interest on a subordinated note owned by you under the
"portfolio interest rule," provided that:
- interest paid on the subordinated note is not effectively connected with
your conduct of a trade or business in the United States,
- you do not actually or constructively own 10% or more of the total
combined voting power of all classes of our stock entitled to vote within
the meaning of section 871(h)(3) of the Code and the regulations
thereunder,
- you are not a controlled foreign corporation that is related to us
through stock ownership,
- you are not a bank whose receipt of interest on a subordinated note is
described in section 881(c)(3)(A) of the Code, and
- you satisfy the statement requirement (described generally below) set
forth in section 871(h) and section 881(c) of the Code and the
regulations thereunder.
To satisfy the requirement referred to in the final bullet above, you, or a
financial institution holding the subordinated note on your behalf, must
provide, in accordance with specified procedures, our paying agent with a
statement to the effect that you are not a U.S. person. Currently, these
requirements will be met if (1) you provide your name and address, and certify,
under penalties of perjury, that you are not a U.S. person (which certification
may be made on an IRS Form W-8BEN), or (2) a financial institution holding the
subordinated note on your behalf certifies, under penalties of perjury, that
such statement has been received by it and furnishes a paying agent with a copy
thereof. The statement requirement referred to in the final bullet above may
also be satisfied with other documentary evidence with respect to a subordinated
note held in an offshore account or through certain foreign intermediaries.
If you cannot satisfy the requirements of the "portfolio interest rule"
described in the bullets above, payments of interest (including OID) made to you
will be subject to a 30% withholding tax unless you provide us or our paying
agent, as the case may be, with a properly executed:
- IRS Form W-8BEN claiming an exemption from or reduction in withholding
under the benefit of an applicable income tax treaty, or
- IRS Form W-8ECI stating that interest paid on the subordinated note is
not subject to withholding tax because it is effectively connected with
your conduct of a trade or business in the United States.
Alternative documentation may be applicable in certain situations.
U.S. FEDERAL INCOME TAX
If you are engaged in a trade or business in the United States and interest
on the subordinated note is effectively connected with the conduct of such trade
or business (and, where a tax treaty applies, is attributable to your U.S.
permanent establishment), you, although exempt from the withholding tax
discussed above (provided the certification requirements described above are
satisfied), will be subject to U.S. federal income tax on such interest on a net
income basis in the same manner as if you were a U.S. Holder. In addition, if
you are a foreign corporation, you may be subject to a branch profits tax equal
to 30% (or lesser rate under an applicable income tax treaty) of such amount,
subject to adjustments.
SALE, EXCHANGE OR RETIREMENT OF SUBORDINATED NOTES
Upon the sale, exchange, retirement or other disposition of an IDS, you
will be treated as having sold, exchanged, retired or disposed of the
subordinated note constituting the IDS. Any gain realized upon the
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sale, exchange, retirement or other disposition of a subordinated note generally
will not be subject to U.S. federal income tax unless:
- such gain is effectively connected with your conduct of a trade or
business in the United States, or
- you are an individual, you are present in the United States for 183 days
or more in the taxable year of such sale, exchange, retirement or other
disposition, and certain other conditions are met.
U.S. FEDERAL ESTATE TAX
A subordinated note beneficially owned by an individual who at the time of
death is a Non-U.S. Holder should not be subject to U.S. federal estate tax,
provided that any payment to such individual on the notes would be eligible for
exemption from the 30% U.S. federal withholding tax under the rules described
above under "-- Consequences to Non-U.S. Holders -- Subordinated Notes -- U.S.
Federal Withholding Tax" without regard to the statement requirement described
therein.
COMMON STOCK
DIVIDENDS
Dividends paid to you generally will be subject to withholding of U.S.
federal income tax at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty (which, in the case of Canada, would generally be
15%). However, dividends that are effectively connected with your conduct of a
trade or business within the United States and, where a tax treaty applies, are
attributable to your U.S. permanent establishment, are not subject to the
withholding tax, but instead are subject to U.S. federal income tax on a net
income basis at applicable graduated individual or corporate rates. Certain
certification and disclosure requirements must be satisfied for effectively
connected income to be exempt from withholding. If you are a foreign
corporation, any such effectively connected dividends received by you may be
subject to an additional branch profits tax at a 30% rate or such lower rate as
may be specified by an applicable income tax treaty (which, in the case of
Canada, would be 5%).
If you wish to claim the benefit of an applicable treaty rate (and avoid
backup withholding as discussed below) for dividends, you will be required to:
- complete IRS Form W-8BEN (or other applicable form) and certify, under
penalties of perjury, that you are not a U.S. person, or
- if the shares of our common stock are held through certain foreign
intermediaries, satisfy the relevant certification requirements of
applicable U.S. Treasury regulations.
Special certification and other requirements apply to certain Non-U.S. Holders
that are entities rather than individuals.
If you are eligible for a reduced rate of U.S. withholding tax pursuant to
an income tax treaty, you may obtain a refund of any excess amounts withheld by
filing an appropriate claim for refund with the IRS.
GAIN ON DISPOSITION OF COMMON STOCK
Upon the sale, exchange, retirement or other disposition of an IDS, you
will be treated as having sold, exchanged, retired or disposed of the shares of
common stock constituting the IDS. You generally will not be subject to U.S.
federal income tax with respect to gain recognized on a sale or other
disposition of shares of our common stock unless:
- the gain is effectively connected with your conduct of a trade or
business in the United States, and, where a tax treaty applies, is
attributable to your U.S. permanent establishment,
- if you are an individual and hold shares of our common stock as a capital
asset, you are present in the United States for 183 or more days in the
taxable year of the sale or other disposition and certain other
conditions are met, or
- we are or have been a "U.S. real property holding corporation" for U.S.
federal income tax purposes.
146
If you are an individual and are described in the first bullet above, you
will be subject to tax on the net gain derived from the sale under regular
graduated U.S. federal income tax rates. If you are an individual and are
described in the second bullet above, you will be subject to a flat 30% tax on
the gain derived from the sale, which may be offset by U.S. source capital
losses (even though you are not considered a resident of the United States). If
you are a foreign corporation and are described in the first bullet above, you
will be subject to tax on your gain under regular graduated U.S. federal income
tax rates and, in addition, may be subject to the branch profits tax equal to
30% of your effectively connected earnings and profits or at such lower rate as
may be specified by an applicable income tax treaty (which, in the case of
Canada, would be 5%).
We believe we are not and do not anticipate becoming a "U.S. real property
holding corporation" for U.S. federal income tax purposes.
U.S. FEDERAL ESTATE TAX
Shares of our common stock held by an individual Non-U.S. Holder at the
time of death will be included in such holder's gross estate for U.S. federal
estate tax purposes, unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The amount of interest payments and dividends paid to you and the amount of
tax, if any, withheld with respect to such payments will be reported annually to
the IRS. Copies of the information returns reporting such interest payments,
dividends and withholding may also be made available to the tax authorities in
the country in which you reside under the provisions of an applicable income tax
treaty.
In general, backup withholding will be required with respect to payments
made by us or any paying agent to you, unless a statement described in the fifth
bullet under "Consequences to Non-U.S. Holders -- Subordinated Notes -- U.S.
Federal Withholding Tax" has been received (and we or the paying agent do not
have actual knowledge or reason to know that you are a U.S. person).
Information reporting and, depending on the circumstances, backup
withholding will apply to the proceeds of a sale of IDSs within the United
States or conducted through U.S.-related financial intermediaries unless a
statement described in the fifth bullet under "Consequences to Non-U.S.
Holders -- Subordinated Notes -- U.S. Federal Withholding Tax" has been received
(and we or the paying agent do not have actual knowledge or reason to know that
you are a U.S. person) or you otherwise establish an exemption.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against your U.S. federal income tax liability provided the
required information is furnished to the IRS.
147
CERTAIN ERISA CONSIDERATIONS
The following is a summary of certain considerations associated with the
purchase of the IDSs by employee benefit plans that are subject to Title I of
the U.S. Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
plans, individual retirement accounts and other arrangements that are subject to
Section 4975 of the Code or provisions under any federal, state, local, non-U.S.
or other laws or regulations that are similar to such provisions of the Code or
ERISA (collectively, "Similar Laws"), and entities whose underlying assets are
considered to include "plan assets" of such plans, accounts and arrangements
(each, a "Plan").
GENERAL FIDUCIARY MATTERS
ERISA and the Code impose certain duties on persons who are fiduciaries of
a Plan subject to Title I of ERISA or Section 4975 of the Code (an "ERISA Plan")
and prohibit certain transactions involving the assets of an ERISA Plan and its
fiduciaries or other interested parties. Under ERISA and the Code, any person
who exercises any discretionary authority or control over the administration of
such an ERISA Plan or the management or disposition of the assets of such an
ERISA Plan, or who renders investment advice for a fee or other compensation to
such a Plan, is generally considered to be a fiduciary of the ERISA Plan.
In considering an investment in the IDSs of a portion of the assets of any
Plan, a fiduciary should determine whether the investment is in accordance with
the documents and instruments governing the Plan and the applicable provisions
of ERISA, the Code or any Similar Law relating to a fiduciary's duties to the
Plan including, without limitation, the prudence, diversification, delegation of
control and prohibited transaction provisions of ERISA, the Code and any other
applicable Similar Laws.
PROHIBITED TRANSACTION ISSUES
Section 406 of ERISA and Section 4975 of the Code prohibit ERISA Plans from
engaging in specified transactions involving plan assets with persons or
entities who are "parties in interest," within the meaning of ERISA, or
"disqualified persons," within the meaning of Section 4975 of the Code, unless
an exemption is available. A party in interest or disqualified person who
engaged in a non-exempt prohibited transaction may be subject to excise taxes
and other penalties and liabilities under ERISA and the Code. In addition, the
fiduciary of the ERISA Plan that engaged in such a non-exempt prohibited
transaction may be subject to penalties and liabilities under ERISA and the
Code.
Whether or not our underlying assets are deemed to include "plan assets,"
as described below, the acquisition and/or holding of the IDSs by an ERISA Plan
with respect to which we, the underwriter, the trustee or the guarantor is
considered a party in interest or a disqualified person may constitute or result
in a direct or indirect prohibited transaction under Section 406 of ERISA and/or
Section 4975 of the Code, unless the investment is acquired and is held in
accordance with an applicable statutory, class or individual prohibited
transaction exemption. In this regard, the U.S. Department of Labor (the "DOL")
has issued prohibited transaction class exemptions, or "PTCEs," that may apply
to the acquisition and holding of the IDSs. These class exemptions include,
without limitation, PTCE 84-14 respecting transactions determined by independent
qualified professional asset managers, PTCE 90-1 respecting insurance company
pooled separate accounts, PTCE 91-38 respecting bank collective investment
funds, PTCE 95-60 respecting life insurance company general accounts and PTCE
96-23 respecting transactions determined by in-house asset managers, although
there can be no assurance that all of the conditions of any such exemptions will
be satisfied.
PLAN ASSET ISSUES
ERISA and the Code do not define "plan assets." However, regulations (the
"Plan Asset Regulations") promulgated under ERISA by the DOL generally provide
that when an ERISA Plan acquires an equity interest in an entity that is an
"operating company", or the equity interest is a "publicly-offered security" (in
each case as defined in the Plan Asset Regulations), such equity interest
148
will not be deemed a "plan asset." The Plan Asset Regulations define an "equity
interest" as any interest in an entity, other than an instrument that is treated
as indebtedness under applicable local law and which has no substantial equity
features. Therefore, we anticipate that shares of our Common Stock would be
considered an equity interest and our notes should be treated as indebtedness.
Under the Plan Asset Regulations, an "operating company" is defined as "an
entity that is primarily engaged, directly or through a majority owned
subsidiary or subsidiaries, in the production or sale of a produce or service
other than the investment of capital." We believe that we are an "operating
company" for purposes of the Plan Asset Regulations, although no assurance can
be given in this regard.
Alternatively, under the Plan Asset Regulations, a "publicly offered
security" is a security that is (a) "freely transferable", (b) part of a class
of securities that is "widely held," and (c)(i) sold to the Plan as part of an
offering of securities to the public pursuant to an effective registration
statement under the Securities Act of 1933 and the class of securities to which
such security is a part is registered under the Securities Exchange Act of 1934
within 120 days after the end of the fiscal year of the issuer during which the
offering of such securities to the public has occurred, or (ii) is part of a
class of securities that is registered under Section 12 of the Exchange Act. We
intend to effect such a registration under the Securities Act and Securities
Exchange Act. The Plan Asset Regulations provide that a security is "widely
held" only if it is part of a class of securities that is owned by 100 or more
investors independent of the issuer and one another. A security will not fail to
be "widely held" because the number of independent investors falls below 100
subsequent to the initial offering thereof as a result of events beyond the
control of the issuer. It is anticipated that the IDSs will be "widely held"
within the meaning of the Plan Asset Regulations, although no assurance can be
given in this regard. The Plan Asset Regulations provide that whether a security
is "freely transferable" is a factual question to be determined on the basis of
all the relevant facts and circumstances. It is anticipated that the IDSs will
be "freely transferable" within the meaning of the Plan Asset Regulations,
although no assurance can be given in this regard.
PLAN ASSET CONSEQUENCES
If VSAH ceases to be an operating company for purposes of the Plan Asset
Regulations and the IDSs cease to be publicly-offered securities within the
meaning of the Plan Asset Regulations, our assets could be deemed to be "plan
assets" under ERISA, unless, at such time, another exemption is available under
the Plan Asset Regulations. This would result, among other things, in (i) the
application of the prudence and other fiduciary responsibility standards of
ERISA to investments made by us, and (ii) the possibility that certain
transactions in which we might seek to engage could constitute "prohibited
transactions" under ERISA and the Code.
Because of the foregoing, the IDSs should not be purchased or held by any
person investing "plan assets" of any Plan, unless such purchase and holding
will not constitute a non-exempt prohibited transaction under ERISA and the Code
or similar violation of any applicable Similar Laws.
REPRESENTATION
Accordingly, by acceptance of the IDSs, each purchaser and subsequent
transferee of the IDSs will be deemed to have represented and warranted that
either (i) no portion of the assets used by such purchaser or transferee to
acquire and hold the IDSs constitutes assets of any Plan or (ii) the purchase
and holding of the IDSs by such purchaser or transferee will not constitute a
non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of
the Code or similar violation under any applicable Similar Laws.
The foregoing discussion is general in nature and is not intended to be
all-inclusive. Due to the complexity of these rules and the penalties that may
be imposed upon persons involved in non-exempt prohibited transactions, it is
particularly important that fiduciaries, or other persons considering purchasing
the IDSs on behalf of, or with the assets of, any Plan, consult with their
counsel regarding the potential applicability of ERISA, Section 4975 of the Code
and any Similar Laws to such investment and whether an exemption would be
applicable to the purchase and holding of the IDSs.
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UNDERWRITING
We have entered into an underwriting agreement dated, , 2003 with
the underwriters named below. CIBC World Markets Corp. is acting as the
representative of the underwriters.
The underwriting agreement provides for the purchase of a specified number
of IDSs by each of the underwriters. The underwriters' obligations are several,
which means that each underwriter is required to purchase a specified number of
IDSs but is not responsible for the commitment of any other underwriter to
purchase the IDSs. Subject to the terms and conditions of the underwriting
agreement, each underwriter has severally agreed to purchase the number of IDSs
set forth opposite its name below:
<Table>
<Caption>
NUMBER OF
UNDERWRITER IDSS
- ----------- ---------
CIBC World Markets Corp. ...................................
--------
Total.............................................
========
</Table>
Under the underwriting agreement, we have agreed to sell and the
underwriters have agreed to purchase the IDSs offered under this offering at a
price of $ , payable in cash to us against delivery. However, the
underwriters have agreed to purchase all of the IDSs offered in this offering
(other than those covered by the over-allotment option described below) if any
are purchased. Under the underwriting agreement, if an underwriter defaults in
its commitment to purchase the IDSs, the commitments of non-defaulting
underwriters may be increased or the underwriting agreement may be terminated,
depending on the circumstances.
This offering is being made concurrently in the United States and in all of
the provinces of Canada. The IDSs will be offered in the United States and
Canada through the underwriters either directly or through their respective U.S.
or Canadian registered broker-dealer affiliates. Subject to applicable law, the
underwriters may offer the IDSs outside of the United States and Canada.
The IDSs should be ready for delivery on or about , 2003, but in
any event no later than , 2003 against payment in immediately
available funds. The underwriters are offering the IDSs subject to various
conditions and may reject all or part of any order. The representative has
advised us that the underwriters propose to offer the IDSs directly to the
public at the public offering price that appears on the cover page of this
prospectus. In addition, the representative may offer some of the IDSs to other
securities dealers at such price less a concession of $ per IDS. The
underwriters may also allow, and such dealers may reallow, a concession not in
excess of $ per IDS to other dealers. After the IDSs are released for sale
to the public, the representative may change the offering price and other
selling terms at various times. The IDSs are being offered in the United States
in U.S. dollars and in Canada in Canadian dollars, at the same offering price
and underwriting discounts and commissions per IDS, calculated based on the noon
buying rate on the date of this prospectus as quoted by the Federal Reserve Bank
of New York.
We have granted the underwriters an over-allotment option. This option,
which is exercisable for up to 30 days after the date of this prospectus,
permits the underwriters to purchase a maximum of additional IDSs from
us to cover all over-allotments. If the underwriters exercise all or part of
this option, they will purchase the IDSs covered by the option at the public
offering price that appears on the cover page of this prospectus, less the
underwriting discount. If this option is exercised in full, the total price to
the public will be $ , and the total proceeds to us will be $ . The
underwriters have severally agreed that, to the extent the over-allotment option
is exercised, they will each purchase a number of additional IDSs proportionate
to the underwriter's initial amount reflected in the foregoing table.
150
The following table provides information regarding the amount of the
underwriting discount to be paid to the underwriters by us:
<Table>
<Caption>
TOTAL WITH TOTAL WITH
NO EXERCISE OF FULL EXERCISE OF
OVER-ALLOTMENT OVER-ALLOTMENT
UNDERWRITING DISCOUNT TO BE PAID BY PER IDS OPTION OPTION
- ----------------------------------------------- -------- -------------- ----------------
Volume Services America Holdings, Inc. $ $ $
</Table>
We estimate that our total expenses of this offering, excluding the
underwriting discount, will be approximately $ .
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933.
We, our executive officers and directors and the existing equity investors
have agreed to a 180-day "lock up," subject to certain exceptions, with respect
to all IDSs and shares of our common stock, including securities that are
convertible into such securities and securities that are exchangeable or
exercisable for such securities, which we may issue or they own prior to this
offering or purchase in or after this offering, as the case may be. This means
that for a period of 180 days following the date of this prospectus, we and such
persons may not offer, sell, pledge or otherwise dispose of any of these
securities or request or demand that we file a registration statement related to
any of these securities without the prior written consent of the representative,
subject to specified exceptions.
