SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 JANUARY 1, 2002 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.
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(Exact name of registrant as specified in its charter)
DELAWARE 57-0969174
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 EAST BROAD STREET, SPARTANBURG, SOUTH CAROLINA 29306
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (864) 598-8600
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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 26, 2002, was $0.
The number of shares outstanding of the registrant's Common Stock, par value
$.01 per share, at March 26, 2002, 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 128 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: 68 sports facilities, 29 convention
centers and 31 other entertainment facilities. At two sports facilities, we have
contracts to 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 68 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
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 two arenas, we have contracts to provide full facility management
services. These services include licensing the arena (and its suites and premium
seats) for events, providing security and ushering, maintaining the arena and
preparing it for events, distributing tickets, printing programs and selling
advertising.
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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)*
FedEx Field Landover, MD Washington Redskins 80,000 (NFL)
HHH Metrodome Minneapolis, MN Minnesota Vikings, 64,000 (NFL) (College Football)
Minnesota Twins 44,000 (MLB)*
INVESCO Field at Mile High Denver, CO Denver Broncos 76,000 (NFL)
Stadium
Pacific Bell Ball Park San Francisco, CA San Francisco Giants 42,000 (MLB)
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)
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)
* "NFL" means National Football League, "MLB" means Major League Baseball"
and "NBA" means "National Basketball Association".
Convention Centers
We currently have contracts to provide services, including banquet
catering and food court operations, to 29 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:
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SIZE
NAME LOCATION (APPROX. SQ. FT)(1)
- ---- -------- -------------------
American Royal Center Kansas City, MO 372,000
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 620,000
Washington, DC Convention Center Washington, DC 381,000
- ------------------
1 Sources: Tradeshow Week Exhibit Hall Directory 2001
Other Entertainment Facilities
We have contracts to provide a wide range of services to 31 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 vary 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
DTE Energy Music Theater Pontiac, MI Music Amphitheater
Glen Helen Pavilion San Bernardino, 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
Sea Life Park Oahu, HI Theme Park
Verizon Wireless Ampitheater Laguna Hills, CA Music Amphitheater
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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 one of 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 January
1, 2002, we served 100 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 January 1, 2002, we served 25 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 January
1, 2002, we served 3 facilities under Management Fee Contracts.
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).
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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.
As we reported in our Annual Report on Form 10-K for our fiscal year
2000, we had a disagreement with one of our major customers that we were in the
process of resolving. As anticipated, we have resolved all outstanding issues
with this customer, which we reported in our Quarterly Report on Form 10-Q for
the quarter ended July 3, 2001.
In November 2001, Major League Baseball ("MLB") announced plans for a
"contraction" to eliminate two MLB teams beginning with the 2002 baseball
season. The status of the announced contraction and the teams to be eliminated
if the contraction were to occur are currently unclear. However, it does not
appear that a contraction will occur in the 2002 MLB season. Press accounts at
the time the contraction was first announced indicated that the Tampa Bay Devil
Rays were a possible target, although not a top target. We currently have a
contract with the Tampa Bay Devil Rays. If they were to be eliminated by
contraction without due compensation to us, it conceivably could have a material
adverse effect on us. We do not have sufficient information to assess either the
likelihood that the Tampa Bay Devil Rays would be subject to such a contraction
or the nature and extent of the effect that it would have on us.
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, Fine Host Corporation and Compass
Group PLC. We also face competition from regional and local service contractors,
some of which are better established within a specific geographic region.
Existing or potential clients may also elect to "self operate" their food
services, eliminating the opportunity for us to compete for the account.
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:
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o the ability to make capital investments;
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 January 1, 2002, we had approximately 1,600 full-time employees.
During calendar 2001, approximately 28,600 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 January 1, 2002, approximately 39% 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.
6
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,
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.
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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 Services America's 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 2001, our Canadian revenues and Canadian assets were less than 2%
of our total revenues and assets, respectively.
ITEM 2. PROPERTIES.
We lease our corporate headquarters of approximately 21,400 square feet
in Spartanburg, South Carolina, the headquarters of Service America in Stamford,
Connecticut of approximately 3,500 square feet, and a regional office in Fords,
New Jersey.
We currently provide our services at 128 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.
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.
In July 2000, the Company entered into an agreement to manage an arena
in the City of Bridgeport, Connecticut once the City completed its construction.
The City recently asserted a claim against the Company of approximately $2.1
million dollars for certain construction charges the City incurred in building
the arena. We believe that we have strong defenses to the claim.
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 2001 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 26,
2002, the latest practicable date, there were four holders of Volume Holdings'
common stock. During our 2001 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
8
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 1997 1998 1999 2000 2001
-------- -------- -------- -------- ------
Net sales................................... $ 196.0 $ 283.4 $ 431.5 $ 522.5 $ 543.1
Depreciation and amortization............... 12.9 18.2 26.8 26.3 24.5
Operating income(a)......................... 4.8 8.7 16.5 20.6 19.2
Interest expense............................ 7.9 11.3 23.0 26.6 23.4
Loss before income taxes,
extraordinary item and cumulative
effect of change in accounting
principle............................... (2.8) (2.2) (6.1) (5.5) (4.0)
Income tax provision (benefit).............. 0.3 1.5 (1.5) (1.3) (0.4)
Net loss(b)................................. (3.1) (5.2) (5.6) (4.2) (3.6)
BALANCE SHEET DATA
Total assets................................ 137.8 269.5 278.6 265.7 265.9
Total debt(c)............................... 79.0 161.3 224.0 219.1 224.6
Total stockholders' equity (deficiency)..... 25.1 52.2 (2.4) (6.5) (10.3)
OTHER DATA
Net cash provided by operating activities... 15.3 2.5 16.1 22.7 24.7
Net cash used in investing activities....... (31.0) (5.3) (25.4) (12.9) (29.3)
Net cash provided by (used in) financing
activities.............................. 15.9 6.3 12.8 (7.3) 5.0
EBITDA as defined(d)........................ 20.8 32.1 47.1 51.7 48.8
Ratio of earnings to fixed charges(e)....... -- -- -- -- --
.........
- --------------------------------------------
<FN>
(a) Operating income includes a non-cash charge of $2.5, $1.4, $1.4, $2.5
and $4.8 in fiscal years 1997, 1998, 1999, 2000 and 2001, respectively,
related to contract termination costs (in fiscal 1997 and 1998), the
write-down of long-lived assets identified as impaired and a contract
loss provision (in fiscal 1999) and the write-down of long-lived assets
identified as impaired (in fiscal 2000 and 2001). Operating income for
fiscal years 1997, 1998, 1999, 2000 and 2001 includes management fees
paid to equity owners of $0.3, $0.3, $0.4, $0.4 and $0.4, respectively.
(b) Net 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 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 as defined is net income (loss) before interest expense, income
tax expense, depreciation and amortization, and:
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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 write-down 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 year 2000, $1.1 of non-recurring strategic corporate
costs, $1.5 of non-cash charges related to the write-down of
impaired assets for certain contracts, $0.7 for the write-off of
assets related to a litigation settlement and $0.3 in related legal
fees and $0.3 in non-cash compensation expense.
o for fiscal year 2001, $4.8 of non-cash charges related to the
write-down of impaired assets for certain contracts and $0.1
in non-cash compensation expense.
o for fiscal 1997, 1998, 1999, 2000 and 2001, $0.3, $0.3, $0.4, $0.4
and $0.4, respectively, for management fees paid to equity owners.
We believe that EBITDA, as defined, provides useful information
regarding our ability to service debt. However, it is not a measure in
accordance with generally accepted accounting principles and should not
be considered as an alternative to net income or cash flow data
prepared in accordance with generally accepted accounting principles.
Our measure of EBITDA, as defined, may not be comparable to similarly
titled measures used by other companies due to differences in methods
of calculation.
(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 $2.8, $2.2, $6.1,
$5.5 and $4.0 for fiscal years 1997, 1998, 1999, 2000 and 2001,
respectively.
</FN>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FISCAL 2001 COMPARED TO FISCAL 2000
Net Sales - In fiscal 2001, net sales increased 3.9% or $20.6 million
as compared to fiscal 2000. The increase was primarily due to net new accounts
(approximately 5%) and an increase in MLB sales (approximately 3%). The Company
commenced operations at seventeen new accounts during fiscal 2001 including one
NFL stadium and six minor league baseball facilities generating additional
revenues of $34.8 million. Partially offsetting this was the loss of $9.2
million in net sales associated with the closure of several accounts. The
Company's increase in MLB sales of $14.8 million was primarily driven by results
at three accounts where the tenant teams had highly successful seasons resulting
in higher attendance and per capita spending.
