SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended October 2, 2001 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 (I.R.S. Employer
of 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
---------------------
N/A
-------------------------------------------
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(X) YES ( ) NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the registrant's Common Stock, par value
$.01 per share, at November 13, 2001, was 100.
VOLUME SERVICES AMERICA, INC.
INDEX
PART I FINANCIAL INFORMATION..........................................................................................1
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................14
Item 3. Quantitative and Qualitative Disclosures about Market Risk...................................................19
PART II OTHER INFORMATION............................................................................................20
Item 6. Exhibits and Reports on Form 8-K.............................................................................20
i
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
OCTOBER 2, 2001 AND JANUARY 2, 2001 (In Thousands, Except Per Share Data)
- ------------------------------------------------------------------------------------------------------------------------------------
OCTOBER 2, JANUARY 2,
ASSETS 2001 2001
---------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents $ 16,960 $ 14,726
Accounts receivable, less allowance for doubtful accounts of
$887 and $876 at October 2, 2001 and January 2, 2001,
respectively 18,359 19,386
Merchandise inventories 17,116 11,524
Prepaid expenses and other 2,856 2,524
Deferred tax asset 2,064 2,064
---------- ---------
Total current assets 57,355 50,224
---------- ---------
PROPERTY AND EQUIPMENT:
Leasehold improvements 47,390 47,036
Merchandising equipment 45,575 43,746
Vehicles and other equipment 7,894 7,473
Construction in process 563 203
---------- ---------
Total 101,422 98,458
Less accumulated depreciation and amortization (42,339) (35,770)
---------- ---------
Property and equipment, net 59,083 62,688
---------- ---------
OTHER ASSETS:
Contract rights, net 78,838 70,793
Cost in excess of net assets acquired, net 46,900 48,228
Deferred financing costs, net 8,874 9,948
Trademarks, net 17,220 17,735
Other 6,230 6,080
---------- ---------
Total other assets 158,062 152,784
---------- ---------
TOTAL ASSETS $ 274,500 $ 265,696
========== =========
1
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
OCTOBER 2, 2001 AND JANUARY 2, 2001
(In Thousands, Except Per Share Data)
- ------------------------------------------------------------------------------------------------------------------------------------
OCTOBER 2, JANUARY 2,
LIABILITIES AND STOCKHOLDERS' DEFICIENCY 2001 2001
----------------- -----------------
CURRENT LIABILITIES:
Short-term note payable $ - $ 1,000
Current maturities of long-term debt 1,150 1,150
Current maturities of capital lease obligation 249 225
Accounts payable 20,886 14,838
Accrued salaries and vacations 11,153 8,707
Liability for insurance 2,580 2,522
Accrued taxes, including income taxes 4,182 2,536
Accrued commissions and royalties 16,310 12,332
Accrued interest 1,101 4,005
Other 3,851 3,164
-------- --------
Total current liabilities 61,462 50,479
-------- --------
LONG TERM LIABILITIES:
Long-term debt 214,688 216,550
Capital lease obligation - 191
Deferred income taxes 2,242 2,242
Liability for insurance 1,804 1,608
Other liabilities 995 1,135
-------- --------
Total long term liabilities 219,729 221,726
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Common stock, $0.01 par value - authorized: 1,000 shares;
issued: 526 shares; outstanding: 332 shares - -
Additional paid-in capital 66,861 66,754
Accumulated deficit (22,540) (22,462)
Accumulated other comprehensive loss (438) (262)
Treasury stock - at cost (194 shares) (49,500) (49,500)
Loans to related parties (1,074) (1,039)
-------- --------
Total stockholders' deficiency (6,691) (6,509)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $274,500 $265,696
======== ========
See notes to consolidated financial statements.
2
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
THIRTEEN AND THIRTY-NINE WEEK PERIODS ENDED OCTOBER 2, 2001 AND FOURTEEN AND FORTY WEEK PERIODS ENDED OCTOBER 3, 2000
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
THIRTEEN FOURTEEN THIRTY-NINE FORTY
WEEKS WEEKS WEEKS WEEKS
ENDED ENDED ENDED ENDED
---------------------------------------------------------------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
2001 2000 2001 2000
---------------- ----------------- ------------------ -----------------
Net sales $ 177,559 $ 188,289 $ 418,399 $ 412,046
Cost of sales 143,533 151,810 342,476 331,786
Selling, general, and administrative 13,155 14,235 35,759 36,849
Depreciation and amortization 6,076 6,791 18,161 19,966
Transaction related expenses - 9 - 791
Contract related losses 933 510 4,132 2,524
--------- --------- --------- ---------
Operating income 13,862 14,934 17,871 20,130
Interest expense 5,554 6,773 18,104 19,926
Other income, net (91) (135) (155) (292)
--------- --------- --------- ---------
Income (loss) before income taxes 8,399 8,296 (78) 496
Income tax provision - 2,112 - 107
--------- --------- --------- ---------
Net income (loss) 8,399 6,184 (78) 389
Other comprehensive loss - foreign currency
translation adjustment (133) (56) (176) (99)
--------- --------- --------- ---------
Comprehensive income (loss) $ 8,266 $ 6,128 $ (254) $ 290
========= ========= ========= =========
See notes to consolidated financial statements.
