SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
(X) Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 28, 1999 or
( ) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from _____ to _____
Commission file number: 333-79419
VOLUME SERVICES AMERICA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 57-0969174
(State or other jurisdiction of (I.R. S. Employer
incorporation or organization) Identification No.)
201 EAST BROAD STREET, SPARTANBURG, SOUTH CAROLINA 29306
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (864) 598-8600
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.
(X) YES ( ) NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
The aggregate market value of the voting stock held by non-affiliates
(shareholders holding less than 5% of the outstanding common stock, excluding
directors and officers), as of March 21, 2000, was $0.
The number of shares outstanding of the registrant's Common Stock, par value
$.01 per share, at March 21, 2000, was 100.
PART I
ITEM 1. BUSINESS.
OVERVIEW
Volume Services America, Inc. ("Volume Services America"), a Delaware
corporation, operates through its subsidiaries as a leading provider of food and
beverage concession, high-end catering and merchandise services for sports
facilities, convention centers and other entertainment facilities throughout the
United States. We currently provide services at 122 client facilities, typically
pursuant to long-term contracts that grant us the exclusive right to provide
various food and beverage (and, under some contracts, merchandise) products and
services within the facility. The breakdown of facilities that we serve by
primary client category is as follows: 61 sports facilities, 28 convention
centers and 33 other entertainment facilities. At one facility, we also provide
full facility management services.
SERVICES AND CLIENT CATEGORIES
Sports Facilities
We currently have contracts to provide services, including food and
beverage concessions and, in some cases, the selling of merchandise, at 61 such
facilities, including stadiums and arenas. At some of these facilities, we also
provide high-end catering services for premium seating, luxury suites and
in-stadium restaurants. 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.
Concession-style sales of food and beverages represent the majority of our
business at sports facilities. High-end catering for premium seating, luxury
suites and in-stadium restaurants is responsible for a significantly smaller,
but growing, portion of net sales at sports facilities.
Our contracts with sport facilities are typically for terms ranging from
five to twenty years. In general, stadium and, to a lesser extent, 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.
At one arena, we provide full facility management services. These services
include licensing the arena (and its suites and premium seats) for events,
providing parking operations, security and ushering, maintaining the arena and
preparing it for events, distributing tickets, printing programs and selling
advertising.
The following chart lists some of our major contracts within the sports
facilities category:
NAME LOCATION SPORTS TEAM TENANT SEATING CAPACITY (SPORT)
ALLTEL Stadium Florida Jacksonville, FL Jacksonville Jaguars 73,000 (NFL)*
HHH Metrodome Minneapolis, MN Minnesota Vikings, 64,000 (NFL) (College Football)
Minnesota Twins 44,000 (MLB)*
FedEx Field Landover, MD Washington Redskins 80,000 (NFL)
Palace of Auburn Hills Auburn Hills, MI Detroit Pistons 21,000 (NBA)*
Qualcomm Stadium San Diego, CA San Diego Chargers, 71,400 (NFL)
San Diego Padres 60,750 (MLB)
RCA Dome Indianapolis, IN Indianapolis Colts 60,000 (NFL)
Rose Bowl Pasadena, CA N/A 102,000 (College Football)
3Com Park San Francisco, CA San Francisco 49ers, 68,000 (NFL)
San Francisco Giants 52,200 (MLB)
Tropicana Field St. Petersburg, FL Tampa Bay Devil Rays 48,500 (MLB)
Truman Sports Complex` Kansas City, MO Kansas City Chiefs 79,000 (NFL)
Kansas City Royals 40,600 (MLB)
Yankee Stadium New York, NY New York Yankees 55,000 (MLB)
<FN>
* "NFL" means National Football League, "MLB" means Major League Baseball and
"NBA" means "National Basketball Association".
</FN>
Convention Centers
We currently have contracts to provide services, including banquet catering
and food court operations, to 28 convention centers, two of which are located in
Canada. Convention centers typically host conventions, industrial and trade
shows, company meetings, banquets, receptions and consumer exhibitions, such as
auto, boat or computer shows.
The services that we provide at convention centers typically include
catering services, including planning, preparing and serving banquets, providing
food court operations, assisting in planning events, and marketing clients'
facilities.
Our contracts with convention centers are typically for terms ranging from
two to five 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. The following chart lists some
of our major contracts within the convention center category:
Size
Name Location (approx. sq. ft)1
American Royal Center Kansas City, MO 372,000
Cobb Galleria Center Atlanta, GA 133,000
Colorado Convention Center Denver, CO 300,000
Cow Palace San Francisco, CA 300,000
Indiana Convention Center Indianapolis, IN 400,500
Jacob K. Javits Center New York, NY 900,000
Kentucky Fair & Expo Center Louisville, KY 1,068,000
Miami Beach Convention Center Miami Beach, FL 503,000
National Trade Center Toronto, ON Canada 1,000,000
San Diego Convention Center San Diego, CA 349,000
Washington, DC Convention Center Washington, DC 381,000
- ------------------
<FN>
1 Sources: Tradeshow Week Exhibit Hall Directory (1999) and IAAM Member and Service Directory
2000 Guide
</FN>
Other Entertainment Facilities
We have contracts to provide a wide range of services to 33 other
entertainment facilities located throughout the United States. Such facilities
include horse racing tracks, music amphitheaters, motor speedways, state parks,
skiing facilities, theme parks and zoos.
While the services that we provide can vary widely depending on the type of
facility concerned, we primarily provide concession services at theme parks,
zoos and music amphitheaters, high-end concession services at music
amphitheaters, and in-facility restaurants, concession services, food court
operations and high-end catering services at horse racing tracks.
The duration, level of capital investment required and commission or
management fee structure of the contracts for these other entertainment
facilities varies from facility to facility.
The following chart lists examples of our contracts within the other
entertainment facilities category:
Name Location Venue Type
Alpine Valley Amphitheater Walworth, WI Music Amphitheater
Belmont, Saratoga and Aqueduct Tracks New York Horse Racing Tracks
Chicago Auditorium Theater Chicago, IL Theater
Glen Helen Pavilion San Bernardino, CA Music Amphitheater
Irvine Meadows Laguna Hills, CA Music Amphitheater
Lake Perris State Park Perris, CA Marina Operation
Lake Placid Ski Resort Lake Placid, NY Ski Resort
Los Angeles Zoo Los Angeles, CA Zoo
Pine Knob Amphitheater Pontiac, MI Music Amphitheater
Sea Life Park Oahu, HI Theme Park
Significant Clients. One of our clients, Yankee Stadium, accounted for
11.1% of our revenues in 1999.
CONTRACTS
We typically enter into one of three types of contract with our clients:
o Profit and Loss Contracts;
o Profit Sharing Contracts; and
o Management Fee Contracts.
Each of our contracts falls into these three categories. However, any
particular contract may contain elements of any of the other types as well as
other features specific to that contract.
In general, our contract categories differ in the amount of risk that we
bear and potential reward (profits or fees) we can receive. For example, in our
Profit and Loss Contracts, we generally retain most profits and are responsible
for most losses; this offers the highest potential upside and downside of our
contracts. In our Profit Sharing Contracts, we generally receive a share of
profits, and sometimes a fee, and receive no payments if there are losses. In
our Management Fee Contracts, we generally earn a fee (but no profits) and are
not responsible for losses; both our upside and downside potential are low.
Profit and Loss Contracts. Under Profit and Loss Contracts, we receive all
of the revenues and bear all of the expenses of the provision of our services at
a facility. These expenses include commissions paid to the client. 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. As of December 28, 1999, we
served 99 facilities under Profit and Loss Contracts.
Profit Sharing Contracts. Under Profit Sharing Contracts, also commonly
referred to in the industry as incentive bonus contracts, we receive a
percentage of any profits earned from the provision of our services at a
facility after deducting expenses. These expenses include commissions payable to
the client. In addition, under some Profit Sharing Contracts, we receive a fixed
fee prior to the determination of profits under the contract. Under Profit
Sharing Contracts, we generally do not bear responsibility for any losses
incurred in connection with the provision of our services as we are reimbursed
for our on-site expenses. However, if a loss is incurred, we typically will
receive no payments under the contract other than reimbursement of our expenses
and our fixed fee, if any. As of December 28, 1999, we served 15 facilities
under Profit Sharing Contracts.
Management Fee Contracts. Under Management Fee Contracts, we receive a
management fee, typically calculated as a fixed dollar amount and/or a fixed or
variable percentage of various categories of sales. In addition, some Management
Fee Contracts entitle us to incentive fees based upon our performance under the
contract, as measured by factors such as revenues or operating costs. We are
reimbursed for all of our on-site expenses under these contracts. As of December
28, 1999, we served 8 facilities under Management Fee Contracts.
2
Under one of our Management Fee Contracts, we provide full facility
management services in addition to food and concession services. For these
services, we receive a base fee and an incentive fee. We have also agreed to
lend the facility owner any amount by which the facility's net revenues fall
below specified benchmarks.
Substantially all 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.
When we enter into new contracts, or extend or renew existing contracts
(particularly for sports facilities), we are often required to make some form of
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, food service equipment and/or grants to
owners or operators of facilities. At the end of the contract term, all capital
investments that we have made typically remain the property of the client, but
generally the client must reimburse us for any undepreciated or unamortized
capital investments if the contract is terminated early (other than due to our
default).
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 we provide.
In general, within each client category, the level of capital investment
and commission are related, such that the greater the capital investment that we
make, the lower the commission we pay to the client. Our Profit Sharing
Contracts generally provide that we are reimbursed each year for the
amortization of our capital investments prior to determining the profits under
the contract.
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 of five to twenty
years. Convention center contracts generally require lower capital investments
and have average 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.
COMPETITION
The recreational food service industry is highly fragmented and
competitive, with several national food service providers as well as a large
number of smaller independent businesses serving discrete local and regional
markets and/or competing in distinct areas. Those 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 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 food service providers,
including ARAMARK, Delaware North Corporation, Ogden Corporation, Fine Host
Corporation and Levy Restaurants. 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.
3
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 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:
o the ability to make capital investments;
o profit and loss, profit sharing or management fee structure;
o service innovation;
o quality and breadth of products and services; and
o reputation within the industry.
Based on the number of facilities that we serve, we have a substantial
market position. Management believes that our position in the market is a
competitive strength because it increases the likelihood that we will be invited
to bid for new contracts to supply food and beverage services to recreational
facilities. Another competitive strength is 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 some
facilities, particularly sports facilities.
However, 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
us. Furthermore, we have more indebtedness than some of our competitors, which
could place us at a competitive disadvantage.
PURCHASING
We have a national distribution contract with SYSCO to cover our
operations. We also have a number of national purchasing programs with major
product suppliers that enable our general managers 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.
We generally purchase any equipment that we require directly from the
manufacturer. We typically obtain several bids when filling our food service
equipment requirements.
EMPLOYEES
As of December 28, 1999, we had approximately 1,600 full-time employees.
During calendar 1999, approximately 29,800 employees 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 28, 1999, approximately 40% 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. At
some locations, local charitable groups raise funds by working at our
concessions operations in exchange for a percentage of gross revenues.
SEASONALITY
Our net sales and operating results have varied, and are expected to
continue to vary, from quarter to quarter as a result of factors which include:
o seasonal patterns within the industry;
o the unpredictability in the number, timing and type of new contracts;
o the timing of contract expirations and special events; and
o the level of attendance at facilities that we serve.
Business at the principal types of facilities that we serve is seasonal in
nature. MLB and minor league baseball sales are concentrated in the second and
third quarters, the majority of NFL activity occurs in the third and fourth
quarters 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 our results of
operations for the third quarter are typically higher than in other quarters.
Results of operations for any particular quarter may not be indicative of
results of operations in the future.
INTELLECTUAL PROPERTY
We have the patents, trademarks, trade names and licenses that are
necessary for the operation of our business as we currently conduct it. We do
not consider our patents, trademarks, trade names and licenses to be material to
the operation of our business.
GOVERNMENT REGULATION
Our operations are subject to various governmental regulations, such as
those governing:
o the service of food and alcoholic beverages;
o minimum wage regulations;
o employment;
o environmental protection; and
o human health and safety.
In addition, our facilities and products are subject to periodic inspection
by federal, state, and local authorities. The cost of regulatory compliance is
subject to additions to or changes in federal or state 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 United States Food and Drug Administration (the "FDA") regulates and
inspects our kitchens. Every commercial kitchen in the United States must meet
the FDA's minimum standards relating to the handling, preparation and delivery
of food, including requirements relating to the temperature of food and the
cleanliness of the kitchen and the hygiene of its personnel. We are also subject
to various state, local and federal laws regarding the disposition of property
and leftover 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 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, 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 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 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.
GENERAL INFORMATION
Volume Services America was formed on December 31, 1992. Its principal
offices are at 201 East Broad Street, Spartanburg, SC 29306, and its telephone
number is (864) 598-8600. Volume Services America is the wholly-owned subsidiary
of Volume Services America Holdings, Inc. ("Volume Holdings"), a Delaware
corporation. Volume Holdings' subsidiaries include Volume Services, Inc.
("Volume Services") and Service America Corporation ("Service America"), each a
Delaware corporation.
We have no operations or assets in any foreign country other than Canada.
During 1999, our Canadian revenues and Canadian assets were less than 5% of our
total revenues and assets, respectively.
ITEM 2. PROPERTIES.