The increases were, in part, offset by a decline in NFL sales of $6.5
million (excluding one new facility) due primarily to four fewer post season NFL
games in fiscal 2001 and the postponement of four NFL games until fiscal 2002 as
a result of the September 11, 2001 terrorist attacks. Additionally, at two of
the NFL facilities the Company services, non-NFL sales declined approximately
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$4.9 million as a result of fewer concerts and other ancillary events. Sales at
our convention center accounts which were adversely impacted by the general
economic slowdown and the events of September 11, 2001, declined $9.8 million.
We estimate that the impact of September 11, 2001 reduced our consolidated net
sales approximately 2% in fiscal 2001 from the level we would have expected
absent such conditions.
Cost of sales - Cost of sales as a percentage of net sales increased 1%
from fiscal 2000. The primary components of the increase were higher commission
costs associated with an increase in sales at accounts with higher commission
rates and a change in the sales mix to products with higher commission
structures at certain accounts.
Selling, general and administrative expenses - Selling, general and
administrative expenses declined as a percentage of net sales as a result of
effective cost controls.
Depreciation and amortization - Depreciation and amortization declined
$1.8 million from fiscal 2000. The decrease was primarily due to a decline in
amortization which was the result of the expiration of the initial contract term
of certain service contracts.
Transaction related expenses - Non-recurring strategic corporate costs
of $1.1 million were incurred during fiscal 2000. No such expenses were incurred
in 2001.
Contract related losses - Contract related losses of $4.8 million for
fiscal 2001 reflects an impairment charge of $2.3 million for equipment,
leasehold improvements and location contracts at certain contracts which the
Company intends to continue operating. Additionally, the Company wrote off $2.5
million of other assets primarily representing long term receivables related to
one of the Company's customers which filed for Chapter 11 Bankruptcy. The
Company is currently still operating at the location; however, our ability to
continue to operate at this account depends on the final outcome of contract
negotiations and the bankruptcy proceedings. The Company has approximately
$600,000 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 $1.4 million from fiscal
2000 primarily due to the factors discussed above. We estimate that the impact
of September 11, 2001 reduced our operating income approximately 8% in fiscal
2001 from the level we would have expected absent such conditions.
Interest expense - Interest expense declined $3.1 million from fiscal
2000 chiefly associated with lower interest rates on the Company's adjustable
rate debt.
FISCAL 2000 COMPARED TO FISCAL 1999
Net Sales. Net sales increased 21.1% or $91.0 million from $431.5
million in fiscal 1999 to $522.5 million in fiscal 2000. The increase was due
primarily to new service contracts which generated additional revenues of $50.2
million. In addition, ten NFL games, six post-season playoff games and four 1999
regular season games that occurred in January 2000 contributed an increase in
net sales of $12.0 million. Of the remaining $28.8 million increase, $16.4
million was the result of an increase in net sales at our convention center
venues due primarily to an increase in corporate event bookings.
Cost of sales. Cost of sales of $424.2 million in fiscal 2000
increased, as a percentage of net sales, 1.8% from fiscal 1999. The primary
component of the increase was higher commission costs associated with our new
service contracts.
Selling, general and administrative expenses. Selling, general, and
administrative expenses of $47.9 million in fiscal 2000 decreased 0.7%, as
percentage of net sales from fiscal 1999. The decline was due primarily to fixed
11
expenses including corporate and field support overhead costs which show no
marked increase as a result of the higher net sales.
Depreciation and amortization. Depreciation and amortization of $26.3
million for fiscal 2000 decreased $0.5 million from the prior year period.
Transaction related expenses. Costs of $1.1 million incurred in fiscal
2000 consists primarily of non-recurring strategic corporate costs. For fiscal
1999, $1.5 million in expenses were incurred primarily relating to personnel
costs, rental costs, and professional fees associated with the acquisition of
Service America in August, 1998 (the "Acquisition") and the subsequent
downsizing of Service America's headquarters in Stamford, CT.
Contract related losses. Contract related losses of $2.5 million in
fiscal 2000 include an impairment charge of approximately $1.5 million relating
to the property and equipment, contract rights and other assets for certain
contracts which we continue to operate. Contract related losses also reflects a
$0.7 million charge for the write-off of assets related to a litigation
settlement involving a terminated contract and $0.3 million in related legal
fees.
Operating income. Operating income increased $4.1 million from $16.5
million in fiscal 1999 to $20.6 million in fiscal 2000. The increase was
primarily due to the factors discussed above.
Interest. Interest expense increased $3.6 million in fiscal 2000
chiefly associated with approximately one additional month of interest expense
on Volume Service America's $100.0 million in senior subordinated notes,
increased borrowings on Volume Service America's revolving line of credit and
higher interest rates on adjustable rate debt during fiscal 2000 as compared to
fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
For fiscal 2001, net cash provided by operating activities was $24.7
million as compared to $22.7 million in fiscal 2000. The $2.0 million increase
was primarily due to lower interest costs and a decline in working capital
partially offset by a decrease in income from operations.
Net cash used in investing activities was $29.3 million in fiscal 2001
compared to $12.9 million in the prior year period. The $16.4 million increase
in cash used in investing activities primarily reflects a higher level of
investment in contract rights and property and equipment associated with new
accounts in fiscal 2001.
Net cash provided by financing activities was $5.0 million in fiscal
2001 as compared to $7.3 million used in financing activities in fiscal 2000.
The change primarily reflects net borrowings of $6.8 million borrowed under the
Company's revolving credit facility used primarily to finance capital
investments as compared to the $3.5 million in net repayments in fiscal 2001.
Additionally, bank overdrafts declined $.5 million compared to $2.4 million in
fiscal 2000.
For fiscal 2000, net cash provided by operating activities was $22.7
million compared to $16.1 million in fiscal 1999. The $6.6 million increase was
primarily due to increased operating activities as a result of the higher
overall sales mainly associated with our new service contracts.
For fiscal 2000, net cash used in investing activities was $12.9
million compared to $25.4 million in fiscal 1999. For the 2000 period, the $12.9
million in investing activities primarily reflects investments for the purchases
of property and equipment and investments in contract rights in connection with
maintaining and/or renewing existing contracts. The higher capital expenditures
in the 1999 period reflect $17.5 million in investments for newly acquired
service contracts.
For fiscal 2000, net cash used in financing activities was $7.3 million
compared to $12.8 million in cash provided by financing activities in fiscal
1999. The fiscal 2000 activity primarily reflects the repayment of $3.5 million
borrowed under the Volume Service America's revolving credit facility and $1.2
12
million of senior secured debt. The 1999 figure reflects the issuance of $100.0
million of senior subordinated notes, and the use of proceeds to retire $45.0
million of senior secured debt and $0.5 million of GE Capital debt, redeem $49.5
million of stock, and pay related fees of $6.2 million. Excluding the financing,
$9.5 million was borrowed under the revolving credit facility to fund working
capital and capital expenditures in fiscal 1999.
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 January 1, 2002, $50.2 million of the revolving credit facility was
available to be borrowed under our credit facility. At that date, there were
$12.8 million in outstanding borrowings and $12.0 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
$11.3 million and $1.2 million in 2002 and 2003, respectively. We anticipate
total capital investment of $47.0 million in fiscal 2002.
NEW ACCOUNTING STANDARDS
The Company adopted SFAS 141 ("SFAS 141") "Business Combinations" as of
July 4, 2001. SFAS 141 requires, among other things, the purchase method of
accounting for business combinations initiated after June 30, 2001, eliminates
the pooling-of-interests method and clarifies the criteria for recording
intangible assets separate from goodwill. The adoption of SFAS 141 had no
significant impact on the Company's financial position or 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 and
trademark 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 evaluating the impact of the
transitional goodwill impairment test required by SFAS 142.
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
13
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 SFAS 144 on
its financial position and results of operations.
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 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 the risk of weaker economic conditions within the United States;
o the risk of events similar to those of September 11, 2001;
o general risks associated with the food industry; and
o future changes in government regulation.
14
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. The table presents principal cash flows and
related weighted average interest rates by expected maturity dates. Weighted
average variable rates are based on implied forward rates in the yield curve at
the reporting date.