3
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY (UNAUDITED)
FOR THE PERIOD JANUARY 3, 2001 TO OCTOBER 2, 2001
(In Thousands, Except Per Share Data)
ACCUMULATED
ADDITIONAL OTHER LOANS TO
COMMON COMMON PAID-IN ACCUMULATED COMPREHENSIVE TREASURY RELATED
SHARES STOCK CAPITAL DEFICIT LOSS STOCK PARTIES TOTAL
BALANCE,
JANUARY 2, 2001 332 $ - $ 66,754 $ (22,462) $ (262) $ (49,500) $ (1,039) $ (6,509)
Noncash compensation 107 107
Loan to related parties - - - - - - (35) (35)
Foreign currency translation - - - - (176) - - (176)
Net loss - - - (78) - - - (78)
--- --- ------- --------- ------ --------- -------- --------
BALANCE,
OCTOBER 2, 2001 332 $ - $ 66,861 $ (22,540) $ (438) $ (49,500) $ (1,074) $ (6,691)
=== === ======== ========= ====== ========= ======== ========
See notes to consolidated financial statements
4
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THIRTY-NINE WEEK PERIOD ENDED OCTOBER 2, 2001 AND FORTY WEEK PERIOD ENDED OCTOBER 3, 2000
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
THIRTY-NINE FORTY
WEEKS WEEKS
ENDED ENDED
---------------- ----------------
OCTOBER 2, OCTOBER 3,
2001 2000
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (78) $ 389
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 18,161 19,966
Amortization of deferred financing costs 1,074 1,154
Contract related losses 4,132 2,220
Noncash compensation 107 -
Deferred tax change - 107
Gain on disposition of assets (32) (6)
Other (176) (99)
Changes in assets and liabilities:
Decrease (increase) in assets:
Accounts and notes receivable 794 (4,743)
Merchandise inventories (5,592) (3,274)
Prepaid expenses (332) 1,274
Other assets (2,232) (1,452)
Increase (decrease) in liabilities:
Accounts payable 4,303 4,248
Accrued salaries and vacations 2,446 5,055
Liability for insurance 254 570
Other liabilities 3,267 11,363
------- -------
Net cash provided by operating activities 26,096 36,772
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (6,185) (5,311)
Proceeds from sale of property and equipment 62 603
Purchase of contract rights (16,420) (5,825)
------- -------
Net cash used in investing activities (22,543) (10,533)
------- -------
5
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THIRTY-NINE WEEK PERIOD ENDED OCTOBER 2, 2001 AND FORTY WEEK PERIOD ENDED OCTOBER 3, 2000
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
THIRTY-NINE FORTY
WEEKS WEEKS
ENDED ENDED
---------------- ----------------
OCTOBER 2, OCTOBER 3,
2001 2000
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt $ (862) $ (862)
Net repayments - revolving loans (2,000) (9,500)
Principal payments on capital lease obligations (167) (153)
Increase in bank overdrafts 1,745 754
Net increase in loans to related parties (35) (90)
------- -------
Net cash used in financing
activities (1,319) (9,851)
------- -------
INCREASE IN CASH 2,234 16,388
CASH AND CASH EQUIVALENTS:
Beginning of period 14,726 12,281
-------- -------
End of period $ 16,960 $28,669
======== =======
See notes to consolidated financial statements.
6
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THIRTY-NINE WEEK PERIOD ENDED OCTOBER 2, 2001 AND FORTY WEEK PERIOD ENDED
OCTOBER 3, 2000
- --------------------------------------------------------------------------------
1. GENERAL
Volume Services America Holdings, Inc. ("Volume Holdings," and together
with its subsidiaries, the "Company") is a holding company, the principal assets
of which are the capital stock of its subsidiary, Volume Services America, Inc.
("Volume Services America"). Volume Holdings' financial information is therefore
substantially the same as that of Volume Services America. Volume Services
America is also a holding company, the principal assets of which are the capital
stock of its subsidiaries, Volume Services, Inc. ("Volume Services") and Service
America Corporation ("Service America"). The Company is owned by current and
former members of management, Blackstone Capital Partners II Merchant Banking
Fund, L.P. ("BCP II"), and General Electric Capital Corporation ("GE Capital").