We lease our corporate headquarters of approximately 19,300 square feet in
Spartanburg, South Carolina, the headquarters of Service America in Stamford,
Connecticut of approximately 12,600 square feet, and a regional office in Fords,
New Jersey. We are currently trying to sublease much of the office space in
Stamford.
We currently provide our services at 122 client facilities, all of which
are owned or leased by our clients. Our 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.
ITEM 3. LEGAL PROCEEDINGS.
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 Enterprises LLC (collectively,
"Silver"). Service America alleged fraud, misrepresentation, negligent
misrepresentation, breach of contract and breach of the covenant of good faith
and fair dealing in connection with Service America's Exclusive Catering
Services Agreement with Silver dated November 21, 1997, and sought damages in
excess of $1 million. Silver subsequently filed counterclaims that alleged
breach of contract, sought an accounting and asserted that Service America had
commenced the proceeding and acted in bad faith. Silver claims damages for
injury to its business in an amount in excess of $11 million. In light of our
meritorious defenses, we do not believe that Silver's claims are well-founded in
fact or law. We are vigorously pursuing our claim and defending against the
counterclaims. The evidentiary proceeding has closed, the parties have made
their final arguments in the arbitration and we are awaiting the arbitrator's
decision.
In addition, we are from time to time involved in various legal proceedings
incidental to the conduct of our business.
In the opinion of management, any liability arising out of any currently
pending proceeding will not have a material adverse effect on our financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We did not submit any matters to a vote of security holders during the
fourth quarter of our 1999 fiscal year.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Each registrant, other than Volume Holdings, is a direct or indirect
wholly-owned subsidiary of Volume Holdings. There is no established public
trading market for the equity securities of Volume Holdings. As of March 23,
2000, the latest practicable date, there were four holders of Volume Holdings'
common stock. In connection with the offering of Volume Service America's senior
notes in 1999, Volume Service America paid a dividend to Holdings in the amount
of $50.0 million. Holdings used the dividend to repay a $500,000 note to General
Electric Capital Corporation ("GE Capital") and to repurchase 194 shares of its
stock from its shareholders. During our 1999 fiscal year, we did not sell any
equity securities that were not registered under the Securities Act of 1933, as
amended.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data is that of Volume
Holdings, Volume Services America's parent company. Volume Holdings is a
guarantor of the senior notes issued by Volume Services America in 1999 and has
no substantial operations or assets other than its investment in Volume Services
America. As a result, the consolidated financial condition and results of
operations of Volume Holdings are substantially the same as those of Volume
Services America. This table contains selected financial data and is qualified
by the more detailed consolidated financial statements, including notes to the
financial statements, of Volume Holdings. The selected financial data should be
read in conjunction with the consolidated financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in this Annual Report on Form 10-K.
Volume Services America Holdings, Inc.
(Dollars in millions)
Statement of Operations Data 1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Net sales................................ $ 164.7 $ 190.4 $ 196.0 $ 283.4 $ 431.5
Depreciation and amortization............ 11.8 12.6 12.9 18.2 26.8
Operating income (loss)(a)............... (0.3) 2.9 4.8 8.7 16.5
Interest expense......................... 0.5 7.3 7.9 11.3 23.0
Loss before income taxes,
extraordinary item and cumulative
effect of change in accounting
principle............................ (1.0) (3.9) (2.8) (2.2) (6.1)
Income tax provision (benefit)........... -- -- 0.3 1.5 (1.5)
Net loss(b) ............................ (1.0) (3.9) (3.1) (5.2) (5.6)
Balance Sheet Data
Total assets............................. 120.1 117.3 137.8 269.5 278.6
Total debt(c)............................ 70.0 69.7 79.0 161.3 224.0
Total stockholders' equity (deficiency).. 26.6 21.9 25.1 52.2 (2.4)
Other Data
EBITDA(d)................................ 12.4 16.3 20.8 32.1 47.1
Ratio of earnings to fixed charges(e).... -- -- -- -- --
<FN>
- ----------
(a) Operating income (loss) includes a non-cash charge of $2.5, $1.4 and $1.4
in fiscal years 1997, 1998 and 1999, respectively, related to contract
termination costs (in fiscal 1997 and 1998) and the writedown of long-lived
assets identified as impaired and a contract loss provision (in fiscal
1999). Operating income (loss) for fiscal years 1995, 1996, 1997, 1998 and
1999 includes management fees paid to equity owners of $1.1, $0.3, $0.3,
$0.3 and $0.4, respectively. Additionally, operating income (loss) includes
$0.9 of trademark fees charged by our former owners for fiscal 1995.
(b) Net income (loss) for Volume Holdings includes an extraordinary loss (net
of income taxes) of $1.5 and $0.9 for the non-cash write-off of deferred
financing costs in fiscal years 1998 and 1999, respectively. Additionally,
net income (loss) for fiscal 1999 includes a charge of $0.3 for the effect
of a change in accounting principle (net of income taxes).
(c) Includes the current portion of long-term debt.
(d) EBITDA is defined as net income (loss) before interest expense, income tax
expense, depreciation and amortization, and:
o for fiscal year 1997, a $2.5 non-cash charge related to contract
termination costs;
o for fiscal year 1998, $3.1 of non-recurring severance expenses
associated with Volume Services' employees and other Service America
expenses incurred in connection with the acquisition of Service
America, $1.4 of non-cash charges related to contract termination
costs for Volume Holdings, and a $1.5 extraordinary loss on debt
extinguishment, net of taxes.
o for fiscal year 1999, $1.5 of non-recurring expenses related to
downsizing the Service America corporate office in connection with the
acquisition of Service America, $1.4 of non-cash charges related to
the writedown of impaired assets for certain contracts and a contract
loss provision, a $0.9 extraordinary loss on debt extinguishment, net
of taxes, and $0.3 for the cumulative effect of a change in accounting
principle, net of taxes.
o for fiscal 1995, 1996, 1997, 1998 and 1999, $1.1, $0.3, $0.3, $0.3 and
$0.4, respectively, for management fees paid to equity owners.
(e) 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. Earnings were insufficient to cover fixed charges
by $1.0, $3.9, $2.8, $2.2 and $6.1 for fiscal years 1995, 1996, 1997, 1998
and 1999, respectively.
</FN>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FISCAL 1999 COMPARED TO FISCAL 1998
Net sales. Net sales increased 52.2% or $148.1 million from $283.4 million
in fiscal 1998 to $431.5 million in fiscal 1999. The increase was primarily due
to the August 24, 1998 acquisition of Service America (the "Acquisition") which
resulted in the inclusion of $186.8 million in net sales for fiscal 1999 as
compared to $75.5 million in fiscal 1998. Excluding the effect of the
Acquisition, net sales increased by $36.7 million as a result of the addition of
eight new contracts, including two NFL facilities, Adelphia Coliseum, home of
the Tennessee Titans, and the Louisiana Superdome and Arena; one MLB venue,
Safeco Field, home of the Seattle Mariners; and two minor league baseball
stadiums, which together generated $41.3 million in net sales. The improvement
was partially offset by the loss of net sales associated with the closure of
several accounts, including one NFL facility, the Trans World Dome.
Cost of sales. Cost of sales of $342.5 million in fiscal 1999 increased
$120.0 million from fiscal 1998 primarily due to the Acquisition and to the
overall increase in net sales. Cost of sales as a percentage of net sales
increased from 78.5% in fiscal 1998 to 79.4% in fiscal 1999 primarily reflecting
the higher variable costs, especially commissions, associated with two service
contracts acquired by Service America.
Selling, general and administrative. Selling, general and administrative
expenses increased $13.2 million from $29.5 million in fiscal 1998 to $42.7
million in fiscal 1999, primarily due to the Acquisition. As a percentage of net
sales, selling, general and administrative expenses declined from 10.4% in
fiscal 1998 to 9.9% in fiscal 1999. Overhead expense, one of the elements of
selling, general and administrative expenses, declined substantially due to the
savings achieved through the elimination of duplicate costs. Offsetting these
savings was an 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
47.4% from $18.2 million in fiscal 1998 to $26.8 million in fiscal 1999. Of the
$8.6 million increase, $4.8 million was due to an increase in amortization
arising from the application of purchase accounting related to the Acquisition.
The remaining $3.8 million increase was primarily due to depreciation as a
result of the assets acquired in the Acquisition and fiscal 1999 capital
expenditures of $26.3 million.
Transaction related expenses. We incurred $1.5 million in transaction
related expenses in fiscal 1999 as compared to $3.1 million in fiscal 1998.
These expenses relate to personnel costs, rental costs and professional fees
associated with the downsizing of the Stamford, Connecticut office in connection
with the Acquisition.
Contract related losses. We incurred non-cash contract related losses of
$1.4 million in both fiscal 1999 and fiscal 1998. The $1.4 million recognized in
fiscal 1999 resulted primarily from our determination that certain contracts
that we intend to continue operating are impaired, in that the future
undiscounted cash flows of these contracts is estimated to be insufficient to
recover the related carrying value of the property and equipment and contract
rights associated with the contracts. As a result, we have written down the
carrying value of these contracts to our estimate of fair value based on the
present value of the discounted future cash flows. The $1.4 million in fiscal
1998 relates to the write-off of assets relating to three terminated concession
contracts.
Operating income. Operating income increased $7.8 million from $8.7 million
in 1998 to $16.5 million in fiscal 1999. The increase was primarily due to the
factors discussed above.
FISCAL 1998 COMPARED TO FISCAL 1997
Net sales. Net sales increased 44.6% from $196.0 million in fiscal 1997 to
$283.4 million in fiscal 1998. The increase was primarily due to the to the
Acquisition which resulted in the inclusion of $75.5 million in revenues for the
period from August 25, 1998 to the end of the fiscal year. In addition, net
sales at MLB venues serviced by us increased by $11.6 million as a result of
post-season playoff games and a 20.7% increase in average attendance at one
client facility.
Cost of sales. Cost of sales increased 41.7% from $157.0 million in fiscal
1997 to $222.5 million in fiscal 1998, primarily as a result of the Acquisition.
As a percentage of net sales, cost of sales declined from 80.1% in fiscal 1997
to 78.5% in fiscal 1998 principally due to the inclusion of Service America
whose cost of sales was 76.7% for the eighteen weeks ended December 29, 1998,
compared to Volume Holdings' percentage of 79.0% excluding Service America.
Other factors contributing to the decrease in cost of sales percentage are
directly related to the net sales increase at Volume Holdings' MLB facilities.
The increased attendance at MLB regular season and playoff games is
incrementally more profitable due to the ability of the employment base to
service more customers without a corresponding increase in labor costs. In
addition, Volume Holdings secured a new service contract in 1998 that had a
lower commission rate than the average of its other contracts contributing to
the reduction in cost of sales as a percentage of net sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 56.1% from $18.9 million in fiscal 1997 to
$29.5 million in fiscal 1998, primarily as a result of the Acquisition. The
percentage of selling, general and administrative expenses as a percentage of
net sales increased from 9.6% in fiscal 1997 to 10.4% in fiscal 1998. The
increase as a percentage of net sales is due to the Acquisition, with such
expenses representing 13.4% of its net sales.
Depreciation and amortization. Depreciation and amortization increased
41.1% from $12.9 million in fiscal 1997 to $18.2 million in fiscal 1998. The
dollar increase was due to:
o Service America's depreciation and amortization from August 24, 1998 to the
end of the fiscal year of $2.4 million;
o amortization of trademark fees, step-up value of location contracts and
costs in excess of fair value of net assets acquired of $2.6 million
resulting from the application of the purchase method of accounting for the
Acquisition; and
o amortization of capital investments made in connection with six new
contracts of $1.3 million.
Transaction related expenses. Transaction related expenses of $3.1 million
in fiscal 1998 primarily include non-recurring severance expense and
non-recurring expenses principally for Volume Services in connection with the
Acquisition.
Contract related losses. We incurred non-cash contract related losses of
$1.4 million in fiscal 1998 as compared to $2.5 million in fiscal 1997. The $1.4
million in fiscal 1998 relates to the write-off of assets relating to three
terminated concession contracts. The $2.5 million in fiscal 1997 relates to the
closure and subsequent write-off of assets in connection with our contract with
Ericsson Stadium.
Operating income. Operating income increased 81.2% from $4.8 million, or
2.4% of net sales, in fiscal 1997 to $8.7 million, or 3.1% of net sales, in
fiscal 1998. The increase was primarily due to the factors as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
For fiscal 1999, net cash provided by operating activities was $16.1
million compared to $2.5 million provided by operating activities for fiscal
1998. The $13.6 million increase in cash provided by operating activities was
primarily due to increased operating activity, mainly as the result of the
Acquisition and higher overall sales due to the addition of new NFL and MLB
venues and a $3.9 million net increase in working capital.
For fiscal 1999, net cash used in investing activities was $25.4 million
compared to $5.3 million in fiscal 1998. The primary components of net cash used
in investing activities were the purchase of property and equipment and
investment in contract rights in connection with acquiring or renewing
contracts. In fiscal 1999, Volume Holdings made $14.6 million in investments in
acquiring new contract rights for Pacific Bell Park, Louisiana Superdome and
Arena and Adelphia Stadium and $1.3 million in contract renewals as compared to
$6.2 million in fiscal 1998. Investments made in the purchase of property and
equipment were $10.4 million in fiscal 1999 as compared to $12.6 million in
fiscal year 1998. These investments were partially offset by proceeds from the
sale of property and equipment which were $.9 million and $15.9 million in
fiscal years 1999 and 1998, respectively. Of the $15.9 million in proceeds for
fiscal 1998, $12.6 million was due to the termination of the Ericsson Stadium
contract.
