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FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
VOLUME SERVICES AMERICA, INC.
See Table of Additional Registrants
(Exact name of registrant as specified in its charter)
DELAWARE 57-0969174
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
201 East Broad Street, Spartanburg, South Carolina 29306
(Address of principal executive offices) (Zip Code)
(864) 598-8600
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
( ) YES ( x ) NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares of Registrant's Common Stock, par value $.01 per share,
outstanding as of November 9, 1999: 100 shares of Common Stock.
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TABLE OF ADDITIONAL REGISTRANTS
ADDRESS INCLUDING ZIP CODE
AND TELEPHONE NUMBER
STATE OR OTHER JURISDICTION INCLUDING AREA CODE, OF
EXACT NAME OF REGISTRANT AS OF INCORPORATION OR I.R.S. EMPLOYER REGISTRANT'S PRINCIPAL
SPECIFIED IN ITS CHARTER ORGANIZATION IDENTIFICATION NUMBER EXECUTIVE OFFICES
201 East Broad Street,
Events Center Wyoming 57-1007720 Spartanburg, SC 29306
Catering, Inc. (864) 598-8600
201 East Broad Street,
Service America Concessions Maryland 06-1182149 Spartanburg, SC 29306 (864)
Corporation 598-8600
201 East Broad Street,
Service America Corporation Delaware 13-1939453 Spartanburg, SC 29306 (864)
598-8600
Service America 201 East Broad Street,
Corporation Wisconsin 39-1655756 Spartanburg, SC 29306 (864)
of Wisconsin 598-8600
201 East Broad Street,
Servo-Kansas, Inc. Kansas 06-1238400 Spartanburg, SC 29306 (864)
598-8600
201 East Broad Street,
Servomation Duchess, Inc. California 95-1943117 Spartanburg, SC 29306 (864)
598-8600
201 East Broad Street,
SVM of Texas, Inc. Texas 75-1913406 Spartanburg, SC 29306 (864)
598-8600
201 East Broad Street,
Volume Services America Delaware 13-3870167 Spartanburg, SC 29306 (864)
Holdings, Inc. 598-8600
201 East Broad Street,
Volume Services, Inc. Delaware 36-2786575 Spartanburg, SC 29306 (864)
598-8600
201 East Broad Street,
Volume Services, Inc. Kansas 57-0973901 Spartanburg, SC 29306 (864)
598-8600
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VOLUME SERVICES AMERICA, INC.
INDEX
Part I. Financial Information
Item 1. Financial Statements (unaudited) -- Volume Services America Holdings,
Inc. and Subsidiaries
Consolidated Balance Sheets as of September 28, 1999 and December 29,
1998.
Consolidated Statements of Operations and Comprehensive Profit (Loss)
for the three months ended and nine months ended September 28, 1999 and
September 29, 1998.
Consolidated Statements of Cash Flows for the nine months ended
September 28, 1999 and September 29, 1998.
Consolidated Statements of Stockholders' Equity (Deficiency) for the
period December 30, 1998 to September 28, 1999.
Notes to Consolidated Financial Statements for the thirty-nine week
periods ended September 29, 1998 and September 28, 1999
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VOLUME SERVICES AMERICA HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 28, 1999 AND DECEMBER 29, 1998
(IN THOUSANDS) (UNAUDITED)
SEPTEMBER 28, DECEMBER 29,
1999 1998
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................ $ 15,579 $ 8,828
Accounts receivable, less allowance for doubtful accounts of $1,374
and $963 at
September 28, 1999 and December 29, 1998, respectively .......... 20,132 17,790
Merchandise inventories .............................................. 13,066 9,585
Prepaid expenses ..................................................... 4,699 3,975
Deferred tax asset ................................................... 2,082 2,082
--------- ---------
Total current assets .......................................................... 55,558 42,260
--------- ---------
PROPERTY AND EQUIPMENT:
Leasehold improvements ............................................... 44,243 40,048
Merchandising equipment .............................................. 42,281 37,197
Vehicles and other equipment ......................................... 6,635 5,702
Construction in process .............................................. 805 262
--------- ---------
Total ......................................................................... 93,964 83,209
Less accumulated depreciation and amortization ....................... 22,794 12,226
--------- ---------
Property and equipment, net ................................................... 71,170 70,983
--------- ---------
OTHER ASSETS:
Contract rights, net ................................................. 74,767 72,935
Cost in excess of net assets acquired, net ........................... 51,890 50,585
Deferred financing costs, net ........................................ 11,597 7,783
Trademarks, net ...................................................... 18,593 19,108
Other ................................................................ 4,474 3,530
--------- ---------
Total other assets ............................................................ 161,321 153,941
--------- ---------
TOTAL ASSETS .................................................................. $ 288,049 $ 267,184
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Current maturities of long-term debt ................................. $ 1,150 $ 4,200
Current maturities of capital lease obligations ...................... 202 189
Revolving loans ...................................................... 1,750 --
Accounts payable ..................................................... 25,075 16,410
Accrued salaries and vacations ....................................... 9,162 8,336
GE Capital Note payable .............................................. -- 500
Liability for self-insured claims .................................... 1,673 2,216
Accrued taxes, other than income taxes ............................... 5,405 3,214