The accompanying financial statements of Volume Holdings have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
for interim financial reporting. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. However, such information reflects all
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair statement of results for the
interim periods.
The results of operations for the thirty-nine week period ended October 2,
2001 are not necessarily indicative of the results to be expected for the
fifty-two week fiscal year ending January 1, 2002 due to the seasonal aspects of
the business. The consolidated financial statements and notes thereto should be
read in conjunction with the audited financial statements and notes thereto for
the year ended January 2, 2001.
2. NEW ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities", as amended by SFAS No. 137 and SFAS No.
138. It requires an entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS No. 133, as amended, became effective for the Company on
January 3, 2001 and the adoption of this statement, as amended, had an
insignificant impact on the Company's financial position.
In July 2001, the FASB issued SFAS No. 141 ("SFAS 141") "Business
Combinations" which requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The Company is currently assessing, but has not yet
determined the impact of SFAS 141 on its financial position and results of
operations.
In July 2001, the FASB issued SFAS No. 142 ("SFAS 142"), "Goodwill and
Other Intangible Assets", which is effective for the Company on January 2, 2002.
SFAS 142 requires, among other things, the discontinuance of goodwill
amortization. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
7
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. SFAS 142 also requires that the company complete a
transitional goodwill impairment test six months from the date of adoption and
then annually thereafter. The Company is currently assessing but has not yet
determined the impact of SFAS 142 on its financial position and results of
operations. Goodwill amortization (pre-tax) for the thirteen and thirty-nine
weeks ended October 2, 2001 was approximately $443,000 and $1.3 million,
respectively.
In October 2001, the FASB issued SFAS No. 144 ("SFAS 144") "Accounting for
the Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
FAS 144 superseded Statement of Financial Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
SFAS 144 will be effective for the Company on January 2, 2002. The Company is
currently assessing but has not yet determined the impact of adopting SFAS 144
on its financial position and results of operations.
3. CONTINGENCIES
On March 15, 2001 and April 20, 2001, respectively, two of the Company's
customers filed for Chapter 11 bankruptcy. The Company had approximately $1.2
million of equipment and leasehold improvements and $3.2 million of receivables
and leasehold improvements, respectively, recorded at the time of the filings
relating to these customers. The proceedings of the March 15, 2001 filing are
substantially completed. Based on the most recent information, the Company
recorded an asset impairment of approximately $900,000 of the $1.2 million of
equipment and leasehold improvements in the second quarter. In addition, the
Company has entered into a concession agreement with the new owner of the
facility. The proceedings of the April 20, 2001 filing are in the preliminary
stages; however, based on the most recent information, the Company wrote-off
$2.3 million of other assets primarily representing long term receivables in the
second quarter. The Company had approximately $841,000 in equipment and
leasehold improvements recorded at October 2, 2001.
4. TRANSACTION RELATED EXPENSES
Transaction related expenses for the forty weeks ended October 3, 2000
consist primarily of non-recurring strategic corporate costs.
5. CONTRACT RELATED LOSSES
Contract related losses for the thirty-nine weeks ended October 2, 2001
consist of an impairment charge of approximately $933,000 recorded in the third
quarter relating primarily to the write-down of equipment and leasehold
improvements for certain contracts which the Company continues to operate. In
addition, in the 2nd quarter, the Company recorded an impairment charge of
$900,000 for equipment and leasehold improvements and a $2.3 million charge for
the write-down of other assets, as described in Note 3.
Contract related losses for the forty weeks ended October 3, 2000 represent
an impairment charge of approximately $1.5 million for certain contracts that
the Company continues to operate. The impairment charge is comprised of
approximately $1.2 million for the write-off of property and equipment and
contract rights and $269,000 of other assets. Contract related losses for the
period ended October 3, 2000 also reflects the write-off of a receivable in the
amount of $754,000 and $305,000 in related legal fees for a terminated service
contract.
8
6. NON-GUARANTOR SUBSIDIARIES FINANCIAL STATEMENTS
The Company's $100 million in 11 1/4% senior subordinated notes due 2009
are jointly and severally, guaranteed by Volume Holdings and all of the
subsidiaries of Volume Service America (the "Guarantor Subsidiaries") except for
certain non-wholly owned U.S. subsidiaries and one non-U.S. subsidiary (together
the "Non-Guarantor Subsidiaries"). The following table sets forth the condensed
consolidating financial statements of Volume Holdings, the Guarantor
Subsidiaries and the Non-Guarantor Subsidiaries as of October 2, 2001 and
January 2, 2001 (in the case of the balance sheets) and for the thirteen and
thirty-nine week periods ended October 2, 2001 and the fourteen and forty week
periods ended October 3, 2000 (in the case of the statements of operations) and
for the thirty-nine week period ended October 2, 2001 and the forty week period
ended October 3, 2000 (in the case of the statement of cash flows).