For fiscal 1999, net cash provided by financing activities was $12.8
million compared to $6.3 million in fiscal 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 debt to GE
Capital, redeem $49.5 million of stock, and pay related fees of $6.2 million.
Excluding this financing, $9.5 million was borrowed under the revolving credit
facility to fund working capital and capital expenditures and bank overdrafts
increased $7.4 million. This is compared to $6.9 million in borrowings under the
revolving credit facility, a $1.8 million decline in bank overdrafts and the
receipt of $3.5 million of cash equity from two Blackstone partnerships (BCP
Volume, L.P. and BCP Offshore Volume L.P.) in fiscal 1998.
For fiscal 1998, net cash provided by operating activities was $2.5 million
compared to $15.3 million provided by operating activities for fiscal 1997. The
$12.9 million decrease in cash provided by operating activities was primarily
due to an increase of $2.1 million in net loss and a net increase in working
capital of $10.1 million, primarily as a result of the acquisition of Service
America. This was partially offset by a $5.3 million increase in depreciation
and amortization and a $1.5 million extraordinary loss.
For fiscal 1998, net cash used in investing activities was $5.3 million
compared to $31.0 million for fiscal 1997. 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. Volume Holdings used $12.6 million and $26.0 million in the
purchase of property and equipment and $6.2 million and $11.6 million for
investment in contract rights, for fiscal 1998 and fiscal 1997, respectively.
The difference in the amount of net cash used in investing activities in these
two periods was primarily due to the large capital investments which were made
in FedEx Field (formerly Jack Kent Cooke Stadium), Tropicana Field and Pacific
Bell Park in fiscal 1997. In addition, in fiscal 1998, we received $12.6 million
in proceeds from assets held for sale after the termination of the Ericsson
Stadium contract.
For fiscal 1998, net cash provided by financing activities was $6.3 million
compared to $15.9 million in fiscal 1997. The $9.6 million decrease in cash
provided by financing activities was primarily due to decreased borrowings under
our revolving credit facilities and lower capital investments made to retain
contracts or to acquire new contracts. This decrease was partially offset by
additional borrowings net of debt repayments and payment of financing costs.
Our liquidity is generated from cash flows from operations as described
above and from revolving credit borrowings available through our credit
facility. In December 1998, we entered into this credit facility with Chase
Manhattan Bank, Goldman Sachs Credit Partners and other lenders to refinance the
pre-Acquisition debt of Volume Services and Service America. At closing of the
facility, we borrowed $160.0 million in term loans to refinance that debt, and
we repaid $45.0 million of these term loans from the proceeds of our senior
notes issuance in 1999. The credit facility also includes a $75.0 million
revolving credit facility.
We use the money we borrow under the revolving credit facility to fund our
working capital needs and for the capital investments we make in connection with
our contracts. Revolving credit borrowings may be made at prime rate or at a
LIBO rate (available for various interest periods) plus, in each case, the
applicable margin. All borrowings under the credit facility are secured by
substantially all the assets of Volume Holdings and most of its subsidiaries,
including Volume Services and Service America.
At December 28, 1999, $53.3 million of the revolving credit facility was
available to be borrowed under our credit facility. At that date, there were
$9.5 million in outstanding borrowings and $12.2 million of outstanding, undrawn
letters of credit reducing availability.
FUTURE LIQUIDITY AND CAPITAL RESOURCES
We believe that cash flow from operating activities, together with
borrowings available under the revolving credit facility, will be sufficient to
fund our currently anticipated capital investment requirements, interest and
principal payment obligations and working capital requirements. We are currently
committed under client contracts to fund capital investments of approximately
$6.3 million and $0.6 million in 2000 and 2001, respectively.
We anticipate total capital investments of $15.0 million in fiscal 2000. In
addition, we are currently in negotiations for two potential new contacts. If we
enter into these contracts, we will be required to fund additional capital
investments of approximately $5.7 million in fiscal 2001 and $8.0 million in
fiscal 2002.
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS
No. 137. This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities on the balance sheet
and measures those instruments at fair value. The accounting for changes in the
fair value of a derivative (that is, gains and losses) depends on the intended
use of the derivative. For us, this new standard will become effective for our
fiscal 2001 financial statements. We have not yet completed our analysis of the
effects of this new standard on our results of operations or financial position.
The new statement may not be applied retroactively.
YEAR 2000
Volume Services has experienced no business or service disruptions from
Year 2000 related issues as of mid-March 2000. However, there is no guarantee
that there will not be any Year 2000 issues in the future. We have budgeted
$5,000 for Year 2000-related contractor support in the event that Tear 2000
issues arise during 2000.
FORWARD LOOKING AND CAUTIONARY STATEMENTS
Except for the historical information and discussions contained herein,
statements contained in this Form 10-K may constitute "forward looking
statements" within the meaning of the Private Securities 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:
o our high degree of leverage and significant debt service obligations;
o our history of net losses;
o 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 such events;
o the risk of labor stoppages affecting sports teams at whose facilities we
provide our services;
o the risk of sports facilities at which we provide services losing their
sports team tenants;
o our ability to retain existing clients or obtain new clients;
o the highly competitive nature of the recreational food service industry;
o any future changes in management;
o general risks associated with the food industry; and
o future changes in government regulation.
ITEM 7A. 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.
December 28, 1999
Fair
Value
2000 2001 2002 2003 2004 Thereafter Total 12/28/99
Long-term debt: (In Millions)
Variable rate:........ $ 1.2 $ 1.2 $ 1.2 $ 1.2 $ 10.7 $ 108.1 $ 123.4 $ 123.4
Average interest rate: 10.0% 10.7% 10.8% 10.9% 10.9% 10.9%
Fixed rate:........... $ 0 $ 0 $ 0 $ 0 $ 0 $ 100.0 $ 100.0 $ 98.5
Average interest rate: 11.25% 11.25% 11.25% 11.25% 11.25%
Fair
Notional Strike Reference Value
Amount Rate Rate Period 12/28/99
------ -------- ----------- ---------- ----------
Purchased interest rate cap 10.0 7.5% 3 month 4/15/99 - $0.00
LIBOR 6/16/01
Fair Value
2000 2001 12/28/99
Interest rate swap
Fixed to variable $0.0 $30.0 $(0.5)
Average pay rate 5.9%
Floor receive rate 5.4%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See index to financial statements at page F-1.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table provides information about each of our directors and
executive officers.
NAME AGE POSITION
Chief Executive Officer and
John T. Dee..................... 61 Chairman of the Board of Directors
Kenneth R. Frick................ 44 Vice President and Chief Financial Officer
Janet L. Steinmayer............. 44 Vice President, General Counsel and Secretary
Howard A. Lipson................ 36 Director
David Blitzer .................. 30 Director
Peter Wallace................... 25 Director
John T. Dee, Chief Executive Officer and Chairman of the Board of
Directors. Mr. Dee has served as Chief Executive Officer and Chairman of the
Board of Directors of Volume Services America since August 1998. Mr. Dee has
served as President, Chief Executive Officer and a director of Service America
since January 1993 and as a consultant to Service America from November 1992 to
January 1993. He has been Chairman of the Board of Directors of Service America
since January 1997. 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 (a food service company) with
responsibility for ARAMARK's recreational food service and public restaurant
operations. From 1979 to 1980, he held senior positions, including President, at
Sportservice Corporation (a food service company), 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,
including Vice President-Sales and President of the Leisure Services Group, a
division of ARAMARK engaged in the recreational food service industry.
Kenneth R. Frick, Vice President and Chief Financial Officer. Mr. Frick has
served as Chief Financial Officer of Volume Services America since August 1998
and as Chief Financial Officer of Volume Services since 1995. 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, and for seven years was
Assistant Controller and Southeast Regional Controller of Volume Services. Mr.
Frick is a certified public accountant.
Janet L. Steinmayer, Vice President, General Counsel and Secretary. Ms.
Steinmayer has been Vice President, General Counsel and Secretary of Volume
Services America since August 1998. 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. ("TWA"). From 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.
Howard A. Lipson, Director. Mr. Lipson is Senior Managing Director of The
Blackstone Group L.P., referred to in this Annual Report on Form 10-K as the
"Blackstone Group", which he joined in 1988. He has been a director of Volume
Services America since 1995. Prior to joining the Blackstone Group, 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., AMF
Group Inc., Ritvik Holdings Inc., Prime Succession Inc. and Roses, Inc. and is a
member of the Advisory Committee of Graham Packaging Company.
David Blitzer, Director. Mr. Blitzer is a Senior Managing Director of the
Blackstone Group, which he joined in 1991. He has been a director of Volume
Services America since 1995. Mr. Blitzer is also a director of Haynes
International, Inc., Republic Engineered Steels, Inc., Bar Technologies, Inc.
and The Imperial Home Decor Group Inc.
Peter Wallace, Director. Mr. Wallace has been associated with the
Blackstone Group since 1997. He has been a director of Volume Services America
since October 1999.
The discussion of the amended stockholders' agreement in "Certain
Relationships and Related Transactions - Amended Stockholders' Agreement" below
(with respect to the rights of management and various Blackstone entities to
appoint directors) and the discussion of the employment agreements in "Executive
Compensation" below, are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
The table below provides information concerning the total compensation of
the Chief Executive Officer and all other executive officers of Volume Services
America based on 1999 salary and bonuses. These officers are referred to
together as the "Named Executives".
ANNUAL COMPENSATION
-------------------
YEAR SALARY BONUS(1) OTHER ANNUAL ALL OTHER
---- ------ -------- COMPENSATION(2) COMPENATION (3)
--------------- ---------------
John T. Dee
Chief Executive Officer and Chairman of
the Board of Directors 1999 $467,354 $137,895 -- $7,497
1998 483,716 -- -- --
Kenneth R. Frick
Vice President and Chief Financial
Officer 1999 194,808 40,000 -- 2,852
1998 153,175 20,535 -- 4,584
Janet L. Steinmayer
Vice President, General Counsel and
Secretary 1999 256,876 59,737 -- 199
1998 291,900 150,000 18,300 --
- ------------------
(1) Bonuses are made pursuant to Volume Service America's bonus plan for
general managers and senior management personnel. Eligible personnel
qualify for bonus payments in the event that Volume Services America
exceeds annual financial performance targets or at the discretion of the
board of directors.
(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 for the
years shown.
(3) All other compensation for Mr. Dee and Ms. Steinmayer consists of the
dollar value of insurance premiums paid by the registrant for that Named
Executive. For Mr. Frick, all other compensation consists of $699 in
insurance premiums paid for him, $392 in interest on investor notes and
$1,761 in employer matching contributions to our 401(k) plan.
DIRECTOR COMPENSATION
Directors of Volume Services America do not receive compensation, except in
their capacity as officers or employees.
EMPLOYMENT AND SEVERANCE AGREEMENTS
We have entered into the following arrangements with our directors and
executive officers:
On August 24, 1998, Volume Holdings entered into an employment agreement
with Mr. Dee. The agreement provides that Mr. Dee will be employed by Volume
Holdings at an annual base salary of $465,000 for a term of five years, subject
to earlier termination by Volume Holdings for or without Cause, or by Mr. Dee
for Good Reason, each as defined in the agreement. Mr. Dee is entitled to a
bonus at the discretion of the Board of Directors of Volume Holdings and to
participate in any executive bonus plan and all employee benefit plans
maintained by Volume Holdings. The agreement provides for severance pay in the
case of a termination by Volume Holdings 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 benefits. During and for two years after Mr.
Dee's employment, Mr. Dee has agreed that, without the written consent of Volume
Holdings, he will not:
o be engaged, in any capacity, in any business that competes with Volume
Holdings' business; or
o solicit any person who was employed by Volume Holdings during the 12 months
preceding such solicitation.
On November 17, 1995, Volume Services entered into an employment agreement
with Mr. Frick. The agreement provides that Mr. Frick will be employed by Volume
Services until he resigns or is dismissed by Volume Services for or without
Cause, as defined in the agreement. Mr. Frick's base salary under the contract
is $195,000 subject to annual review. Mr. Frick is also entitled to receive an
annual bonus pursuant to any management incentive compensation plan established
by Volume Services. 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. In the case of termination without Cause by
Volume Services, Mr. Frick will receive a one-time payment of two times his base
annual salary plus any accrued but unpaid bonus. During and for two years after
his employment, Mr. Frick has agreed not to:
o solicit employees of Volume Services to cease such employment without the
written consent of Volume Services; or
o have any involvement in any capacity in any contract concessions business
similar to that of Volume Services in those states in the United States in
which Volume Services does business and over which Mr. Frick has had
supervisory responsibility.