The representative has informed us that they do not expect discretionary
sales by the underwriters to exceed 5% of the IDSs offered by this offering.
There is no established trading market for the IDSs, the shares of our
common stock or the subordinated notes. The offering price for the IDSs will be
determined by us and the representative based on the following factors:
- prevailing market and general economic conditions,
- our financial information,
- our history and prospects,
- the history of and prospects for the industry in which we compete,
- an assessment of our management, our past and present operations, and the
prospects for, and timing of, our future revenues, and
- the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
We have applied to list the IDSs on the American Stock Exchange under the
symbol "CVP" and on the Toronto Stock Exchange under the symbol " ." We have
also applied to list the shares of our common stock on the Toronto Stock
Exchange under the symbol "CVP."
Rules of the Commission may limit the ability of the underwriters to bid
for or purchase IDSs before the distribution of the IDSs is completed. However,
the underwriters may engage in the following activities in accordance with the
rules:
- Stabilizing transactions -- The representative may make bids or purchases
for the purpose of pegging, fixing or maintaining the price of the IDSs,
so long as stabilizing bids do not exceed a specified maximum.
- Over-allotment and syndicate covering transactions -- The underwriters
may sell more IDSs in connection with this offering than the number of
IDSs that they have committed to purchase. This over-allotment creates a
short position for the underwriters. This short sales position may
involve either "covered" short sales or "naked" short sales. Covered
short sales are short sales made in an amount not greater than the
underwriters' over-allotment option to purchase additional IDSs in this
offering described above. The underwriters may close out any covered
short position either by
151
exercising their over-allotment option or by purchasing IDSs in the open
market. To determine how they will close the covered short position, the
underwriters will consider, among other things, the price of IDSs
available for purchase in the open market as compared to the price at
which they may purchase IDSs through the over-allotment option. Naked
short sales are short sales in excess of the over-allotment option. The
underwriters must close out any naked short position by purchasing IDSs
in the open market. A naked short position is more likely to be created
if the underwriters are concerned that, in the open market after pricing,
there may be downward pressure on the price of the IDSs that could
adversely affect investors who purchase IDSs in this offering.
- Penalty bids -- If the representative purchases IDSs in the open market
in a stabilizing transaction or syndicate covering transaction, it may
reclaim a selling concession from the underwriters and selling group
members who sold those IDSs as part of this offering.
In accordance with policy statements of the Commission des valeurs
mobilieres du Quebec and the Ontario Securities Commission, the underwriters in
Canada may not, throughout the period of distribution, bid for or purchase the
IDSs. Such restriction is subject to certain exceptions, provided that the bid
or purchase was not engaged in for the purpose of creating actual or apparent
active trading in, or raising the price of the IDSs, including: (1) a bid or
purchase permitted under the by-laws and rules of the Toronto Stock Exchange
relating to market stabilization and passive market making activities; and (2) a
bid or purchase made for and on behalf of a customer where the order was not
solicited during the period of the distribution. Under the first mentioned
exemption, in connection with this offering, the underwriters may over-allot or
effect transactions which stabilize or maintain the market price of the IDSs at
a level other than that which might otherwise prevail in the open market. Such
transactions, if commenced, may be discontinued at any time.
The underwriters' purchases to cover the syndicate short sales or to
stabilize the market price of the IDSs or the imposition of penalty bids may
have the effect of raising or maintaining the market price of the IDSs or
preventing or mitigating a decline in the market price of the IDSs. As a result,
the price of the IDSs may be higher than the price that might otherwise exist in
the open market. The imposition of a penalty bid might also have an effect on
the price of the IDSs if it discourages resales of the IDSs.
Neither we nor the underwriters make any representation or prediction as to
the effect that the transactions described above may have on the price of the
IDSs. These transactions may occur on the American Stock Exchange, the Toronto
Stock Exchange or otherwise. If such transactions are commenced, they may be
discontinued without notice at any time.
A prospectus in electronic format may be made available on the websites
maintained by one or more of the underwriters. The representative may agree to
allocate a number of IDSs to underwriters for sale to their online brokerage
account holders. The representative will allocate IDSs to underwriters that may
make Internet distributions on the same basis as other allocations. Other than
the prospectus in electronic format, the information on any of these websites
and any other information contained on a website maintained by an underwriter or
syndicate member is not part of this prospectus.
We and the underwriters expect that the IDSs will be ready for delivery on
the th business day following the date of this prospectus. Under Commission
regulations, secondary market trades are required to settle in three business
days following the trade date (commonly referred to as "T+3"), unless the
parties to the trade agree to a different settlement cycle. As noted above, the
IDSs will settle in T+ . Therefore, purchasers who wish to trade on the date of
this prospectus or during the next succeeding business day(s) must specify an
alternate settlement cycle at the time of the trade to prevent a failed
settlement. Purchasers of the IDSs who wish to trade IDSs on the date of this
prospectus or during the next succeeding business day(s) should consult
their own advisors.
CIBC World Markets Corp. is the lead arranger and sole bookrunner of the
new credit facility. The underwriters have provided, and may continue to
provide, from time to time investment banking, commercial banking, advisory and
other services to us and the existing equity investors for customary fees and
expenses in the ordinary course of their business.
152
LEGAL MATTERS
The validity of the issuance of the IDSs offered hereby and the shares of
our common stock and subordinated notes represented thereby will be passed upon
for us by Simpson Thacher & Bartlett LLP, New York, New York. Certain legal
matters relating to this offering will be passed upon for the underwriters by
Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York.
EXPERTS
The consolidated financial statements as of January 1, 2002 and December
31, 2002 and for each of the three years in the period ended December 31, 2002
included in this prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein (which report
expresses an unqualified opinion and includes an explanatory paragraph relating
to the adoption of the provisions of Statement of Financial Standards No. 142,
"Goodwill and Other Intangible Assets" as of January 2, 2002) and have been so
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a Registration Statement on Form S-1 with the Commission
regarding this offering. This prospectus, which is part of the registration
statement, does not contain all of the information included in the registration
statement, and you should refer to the registration statement and its exhibits
to read that information. As a result of the effectiveness of the registration
statement, we are subject to the informational reporting requirements of the
Exchange Act of 1934 and, under that Act, we will file reports, proxy statements
and other information with the Commission. You may read and copy the
registration statement, the related exhibits and the reports, proxy statements
and other information we file with the SEC at the SEC's public reference
facilities maintained by the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. You can also request copies of those documents, upon
payment of a duplicating fee, by writing to the SEC. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. The SEC also maintains an Internet site that contains reports, proxy and
information statements and other information regarding issuers that file with
the SEC. The site's Internet address is www.sec.gov.
You may also request a copy of these filings, at no cost, by writing or
telephoning us at:
Volume Services America Holdings, Inc.
201 East Broad Street
Spartanburg, South Carolina 29306
(864) 598-8600
153
VOLUME SERVICES AMERICA HOLDINGS, INC.
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
INDEPENDENT AUDITORS' REPORT................................ F-2
CONSOLIDATED FINANCIAL STATEMENTS AS OF JANUARY 1, 2002 AND
DECEMBER 31, 2002 AND FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED DECEMBER 31, 2002:
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Operations and Comprehensive
Income (Loss).......................................... F-5
Consolidated Statements of Stockholders' Deficiency....... F-6
Consolidated Statements of Cash Flows..................... F-7
Notes to Consolidated Financial Statements................ F-9
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF VOLUME
SERVICES AMERICA HOLDINGS, INC. FOR THE THIRTEEN WEEK
PERIODS ENDED APRIL 1, 2003 AND APRIL 2, 2002
Consolidated Balance Sheets............................... F-32
Consolidated Statements of Operations and Comprehensive
Loss................................................... F-34
Consolidated Statements of Stockholders' Deficiency....... F-35
Consolidated Statements of Cash Flows..................... F-36
Notes to Consolidated Financial Statements................ F-38
</Table>
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Volume Services America Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Volume
Services America Holdings, Inc. and subsidiaries (collectively, the "Company")
as of January 1, 2002 and December 31, 2002, and the related consolidated
statements of operations and comprehensive income (loss), stockholders'
deficiency, and cash flows for each of the three years in the period ended
December 31, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Volume Services America
Holdings, Inc. and subsidiaries at January 1, 2002 and December 31, 2002, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets as of January 2, 2002.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
March 5, 2003
F-2
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 1, 2002 AND DECEMBER 31, 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
JANUARY 1, DECEMBER 31,
2002 2002
---------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 15,142 $ 10,374
Accounts receivable, less allowance for doubtful accounts
of $984 and $810 at January 1, 2002 and December 31,
2002, respectively..................................... 18,386 16,488
Merchandise inventories................................... 13,221 13,682
Prepaid expenses and other................................ 2,469 2,354
Deferred tax asset........................................ 701 2,764
-------- --------
Total current assets................................... 49,919 45,662
-------- --------
PROPERTY AND EQUIPMENT:
Leasehold improvements.................................... 47,548 49,452
Merchandising equipment................................... 46,410 51,185
Vehicles and other equipment.............................. 8,426 8,625
Construction in process................................... 176 295
-------- --------
Total.................................................. 102,560 109,557
Less accumulated depreciation and amortization............ (44,772) (53,498)
-------- --------
Property and equipment, net............................ 57,788 56,059
-------- --------
OTHER ASSETS:
Contract rights, net...................................... 80,680 101,702
Cost in excess of net assets acquired, net................ 46,457 46,457
Deferred financing costs, net............................. 8,517 7,086
Trademarks, net........................................... 17,049 17,049
Deferred tax asset........................................ 32 --
Other..................................................... 5,458 6,177
-------- --------
Total other assets..................................... 158,193 178,471
-------- --------
TOTAL ASSETS................................................ $265,900 $280,192
======== ========
</Table>
See notes to consolidated financial statements.
F-3
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
JANUARY 1, 2002 AND DECEMBER 31, 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
JANUARY 1, DECEMBER 31,
2002 2002
---------- ------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Short-term note payable................................... $ 4,750 $ --
Current maturities of long-term debt...................... 1,150 1,150
Current maturities of capital lease obligation............ 267 --
Accounts payable.......................................... 14,977 14,798
Accrued salaries and vacations............................ 8,546 8,683
Liability for insurance................................... 2,934 4,441
Accrued taxes, including income taxes..................... 3,235 3,890
Accrued commissions and royalties......................... 11,901 13,627
Accrued interest.......................................... 3,847 3,832
Other..................................................... 4,439 6,057
-------- --------
Total current liabilities.............................. 56,046 56,478
-------- --------
LONG-TERM LIABILITIES:
Long-term debt............................................ 218,400 224,250
Deferred income taxes..................................... -- 2,031
Liability for insurance................................... 838 2,001
Other liabilities......................................... 876 700
-------- --------
Total long-term liabilities............................ 220,114 228,982
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Common stock, $0.01 par value -- authorized: 1,000 shares;
issued: 526 shares; outstanding: 332 shares............ -- --
Additional paid-in capital................................ 66,852 67,417
Accumulated deficit....................................... (26,062) (21,566)
Accumulated other comprehensive loss...................... (471) (444)
Treasury stock -- at cost (194 shares).................... (49,500) (49,500)
Loans to related parties.................................. (1,079) (1,175)
-------- --------
Total stockholders' deficiency......................... (10,260) (5,268)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY.............. $265,900 $280,192
======== ========
</Table>
See notes to consolidated financial statements.
F-4
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED JANUARY 2, 2001, JANUARY 1, 2002 AND DECEMBER 31, 2002
<Table>
<Caption>
JANUARY 2, JANUARY 1, DECEMBER 31,
2001 2002 2002
----------- ----------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales............................................. $ 522,533 $ 543,113 $ 577,162
Cost of sales......................................... 424,160 446,596 470,929
Selling, general and administrative................... 47,860 48,108 55,257
Depreciation and amortization......................... 26,300 24,492 26,185
Transaction related expenses.......................... 1,105 -- 597
Contract related losses............................... 2,524 4,762 699
----------- ----------- ----------
Operating income...................................... 20,584 19,155 23,495
Interest expense...................................... 26,577 23,429 20,742
Other income, net..................................... (486) (242) (1,556)
----------- ----------- ----------
Income (loss) before income taxes..................... (5,507) (4,032) 4,309
Income tax benefit.................................... (1,288) (432) (187)
----------- ----------- ----------
Net income (loss)..................................... (4,219) (3,600) 4,496
Other comprehensive income (loss) -- foreign currency
translation adjustment.............................. (64) (209) 27
----------- ----------- ----------
Comprehensive income (loss)........................... $ (4,283) $ (3,809) $ 4,523
=========== =========== ==========
Basic Net Income (Loss) per share..................... $(12,708.54) $(10,844.55) $13,541.17
=========== =========== ==========
Diluted Net Income (Loss) per share................... $(12,708.54) $(10,844.55) $13,541.17
=========== =========== ==========
</Table>
See notes to consolidated financial statements.
F-5
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
YEARS ENDED JANUARY 2, 2001, JANUARY 1, 2002 AND DECEMBER 31, 2002
<Table>
<Caption>
ACCUMULATED
ADDITIONAL OTHER LOANS TO
COMMON COMMON PAID-IN ACCUMULATED COMPREHENSIVE TREASURY RELATED
SHARES STOCK CAPITAL DEFICIT LOSS STOCK PARTIES TOTAL
------ ------ ---------- ----------- ------------- -------- -------- -------
(IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE, DECEMBER 28, 1999.......... 332 $ -- $66,474 $(18,243) $(198) $(49,500) $ (919) $(2,386)
Noncash compensation.............. -- -- 280 -- -- -- -- 280
Loans to related parties.......... -- -- -- -- -- -- (120) (120)
Foreign currency translation...... -- -- -- -- (64) -- -- (64)
Net loss.......................... -- -- -- (4,219) -- -- -- (4,219)
--- ----- ------- -------- ----- -------- ------- -------
BALANCE, JANUARY 2, 2001............ 332 -- 66,754 (22,462) (262) (49,500) (1,039) (6,509)
Noncash compensation.............. -- -- 98 -- -- -- -- 98
Loans to related parties.......... -- -- -- -- -- -- (40) (40)
Foreign currency translation...... -- -- -- -- (209) -- -- (209)
Net loss.......................... -- -- -- (3,600) -- -- -- (3,600)
--- ----- ------- -------- ----- -------- ------- -------
BALANCE, JANUARY 1, 2002............ 332 -- 66,852 (26,062) (471) (49,500) (1,079) (10,260)
Noncash compensation.............. -- -- 565 -- -- -- -- 565
Loans to related parties.......... -- -- -- -- -- -- (96) (96)
Foreign currency translation...... -- -- -- -- 27 -- -- 27
Net income........................ -- -- -- 4,496 -- -- -- 4,496
--- ----- ------- -------- ----- -------- ------- -------
BALANCE, DECEMBER 31, 2002.......... 332 $ $67,417 $(21,566) $(444) $(49,500) $(1,175) $(5,268)
=== ===== ======= ======== ===== ======== ======= =======
</Table>
See notes to consolidated financial statements.
F-6
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 2, 2001, JANUARY 1, 2002 AND DECEMBER 31, 2002
<Table>
<Caption>
YEARS ENDED
--------------------------------------
JANUARY 2, JANUARY 1, DECEMBER 31,
2001 2002 2002
---------- ---------- ------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(4,219) $(3,600) $ 4,496
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 26,300 24,492 26,185
Amortization of deferred financing costs............... 1,511 1,431 1,431
Contract related losses................................ 2,220 4,762 699
Noncash compensation................................... 280 98 565
Deferred tax change.................................... (1,158) (911) --
(Gain) loss on disposition of assets................... (256) (37) 70
Other.................................................. (64) (209) 27
Changes in assets and liabilities:
Decrease (increase) in assets:
Accounts receivable............................... (3,218) 767 1,898
Merchandise inventories........................... (577) (1,697) (461)
Prepaid expenses.................................. 2,407 55 115
Other assets...................................... (1,798) (1,612) (1,920)
Increase (decrease) in liabilities:
Accounts payable.................................. 74 593 (1,147)
Accrued salaries and vacations.................... 657 (161) 137
Liability for insurance........................... 574 (358) 2,670
Accrued commissions and royalties................. 2,074 (431) 1,726
Other liabilities................................. (2,123) 1,557 2,082
------- ------- --------
Net cash provided by operating activities....... 22,684 24,739 38,573
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (6,399) (8,052) (9,901)
Proceeds from sale of property and equipment.............. 965 139 2,515
Purchase of contract rights............................... (7,477) (21,367) (37,660)
------- ------- --------
Net cash used in investing activities........... (12,911) (29,280) (45,046)
------- ------- --------
</Table>
See notes to consolidated financial statements.
F-7
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED JANUARY 2, 2001, JANUARY 1, 2002 AND DECEMBER 31, 2002
<Table>
<Caption>
YEARS ENDED
-----------------------------------------
JANUARY 2, JANUARY 1, DECEMBER 31,
2001 2002 2002
---------- ---------- ---------------
(IN THOUSANDS)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) -- revolving loans............ $(3,500) $ 6,750 $ 2,250
Principal payments on long-term debt...................... (1,150) (1,150) (1,150)
Principal payments on capital lease obligations........... (206) (149) (267)
Increase (decrease) in bank overdrafts.................... (2,352) (454) 968
Net increase in loans to related parties.................. (120) (40) (96)
------- ------- -------
Net cash (used in) provided by financing activities.... (7,328) 4,957 1,705
------- ------- -------
INCREASE (DECREASE) IN CASH................................. 2,445 416 (4,768)
CASH AND CASH EQUIVALENTS:
Beginning of year......................................... 12,281 14,726 15,142
------- ------- -------
End of year............................................... $14,726 $15,142 $10,374
======= ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................................. $24,934 $22,155 $18,493
======= ======= =======
Income taxes paid......................................... $ 391 $ 696 $ 188
======= ======= =======
</Table>
See notes to consolidated financial statements.
F-8
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 2, 2001, JANUARY 1, 2002 AND DECEMBER 31, 2002
1. GENERAL
Volume Services America Holdings, Inc. ("Volume Holdings," and together
with its subsidiaries, the "Company") is a holding company, the principal assets
of which are the capital stock of its subsidiary, Volume Services America, Inc.
("Volume Services America"). Volume Holdings' financial information is therefore
substantially the same as that of Volume Services America. Volume Services
America is also a holding company, the principal assets of which are the capital
stock of its subsidiaries, Volume Services, Inc. ("Volume Services") and Service
America Corporation ("Service America"). The Company is beneficially owned by
its senior management, entities affiliated with Blackstone Management Associates
II L.L.C. ("Blackstone"), and General Electric Capital Corporation ("GE
Capital"). GE Capital controlled 36.3 percent of the Company at December 31,
2002. As of December 31, 2002, the remainder of the Company's capital stock was
beneficially owned by Blackstone through its limited partnerships, BCP Volume
L.P. and BCP Offshore Volume L.P. (59.4 percent) and by current and former
management employees of the Company (4.2 percent).