Accrued commissions and royalties .................................... 16,208 8,603
Accrued interest ..................................................... 1,177 1,156
Other ................................................................ 3,687 3,834
--------- ---------
Total current liabilities ..................................................... 65,489 48,658
--------- ---------
LONG TERM LIABILITIES:
Long term debt ....................................................... 212,988 155,800
Capital lease obligation ............................................. 469 622
Deferred income tax .................................................. 5,461 6,684
Liability for self-insured claims .................................... 2,099 2,949
Other liabilities .................................................... 2,462 2,594
--------- ---------
Total long term liabilities ................................................... 223,479 168,649
--------- ---------
STOCKHOLDERS' EQUITY (DEFICIENCY):
Common stock ($.01 par value; 1,000 shares authorized; 332 and 526 shares
issued and outstanding at September 28, 1999 and December 29, 1998,
respectively)........................................................ -- --
Additional paid-in capital .................................................... 16,974 66,474
Accumulated deficit ........................................................... (14,466) (12,595)
Accumulated other comprehensive loss .......................................... (193) (67)
Investors' notes receivable ................................................... (3,234) (3,935)
--------- ---------
Total stockholders' equity (deficiency) ....................................... (919) 49,877
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) ....................... $ 288,049 $ 267,184
========= =========
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VOLUME SERVICES AMERICA HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE PROFIT (LOSS)
(IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- -------------------------------
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29,
1999 1998 1999 1998
------------- ------------- ------------- -------------
Net sales .............................................. $ 147,058 $ 99,699 $ 329,689 $ 186,703
--------- --------- --------- ---------
Cost of sales .......................................... 115,033 77,226 259,553 146,382
Selling, general, and administrative ................... 13,244 9,365 33,141 18,862
Depreciation and amortization .......................... 6,721 5,182 19,886 11,687
Transaction fees and expenses .......................... 328 612 1,555 612
--------- --------- --------- ---------
Operating profit ....................................... 11,732 7,314 15,554 9,160
Interest expense, net .................................. 6,215 2,739 16,770 7,289
Other income, net ...................................... (53) (112) (268) (244)
--------- --------- --------- ---------
Profit (loss) before income taxes ...................... 5,570 4,687 (948) 2,115
--------- --------- --------- ---------
Income tax provision (benefit) ......................... (187) 1,870 (206) 1,870
--------- --------- --------- ---------
Net profit (loss) before extraordinary item and
cumulative effect of change in accounting
principles........................................... 5,757 2,817 (742) 245
Extraordinary item, net of income tax .................. -- -- 873 --
Cumulative effect of change in accounting principles,
net of income tax.................................... .. -- -- 256 --
--------- --------- --------- ---------
Net profit (loss) ...................................... 5,757 2,817 (1,871) 245
Other comprehensive loss:
Foreign currency translation adjustment ................ 24 (33) (126) (33)
--------- --------- --------- ---------
Comprehensive profit (loss) ............................ $ 5,781 $ 2,784 $ (1,997) $ 212
========= ========= ========= =========
See Notes to Consolidated Financial Statements.
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VOLUME SERVICES AMERICA HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 28, 1999 AND SEPTEMBER 29, 1998
(IN THOUSANDS) (UNAUDITED)
SEPTEMBER 28, SEPTEMBER 29,
1999 1998
------------- -------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net profit (loss) .................................................... $ (1,871) $ 245
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization ................................... 19,886 11,687
Amortization of deferred financing costs ........................ 844 389
Extraordinary item .............................................. 873 --
Cumulative effect of change in accounting principles ............ 256 --
Deferred tax expense ............................................ (476) --
Foreign exchange adjustment ..................................... (126) --
Gain on disposition of assets ................................... (15) (68)
Loss from termination of contracts .............................. -- 747
Changes in assets and liabilities:
Decrease (increase) in assets:
Accounts and notes receivable ...................... (2,342) (2,109)
Merchandise inventories ............................ (3,481) (1,718)
Prepaid expenses ................................... (2,469) (1,179)
Other assets ....................................... (959) (2,138)
Other receivables .................................. -- (607)
Increase (decrease) in liabilities:
Accounts payable ................................... 648 (3,491)
Accrued salaries and vacations ..................... 826 953
Liabilities for self-insurance ..................... (1,393) 1,175
Other liabilities .................................. 9,427 2,995
--------- ---------
Net cash provided by operating activities ....................... 19,628 6,881