On September 29, 1998, Volume Holdings entered into an employment agreement
with Ms. Steinmayer. The agreement provides that Ms. Steinmayer will be employed
by Volume Holdings at an annual base salary of $180,000, plus $250 per hour for
each hour that she works in excess of 24 hours per week, until the agreement is
terminated by Volume Holdings for or without Cause, or by Ms. Steinmayer for
Good Reason, each as defined in the agreement. Ms. Steinmayer is entitled to a
bonus at the discretion of the Board of Directors of Volume Holdings and to
participate in any executive bonus plan and all employee benefit plans
maintained by Volume Holdings. The agreement provides for severance pay in the
case of a termination by Volume Holdings without Cause or by Ms. Steinmayer for
Good Reason in an amount equal to two times her compensation in the one year
period prior to the date of termination (annualized in the case of termination
prior to the end of the first year), plus ancillary benefits. During and for two
years after Ms. Steinmayer's employment, she has agreed that she will not,
without the prior written consent of Volume Holdings:
o 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
Volume Holdings operates; or
o solicit any employee of Volume Holdings to leave its employment.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Volume Services America is a wholly owned subsidiary of Volume Holdings.
The following table and accompanying footnotes set forth certain information
concerning the beneficial ownership of the Volume Holdings common stock. Except
as disclosed below, none of our officers or directors beneficially owns any of
our stock. Except as indicated in the footnotes to this table, we believe that
the persons named in the table have sole voting and investment power with
respect to all shares shown as beneficially owned by them.
Shares
Name and Address Beneficially Owned Percentage Owner
Blackstone Management Associates II L.L.C.(1)
Peter G. Peterson(1)
Stephen A. Schwartzman(1)
345 Park Avenue
New York, NY 10154.................................... 211.8 63.7%
BCP Volume L.P.(1)
Blackstone Capital Partners II Merchant
Banking Fund L.P.(1)
345 Park Avenue
New York, NY 10154.................................... 157.0 47.2%
General Electric Capital Corporation(2)
Recreational Services L.L.C.(2)
201 High Ridge Road
Stamford, Connecticut 06927........................... 120.8 36.3%
BCP Offshore Volume L.P.(1)
Blackstone Offshore Capital Partners II L.P.(1)
345 Park Avenue
New York, NY 10154.................................... 40.7 12.3%
VSI Management Direct L.P.(1)(3)
VSI Management I, L.L.C. (1)(3)
Kenneth R. Frick(3)
c/o Volume Services, Inc.
201 East Broad Street
Spartanburg, South Carolina 29306..................... 14.1 4.2%
(1) Blackstone Management Associates II L.L.C. ("BMA II") is one of two
managing members of VSI Management I, L.L.C. ("VSI I"), BMA II is also the
general partner of Blackstone Capital Partners II Merchant Banking Fund
L.P. ("BCP II") and the investment general partner of Blackstone Offshore
Capital Partners II L.P. ("BOC II"). BMA II thus exercises shared voting
and dispositive power with respect to VSI I (see note (3)) and sole voting
and dispositive authority with respect to BCP II and BOC II. BCP II is the
general partner of BCP Volume L.P and exercises sole voting and dispositive
power with respect to its shares. BOC II is the general partner for BCP
Offshore Volume L.P. and exercises sole voting and dispositive power with
respect to its shares. VSI I is the general partner for VSI Management
Direct L.P. and exercises sole voting and dispositive power with respect to
its shares. Messrs. Peter G. Peterson and Stephen A. Schwarzman are members
of BMA II, which has or shares investment and voting control over the
shares held or controlled by each of the foregoing entities. Each of these
individuals disclaims beneficial ownership of such shares.
(2) Recreational Services L.L.C. ("Recreational Services") is a limited
liability company, the managing member of which is GE Capital.
(3) VSI Management Direct L.P. is a limited partnership, the general partner of
which is VSI I. The managing members of VSI I are Kenneth R. Frick, our
Vice President and Chief Financial Officer, and BMA II, and they exercise
shared voting and dispositive power over the shares owned by VSI Management
Direct L.P. Mr. Frick disclaims beneficial ownership of such shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ASSIGNMENT AND ASSUMPTION AGREEMENT
Pursuant to an assignment and assumption agreement, Service America
assigned the promissory notes and common stock of Compass Group PLC ("Compass")
received from the sale to Compass of Service America's institutional vending and
dining business, which were valued by the parties at $108.4 million, to GE
Capital in consideration for:
o the forgiveness of $17.9 million of debt and interest and $3.8 million of
accrued dividends owed by Service America to GE Capital; and
o the assumption by GE Capital of a percentage of certain categories of
liabilities on Service America's balance sheet as of the closing date of
the Compass transaction. These percentages represented an approximation of
the amount of each category of liabilities attributable to all
institutional vending and dining operations sold by Service America on or
prior to September 27, 1996.
Pursuant to the assignment and assumption agreement, Service America serves
as GE Capital's agent for purposes of paying and discharging all of such assumed
liabilities, and these transactions with GE Capital are reflected in Service
America's financial statements. Certain liabilities assumed by GE Capital are
subject to an aggregate maximum of approximately $16.3 million, but this amount
does not apply to:
o certain anticipated or contingent liabilities, which were assumed 100% by
GE Capital;
o casualty insurance, including worker's compensation;
o medical insurance; and
o certain accrued taxes.
In addition, GE Capital agreed to reimburse Service America for its part of
the compensation for one of its employees between August 1998 and August 1999.
The total amount that GE Capital paid Service America during 1999 for this
reimbursement was $175,000.
As of December 28, 1999, GE Capital had assumed accrued liabilities of
$16.3 million subject to the limit. We do not believe that outstanding
liabilities subject to the limit will exceed the $0.6 million which remains
available, but we cannot assure you that this will be the case. If such
liabilities do exceed the limit, we will be liable for them. As of December
28,1999, approximately $2.0 million of liabilities not subject to the limit were
outstanding. GE Capital will be solely responsible for these liabilities until
April 20, 2000. On April 20, 2000, GE Capital will pay us a sum equal to 125% of
the total liabilities that we agree with GE Capital to be then outstanding.
After this payment, we will be responsible for the entire actual amount of all
liabilities.
TAX INDEMNITY AGREEMENT
Service America ceased being a member of the General Electric Company
consolidated group, referred to as the "GE Consolidated Group", for federal
income tax purposes by reason of the Acquisition. Accordingly, Service America
and GE Capital in January 1997 entered into a tax indemnity agreement. Under
this agreement:
o 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
o 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
LETTERS OF CREDIT
Upon entering into the senior credit facilities in December 1998, Volume
Services America obtained two letters of credit in favor of GE Capital for $1.1
million and $6.8 million, respectively. These letters of credit were obtained to
reimburse GE Capital for any liability that it may incur pursuant to its
guarantee of certain letters of credit provided to support obligations of
Service America prior to the acquisition of Service America by Volume Holdings
and which were then still outstanding. During 1999, the maximum aggregate
outstanding amount of these letters of credit was $7.9 million. Both letters of
credit were cancelled by August 1999.
AMENDED STOCKHOLDERS' AGREEMENT
On December 21, 1995, VSI Management Direct L.P. ("VSI Management"), BCP
Volume L.P., BCP Offshore Volume L.P. and Volume Holdings entered into a
stockholders' agreement. On August 24, 1998, these parties, together with GE
Capital and Recreational Services, entered into an amended and restated
stockholders' agreement. In the discussion of the stockholders' agreement below,
we refer to BCP Volume L.P. and BCP Offshore Volume L.P. collectively as
"Blackstone".
Management; Board of Directors. The Board of Volume Holdings will be
comprised of a Chairman, one director appointed by VSI Management (provided that
the Chairman is not a partner of VSI Management and that VSI Management consults
with Blackstone prior to the appointment) and three directors appointed by
Blackstone (provided that Blackstone is the sole Controlling Stockholder,
defined in the agreement). If Blackstone ceases to be the sole Controlling
Stockholder, each of Blackstone and GE Capital will have the right to appoint
two directors. Until GE Capital is entitled to appoint a director, it is
entitled to appoint an Observer, as defined in the agreement, who is not
entitled to vote on any Board matters.
Transfers of Shares. No transfers of the shares of Volume Holdings' common
stock, referred to as the "Shares", may be made by any stockholder, as defined
in the agreement, within one year from the date of the amended stockholders'
agreement other than:
o to a defined category of persons affiliated with or successors in title to
existing stockholders, each of whom agrees to be bound by the terms of the
amended stockholders' agreement, each referred to as a "Permitted
Transferee";
o pursuant to a public offering of the Shares; or
o in accordance with the exercise of the drag-along or tag-along rights
discussed below.
If either of Blackstone or Recreational Services, for these purposes,
referred to as the "Transferring Stockholder", intends to transfer its Shares
while the amended stockholders' agreement is in effect (other than by way of a
public offering or pursuant to Rule 144 under the Securities Act or to a
Permitted Transferee) and the Transferring Stockholder still beneficially owns
at least one-third of the number of Shares on a fully diluted basis that it held
at the date of the amended stockholders' agreement, then each other stockholder
will have the right to require the purchaser of such Transferring Stockholder's
Shares to purchase the same proportion of the Shares that such stockholder owns,
on the same terms as those offered to the Transferring Stockholder, referred to
as the "tag-along right".
If all of the Controlling Stockholders accept an offer by a party other
than a stockholder, referred to as a "Third Party", to purchase all of the
Shares owned by the stockholders (and the Controlling Stockholder to whom the
offer was made still owns at least one-third of the Shares owned by it at the
date of the amended stockholders' agreement), then each stockholder is obliged
to transfer its Shares to the Third Party on the same terms as those accepted by
the Controlling Stockholders, referred to as the "drag-along right".
After one year from the date of the amended stockholders' agreement, a
stockholder may also transfer Shares:
o pursuant to a transfer that is exempt from the registration requirements of
the Securities Act; or
o if such stockholder is not a Controlling Stockholder, after offering the
Shares first to Volume Holdings and then to each of Blackstone and
Recreational Services in proportion to their respective holdings of Shares.
Unless a stockholder transfers Shares pursuant to a public offering, Rule
144 under the Securities Act or the drag-along right, all transferees are
required to become bound by the terms of the amended stockholders' agreement.
Restrictions on Corporate Action. For so long as Recreational Services owns
at least 20% of the Shares, we may not take certain fundamental corporate
actions without the consent of each of Recreational Services and Blackstone,
including the amendment of the certificate of incorporation or by-laws of Volume
Holdings or the modification of any stock option, bonus or benefit plan.
Similarly, as long as Recreational Services owns at least 20% of the Shares,
Volume Holdings may not enter into any transaction with Blackstone, or its
affiliates, without the consent of Recreational Services, except for:
o the payment of regular fees or expenses to its directors;
o transactions that are reasonable in the light of industry practice and that
are of a value not greater than $500,000 individually and $1,000,000 in the
aggregate in any one year;
o the payment of the monitoring fee discussed below; or
o transaction fees up to 1% of the value of a company being acquired by
Volume Holdings, as long as GE Capital also receives a proportional fee
based on Recreational Services' Share ownership relative to Blackstone's
Share ownership.
Annual Fees. The amended stockholders' agreement permits the payment of
annual monitoring fees by Volume Holdings of $250,000 to Blackstone and $167,000
to GE Capital. The fees payable to Blackstone and GE Capital have been accounted
for as an expense, but not yet paid.
Registration Rights. Blackstone has the right to demand registration of the
Shares by Volume Holdings under the Securities Act at any time, subject to a
maximum of three such registrations. Recreational Services has the right to
demand such registration on one occasion only, at any time on or after the third
anniversary of the date of the amended stockholders' agreement.
Financings. The amended stockholders' agreement also obliged Volume
Holdings to use its reasonable best efforts to consummate a financing by August
24, 1999. The proceeds of the financing were to be applied to pay related fees
and expenses, to repay debt of Volume Holdings and to repurchase Shares from the
holders in accordance with a formula set out in the exchange agreement with
respect to our senior notes. Volume Holdings satisfied this requirement by
consummation of the senior credit facilities and the issuance of Volume Service
America's senior notes.
LEASING SERVICES
GE Capital and its affiliates provided us leasing and financing services
during 1999 on arms-length terms. Payments to GE Capital and its affiliates
during 1999, net of discounts earned, were approximately $185,000.
LOANS TO VSI PARTNERSHIPS
During 1999, VSI Management and VSI Management II, L.P. ("VSI Management
II") repurchased some of their partnership interests from some former members of
management. To fund this purchase, Volume Services America loaned $854,000 to
VSI Management and $65,000 to VSI Management II. The loans were on arms-length
terms, with interest accruing at the applicable federal rate, and the full
amount of the loans remained outstanding at December 28, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) See index to financial statements at page F-1.
(b) We did not file any Current Report on Form 8-K during the last quarter of
our 1999 fiscal year.
(c) Exhibits:
No. Description
--- -----------
2. See Exhibit 10.1
3.1 Restated Certificate of Incorporation of Volume Services America,
Inc. Incorporated by reference to Exhibit 3.1 to our Registration
Statement on Form S-4, Commission File No. 333-79419 (the "Form
S-4").
3.2 By-laws of Volume Services America, Inc. Incorporated by
reference to Exhibit 3.2 to the Form S-4.
3.3 Restated Certificate of Incorporation of Volume Services America
Holdings, Inc. Incorporated by reference to Exhibit 3.3 to the
Form S-4.
3.4 By-laws of Volume Services America Holdings, Inc. Incorporated by
reference to Exhibit 3.4 to the Form S-4.
3.5 Restated Certificate of Incorporation of Volume Services, Inc.
Incorporated by reference to Exhibit 3.5 to the Form S-4.
3.6 By-laws of Volume Services, Inc. Incorporated by reference to
Exhibit 3.6 to the Form S-4.