Consolidating Condensed Balance Sheet
October 2, 2001 (in thousands)
Combined Combined
Volume Guarantor Non-guarantor
ASSETS Holdings Subsidiaries Subsidiaries Eliminations Consolidated
Current Assets:
Cash and cash equivalents $ 16,736 $ 224 $ 16,960
Accounts receivable 16,335 2,024 18,359
Other current assets 28,838 1,304 $ (8,106) 22,036
--------- ------- -------- ---------
Total current assets 61,909 3,552 (8,106) 57,355
Property and equipment 55,946 3,137 - 59,083
Contract rights, net 77,926 912 - 78,838
Cost in excess of net assets acquired,
net 46,900 - - 46,900
Investment in subsidiaries $ (6,691) - - 6,691 -
Other assets - 32,318 6 - 32,324
-------- --------- -------- -------- ---------
TOTAL ASSETS $ (6,691) $ 274,999 $ 7,607 $ (1,415) $ 274,500
======== ========= ======= ======== =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Intercompany liabilities $ 8,106 $ (8,106)
Other current liabilities $ 59,998 1,464 - $ 61,462
--------- ------- -------- ---------
Total current liabilities 59,998 9,570 (8,106) 61,462
Long-term debt 214,688 - - 214,688
Other liabilities 5,041 - - 5,041
--------- ------- -------- ---------
Total liabilities 279,727 9,570 (8,106) 281,191
--------- ------- -------- ---------
Stockholders' deficiency:
Common stock $ - - - - -
Additional paid-in capital 66,861 66,861 - (66,861) 66,861
Accumulated deficit (22,540) (21,015) (1,525) 22,540 (22,540)
Treasury stock and other (51,012) (50,574) (438) 51,012 (51,012)
-------- --------- ------- -------- ---------
Total stockholders'
deficiency (6,691) (4,728) (1,963) 6,691 (6,691)
-------- --------- ------- -------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIENCY $ (6,691) $ 274,999 $ 7,607 $ (1,415) $ 274,500
======== ========= ======= ======== =========
9
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
THIRTEEN WEEK PERIOD ENDED OCTOBER 2, 2001 (IN THOUSANDS)
COMBINED COMBINED
VOLUME GUARANTOR NON-GUARANTOR
HOLDINGS SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Net sales $170,669 $ 6,890 $177,559
Cost of sales 137,704 5,829 143,533
Selling, general, and administrative 12,672 483 13,155
Depreciation and amortization 5,864 212 6,076
Contract related losses 933 - 933
-------- ------- --------
Operating income 13,496 366 13,862
Interest expense 5,443 111 5,554
Other income, net (85) (6) (91)
Equity in earnings of subsidiaries $ 8,399 - - $ (8,399) -
------- -------- ------- -------- --------
Net income 8,399 8,138 261 (8,399) 8,399
Other comprehensive loss -
foreign currency translation adjustment - - (133) - (133)
-------- -------- ------- -------- --------
Comprehensive income $ 8,399 $ 8,138 $ 128 $ (8,399) $ 8,266
======= ======== ======= ======== ========
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
THIRTY-NINE WEEK PERIOD ENDED OCTOBER 2, 2001 (IN THOUSANDS)
COMBINED COMBINED
VOLUME GUARANTOR NON-GUARANTOR
HOLDINGS SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Net sales $399,266 $19,133 $418,399
Cost of sales 325,686 16,790 342,476
Selling, general, and administrative 34,504 1,255 35,759
Depreciation and amortization 17,562 599 18,161
Contract related losses 4,132 - 4,132
-------- ------- --------
Operating income 17,382 489 17,871
Interest expense 17,993 111 18,104
Other income, net (130) (25) (155)
Loss in earnings of subsidiaries $ (78) - - $ 78 -
----- -------- ------- ---- --------
Net income (loss) (78) (481) 403 78 (78)
Other comprehensive loss -
foreign currency translation adjustment - - (176) - (176)
----- -------- ------- ---- --------
Comprehensive income (loss) $ (78) $ (481) $ 227 $ 78 $ (254)
===== ======== ======= ==== ========
10
Consolidating Condensed Statement of Cash Flows
Thirty-nine Week Period Ended October 2, 2001 (in thousands)
Combined Combined
Volume Guarantor Non-guarantor
Holdings Subsidiaries Subsidiaries Consolidated
Cash Flows from Operating Activities $ - $ 26,375 $ (279) $ 26,096
---- -------- ------ --------
Cash Flows from Investing Activities:
Purchase of property and equipment - (6,120) (65) (6,185)
Proceeds from sale of property and equipment - 62 - 62
Purchase of contract rights - (16,420) - (16,420)
---- -------- ------ --------
Net cash used in investing activities - (22,478) (65) (22,543)
---- -------- ------ --------
Cash Flows from Financing Activities:
Principal payments on long-term debt - (862) - (862)
Net repayments - revolving loans - (2,000) - (2,000)
Principal payments on capital lease obligations - (167) - (167)