At December 31, 2002, the Company had approximately 129 contracts to
provide specified concession services, including catering and novelty
merchandise items at stadiums, sports arenas, convention centers and other
entertainment facilities at various locations in the United States and Canada.
Contracts to provide these services were generally obtained through competitive
bids. In most instances, the Company has the right to provide these services in
a particular location for a period of several years, with the duration of time
often a function of the required investment in facilities or other financial
considerations. The contracts vary in length generally from 1 to 20 years.
Certain of the contracts contain renewal clauses.
On February 11, 2003, the Company announced that it changed its tradename
for its operating subsidiaries, Volume Services and Service America, from Volume
Services America to Centerplate.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements
include the accounts of Volume Holdings, and its wholly owned subsidiary, Volume
Services America, and its wholly owned subsidiaries, Volume Services and Service
America. All significant intercompany transactions have been eliminated.
Fiscal Year -- The Company has adopted a 52-53 week period ending on the
Tuesday closest to December 31 as its fiscal year end. The 2001 and 2002 fiscal
years consisted of 52 weeks and fiscal year 2000 contained 53 weeks.
Cash and Cash Equivalents -- The Company considers temporary cash
investments purchased with an original maturity of three months or less to be
cash.
Revenue Recognition -- The Company typically enters into one of three types
of contracts: 1) profit and loss contracts, 2) profit sharing contracts, and 3)
management fee contracts. Under profit and loss and profit-sharing contracts,
revenue from food and beverage concessions and catering contract food services
is recognized as net sales when the services are provided. Management fee
contracts provide the Company with a fixed fee or a fixed fee plus an incentive
fee and the Company bears no profit or loss risk. Fees received for management
fee contracts are included in net sales when earned.
Merchandise Inventories -- Merchandise inventories consist of food,
beverage, team and other merchandise. Inventory is valued at the lower of cost
or market, determined on the first-in, first-out basis.
Depreciation -- Property and equipment is stated at cost and is depreciated
on the straight-line method over the lesser of the estimated useful life of the
asset and the term of the contract at the site
F-9
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
where such property and equipment is located. Following are the estimated useful
lives of the property and equipment:
- Leasehold improvements -- 10 years subject to limitation by the lease
term or contract term, if applicable
- Merchandising equipment -- 5 to 10 years subject to limitation by the
contract term, if applicable
- Vehicles and other equipment -- 2 to 10 years subject to limitation by
the contract term, if applicable
Contract Rights -- Contract rights, net of accumulated amortization,
consist primarily of certain directly attributable costs incurred by the Company
in obtaining or renewing contracts with clients and the adjustment to fair value
of contract rights acquired in the acquisitions of Volume Services in 1995 and
Service America in 1998. These costs for the Company are amortized over the
contract life of each such contract, including optional renewal periods where
the option to renew rests solely with the Company. Accumulated amortization was
approximately $35,321,000 at January 1, 2002 and $34,396,000 at December 31,
2002. Amortization expense for fiscal 2003-2007 is estimated to be approximately
$13,700,000, $12,500,000, $11,600,000, $10,000,000 and $9,200,000, respectively.
Cost in Excess of Net Assets Acquired and Trademarks -- At the beginning of
fiscal 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible
Assets. With the adoption of SFAS No. 142, cost in excess of net assets acquired
(goodwill) and trademarks were no longer subject to amortization. On an annual
basis, we test our indefinite-lived intangible assets (goodwill and trademarks)
for impairment. Additionally, these assets are tested between annual tests if an
event occurs or circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying amount. We have determined
that the reporting unit is the Company. In performing these assessments, we
compare the fair value of the Company to its carrying amount, including the
indefinite-lived assets. If the fair value of the Company exceeds the carrying
amount, then it is determined that goodwill is not impaired. Should the carrying
amount exceed the fair value, then we would need to perform the second step in
the impairment test. Fair value for these tests is determined based upon a
discounted cash flow model. In performing the annual trademark assessment,
management compares the fair value of the intangible assets to their carrying
values. Fair value is determined based on a discounted cash flow model. 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. The Company has
completed the impairment tests required by SFAS No. 142, which did not result in
an impairment charge. Accumulated amortization for goodwill and trademarks were
approximately $6,748,000 and $3,551,000, respectively at December 31, 2002.
Goodwill and trademark amortization (pre-tax) was approximately $2,458,000 in
each of fiscal years 2000 and 2001. Had SFAS No. 142 been in effect for those
fiscal years, the adjusted net income (loss) would have been as follows:
<Table>
<Caption>
FISCAL YEAR ENDED
----------------------------------------
JANUARY 2, JANUARY 1, DECEMBER 31,
2001 2002 2002
----------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Reported net income (loss)............................ $ (4,219) $ (3,600) $ 4,496
Goodwill amortization............................... 1,771 1,771 --
Trademark amortization.............................. 687 687 --
----------- ----------- ----------
Adjusted net income (loss)............................ $ (1,761) $ (1,142) $ 4,496
=========== =========== ==========
</Table>
F-10
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
FISCAL YEAR ENDED
----------------------------------------
JANUARY 2, JANUARY 1, DECEMBER 31,
2001 2002 2002
----------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BASIC NET LOSS PER SHARE:
Reported net income (loss).......................... $(12,708.54) $(10,844.55) $13,541.17
Goodwill amortization............................... 5,334.95 5,334.95 --
Trademark amortization.............................. 2,067.98 2,067.98 --
----------- ----------- ----------
Adjusted net income (loss)............................ $ (5,305.60) $ (3,441.61) $13,541.17
=========== =========== ==========
DILUTED NET LOSS PER SHARE:
Reported net income (loss).......................... $(12,708.54) $(10,844.55) $13,541.17
Goodwill amortization............................... 5,334.95 5,334.95 --
Trademark amortization.............................. 2,067.98 2,067.98 --
----------- ----------- ----------
Adjusted net income (loss)............................ $ (5,305.60) $ (3,441.61) $13,541.17
=========== =========== ==========
</Table>
Deferred Financing Costs -- Deferred financing costs are being amortized as
interest expense over the life of the respective debt using the effective
interest method. Accumulated amortization was approximately $4,492,000 at
January 1, 2002 and $5,923,000 at December 31, 2002.
Impairment of Long-Lived Assets and Contract Losses -- In accordance with
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
the Company reviews long-lived assets and contract assets for impairment
whenever events or changes in circumstances indicate that the book value of the
asset group may not be recoverable. Accordingly, the Company estimates the
future undiscounted cash flows expected to result from the use of the asset
group and their eventual disposition. If the sum of the expected future
undiscounted cash flows is less than the carrying amount of the asset group, an
impairment loss is recognized. Measurement of an impairment loss for long-lived
assets, such as property, and certain identifiable intangibles, is based on the
estimated fair value of the asset determined by future discounted net cash
flows.
Derivative Financial Instruments -- The Company accounts for derivative
financial instruments in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 137, Accounting for Derivative Instruments
and Hedging Activities -- Deferral of the Effective Date of the Financial
Accounting Standards Board ("FASB") Statement No. 133, and SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities.
SFAS No. 133 requires that an entity recognize all derivatives as either assets
or liabilities measured at fair value. In addition, all derivatives used in
hedging relationships must be designated, reassessed and documented pursuant to
the provisions of SFAS No. 133.
The Company is exposed to fluctuations in the fair value of certain
liabilities. The Company uses derivative financial instruments such as interest
rate swap agreements to manage exposure to fluctuations in the fair value of its
fixed-rate debt instruments.
The Company does not hold or issue any derivative financial instruments for
trading purposes and is not a party to leveraged instruments. The credit risks
associated with the Company's derivative financial instruments are controlled
through the evaluation and monitoring of the creditworthiness of the
counterparties. Although the Company may be exposed to losses in the event of
nonperformance by the counterparties, the Company does not expect such losses,
if any, to be significant.
Insurance -- At the beginning of fiscal 2002, the Company adopted a high
deductible insurance program for general liability, auto liability, and workers'
compensation risk supplemented by stop-loss type
F-11
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
insurance policies. During the fiscal years 1999 through 2001, the Company had a
premium-based insurance program for general liability, automobile liability and
workers' compensation risk. Prior to fiscal 1999, the Company was primarily
self-insured for general liability, automobile liability and workers'
compensation risks, supplemented by stop-loss type insurance policies.
Management determines the estimate of the reserve for the deductible and
self-insurance considering a number of factors, including historical experience
and actuarial assessment of the liabilities for reported claims and claims
incurred but not reported. The self-insurance liabilities for estimated incurred
losses were discounted (using rates between 2.17 percent and 5.07 percent at
January 1, 2002 and 1.32 percent and 3.83 percent at December 31, 2002), to
their present value based on expected loss payment patterns determined by
experience. The total discounted self-insurance liabilities recorded by the
Company at January 1, 2002 and December 31, 2002 were $2,061,000 and $4,654,000,
respectively. The related undiscounted amounts were $2,184,000 and $4,955,000,
respectively.
The Company became self-insured for employee health insurance in December
1999. Prior to December 1999, the Company had a premium-based insurance program.
The employee health self-insurance liability is based on claims filed and
estimates for claims incurred but not reported. The total liability recorded by
the Company at January 1, 2002 and December 31, 2002 was $951,000 and
$1,222,000, respectively.
Cash Overdrafts -- The Company has included in accounts payable on the
accompanying consolidated balance sheets cash overdrafts totaling $6,614,000 and
$7,582,000 at January 1, 2002 and December 31, 2002, respectively.
Foreign Currency -- The balance sheet and results of operations of the
Company's Canadian subsidiary (a subsidiary of Service America) are measured
using the local currency as the functional currency. Assets and liabilities have
been translated into United States dollars at the rates of exchange at the
balance sheet date. Revenues and expenses are translated into United States
dollars at the average rate during the period. The exchange gains and losses
arising on transactions are charged to income as incurred. Translation gains and
losses arising from the use of differing exchange rates from year to year are
included in accumulated other comprehensive loss. These amounts were not
significant for any period reported.
Transaction Related Expenses -- Transaction related expenses in fiscal year
2000 consist primarily of expenses incurred in connection with the analysis of a
potential recapitalization and strategic investment opportunities. Transaction
related expenses in fiscal year 2002 consist primarily of expenses incurred in
connection with the structuring and evaluation of financing and recapitalization
strategies, including proposals for securities offerings that preceded the
proposed initial public offering of Income Deposit Securities (IDSs) and the
related refinancing of the existing credit facility and senior subordinated
notes.
Income Taxes -- The provision for income taxes includes federal, state and
foreign taxes currently payable, and the change in deferred tax assets and
liabilities. Deferred tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax basis of assets and liabilities. A valuation allowance is
established for deferred tax assets when it is more likely than not that the
benefits of such assets will not be realized.
Segment Reporting -- The combined operations of the Company, consisting of
contracts to provide concession services, including catering and novelty
merchandise items at stadiums, sports arenas, convention centers and other
entertainment facilities, comprise one reportable segment.
Reclassifications -- Certain amounts in 2000 and 2001 have been
reclassified, where applicable, to conform to the financial statement
presentation used in 2002.
F-12
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Noncash Compensation -- The Company has elected to follow the accounting
provisions of Accounting Principles Board Opinion ("APBO") No. 25, Accounting
for Stock Issued to Employees for Stock-Based Compensation. The Company will
continue to account for existing stock-based compensation on the non-recourse
loans using the fair value method and will apply the disclosure provisions of
SFAS No. 148, Accounting for Stock-Based Compensation -- Transition and
Disclosure (see new Accounting Standards).
New Accounting Standards -- In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Correction. First, SFAS No. 145 rescinds SFAS No. 4, Reporting
Gains and Losses from Extinguishment of Debt, and an amendment of that
statement, SFAS No. 64, Extinguishment of Debt Made to Satisfy Sinking-Fund
Requirements. Because of the rescission of SFAS No. 4, the gains and losses from
the extinguishments of debt are no longer required to be classified as
extraordinary items. SFAS No. 64 amended SFAS No. 4 and is no longer needed
because SFAS No. 4 is rescinded. Second, SFAS No. 145 rescinds SFAS No. 44,
Accounting for Intangible Assets of Motor Carriers. This statement was
originally issued to establish accounting requirements for the effects of
transition to the provisions of the Motor Carrier Act of 1980. As those
transitions are complete, SFAS No. 44 is no longer needed. Third, SFAS No. 145
amends SFAS No. 13, Accounting for Leases, to require sale-leaseback accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. The amendment of SFAS No. 13 is effective for
transactions occurring after May 15, 2002. There has been no impact to the
Company due to the Amendment of SFAS No. 13. Lastly, SFAS No. 145 makes various
technical corrections to existing pronouncements that are not substantive in
nature. The Company does not believe the impact on our financial position and
results of operations of the rescission of SFAS Nos. 4, 44, and 64 and the other
technical corrections prescribed by this statement, all of which become
effective for the Company in fiscal 2003, will be material.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue 94-3, Liability Recognition for
Certain Employees Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring). The Company does not
believe the impact of the statement on our financial position or results of
operations will be material.
On November 25, 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, which elaborates on the disclosures to be
made by a guarantor about its obligations under certain guarantees issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The interpretation expands on the accounting guidance of
SFAS No. 5 Accounting for Contingencies, SFAS No. 57, Related Party Disclosures,
and SFAS No. 107, Disclosures about Fair Value of Financial Instruments. The
interpretation also incorporates, without change, the provisions of FASB
Interpretation No. 34, Disclosure of Indirect Guarantees of Indebtedness of
Others, which it supersedes. The interpretation does identify several situations
where the recognition of a liability at inception for a guarantor's obligation
is not required. The initial recognition and measurement provisions of
Interpretation No. 45 apply on a prospective basis to guarantees issued or
modified after December 31, 2002, regardless of the guarantor's fiscal year-end.
The disclosures are effective for financial statements of interim or annual
periods ending after December 15, 2002. The Company does not believe the impact
of this Interpretation on its financial position or results of operations will
be material or that additional disclosure is required.
On December 31, 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation -- Transition and Disclosure. SFAS No. 148 amends SFAS
No. 123, Accounting for Stock-Based
F-13
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Compensation, to provide alternative methods of transition to SFAS No. 123's
fair value method of accounting for stock-based employee compensation. SFAS No.
148 also amends the disclosure provisions of SFAS No. 123 and APB Opinion No.
28, Interim Financial Reporting, to require disclosure in the summary of
significant policies of the effects of an entity's accounting policy with
respect to stock-based employee compensation on reported net income and earnings
per share in annual and interim financial statements. While SFAS No. 148 does
not amend SFAS No. 123 to require companies to account for employee stock
options using the fair value method, the disclosure provisions of SFAS No. 148
are applicable to all companies with stock-based compensation, regardless of
whether they account for that compensation using the fair value method of SFAS
No. 123 or the intrinsic value method of APB Opinion No. 25, Accounting for
Stock Issued to Employees. SFAS No. 148's amendment of the transition and annual
disclosure requirements of SFAS No. 123 are effective for fiscal years ending
after December 15, 2002. The implementation of this Statement will not
materially affect the Company's financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51, Consolidated Financial Statements. This interpretation applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest it acquired before February 1, 2003. This interpretation may be applied
prospectively with a cumulative-effect adjustment as of the date on which it is
first applied or by restating previously issued financial statements for one or
more years with a cumulative-effect adjustment as of the beginning of the first
year restated. The implementation of this interpretation will not materially
affect the Company's financial position or results of operations.
3. SIGNIFICANT RISKS AND UNCERTAINTIES
Use of Estimates -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. The Company's most
significant financial statement estimates include the estimate of the
recoverability of contract rights and related assets, potential litigation
claims and settlements, the liability for self-insured claims, the valuation
allowance for deferred tax assets and the allowance for doubtful accounts.
Actual results could differ from those estimates.
Certain Risk Concentrations -- Financial instruments that potentially
subject the Company to a concentration of credit risk principally consist of
cash equivalents, short-term investments and accounts receivable. The Company
places its cash equivalents and short-term investments with high-credit
qualified financial institutions and, by practice, limits the amount of credit
exposure to any one financial institution.
Concentrations of credit risk with respect to accounts receivable are
limited due to many customers comprising the Company's customer base and their
dispersion across different geographic areas. For the fiscal years ended January
2, 2001, January 1, 2002 and December 31, 2002, the Company had one customer
that accounted for approximately 9.8 percent, 10.0 percent and 8.6 percent of
net sales, respectively.
The Company's revenues and earnings are dependent on various factors such
as attendance levels and the number of games played by the professional sports
teams which are tenants at facilities serviced by the Company, which can be
favorably impacted if the teams qualify for post-season play, or adversely
affected if there are stoppages such as strikes by players of the teams.
F-14
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. DEBT
Long-term debt consists of the following (in thousands):
<Table>
<Caption>
2001 2002
-------- --------
Term B borrowings........................................... $111,550 $110,400
Revolving loans............................................. 8,000 15,000
Senior subordinated notes................................... 100,000 100,000
-------- --------
219,550 225,400
Less -- current portion of long-term debt................... (1,150) (1,150)
-------- --------
Total long-term debt........................................ $218,400 $224,250
======== ========
</Table>
Credit Agreement -- On December 3, 1998, Volume Services America (the
"Borrower") entered into a credit agreement, which provided for $160,000,000 in
term loans, consisting of $40,000,000 of Tranche A term loans ("Term Loan A")
and $120,000,000 of Tranche B term loans ("Term Loan B" and together with Term
Loan A, the "Term Loans") and a $75,000,000 revolving credit facility (the
"Revolving Credit Facility"). Borrowings under the Term Loans were used to repay
in full all outstanding indebtedness of Volume Services and Service America
under their then existing credit facilities and to pay fees and expenses
incurred in connection with the acquisition of Service America and the credit
agreement. All borrowings under the credit facility are secured by substantially
all the assets of Volume Holdings and the majority of its subsidiaries,
including Volume Services and Service America. The commitments under the
Revolving Credit Facility are available to fund capital investment requirements,
working capital and general corporate needs of the Company. On March 4, 1999,
the $40,000,000 of Term A borrowings and $5,000,000 of Term B borrowings were
repaid with the proceeds from the Senior Subordinated Notes discussed below.
Installments of Term Loan B are due in consecutive quarterly installments
on the last day of each fiscal quarter with 25 percent of the following annual
amounts being paid on each installment date: $1,150,000 in each year from 2003
through 2005, and $106,950,000 in 2006.