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Decrease in restricted cash .......................................... -- (4,998)
Purchase of Service America .......................................... -- 1,587
Payment of acquisition costs ......................................... (175) --
Purchase of property, plant and equipment ............................ (7,690) (10,752)
Proceeds from sale of property and equipment ......................... -- 150
Purchase of contract rights .......................................... (13,371) (5,510)
Proceeds from sale of assets held for sale ........................... -- 10,000
--------- ---------
Net cash used in investing activities ....................... (21,236) (9,523)
--------- ---------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Principal payments on debt ........................................... (46,362) (225)
Redemption of stock .................................................. (49,500) --
Payments of financing costs .......................................... (6,108) --
Net borrowings - revolving loans ..................................... 1,750 6,971
Net increase in investors' notes receivable .......................... 701 (250)
Proceeds from long-term debt ......................................... 100,000 --
Principal payments on capital lease obligations ...................... (140) (58)
Net bank overdraft ................................................... 8,018 852
Capital contribution ................................................. -- 3,750
--------- ---------
Net cash provided by financing activities ................... 8,359 11,040
--------- ---------
INCREASE IN CASH .............................................................. 6,751 8,398
CASH - BEGINNING OF PERIOD .................................................... 8,828 5,426
--------- ---------
CASH - END OF PERIOD .......................................................... $ 15,579 $ 13,824
========= =========
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VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE PERIOD DECEMBER 30, 1998 TO SEPTEMBER 28, 1999
(IN THOUSANDS) (UNAUDITED)
Accumulated
Additional Other Investors'
Common Common Paid-in Accumulated Comprehensive Notes
Shares Stock Capital Deficit Loss Receivable Total
------ ----- ------- ------- ---- ---------- -----
Balance, December 29, 1998 526 $ -- $ 66,474 $(12,595) $ (67) $(3,935) $ 49,877
Stock redemption (194) (49,500) (49,500)
Change in investors'
notes receivable 701 701
Foreign currency
translation (126) (126)
Net loss (1,871) (1,871)
--- -- -------- -------- ------ ------- --------
Balance,
September 28, 1999 332 $ -- $ 16,974 $(14,466) $ (193) $(3,234) $ (919)
=== ==== ======== ======== ====== ======= ========
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VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTY-NINE WEEK PERIODS ENDED SEPTEMBER 29, 1998 AND SEPTEMBER 28, 1999
(UNAUDITED)
1. GENERAL
Volume Services America Holdings, Inc. ("Volume Holdings," and together
with its subsidiaries, the "Company"), formerly VSI Acquisition II Corporation
and Subsidiaries ("VSI"), is a holding company, the principal assets of which
are the capital stock of its subsidiary, Volume Services America, Inc. ("Volume
Services America"). Volume Services America is also a holding company, the
principal assets of which are the capital stock of its subsidiaries, Volume
Services, Inc. ("Volume Services") and Service America Corporation ("Service
America"). The Company is controlled by its senior management, Blackstone
Capital Partners II Merchant Banking Fund, L.P. ("BCP II"), and General Electric
Capital Corporation ("GE Capital"). GE Capital, which as of September 28, 1999
controlled 36.3% of the Company through its controlling interest in Recreational
Services, LLC, was the majority stockholder (on a fully diluted basis) of
Service America prior to the Acquisition of Service America by Volume Holdings
on August 24, 1998. As of September 28, 1999, the remainder of Volume Holdings'
capital stock was owned by limited partnerships controlled by BCP Volume L.P.
and BCP Offshore Volume L.P. (collectively, "Blackstone") (59.4%), and by Volume
Holdings and current and former management employees of Volume Services (4.2%).
Volume Holdings is a holding company, the principal assets of which are
the capital stock of its subsidiary, Volume Services America. Volume Holdings'
financial information is therefore substantially the same as that of Volume
Services America.
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 thirty-nine week period ended
September 28, 1999 are not necessarily indicative of the results to be expected
for the year ending December 28, 1999 due to the seasonal aspects of the
business. The consolidated financial statements and notes thereto should be read
in conjunction with the audited financial statements and notes thereto for the
year ended December 29, 1998.
2. DEBT
On March 4, 1999, Volume Services America issued $100 million in senior
subordinated notes (the "Notes") at an interest rate of 11-1/4% through a Rule
144A Offering (the "Offering"). The Notes mature on March 1, 2009 and interest
is payable on March 1 and September 1 of each year. Such Notes are unsecured,
are subordinated to all the existing and future senior debt of Volume Services
America, rank pari passu with all existing and future pari passu debt of Volume
Services America, and are senior to all of Volume Services America's existing
and future subordinated debt. Furthermore, the Notes are guaranteed by Volume
Holdings and all of the subsidiaries of Volume Services America (the "Guarantor
Subsidiaries"), except for certain non-wholly owned subsidiaries and one
non-U.S. subsidiary (the "Non-Guarantor Subsidiaries").