January 1, 2002
Fair
Value
2002 2003 2004 2005 2006 Thereafter Total 1/1/02
---- ---- ---- ---- ---- ---------- ----- ------
Long-term debt: (In Millions)
Variable rate:........ $ 1.2 $ 1.2 $ 9.2 $ 1.2 $ 106.8 $ -- $ 119.6 $ 119.6
Average interest rate: 6.25% 6.25% 6.25% 6.25% 6.25% 6.25%
Fixed rate:........... $ 0 $ 0 $ 0 $ 0 $ 0 $ 100.0 $ 100.0 $ 95.0
Average interest rate: 11.25% 11.25% 11.25% 11.25% 11.25%
Short-term debt:
Variable rate: $ 4.8 $ 4.8
Average interest rate: 5.61%
15
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
VOLUME SERVICES AMERICA HOLDINGS, INC.
TABLE OF CONTENTS
- ------------------------------------------------------------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT 17
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED JANUARY 2, 2001
AND JANUARY 1, 2002:
Consolidated Balance Sheets 18-19
Consolidated Statements of Operations and Comprehensive Loss 20
Consolidated Statements of Stockholders' Deficiency 21
Consolidated Statements of Cash Flows 22-23
Notes to Consolidated Financial Statements 24-43
16
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Volume Services America Holdings, Inc.:
We have audited the accompanying balance sheets of Volume Services America
Holdings, Inc. and subsidiaries (collectively the "Company") as of January 2,
2001 and January 1, 2002, and the related consolidated statements of operations
and comprehensive loss, stockholders' deficiency, and cash flows for each of the
three years in the period ended January 1, 2002. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at January 2, 2001 and January
1, 2002, and the results of its operations and cash flows for each of the
three years in the period ended January 1, 2002 in conformity with accounting
principles generally accepted in the United States of America.
March 8, 2002
17
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 2, 2001 AND JANUARY 1, 2002 (IN THOUSANDS, EXCEPT PER SHARE DATA)
- ------------------------------------------------------------------------------------------------------------------------------------
January 2, January 1,
ASSETS 2001 2002
CURRENT ASSETS:
Cash and cash equivalents $ 14,726 $ 15,142
Accounts receivable, less allowance for doubtful accounts of $876 and
$984 at January 2, 2001 and January 1, 2002, respectively 19,386 18,386
Merchandise inventories 11,524 13,221
Prepaid expenses and other 2,524 2,469
Deferred tax asset 2,064 701
------------ -----------
Total current assets 50,224 49,919
------------ -----------
PROPERTY AND EQUIPMENT:
Leasehold improvements 47,036 47,548
Merchandising equipment 43,746 46,410
Vehicles and other equipment 7,473 8,426
Construction in process 203 176
------------ -----------
Total 98,458 102,560
Less accumulated depreciation and amortization (35,770) (44,772)
------------ -----------
Property and equipment, net 62,688 57,788
------------ -----------
OTHER ASSETS:
Contract rights, net 70,793 80,680
Cost in excess of net assets acquired, net 48,228 46,457
Deferred financing costs, net 9,948 8,517
Trademarks, net 17,735 17,049
Deferred tax asset - 32
Other 6,080 5,458
------------ -----------
Total other assets 152,784 158,193
------------ -----------
TOTAL ASSETS $ 265,696 $ 265,900
============ ===========
18
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
JANUARY 2, 2001 AND JANUARY 1, 2002 (IN THOUSANDS, EXCEPT PER SHARE DATA)
- ------------------------------------------------------------------------------------------------------------------------------------
January 2, January 1,
LIABILITIES AND STOCKHOLDERS' DEFICIENCY 2001 2002
CURRENT LIABILITIES:
Short-term note payable $ 1,000 $ 4,750
Current maturities of long-term debt 1,150 1,150
Current maturities of capital lease obligation 225 267
Accounts payable 14,838 14,977
Accrued salaries and vacations 8,707 8,546
Liability for insurance 2,522 2,934
Accrued taxes, including income taxes 2,536 3,235
Accrued commissions and royalties 12,332 11,901
Accrued interest 4,005 3,847
Other 3,164 4,439
-------- -------
Total current liabilities 50,479 56,046
-------- -------
LONG-TERM LIABILITIES:
Long-term debt 216,550 218,400
Capital lease obligation 191 -
Deferred income taxes 2,242 -
Liability for insurance 1,608 838
Other liabilities 1,135 876
------- -------
Total long-term liabilities 221,726 220,114
------- -------
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 66,754 66,852
Accumulated deficit (22,462) (26,062)
Accumulated other comprehensive loss (262) (471)
Treasury stock - at cost (194 shares) (49,500) (49,500)
Loans to related parties (1,039) (1,079)
-------- --------
Total stockholders' deficiency (6,509) (10,260)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $265,696 $265,900
======== ========
See notes to consolidated financial statements.
19
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 28, 1999, JANUARY 2, 2001 AND JANUARY 1, 2002
(IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------------------
December 28, January 2, January 1,
1999 2001 2002
Net sales $ 431,453 $ 522,533 $ 543,113
Cost of sales 342,489 424,160 446,596
Selling, general and administrative 42,713 47,860 48,108
Depreciation and amortization 26,815 26,300 24,492
Transaction related expenses 1,529 1,105 -
Contract related losses 1,422 2,524 4,762
----------- ----------- ----------
Operating income 16,485 20,584 19,155
Interest expense 23,029 26,577 23,429
Other income, net (476) (486) (242)
----------- ----------- ----------
Loss before income taxes (6,068) (5,507) (4,032)
Income tax benefit (1,549) (1,288) (432)
----------- ----------- ----------
Loss before extraordinary item and
cumulative effect of change in accounting
principle (4,519) (4,219) (3,600)
Extraordinary loss on debt extinguishment,
net of taxes (873) - -
Cumulative effect of change in accounting
principle, net of taxes (256) - -
----------- ----------- ----------
Net loss (5,648) (4,219) (3,600)
Other comprehensive loss - foreign currency
translation adjustment (131) (64) (209)
----------- ----------- ----------
Comprehensive loss $ (5,779) $ (4,283) $ (3,809)
=========== =========== ==========
See notes to consolidated financial statements.
20
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
YEARS ENDED DECEMBER 28, 1999, JANUARY 2, 2001 AND JANUARY 1, 2002
(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, DECEMBER 29, 1998 526 $ - $ 66,474 $ (12,595) $ (67) $ - $ (1,571) $ 52,241
Stock redemption (194) - - - - (49,500) - (49,500)
Loans to related parties - - - - - - (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 (18,243) (198) (49,500) (919) (2,386)
Noncash compensation - - 280 - - - - 280
Loans to related parties - - - - - - (120) (120)
Foreign currency translation - - - - (64) - - (64)
Net loss - - - (4,219) - - - (4,219)
------ ----- -------- --------- ------ --------- -------- ---------
BALANCE, JANUARY 2, 2001 332 - 66,754 (22,462) (262) (49,500) (1,039) (6,509)
Noncash compensation - - 98 - - - - 98
Loans to related parties - - - - - - (40) (40)
Foreign currency translation - - - - (209) - - (209)
Net loss - - - (3,600) - - - (3,600)
------ ----- -------- --------- ------ --------- -------- ---------
BALANCE, JANUARY 1, 2002 332 $ - $ 66,852 $ (26,062) $ (471) $ (49,500) $ (1,079) $ (10,260)
====== ===== ======== ========= ====== ========= ======== =========
See notes to consolidated financial statements
21
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 28, 1999, JANUARY 2, 2001 AND JANUARY 1, 2002
(IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED
----------------------------------------------
December 28, January 2, January 1,
1999 2001 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,648) $ (4,219) $ (3,600)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Extraordinary item 873 - -
Cumulative effect of change in accounting principle 256 - -
Depreciation and amortization 26,815 26,300 24,492
Amortization of deferred financing costs 1,475 1,511 1,431
Contract related losses 1,422 2,220 4,762
Noncash compensation - 280 98
Deferred tax change (3,267) (1,158) (911)
Gain on disposition of assets (13) (256) (37)
Other (131) (64) (209)
Changes in assets and liabilities acquisition:
Decrease (increase) in assets:
Accounts receivable 855 (3,218) 767
Merchandise inventories (1,362) (577) (1,697)
Prepaid expenses (2,577) 2,407 55
Other assets (639) (1,798) (1,612)
Increase (decrease) in liabilities:
Accounts payable (4,857) 74 593
Accrued salaries and vacations (466) 657 (161)
Liability for insurance (1,609) 574 (358)
Other liabilities 4,963 (49) 1,126
---------- -------- --------
Net cash provided by operating activities 16,090 22,684 24,739
---------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (10,418) (6,399) (8,052)
Proceeds from sale of property and equipment 887 965 139
Purchase of contract rights (15,882) (7,477) (21,367)
---------- -------- --------
Net cash used in investing activities (25,413) (12,911) (29,280)
---------- -------- --------
22
VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 28, 1999, JANUARY 2, 2001 AND JANUARY 1, 2002
(IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED
-------------------------------------------------
December 28, January 2, January 1,
1999 2001 2002
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings - revolving loans $ 9,500 $ (3,500) $ 6,750
Principal payments on long-term debt (46,650) (1,150) (1,150)
Proceeds from long-term debt 100,000 - -
Payments of financing costs (6,600) - -
Principal payments on capital lease obligations (189) (206) (149)
Increase (decrease) in bank overdrafts 5,563 (2,352) (454)
Net increase (decrease) in loans to related parties 652 (120) (40)
Redemption of stock (49,500) - -
---------- --------- ---------
Net cash provided by (used in) financing activities 12,776 (7,328) 4,957
---------- --------- ---------
INCREASE IN CASH 3,453 2,445 416
CASH AND CASH EQUIVALENTS:
Beginning of year 8,828 12,281 14,726
---------- --------- ---------
End of year $ 12,281 $ 14,726 $ 15,142
========== ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 17,790 $ 24,934 $ 22,155
========== ========= =========
Income taxes paid $ 578 $ 391 $ 696
========== ========= =========
See notes to consolidated financial statements.