The Revolving Credit Facility allows the Company to borrow up to
$75,000,000 and includes a sub-limit of $35,000,000 for letters of credit which
reduce availability under the Revolving Credit Facility and a sub-limit of
$5,000,000 for Swingline Loans. Revolving Loans must be repaid at the Revolving
Credit Facility maturity date and Swingline Loans must be either repaid within
one month or converted to Revolving Loans. The Revolving Credit Facility will
mature on December 3, 2004. At December 31, 2002, $15,000,000 in Revolving Loans
were outstanding under the Revolving Credit Facility, and approximately
$16,277,000 of letters of credit were outstanding but undrawn.
Borrowings under the credit agreement bear interest at floating rates based
upon the interest rate option elected by the Company and the Company's leverage
ratio. The weighted average interest rates at January 1, 2002 were 6.38 percent
for Term Loan B and 5.61 percent for the Revolving Credit Facility. The weighted
average interest rates at December 31, 2002 were 5.19 percent for Term Loan B
and 4.80 percent for the Revolving Credit Facility.
The credit agreement calls for mandatory prepayment of the loans under
certain circumstances and optional prepayment without penalty. The credit
agreement contains covenants that require the Company to comply with certain
financial covenants, including a maximum net leverage ratio, an interest
coverage ratio and a minimum consolidated cash net worth test, as defined. At
December 31, 2002, the Company was in compliance with all covenants. In
addition, Volume Services America is restricted in its ability to pay dividends
and other restricted payments in an amount greater than approximately
$49,500,000 at December 31, 2002.
F-15
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Senior Subordinated Notes -- On March 4, 1999, Volume Services America
completed a private placement of 11 1/4% Senior Subordinated Notes in the
aggregate principal amount of $100,000,000. On September 30, 1999, the Company
exchanged the Senior Subordinated Notes for notes which have been registered
under the Securities Act of 1933. The notes mature on March 1, 2009 and interest
is payable on March 1 and September 1 of each year, beginning on September 1,
1999. Such notes are unsecured, are subordinated to all the existing senior debt
and any future senior debt of Volume Services America, rank equally with all of
the other senior subordinated debt of Volume Services America, and rank senior
to all of Volume Services America's existing subordinated debt and any future
subordinated debt. Furthermore, the debt is guaranteed by Volume Holdings and
all of the subsidiaries of Volume Services America, except for certain
non-wholly owned U.S. subsidiaries and one non-U.S. subsidiary. The proceeds of
the notes were used to (i) repay $40,000,000 of Term A Borrowings and $5,000,000
of Term B Borrowings, (ii) fund the repurchase by Volume Holdings of 194 shares
of Volume Holdings common stock for $49,500,000 and the repayment by Volume
Holdings of a $500,000 note in favor of GE Capital and (iii) pay fees and
expenses incurred in connection with the notes and the consent from lenders to
an amendment to the Revolving Credit Facility.
Aggregate annual maturities of long-term debt at December 31, 2002 are as
follows (in thousands):
<Table>
2003........................................................ $ 1,150
2004........................................................ 1,150
2005........................................................ 16,150
2006........................................................ 106,950
2007........................................................ --
Thereafter.................................................. 100,000
--------
Total....................................................... $225,400
========
</Table>
F-16
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
The components of deferred taxes are (in thousands):
<Table>
<Caption>
2001 2002
------- -------
Deferred tax liabilities:
Intangibles (goodwill, contract rights and trademarks).... $(6,509) $(5,853)
Differences between book and tax basis of property........ -- (858)
Other..................................................... (1,130) (1,115)
------- -------
(7,639) (7,826)
------- -------
Deferred tax assets:
Difference between book and tax basis of property......... 2 --
Bad debt reserves......................................... 291 158
Inventory reserves........................................ 144 91
Other reserves and accrued liabilities.................... 4,692 4,441
General business and AMT credit carryforwards............. 3,499 3,020
Accrued compensation and vacation......................... 980 1,205
Net operating loss carryforward........................... 1,021 586
------- -------
10,629 9,501
Valuation allowance......................................... (2,257) (942)
------- -------
8,372 8,559
------- -------
Net deferred tax asset...................................... $ 733 $ 733
======= =======
Net deferred tax asset is recognized as follows in the
accompanying 2001 and 2002 consolidated balance sheets:
Current deferred tax asset................................ $ 701 $ 2,764
Noncurrent deferred tax asset (liability)................. 32 (2,031)
------- -------
Net deferred tax asset...................................... $ 733 $ 733
======= =======
</Table>
At December 31, 2002, the Company had approximately $13,423,000 of federal
net operating loss carryforwards, $6,597,000 of which are from the acquisition
of Service America. These carryforwards expire in varying periods ending on or
before 2020. The Company's future ability to utilize the acquired Service
America net operating loss carryforward is limited to some extent by Section 382
of the Internal Revenue Code of 1986, as amended. At December 31, 2002, the
Company has approximately $4,732,000 of federal general business tax credit
carryforwards. These carryforwards expire in various periods ending on or before
2021. In addition, the Company has approximately $637,000 of Canadian net
operating loss carryforwards. These carryforwards expire in various periods
ending on or before 2008.
At December 31, 2002, the Company had a valuation allowance of
approximately $942,000 related to the deferred tax assets associated with
certain net operating loss and credit carryforwards. Management believes that,
based on a number of factors, the available objective evidence creates
sufficient uncertainty regarding the realizability of certain of these net
operating losses and credit carryovers. These carryovers are dependent upon
future income. Management has reduced the valuation allowance in fiscal year
2002 by approximately $1,315,000.
F-17
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Although realization of the net deferred tax assets is not assured,
management believes that it is more likely than not that all of the net deferred
tax assets will be realized. The amount of net deferred tax assets considered
realizable, however, could be reduced in the near term based on changing
conditions.
The components of the benefit for income taxes on income (loss) are as
follows (in thousands):
<Table>
<Caption>
FISCAL YEAR ENDED
--------------------------------------
JANUARY 2, JANUARY 1, DECEMBER 31,
2001 2002 2002
---------- ---------- ------------
Current provision (benefit)......................... $ (130) $ 478 $(187)
Deferred benefit.................................... (1,158) (910) --
------- ----- -----
Total benefit for income taxes...................... $(1,288) $(432) $(187)
======= ===== =====
</Table>
A reconciliation of the provision for income taxes on continuing operations
to the federal statutory rate follows:
<Table>
<Caption>
FISCAL YEAR ENDED
--------------------------------------
JANUARY 2, JANUARY 1, DECEMBER 31,
2001 2002 2002
---------- ---------- ------------
Statutory rate...................................... (34)% (34)% 34%
Differences:
State income taxes................................ (1) 11 2
Nondeductible expenses (meals and
entertainment)................................. 4 2 2
Adjustment to valuation allowance................. -- 56 (31)
Goodwill.......................................... 9 13 --
Federal tax credits............................... (1) (56) (5)
Reserve for tax audit............................. -- -- (9)
Nondeductible compensation........................ 2 1 4
Other............................................. (2) (4) (1)
--- --- ---
Total benefit for income taxes...................... (23)% (11)% (4)%
=== === ===
</Table>
6. EQUITY TRANSACTIONS
Loans to Related Parties -- At January 1, 2002 and December 31, 2002, the
Company had outstanding loans to VSI Management Direct L.P. and another
partnership which hold a direct and an indirect ownership, respectively, in the
Company. The loans were used to fund the repurchase of partnership interests
from former members of management. Accordingly, these amounts have been included
as a reduction to stockholders' equity.
Noncash Compensation -- During fiscal 2000, certain management employees
purchased units in the two partnerships described above. These purchases were
financed with nonrecourse loans. The terms of the purchase agreements are such
that the issuance of these units is a variable plan, which requires the Company
to revalue the units at each measurement date for changes in the fair value of
the units. The related compensation expense is recorded in selling, general, and
administrative expenses in the statement of operations and comprehensive income
(loss) for fiscal years 2000, 2001 and 2002. Had compensation costs been
determined as prescribed by SFAS No. 123, Accounting for Stock-Based
Compensation, the effect on the Company's net earnings would not have been
significant.
F-18
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INTEREST RATE HEDGING ARRANGEMENTS
Effective April 15, 1999, the Company entered into an interest cap
transaction with the Union Bank of California ("UBOC") for a $10,000,000
notional amount for $4,200. The interest rate cap protected the Company if the
three-month LIBOR exceeded 7.5 percent through January 16, 2001.
The Company entered into an interest rate swap transaction on April 16,
1999 with UBOC for a $30,000,000 notional amount with no up front cost. This
swap provided that the Company pay UBOC one-month LIBOR and that UBOC pay the
Company 5.375 percent each month until April 20, 2001. On October 20, 1999, the
Company sold an interest rate floor on this swap to UBOC and received $34,000.
The interest rate floor was marked-to-market. Consequently, in the event that
one-month LIBOR was less than 5.375 percent the Company would pay 5.375 percent.
All interest rate hedging arrangements expired in fiscal 2001 and no
arrangements were entered into during fiscal 2002.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments and related underlying
assumptions are as follows:
Long-Term Debt -- The Company estimates that the carrying value at January
1, 2002 and December 31, 2002 approximates the fair value of the Term Loans and
Revolving Credit Facility based upon the variable rate of interest and frequent
repricing. The Company estimates the fair value of the Senior Subordinated Notes
to be approximately $97,000,000 (book value $100,000,000) at January 1, 2002 and
$95,000,000 (book value $100,000,000) at December 31, 2002 based on third-party
quotations for the same or similar issues.
Interest Rate Hedging Arrangements -- At January 2, 2001, the Company
estimated the fair values of the interest rate swap, cap and floor as a loss of
$114,389, $0 and a loss of $620, respectively. These figures represent the
estimated amounts the Company would have paid or received to terminate these
financial instrument agreements, as quoted by the financial institution. As of
January 1, 2002 all arrangements the Company had been party to had matured and
no additional arrangements were entered into during fiscal 2002.
Current Assets and Current Liabilities -- The Company estimates the
carrying value of these assets and liabilities to approximate their fair value
based upon the nature of the financial instruments and their relatively short
duration.
9. COMMITMENTS AND CONTINGENCIES
Leases and Client Contracts -- The Company operates primarily at its
clients' premises pursuant to written contracts. The length of a contract
generally ranges from 1 to 20 years. Certain of these client contracts provide
for payment by the Company to the client for both fixed and variable commissions
and royalties. Aggregate commission and royalty expense under these agreements
was $168,782,000, $183,324,000 and $192,499,000 for fiscal years 2000, 2001 and
2002, respectively. Minimum guaranteed commission and royalty expense was
approximately $10,223,000, $7,016,000 and $7,625,000 for fiscal years 2000, 2001
and 2002, respectively.
The Company leases a number of real properties and other equipment under
varying lease terms which are noncancelable. In addition, the Company has
numerous month-to-month leases. Rent expense was approximately $1,080,000,
$961,000 and $1,112,000 in fiscal 2000, fiscal 2001 and fiscal 2002,
respectively.
F-19
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum commitments for all operating leases and minimum commissions
and royalties due under client contracts are as follows (in thousands):
<Table>
<Caption>
COMMISSIONS
OPERATING AND
YEAR LEASES ROYALTIES
- ---- --------- -----------
2003........................................................ $ 532 $ 7,598
2004........................................................ 377 7,331
2005........................................................ 186 6,958
2006........................................................ 113 4,876
2007........................................................ 20 3,066
Thereafter.................................................. -- 10,359
------ -------
Total....................................................... $1,228 $40,188
====== =======
</Table>
Employment Contracts -- The Company has employment agreements and
arrangements with its executive officers and certain management personnel. The
agreements generally continue until terminated by the executive or the Company,
and provide for severance payments under certain circumstances. The agreements
include a covenant against competition with the Company, which extends for a
period of time after termination for any reason. As of December 31, 2002, if all
of the employees under contract were to be terminated by the Company without
good cause (as defined) under these contracts, the Company's liability would be
approximately $6.5 million.
Commitments -- Pursuant to its contracts with various clients, the Company
is committed to spend approximately $18.8 million during 2003 and $1.8 million
during 2004 for equipment improvements and location contract rights.
At December 31, 2002, the Company has $8,502,000 of letters of credit
collateralizing the Company's performance and other bonds, and $6,344,000 in
letters of credit collateralizing the self-insurance reserves of the Company,
and $1,431,000 in other letters of credit.
Contingencies -- On April 20, 2001 one of the Company's customers filed for
Chapter 11 bankruptcy. The Company had approximately $3.2 million of receivables
and leasehold improvements recorded at the time of the filings relating to this
customer. In fiscal 2001, the Company wrote-off $2.5 million of other assets
primarily representing long term receivables. In 2002, the Company filed a
bankruptcy claim in the amount of $3.2 million. Subsequently, the Company has
negotiated a settlement agreement with the customer the terms of which have been
agreed upon but not yet finalized.
In July 2000, the Company entered into an agreement to manage an arena in
the City of Bridgeport, Connecticut once the City completed its construction. In
2001, the City asserted a claim against the Company of approximately $2.1
million for certain construction charges the City incurred on building the
arena. The Company settled the claim with the City for less than $100,000 in the
third quarter of fiscal 2002.
Litigation -- There are various claims and pending legal actions against or
indirectly involving the Company. It is the opinion of management, after
considering a number of factors, including, but not limited to, the current
status of the litigation (including any settlement discussions), views of
retained counsel, the nature of the litigation, the prior experience of the
Company, and the amounts which the Company has accrued for known contingencies,
that the ultimate disposition of these matters will not materially affect the
financial position or future results of operations of the Company.
F-20
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. RELATED PARTY TRANSACTIONS
Management Fees -- Certain administrative and management functions are
provided to the Company by Blackstone and GE Capital through monitoring
agreements. The Company paid Blackstone Management Partners II L.P., an
affiliate of Blackstone, a fee of $250,000 in fiscal years 2000, 2001 and 2002.
GE Capital was paid management fees of $167,000 in fiscal years 2000, 2001 and
2002. Such amounts are included in selling, general and administrative expenses.
Leasing Services -- GE Capital and its affiliates provide leasing and
financing services to the Company. Payments to GE Capital and its affiliates for
fiscal years 2000, 2001 and 2002 for such services, net of discounts earned,
were approximately $165,000, $95,000 and $75,000, respectively, and are included
in selling, general and administrative expenses.
Management Incentive Agreement -- The Company maintains a discretionary
incentive plan whereby general managers and senior management personnel qualify
for incentive payments in the event that the Company has exceeded certain
financial performance targets determined on an annual basis. The Company has
accrued approximately $1,096,000 and $951,000 in accrued salaries and vacations
in the accompanying balance sheets at January 1, 2002 and December 31, 2002,
respectively, for such incentives payable to certain general managers and senior
management personnel. These amounts are included in selling, general, and
administrative expenses. Under the plan, the payment of the executive officers'
bonuses for 2002 was contingent on the Company's financial performance in 2002.
The bonus amounts paid to each executive officer do not reflect the full amount
of the annual bonus that each executive officer would have received as a 2002
bonus payment. At the Company's board of directors' request, the named executive
officers agreed to forfeit the balance of their 2002 bonus in exchange for a
commitment that the Company will pay bonuses (the sum of which, in the
aggregate, will not exceed $1,000,000) upon a successful refinancing or other
similar transaction by the Company, currently anticipated to occur pursuant to
the offering of IDSs, but not limited to the offering of IDSs. If such
refinancing or other similar transaction is not completed, these contingent
bonuses will not be paid.
11. RETIREMENT PLAN
Effective February 15, 2000, the Volume Service 401(k) plan was merged into
the Service America 40l(k) plan, forming the Volume Services America 401(k)
defined contribution plan. This plan covers substantially all Volume Services
America employees. Employees may contribute up to 16 percent of their eligible
earnings and the Company will match 25 percent of employee contributions up to
the first 6 percent of employee compensation, with an additional discretionary
match up to 50 percent. The Company's contributions to the previous individual
plans and the combined plan were approximately $319,000 for fiscal 2000,
$397,000 in fiscal 2001 and $313,000 in fiscal 2002.
Multi-Employer Pension Plans -- Certain of the Company's union employees
are covered by multi-employer defined benefit pension plans administered by
unions. Under the Employee Retirement Income Security Act ("ERISA"), as amended,
an employer upon withdrawal from a multi-employer pension plan is required to
continue funding its proportionate share of the plan's unfunded vested benefits.
Amounts charged to expense and contributed to the plans were not material for
the periods presented.
12. CONTRACT RELATED LOSSES
During fiscal years 2000, 2001 and 2002, several contracts which the
Company intends to continue operating were identified as impaired, as the future
undiscounted cash flows of each of these contracts was estimated to be
insufficient to recover the related carrying value of the property and equipment
and contract rights associated with each contract. As such, the carrying values
of these contracts were written down to the Company's estimate of fair value
based on the present value of the discounted future cash
F-21
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
flows. The Company wrote down approximately $976,000 of property and equipment,
$221,000 of contract rights and $269,000 of other assets in fiscal 2000. In
fiscal 2001, the Company wrote down approximately $2.3 million of property and
equipment and contract rights. In addition, the Company recorded an impairment
charge of approximately $2.5 million for the write down of other assets. In
fiscal 2002, the Company wrote down approximately $699,000 in contract rights
related to a certain contract.
On June 12, 1998, Service America commenced arbitration proceedings through
the American Arbitration Association in New York, New York against Silver
Huntington Realty LLC and Silver Huntington LLC. In May 2000, the arbitrator
reached a decision in this matter. The decision provided for no payment from
either party to the other. As a result, in fiscal 2000, the Company wrote off
related assets in the amount of $754,000 and recorded approximately $305,000 in
related legal fees.
13. OTHER INCOME
During fiscal 2002, Service America received approximately $1.4 million
from funds previously set aside to satisfy creditors pursuant to a plan of
reorganization approved in 1993. Under the plan of reorganization, Service
America was required to deposit funds with a disbursing agent for the benefit of
its creditors. Any funds which remained unclaimed by its creditors after a
period of two years from the date of distribution were forfeited and all
interest in those funds reverted back to Service America. Counsel has advised
that Service America has no obligation to escheat such funds. These funds were
recorded in Other income, net.
14. EXECUTIVE EMPLOYMENT AGREEMENTS
Effective April 15, 2002, the Company entered into an Executive Employment
Agreement (the "Agreement") with its Chief Executive Officer, Lawrence E. Honig.
The Agreement provides for the grant of stock options equal to three percent of
the total outstanding number of shares of Volume Holdings on the option issuance
date, pursuant to a stock option plan that was to be adopted within 180 days of
the effective date of the Agreement. As of the date hereof, the Company and the
Chief Executive Officer are working to develop the stock option plan, or the
equivalent, which they anticipate will be completed in the near future. In
addition, if a sale of all or substantially all of our stock and/or assets takes
place before April 15, 2004 and the total amounts received by or distributed to
our stockholders per share in such sale exceed the exercise price per share for
the shares subject to these options, and such excess value, multiplied by the
number of shares as to which Mr. Honig has options (the "aggregate excess
value"), is less than $1 million, Mr. Honig will be paid the difference between
the aggregate excess value and $1 million at the time such sale is consummated.