The proceeds of the Offering 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 Offering and the
consent from lenders to an amendment to the Credit Agreement dated as of
December 3, 1998, as amended, among Volume Services America, Volume Holdings,
the financial institutions named therein and The Chase Manhattan Bank, as
administrative agent. In conjunction with the Offering, Volume Services America
recognized an extraordinary loss of $873,000, net of taxes (approximately
$570,000) on its statement of operations for the early extinguishment of
$45,000,000 of term loans.
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VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTY-NINE WEEK PERIODS ENDED SEPTEMBER 29, 1998 AND SEPTEMBER 28, 1999
(UNAUDITED)
2. DEBT - (CONTINUED)
Long-term debt consists of the following (in thousands):
September 28, 1999 December 29, 1999
------------------ -----------------
Term A Borrowings $ -- $ 40,000
Term B Borrowings 114,138 120,000
Revolving Loans 1,750
Senior Subordinated Notes 100,000
--------- ---------
215,888 160,000
Less current maturities of long-term debt (2,900) (4,200)
--------- ---------
Total long-term debt $ 212,988 $ 155,800
========= =========
Aggregate annual maturities of long-term debt are as follows (in thousands)
1999 $ 576
2000 1,150
2001 1,150
2002 1,150
2003 1,150
Thereafter 210,712
---------
Total $ 215,888
=========
3. STOCK REDEMPTION
In conjunction with the Offering, Volume Services America paid a
$50,000,000 dividend to Volume Holdings. Volume Holdings used the proceeds to
redeem 194 shares of its common stock (the "Stock Redemption") and to repay a
$500,000 note in favor of GE Capital.
4. RELATED PARTIES
MANAGEMENT FEES - Certain administrative and management functions were
provided to VSI by the Blackstone Group, L.P. through a monitoring agreement.
Volume Services paid the Blackstone Group approximately $188,000 in the
thirty-nine week periods ended September 28, 1999 and September 29, 1998. As
part of the August 24, 1998 acquisition of Service America, the Company agreed
to pay to GE Capital, an annual monitoring fee of $167,000. In the thirty-nine
week period ended September 28, 1999, $125,000 was paid to GE Capital. Such
amounts are included in selling, general and administrative expenses.
INVESTORS' NOTES RECEIVABLE - The Company had $3,234,000 and $3,935,000
in receivables due from various investors at September 28, 1999 and December
29,1998, respectively.
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VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THIRTY-NINE WEEK PERIODS ENDED SEPTEMBER 29, 1998 AND SEPTEMBER 28, 1999
(UNAUDITED)
5. INTEREST RATE HEDGING ARRANGEMENTS
On March 15, 1999, the Company terminated an interest rate swap
effective April 12, 1999 and received $180,000 which was used as a reduction to
interest expense during fiscal year 1999.
Effective April 15, 1999 the Company entered into an interest cap
transaction with the Chase Manhattan Bank for a $10 million notional amount for
$4,200. The interest rate cap protects the company if the three month London
Interbank Offered Rate ("LIBOR") exceeds 7.5% through January 16, 2001. The
Company also entered into an interest rate swap transaction on April 16, 1999
with the Union Bank of California ("UBOC") for a $30 million notional amount
with no up front cost. This swap provides that the Company pays to UBOC one
month LIBOR and that UBOC pays to the Company 5.375% each month until April 20,
2001.
6. CHANGE IN ACCOUNTING PRINCIPLE
The Company 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 of December 31, 1998. As a result, the Company recorded
a charge of $256,000 net of tax (approximately $170,000) reflecting the effect
of the change in accounting principle.
7. SERVICE AMERICA ACQUISITION
As described in Note 1, Volume Holdings acquired Service America on
August 24, 1998. The Service America Acquisition was accounted for using the
purchase method in accordance with APB No. 16. The results of operations after
the acquisition date are included in Volume Holdings consolidated statements of
income.
The following unaudited pro forma financial information presents a
summary of consolidated results of operations as if the Service America
Acquisition had occurred as of December 31, 1997, after giving effect to certain
adjustments, including amortization of goodwill, interest expense on acquisition
debt and related income tax effects. The pro forma results have been prepared
for comparative purposes only and do not purport to be indicative of what would
have occurred had the acquisition been made on that date, nor are they
necessarily indicative of results which may occur in the future.
September 29, 1998
------------------
(in thousands)
Net Sales $309,200
Net Loss (1,200)
8. PAYMENT OF VOLUME SERVICES AMERICA SENIOR SUBORDINATED NOTES
The Notes are jointly and severally, irrevocably and fully and
unconditionally guaranteed by Volume Holdings and all of the Guarantor
Subsidiaries, except for the Non-Guarantor Subsidiaries. The Guarantor
Subsidiaries are wholly owned subsidiaries of Volume Services America and have
guaranteed the Notes fully and unconditionally and jointly and severally. The
following table sets forth the condensed consolidated financial statements of
Volume Holdings, Guarantor Subsidiaries and Non-Guarantor Subsidiaries as of and
for the thirty-nine week period ended September 28, 1999. Volume Services
America has not presented separate financial statements and other disclosures
concerning the Guarantor Subsidiaries and Non-Guarantor Subsidiaries because
management of Volume Services America has determined that such information is
not material to investors.