23
VOLUME SERVICES AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 28, 1999, JANUARY 2, 2001 AND JANUARY 1, 2002
- --------------------------------------------------------------------------------
1. GENERAL
Volume Services America Holdings, Inc. ("Volume Holdings," and together
with its subsidiaries, the "Company") is a holding company, the principal
assets of which are the capital stock of its subsidiary, Volume Services
America, Inc. ("Volume Services America"). Volume Holdings' financial
information is therefore substantially the same as that of Volume Services
America. Volume Services America is also a holding company, the principal
assets of which are the capital stock of its subsidiaries, Volume
Services, Inc. ("Volume Services") and Service America Corporation
("Service America"). The Company is 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 controlled
36.4 percent of the Company at January 1, 2002. As of January 1, 2002, the
remainder of the Company's capital stock was owned by BCP II through its
limited partnerships, BCP Volume L.P. and BCP Offshore Volume L.P.
("Blackstone") (59.4 percent) and by current and former management
employees of the Company (4.2 percent).
At January 1, 2002, the Company had approximately 128 contracts to provide
specified concession services, including catering and novelty merchandise
items at stadiums, sports arenas, convention centers and other
entertainment facilities at various locations in the United States and
Canada. Contracts to provide these services were generally obtained
through competitive bids. In most instances, the Company has the right to
provide these services in a particular location for a period of several
years, with the duration of time often a function of the required
investment in facilities or other financial considerations. The contracts
vary in length generally from 1 to 20 years. Certain of the contracts
contain renewal clauses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company, and its wholly owned subsidiary,
Volume Services America, and its wholly owned subsidiaries, Volume
Services and Service America. All significant intercompany transactions
have been eliminated.
FISCAL YEAR - The Company has adopted a 52-53 week period ending on the
Tuesday closest to December 31 as its fiscal year end. The 1999 and 2001
fiscal years consisted of 52 weeks and fiscal year 2000 contained 53
weeks.
CASH AND CASH EQUIVALENTS - The Company considers temporary cash
investments purchased with an original maturity of three months or less to
be cash.
REVENUE RECOGNITION - The Company typically enters into one of three types
of contracts: 1) profit and loss contracts, 2) profit sharing contracts,
and 3) management fee contracts. Under profit and loss and profit-sharing
contracts, revenue from food and beverage concessions and catering
contract food services is recognized as net sales when the services are
provided. Management fee contracts provide the Company with a fixed fee or
a fixed fee plus an incentive fee and the Company bears no profit or loss
risk. Fees received for management fee contracts are included in net sales
when earned.
24
The aggregate amount of sales recognized by the Company and sales
collected on behalf of others under management fee contracts from services
provided to the end users of the products is defined as "managed
revenues." The Company's total managed revenues for fiscal years 1999,
2000 and 2001 were approximately $452,679,000, $542,324,000 and
$554,677,000, respectively.
MERCHANDISE INVENTORIES - Merchandise inventories consist of food,
beverage, 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:
o Leasehold improvements - generally 10 years - limited by the lease
term or contract term, if applicable
o Merchandising equipment - generally 5 to 10 years limited by the
contract term, if applicable
o Vehicles and other equipment - generally 2 to 10 years limited by the
contract term, if applicable
CONTRACT RIGHTS - Contract rights, net of accumulated amortization,
consist primarily of certain directly attributable costs incurred by the
Company in obtaining or renewing contracts with clients and the adjustment
to fair value of contract rights acquired in the acquisitions of Volume
Services in 1995 and Service America in 1998. These costs for the Company
are amortized over the contract life of each such contract, including
optional renewal periods where the option to renew rests solely with the
Company. Accumulated amortization was approximately $29,789,000 at January
2, 2001 and $35,321,000 at January 1, 2002.
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. Accumulated amortization was approximately $4,977,000 at January 2,
2001 and $6,748,000 at January 1, 2002.
TRADEMARKS - Trademarks are being amortized on a straight-line basis over
30 years. Accumulated amortization was approximately $2,865,000 at January
2, 2001 and $3,551,000 at January 1, 2002.
DEFERRED FINANCING COSTS - Deferred financing costs are being amortized as
interest expense over the life of the respective debt using the interest
method. Accumulated amortization was approximately $3,062,000 at January
2, 2001 and $4,492,000 at January 1, 2002.
IMPAIRMENT OF LONG-LIVED ASSETS AND CONTRACT LOSSES - The Company reviews
long-lived assets and contract assets for impairment whenever events or
changes in circumstances indicate that the book value of the asset may not
be recoverable. Accordingly, 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, such
as property, and certain identifiable intangibles, is based on the
estimated fair value of the asset determined by future discounted net cash
flows.
25
The Company assesses cost in excess of net assets acquired (goodwill) for
impairment whenever facts and circumstances indicate that the carrying
amount may not be fully recoverable. To analyze recoverability, the
Company projects future undiscounted cash flows over the remaining life of
goodwill. If the sum of the expected future undiscounted cash flows is
less than the carrying amount of goodwill, an impairment loss is
recognized. Measurement of an impairment loss for goodwill is based upon
the difference between the carrying amount of goodwill and the future
undiscounted cash flows.
DERIVATIVE FINANCIAL INSTRUMENTS - The Company accounts for derivative
financial instruments in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended by SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of the
Financial Accounting Standards Board ("FASB") Statement No. 133, and SFAS
No. 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities, which became effective for the Company on January 3, 2001.
SFAS No. 133 requires that an entity recognize all derivatives as either
assets or liabilities measured at fair value. In addition, all derivatives
used in hedging relationships must be designated, reassessed and
documented pursuant to the provisions of SFAS No. 133. The adoption of
SFAS No. 133 had an insignificant impact on the Company's financial
position.
The Company is exposed to fluctuations in the fair value of certain
liabilities. The Company uses derivative financial instruments such as
interest rate swap agreements to manage exposure to fluctuations in the
fair value of its fixed-rate debt instruments.
The Company does not hold or issue any derivative financial instruments
for trading purposes and is not a party to leveraged instruments. The
credit risks associated with the Company's derivative financial
instruments are controlled through the evaluation and monitoring of the
creditworthiness of the counterparties. Although the Company may be
exposed to losses in the event of nonperformance by the counterparties,
the Company does not expect such losses, if any, to be significant.
INSURANCE - At the beginning of fiscal 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 4.92
percent and 5.11 percent at January 2, 2001 and 2.17 percent and 5.07
percent at January 1, 2002), to their present value based on expected loss
payment patterns determined by experience. The total discounted
self-insurance liabilities recorded by the Company at January 2, 2001 and
January 1, 2002 were $2,755,000 and $2,061,000, respectively. The related
undiscounted amounts were $3,256,000 and $2,184,000, respectively.
The Company became self-insured for employee health insurance in December
1999. Prior to December 1999, the Company had a premium-based insurance
program. The employee health self-insurance liability is based on claims
filed and estimates for claims incurred but not reported. The total
liability recorded by the Company at January 2, 2001 and January 1, 2002
was $793,000 and $951,000, respectively.