The exercise price per share is to be equivalent to the value of our company as
determined by the board of directors for purposes of restructuring management's
equity in our company, divided by the number of outstanding shares at the time
of such restructuring and the stock options will vest 20% per year during a
period of five years. The stock options will terminate ten years from the grant
date. The Company plans to measure compensation cost, if any, associated with
the stock options based upon the intrinsic value of the stock options measured
at the grant date, in accordance with the provisions of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees.
15. SUBSEQUENT EVENTS
On February 13, 2003, Volume Services America Holdings, Inc. filed a
registration statement on Form S-1 with the Securities and Exchange Commission
for the proposed offering of IDSs. The Company has also filed a preliminary
prospectus with the Canadian provincial securities regulatory authorities. In
connection with this offering, Volume Services America would commence a tender
offer and consent solicitation for its outstanding 11 1/4% senior subordinated
notes due 2009 and would refinance its existing credit facility. Under the
proposed offering of IDSs, Volume Holdings would be the proposed issuer of the
new subordinated notes but the non-guarantor subsidiaries (see Note 17) would
remain the same. There is
F-22
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
no guarantee that the offering of IDSs will occur and the Company may elect not
to proceed with the offering or any or all of the related transactions due to
changes in the Company's business or strategic plans, general economic and
market conditions or any other factors.
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarterly operating results for the years ended January 1, 2002 and
December 31, 2002 are as follows (in thousands, except per share data):
<Table>
<Caption>
FIRST SECOND THIRD FOURTH
YEAR ENDED QUARTER QUARTER QUARTER QUARTER TOTAL
JANUARY 1, 2002 ----------- ---------- ---------- ----------- -----------
Net sales....................... $ 83,194 $ 157,646 $ 177,559 $ 124,714 $ 543,113
Cost of sales................... 70,972 127,972 143,533 104,119 446,596
Selling, general, and
administrative................ 10,321 12,281 13,155 12,351 48,108
Depreciation and amortization... 6,008 6,077 6,076 6,331 24,492
Contract related losses......... -- 3,199 933 630 4,762
----------- ---------- ---------- ----------- -----------
Operating income (loss)......... (4,107) 8,117 13,862 1,283 19,155
Interest expense, net........... 6,545 6,006 5,554 5,324 23,429
Other income, net............... (21) (44) (91) (86) (242)
----------- ---------- ---------- ----------- -----------
Income (loss) before income
taxes......................... (10,631) 2,155 8,399 (3,955) (4,032)
Income tax benefit.............. -- -- -- (432) (432)
----------- ---------- ---------- ----------- -----------
Net income (loss)............... $ (10,631) $ 2,155 $ 8,399 $ (3,523) $ (3,600)
=========== ========== ========== =========== ===========
Basic net income (loss) per
share......................... $(32,021.07) $ 6,487.58 $25,298.59 $(10,609.65) $(10,844.55)
Diluted net income (loss) per
share......................... $(32,021.07) $ 6,487.58 $25,298.59 $(10,609.65) $(10,844.55)
</Table>
<Table>
<Caption>
FIRST SECOND THIRD FOURTH
YEAR ENDED QUARTER QUARTER QUARTER QUARTER TOTAL
DECEMBER 31, 2002 ----------- ---------- ---------- ---------- -----------
Net sales........................ $ 87,840 $ 166,421 $ 195,100 $ 127,801 $ 577,162
Cost of sales.................... 74,799 134,279 156,459 105,392 470,929
Selling, general, and
administrative................. 11,633 14,951 16,015 12,658 55,257
Depreciation and amortization.... 5,593 6,679 6,734 7,179 26,185
Transaction related expenses..... -- -- -- 597 597
Contract related losses.......... -- 699 -- -- 699
----------- ---------- ---------- ---------- -----------
Operating income (loss).......... (4,185) 9,813 15,892 1,975 23,495
Interest expense, net............ 5,357 5,175 5,129 5,081 20,742
Other income, net................ (1,384) (34) (28) (110) (1,556)
----------- ---------- ---------- ---------- -----------
Income (loss) before income
taxes.......................... (8,158) 4,672 10,791 (2,996) 4,309
Income tax provision (benefit)... (1,288) 831 1,008 (738) (187)
----------- ---------- ---------- ---------- -----------
Net income (loss)................ $ (6,870) $ 3,841 $ 9,783 $ (2,258) $ 4,496
=========== ========== ========== ========== ===========
Basic net income (loss) per
share.......................... $(20,691.49) $11,569.60 $29,466.29 $(6,803.23) $(13,541.17)
Diluted net income (loss) per
share.......................... $(20,691.49) $11,569.60 $29,466.29 $(6,803.23) $(13,541.17)
</Table>
Certain amounts in the second quarter of the quarterly results of
operations for fiscal 2001 and 2002 have been reclassified from the presentation
as filed in the Company's report on Form 10-Q for the quarterly period ended
July 2, 2002 to conform to the financial statement presentation used for the
year ended December 31, 2002. The reclassification from cost of sales to
selling, general and administrative expenses in the second quarter of fiscal
2001 and 2002 was $524,000 and $417,000, respectively.
F-23
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. NON-GUARANTOR SUBSIDIARIES FINANCIAL STATEMENTS
The senior subordinated notes are jointly and severally guaranteed by
Volume Holdings and all of the subsidiaries of Volume Services America, except
for certain non-wholly owned U.S. subsidiaries and one non-U.S. subsidiary. The
following table sets forth the condensed consolidating financial statements of
the Parent Company, Guarantor Subsidiaries (includes Volume Services America,
the issuer) and Non-Guarantor Subsidiaries as of January 1, 2002 and December
31, 2002 (in the case of the balance sheet) and for the years ended January 2,
2001, January 1, 2002 and December 31, 2002 (in the case of the statement of
operations and comprehensive income (loss) and the statement of cash flows):
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS, YEAR
ENDED JANUARY 2, 2001
<Table>
<Caption>
ISSUER AND
COMBINED COMBINED
VOLUME GUARANTOR NON-GUARANTOR
HOLDINGS SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
Net sales................. $ -- $491,232 $31,301 $ -- $522,533
Cost of sales............. -- 398,063 26,097 -- 424,160
Selling, general, and
administrative.......... -- 44,491 3,369 -- 47,860
Depreciation and
amortization............ -- 23,870 2,430 -- 26,300
Transaction related
expenses................ -- 1,105 -- -- 1,105
Contract related losses... -- 2,524 -- -- 2,524
-------- -------- ------- ------ --------
Operating income (loss)... -- 21,179 (595) -- 20,584
Interest expense.......... -- 26,577 -- -- 26,577
Other income, net......... -- (450) (36) -- (486)
-------- -------- ------- ------ --------
Loss before income
taxes................... -- (4,948) (559) -- (5,507)
Income tax benefit........ -- (1,288) -- -- (1,288)
Loss in earnings of
subsidiaries............ (4,219) -- -- 4,219 --
-------- -------- ------- ------ --------
Net loss.................. (4,219) (3,660) (559) 4,219 (4,219)
Other comprehensive loss
foreign currency........ -- -- (64) -- (64)
-------- -------- ------- ------ --------
Comprehensive loss........ $ (4,219) $ (3,660) $ (623) $4,219 $ (4,283)
======== ======== ======= ====== ========
</Table>
F-24
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS, YEAR ENDED JANUARY 2, 2001
<Table>
<Caption>
ISSUER AND
COMBINED COMBINED
VOLUME GUARANTOR NON-GUARANTOR
HOLDINGS SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
-------- ------------ ------------- ------------
(IN THOUSANDS)
Cash flows from operating activities... $ -- $ 22,159 $ 525 $ 22,684
----- -------- ------- --------
Cash flows from investing activities:
Purchase of property and equipment... -- (5,877) (522) (6,399)
Proceeds from sale of property, plant
and equipment..................... -- 965 -- 965
Purchase of contract rights.......... -- (6,677) (800) (7,477)
----- -------- ------- --------
Net cash used in investing
activities...................... -- (11,589) (1,322) (12,911)
----- -------- ------- --------
Cash flows from financing activities:
Net borrowings -- revolving loans.... -- (3,500) -- (3,500)
Principal payments on long-term
debt.............................. -- (1,150) -- (1,150)
Principal payments on capital lease
obligations....................... -- (206) -- (206)
Decrease in bank overdrafts.......... -- (828) (1,524) (2,352)
Increase in loans to related
parties........................... -- (120) -- (120)
----- -------- ------- --------
Net cash provided by financing
activities...................... -- (5,804) (1,524) (7,328)
Increase (decrease) in cash............ -- 4,766 (2,321) 2,445
Cash and cash equivalents:
Beginning of year.................... -- 9,392 2,889 12,281
----- -------- ------- --------
End of year.......................... $ -- $ 14,158 $ 568 $ 14,726
===== ======== ======= ========
</Table>
F-25
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED BALANCE SHEET, JANUARY 1, 2002
<Table>
<Caption>
ISSUER AND
COMBINED COMBINED
VOLUME GUARANTOR NON-GUARANTOR
HOLDINGS SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash
equivalents.......... $ -- $ 14,976 $ 166 $ -- $ 15,142
Accounts receivable..... -- 16,471 1,915 -- 18,386
Other current assets.... -- 23,667 1,028 (8,304) 16,391
-------- -------- ------- -------- --------
Total current
assets............. -- 55,114 3,109 (8,304) 49,919
Property and equipment.... -- 54,607 3,181 -- 57,788
Contract rights, net...... -- 79,890 790 -- 80,680
Cost in excess of net
assets acquired, net.... -- 46,457 -- -- 46,457
Investment in
subsidiaries............ (10,260) -- -- 10,260 --
Other assets.............. -- 31,050 6 -- 31,056
-------- -------- ------- -------- --------
Total assets.............. $(10,260) $267,118 $ 7,086 $ 1,956 $265,900
======== ======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Intercompany
liabilities.......... $ -- $ -- $ 8,304 $ (8,304) $ --
Other current
liabilities.......... -- 54,901 1,145 -- 56,046
-------- -------- ------- -------- --------
Total current
liabilities........ -- 54,901 9,449 (8,304) 56,046
Long-term debt............ -- 218,400 -- -- 218,400
Other liabilities......... -- 1,714 -- -- 1,714
-------- -------- ------- -------- --------
Total liabilities.... -- 275,015 9,449 (8,304) 276,160
-------- -------- ------- -------- --------
Stockholders' deficiency:
Common stock............ -- -- -- -- --
Additional paid-in
capital.............. 66,852 66,852 -- (66,852) 66,852
Accumulated deficit..... (26,062) (24,170) (1,892) 26,062 (26,062)
Treasury stock and
other................ (51,050) (50,579) (471) 51,050 (51,050)
-------- -------- ------- -------- --------
Total stockholders'
deficiency......... (10,260) (7,897) (2,363) 10,260 (10,260)
-------- -------- ------- -------- --------
Total liabilities and
stockholders'
deficiency.............. $(10,260) $267,118 $ 7,086 $ 1,956 $265,900
======== ======== ======= ======== ========
</Table>
F-26
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS, YEAR
ENDED JANUARY 1, 2002
<Table>
<Caption>
ISSUER AND
COMBINED COMBINED
VOLUME GUARANTOR NON-GUARANTOR
HOLDINGS SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
Net sales................. $ -- $518,714 $24,399 $ -- $543,113
Cost of sales............. -- 424,623 21,973 -- 446,596
Selling, general, and
administrative.......... -- 46,503 1,605 -- 48,108
Depreciation and
amortization............ -- 23,678 814 -- 24,492
Transaction related
expenses................ -- -- -- -- --
Contract related losses... -- 4,762 -- -- 4,762
-------- -------- ------- ------ --------
Operating income (loss)... -- 19,148 7 -- 19,155
Interest expense.......... -- 23,429 -- -- 23,429
Other income, net......... -- (213) (29) -- (242)
-------- -------- ------- ------ --------
Income (loss) before
income taxes............ -- (4,068) 36 -- (4,032)
Income tax benefit........ -- (432) -- -- (432)
Loss in earnings of
subsidiaries............ (3,600) -- -- 3,600 --
-------- -------- ------- ------ --------
Net income (loss)......... (3,600) (3,636) 36 3,600 (3,600)
Other comprehensive loss
foreign currency........ -- -- (209) -- (209)
-------- -------- ------- ------ --------
Comprehensive loss........ $ (3,600) $ (3,636) $ (173) $3,600 $ (3,809)
======== ======== ======= ====== ========
</Table>
F-27
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS, YEAR ENDED JANUARY 1, 2002
<Table>
<Caption>
ISSUER AND
COMBINED COMBINED
VOLUME GUARANTOR NON-GUARANTOR
HOLDINGS SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
-------- ------------ ------------- ------------
(IN THOUSANDS)
Cash flows from operating activities... $ -- $ 24,874 $(135) $ 24,739
----- -------- ----- --------
Cash flows from investing activities:
Purchase of property and equipment... -- (7,785) (267) (8,052)
Proceeds from sale of property, plant
and equipment..................... -- 139 -- 139
Purchase of contract rights.......... -- (21,367) -- (21,367)
----- -------- ----- --------
Net cash used in investing
activities...................... -- (29,013) (267) (29,280)
----- -------- ----- --------
Cash flows from financing activities:
Net borrowings -- revolving loans.... -- 6,750 -- 6,750
Principal payments on long-term
debt.............................. -- (1,150) -- (1,150)
Principal payments on capital lease
obligations....................... -- (149) -- (149)
Decrease in bank overdrafts.......... -- (454) -- (454)
Increase in loans to related
parties........................... -- (40) -- (40)
----- -------- ----- --------
Net cash provided by financing
activities...................... -- 4,957 -- 4,957
----- -------- ----- --------
Increase (decrease) in cash............ -- 818 (402) 416
Cash and cash equivalents:
Beginning of year.................... -- 14,158 568 14,726
----- -------- ----- --------
End of year.......................... $ -- $ 14,976 $ 166 $ 15,142
===== ======== ===== ========
</Table>
F-28
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED BALANCE SHEET, DECEMBER 31, 2002
<Table>
<Caption>
ISSUER AND
COMBINED COMBINED
VOLUME GUARANTOR NON-GUARANTOR
HOLDINGS SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash
equivalents.......... $ -- $ 10,150 $ 224 $ -- $ 10,374
Accounts receivable..... -- 15,309 1,179 -- 16,488
Other current assets.... -- 24,948 1,147 (7,295) 18,800
-------- -------- ------- -------- --------
Total current
assets............. -- 50,407 2,550 (7,295) 45,662
Property and equipment.... -- 52,951 3,108 -- 56,059
Contract rights, net...... -- 101,017 685 -- 101,702
Cost in excess of net
assets acquired, net.... -- 46,457 -- -- 46,457
Investment in
subsidiaries............ (5,268) 5,268
Other assets.............. -- 30,290 22 30,312
-------- -------- ------- -------- --------
Total assets.............. $ (5,268) $281,122 $ 6,365 $ (2,027) $280,192
======== ======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Intercompany
liabilities.......... $ -- $ -- $ 7,295 $ (7,295) $ --
Other current
liabilities.......... -- 55,047 1,431 -- 56,478
-------- -------- ------- -------- --------
Total current
liabilities........ -- 55,047 8,726 (7,295) 56,478
Long-term debt............ -- 224,250 -- -- 224,250
Other liabilities......... -- 4,732 -- -- 4,732
-------- -------- ------- -------- --------
Total liabilities.... -- 284,029 8,726 (7,295) 285,460
-------- -------- ------- -------- --------
Stockholders' deficiency:
Common stock
Additional paid-in
capital.............. 67,417 67,417 -- (67,417) 67,417
Accumulated deficit..... (21,566) (19,649) (1,917) 21,566 (21,566)
Treasury stock and
other................ (51,119) (50,675) (444) 51,119 (51,119)
-------- -------- ------- -------- --------
Total stockholders'
deficiency......... (5,268) (2,907) (2,361) 5,268 (5,268)
-------- -------- ------- -------- --------
Total liabilities and
stockholders'
deficiency.............. $ (5,268) $281,122 $ 6,365 $ (2,027) $280,192
======== ======== ======= ======== ========
</Table>
F-29
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME, YEAR
ENDED DECEMBER 31, 2002
<Table>
<Caption>
ISSUER AND
COMBINED COMBINED
VOLUME GUARANTOR NON-GUARANTOR
HOLDINGS SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
Net sales.................. $ -- $547,188 $29,974 $ -- $577,162
Cost of sales.............. -- 444,767 26,162 -- 470,929
Selling, general, and
administrative........... -- 52,369 2,888 -- 55,257
Depreciation and
amortization............. 25,209 976 -- 26,185
Transaction related
expenses................. -- 597 -- -- 597
Contract related losses.... -- 699 -- -- 699
------ -------- ------- ------- --------
Operating income (loss).... -- 23,547 (52) -- 23,495
Interest expense........... -- 20,727 15 -- 20,742
Other income, net.......... -- (1,553) (3) -- (1,556)
------ -------- ------- ------- --------
Income (loss) before income
taxes.................... -- 4,373 (64) -- 4,309
Income tax benefit......... -- (148) (39) -- (187)
Equity in earnings of
subsidiaries............. 4,496 -- -- (4,496) --
------ -------- ------- ------- --------
Net income (loss).......... 4,496 4,521 (25) (4,496) 4,496
Other comprehensive income
foreign currency......... -- -- 27 -- 27
------ -------- ------- ------- --------
Comprehensive income....... $4,496 $ 4,521 $ 2 $(4,496) $ 4,523
====== ======== ======= ======= ========
</Table>
F-30
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS, YEAR ENDED DECEMBER 31, 2002
<Table>
<Caption>
ISSUER AND
COMBINED COMBINED
VOLUME GUARANTOR NON-GUARANTOR
HOLDINGS SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
-------- ------------ ------------- ------------
(IN THOUSANDS)
Cash flows from operating activities... $ -- $ 37,906 $ 667 $ 38,573
Cash flows from investing activities:
Purchase of property and equipment... -- (9,292) (609) (9,901)
Proceeds from sale of property, plant
and equipment..................... -- 2,515 -- 2,515
Purchase of contract rights.......... -- (37,660) -- (37,660)
------ -------- ----- --------
Net cash used in investing
activities...................... -- (44,437) (609) (45,046)
------ -------- ----- --------
Cash flows from financing activities:
Net borrowings -- revolving loans.... -- 2,250 -- 2,250
Principal payments on long-term
debt.............................. -- (1,150) -- (1,150)
Principal payments on capital lease
obligations....................... -- (267) -- (267)
Increase in bank overdrafts.......... -- 968 -- 968
Increase in loans to related
parties........................... -- (96) -- (96)
------ -------- ----- --------
Net cash provided by financing
activities...................... -- 1,705 -- 1,705
------ -------- ----- --------
Increase (decrease) in cash............ -- (4,826) 58 (4,768)
Cash and cash equivalents:
Beginning of year.................... -- 14,976 166 15,142
------ -------- ----- --------
End of year.......................... $ -- $ 10,150 $ 224 $ 10,374
====== ======== ===== ========
</Table>
F-31
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
DECEMBER 31, 2002 AND APRIL 1, 2003
(IN THOUSANDS)
<Table>
<Caption>
DECEMBER 31, APRIL 1,
2002 2003
------------ --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 10,374 $ 11,301
Accounts receivable, less allowance for doubtful accounts
of $715 and $810 at December 31, 2002 and April 1,
2003, respectively..................................... 16,488 17,202
Merchandise inventories................................... 13,682 16,535
Prepaid expenses and other................................ 2,354 4,664
Deferred tax asset........................................ 2,764 2,764
-------- --------
Total current assets................................... 45,662 52,466
-------- --------
PROPERTY AND EQUIPMENT:
Leasehold improvements.................................... 49,452 49,547
Merchandising equipment................................... 51,185 52,537
Vehicles and other equipment.............................. 8,625 9,082
Construction in process................................... 295 1,887
-------- --------
Total.................................................. 109,557 113,053
Less accumulated depreciation and amortization............ (53,498) (55,557)
-------- --------
Property and equipment, net............................ 56,059 57,496
-------- --------
OTHER ASSETS:
Contract rights, net...................................... 101,702 103,932
Cost in excess of net assets acquired..................... 46,457 46,457
Deferred financing costs, net............................. 7,086 6,728
Trademarks................................................ 17,049 17,049
Deferred tax asset........................................ -- 1,205
Other..................................................... 6,177 6,090
-------- --------
Total other assets..................................... 178,471 181,461
-------- --------
TOTAL ASSETS................................................ $280,192 $291,423
======== ========
</Table>
F-32
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED) -- (CONTINUED)
DECEMBER 31, 2002 AND APRIL 1, 2003
(IN THOUSANDS)
<Table>
<Caption>
DECEMBER 31, APRIL 1,
2002 2003
------------ --------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Short-term note payable................................... $ -- $ 3,500
Current maturities of long-term debt...................... 1,150 1,150
Accounts payable.......................................... 14,798 16,511
Accrued salaries and vacations............................ 8,683 11,460
Liability for insurance................................... 4,441 4,538
Accrued taxes, including income taxes..................... 3,890 3,983
Accrued commissions and royalties......................... 13,627 13,101
Accrued interest.......................................... 3,832 1,035
Other..................................................... 6,057 7,074
-------- --------
Total current liabilities.............................. 56,478 62,352
-------- --------
LONG TERM LIABILITIES:
Long-term debt............................................ 224,250 236,962
Liability for insurance................................... 2,001 2,975
Deferred income taxes..................................... 2,031 --
Other liabilities......................................... 700 700
-------- --------
Total long-term liabilities............................ 228,982 240,637
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Common stock, $0.01 par value -- authorized: 1,000 shares;
issued:
526 shares; outstanding: 332 shares.................... -- --
Additional paid-in capital................................ 67,417 67,417
Accumulated deficit....................................... (21,566) (28,111)
Accumulated other comprehensive loss...................... (444) (197)
Treasury stock -- at cost (194 shares).................... (49,500) (49,500)
Loans to related parties.................................. (1,175) (1,175)
-------- --------
Total stockholders' deficiency......................... (5,268) (11,566)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY.............. $280,192 $291,423
======== ========
</Table>
See notes to consolidated financial statements.