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VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATING BALANCE SHEET
SEPTEMBER 28, 1999
(IN THOUSANDS)
COMBINED COMBINED
VOLUME GUARANTOR NON-GUARANTOR
HOLDINGS SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ -------------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................ $ 14,362 $ 1,217 $ 15,579
Accounts receivable ...................... 18,075 2,057 20,132
Other current assets ..................... 28,284 985 (9,422) 19,847
--------- --------- --------- --------- ---------
Total current assets .............................. -- 60,721 4,259 (9,422) 55,558
Property, plant and equipment ............ 66,936 4,234 71,170
Contract rights, net ..................... 71,822 2,945 74,767
Cost in excess of net assets
acquired, net ....................... 51,890 -- 51,890
Investment in subsidiaries ............... $ (919) 919 --
Other assets ...................................... 34,664 -- 34,664
--------- --------- --------- --------- ---------
Total assets ...................................... $ (919) $ 286,033 $ 11,438 $ (8,503) $ 288,049
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Intercompany liabilities ................. $ 9,422 $ (9,422) $ --
Other current liabilities ................ 62,586 2,903 65,489
--------- --------- --------- --------- ---------
Total current liabilities ......................... -- 62,586 12,325 (9,422) 65,489
Long-term debt ........................... 212,988 -- 212,988
Other liabilities ........................ 10,491 -- 10,491
--------- --------- --------- --------- ---------
Total liabilities ................................. -- 286,065 12,325 (9,422) 288,968
STOCKHOLDERS' EQUITY (DEFICIENCY):
Common stock ............................. -- -- -- -- --
Additional paid-in capital ............... 16,974 16,974 -- (16,974) 16,974
Accumulated deficit ...................... (14,466) (13,772) (694) 14,466 (14,466)
Other .................................... (3,427) (3,234) (193) 3,427 (3,427)
--------- --------- --------- --------- ---------
Total stockholders' equity (deficiency) ........... (919) (32) (887) 919 (919)
Total liabilities and stockholders'
equity (deficiency) ............................ $ (919) $ 286,033 $ 11,438 $ (8,503) $ 288,049
========= ========= ========= ========= =========
11
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VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
THIRTY-NINE WEEK PERIOD ENDED SEPTEMBER 28, 1999
(IN THOUSANDS)
COMBINED COMBINED
VOLUME GUARANTOR NON-GUARANTOR
HOLDINGS SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
Net sales..................... $306,304 $23,385 $329,689
Cost of sales................. 240,635 18,918 259,553
Selling, general and
administrative............. 30,329 2,812 33,141
Depreciation and
amortization............. 18,010 1,876 19,886
Transaction fees and expenses. 1,555 -- 1,555
------- -------- ------- ------ -------
Operating profit (loss)....... -- 15,775 (221) -- 15,554
Interest expense.............. 16,683 87 16,770
Other income, net............. (257) (11) (268)
------- -------- ------- ------ -------
Loss before income taxes...... -- (651) (297) -- (948)
Income tax benefit............ (206) -- (206)
------- -------- ------- ------ -------
Loss before extraordinary
item and cumulative effect
of change in accounting
principle.................. -- (445) (297) -- (742)
Extraordinary item, net of
income taxes................ 873 -- 873
Cumulative effect on change
in accounting principle,
net of income taxes......... 256 -- 256
Equity in earnings of
subsidiaries............... $(1,871) $1,871 --
------- -------- ------- ------ -------
Net income (loss)............. (1,871) (1,574) (297) 1,871 (1,871)
Other comprehensive loss --
foreign currency......... -- (126) (126)
Comprehensive income (loss)... $(1,871) $ (1,574) $ (423) $1,871 $(1,997)
======= ======== ======= ====== =======
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VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
THIRTY-NINE WEEK PERIOD ENDED SEPTEMBER 28, 1999
(IN THOUSANDS)
COMBINED
COMBINED GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------------------ ------------- ------------
Cash Flows Provided by Operating Activities....... $ 17,420 $ 2,208 $ 19,628
--------- --------- ---------
Cash Flows Used In Investing Activities:
Payment of acquisition costs.................... (175) -- (175)
Purchase of property, plant and equipment....... (6,749) (941) (7,690)
Purchase of contract rights..................... (12,710) (661) (13,371)
--------- --------- ---------
Net cash used in investing activities...... (19,634) (1,602) (21,236)
Cash Flows Provided by Financing Activities:
Principal payments on long-term debt............ (46,362) -- (46,362)
Net borrowings--revolving loans................. 1,750 -- 1,750
Proceeds from long-term debt.................... 100,000 -- 100,000
Payments of financing costs..................... (6,108) -- (6,108)
Principal payments on capital lease obligations. (140) -- (140)
Increase in bank overdrafts..................... 7,563 455 8,018
Increase in investors' notes receivable......... 701 -- 701
Redemption of Stock............................. (49,500) -- (49,500)
--------- --------- ---------
Net cash provided by financing activities..... 7,904 455 8,359
Increase (decrease) in cash....................... 5,690 1,061 6,751
Cash and cash equivalents--beginning of period.... 8,672 156 8,828
--------- --------- ---------
Cash and cash equivalents--end of period.......... $ 14,362 $ 1,217 $ 15,579
========= ========= =========
9. SUBSEQUENT EVENTS
On June 24, 1999, Ogden Entertainment Inc., a subsidiary of Ogden
Corporation, referred to as "Ogden", entered into an agreement with Volume
Holdings, Blackstone, VSI Management Direct L.P. and Recreational Services, LLC,
collectively referred to as the "Sellers", for the option to purchase all of the
outstanding common stock of Volume Holdings for $127 million in cash. However,
on September 30, 1999, Ogden informed the Sellers of its intention not to
exercise the option. In accordance with the agreement, a deposit of $10 million
was forfeited by Ogden and will be distributed amongst the Sellers.