CASH OVERDRAFTS - The Company has included in accounts payable on the
accompanying consolidated balance sheets cash overdrafts totaling
$7,068,000 and $6,614,000 at January 2, 2001 and January 1, 2002,
respectively.
26
FOREIGN CURRENCY - The balance sheet and results of operations of the
Company's Canadian subsidiary (a subsidiary of Service America) are
measured using the local currency as the functional currency. Assets and
liabilities have been translated into United States dollars at the rates
of exchange at the balance sheet date. Revenues and expenses are
translated into United States dollars at the average rate during the
period. The exchange gains and losses arising on transactions are charged
to income as incurred. Translation gains and losses arising from the use
of differing exchange rates from year to year are included in accumulated
other comprehensive loss. These amounts were not significant for any
period reported.
TRANSACTION RELATED EXPENSES - Transaction related expenses in fiscal year
1999 primarily include personnel costs, rental costs and professional fees
associated with downsizing Service America Corporation's Stamford,
Connecticut office. Transaction related expenses in fiscal year 2000
consist primarily of nonrecurring strategic corporate costs.
INCOME TAXES - The provision for income taxes includes federal, state and
foreign taxes currently payable, and the change in deferred tax assets and
liabilities. Deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between the
carrying amounts and the tax basis of assets and liabilities. A valuation
allowance is established for deferred tax assets when it is more likely
than not that the benefits of such assets will not be realized.
SEGMENT REPORTING - The combined operations of the Company, consisting of
contracts to provide concession services, including catering and novelty
merchandise items at stadiums, sports arenas, convention centers and other
entertainment facilities, comprise one reportable segment.
RECLASSIFICATIONS - Certain amounts in 1999 and 2000 have been
reclassified, where applicable, to conform to the financial statement
presentation used in 2001.
NONCASH COMPENSATION - The Company has elected to follow the accounting
provisions of Accounting Principles Board Opinion ("APBO") No. 25,
Accounting for Stock Issued to Employees for Stock-Based Compensation.
NEW ACCOUNTING STANDARDS - The Company adopted SFAS 141 ("SFAS 141")
"Business Combinations" as of July 4, 2001. SFAS 141 requires, among
other things, the purchase method of accounting for business combinations
initiated after June 30, 2001, eliminates the pooling-of-interests method
and clarifies the criteria for recording intangible assets separate from
goodwill. The adoption of SFAS 141 had no significant impact on the
Company's financial position or results of operations.
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets ("SFAS 142"), which is effective for the Company on January 2,
2002. SFAS 142 requires, among other things, the discontinuance of
goodwill and trademark 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 impairment test six
months from the date of adoption and then annually thereafter. The Company
is currently evaluating the impact of the transitional impairment test
required by SFAS 142. Goodwill and trademark amortization (pre-tax)
was approximately $2,504,000, $2,458,000, and $2,458,000 for fiscal years
1999, 2000 and 2001, respectively.
27
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 SFAS 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 SFAS 144 on
its financial position and results of operations.
3. CHANGE IN ACCOUNTING PRINCIPLE
In fiscal year 1999, 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 28, 1999.
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 accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. The Company's most significant financial statement estimates
include the estimate of the recoverability of contract rights and related
assets, potential litigation claims and settlements, the liability for
self-insured claims, the valuation allowance for deferred tax assets and
the allowance for doubtful accounts. Actual results could differ from
those estimates.
CERTAIN RISK CONCENTRATIONS - Financial instruments that potentially
subject the Company to a concentration of credit risk principally consist
of cash equivalents, short-term investments and accounts receivable. The
Company places its cash equivalents and short-term investments with
high-credit qualified financial institutions and, by practice, limits the
amount of credit exposure to any one financial institution.
Concentrations of credit risk with respect to accounts receivable are
limited due to many customers comprising the Company's customer base and
their dispersion across different geographic areas. For the fiscal years
ended December 28, 1999, January 2, 2001 and January 1, 2002, the Company
had one customer that accounted for approximately 11.1 percent, 9.8
percent, and 10.0 percent 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 there are stoppages such as
strikes by the teams.
28
5. DEBT
Long-term debt consists of the following (in thousands):
2000 2001
Term B borrowings $ 112,700 $ 111,550
Revolving loans 5,000 8,000
Senior subordinated notes 100,000 100,000
--------- ---------
217,700 219,550
Less - current portion of long-term debt (1,150) (1,150)
--------- ---------
Total long-term debt $ 216,550 $ 218,400
========= =========
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. All borrowings under the credit facility are secured by
substantially all the assets of Volume Holdings and the majority of its
subsidiaries, including Volume Services and Service America. The
commitments under the Revolving Credit Facility are available to fund
capital investment requirements, working capital and general corporate
needs of the Company. On March 4, 1999, the $40,000,000 of Term A
borrowings and $5,000,000 of Term B borrowings were repaid with the
proceeds from the Senior Subordinated Notes discussed below.
Installments of Term Loan B are due in consecutive quarterly installments
on the last day of each fiscal quarter with 25 percent of the following
annual amounts being paid on each installment date: $1,150,000 in each
year from 2002 through 2005, and $106,950,000 in 2006.
The Revolving Credit Facility allows the Company to borrow up to
$75,000,000 and includes a sub-limit of $35,000,000 for letters of credit
which reduce availability under the Revolving Credit Facility and a
sub-limit of $5,000,000 for Swingline Loans. Revolving Loans must be
repaid at the Revolving Credit Facility maturity date and Swingline Loans
must be either repaid within one month or converted to Revolving Loans.
The Revolving Credit Facility will mature on December 3, 2004. At January
1, 2002, $12,750,000 was outstanding under the Revolving Credit Facility,
consisting of $8,000,000 in Revolving Loans and $4,750,000 in Swingline
Loans (included in short-term note payable), and approximately $12,039,000
of letters of credit were outstanding but undrawn.
Borrowings under the credit agreement bear interest at floating rates
based upon the interest rate option elected by the Company and the
Company's leverage ratio. The weighted average interest rates at January
2, 2001 were 10.25 percent for Term Loan B and 11.5 percent for the
Revolving Credit Facility. The weighted average interest rates at January
1, 2002 were 6.38 percent for Term Loan B and 5.61 percent for the
Revolving Credit Facility.
29
The credit agreement calls for mandatory prepayment of the loans under
certain circumstances and optional prepayment without penalty. The credit
agreement contains covenants that require the Company to comply with
certain financial covenants, including a maximum net leverage ratio, an
interest coverage ratio and a minimum consolidated cash net worth test, as
defined. At January 1, 2002, the Company was in compliance with all
covenants. In addition, Volume Services America is restricted in its
ability to pay dividends and other restricted payments in an amount
greater than approximately $49,500,000 at January 1, 2002.
SENIOR SUBORDINATED NOTES - On March 4, 1999, Volume Services America
completed a private placement of 11-1/4 percent 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), in 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 January 1, 2002 are as
follows (in thousands):
2002 $ 1,150
2003 1,150
2004 9,150
2005 1,150
2006 106,950
Thereafter 100,000
---------
Total $ 219,550
=========
6. 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 as of January 1, 2002 (in thousands):
2002 $ 279
Less - amount representing interest (12)
-----
Total capital lease obligation $ 267
30
Under the terms of the lease agreement, certain equipment is pledged to
secure performance as follows (in thousands):
Equipment $ 914
Accumulated depreciation (343)
-----
Total $ 571
=====
7. INCOME TAXES
The components of deferred taxes are (in thousands):
2000 2001
Deferred tax liabilities:
Intangibles (goodwill, contract rights and trademarks) $ (6,711) $ (6,509)
Other (455) (1,130)
-------- --------
(7,166) (7,639)
-------- --------
Deferred tax assets:
Difference between book and tax basis of property 1,129 2
Bad debt reserves 334 291
Inventory reserves 203 144
Other reserves and accrued liabilities 2,789 4,692
General business and AMT credit carryforwards 822 3,499
Accrued compensation and vacation 954 980
Net operating loss carryforward 757 1,021
-------- --------
6,988 10,629
Valuation allowance (2,257)
--------
6,988 8,372
Net deferred tax asset (liability) $ (178) $ 733
======== ========
Net deferred tax liability is recognized as follows in the
accompanying 2000 and 2001 consolidated balance sheets:
Current deferred tax asset $ 2,064 $ 701
Noncurrent deferred tax asset (liability) (2,242) 32
-------- -------
Net deferred tax asset (liability) $ (178) $ 733
======== =======
At January 1, 2002, the Company has approximately $15,105,000 of net
operating loss carryforwards, $7,754,000 of which are from the acquisition
of Service America. These carryforwards expire in varying amounts
beginning in years 2004 through 2020. The Company's future ability to
utilize the acquired Service America net operating loss carryforward is
limited to some extent by Section 382 of the Internal Revenue Code of
1986, as amended. At January 1, 2002, the Company has approximately
$5,212,000 of tax credit carryforwards. These tax credit carryforwards
resulted primarily from wage credits generated pursuant to a review of
prior year returns. These carryforwards expire in varying amounts
beginning in years 2005 through 2021.