F-33
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)
THIRTEEN WEEK PERIODS ENDED APRIL 2, 2002 AND APRIL 1, 2003
<Table>
<Caption>
THIRTEEN WEEKS ENDED
-------------------------
APRIL 2, APRIL 1,
2002 2003
----------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net sales................................................... $ 87,840 $ 96,900
Cost of sales............................................... 74,799 81,655
Selling, general, and administrative........................ 11,633 13,375
Depreciation and amortization............................... 5,593 6,475
Contract related losses..................................... -- 110
----------- -----------
Operating loss.............................................. (4,185) (4,715)
Interest expense............................................ 5,357 5,071
Other income, net........................................... (1,384) (5)
----------- -----------
Loss before income taxes.................................... (8,158) (9,781)
Income tax benefit.......................................... (1,288) (3,236)
----------- -----------
Net loss.................................................... (6,870) (6,545)
Other comprehensive gain (loss) -- foreign currency
translation adjustment.................................... (14) 247
----------- -----------
Comprehensive loss.......................................... $ (6,884) $ (6,298)
=========== ===========
Basic Net loss per share.................................... $(20,691.49) $(19,713.79)
=========== ===========
Diluted Net loss per share.................................. $(20,691.49) $(19,713.79)
=========== ===========
</Table>
See notes to consolidated financial statements.
F-34
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY (UNAUDITED)
FOR THE PERIOD FROM DECEMBER 31, 2002 TO APRIL 1, 2003
<Table>
<Caption>
ACCUMULATED
ADDITIONAL OTHER LOANS TO
COMMON COMMON PAID-IN ACCUMULATED COMPREHENSIVE TREASURY RELATED
SHARES STOCK CAPITAL DEFICIT LOSS STOCK PARTIES TOTAL
------ ------ ---------- ----------- ------------- -------- -------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE, DECEMBER 31, 2002........ 332 $ -- $67,417 $(21,566) $(444) $(49,500) $(1,175) $ (5,268)
Foreign currency translation.... -- -- -- -- 247 -- 247
Net loss........................ -- -- -- (6,545) -- -- -- (6,545)
--- ----- ------- -------- ----- -------- ------- --------
BALANCE, APRIL 1, 2003............ 332 $ -- $67,417 $(28,111) $(197) $(49,500) $(1,175) $(11,566)
=== ===== ======= ======== ===== ======== ======= ========
</Table>
See notes to consolidated financial statements.
F-35
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THIRTEEN WEEK PERIODS ENDED APRIL 2, 2002 AND APRIL 1, 2003
<Table>
<Caption>
THIRTEEN WEEKS ENDED
---------------------
APRIL 2, APRIL 1,
2002 2003
--------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(6,870) $(6,545)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 5,593 6,475
Amortization of deferred financing costs............... 358 358
Contract related losses................................ -- 110
Deferred tax change.................................... (1,288) (3,236)
Loss on disposition of assets.......................... -- 24
Other.................................................. (14) 247
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable............................... 4,737 (545)
Merchandise inventories........................... (2,002) (2,853)
Prepaid expenses.................................. (809) (2,312)
Other assets...................................... 40 (267)
Increase (decrease) in liabilities:
Accounts payable.................................. 341 1,862
Accrued salaries and vacations.................... 786 2,777
Liability for insurance........................... 1,023 1,071
Accrued commissions and royalties................. (782) (526)
Other liabilities................................. (1,005) (1,687)
------- -------
Net cash (used in) provided by operating
activities.................................... 108 (5,047)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (2,651) (4,257)
Contract rights acquired.................................. (204) (5,832)
------- -------
Net cash used in investing activities........... (2,855) (10,089)
------- -------
</Table>
F-36
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)(UNAUDITED)
THIRTEEN WEEK PERIODS ENDED APRIL 2, 2002 AND APRIL 1, 2003
<Table>
<Caption>
THIRTEEN WEEKS ENDED
---------------------
APRIL 2, APRIL 1,
2002 2003
--------- ---------
(IN THOUSANDS)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings -- revolving loans......................... $ 1,500 $16,500
Principal payments on long-term debt...................... (287) (288)
Principal payments on capital lease obligations........... (57) --
Decrease in bank overdrafts............................... (1,758) (149)
------- -------
Net cash provided by (used in) financing activities.... (602) 16,063
------- -------
INCREASE/(DECREASE) IN CASH................................. (3,349) 927
CASH AND CASH EQUIVALENTS:
Beginning of period....................................... 15,142 10,374
------- -------
End of period............................................. $11,793 $11,301
======= =======
</Table>
See notes to consolidated financial statements.
F-37
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THIRTEEN WEEK PERIODS ENDED APRIL 2, 2002 AND APRIL 1, 2003
1. GENERAL
Volume Services America Holdings, Inc. ("Volume Holdings," and together
with its subsidiaries, the "Company") is a holding company, the principal assets
of which are the capital stock of its subsidiary, Volume Services America, Inc.
("Volume Services America"). Volume Holdings' financial information is therefore
substantially the same as that of Volume Services America. Volume Services
America is also a holding company, the principal assets of which are the capital
stock of its subsidiaries, Volume Services, Inc. ("Volume Services") and Service
America Corporation ("Service America"). The Company is beneficially owned by
its senior management and entities affiliated with Blackstone Management
Associates II L.L.C. ("Blackstone") and General Electric Capital Corporation
("GE Capital").
The accompanying financial statements of Volume Holdings have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
for interim financial reporting. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. However, such information reflects all
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair statement of results for the
interim periods.
The results of operations for the thirteen week period ended April 1, 2003
are not necessarily indicative of the results to be expected for the fifty-two
week fiscal year ending December 30, 2003 due to the seasonal aspects of the
business.
On February 11, 2003, the Company announced that it changed its tradename
for its operating subsidiaries, Volume Services and Service America, from Volume
Services America to Centerplate.
On February 13, 2003, Volume Holdings filed a registration statement on
Form S-1 in respect of a proposed initial public offering of Income Deposit
Securities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cost in Excess of Net Assets Acquired and Trademarks -- The Company has
performed its annual impairment tests of goodwill and trademarks in accordance
with Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, and determined that no impairment exists.
Reclassifications -- Certain amounts in 2002 have been reclassified, where
applicable, to conform to the financial statement presentation used in 2003.
New Accounting Standards -- In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections. First, SFAS No. 145 rescinds SFAS No. 4,
Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that
statement, SFAS No. 64, Extinguishment of Debt Made to Satisfy Sinking-Fund
Requirements. Because of the rescission of SFAS No. 4, the gains and losses from
the extinguishment of debt are no longer required to be classified as
extraordinary items. SFAS No. 64 amended SFAS No. 4 and is no longer needed
because SFAS No. 4 is rescinded. Second, SFAS No. 145 rescinds SFAS No. 44,
Accounting for Intangible Assets of Motor Carriers. This statement was
originally issued to establish accounting requirements for the effects of
transition to the provisions of the Motor Carrier Act of 1980. As those
transitions are complete, SFAS No. 44 is no longer needed. Third, SFAS No. 145
amends SFAS No. 13, Accounting for Leases, to require sale-leaseback accounting
for certain lease modifications that have economic effects that are similar to
sales-leaseback transactions. Lastly, SFAS No. 145 makes various technical
corrections to existing pronouncements that are not substantive in nature. The
implementation of this standard did not have a material effect on our financial
position or results of operations.
F-38
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability
Recognition for Certain Employees Termination Benefits and Other Costs to Exit
an Activity (Including Certain Costs Incurred in a Restructuring) and is
effective for exit or disposal activities after December 31, 2002. The
implementation of this standard did not have a material effect on our financial
position or results of operations.
On November 25, 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, which elaborates on the disclosures to be
made by a guarantor about its obligations under certain guarantees issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The Interpretation expands on the accounting guidance of
SFAS No. 5 Accounting for Contingencies, SFAS No. 57, Related Party Disclosures,
and SFAS No. 107, Disclosures about Fair Value of Financial Instruments. The
Interpretation also incorporates, without change, the provisions of FASB
Interpretation No. 34, Disclosure of Indirect Guarantees of Indebtedness of
Others, which it supersedes. The Interpretation does identify several situations
where the recognition of a liability at inception for a guarantor's obligation
is not required. The initial recognition and measurement provisions of
Interpretation 45 apply on a prospective basis to guarantees issued or modified
after December 31, 2002, regardless of the guarantor's fiscal year-end. The
disclosures are effective for financial statements of interim or annual periods
ending after December 15, 2002. Adoption of this Interpretation did not have a
material effect on our financial position or results of operations.
On December 31, 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation -- Transition and Disclosure. SFAS No. 148 amends SFAS
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure provisions of
SFAS No. 123 and APB Opinion No. 28, Interim Financial Reporting, to require
disclosure in the summary of significant policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
While SFAS No. 148 does not amend SFAS No. 123 to require companies to account
for employee stock options using the fair value method, the disclosure
provisions of SFAS No. 148's amendment of the transition and annual disclosure
requirements of SFAS No. 123 or the intrinsic value method of APB Opinion No.
25, Accounting for Stock Issued to Employees. SFAS No. 148's amendment of the
transition and annual disclosure requirements of SFAS No. 123 are effective for
fiscal years ending after December 15, 2002. The implementation of this standard
did not have a material effect on our financial position or results of
operations.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51, Consolidated Financial Statements. This Interpretation applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest it acquired before February 1, 2003. This Interpretation may be applied
prospectively with a cumulative-effect adjustment as of the date on which it is
first applied or by restating previously issued financial statements for one or
more years with a cumulative-effect adjustment as of the beginning of the first
year restated. Adoption of this Interpretation did not have a material effect on
our financial position or results of operations.
F-39
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies financial accounting and reporting for derivative instruments
including certain derivatives embedded in other contracts. This statement is
effective for contracts entered into or modified after June 30, 2003. The
implementation of this standard is not expected to have a material effect on our
financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
establishes standards for classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. This statement
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
after June 15, 2003. The implementation of this standard is not expected to have
a material effect on our financial position or results of operations.
Income Taxes -- The provision for income taxes includes federal, state and
foreign taxes currently payable, and the change in deferred tax assets and
liabilities. Deferred tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax basis of assets and liabilities. A valuation allowance is
established for deferred tax assets when it is more likely than not that the
benefits of such assets will not be realized.
Income taxes for the thirteen weeks ended April 1, 2003 and April 2, 2002
are calculated using the projected effective tax rate for fiscal 2003 and 2002,
respectively, which includes the reversal of approximately $0.9 million and $2.3
million, respectively, of valuation allowances on deferred tax assets and the
utilization of approximately $1.0 million of wage and tip credits in the 2003
period.
3. COMMITMENTS AND CONTINGENCIES
There are various claims and pending legal actions against or directly
involving the Company. 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 accrued for known contingencies, that the ultimate disposition of any
currently pending proceeding or contingency will not have a material adverse
effect on the Company's financial condition or results of operations.
4. NON-GUARANTOR SUBSIDIARIES FINANCIAL STATEMENTS
The VSA's $100 million in 11 1/4% senior subordinated notes due 2009 are
jointly and severally guaranteed by Volume Holdings and all of the subsidiaries
of Volume Service America (the "Guarantor Subsidiaries"), except for certain
non-wholly owned U.S. subsidiaries and one non-U.S. subsidiary (together the
"Non-Guarantor Subsidiaries"). The following table sets forth the condensed
consolidating financial statements of Volume Holdings, the Guarantor
Subsidiaries and the Non-Guarantor Subsidiaries as of April 1, 2003 and December
31, 2002 (in the case of the balance sheets) and for the thirteen week periods
ended April 1, 2003 and April 2, 2002 (in the case of the statements of
operations and comprehensive income (loss) and statement of cash flows).
F-40
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED BALANCE SHEET, APRIL 1, 2003 (IN THOUSANDS)
<Table>
<Caption>
ISSUER AND
COMBINED COMBINED
VOLUME GUARANTOR NON-GUARANTOR
HOLDINGS SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents......... $ -- $ 11,064 $ 237 $ -- $ 11,301
Accounts receivable............... -- 15,233 1,969 -- 17,202
Other current assets.............. -- 29,844 1,538 (7,419) 23,963
-------- -------- ------- -------- --------
Total current assets......... -- 56,141 3,744 (7,419) 52,466
Property and equipment............ -- 54,415 3,081 -- 57,496
Contract rights, net.............. -- 103,281 651 -- 103,932
Cost in excess of net assets
acquired, net................... -- 46,457 -- -- 46,457
Investment in subsidiaries........ (11,566) -- -- 11,566 --
Other assets...................... -- 31,021 51 -- 31,072
-------- -------- ------- -------- --------
Total assets...................... $(11,566) $291,315 $ 7,527 $ 4,147 $291,423
======== ======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Intercompany liabilities........ $ -- $ -- $ 7,419 $ (7,419) $ --
Other current liabilities....... -- 59,825 2,527 -- 62,352
-------- -------- ------- -------- --------
Total current liabilities.... -- 59,825 9,946 (7,419) 62,352
Long-term debt.................... -- 236,962 -- -- 236,962
Other liabilities................. -- 3,675 -- -- 3,675
-------- -------- ------- -------- --------
Total liabilities............ -- 300,462 9,946 (7,419) 302,989
-------- -------- ------- -------- --------
Stockholders' deficiency:
Common stock.................... -- -- -- -- --
Additional paid-in capital...... 67,417 67,417 -- (67,417) 67,417
Accumulated deficit............. (28,111) (25,889) (2,222) 28,111 (28,111)
Treasury stock and other........ (50,872) (50,675) (197) 50,872 (50,872)
-------- -------- ------- -------- --------
Total stockholders'
deficiency................. (11,566) (9,147) (2,419) 11,566 (11,566)
-------- -------- ------- -------- --------
Total liabilities and
stockholders' deficiency........ $(11,566) $291,315 $ 7,527 $ 4,147 $291,423
======== ======== ======= ======== ========
</Table>
F-41
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
THIRTEEN WEEK PERIOD ENDED APRIL 1, 2003
<Table>
<Caption>
ISSUER AND
COMBINED COMBINED
VOLUME GUARANTOR NON-GUARANTOR
HOLDINGS SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
Net sales.................. $ -- $90,656 $6,244 $ -- $96,900
Cost of sales.............. -- 76,048 5,607 -- 81,655
Selling, general, and
administrative........... -- 12,619 756 -- 13,375
Depreciation and
amortization............. -- 6,286 189 -- 6,475
Contract related losses.... -- 110 -- -- 110
------- ------- ------ ------ -------
Operating loss............. -- (4,407) (308) -- (4,715)
Interest expense........... -- 5,071 -- 5,071
Other income, net.......... -- (2) (3) -- (5)
------- ------- ------ ------ -------
Loss before income taxes... -- (9,476) (305) -- (9,781)
Income tax benefit......... -- (3,236) -- -- (3,236)
------- ------- ------ ------ -------
Loss in earnings of
subsidiaries............. (6,545) -- -- 6,545 --
------- ------- ------ ------ -------
Net loss................... (6,545) (6,240) (305) 6,545 (6,545)
Other comprehensive
income -- foreign
currency translation
adjustment............... -- -- 247 -- 247
------- ------- ------ ------ -------
Comprehensive loss......... $(6,545) $(6,240) $ (58) $6,545 $(6,298)
======= ======= ====== ====== =======
</Table>
F-42
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
THIRTEEN WEEK PERIOD ENDED APRIL 1, 2003
<Table>
<Caption>
ISSUER AND
COMBINED COMBINED
VOLUME GUARANTOR NON-GUARANTOR
HOLDINGS SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
-------- ------------ ------------- ------------
(IN THOUSANDS)
Cash Flows Provided by (Used In)
Operating Activities................. $ -- $ (5,094) $ 47 $ (5,047)
----- -------- ---- --------
Cash Flows from Investing Activities:
Purchase of property and equipment,
net............................... -- (4,223) (34) (4,257)
Contract rights acquired, net........ -- (5,832) -- (5,832)
----- -------- ---- --------
Net cash used in investing
activities...................... -- (10,055) (34) (10,089)
----- -------- ---- --------
Cash Flows from Financing Activities:
Net borrowings -- revolving loans.... -- 16,500 -- 16,500
Principal payments on long-term
debt.............................. -- (288) -- (288)
Decrease in bank overdrafts.......... -- (149) (149)
----- -------- ---- --------
Net cash provided by financing
activities...................... -- 16,063 16,063
----- -------- ---- --------
Increase in cash....................... -- 914 13 927
Cash and cash equivalents -- beginning
of period............................ -- 10,150 224 10,374
----- -------- ---- --------
Cash and cash equivalents -- end of
period............................... $ -- $ 11,064 $237 $ 11,301
===== ======== ==== ========
</Table>
F-43
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED BALANCE SHEET, DECEMBER 31, 2002 (IN THOUSANDS)
<Table>
<Caption>
ISSUER AND
COMBINED COMBINED
VOLUME GUARANTOR NON-GUARANTOR
HOLDINGS SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents....... $ $ 10,150 $ 224 $ $ 10,374
Accounts receivable............. 15,309 1,179 16,488
Other current assets............ 24,948 1,147 (7,295) 18,800
-------- -------- ------- -------- --------
Total current assets......... 50,407 2,550 (7,295) 45,662
Property and equipment............ 52,951 3,108 56,059
Contract rights, net.............. 101,017 685 101,702
Cost in excess of net assets
acquired, net................... 46,457 46,457
Investment in subsidiaries........ (5,268) 5,268
Other assets...................... 30,290 22 30,312
-------- -------- ------- -------- --------
Total assets...................... $ (5,268) $281,122 $ 6,365 $ (2,027) $280,192
======== ======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Intercompany liabilities........ $ $ $ 7,295 $ (7,295) $
Other current liabilities....... 55,047 1,431 56,478
-------- -------- ------- -------- --------
Total current liabilities.... 55,047 8,726 (7,295) 56,478
Long-term debt.................... 224,250 224,250
Other liabilities................. 4,732 4,732
-------- -------- ------- -------- --------
Total liabilities............ 284,029 8,726 (7,295) 285,460
-------- -------- ------- -------- --------
Stockholders' deficiency:
Common stock....................