Additionally, Volume Holdings incurred $249,000 in direct costs in connection
with the transaction which are to be reimbursed by the Sellers.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE REGISTRANTS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 28, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 29, 1998
NET SALES - Net sales of $147.1 million in the current period increased
$47.4 million from the comparable period of 1998. The increase was primarily due
to the August 24, 1998 acquisition (the "Acquisition") of Service America, which
resulted in the inclusion of $50.0 million in additional net sales for the
current period. Excluding the effect of the Acquisition, net sales decreased by
$2.6 million primarily due to the closure of three amphitheater accounts and one
National Football League ("NFL") venue and lower attendance at one of the
Company's Major League Baseball ("MLB") accounts. These declines were partially
offset by the opening of three new accounts, including one NFL facility.
COST OF SALES - Cost of sales of $115.0 million in the current period
were $37.8 million higher than the comparable period of 1998 primarily due to
the Acquisition. Cost of sales as a percentage of net sales increased from 77.5%
in the 1998 period to 78.2% in the current period reflecting the higher variable
costs, especially commissions, associated with two service contracts acquired by
Service America in the 1999 period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses of $13.2 million in the current period were $3.9 million
higher than the comparable period of 1998. The increase in these costs was
primarily a result of the Acquisition and the higher costs associated with
operating the convention center service contracts acquired with Service America.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization expenses
of $6.7 million in the current period were $1.5 million higher than the
comparable period of 1998. The increase was principally due to the Acquisition
both in terms of increased amortization arising from the application of purchase
accounting as well as the inclusion of two additional months of depreciation on
assets used at Service America service contract sites in the 1999 period
compared to the comparable period in 1998.
TRANSACTION FEES AND EXPENSES - $0.3 million in transaction fees and
expenses primarily relating to personnel costs and professional fees were
incurred in the three months ended September 28, 1999.
OPERATING PROFIT - Operating profit increased $4.4 million in the
current period from the comparable period of 1998, primarily due to the factors
described above.
NINE MONTHS ENDED SEPTEMBER 28, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 29,
1998
NET SALES - Net sales of $329.7 million in the current year-to-date
increased by $143.0 million from the comparable period in 1998. The increase was
due to the Acquisition, which resulted in the inclusion of $141.9 million in
additional sales during the 1999 period. Excluding the effect of the
Acquisition, net sales increased by $1.1 million. The improvement was primarily
due to sales from five accounts (including three new venues: one NFL facility
and two facilities which opened in the second half of 1998) partially offset by
lower attendance at one of the Company's MLB accounts and the closure of three
amphitheaters and one NFL account.
COST OF SALES - Cost of sales for the 1999 year-to-date were $259.6
million compared to $146.4 million for the comparable period in 1998. The
increase was primarily due to the Acquisition. The increase as a percentage of
net sales from 78.4% in 1998 to 78.7% reflects the high variable costs
associated with two of Service America's new service contracts acquired in the
1999 year-to-date.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses increased to $33.1 million in the current year-to-date
from $18.9 million in the comparable period of 1998 primarily due to the
Acquisition. As a percentage of net sales, selling, general, and administrative
expenses were 10.1% for both 1999 and 1998 comparable periods. Overhead expense,
as one of the elements of selling, general and administrative expenses, declined
1.9% as a percentage of net sales, primarily reflecting the savings achieved due
to the elimination of duplicate costs. Offsetting these savings was a 1.9%
increase in other elements of selling, general, and administrative expenses
primarily due to the increased cost structure associated with operating
convention centers, the primary component of Service America's business.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization increased
to $19.9 million for 1999 year-to-date from $11.7 million in the comparable 1998
period. Of the increase, $5.8 million was due to an increase in amortization
arising from the application of purchase accounting related to the Acquisition.