3.7 Restated Certificate of Incorporation of Service America
Corporation. Incorporated by reference to Exhibit 3.7 to the Form
S-4.
3.8 By-laws of Service America Corporation. Incorporated by re
ference to Exhibit 3.8 to the Form S-4.
3.9 Articles of Incorporation of Events Center Catering, Inc.
Incorporated by reference to Exhibit 3.9 to the Form S-4.
3.10 Articles of Incorporation of Service America Concessions
Corporation. Incorporated by reference to Exhibit 3.10 to the
Form S-4.
3.11 By-laws of Service America Concessions Corporation. Incorporated
by reference to Exhibit 3.11 to the Form S-4.
3.12 Articles of Incorporation of Service America Corporation of
Wisconsin. Incorporated by reference to Exhibit 3.12 to the Form
S-4.
3.13 By-laws of Service America Corporation of Wisconsin. Incorporated
by reference to Exhibit 3.13 to the Form S-4.
3.14 Articles of Incorporation of Servo-Kansas, Inc. Incorporated by
reference to Exhibit 3.14 to the Form S-4.
3.15 By-laws of Servo-Kansas, Inc. Incorporated by reference to
Exhibit 3.15 to the Form S-4.
3.16 Articles of Incorporation of Servomation Duchess, Inc.
Incorporated by reference to Exhibit 3.16 to the Form S-4.
3.17 By-laws of Servomation Duchess, Inc. Incorporated by reference to
Exhibit 3.17 to the Form S-4.
3.18 Articles of Incorporation of SVM of Texas, Inc. Incorporated by
reference to Exhibit 3.18 to the Form S-4.
3.19 By-laws of SVM of Texas, Inc. Incorporated by reference to
Exhibit 3.19 to the Form S-4.
3.20 Certificate of Incorporation of Volume Services, Inc.
Incorporated by reference to Exhibit 3.20 to the Form S-4.
3.21 By-laws of Volume Services, Inc. Incorporated by reference to
Exhibit 3.21 to the Form S-4.
4.1 Indenture, dated as of March 4, 1999, between Volume Services
America, Inc. and Norwest Bank Minnesota, National Association.
Incorporated by reference to Exhibit 4.1 to the Form S-4. 4.2
Exchange and Registration Rights Agreement, dated March 4, 1999,
between Volume Services America, Inc., Chase Securities Inc. and
Goldman, Sachs & Co. Incorporated by reference to Exhibit 4.2 to
the Form S-4.
10.1 Purchase Agreement, dated February 25, 1999, between Volume
Services America, Inc., Chase Securities Inc. and Goldman, Sachs
& Co. Incorporated by reference to Exhibit 1 to the Form S-4.
10.2 Share Exchange Agreement, dated as of July 27, 1998, among VSI
Acquisition II Corporation, as Buyer, the Stockholders of the
Buyer and the Sellers specified therein. Incorporated by
reference to Exhibit 10.1 to the Form S-4.
10.3 Amended and Restated Stockholders' Agreement, dated as of August
24, 1998, among VSI Acquisition II Corporation, BCP Volume L.P.,
BCP Offshore Volume L.P., VSI Management Direct L.P., General
Electric Capital Corporation and Recreational Services L.L.C.
Incorporated by reference to Exhibit 10.2 to the Form S-4.
10.4 Credit Agreement, dated as of December 3, 1998, among Volume
Services America, Inc., Volume Services America Holdings, Inc.,
certain financial institutions as the Lenders, Goldman Sachs
Credit Partners L.P., Chase Securities Inc., Chase Manhattan Bank
Delaware and The Chase Manhattan Bank. Incorporated by reference
to Exhibit 10.3 to the Form S-4.
*10.4.1. First Amendment, dated as of February 8, 1999 to the
Credit Agreement, dated as of December 3, 1998, among Volume
Services America, Inc., Volume Services America Holdings, Inc.,
certain financial institutions as the Lenders, Goldman Sachs
Credit Partners, L.P., Chase Securities, Inc., Chase Manhattan
Bank Delaware and The Chase Manhattan Bank.
10.5 Volume Services, Inc., Deferred Compensation Plan, Enrollment
Information and Forms. Incorporated by reference to Exhibit 10.4
to the Form S-4.
10.6 Volume Services America, 1999 Bonus Plan. Incorporated by
reference to Exhibit 10.5 to the Form S-4.
10.7 Service America Corporation, Deferred Compensation Plan,
effective as of February 9, 1999. Incorporated by reference to
Exhibit 10.6 to the Form S-4.
10.8 Employment Agreement dated as of August 24, 1998, by and between
VSI Acquisition II Corporation and John T. Dee. Incorporated by
reference to Exhibit 10.7 to the Form S-4.
10.9 Employment Agreement dated as of November 17, 1998, by and
between Volume Services, Inc. (a Delaware corporation) and
Kenneth R. Frick. Incorporated by reference to Exhibit 10.8 to
the Form S-4.
10.10Employment Agreement, dated as of September 29, 1998, by and
between VSI Acquisition Corporation and Janet L. Steinmayer.
Incorporated by reference to Exhibit 10.10 to the Form S-4.
*12 Computation of Ratio of Earnings to Fixed Charges
*21 List of Subsidiaries
*27.1 Financial Data Schedule
------------------
*Filed herewith
(d) Financial Statement Schedules
SUPPLEMENTAL INFORMATION TO BE FURNISHED
WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH
HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
We have not sent to shareholders any annual report to security holders,
proxy statement, form of proxy or other proxy soliciting material during or with
respect to our 1999 fiscal year.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 21, 2000.
Volume Services America, Inc.
By: /s/ Kenneth R. Frick
-------------------------
Name: Kenneth R. Frick
Title: Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of each
registrant and in the capacities indicated on March 21, 2000.
Signature Title
/s/ John T. Dee Chief Executive Officer and Chairman
- -------------------------
John T. Dee (Principal Executive Officer)
/s/ Kenneth R. Frick Vice President and Chief Financial Officer
- -------------------------
Kenneth R. Frick (Principal Financial Officer)
/s/ Howard A. Lipson
- --------------------
Howard A. Lipson
/s/ David Blitzer Directors
- ----------------------
David Blitzer
/s/ Peter Wallace
- -----------------
Peter Wallace
[GRAPHIC OMITTED]
Volume Services America
Holdings, Inc.
Consolidated Financial Statements for the Years
Ended December 29, 1998 and December 28,
1999 and Independent Auditors' Report
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 (the "Company") as of December 29, 1998
and December 28, 1999, and the related consolidated statements of operations and
comprehensive loss, stockholders' equity (deficiency), and cash flows for each
of the three years in the period ended December 28, 1999. 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 the Company at December 29, 1998
and December 28, 1999, and the results of its operations and its cash flows for
each of the three years in the period ended December 28, 1999 in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche
---------------------
March 10, 2000
Greenville, South Carolina
- F1 -
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 29, 1998 AND DECEMBER 28, 1999 (IN THOUSANDS)
DECEMBER 29, DECEMBER 28,
ASSETS 1998 1999
CURRENT ASSETS:
Cash and cash equivalents $ 8,828 $ 12,281
Accounts receivable, less allowance for doubtful accounts of
$963 and $1,348 at December 29, 1998 and December 28, 1999,
respectively 17,790 16,935
Merchandise inventories 9,585 10,947
Prepaid expenses and other 3,975 6,870
Deferred tax asset 2,082 3,756
----- -----
Total current assets 42,260 50,789
------ ------
PROPERTY AND EQUIPMENT:
Leasehold improvements 40,048 44,518
Merchandising equipment 37,197 43,261
Vehicles and other equipment 5,702 6,953
Construction in process 262 474
--- ---
Total 83,209 95,206
Less accumulated depreciation and amortization (12,226) (25,805)
------- -------
Property and equipment, net 70,983 69,401
------ ------
OTHER ASSETS:
Contract rights, net 72,935 73,808
Cost in excess of net assets acquired, net 50,585 50,000
Deferred financing costs, net 7,783 11,459
Trademarks, net 19,108 18,422
Other 5,894 4,742
----- -----
Total other assets 156,305 158,431
------- -------
TOTAL ASSETS $ 269,548 $ 278,621
========== ==========
- F2 -
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 29, 1998 AND DECEMBER 28, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 29, DECEMBER 28,
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) 1998 1999
CURRENT LIABILITIES:
Note payable $ 500 $ -
Current maturities of long-term debt 4,200 1,150
Current maturities of capital lease obligation 189 206
Accounts payable 16,410 17,116
Accrued salaries and vacations 8,336 8,050
Liability for self-insured claims 2,216 2,186
Accrued taxes, including income taxes 3,384 2,706
Accrued commissions and royalties 8,603 10,258
Accrued interest 1,156 3,873
Other 3,664 4,304
----- -----
Total current liabilities 48,658 49,849
------ ------
LONG TERM LIABILITIES
Long term debt 155,800 222,200
Capital lease obligation 622 416
Deferred income tax 6,684 5,091
Liability for self-insured claims 2,949 1,370
Other liabilities 2,594 2,081
----- -----
Total long term liabilities 168,649 231,158
------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY):
Common stock, $0.01 par value:
Authorized - 1,000 shares; issued: 526 at December 29, 1998 and
December 28, 1999; outstanding: 526 and 332 at December 29, 1998
and December 28, 1999 - -
Additional paid-in capital 66,474 66,474
Accumulated deficit (12,595) (18,243)
Accumulated other comprehensive loss (67) (198)
Treasury stock - at cost (none at December 29, 1998 and
194 shares at December 28, 1999) - (49,500)
Other (1,571) (919)
------ ----
Total stockholders' equity (deficiency) 52,241 (2,386)
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $ 269,548 $ 278,621
========= =========
See notes to consolidated financial statements.
- F3 -
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 30, 1997, DECEMBER 29, 1998 AND DECEMBER 28, 1999
(IN THOUSANDS)
1997 1998 1999
Net sales $ 196,032 $ 283,441 $ 431,453
Cost of sales 156,965 222,533 342,489
Selling, general, and administrative 18,874 29,464 42,713
Depreciation and amortization 12,895 18,197 26,815
Transaction related expenses - 3,081 1,529
Contract related losses 2,505 1,423 1,422
----- ----- -----
Operating income 4,793 8,743 16,485
Interest expense 7,916 11,322 23,029
Other income, net (336) (359) (476)
---- ---- ----
Loss before income taxes (2,787) (2,220) (6,068)
Income tax provision (benefit) 319 1,518 (1,549)
--- ----- ------
Loss before extraordinary item and cumulative effect of
change in accounting principle (3,106) (3,738) (4,519)
Extraordinary loss on debt extinguishment, net of taxes - 1,499 873
Cumulative effect of change in accounting principle,
net of taxes - - 256
--- ---- ---
Net loss (3,106) (5,237) (5,648)
Other comprehensive loss - foreign currency translation
adjustment - (67) (131)
--- --- ----
Comprehensive loss $ (3,106) $ (5,304) $ (5,779)
=========== ========== ===========
See notes to consolidated financial statements.