Additional paid-in capital...... 67,417 67,417 (67,417) 67,417
Accumulated deficit............. (21,566) (19,649) (1,917) 21,566 (21,566)
Treasury stock and other........ (51,119) (50,675) (444) 51,119 (51,119)
-------- -------- ------- -------- --------
Total stockholders'
deficiency................. (5,268) (2,907) (2,361) 5,268 (5,268)
-------- -------- ------- -------- --------
Total liabilities and
stockholders' deficiency........ $ (5,268) $281,122 $ 6,365 $ (2,027) $280,192
======== ======== ======= ======== ========
</Table>
F-44
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
THIRTEEN WEEK PERIOD ENDED APRIL 2, 2002
<Table>
<Caption>
ISSUER AND
COMBINED COMBINED
VOLUME GUARANTOR NON-GUARANTOR
HOLDINGS SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
Net sales.................. $82,058 $5,782 $87,840
Cost of sales.............. 69,679 5,120 74,799
Selling, general, and
administrative........... 11,085 548 11,633
Depreciation and
amortization............. 5,371 222 5,593
------- ------- ------ ------ -------
Operating loss............. (4,077) (108) (4,185)
Interest expense........... 5,357 5,357
Other income, net.......... (1,384) (1,384)
------- ------- ------ ------ -------
Loss before income taxes... (8,050) (108) (8,158)
Income tax benefit......... (1,288) -- (1,288)
------- ------- ------ ------ -------
Loss in earnings of
subsidiaries............. $(6,870) -- -- $6,870 --
------- ------- ------ ------ -------
Net loss................... (6,870) (6,762) (108) 6,870 (6,870)
Other comprehensive loss --
foreign currency
translation adjustment... -- -- (14) -- (14)
------- ------- ------ ------ -------
Comprehensive loss......... $(6,870) $(6,762) $ (122) $6,870 $(6,884)
======= ======= ====== ====== =======
</Table>
F-45
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
THIRTEEN WEEK PERIOD ENDED APRIL 2, 2002
<Table>
<Caption>
ISSUER AND
COMBINED COMBINED
VOLUME GUARANTOR NON-GUARANTOR
HOLDINGS SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
-------- ------------ ------------- ------------
(IN THOUSANDS)
Cash Flows Provided by (Used In)
Operating Activities................. $ -- $ (109) $ 217 $ 108
----- ------- ----- -------
Cash Flows from Investing Activities:
Purchase of property and equipment... -- (2,477) (174) (2,651)
Purchase of contract rights.......... -- (204) -- (204)
----- ------- ----- -------
Net cash used in investing
activities...................... -- (2,681) (174) (2,855)
----- ------- ----- -------
Cash Flows from Financing Activities:
Net borrowings -- revolving loans.... -- 1,500 -- 1,500
Principal payments on long-term
debt.............................. -- (287) -- (287)
Principal payments on capital lease
obligations....................... -- (57) -- (57)
Decrease in bank overdrafts.......... -- (1,758) (1,758)
----- ------- ----- -------
Net cash used in financing
activities...................... -- (602) (602)
----- ------- ----- -------
Increase (decrease) in cash............ -- (3,392) 43 (3,349)
Cash and cash equivalents -- beginning
of period............................ -- 14,976 166 15,142
----- ------- ----- -------
Cash and cash equivalents -- end of
period............................... $ -- $11,584 $ 209 $11,793
===== ======= ===== =======
</Table>
F-46
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INCOME DEPOSIT SECURITIES (IDSS)
VOLUME SERVICES AMERICA HOLDINGS, INC.
-------------------------
PROSPECTUS
-------------------------
, 2003
UNTIL , 2003 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT BUY, SELL OR TRADE OUR IDSS, WHETHER OR NOT PARTICIPATING IN THIS
OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS IN
ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Volume Services America
Holdings, Inc. in connection with the offer and sale of the securities being
registered. All amounts are estimates except the SEC registration fee and the
NASD filing fee.
<Table>
SEC registration fee........................................ $25,300
NASD filing fee............................................. $28,000
American Stock Exchange listing fee*........................
Toronto Stock Exchange listing fee (IDSs)*..................
Toronto Stock Exchange listing fee (Common stock)*..........
Transfer agent's fee*.......................................
Trustee's fee*..............................................
Printing and engraving expenses*............................
Legal fees and expenses*....................................
Accounting fees and expenses*...............................
Miscellaneous*..............................................
-------
Total..................................................... $
=======
</Table>
- ---------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
DELAWARE. The General Corporation Law of the State of Delaware ("DGCL")
authorizes corporations to limit or eliminate the personal liability of
directors to corporations and their stockholders for monetary damages for
breaches of directors' fiduciary duties. The certificates of incorporation of
the Delaware registrants include a provision that eliminates the personal
liability of directors for monetary damages for actions taken as a director,
except for liability for breach of duty of loyalty; for acts or omissions not in
good faith or involving intentional misconduct or knowing violation of law;
under Section 174 of the DGCL (unlawful dividends and stock repurchases); or for
transactions from which the director derived improper personal benefit.
The certificates of incorporation of the Delaware registrants provide that
these registrants must indemnify their directors and officers to the fullest
extent authorized by the DGCL and must also pay expenses incurred in defending
any such proceeding in advance of its final disposition upon delivery of an
undertaking, by or on behalf of an indemnified person, to repay all amounts so
advanced if it should be determined ultimately that such person is not entitled
to be indemnified under this section or otherwise.
The indemnification rights set forth above shall not be exclusive of any
other right which an indemnified person may have or hereafter acquire under any
statute, provision of our certificate of incorporation, our by laws, agreement,
vote of stockholders or disinterested directors or otherwise.
Volume Services America Holdings, Inc. maintains insurance to protect
itself and its directors and, officers and those of its subsidiaries against any
such expense, liability or loss, whether or not it would have the power to
indemnify them against such expense, liability or loss under applicable law.
KANSAS. Under Section 17-6305 of the Kansas General Corporation Code, a
corporation may indemnify a director, officer, employee, or agent of the
corporation (or other entity if such person is serving in such capacity at the
corporation's request) against expenses (including attorneys' fees), judgments,
fines, and amounts paid in settlement actually and reasonably incurred by him if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the
II-1
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. In the case of an action
brought by or in the right of a corporation, the corporation may indemnify a
director, officer, employee, or agent of the corporation (or other entity if
such person is serving in such capacity at the corporation's request) against
expenses (including attorneys' fees) actually and reasonably incurred by him if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, except that no indemnification
shall be made in respect of any claim, issue, or matter as to which such person
shall have been adjudged to be liable to the corporation unless a court
determines that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnification for such expenses as the court shall deem proper. Expenses
(including attorneys' fees) incurred by an officer or director in defending any
civil or criminal action, suit or proceeding may be paid by the corporation in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of such director or officer to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by the corporation.
Section 17-6002(b)(8) of the Kansas General Corporation Code provides that
directors shall not be personally liable for monetary damages for breaches of
their fiduciary duty as directors, except for (i) breaches of their duty of
loyalty to their corporations or their stockholders, (ii) acts or omissions not
in good faith or which involve intentional misconduct or knowing violations of
law, (iii) certain transactions under Section 17-6424 of the Kansas General
Corporation Code (unlawful payment of dividends), or (iv) transactions from
which a director derives an improper personal benefit.
Consistent with Section 17-6305 of the Kansas General Corporation Code, the
bylaws of the Kansas registrants provide that they will indemnify their
directors and voting trustees against costs and expenses actually and necessary
incurred by or empowered upon them in connection with the defense of any action,
suit, or proceeding, except in relation to any matters as to which they shall
have been adjudged liable (without such judgment being reversed) for gross
misconduct in the performance of their duties as such directors or such voting
trustees.
MARYLAND. The certificate of incorporation of the Maryland registrant
provides that the Maryland registrant shall, to the fullest extent permitted by
the Maryland General Corporation Law and in accordance with Section 2-418 of the
Maryland General Corporation Law, indemnify any and all persons whom it shall
have power to indemnify from and against any and all of the expenses,
liabilities or other matters referred to in or covered by the Maryland General
Corporation Law.
Section 2-418 of the Maryland General Corporation Law (the "MGCL")
generally permits indemnification of any director made a party to any
proceedings by reason of service as a director unless it is established that:
(i) the act or omission of such person was material to the matter giving rise to
the proceedings and was committed in bad faith or was the result of active and
deliberate dishonesty; (ii) such person actually received an improper personal
benefit in money, property or services; or (iii) in the case of any criminal
proceedings, such person had reasonable cause to believe that the act or
omission was unlawful. The indemnity may include judgments, penalties, fines,
settlements and reasonable expenses (including attorneys' fees) actually
incurred by the director in connection with the proceeding; but, if the
proceeding is one by or in the right of the corporation, indemnification is not
permitted with respect to any proceeding in which the director has been adjudged
to be liable to the corporation, or if the proceeding is one charging improper
personal benefit to the director, whether or not involving action in the
director's official capacity, indemnification of the director is not permitted
if the director was adjudged to be liable on the basis that personal benefit was
improperly received.
In addition, under Maryland law and unless limited by the charter, the
Maryland registrant is required to indemnify a current or former director or
officer in any proceeding arising out of such individual's official capacity if
a court of appropriate jurisdiction determines such individual is entitled to
indemnification. However, indemnification with respect to any proceeding by or
in the right of the corporation or in which a director was adjudged liable on
the basis that personal benefit was improperly received shall be limited to
expenses.
II-2
Under Maryland law, the Maryland registrant may pay or reimburse, in
advance of final disposition of a proceeding, reasonable expenses incurred by a
current or former director of officer, if such individual affirms in good faith
that he or she has satisfied the applicable standard of conduct necessary for
indemnification and agrees to repay amounts paid to such individual if it is
determined that such standard is not met.
Indemnification under the provision of Maryland law is not deemed exclusive
of any other rights, by indemnification or otherwise, to which a director may be
entitled under the charter, bylaws, any resolution of stockholders or directors,
any agreement or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office.
The statute permits a Maryland corporation to indemnify its officers,
employees and agents to the same extent as its directors.
WYOMING. Section 17-16-851 of the Wyoming Business Corporation Act
("WBCA") provides that a corporation may indemnify an individual who is a party
to a proceeding because he is a director against liability incurred in the
proceeding if, among other factors: (i) he conducted himself in good faith; and
(ii) he reasonably believed that his conduct was in or at least not opposed to
the corporation's best interests; and (iii) in the case of any criminal
proceeding, he had no reasonable cause to believe his conduct was unlawful. Such
indemnification must be authorized by directors, legal counsel or shareholders
as provided in Section 17-16-855.
Unless ordered by a court under WBCA Section 17-16-854(a)(iii), a
corporation may not indemnify a director under Section 17-16-851: (i) in
connection with a proceeding by or in the right of the corporation, except for
reasonable expenses incurred in connection with the proceeding if it is
determined that the director has met the standard of conduct as set forth in the
preceding paragraph; or (ii) in connection with any proceeding with respect to
conduct for which he was adjudged liable on the basis that he received a
financial benefit to which he was not entitled.
Pursuant to Section 17-16-852 of the WBCA, a corporation is required to
indemnify a director who was wholly successful, on the merits or otherwise, in
the defense of any proceeding to which he was a party because he was a director
of the corporation against reasonable expenses incurred by him in connection
with the proceeding.
Pursuant to Section 17-16-853 of the WBCA, a corporation may, before final
disposition of a proceeding, advance funds to pay for or reimburse reasonable
expenses incurred by a director who is a party to a proceeding because he is a
director, if he delivers to the corporation: (i) a written affirmation of his
good faith belief that he has met the standard of conduct described in WBCA
Section 17-16-851; and (ii) his written undertaking to repay any funds advanced
if he is not entitled to mandatory indemnification under Section 17-16-852
(above) and it is determined that he has not met the standard of conduct
described in WBCA Section 17-16-851.
Section 17-16-856 of the WBCA provides that a corporation may indemnify and
advance expenses to an officer of the corporation who is a party to a proceeding
because he is an officer of the corporation: (i) to the same extent as a
director; and (ii) if he is an officer but not a director, to such further
extent as may be provided by the articles of incorporation, the by-laws, a
resolution of the board of directors or contract, except for: (A) liability in
connection with a proceeding by or in the right of the corporation other than
for reasonable expenses incurred in connection with the proceeding; or (B)
liability arising out of conduct that constitutes: receipt by him of a financial
benefit to which he is not entitled; an intentional infliction of harm on the
corporation or the shareholders; or an intentional violation of criminal law. An
officer of a corporation who is not a director is entitled to mandatory
indemnification under Section 17-16-852 of the WBCA, and may apply to a court
under Section 17-16-854 of the WBCA for indemnification or an advance for
expenses, in each case to the same extent to which a director may be entitled to
indemnification or advance for expenses under those provisions.
WISCONSIN. The Wisconsin registrant is incorporated under the Wisconsin
Business Corporation Law (the "WBCL"). Under Section 180.0851(1) of the WBCL,
the Wisconsin registrant is required to
II-3
indemnify a director or officer, to the extent such person is successful on the
merits or otherwise in the defense of a proceeding, for all reasonable expenses
incurred in the proceeding if such person was a party because he or she was a
director or officer of the corporation. In all other cases, the Wisconsin
registrant is required by Section 180.0851(2) to indemnify a director or officer
against liability incurred in a proceeding to which such person was a party
because he or she was a director or officer of the corporation, unless it is
determined that he or she breached or failed to perform a duty owed to the
corporation and the breach or failure to perform constitutes:
- a willful failure to deal fairly with the Wisconsin registrant or its
shareholders in connection with a matter in which the director or officer
has a material conflict of interest;
- a violation of criminal law, unless the director or officer had
reasonable cause to believe his or her conduct was lawful or no
reasonable cause to believe his or her conduct was unlawful;
- a transaction from which the director or officer derived an improper
personal profit; or
- willful misconduct.
Section 180.0858(1) provides that, subject to certain limitations, the
mandatory indemnification provisions do not preclude any additional right to
indemnification or allowance of expenses that a director or officer may have
under the Wisconsin registrant's articles of incorporation, bylaws, any written
agreement or a resolution of the board of directors or shareholders.
Section 180.0859 of the WBCL provides that it is the public policy of the
State of Wisconsin to require or permit indemnification, allowance of expenses
and insurance to the extent required or permitted under Sections 180.0850 to
180.0858 of the WBCL, for any liability incurred in connection with a proceeding
involving a federal or state statute, rule or regulation regulating the offer,
sale or purchase of securities.
Section 180.0828 of the WBCL provides that, with certain exceptions, a
director is not liable to a corporation, its shareholders, or any person
asserting rights on behalf of the corporation or its shareholders, for damages,
settlements, fees, fines, penalties or other monetary liabilities arising from a
breach of, or failure to perform, any duty resulting solely from his or her
status as a director, unless the person asserting liability proves that the
breach or failure to perform constitutes any of the four exceptions to mandatory
indemnification under Section 180.0851(2) referred to above. Under Section
180.0833 of the WBCL, directors of the Wisconsin registrant against whom claims
are asserted with respect to the declaration of improper dividends or
distributions to shareholders or certain other improper acts which they approved
are entitled to contribution from other directors who approved such actions and
from shareholders who knowingly accepted an improper dividend or distribution,
as provided therein.
Bylaws. The Wisconsin registrant's bylaws contains provisions that
generally parallel the indemnification provisions of the WBCL and cover certain
procedural matters not dealt with in the WBCL.