31
At January 1, 2002, the Company established a valuation allowance of
$2,257,000 related to net operating losses and credit carryforwards.
Management believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the
realizability of these net operating losses and credit carryovers. These
carryovers are dependent upon future income.
Although realization of the net deferred tax assets is not assured,
management believes that it is more likely than not that all of the net
deferred tax assets will be realized. The amount of net deferred tax
assets considered realizable, however, could be reduced in the near term
based on changing conditions.
The benefit for income taxes is as follows (in thousands):
Fiscal Year Ended
--------------------------------------------------------------
December 28, January 2, January 1,
1999 2001 2002
Current provision (benefit) $ 1,718 $ (130) $ 478
Deferred benefit (3,267) (1,158) (910)
-------- -------- ------
Total benefit for income taxes $ (1,549) $ (1,288) $ (432)
======== ======== ======
The difference between the statutory federal income tax rate and the
effective tax rate on net loss is as follows:
Fiscal Year Ended
----------------------------------------------------------
December 28, January 2, January 1,
1999 2001 2002
Statutory rate (34)% (34)% (34)%
Differences:
State income taxes (3) (1) 11
Nondeductible expenses (meals and
entertainment) 1 4 2
Adjustment to valuation allowance - - 56
Goodwill 8 9 13
Federal tax credits (2) (1) (56)
Foreign tax reserve 3 - -
Other 1 - (3)
---- ---- ----
Total benefit for income taxes (26)% (23)% (11)%
===== ===== =====
8. EQUITY TRANSACTIONS
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.
32
LOANS TO RELATED PARTIES - At January 2, 2001 and January 1, 2002, the
Company has made loans to VSI Management Direct L.P. and another
partnership which hold a direct and an indirect ownership, respectively,
in the Company. The loans were used to fund the repurchase of partnership
interests from former members of management. Accordingly, these amounts
have been included as a reduction to stockholders' equity.
NONCASH COMPENSATION - During fiscal 2000, certain management employees
purchased units in two partnerships that have an indirect ownership in the
Company. These purchases were financed with nonrecourse loans. The terms
of the purchase agreements are such that the issuance of these units is a
variable plan, which requires the Company to revalue the units at each
measurement date for changes in the fair value of the units. The related
compensation expense is recorded in selling, general, and administrative
expenses in the statement of operations and comprehensive loss, for fiscal
years 2000 and 2001. Had compensation costs been determined as prescribed
by SFAS No. 123, Accounting for Stock-Based Compensation, the effect on
the Company's net earnings would not have been significant.
9. INTEREST RATE HEDGING ARRANGEMENTS
Effective April 15, 1999, the Company entered into an interest cap
transaction with the Union Bank of California ("UBOC") for a $10,000,000
notional amount for $4,200. The interest rate cap protected the Company if
the three-month LIBOR exceeds 7.5 percent through January 16, 2001.
The Company entered into an interest rate swap transaction on April 16,
1999 with UBOC for a $30,000,000 notional amount with no up front cost.
This swap provided that the Company pay UBOC one-month LIBOR and that UBOC
pay the Company 5.375 percent each month until April 20, 2001. On October
20, 1999, the Company sold an interest rate floor on this swap to UBOC and
received $34,000. The interest rate floor was marked-to-market.
Consequently, in the event that one-month LIBOR was less than 5.375
percent the Company would pay 5.375 percent.
All interest rate hedging arrangements expired in fiscal 2001.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments and related underlying
assumptions are as follows:
LONG-TERM DEBT - The Company estimates that the carrying value at January
2, 2001 and January 1, 2002 approximates the fair value of the Term Loans
and Revolving Credit Facility based upon the variable rate of interest and
frequent repricing. The Company estimates the fair value of the Senior
Subordinated Notes to be approximately $ 87,000,000 (book value of
$100,000,000) at January 2, 2001 and $97,000,000 (book value $100,000,000)
at January 1, 2002 based on third-party quotations for the same or similar
issues.
INTEREST RATE HEDGING ARRANGEMENTS - At January 2, 2001, the Company
estimated the fair values of the interest rate swap, cap and floor as a
loss of $114,389, $0 and a loss of $620, respectively. These figures
represent the estimated amounts the Company would have paid or received to
terminate these financial instrument agreements, as quoted by the
financial institution. As of January 1, 2002 all arrangements the Company
had been party to have matured.
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.
33
11. COMMITMENTS AND CONTINGENCIES
LEASES AND CLIENT CONTRACTS - The Company operates primarily at its
clients' premises pursuant to written contracts. The length of a contract
generally ranges from 1 to 20 years. Certain of these client contracts
provide for payment by the Company to the client for both fixed and
variable commissions and royalties. Aggregate commission and royalty
expense under these agreements was $131,056,000, $168,782,000 and
$183,324,000 for fiscal years 1999, 2000 and 2001, respectively. Minimum
guaranteed commission and royalty expense was approximately $9,955,000,
$10,223,000 and $7,016,000 for fiscal years 1999, 2000 and 2001,
respectively.
The Company leases a number of real properties and other equipment under
varying lease terms which are noncancelable. In addition, the Company has
numerous month-to-month leases. Rent expense was approximately $1,085,000,
$1,080,000 and $961,000 in fiscal 1999, fiscal 2000 and fiscal 2001,
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
2002 $ 389 $ 7,610
2003 372 5,851
2004 155 5,211
2005 34 4,651
2006 - 2,406
Thereafter - 854
----- --------
Total $ 950 $ 26,583
===== ========
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
January 1, 2002, if all of the employees under contract were to be
terminated by the Company without good cause (as defined) under these
contracts, the Company's liability would be approximately $6.0 million.
COMMITMENTS - Pursuant to its contracts with various clients, the Company
is committed to spend approximately $11,307,000 during 2002 and $1,186,000
during 2003 for equipment improvements and location contract rights.
At January 1, 2002, the Company has $7,468,000 of letters of credit
collateralizing the Company's performance and other bonds, and $3,145,000
in letters of credit collateralizing the self-insurance reserves of the
Company, and $1,426,000 in other letters of credit.
34
CONTINGENCIES - On April 20, 2001 one of the Company's customers filed for
Chapter 11 bankruptcy. The Company had approximately $3.2 million of
receivables and leasehold improvements recorded at the time of the filings
relating to this customer. The proceedings of the filing are in the
preliminary stages; however, based on the most recent information, the
Company wrote-off $2.5 million of other assets primarily representing long
term receivables. The Company had approximately $600,000 in equipment and
leasehold improvements recorded at January 1, 2002.
In July 2000, the Company entered into an agreement to manage an arena in
the City of Bridgeport, Connecticut once the City completed its
construction. The City recently asserted a claim against the Company of
approximately $2.1 million dollars for certain construction charges the
City incurred in building the arena. The Company believes that it has a
strong defense to the claim.
LITIGATION - There are various claims and pending legal actions against or
indirectly involving the Company. It is the opinion of management, after
considering a number of factors, including, but not limited to, the
current status of the litigation (including any settlement discussions),
views of retained counsel, the nature of the litigation, the prior
experience of the Company, and the amounts which the Company has accrued
for known contingencies, that the ultimate disposition of these matters
will not materially affect the financial position or future results of
operations of the Company.
12. RELATED PARTY TRANSACTIONS
MANAGEMENT FEES - Certain administrative and management functions are
provided to the Company by the Blackstone Group and GE Capital through
monitoring agreements. The Company paid Blackstone Management Partners II
L.P., an affiliate of Blackstone, a fee of $250,000 in fiscal years 1999,
2000 and 2001. GE Capital was paid management fees of $167,000 in fiscal
years 1999, 2000 and 2001. Such amounts are included in selling, general
and administrative expenses.
LEASING SERVICES - GE Capital and its affiliates provide leasing and
financing services to the Company. Payments to GE Capital and its
affiliates for fiscal years 1999, 2000 and 2001 for such services, net of
discounts earned, were approximately $185,000, $165,000 and $95,000,
respectively, and are included in selling, general and administrative
expenses. The Company also leases equipment from GE Capital under a
capital lease (Note 6).