- F4 -
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 30, 1997, DECEMBER 29, 1998 AND DECEMBER 28, 1999
(IN THOUSANDS, except per share data)
ACCUMULATED
ADDITIONAL OTHER
COMMON COMMON PAID-IN TREASURY ACCUMULATED COMPREHENSIVE
SHARES STOCK CAPITAL STOCK DEFICIT LOSS OTHER TOTAL
BALANCE,
DECEMBER 30, 1996 270 $ 3 $ 26,997 $ - $ (4,252) $ - $ (857) $ 21,891
Capital investment 69 - 6,857 - - - (457) 6,400
Loan to investor - - - - - - (4) (4)
Reverse stock split - (3) 3 - - - - -
Net loss - - - - (3,106) - - (3,106)
------ ------
BALANCE, -
DECEMBER 30, 1997 339 - 33,857 - (7,358) - (1,318) 25,181
Capital investment 37 - 3,750 - - - (250) 3,500
Shares issued in acquisition 150 - 28,867 - - - - 28,867
Loan to investor - - - - - - (3) (3)
Foreign currency translation - - - - - (67) - (67)
Net loss - - - - (5,237) - - (5,237)
------ ------
BALANCE,
DECEMBER 29, 1998 526 - 66,474 - (12,595) (67) (1,571) 52,241
Stock redemption (194) - - (49,500) - - - (49,500)
Loan to related entities - - - - - - (912) (912)
Repayment of investor
notes - - - - - - 1,564 1,564
Foreign currency
translation - - - - - (131) - (131)
Net loss - - - - (5,648) - - (5,648)
------ ------
BALANCE,
DECEMBER 28, 1999 332 $ - $ 66,474 $(49,500) $(18,243) $(198) $ (919) $ (2,386)
=== ==== === == ======== ======== ======== ===== ====== ========
See notes to consolidated financial statements
- F5 -
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 30, 1997, DECEMBER 29, 1998 AND DECEMBER 28, 1999
(IN THOUSANDS)
YEARS ENDED
------------------------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
1997 1998 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,106) $ (5,237) $ (5,648)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Extraordinary item - 1,499 873
Cumulative effect of change in accounting
principle - - 256
Depreciation and amortization 12,895 18,197 26,815
Amortization of deferred financing costs 354 551 1,475
Contract related losses 2,505 1,423 1,422
Deferred tax change - 1,159 (3,267)
Gain on disposition of assets (208) (15) (13)
Other - 242 (131)
Changes in assets and liabilities, net of
effect of acquisition:
Decrease (increase) in assets:
Accounts and notes receivable (1,232) (2,361) 855
Merchandise inventories (36) 15 (1,362)
Prepaid expenses (423) (470) (2,577)
Other assets (2,009) (1,479) (639)
Increase (decrease) in liabilities:
Accounts payable 3,694 (4,459) (4,857)
Accrued salaries and vacations 1,785 453 (466)
Liabilities for self-insurance 718 733 (1,609)
Other liabililities 411 (7,799) 4,963
--- ------ -----
Net cash provided by operating activities 15,348 2,452 16,090
------ ----- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in restricted cash 5,939 2 -
Cash purchased in acquisition of Service
America - 1,587 -
Payment of acquisition costs - (2,820) -
Purchase of minority interest stock of Service
America - (631) -
Purchase of property and equipment (25,987) (12,635) (10,418)
Proceeds from sale of property and equipment 639 3,349 887
Proceeds from assets held for sale - 12,575 -
Additions to assets held for sale - (607) -
Purchase of contract rights (11,599) (6,169) (15,882)
------- ------ -------
Net cash used in investing activities (31,008) (5,349) (25,413)
------- ------ -------
- F6 -
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 30, 1997, DECEMBER 29, 1998 AND DECEMBER 28, 1999
(IN THOUSANDS)
YEARS ENDED
----------------------------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
1997 1998 1999
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt $ (6,800) $(154,291) $ (46,650)
Net borrowings - revolving loans 16,100 6,897 9,500
Proceeds from long-term debt - 160,000 100,000
Payments of financing costs - (7,859) (6,600)
Principal payments on capital lease obligations - (103) (189)
Increase (decrease) in bank overdrafts 185 (1,842) 5,563
Net increase (decrease) in other equity (4) (3) 652
Capital contribution 6,400 3,500 -
Redemption of stock - - (49,500)
----- ----- -------
Net cash provided by financing
activities 15,881 6,299 12,776
------ ----- ------
INCREASE IN CASH 221 3,402 3,453
CASH AND CASH EQUIVALENTS:
Beginning of period 5,205 5,426 8,828
----- ----- -----
End of period $ 5,426 $ 8,828 $ 12,281
======= ======= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 6,968 $ 5,892 $ 17,790
======= ======= ========
Income taxes paid $ 43 $ 449 $ 578
==== ===== =====
Noncash activities:
Issuance of investors' notes receivable
relating to capital contribution $ 457 $ 250 $ -
===== ===== ==
Capital lease obligation $ - $ 914 $ -
== ===== ==
Purchase of Service America for stock and
note payable $ - $ 28,867 $ -
== ======== ==
See notes to consolidated financial statements.
- F7 -
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 30, 1997, DECEMBER 29, 1998 AND DECEMBER 28, 1999
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 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 owned 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
December 28, 1999 controlled 36.4% 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 December 28, 1999, the
remainder of the Company's capital stock was owned by limited partnerships
controlled by BCP Volume L.P. and BCP Offshore Volume L.P. ("Blackstone")
(59.4%) and by current and former management employees of Volume Services
(4.2%). At December 28, 1999, the Company had approximately 122 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 one to twenty years. Certain of the contracts contain
renewal clauses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of the Company, and its wholly owned subsidiaries, Volume
Services America, 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 1997, 1998 and
1999 fiscal years consisted of 52 weeks.
CASH AND CASH EQUIVALENTS - The Company considers temporary cash
investments purchased with a maturity of three months or less to be cash.
- F8 -
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 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, only the amount
of the fees received are included in net sales when earned. The total
revenue received by the Company from services provided to the end users of
the products without regard to the type of contract is defined as "managed
revenues". The Company's total managed revenues for fiscal years 1997, 1998
and 1999 were approximately $234,783,000, $315,728,000 and $452,679,000,
respectively.
MERCHANDISE INVENTORIES - Merchandise inventories consist of food,
beverage, and team and other merchandise. Inventory is valued primarily 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 where such property and
equipment is located. Following are the estimated useful lives of the
property and equipment:
- Leasehold improvements - esimated useful life limited by the
lease term (contract term)
- Merchandising equipment - five to ten years limited by the
contract term
- Vehicles and other equipment - two to ten years limited by the
contract term
CONTRACT RIGHTS - Contract rights, net of accumulated amortization, of
approximately $72,935,000 at December 29, 1998 and $73,808,000 at December
28, 1999 consist primarily of certain directly attributable costs incurred
by the Company in obtaining or renewing contracts with clients and the fair
value of contract rights acquired related to the acquisitions of VSI 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 $12,947,000 at December 29, 1998
and $22,163,000 at December 28, 1999.
COST IN EXCESS OF NET ASSETS ACQUIRED - Cost in excess of net assets
acquired (goodwill) is being amortized on the straight-line basis over 30
years. Amortization expense was approximately $291,000 in fiscal 1997,
$790,000 in fiscal 1998, and $1,817,000 in fiscal 1999. Accumulated
amortization was approximately $1,389,000 at December 29, 1998 and
$3,206,000 at December 28, 1999.
TRADEMARKS - Trademarks consist of the net book value of the trademarks of
the Company of $19,108,000 at December 29, 1998 and $18,422,000 at December
28, 1999 and are being amortized on a straight-line basis over 30 years.
Accumulated amortization was approximately $1,492,000 at December 29, 1998
and $2,178,000 at December 28, 1999.
DEFERRED FINANCING COSTS - The net book value of deferred financing costs
of $7,783,000 at December 29, 1998 and $11,459,000 at December 28, 1999 is
being amortized as interest expense over the life of the respective debt
using the interest method. Accumulated amortization was approximately
$76,000 at December 29, 1998 and $1,550,000 at December 28, 1999.
IMPAIRMENT OF LONG-LIVED ASSETS AND CONTRACT LOSSES- The Company accounts
for impairment of long-lived assets in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for the Long-Lived Assets to be
Disposed of". SFAS No. 121 requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
book value of the asset may not be recoverable. In accordance with
- F9 -
SFAS No. 121, the Company estimates the future undiscounted cash flows
expected to result from the use of the asset and its eventual disposition.
If the sum of the expected future undiscounted cash flows is less than the
carrying amount of the asset, an impairment loss is recognized. Measurement
of an impairment loss for long-lived assets and identifiable intangibles is
based on the estimated fair value of the asset determined by future
discounted net cash flows.
DERIVATIVE FINANCIAL INSTRUMENTS - The Company uses derivative financial
instruments, including interest rate swaps, caps and floors as a means of
hedging exposure to interest rate risks. All hedging instruments are
designated as hedges and are highly correlated to the underlying risk as
required by generally accepted accounting principles. Instruments that do
not qualify for hedge accounting are marked-to-market with changes
recognized in current earnings. The Company is the end-user and does not
utilize these instruments for speculative purposes. The Company has
rigorous standards regarding the financial stability and credit standing of
its major counterparties.
Interest rate swaps and caps involve the periodic exchange of payments
without the exchange of underlying principal or notional amounts. Net
payments are recognized as an adjustment to interest expense. Should the
swaps or caps be terminated, unrealized gains or losses are deferred and
amortized over the shorter of the remaining original term of the hedging
instrument or the remaining life of the underlying debt instrument.
INSURANCE - At the beginning of fiscal 1999, the Company adopted 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 its estimate of the reserve for 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 4.51% and 4.68% at
December 29, 1998 and 5.14% and 5.98 % at December 28, 1999, to their
present value based on expected loss payment patterns determined by
experience. The total discounted self-insurance liabilities recorded by the
Company at December 29, 1998 and December 28, 1999 were $5,390,000 and
$3,398,000, respectively. The related undiscounted amounts were $5,803,000
and $3,884,000, respectively.
CASH OVERDRAFTS - The Company has included in accounts payable on the
accompanying consolidated balance sheets cash overdrafts totaling
$3,857,000 and $9,420,000 at December 29, 1998 and December 28, 1999,
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.
TRANSACTION RELATED EXPENSES - Transaction related expenses primarily
include personnel costs, rental costs and professional fees associated with
downsizing Service America Corporation's Stamford, CT office (see Note 5).
- F10 -
INCOME TAXES - The Company recognizes deferred tax assets and liabilities
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's contracts
comprises one operating segment.
RECLASSIFICATIONS - Certain amounts in 1997 and 1998 have been
reclassified, where applicable, to conform to the financial statement
presentation used in 1999.
NEW ACCOUNTING STANDARDS - In June 1998, the Financial Accounting Standards
Board issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities as amended by SFAS No. 137. This statement establishes
accounting and reporting standards for derivative instruments and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities on the balance sheet and measures those
instruments at fair value. The accounting for changes in the fair value of
a derivative (that is, gains and losses) depends on the intended use of the
derivative. It will become effective for the Company for the fiscal year
2001 financial statements. The Company has not yet completed its analysis
of the effects of this new standard on its results of operations or
financial position. The statement may not be applied retroactively.
3. 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 30, 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 during fiscal
year 1999.
4. SIGNIFICANT RISKS AND UNCERTAINTIES
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles 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 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.
- F11 -
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 December 30, 1997, December 29, 1998 and December 28, 1999, the
Company had one customer that accounted for approximately 16.4%, 15.8%, and
11.1% of operating revenues, 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
football and baseball 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 the teams are on strike.
5. ACQUISITION
On August 24, 1998, Volume Holdings, BCP Volume L.P., BCP Offshore Volume
L.P. and VSI Management Direct L.P. ("VSI Management"), together with GE
Capital and certain management shareholders of Service America, purchased
substantially all of the capital stock of Service America (the
"Acquisition"). The purchase price was $32.8 million which consisted of (a)
$1,000 in cash (b) 150 newly issued shares of the Volume Holdings Common
Stock representing approximately 28.5% of the outstanding common stock of
Volume Holdings on a fully diluted basis after giving effect to such
issuance (c) the issuance to GE Capital of a 6.0% per annum senior
subordinated promissory note, due on December 31, 1999, in an aggregate
principal amount of $500,000 and (d) $2.8 million of transaction costs. By
December 1998, the Company had purchased the remainder of Service America
capital stock and contributed all of the Service America capital stock to
Volume Services America. The purchase method of accounting was used to
establish and record a new cost basis for the assets acquired and
liabilities assumed. The difference between the purchase price and the fair
market values of the assets acquired and liabilities assumed was recorded
as goodwill in the amount of $44.5 million and is being amortized over 30
years. The results of Service America's operations have been included in
the Company's statement of operations beginning August 25, 1998 (date of
acquisition).
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 January 1, 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.
PRO FORMA
(IN THOUSANDS)
YEAR ENDED
----------
1997 1998
Net sales $368,900 $ 405,900
Loss before extraordinary item (12,500) (9,900)
Net loss (14,300) (11,900)
- F12 -
6. DEBT
Long Term Debt consists of the following (in thousands):
1998 1999
Term A Borrowings $ 40,000 $ -
Term B Borrowings 120,000 113,850
Revolving Credit Facility - 9,500
Senior Subordinated Notes - 100,000
------- ----------
160,000 223,350
Less current portion of long-term debt (4,200) (1,150)
------ ------
Total long-term debt $155,800 $222,200
======== ========
1998 CREDIT AGREEMENT - On December 3, 1998, Volume Services America (the
"Borrower") entered into a credit agreement, which provided for
$160,000,000 in term loans, consisting of $40,000,000 of Tranche A term
loans ("Term Loan A") and $120,000,000 of Tranche B term loans ("Term Loan
B" and together with Term Loan A, the "Term Loans") and a $75,000,000
revolving credit facility (the "Revolving Credit Facility"). 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. The commitments under the Revolving Credit Facility are
available to fund capital investment requirements, working capital and
general corporate needs of the Company. In conjunction with the credit
agreement, the Company recognized an extraordinary loss of $1,499,000, net
of taxes (approximately $999,000) on its statement of operations for the
early extinguishment of its previous debt in fiscal year 1998.
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% of the following annual
amounts being paid on each installment date: $1,150,000 in each year from
2000 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. The Revolving Credit Facility
will mature on December 3, 2004. At December 28, 1999, $9,500,000 was
outstanding under the Revolving Credit Facility and approximately
$12,198,000 of letters of credit were outstanding but undrawn.
The credit agreement bears interest at floating rates based upon the
interest rate option elected by the Company and the Company's leverage
ratio. The interest rates at December 29, 1998 were 8.25% for Term Loan A
and 9% for Term Loan B. The interest rates at December 28, 1999 were 9.94%
for Term Loan B and 10.5% for the Revolving Credit Facility.
- F13 -
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. 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 million at December 28, 1999.
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 million. 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 debt and any future debt of Volume Services America,
rank equally with all of the other Senior Subordinated debt of Volume
Services America, and senior to all of Volume Services America's existing
and subordinated debt. Furthermore, the debt is guaranteed by the Company
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 Credit
Agreement. In conjunction with the notes, 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 in fiscal year 1999.