TEXAS. Article 2.02-1 of the Texas Business Corporation Act (the "TBCA")
provides that a director of a Texas corporation may be indemnified against
judgments, penalties, fines, settlements and reasonable expenses actually
incurred by him in connection with any action, suit or proceeding in which he
was, is, or is threatened to be made a named defendant by reason of his position
as director or officer, provided that he conducted himself in good faith and
reasonably believed that, in the case of conduct in his official capacity as a
director or officer of the corporation, such conduct was in the corporation's
best interests; and, in all other cases, that such conduct was at least not
opposed to the corporation's best interests. If a director is found liable to
the corporation or is found liable on the basis that personal benefit was
improperly received by the person, the indemnification is limited to reasonable
expenses actually incurred by the person in connection with the proceeding and
shall not be made in respect of any proceeding in which the person shall have
been found liable for willful or intentional misconduct in the performance of
his duty to the corporation. In the case of a criminal proceeding, a director or
officer may be indemnified only if he had no reasonable cause to believe his
conduct was unlawful. If a director or officer is wholly successful, on the
merits or otherwise, in connection with such a proceeding, such indemnification
is mandatory.
II-4
The TBCA further provides that a corporation may indemnify and advance
expenses to an officer, employee or agent of the corporation, and to those who
are not or were not officers, employees or agents but who are or were serving at
the request of the corporation, to the same extent that it my indemnify and
advance expenses to directors.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. The following exhibits are filed as part of this
Registration Statement, or incorporated herein by reference:
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
1.1* Form of Underwriting Agreement.
3.1 Form of Restated Certificate of Incorporation of Volume
Services America Holdings, Inc.
3.2 Form of Amended and Restated By-laws of Volume Services
America Holdings, Inc.
3.3 Form of Restated Certificate of Incorporation of Volume
Services America, Inc.
3.4 Form of Amended and Restated By-laws of Volume Services
America, Inc.
3.5 Form of Restated Certificate of Incorporation of Volume
Services, Inc. (a Delaware corporation).
3.6 Form of Amended and Restated By-laws of Volume Services,
Inc. (a Delaware corporation).
3.7 Form of Restated Certificate of Incorporation of Service
America Corporation.
3.8 Form of Amended and Restated By-laws of Service America
Corporation.
3.9 Form of Restated Articles of Incorporation of Events Center
Catering, Inc.
3.10 Form of Amended and Restated By-laws of Events Center
Catering, Inc.
3.11 Form of Articles of Amendment and Restatement of the Charter
of Service America Concessions Corporation.
3.12 Form of Amended and Restated By-laws of Service America
Concessions Corporation.
3.13 Form of Restated and Amended Articles of Incorporation of
Service America Corporation of Wisconsin.
3.14 Form of Amended and Restated By-laws of Service America
Corporation of Wisconsin.
3.15 Form of Restated Articles of Incorporation of Servo-Kansas,
Inc.
3.16 Form of Amended and Restated By-laws of Servo-Kansas, Inc.
3.17 Form of Amended and Restated Articles of Incorporation of
SVM of Texas, Inc.
3.18 Form of Amended and Restated By-laws of SVM of Texas, Inc.
3.19 Form of Restated Articles of Incorporation of Volume
Services, Inc. (a Kansas corporation).
3.20 Form of Amended and Restated By-laws of Volume Services,
Inc. (a Kansas corporation).
4.1 Indenture, dated as of March 4, 1999, among Volume Services
America, Inc., the guarantors thereto and Norwest Bank
Minnesota, National Association (including Form of Senior
Subordinated Note).
4.2* Form of Amended Indenture, dated as of , 2003, among
Volume Services America, Inc., the guarantors thereto and
Norwest Bank Minnesota, National Association.
4.3* Indenture, dated as of , 2003, among Volume
Services America Holdings, Inc., the guarantors thereto and
The Bank of New York, as Trustee.
4.4* Form of Subordinated Note (included in Exhibit 4.2).
4.5* Form of Registration Rights Agreement.
4.6* Form of Amended and Restated Stockholders Agreement.
4.7* Form of stock certificate for common stock.
</Table>
II-5
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
4.8 Form of global IDS.
5.1* Opinion of Simpson Thacher & Bartlett LLP.
8.1* Opinion of Simpson Thacher & Bartlett LLP.
10.1* Credit Agreement, dated as of , 2003, among Volume
Services America, Inc., the guarantors thereto and certain
financial institutions as the Lenders.
10.2* Volume Services America Deferred Compensation Plan,
effective as of June 1, 2000.
10.3** Employment Agreement, dated as of August 24, 1998, by and
between VSI Acquisition II Corporation and John T. Dee.
10.4** Letter Agreement, dated May 1, 2002, amending the terms of
the Employment Agreement by and between Volume Services
America Holdings, Inc. (formerly VSI Acquisition II
Corporation) and John T. Dee.
10.5** Employment Agreement dated as of November 17, 1995, by and
between Volume Services, Inc. (a Delaware corporation) and
Kenneth R. Frick.
10.6** Employment Agreement dated as of September 29, 1998, by and
between VSI Acquisition II Corporation and Janet L.
Steinmayer.
10.7** Employment Agreement, dated April 15, 2002 by and between
Volume Services America Holdings, Inc. and Lawrence E.
Honig.
10.8* Amendment and Waiver Agreement, dated as of July 1, 2003, by
and between Volume Services America Holdings, Inc. and
Lawrence E. Honig.
10.9 Form of Volume Services America Holdings, Inc. Long-Term
Incentive Plan.
12.1* Computation of Ratio of Earnings to Fixed Charges.
21.1* Subsidiaries of Volume Services America Holdings, Inc.
23.1 Consent of Deloitte & Touche LLP.
23.2* Consent of Simpson Thacher & Bartlett LLP (included in
Exhibit 5.1).
23.3* Consent of Simpson Thacher & Bartlett LLP (included in
Exhibit 8.1).
24.1** Powers of Attorney (included on signature page).
25.1* Form T-1 Statement of Eligibility under Trust Indenture Act
of 1939, as amended, of as Trustee.
</Table>
- ---------------
* To be filed by amendment.
** Previously filed.
(b) Financial Statement Schedules
ITEM 17. UNDERTAKINGS
1. The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
2. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is therefore unenforceable. In the event that a claim
for indemnification by the registrant against such liabilities, other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding, is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of
II-6
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
3. The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Spartanburg, South
Carolina on July 16, 2003.
VOLUME SERVICES AMERICA HOLDINGS, INC.
By: /s/ LAWRENCE E. HONIG
------------------------------------
Name: Lawrence E. Honig
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
their capacities on the 16th day of July, 2003.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
* Director
- --------------------------------------
David Blitzer
* Chairman of the Board
- --------------------------------------
John T. Dee
/s/ LAWRENCE E. HONIG Chief Executive Officer and Director
- -------------------------------------- (Principal Executive Officer)
Lawrence E. Honig
* Executive Vice President and Chief Financial
- -------------------------------------- Officer (Principal Financial and Accounting
Kenneth R. Frick Officer)
* Director
- --------------------------------------
Howard A. Lipson
* Director
- --------------------------------------
Peter Wallace
*By: /s/ LAWRENCE E. HONIG
- --------------------------------------
Attorney-in-fact
</Table>
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Spartanburg, South
Carolina on July 16, 2003.
VOLUME SERVICES AMERICA, INC.
By: /s/ LAWRENCE E. HONIG
------------------------------------
Name: Lawrence E. Honig
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
their capacities on the 16th day of July, 2003.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
* Director
- --------------------------------------
David Blitzer
* Chairman of the Board
- --------------------------------------
John T. Dee
/s/ LAWRENCE E. HONIG Chief Executive Officer and Director
- -------------------------------------- (Principal Executive Officer)
Lawrence E. Honig
* Executive Vice President and Chief Financial
- -------------------------------------- Officer (Principal Financial and Accounting
Kenneth R. Frick Officer)
* Director
- --------------------------------------
Howard A. Lipson
* Director
- --------------------------------------
Peter Wallace
*By: /s/ LAWRENCE E. HONIG
- --------------------------------------
Attorney-in-fact
</Table>
II-9
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Spartanburg, South
Carolina on July 16, 2003.
VOLUME SERVICES, INC.
(A DELAWARE CORPORATION)
By: /s/ LAWRENCE E. HONIG
------------------------------------
Name: Lawrence E. Honig
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
their capacities on the 16th day of July, 2003.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
* Director
- --------------------------------------
David Blitzer
* Chairman of the Board
- --------------------------------------
John T. Dee
/s/ LAWRENCE E. HONIG Chief Executive Officer and Director
- -------------------------------------- (Principal Executive Officer)
Lawrence E. Honig
* Executive Vice President and Chief Financial
- -------------------------------------- Officer
Kenneth R. Frick (Principal Financial and Accounting Officer)
* Director
- --------------------------------------
Howard A. Lipson
* Director
- --------------------------------------
Peter Wallace
*By: /s/ LAWRENCE E. HONIG
- --------------------------------------
Attorney-in-fact
</Table>
II-10
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Spartanburg, South
Carolina on July 16, 2003.
EVENTS CENTER CATERING, INC.
By: /s/ LAWRENCE E. HONIG
------------------------------------
Name: Lawrence E. Honig
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
their capacities on the 16th day of July, 2003.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
* Chairman of the Board
- --------------------------------------
John T. Dee
/s/ LAWRENCE E. HONIG Chief Executive Officer and Director
- -------------------------------------- (Principal Executive Officer)
Lawrence E. Honig
* Vice President, Chief Financial Officer and
- -------------------------------------- Director
Kenneth R. Frick (Principal Financial and Accounting Officer)
* Director
- --------------------------------------
Janet L. Steinmayer
*By: /s/ LAWRENCE E. HONIG
- --------------------------------------
Attorney-in-fact
</Table>
II-11
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Spartanburg, South
Carolina on July 16, 2003.
SERVICE AMERICA CONCESSIONS
CORPORATION
By: /s/ LAWRENCE E. HONIG
------------------------------------
Name: Lawrence E. Honig
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
their capacities on the 16th day of July, 2003.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
* Chairman of the Board
- --------------------------------------
John T. Dee
/s/ LAWRENCE E. HONIG Chief Executive Officer and Director
- -------------------------------------- (Principal Executive Officer)
Lawrence E. Honig
* Vice President, Chief Financial Officer and
- -------------------------------------- Director
Kenneth R. Frick (Principal Financial and Accounting Officer)
* Director
- --------------------------------------
Janet L. Steinmayer
*By: /s/ LAWRENCE E. HONIG
- --------------------------------------
Attorney-in-fact
</Table>
II-12
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Spartanburg, South
Carolina on July 16, 2003.
SERVICE AMERICA CORPORATION OF
WISCONSIN
By: /s/ LAWRENCE E. HONIG
------------------------------------
Name: Lawrence E. Honig
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
their capacities on the 16th day of July, 2003.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
* Chairman of the Board
- --------------------------------------
John T. Dee
/s/ LAWRENCE E. HONIG Chief Executive Officer and Director
- -------------------------------------- (Principal Executive Officer)
Lawrence E. Honig
* Vice President, Chief Financial Officer and
- -------------------------------------- Director
Kenneth R. Frick (Principal Financial and Accounting Officer)
* Director
- --------------------------------------
Janet L. Steinmayer
*By: /s/ LAWRENCE E. HONIG
- --------------------------------------
Attorney-in-fact
</Table>
II-13
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Spartanburg, South
Carolina on July 16, 2003.
SERVO-KANSAS, INC.
By: /s/ LAWRENCE E. HONIG
------------------------------------
Name: Lawrence E. Honig
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
their capacities on the 16th day of July, 2003.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
* Chairman of the Board
- --------------------------------------
John T. Dee
/s/ LAWRENCE E. HONIG Chief Executive Officer and Director
- -------------------------------------- (Principal Executive Officer)
Lawrence E. Honig
* Vice President, Chief Financial Officer and
- -------------------------------------- Director
Kenneth R. Frick (Principal Financial and Accounting Officer)
* Director
- --------------------------------------
Janet L. Steinmayer
*By: /s/ LAWRENCE E. HONIG
- --------------------------------------
Attorney-in-fact
</Table>
II-14
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Spartanburg, South
Carolina on July 16, 2003.
SVM OF TEXAS, INC.
By: /s/ LAWRENCE E. HONIG
------------------------------------
Name: Lawrence E. Honig
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
their capacities on the 16th day of July, 2003.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
* Chairman of the Board
- --------------------------------------
John T. Dee
/s/ LAWRENCE E. HONIG Chief Executive Officer and Director
- -------------------------------------- (Principal Executive Officer)
Lawrence E. Honig
* Vice President, Chief Financial Officer and
- -------------------------------------- Director
Kenneth R. Frick (Principal Financial and Accounting Officer)
* Director
- --------------------------------------
Janet L. Steinmayer
*By: /s/ LAWRENCE E. HONIG
- --------------------------------------
Attorney-in-fact
</Table>
II-15
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Spartanburg, South
Carolina on July 16, 2003.
VOLUME SERVICES, INC.
(A KANSAS CORPORATION)
By: /s/ LAWRENCE E. HONIG
------------------------------------
Name: Lawrence E. Honig
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
their capacities on the 16th day of July, 2003.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
* Chairman of the Board
- --------------------------------------
John T. Dee
/s/ LAWRENCE E. HONIG Chief Executive Officer and Director
- -------------------------------------- (Principal Executive Officer)
Lawrence E. Honig
* Vice President, Chief Financial Officer and
- -------------------------------------- Director
Kenneth R. Frick (Principal Financial and Accounting Officer)
* Director
- --------------------------------------
Janet L. Steinmayer
*By: /s/ LAWRENCE E. HONIG
- --------------------------------------
Attorney-in-fact
</Table>
II-16
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Spartanburg, South
Carolina on July 16, 2003.
SERVICE AMERICA CORPORATION
By: /s/ LAWRENCE E. HONIG
------------------------------------
Name: Lawrence E. Honig
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
their capacities on the 16th day of July, 2003.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
* Director
- --------------------------------------
David Blitzer
* Chairman of the Board
- --------------------------------------
John T. Dee
/s/ LAWRENCE E. HONIG Chief Executive Officer and Director
- -------------------------------------- (Principal Executive Officer)
Lawrence E. Honig
* Executive Vice President and Chief Financial
- -------------------------------------- Officer
Kenneth R. Frick (Principal Financial and Accounting Officer)
* Director
- --------------------------------------
Howard A. Lipson
* Director
- --------------------------------------
Peter Wallace
*By: /s/ LAWRENCE E. HONIG
- --------------------------------------
Attorney-in-fact
</Table>
II-17
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
1.1* Form of Underwriting Agreement.
3.1 Form of Restated Certificate of Incorporation of Volume
Services America Holdings, Inc.
3.2 Form of Amended and Restated Bylaws of Volume Services
America Holdings, Inc.
3.3 Form of Restated Certificate of Incorporation of Volume
Services America, Inc.
3.4 Form of Amended and Restated By-laws of Volume Services
America, Inc.
3.5 Form of Restated Certificate of Incorporation of Volume
Services, Inc. (a Delaware corporation).
3.6 Form of Amended and Restated By-laws of Volume Services,
Inc. (a Delaware corporation).
3.7 Form of Restated Certificate of Incorporation of Service
America Corporation.
3.8 Form of Amended and Restated By-laws of Service America
Corporation.
3.9 Form of Restated Articles of Incorporation of Events Center
Catering, Inc.
3.10 Form of Amended and Restated By-laws of Events Center
Catering, Inc.
3.11 Form of Articles of Amendment and Restatement of the Charter
of Service America Concessions Corporation.
3.12 Form of Amended and Restated By-laws of Service America
Concessions Corporation.
3.13 Form of Restated and Amended Articles of Incorporation of
Service America Corporation of Wisconsin.
3.14 Form of Amended and Restated By-laws of Service America
Corporation of Wisconsin.
3.15 Form of Restated Articles of Incorporation of Servo-Kansas,
Inc.
3.16 Form of Amended and Restated By-laws of Servo-Kansas, Inc.
3.17 Form of Amended and Restated Articles of Incorporation of
SVM of Texas, Inc.
3.18 Form of Amended and Restated By-laws of SVM of Texas, Inc.
3.19 Form of Restated Articles of Incorporation of Volume
Services, Inc. (a Kansas corporation).
3.20 Form of Amended and Restated By-laws of Volume Services,
Inc. (a Kansas corporation).
4.1 Indenture, dated as of March 4, 1999, among Volume Services
America, Inc., the guarantors thereto and Norwest Bank
Minnesota, National Association (including Form of Senior
Subordinated Note).
4.2* Form of Amended Indenture, dated as of , 2003, among
Volume Services America, Inc., the guarantors thereto and
Norwest Bank Minnesota, National Association.
4.3* Indenture, dated as of , 2003, among Volume Services
America Holdings, Inc., the guarantors thereto and The Bank
of New York, as Trustee.
4.4* Form of Subordinated Note (included in Exhibit 4.2).
4.5* Form of Registration Rights Agreement.
4.6* Form of Amended and Restated Stockholders Agreement.
4.7* Form of stock certificate for common stock.
4.8 Form of global IDS.
5.1* Opinion of Simpson Thacher & Bartlett LLP.
8.1* Opinion of Simpson Thacher & Bartlett LLP.
10.1* Credit Agreement, dated as of , 2003, among Volume
Services America, Inc., the guarantors thereto and certain
financial institutions as the Lenders.
10.2* Volume Services American Deffered Compensation Plan,
effective as of June 1, 2000.
</Table>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.3** Employment Agreement, dated as of August 24, 1998, by and
between VSI Acquisition II Corporation and John T. Dee.
10.4** Letter Agreement, dated May 1, 2002, amending the terms of
the Employment Agreement by and between Volume Services
America Holdings, Inc. (formerly VSI Acquisition II
Corporation) and John T. Dee.
10.5** Employment Agreement dated as of November 17, 1995, by and
between Volume Services, Inc. (a Delaware corporation) and
Kenneth R. Frick.
10.6** Employment Agreement dated as of September 29, 1998, by and
between VSI Acquisition II Corporation and Janet L.
Steinmayer.
10.7** Employment Agreement dated April 15, 2002 by and between
Volume Services America Holdings, Inc. and Lawrence E.
Honig.
10.8* Amendment and Waiver Agreement, dated as of July 1, 2003, by
and between Volume Services America Holdings, Inc. and
Lawrence E. Honig.
10.9 Form of Volume Services America Holdings, Inc. Long-Term
Incentive Plan.
12.1* Computation of Ratio of Earnings to Fixed Charges.
21.1* Subsidiaries of Volume Services America Holdings, Inc.
23.1 Consent of Deloitte & Touche LLP.
23.2* Consent of Simpson Thacher & Bartlett LLP (included in
Exhibit 5.1).
23.3* Consent of Simpson Thacher & Bartlett LLP (included in
Exhibit 8.1).
24.1** Powers of Attorney (included on signature page).
25.1* Form T-1 Statement of Eligibility under Trust Indenture Act
of 1939, as amended, of as Trustee.
</Table>
- ---------------
* To be filed by amendment.
** Previously filed.