Increase in bank overdrafts - 1,745 - 1,745
Increase in loans to related parties - (35) - (35)
---- -------- ------ --------
Net cash used in financing activities - (1,319) - (1,319)
---- -------- ------ --------
Increase (decrease) in cash - 2,578 (344) 2,234
Cash and cash equivalents - beginning of period - 14,158 568 14,726
---- -------- ------ --------
Cash and cash equivalents - end of period $ - $ 16,736 $ 224 $ 16,960
==== ======== ====== ========
11
Consolidating Condensed Balance Sheet
January 2, 2001 (in thousands)
Combined Combined
Parent Guarantor Non-guarantor
ASSETS Company Subsidiaries Subsidiaries Eliminations Consolidated
Current Assets:
Cash and cash equivalents $ 14,158 $ 568 $ 14,726
Accounts receivable 17,272 2,114 19,386
Other current assets 23,791 990 $ (8,669) 16,112
-------- ------- -------- --------
Total current assets 55,221 3,672 (8,669) 50,224
Property and equipment 59,045 3,643 - 62,688
Contract rights, net 69,506 1,287 - 70,793
Cost in excess of net assets acquired,
net 48,228 - - 48,228
Investment in subsidiaries $ (6,509) - - 6,509
Other assets - 33,738 25 - 33,763
-------- -------- ------- ------- --------
TOTAL ASSETS $ (6,509) $265,738 $ 8,627 $ (2,160) $265,696
======== ======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Intercompany liabilities $ 8,669 $ (8,669)
Other current liabilities $ 48,331 2,148 - $ 50,479
-------- ------- -------- --------
Total current liabilities 48,331 10,817 (8,669) 50,479
Long-term debt 216,550 - - 216,550
Other liabilities 5,176 - - 5,176
-------- ------- -------- --------
Total liabilities 270,057 10,817 (8,669) 272,205
-------- ------- -------- --------
Stockholders' Deficiency:
Common stock
Additional paid-in capital $ 66,754 66,754 - (66,754) 66,754
Accumulated deficit (22,462) (20,534) (1,928) 22,462 (22,462)
Treasury stock and other (50,801) (50,539) (262) 50,801 (50,801)
-------- -------- ------- -------- --------
Total stockholders'
deficiency (6,509) (4,319) (2,190) 6,509 (6,509)
-------- -------- ------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIENCY $ (6,509) $265,738 $ 8,627 $ (2,160) $265,696
======== ======== ======= ======== ========
12
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME ( LOSS)
FOURTEEN WEEK PERIOD ENDED OCTOBER 3, 2000 (IN THOUSANDS)
COMBINED COMBINED
VOLUME GUARANTOR NON-GUARANTOR
HOLDINGS SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Net sales $180,252 $ 8,037 $188,289
Cost of sales 145,037 6,773 151,810
Selling, general, and administrative 13,337 898 14,235
Depreciation and amortization 6,126 665 6,791
Transaction related expenses 9 - 9
Contract related losses 510 - 510
-------- ------- --------
Operating income (loss) 15,233 (299) 14,934
Interest expense 6,773 - 6,773
Other income, net (129) (6) (135)
-------- ------- --------
Income (loss) before income taxes 8,589 (293) 8,296
Income tax provision 2,112 - 2,112
Equity in earnings of subsidiaries $ 6,184 - - $ (6,184) -
------- -------- ------- -------- -------
Net income (loss) 6,184 6,477 (293) (6,184) 6,184
Other comprehensive loss -
foreign currency translation adjustment - - (56) - (56)
------- -------- ------- -------- -------
Comprehensive income (loss) $ 6,184 $ 6,477 $ (349) $ (6,184) $ 6,128
======= ======== ======= ======== =======
Consolidating Condensed Statement of Operations and Comprehensive Income (Loss)
Forty Week Period Ended October 3, 2000 (in thousands)
Combined Combined
Volume Guarantor Non-guarantor
Holdings Subsidiaries Subsidiaries Eliminations Consolidated
Net sales $390,367 $21,679 $412,046
Cost of sales 313,692 18,094 331,786
Selling, general, and administrative 34,396 2,453 36,849
Depreciation and amortization 18,077 1,889 19,966
Transaction related expenses 791 - 791
Contract related losses 2,524 - 2,524
-------- ------- --------
Operating income (loss) 20,887 (757) 20,130
Interest expense 19,926 - 19,926
Other income, net (266) (26) (292)
-------- ------- --------
Income (loss) before income taxes 1,227 (731) 496
Income tax provision 107 - 107
Equity in earnings of subsidiaries $ 389 - - $ (389) -
----- -------- ------- ------ --------
Net income (loss) 389 1,120 (731) (389) 389
Other comprehensive loss -
foreign currency translation adjustment - - (99) - (99)
----- -------- ------- ------ --------
Comprehensive income (loss) $ 389 $ 1,120 $ (830) $ (389) $ 290
===== ======= ======= ====== ========
13
Consolidating Condensed Statement of Cash Flows
Forty Week Period Ended October 3, 2000 (in thousands)