MANAGEMENT INCENTIVE AGREEMENT - The Company maintains a discretionary
incentive plan whereby general managers and senior management personnel
qualify for incentive payments in the event that the Company has exceeded
certain financial performance targets determined on an annual basis. The
Company has accrued approximately $1,597,000 and $1,096,000 in accrued
salaries and vacations in the accompanying balance sheets at January 2,
2001 and January 1, 2002, respectively, for such incentives payable to
certain general managers and senior management personnel. These amounts
are included in selling, general, and administrative expenses.
13. RETIREMENT PLAN
Effective February 15, 2000, the Volume Service 401(k) plan was merged
into the Service America 40l(k) plan, forming the Volume Services America
401(k) defined contribution plan. This plan covers substantially all
Volume Services America employees. Employees may contribute up to 16
percent of their eligible earnings and the Company will match 25 percent
of employee contributions up to the first 6 percent of employee
compensation, with an additional discretionary match up to 50 percent. The
Company's contributions to the previous individual plans and the combined
plan were approximately $178,000 for fiscal 1999, $319,000 for fiscal 2000
and $397,000 in fiscal 2001.
35
MULTI-EMPLOYER PENSION PLANS - Certain of the Company's union employees
are covered by multi-employer defined benefit pension plans administered
by unions. Under the Employee Retirement Income Security Act ("ERISA"), as
amended, an employer upon withdrawal from a multi-employer pension plan is
required to continue funding its proportionate share of the plan's
unfunded vested benefits. Amounts charged to expense and contributed to
the plans were not material for the periods presented.
14. CONTRACT RELATED LOSSES
During fiscal years 1999, 2000 and 2001, 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 and approximately
$976,000 of property and equipment, $221,000 of contract rights and
$269,000 of other assets in fiscal 2000. In fiscal 2001, the Company wrote
down approximately $2.3 million of property and equipment and contract
rights. In addition, the Company recorded an impairment charge of
approximately $2.5 million for the write down of other assets, as
described in Note 11.
During fiscal 1999, the Company recorded a loss for an underperforming
contract to reserve for the estimated future losses of approximately
$401,000.
On June 12, 1998, Service America commenced arbitration proceedings
through the American Arbitration Association in New York, New York against
Silver Huntington Realty LLC and Silver Huntington LLC (see Note 12). In
May 2000, the arbitrator reached a decision in this matter. The decision
provided for no payment from either party to the other. As a result, the
Company wrote off related assets in the amount of $754,000 and recorded
approximately $305,000 in related legal fees.
36
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarterly operating results for the years ended January 2, 2001 and
January 1, 2002 are as follows (in thousands):
YEAR ENDED FIRST SECOND THIRD FOURTH
JANUARY 2, 2001 QUARTER QUARTER QUARTER QUARTER TOTAL
Net sales $80,120 $ 143,637 $ 188,289 $ 110,487 $ 522,533
Cost of sales 64,243 115,733 151,810 92,374 424,160
Selling, general, and administrative 9,577 13,037 14,235 11,011 47,860
Depreciation and amortization 6,489 6,686 6,791 6,334 26,300
Transaction related expenses 770 12 9 314 1,105
Contract related losses 205 1,809 510 - 2,524
------- --------- --------- ---------- ---------
Operating income (loss) (1,164) 6,360 14,934 454 20,584
Interest expense, net 6,602 6,551 6,773 6,651 26,577
Other income, net (48) (109) (135) (194) (486)
------- --------- --------- ---------- ---------
Income (loss) before income taxes (7,718) (82) 8,296 (6,003) (5,507)
Income tax provision (benefit) 124 (2,129) 2,112 (1,395) (1,288)
------- --------- --------- ---------- ---------
Net income (loss) $(7,842) $ 2,047 $ 6,184 $ (4,608) $ (4,219)
======= ========= ========= ========== =========
YEAR ENDED FIRST SECOND THIRD FOURTH
JANUARY 1, 2002 QUARTER QUARTER QUARTER QUARTER TOTAL
Net sales $83,194 $157,646 $177,559 $124,714 $543,113
Cost of sales 70,972 127,972 143,533 104,119 446,596
Selling, general, and administrative 10,321 12,281 13,155 12,351 48,108
Depreciation and amortization 6,008 6,077 6,076 6,331 24,492
Contract related losses - 3,199 933 630 4,762
-------- -------- ------- ------- -------
Operating income (loss) (4,107) 8,117 13,862 1,283 19,155
Interest expense, net 6,545 6,006 5,554 5,324 23,429
Other income, net (21) (44) (91) (86) (242)
-------- -------- ------- ------- -------
Income (loss) before income taxes (10,631) 2,155 8,399 (3,955) (4,032)
Income tax benefit - - - (432) (432)
-------- -------- ------- -------- -------
Net income (loss) $(10,631) $ 2,155 $ 8,399 $ (3,523) $(3,600)
======== ======== ======= ======== =======
37
16. NON-GUARANTOR SUBSIDIARIES FINANCIAL STATEMENTS
The senior subordinated notes are jointly and severally 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 following table sets forth the condensed consolidated financial
statements of the Parent Company, Guarantor Subsidiaries and Non-Guarantor
Subsidiaries as of and for the periods ended January 2, 2001 and January
1, 2002 (in the case of the balance sheet) and for the years ended
December 28, 1999, January 2, 2001 and January 1, 2002 (in the case of the
statement of operations and the cash flows):
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)
Loss 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)
======== ======== ======== ======= ========
38
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:
Net borrowings - revolving loans - 9,500 - 9,500
Principal payments on long-term debt - (46,650) - (46,650)
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 loans to related parties - 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 year - 8,692 136 8,828
------- ------- ------- --------
End of year $ - $ 9,390 $ 2,891 $ 12,281
======= ======= ======= ========
39
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
======== ========== ======== ======== =========
40
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS, YEAR ENDED
JANUARY 2, 2001 (IN THOUSANDS)
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Net sales $ - $ 491,232 $ 31,301 $ - $ 522,533
Cost of sales - 398,063 26,097 - 424,160
Selling, general, and administrative - 44,491 3,369 - 47,860
Depreciation and amortization - 23,870 2,430 - 26,300
Transaction related expenses - 1,105 - - 1,105
Contract related losses - 2,524 - - 2,524
-------- -------- ------ ------- --------
Operating income (loss) - 21,179 (595) - 20,584
Interest expense - 26,577 - 26,577
Other income, net - (450) (36) - (486)
-------- -------- ------ ------- --------
Loss before income taxes - (4,948) (559) - (5,507)
Income tax benefit - (1,288) - - (1,288)
Loss in earnings of subsidiaries (4,219) - - 4,219 -
-------- -------- ------ ------- --------
Net loss (4,219) (3,660) (559) 4,219 (4,219)
Other comprehensive loss
foreign currency - - (64) - (64)
-------- -------- ------ ------- --------
Comprehensive loss $ (4,219) $ (3,660) $ (623) $ 4,219 $ (4,283)
======== ======== ====== ======= ========
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS, YEAR ENDED JANUARY 2, 2001 (IN THOUSANDS)
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
Cash flows from operating activities $ - $ 22,159 $ 525 $ 22,684
---- -------- ------ ---------
Cash flows from investing activities:
Purchase of property and equipment - (5,877) (522) (6,399)
Proceeds from sale of property, plant and equipment - 965 - 965
Purchase of contract rights - (6,677) (800) (7,477)
---- -------- ------ ---------
Net cash used in investing activities - (11,589) (1,322) (12,911)
---- -------- ------ ---------
Cash flows from financing activities:
Net borrowings - revolving loans - (3,500) - (3,500)
Principal payments on long-term debt - (1,150) - (1,150)
Principal payments on capital lease obligations - (206) - (206)
Decrease in bank overdrafts - (828) (1,524) (2,352)
Decrease in loans to related parties - (120) - (120)
---- -------- ------ --------
Net cash used in financing activities - (5,804) (1,524) (7,328)
---- -------- ------ --------
Increase (decrease) in cash - 4,766 (2,321) 2,445
Cash and cash equivalents:
Beginning of year - 9,392 2,889 12,281
---- -------- ----- --------
End of year $ - $ 14,158 $ 568 $ 14,726
==== ======== ====== ========
41
CONSOLIDATING CONDENSED BALANCE SHEET, JANUARY 1, 2002 (IN THOUSANDS)
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
ASSETS COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Current assets:
Cash and cash equivalents $ - $ 14,976 $ 166 $ - $ 15,142
Accounts receivable - 16,471 1,915 - 18,386
Other current assets - 23,667 1,028 (8,304) 16,391
-------- --------- ------- ------- ---------