Aggregate annual maturities of long-term debt at December 28, 1999 are as
follows (in thousands):
2000 $ 1,150
2001 1,150
2002 1,150
2003 1,150
2004 10,650
Thereafter 208,100
-------
Total $ 223,350
=========
- F14 -
7. CAPITAL LEASE OBLIGATION
The Company is obligated to make minimum lease payments under a capital
lease agreement. The following is a schedule of future minimum lease
payments under the capital lease together with the present value of the net
minimum lease payments as of December 28, 1999 (in thousands):
FISCAL YEAR
2000 $ 250
2001 250
2002 196
---- ---
Total minimum lease payments 696
Less: Amount representing interest (74)
---
Present value of minimum lease payments 622
Less current portion of capital lease obligation (206)
----
Total long-term capital lease obligation $ 416
=====
Under the terms of the lease agreement, certain equipment is pledged to
secure performance as follows (in thousands):
Equipment $ 914
Accumulated depreciation (160)
----
Total $ 754
=====
8. INCOME TAXES
The components of deferred taxes are (in thousands):
1998 1999
Deferred tax liabilities:
Intangibles (goodwill, contract rights and trademarks) $(13,648) $ (9,746)
Other prepaid assets (1,265) (525)
------ ----
(14,913) (10,271)
------- -------
Deferred tax assets:
Difference between book and tax basis of property 1,764 17
Bad debt reserves 385 461
Inventory reserves 79 73
Other reserves and accrued liabilities 4,617 3,503
General business credit carryforwards 978 1,491
Accrued compensation and vacation 781 867
Net operating loss carryforward 1,707 2,524
----- -----
10,311 8,936
------ -----
Net deferred tax liabilities $ (4,602) $ (1,335)
======== ========
- F15 -
1998 1999
Net deferred tax liability is recognized as follows in the
accompanying 1998 and 1999 consolidated balance sheets:
Current deferred tax asset $ 2,082 $ 3,756
Noncurrent deferred tax liability (6,684) (5,091)
------ ------
Net deferred tax liability $ (4,602) $ (1,335)
======== ========
At December 28, 1999, the Company has $20,388,000 of net operating loss
carryforwards, $13,000,000 of which are from the acquisition of Service
America. These carryforwards begin to expire in years 2005 through 2018.
The Company's future ability to utilize the acquired Service America net
operating loss carryforward is limited by section 382 of the Internal
Revenue Code of 1986, as amended. The general business credit carryforwards
begin to expire in 2005.
As a result of the 1998 acquisition of Service America Corporation, the
Company's valuation allowance was reduced for pre-acquisition tax benefits
that management considers more likely than not to be realized at the date
of acquisition. This valuation allowance reduction was recognized as part
of purchase price adjustments and is not reflected in the tax provision for
the year.
As of December 28, 1999, there was a change in management's estimate of
certain items relating to the basis of tax liabilities that existed at the
date of the acquisition of Service America. The effect of adjustments to
these liabilities, which approximates $970,000, was applied as a decrease
to goodwill attributable to the acquisition.
The provision for income taxes is as follows (in thousands):
FISCAL YEAR ENDED
---------------------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
1997 1998 1999
Current expense $ 319 $ 359 $ 1,718
----- ----- -------
Deferred provision (benefit):
Changes in temporary differences 1,125 1,159 (3,267)
Decrease in valuation (1,125) - -
------
Total deferred provision - 1,159 (3,267)
------ ----- ------
Total provision (benefit) for income taxes $ 319 $ 1,518 $(1,549)
===== ======= =======
- F16 -
The difference between the statutory federal income tax rate and the
effective tax rate on net loss is as follows:
FISCAL YEAR ENDED
------------------------------------------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
1997 1998 1999
Statutory rate (34)% (34)% (34)%
Differences:
State income taxes 4 33 (3)
Non-deductible expenses (meals and
entertainment) 1 2 1
Adjustment to valuation allowance 40 58 -
Goodwill - 8 8
Federal tax credits - - (2)
Foreign tax reserve - - 3
Other - 1 1
- -
Total provision (benefit) for income taxes 11 % 68 % (26)%
== == ===
9. EQUITY TRANSACTIONS
SALE OF COMMON STOCK - During 1997, the Company issued 68.6 shares of
common stock for $6,857,000. Of the $6,857,000, $457,000 was financed by
the Company in the form of investors' notes and the remaining balance was
received in cash.
During 1998, the Company issued 37.5 shares of common stock for $3,750,000.
Of the $3,750,000 , $250,000 was financed by the Company in the form of
investors' notes and the remaining balance was received in cash.
STOCK REDEMPTION - From the proceeds of the Senior Subordinated Notes
described in Note 5, Volume Services America paid a $50,000,000 dividend in
1999 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.
OTHER - At December 30, 1997 and December 29, 1998, other equity consisted
of investors' notes receivable due from various investors. These
nonrecourse notes were due if the Company should undergo a recapitalization
as defined by the note agreements. Because the proceeds of the notes were
used to buy Company stock, the notes have been reflected as a reduction of
stockholders' equity. All notes were repaid during fiscal 1999 with the
proceeds received from the stock redemption noted above.
At December 28, 1999, other equity consists of loans by the Company to VSI
Management and another partnership which holds an indirect ownership 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.
- F17 -
10. INTEREST RATE HEDGING ARRANGEMENTS
On January 26, 1998, the Company entered into an interest rate swap
transaction with Chase in order to limit its exposure to future
fluctuations in London Interbank Offered Rate ("LIBOR") rate related to
debt instruments outstanding at that time. The agreement provided for a
fixed rate of interest of 5.39% for a period ending January 12, 1999 on a
notional amount of $80,000,000. On December 9, 1998, the Company terminated
this transaction effective January 12, 1999 and entered into a new interest
rate swap transaction providing a fixed interest rate of 5.06% for a two
year period on a notional amount of $80,000,000. On March 15, 1999, the
Company terminated the interest rate swap effective April 12, 1999 and
received $180,000 which was deferred and will be amortized as a reduction
to interest expense over the original life of the terminated swap.
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 protects the Company if
the three month LIBOR exceeds 7.5% 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 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. On October
20, 1999, the Company sold an interest rate floor on this swap to UBOC and
received $34,000, which is being marked-to-market. Consequently, in the
event that one month LIBOR is less than 5.375% the Company must instead pay
5.375%.
The counterparties to the Company's interest rate exchange agreements are
major financial institutions. Such financial institutions are leading
market-makers in the financial derivatives markets and are expected to
fully perform under the terms of such exchange agreements.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments and related underlying
assumptions are as follows:
LONG-TERM DEBT - The Company estimates that the carrying value at December
29, 1998 and December 28, 1999 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 that the fair value
of the Senior Subordinated Notes to be approximately $98,500,000 (book
value $100,000,000) based on third party quotations for the same or similar
issues.
INTEREST RATE HEDGING ARRANGEMENTS - At December 29, 1998, the Company
estimates the fair value of the interest rate swap agreement was a gain of
approximately $431,000. At December 28, 1999, the Company estimates the
fair values of the interest rate swap, cap and floor are a loss of
$450,250, a loss of $5,100 and a gain of $1,900, respectively. These
figures represent the estimated amounts the Company would pay or receive to
terminate these financial instrument agreements, as quoted by the financial
institution.
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.
- F18 -
12. 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 one to twenty years. Certain of these client
contracts provide for both fixed and variable commissions and royalties.
Aggregate commission and royalty expense under these agreements was
$60,402,000 (minimum of approximately $4,500,000) for fiscal 1997 and
$86,489,000 (minimum of approximately $3,634,000) for fiscal 1998 and
$131,056,000 (minimum of approximately $9,955,000) for fiscal 1999.
The Company leases a number of real properties and other equipment under
varying lease terms which are noncancelable. Rent expense for all operating
leases was approximately $255,000, $1,317,000 and $1,085,000 in fiscal
1997, fiscal 1998 and fiscal 1999, respectively.
Future minimum commitments for all operating leases and minimum commissions
and royalties due under client contracts are as follows (in thousands):
COMMISSIONS
OPERATING AND
YEAR LEASES ROYALTIES
2000 $ 376 $ 10,222
2001 312 8,630
2002 191 6,409
2003 86 5,249
2004 37 4,510
Thereafter - 24,968
------ ------
Total $1,002 $59,988
====== =======
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 28, 1999 if all of the employees under contract were to be
terminated by the Company without good cause (as defined) under these
contracts, the Company's liability would be approximately $5.0 million.
COMMITMENTS - Pursuant to its contracts with various clients, the Company
is committed to spend approximately $6,300,000 during 2000 and $605,000
during 2001 for equipment improvements and location contract rights. In
addition, the Company currently is engaged in negotiations pursuant to
which it expects to enter into a new contract which will require the
Company to fund additional future capital investments of approximately
$5,700,000, which would be invested in 2000 and 2001.
The Company has $5,858,000 of letters of credit collateralizing the
Company's performance and other bonds, and $4,893,000 in letters of credit
collateralizing the self-insurance reserves of the Company, and $1,448,000
in other letters of credit.
- F19 -
LITIGATION - 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 Enterprises
LLC (collectively, "Silver"). Service America alleged fraud,
misrepresentation, negligent misrepresentation, breach of contract and
breach of the covenant of good faith and fair dealing in connection with
Service America's Exclusive Catering Services Agreement with Silver dated
November 21, 1997, and sought damages in excess of $1 million. Silver
subsequently filed a counterclaim that alleged breach of contract, sought
an accounting and asserted that Service America had commenced the
proceeding and acted in bad faith. Silver claims damages for injury to its
business in an amount in excess of $11 million. In light of Service
America's meritorious defenses, it does not believe that Silver's claims
are well-founded in fact or law. Service America is vigorously pursuing its
claim and defending against the counterlcaims. The evidentiary proceeding
has closed, the parties have made their final arguments in the arbitration
and Service America is awaiting the artitrator's decision.
There are various other 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.
13. RELATED PARTY TRANSACTIONS
MANAGEMENT FEES - Certain administrative and management functions were
provided to VSI by the Blackstone Group through a monitoring agreement. VSI
paid Blackstone Management Partners II L.P., an affiliate of Blackstone,
management fees of approximately $250,000 in fiscal 1997. Such amounts are
included in selling, general and administrative expenses.
As part of the Acquisition (see Note 5), the Company paid management fees
to Blackstone and GE Capital of $250,000 and $167,000, respectively, for
consulting, monitoring and financial advisory services provided to the
Company. The fee of $250,000 paid to Blackstone Management Partners II L.P.
in fiscal 1998 and fiscal 1999 is consistent with the amount paid by the
Company in previous years. The Company paid GE Capital management fees of
approximately $42,000 and $167,000 for fiscal 1998 and fiscal 1999. Such
amounts are included in selling, general and administrative expenses.
The Company also paid fees of $125,000 in July 1998 and $2,275,000 in
December 1998 to the Blackstone Group in connection with the Acquisition,
in accordance with the terms of an arrangement entered into in May 1998.
Such amounts were included in the calculation of goodwill.
GE CAPITAL RECEIVABLE - This receivable represents amounts to reimburse
Service America for future estimated liabilities (an equal amount has been
included in other long-term liabilities) to be paid by Service America on
behalf of GE Capital.
At December 28, 1999, the receivable was $2,061,000 and is included in
prepaid and other assets as the receivable is scheduled to be finalized and
settled in early 2000. At December 29, 1998, the receivable was $2,364,000
and has been recorded in prepaid and other assets.
In addition, GE Capital agreed to reimburse Service America for its
compensation of one of its employees between August 1998 and August 1999.
The total amount that GE Capital paid Service America during 1999 for this
reimbursement was $175,000.
- F20 -
LEASING SERVICES - GE Capital and its affiliates provide leasing and
financing services to the Company. Payments to GE Capital and its
affiliates for fiscal year 1998 and 1999 for such services, net of
discounts earned, were approximately $1,900,000 and $185,000 and are
included in selling, general and administrative expense on the statement of
operations and comprehensive loss.
MANAGEMENT INCENTIVE AGREEMENT - During 1998, the Company introduced 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. The Company has accrued
approximately $373,000 and $865,000 in accrued salaries and vacations in
the accompanying balance sheets at December 29, 1998 and December 28, 1999,
respectively, for such incentives payable to certain general managers and
senior management personnel.
14. RETIREMENT PLAN
Volume Services has a 40l(k) defined contribution plan which covers
substantially all Volume Services employees. Employees may contribute up to
15% of their eligible earnings and the Company will match 25% of employee
contributions up to the first 6% of employee compensation. Contributions to
the plan were approximately $203,000 for fiscal 1997, $185,000 for fiscal
1998 and $178,000 for fiscal 1999.
Service America has a 401(k) defined contribution plan which covers
substantially all Service America employees. Employees may contribute up to
16% of their eligible earnings. The Company's contribution is
discretionary. No amounts were contributed by the Company to the plan
during fiscal 1998 or 1999.
Effective January 2000, the Volume Service and Service America 40l(k)'s
were merged into one plan.
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. The Company may incur a withdrawal liability if a
recreational services contract is terminated or not renewed. Amounts
charged to expense and contributed to the plans were not material for the
periods presented.
15. CONTRACT RELATED LOSSES
In March 1998, the Company terminated a concession contract with one of its
clients. The Company recognized a loss from this termination of
approximately $2,505,000 during fiscal 1997 which includes a $1,100,000
write-down on assets held for sale to their estimated realizable value for
the year ended December 30, 1997. As part of the settlement, the Company
sold certain assets to the former client. Net proceeds of the sale of these
assets totaled $12,575,000 in fiscal 1998.
The Company terminated three additional concession contracts in fiscal
1998. The Company recognized a loss of approximately $1,423,000 for the
year ended December 29, 1998, which relates to the write off of assets
relating to the contracts.