Combined Combined
Volume Guarantor Non-guarantor
Holdings Subsidiaries Subsidiaries Consolidated
Cash Flows from Operating Activities $ - $ 35,712 $ 1,060 $ 36,772
---- -------- ------- --------
Cash Flows from Investing Activities:
Purchase of property and equipment - (4,849) (462) (5,311)
Proceeds from sale of property and equipment - 603 - 603
Purchase of contract rights - (5,025) (800) (5,825)
---- -------- ------- --------
Net cash used in investing activities - (9,271) (1,262) (10,533)
---- -------- ------- --------
Cash Flows from Financing Activities:
Principal payments on long-term debt - (862) - (862)
Net repayments - revolving loans - (9,500) - (9,500)
Principal payments on capital lease obligations - (153) - (153)
Increase (decrease) in bank overdrafts - 2,246 (1,492) 754
Increase in loans to related parties - (90) - (90)
---- -------- ------- --------
Net cash used in financing activities - (8,359) (1,492) (9,851)
---- -------- ------- --------
Increase (decrease) in cash - 18,082 (1,694) 16,388
Cash and cash equivalents - beginning of period - 9,392 2,889 12,281
---- -------- ------- --------
Cash and cash equivalents - end of period $ - $ 27,474 $ 1,195 $ 28,669
==== ======== ======= ========
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
SEASONALITY AND QUARTERLY RESULTS
The Company's 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 events; and
o the level of attendance at the facilities which we serve.
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Business at the principal types of facilities which we serve is seasonal in
nature with Major League Baseball ("MLB") and minor league baseball sales
concentrated in the second and third quarter, the majority of National Football
League ("NFL") activity occurring in the fourth quarter and convention centers
and arenas generally hosting fewer events during the summer months. The
Company's results are typically impacted to a greater degree by the above
factors than a change in the number of weeks in a reporting period as was the
case in the thirteen and thirty-nine weeks ended October 2, 2001 versus the
fourteen and forty weeks ended October 3, 2000. Results of operations for any
particular quarter may not be indicative of results of operations for future
periods.
Set forth below are comparative net sales by quarter (in thousands) for fiscal
2001, through the 3rd Quarter, fiscal 2000 and 1999:
2001 2000 1999
---- ---- ----
1st Quarter $ 83,194 $ 80,120 $ 66,290
2nd Quarter $157,646 $143,637 $116,341
3rd Quarter $177,559 $188,289 $147,058
4th Quarter - $110,487 $101,764
RESULTS OF OPERATIONS
QUARTER ENDED OCTOBER 2, 2001 COMPARED TO THE QUARTER ENDED OCTOBER 3, 2000
Net Sales - Net sales of $177.6 million for the quarter ended October 2, 2001
decreased $10.7 million (approximately 6%) from $188.3 million in the prior year
period. The Company's results for the third quarter have been adversely impacted
by weaker economic conditions and by the September 11, 2001 terrorist attacks.
We estimate that the impact of the terrorist attacks reduced our consolidated
net sales by approximately 7% for the third quarter from the level of sales we
would have expected absent such conditions; however, we believe that
approximately 57% of these sales are recoverable in future periods as discussed
below. The Company's MLB accounts generated lower sales than prior year
(approximately 5%) mainly attributable to fewer scheduled games for the third
quarter of fiscal 2001 as compared to the prior year period and MLB's decision
to postpone games the week of September 11, 2001. Twenty-eight games at
facilities the Company serves were impacted by this postponement and will be
reported in the Company's fourth quarter. Four NFL games were also postponed at
Company serviced venues and were rescheduled to be played during fiscal 2002. At
convention center accounts, the Company had been experiencing an increase in
event cancellations and downsizing of events prior to September 11, 2001 which
we believe was attributable to the economic slowdown. The events of September
11, 2001 further adversely impacted the convention center results. We estimate
consolidated net sales were reduced by approximately 3%, excluding one
non-recurring catering event, from the level we would have expected absent such
cancellations. The decline in consolidated net sales was partially offset by the
addition of fifteen new accounts (approximately 5%, net of closed accounts).