The remaining $2.4 million increase was primarily due to depreciation as a
result of the net assets acquired in the Acquisition and capital expenditures
for purchases made through September 28, 1999.
TRANSACTION FEES AND EXPENSES - The Company incurred $1.6 million in
transaction costs in the nine months ended September 28, 1999. These expenses
relate to personnel costs, rental costs and professional fees associated with
the downsizing of the Stamford, CT office location.
OPERATING PROFIT - Operating profit increased $6.4 million from $9.2
million in the nine months ended September 29, 1998 to $15.6 million in the
comparable period this year. The increase was primarily due to the factors
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 28, 1999, net cash provided by
operating activities was $19.6 million compared to net cash used in operating
activities of $6.9 million in the nine months ended September 29, 1998. The
$12.7 million increase in cash provided by operating activities was primarily
due to the sales increase related to the Acquisition which caused an increase of
$3.1 million in accrued commissions and royalties and $8.2 million increase in
depreciation and amortization.
For the nine months ended September 28, 1999, net cash used in
investing activities was $21.2 million compared to $9.5 million in the nine
months ended September 29, 1998. The primary components of net cash used in
investing activities for these periods were purchases of property and equipment,
and investments in contract rights in connection with acquiring or renewing
contracts. The difference in the amounts used in investments in these two
periods was primarily due to large capital investments which we made at
Tropicana Field MLB Stadium in St. Petersburg, FL, during the 1998 period which
was partially offset by a 1999 capital investment made to Pacific Bell Ball
Park, the future home of MLB's San Francisco Giants. In addition, we received
$10.0 million of proceeds from the sale of assets held for sale after the
termination of the Ericsson Stadium contract in the 1998 period. Typically,
capital investments are non-recurring items from one year to the next. We also
made investments of $16.2 million in the purchase of property and equipment at
numerous locations in the 1999 period.
For the nine months ended September 28, 1999, net cash provided by
financing activities was $8.4 million compared to $11.0 million in the nine
months ended September 29, 1998. The 1999 figure reflects the issuance of $100.0
million of senior subordinated notes, and the use of proceeds to retire $45.0
million of senior secured debt and $0.5 million of GE Capital debt. It also
reflects the redemption of $49.5 million of stock and the payment of related
fees of $5.7 million. Excluding the financing, we borrowed $1.8 million under
our revolving credit facility in the 1999 period, and increased our bank
overdrafts (outstanding checks) by $8.0 million to fund working capital and
capital expenditures. This is compared to $7.0 million under our revolving
credit facility, the receipt of $3.5 million of cash equity from Blackstone and
an increase of our bank overdrafts by $.9 million to fund working capital and
capital expenditures which occurred in the 1998 period.
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YEAR 2000 ISSUE
The year 2000 ("Y2K") problem stems from computer programs written in a
way that differentiates calendar years by using two rather than four digits. As
a result, many information systems may be unable to properly recognize and
process date sensitive information beyond December 31, 1999.
We have been addressing the "Y2K" situation since 1996. In 1996, we
replaced our primary information systems with systems that are certified "Y2K"
compliant. As of June 29, 1999, we had replaced other peripheral equipment that
connects with our primary information system. As a result of these two
initiatives, we believe that our primary information system, and all accounting
systems at our headquarters location are ready for "Y2K" transactions.
We have developed a plan outline to assess, remediate and test our
secondary information technology systems, such as communication, security, and
point of sale systems. We initiated a survey and assessment of secondary
information systems and other equipment on May 10, 1999. An independent
consultant has been retained to assist us in performing the survey and
assessment. As a result of the seasonal nature of our business, we will not
provide our services to all of the sites at which we operate in the first
quarter of the year 2000. The independent consultant has completed his
assessment of those of our sites at which we will be providing our services in
the first quarter of the year 2000, which we refer to as our priority sites. We
expect testing by the independent consultant, and any remedial work which is
consequently required, to be completed at our non-priority sites during the
first quarter of the year 2000, prior to the date on which we will operate at
these sites. Our secondary information systems will therefore be fully upgraded
by the end of the first quarter of the year 2000.
We have identified eight key vendors and suppliers. We believe that
these suppliers are capable of supplying all of the products and supplies, which
we require to provide our services at an event. While we have not received
warranties or certification from these suppliers, we have reviewed "Year 2000
Statements" from seven of them, and expect to review a statement from the eighth
supplier shortly. These Year 2000 Statements set out the status of each
supplier's Year 2000 compliance efforts. The Year 2000 Statements which we have
reviewed indicate that each supplier is taking action to minimize business
disruption from Y2K problems with its internal systems and those of its
suppliers, and that each supplier is developing contingency plans to ensure that
it can meet its commitments to its customers if its critical information systems
are disrupted. Based upon these Year 2000 Statements, we have determined that
lack of product availability due to Y2K issues should not be material to our
business, and we do not expect Y2K issues to affect our ability to run our
business without interruption.