- F21 -
During fiscal 1999, several contracts which the Company intends to continue
operating were identified as impaired, as the future undiscounted cash
flows of each of these contracts was estimated to be insufficient to
recover the related carrying value of the property and equipment and
contract rights associated with each contract. As such, the carrying values
of these contracts were written down to the Company's estimate of fair
value based on the present value of the discounted future cash flows. The
Company wrote down approximately $573,000 of property and equipment and
$448,000 of contract rights in fiscal 1999.
During fiscal 1999, the Company recorded a loss for an underperforming
contract with estimated future losses of approximately $401,000.
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarterly operating results for the years ended December 29, 1998 and
December 28, 1999 are as follows (in thousands):
YEAR ENDED FIRST SECOND THIRD FOURTH
DECEMBER 29, 1998 QUARTER QUARTER QUARTER QUARTER TOTAL
Net sales $ 27,294 $ 59,710 $ 99,699 $ 96,738 $ 283,441
Cost of sales 22,422 46,734 77,226 76,151 222,533
Selling, general, and administrative 4,460 5,037 9,365 10,602 29,464
Depreciation and amortization 2,907 3,598 5,182 6,510 18,197
Transaction related expenses - - 612 2,469 3,081
Contract related losses - - - 1,423 1,423
------ ------ ----- ----- ------
Operating income (loss) (2,495) 4,341 7,314 (417) 8,743
Interest expense, net 2,287 2,263 2,739 4,033 11,322
Other income, net (33) (99) (112) (115) (359)
--- --- ---- ---- ----
Income (loss) before income taxes (4,749) 2,177 4,687 (4,335) (2,220)
Income tax provision (benefit) 19 (19) 1,870 (352) 1,518
-- --- ----- ---- -----
Loss before extraordinary item (4,768) 2,196 2,817 (3,983) (3,738)
Extraordinary loss on debt
extinguishment, net of taxes - - - 1,499 1,499
------ ----- ----- ----- -----
Net income (loss) $ (4,768) $ 2,196 $ 2,817 $ (5,482) $ (5,237)
======== ======= ======= ======== ========
- F22 -
YEAR ENDED FIRST SECOND THIRD FOURTH
DECEMBER 28, 1999 QUARTER QUARTER QUARTER QUARTER TOTAL
Net sales $ 66,290 $ 116,341 $ 147,058 $ 101,764 $ 431,453
Cost of sales 54,314 90,206 115,033 82,936 342,489
Selling, general, and administrative 9,444 10,453 13,244 9,572 42,713
Depreciation and amortization 6,347 6,818 6,721 6,929 26,815
Transaction related expenses 1,018 209 328 (26) 1,529
Contract related losses - - - 1,422 1,422
----- ----- ------ ----- -----
Operating income (loss) (4,833) 8,655 11,732 931 16,485
Interest expense, net 4,632 5,923 6,215 6,259 23,029
Other income, net (101) (113) (53) (209) (476)
---- ---- --- ---- ----
Income (loss) before income taxes (9,364) 2,845 5,570 (5,119) (6,068)
Income tax provision (benefit) (2,670) 2,650 (187) (1,342) (1,549)
------ ----- ---- ------ ------
Income (loss) before
extraordinary item and
cumulative effect of change
in accounting principles (6,694) 195 5,757 (3,777) (4,519)
Extraordinary loss on debt
extinguishment, net of taxes 873 - - - 873
Cumulative effect of change in
accounting principles, net of
taxes 256 - - - 256
--- --- --- --- ---
Net income (loss) $ (7,823) $ 195 $ 5,757 $ (3,777) $(5,648)
======== ====== ======= ======== =======
17. NON-GUARANTOR SUBSIDIARIES FINANCIAL STATEMENTS
The senior subordinated notes are jointly and severally, guaranteed by the
Company and all of the subsidiaries of Volume Service America, except for
certain non-wholly owned U.S. subsidiaries and one non-U.S. subsidiary. The
following table sets forth the condensed consolidated financial statements
of the Parent Company, Guarantor Subsidiaries and Non-Guarantor
Subsidiaries as of and for the fifty-two week period ended December 29,
1998 and December 28, 1999. As the nonguarantor subsidiaries related to
Service America which was acquired in 1998, no information as of December
30, 1997 and for the fifty-two week period then ended is provided.
- F23 -
CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 29, 1998 (IN THOUSANDS)
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
ASSETS COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Current Assets:
Cash and cash equivalents $ 8,692 $ 136 $ 8,828
Accounts receivable 16,958 832 17,790
Other current assets 23,190 1,217 $ (8,765) 15,642
------ ----- -------- ------
Total current assets 48,840 2,185 (8,765) 42,260
Property and equipment 67,601 3,382 - 70,983
Contract rights, net 69,407 3,528 - 72,935
Cost in excess of net assets acquired,
net 50,585 - - 50,585
Investment in subsidiaries $ 52,241 - - (52,241) -
Other assets - 32,785 - - 32,785
------ ------ ------
TOTAL ASSETS $ 52,241 $269,218 $ 9,095 $(61,006) $269,548
======== ======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Intercompany liabilities $ 899 $ 7,866 $ (8,765)
Other current liabilities 46,991 1,667 - $ 48,658
------ ----- --------
Total current liabilities 47,890 9,533 (8,765) 48,658
Long-term debt 155,800 - - 155,800
Other liabilities 12,849 - - 12,849
------ ----- ----- ------
Total liabilities 216,539 9,533 (8,765) 217,307
------- ------ ------ -------
Stockholders' equity (deficiency):
Common stock $ - - - - -
Additional paid-in capital 66,474 66,474 - (66,474) 66,474
Accumulated deficit (12,595) (12,224) (371) 12,595 (12,595)
Other (1,638) (1,571) (67) 1,638 (1,638)
------ ------ --- ----- ------
Total stockholders' equity
(deficiency) 52,241 52,679 (438) (52,241) 52,241
------ ------ ------ ------- ------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIENCY) $ 52,241 $269,218 $ 9,095 $(61,006) $269,548
======== ======== ======= ======== ========
-F24-
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
YEAR ENDED DECEMBER 29, 1998 (IN THOUSANDS)
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Net sales $273,482 $9,959 $283,441
Cost of sales 214,776 7,757 222,533
Selling, general, and administrative 27,755 1,709 29,464
Depreciation and amortization 17,333 864 18,197
Transaction related expenses 3,081 - 3,081
Contract related losses 1,423 - 1,423
----- -----
Operating income (loss) 9,114 (371) 8,743
Interest expense 11,322 - 11,322
Other income, net (359) - (359)
---- ----
Loss before income taxes (1,849) (371) (2,220)
Income tax provision 1,518 - 1,518
----- -----
Loss before extraordinary item (3,367) (371) (3,738)
Extraordinary loss 1,499 - 1,499
Equity in earnings of subsidiaries $ (5,237) - - $ 5,237 -
-------- ----- ---- -------
Net loss (5,237) (4,866) (371) 5,237 (5,237)
Other comprehensive loss - - (67) - (67)
-------- ----- --- ---
Comprehensive loss $ (5,237) $ (4,866) $ (438) $ 5,237 $ (5,304)
======== ======== ====== ======= ========
-F25-
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 29, 1998 (IN THOUSANDS)
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
Cash Flows from Operating Activities $ (49) $ 3,185 $ (434) $ 2,702
------- ------- ------ --------
Cash Flows Provided by Investing Activities:
Decrease in restricted cash - 2 - 2
Cash purchased in acquisition of Service America - 1,587 - 1,587
Payment of acquisition costs (2,820) - - (2,820)
Purchase of minority interest stock of Service
America (631) - - (631)
Purchase of property and equipment - (12,313) (322) (12,635)
Proceeds from sale of property and equipment - 3,349 - 3,349
Proceeds from assets held for sale - 12,575 - 12,575
Additions to assets held for sale - (607) - (607)
Purchase of contract rights - (6,164) (5) (6,169)
----- ------ -- ------
Net cash used in investing activities (3,451) (1,571) (327) (5,349)
------ ------ ---- ------
Cash Flows from Financing Activities:
Principal payments on long-term debt - (154,291) - (154,291)
Net borrowings - revolving loans - 6,897 - 6,897
Proceeds from long-term debt - 160,000 - 160,000
Payments of financing costs - (7,859) - (7,859)
Principal payments on capital lease obligations - (103) - (103)
Decrease in bank overdrafts - (2,555) 713 (1,842)
Increase in other equity - (253) - (253)
Capital contributions 3,500 - - 3,500
----- -----
Net cash provided by financing activities 3,500 1,836 713 6,049
----- ----- --- -----
Increase (decrease) in cash - 3,450 (48) 3,402
Cash and cash equivalents - beginning of period - 5,242 184 5,426
----- ----- --- -----
Cash and cash equivalents - end of period $ - $ 8,692 $ 136 $ 8,828
== ======= ===== =======
-F26-
CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 28, 1999 (IN THOUSANDS)
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
ASSETS
Current Assets:
Cash and cash equivalents $ 9,392 $ 2,889 $ 12,281
Accounts receivable 15,619 1,316 16,935
Other current assets 29,775 869 $(9,071) 21,573
------ --- ------- ------
Total current assets 54,786 5,074 (9,071) 50,789
Property and equipment 65,343 4,058 - 69,401
Contract rights, net 71,814 1,994 - 73,808
Cost in excess of net assets acquired,
net 50,000 - - 50,000
Investment in subsidiaries $ (2,386) - - 2,386
Other assets - 34,616 7 - 34,623
----- ------ - ----- ------
TOTAL ASSETS $ (2,386) $276,559 $ 11,133 $ (6,685) $278,621
======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Intercompany liabilities $ 9,071 $ (9,071)
Other current liabilities $ 46,220 3,629 $ 49,849
-------- ----- --------
Total current liabilities 46,220 12,700 (9,071) 49,849
Long-term debt 222,200 - - 222,200
Other liabilities 8,958 - - 8,958
----- ------ ----- -----
Total liabilities 277,378 12,700 (9,071) 281,007
------- ------ ------ -------
Stockholders' Equity (Deficiency):
Common stock
Additional paid-in capital $ 66,474 16,974 - (16,974) 66,474
Accumulated deficit (18,243) (16,874) (1,369) 18,243 (18,243)
Other (50,617) (919) (198) 1,117 (50,617)
------- ---- ---- ----- -------
Total stockholders' equity
(deficiency) (2,386) (819) (1,567) 2,386 (2,386)
------ ---- ------ ----- ------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIENCY) $ (2,386) $276,559 $ 11,133 $ (6,685) $278,621
======== ======== ======== ======== ========
-F27-
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
YEAR ENDED DECEMBER 28, 1999 (IN THOUSANDS)
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Net sales $ 402,150 $ 29,303 $ 431,453
Cost of sales 318,627 23,862 342,489
Selling, general, and administrative 39,123 3,590 42,713
Depreciation and amortization 24,402 2,413 26,815
Transaction related expenses 1,529 - 1,529
Contract related losses 972 450 1,422
--- --- -----
Operating income (loss) 17,497 (1,012) 16,485
Interest expense 23,029 - 23,029
Other income, net (461) (15) (476)
---- --- ----
Loss before income taxes (5,071) (997) (6,068)
Income tax benefit (1,549) - (1,549)
------ ------
Loss before extraordinary item
and cumulative effect of change in
accounting principle (3,522) (997) (4,519)
Extraordinary item, net of
taxes 873 - 873
Cumulative effect of change in
accounting principle, net of
taxes 256 - 256
Equity in earnings of subsidiaries $ (5,648) - - $ 5,648 -
-------- ----- ---- ------- -----
Net loss (5,648) (4,651) (997) 5,648 (5,648)
Other comprehensive loss
foreign currency - - (131) - (131)
-------- ----- - ---- ----- ----
Comprehensive loss $ (5,648) $ (4,651) $ (1,128) $ 5,648 $ (5,779)
======== ======== ======== ======= ========
-F28-
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 28, 1999 (IN THOUSANDS)
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
Cash Flows from Operating Activities $ - $ 11,759 $ 4,331 $ 16,090
-- -------- ------- --------
Cash Flows from Investing Activities:
Purchase of property and equipment - (9,423) (995) (10,418)
Proceeds from sale of property, plant and
equipment - 887 - 887
Purchase of contract rights - (15,221) (661) (15,882)
-- ------- ---- -------
Net cash used in investing activities - (23,757) (1,656) (25,413)
Cash Flows from Financing Activities:
Principal payments on long-term debt - (46,650) - (46,650)
Net borrowings - revolving loans - 9,500 - 9,500
Proceeds from long-term debt - 100,000 - 100,000
Payments of financing costs - (6,600) - (6,600)
Principal payments on capital lease obligations - (189) - (189)
Increase in bank overdrafts - 5,483 80 5,563
Dividend from subsidiary 49,500 (49,500) - -
Redemption of stock (49,500) - - (49,500)
Increase in other equity - 652 - 652
-- --- ---
Net cash provided by financing activities - 12,696 80 12,776
-- ------ -- ------
Increase in cash - 698 2,755 3,453
Cash and cash equivalents - beginning of period - 8,692 136 8,828
-- ----- --- -----
Cash and cash equivalents - end of period $ - $ 9,390 $ 2,891 $ 12,281
== ======= ======= ========
-F29-