Cost of sales - Cost of sales of $143.5 million for the quarter decreased $8.3
million from $151.8 million in the prior year period due to the decline in the
overall sales volume. Cost of sales as a percentage of net sales remained
constant at approximately 81% for both periods.
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Selling, general and administrative expenses - Selling, general and
administrative expenses of $13.2 million declined slightly as a percentage of
net sales from the prior year period as a result of effective cost controls.
Depreciation and amortization - Depreciation and amortization of $6.1 million
for the third quarter of fiscal 2001 declined $0.7 million from the prior year
quarter. The decrease was primarily due to a decline in amortization which was
the result of the expiration of the initial contract term of certain service
contracts.
Contract related losses - Contract related losses of $0.9 million for the third
quarter of fiscal 2001 and $0.5 million in the 2000 period reflect impairment
charges for the write-down of equipment, leasehold improvements and location
contracts for certain service contracts which the Company continues to operate.
Operating income - Operating income decreased $1.1 million from the prior year
period primarily due to the factors discussed above.
Interest expense - Interest expense declined $1.2 million from the prior year
period chiefly associated with lower interest rates on the Company's adjustable
rate debt.
Income taxes - Management has evaluated the available evidence about future
taxable income and other possible sources of realization of deferred tax assets
and based on its best current estimates believes that no taxable income or
benefit will be realized in fiscal 2001.
THREE QUARTERS ENDED OCTOBER 2, 2001 COMPARED TO THE THREE QUARTERS ENDED
OCTOBER 3, 2000
Net Sales - Net sales of $418.4 million for the three quarters ended October 2,
2001 increased $6.4 million or 2% from $412.0 million in the prior year period.
The increase was primarily due to net new accounts (approximately 3%) and an
increase in MLB sales (approximately 2%). The MLB sales increase was
attributable to higher attendance and per capita spending at certain facilities,
but was partially offset by the postponement of twenty-eight games until the
Company's fourth fiscal quarter as a result of the September 11, 2001 terrorist
attacks. The increases were, in part, offset by a decline in NFL sales
(approximately 2%) due primarily to eight fewer NFL games in the first quarter
of fiscal 2001 as compared to the prior year period and the postponement of four
NFL games until fiscal 2002 due to the terrorist attacks. Additionally, sales at
the Company's convention centers have declined (approximately 2%, excluding one
non-recurring catering event) due to the cancellation and downsizing of events,
most notably by the business sector, which management attributes to the economic
downturn and which have been further adversely impacted by the events of
September 11, 2001.
Cost of sales - Cost of sales of $342.5 million for the three quarters ended
October 2, 2001 increased $10.7 million from $331.8 million in the prior year
period. Cost of sales as a percentage of net sales increased 1% from the prior
year. The primary component of the increase was commission costs associated with
the increase in sales volume at MLB facilities and new accounts that have higher
commission structures.
Selling, general and administrative expenses - Selling, general and
administrative expenses of $35.8 million decreased $1.1 million or as a
percentage of net sales declined approximately .4% as a result of effective cost
controls.
Depreciation and amortization - Depreciation and amortization of $18.2 million
for the three quarters ended October 2, 2001 declined $1.8 million from the
prior year period. The decrease was primarily due to a decline in amortization
16
which was the result of the expiration of the initial contract term of certain
service contracts.
Transaction related expenses - Non-recurring strategic corporate costs of $0.8
million were incurred during the prior year period.
Contract related losses - Contract related losses of $4.1 million for the three
quarters ended October 2, 2001 reflects an impairment charge of $1.8 million for
the write-off of equipment, leasehold improvements and location contracts.
Additionally, the Company recorded a receivable reserve of $2.3 million related
to two of the Company's customers which filed for Chapter 11 Bankruptcy. At one
of the two customer locations, the Company has entered into a service contract
with the new owner. The Company is currently still operating at the other
location; however, our ability to continue to operate at this location depends
on the final outcome of contract negotiations and the bankruptcy proceedings.
The company has approximately $841,000 in equipment and leasehold improvements
recorded for this location. Management is unable to predict the ultimate outcome
or whether there will be additional losses related to this contract. Contract
related losses of $2.5 million in the prior year period includes an impairment
charge of approximately $1.5 million relating to certain contracts which the
Company continues to operate and a $0.7 million charge for the write-off of a
customer receivable and $0.3 million in related legal fees for a terminated
service contract.