RISKS. We acquired our primary network, financial accounting,
purchasing and payroll processing systems in 1996. The systems were "Y2K"
certified at the time we acquired them. Management believes, based on the
information currently available to it, that scenarios which could adversely
affect us and which could be caused by technology failures relating to "Y2K"
include:
1. legal risks, over failure to deliver contracted
services;
2. increased operational costs, due to manual
processing, data corruption or disaster recovery; and
3. cancellation of events at venues we serve.
CONTINGENCY PLANS. We maintain contingency plans for computer failures,
power outages, and natural disasters. "Y2K" contingency plans for critical
systems are currently being developed and will be integrated with our existing
contingency plans where appropriate by December 1999. Y2K contingency plans for
secondary information systems are being developed in conjunction with the
remediation and testing process, with contingency plans for priority sites
scheduled for completion by November 30, 1999. To date, 63% of our priority
sites contingency plans have been reviewed.
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COSTS. Based on the current status of projected plans, we believe that
the costs associated with modifying our computer and other automated systems,
and "Y2K" events caused by our operational systems, would not have a material
adverse impact on our operations or financial condition. The aggregate
incremental costs associated with Y2K compliance are expected to be less than
$100,000. However, we cannot assure you that these estimates will be achieved
and actual results could differ materially from those anticipated.
FORWARD LOOKING AND CAUTIONARY STATEMENTS
Except for the historical information and discussions contained herein,
statements contained in this Form 10-Q may constitute "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements involve a number of risks, uncertainties and other
factors that could cause actual results to differ materially, including, among
other things:
- - our high degree of leverage and significant debt service obligations;
- - our history of net losses;
- - the successful integration of Volume Services and Service America and
the realization of the cost savings we expect to achieve;
- - the level of attendance at events held at the facilities at which we
provide our services and the level of spending on the services which we
provide at such 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;
- - our ability to retain existing clients or obtain new clients;
- - the highly competitive nature of the recreational food service
industry;
- - any future changes in management;
- - general risks associated with the food industry;
- - future changes in government regulation; and
- - the potential effect of year 2000 computer issues.
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ITEM 3. REGISTRANTS' QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate volatility with regard to existing
issuances of variable rate debt. We use interest rate swaps to reduce interest
rate volatility to achieve a desired proportion of variable versus fixed rate
debt, based on current and projected market conditions. The table below provides
information about our derivative financial instruments and other financial
instruments that are sensitive to changes in interest rates, including interest
rate swaps and debt obligations. For debt obligations, the table presents
principal cash flows and related weighted average interest rates by expected
maturity dates. For interest rate swaps and caps, the table presents notional
amounts and weighted average interest rates by expected (contractual) maturity
dates. Notional amounts are used to calculate the contractual payments to be
exchanged under the contract. Weighted average variable rates are based on
implied forward rates in the yield curve at the reporting date.
Expected Maturity Date
---------------------------------------------------- Fair
Value
1999 2000 2001 2001 2003 Thereafter Total 9/28/99
---- ---- ---- ---- ---- ---------- ----- -------
Long-term debt: (In Millions)
Variable rate.......... $ 1.2 $ 1.2 $ 1.2 $ 1.2 $ 1.2 $ 8.7 $114.7 $114.7
Average interest rate... 9.3% 9.3% 9.3% 9.3% 9.3% 9.3%
Fixed rate............... $ 0 $ 0 $ 0 $ 0 $ 0 $ 100 $ 100 $ 100
Average interest rate.... 11.25% 11.25% 11.25% 11.25% 11.25%
Interest Rate Swap:
Fixed to variable....... $ 0 $ 0 $ 30 $ 30 $ (0.3)
Average pay rate......... 5.5%
Average receive rate..... 5.4%
NOMINAL FAIR VALUE
AMOUNT STRIKE RATE REFERENCE RATE PERIOD 9/28/99
------ ----------- -------------- ------ ----------
Purchased interest rate cap..... $ 10.0 7.5% 3 month 4/15/99 - $0.00
LIBOR 6/16/01
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PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
27 Financial Data Schedule
(b) Reports on Form 8-K. No Current Report on Form 8-K has been filed by the
Company since June 29, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Volume Services America, Inc.
Events Center Catering, Inc.
Service America Concessions Corporation
Service America Corporation
Service America Corporation of Wisconsin
Servo-Kansas, Inc.
Servomation Duchess, Inc.
SVM of Texas, Inc.
Volume Services America Holdings, Inc.
Volume Services, Inc.
Volume Services, Inc.
By:
----------------------------------------------
Name: Kenneth R. Frick
Title: Vice President, Chief Financial Officer
and Treasurer
Date: November __, 1999
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