Operating income - Operating income declined $2.2 million from the prior year
period primarily due to the factors discussed above.
Interest expense - Interest expense declined $1.8 million from the prior year
period chiefly associated with lower interest rates on the Company's adjustable
rate debt.
Income taxes - Management has evaluated the available evidence about future
taxable income and other possible sources of realization of deferred tax assets
and based on its best current estimates believes that no taxable income or
benefit will be realized in fiscal 2001.
LIQUIDITY AND CAPITAL RESOURCES
For the three quarters ended October 2, 2001, net cash provided by operating
activities was $26.1 million compared to $36.8 million in the prior year period.
The $10.7 million decrease from the prior year period was primarily due to an
increase in working capital chiefly attributable to a $11.6 million increase in
accrued commissions during the 2000 period as compared to only a $4.0 million
increase in the 2001 period. The Company' working capital as of October 2, 2001
has declined approximately $3.9 million from fiscal year ended January 2, 2001
primarily due to seasonal fluctuations as a result of the number and timing of
events.
Net cash used in investing activities was $22.5 million in the three quarters
ended October 2, 2001 compared to $10.5 million in the prior year period. The
$12.0 million increase in cash used in investing activities primarily reflects a
higher level of investment in contract rights and property and equipment
associated with new accounts during the first three quarters of fiscal 2001
versus the prior year period.
Net cash used in financing activities was $1.3 million in the three quarters
ended October 2, 2001 as compared to $9.9 million in the prior year period. The
$8.6 million decrease primarily reflects net repayments of $2.0 million borrowed
under the Company's revolving credit facility in the current period as compared
to the $9.5 million repaid in the prior year period.
17
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 anticipate total
capital investments of $32.5 million in fiscal 2001. At October 2, 2001, $54.5
million of the Company's revolving credit facility was available to be borrowed.
At that date, there were $4.0 million in outstanding revolving credit borrowings
and $16.5 million of outstanding, undrawn letters of credit reducing
availability.
NEW ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities", as amended by SFAS No. 137 and SFAS No.
138. It requires an entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS No. 133, as amended, became effective for the Company on
January 3, 2001 and the adoption of this statement, as amended, had an
insignificant impact on the Company's financial position.
In July 2001, the FASB issued SFAS No. 141 ("SFAS 141") "Business Combinations"
which requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
The Company is currently assessing, but has not yet determined the impact of
SFAS 141 on its financial positions and results of operations.
In July 2001, the FASB issued SFAS No. 142 ("SFAS 142") "Goodwill and Other
Intangible Assets" which is effective for the Company on January 2, 2002. SFAS
142 requires, among other things, the discontinuance of goodwill amortization.
In addition, the standard includes provisions for the reclassification of
certain existing recognized intangibles as goodwill, reassessment of the useful
lives of existing recognized intangibles, reclassification of certain
intangibles out of previously reported goodwill and the identification of
reporting units for purposes of assessing potential future impairments of
goodwill. SFAS 142 also requires that the company complete a transitional
goodwill impairment test six months from the date of adoption and then annually
thereafter. The Company is currently assessing but has not yet determined the
impact of SFAS 142 on its financial position and results of operations. Goodwill
amortization (pre-tax) for the thirteen and thirty-nine weeks ended October 2,
2001 was approximately $443,000 and $1.3 million, respectively.
In October 2001, the FASB issued SFAS No. 144 ("SFAS 144") "Accounting for the
Impairment or Disposal of Long-Lived Assets" which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS 144 superseded Statement of Financial Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". SFAS 144 will be effective for the Company on January 2, 2002. The Company
is currently assessing but has not yet determined the impact of adopting SFAS
144 on its financial position and results of operations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As of October 2, 2001, the interest rate cap and swap agreements that the
Company had been party to have matured. The Company does not expect to enter
into any similar agreements.
Interest Rate Risk - The Company's financial instruments with market risk
exposure consist of its term loans and revolving credit facility borrowings. A
change in interest rates of one percent on the outstanding borrowings as of
October 2, 2001 would cause a change in annual interest expense of approximately
$1.1 million. The Company's Senior Subordinated Notes are fixed interest rate
debt obligations.
Forward Looking and Cautionary Statements
Except for the historical information and discussions contained herein,
statements contained in this form 10-Q may constitute "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements involve a number of risks, uncertainties and other
factors that could cause actual results to differ materially, including, among
other things:
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.
19
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: None
(b) No reports on Form 8-K have been filed during the quarter for which this
report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on November 15, 2001.
VOLUME SERVICES AMERICA, INC.
By: /s/ Kenneth R. Frick
--------------------------------------
Name: Kenneth R. Frick
Title: Executive Vice President and
Chief Financial Officer
20