Total current assets - 55,114 3,109 (8,304) 49,919
Property and equipment - 54,607 3,181 - 57,788
Contract rights, net - 79,890 790 - 80,680
Cost in excess of net assets acquired, net - 46,457 - - 46,457
Investment in subsidiaries (10,260) - - 10,260 -
Other assets - 31,050 6 - 31,056
-------- --------- ------- ------- ---------
Total assets $(10,260) $ 267,118 $ 7,086 $ 1,956 $ 265,900
======== ========= ======= ======= =========
Liabilities and Stockholders' Deficiency
Current liabilities:
Intercompany liabilities $ - $ - $ 8,304 $(8,304) $ -
Other current liabilities - 54,901 1,145 - 56,046
-------- --------- ------- ------- ---------
Total current liabilities - 54,901 9,449 (8,304) 56,046
Long-term debt - 218,400 - - 218,400
Other liabilities - 1,714 - - 1,714
Total liabilities - 275,015 9,449 (8,304) 276,160
-------- --------- ------- ------- ---------
Stockholders' deficiency:
Common stock - - - - -
Additional paid-in capital 66,852 66,852 - (66,852) 66,852
Accumulated deficit (26,062) (24,170) (1,892) 26,062 (26,062)
Treasury stock and other (51,050) (50,579) (471) 51,050 (51,050)
--------- --------- ------- ------- ---------
Total stockholders' deficiency (10,260) (7,897) (2,363) 10,260 (10,260)
--------- --------- ------- ------- ---------
Total liabilities and stockholders'
deficiency $ (10,260) $ 267,118 $ 7,086 $ 1,956 $ 265,900
========= ========= ======= ======= =========
42
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS, YEAR ENDED
JANUARY 1, 2002 (IN THOUSANDS)
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Net sales $ - $ 518,714 $ 24,399 $ - $ 543,113
Cost of sales - 424,623 21,973 - 446,596
Selling, general, and administrative - 46,503 1,605 - 48,108
Depreciation and amortization - 23,678 814 - 24,492
Transaction related expenses - - - - -
Contract related losses - 4,762 - - 4,762
-------- -------- ------ -------- --------
Operating income (loss) - 19,148 7 - 19,155
Interest expense - 23,429 - - 23,429
Other income, net - (213) (29) - (242)
-------- -------- ------ -------- --------
Income (loss) before income taxes - (4,068) 36 - (4,032)
Income tax benefit - (432) - - (432)
Loss in earnings of subsidiaries (3,600) - - 3,600 -
-------- -------- ------ -------- --------
Net income (loss) (3,600) (3,636) 36 3,600 (3,600)
Other comprehensive loss
foreign currency - - (209) - (209)
-------- -------- ------ -------- --------
Comprehensive loss $ (3,600) $ (3,636) $ (173) $ 3,600 $ (3,809)
======== ======== ====== ======== ========
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS, YEAR ENDED JANUARY 1, 2002 (IN THOUSANDS)
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
Cash flows from operating activities $ - $ 24,874 $(135) $ 24,739
---- -------- ------ --------
Cash flows from investing activities:
Purchase of property and equipment - (7,785) (267) (8,052)
Proceeds from sale of property, plant and equipment - 139 - 139
Purchase of contract rights - (21,367) - (21,367)
---- -------- ----- --------
Net cash used in investing activities - (29,013) (267) (29,280)
---- -------- ----- --------
Cash flows from financing activities:
Net borrowings - revolving loans - 6,750 - 6,750
Principal payments on long-term debt - (1,150) - (1,150)
Principal payments on capital lease obligations - (149) - (149)
Decrease in bank overdrafts - (454) - (454)
Decrease in loans to related parties - (40) - (40)
---- -------- ----- --------
Net provided by financing activities - 4,957 - 4,957
---- -------- ----- --------
Increase (decrease) in cash - 818 (402) 416
Cash and cash equivalents:
Beginning of year - 14,158 568 14,726
---- -------- ----- --------
End of year $ - $ 14,976 $ 166 $ 15,142
==== ======== ===== ========
43
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
John T. Dee................................. 63 Chief Executive Officer and Chairman of the
Board of Directors
Kenneth R. Frick............................ 46 Executive Vice President and Chief Financial Officer
Janet L. Steinmayer......................... 46 Executive Vice President, General Counsel and
Secretary
Howard A. Lipson............................ 38 Director
David Blitzer .............................. 32 Director
Peter Wallace............................... 27 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, Executive 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. He
served as Vice President from August 1998 to December 2000, when he became
Executive Vice President. Mr. Frick has 18 years of experience in the
recreational food service industry, 14 of them with Volume Services. Prior to
becoming Chief Financial Officer of Volume Services in 1995, Mr.
Frick was the Controller for Volume Services, and for seven years was Assistant
Controller and Southeast Regional Controller of Volume Services. Mr. Frick is a
certified public accountant.
Janet L. Steinmayer, Executive Vice President, General Counsel and
Secretary. Ms. Steinmayer has been General Counsel and Secretary of Volume
Services America since August 1998. She served as Vice President from August
1998 to December 2000, when she became Executive Vice President. Ms. Steinmayer
has been Corporate Vice President, General Counsel and Secretary of Service
America since November 1993. From 1992 to 1993, she was Senior Vice President--
External Affairs and General Counsel of Trans World Airlines, Inc. ("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.
44
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. 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 Allied Waste
Industries, Inc., Haynes International, Inc., Republic Technologies
International, Inc. and The Imperial Home Decor Group Inc.
Peter Wallace, Director. Mr. Wallace has been associated with the
Blackstone Group since 1997 and became an Associate in January 2001. 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 2001 salary and bonuses. These officers are referred
to together as the "Named Executives".
ANNUAL COMPENSATION
------------------------------------------------
OTHER ANNUAL ALL OTHER
YEAR SALARY BONUS(1) COMPENSATION(2) COMPENSATION
---- ------ -------- --------------- ------------
John T. Dee
Chief Executive Officer and Chairman of
the Board of Directors 2001 $487,509 $187,700 $107,983 (3)
2000 $489,918 $137,500 -- 5,912
1999 467,354 137,895 -- 7,497
Kenneth R. Frick
Executive Vice President and Chief
Financial Officer 2001 $215,396 $88,200 $8,538 (4)
2000 206,635 50,000 -- 2,370
1999 194,808 40,000 -- 2,852
Janet L. Steinmayer
Executive Vice President, General
Counsel and Secretary 2001 $247,013 $94,700 $261 (5)
2000 269,318 31,917 236
1999 256,876 59,737 -- 199
45
- ------------------
<FN>
(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) Amounts included under "All Other Compensation" for Mr. Dee for 2001
consist of $107,983 in insurance premiums.
(4) Amounts included under "All Other Compensation" for Mr. Frick for 2001
consist of the Company's contributions of $2,625 under the 401(k) Plan
and $5,913 in insurance premiums.
(5) Amounts included under "All Other Compensation" for Ms. Steinmayer for
2001 consist of $261 in insurance premiums.
</FN>
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 (including annual increases) is $204,750 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
46
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 (which has
been increased without formal amendment to $190,000), 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.
47
SHARES
NAME AND ADDRESS BENEFICIALLY OWNED PERCENTAGE OWNER
- ---------------- ------------------ ----------------
Blackstone Management Associates II L.L.C.(1)
Peter G. Peterson(1)
Stephen A. Schwarzman(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%
<FN>
(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 Executive 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.
</FN>
48
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
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.
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
49
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.
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.
50
LEASING SERVICES
GE Capital and its affiliates provided us leasing and financing
services during 2001 on arms-length terms. Payments to GE Capital and its
affiliates during 2001, net of discounts earned, were approximately $95,000. We
also lease equipment from GE Capital under a capital lease; payments to GE
Capital under this lease were approximately $225,000 in 2001.
LOANS TO VSI PARTNERSHIPS
During 1999, 2000 and 2001, VSI Management and another partnership
repurchased some of their partnership interests from some former members of
management. To fund these purchases and to pay for tax preparation costs, Volume
Services America loaned a total of $1,079,000 to these entities. 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 January 1, 2002.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) See financial statements beginning at page 17.
(b) We did not file any Current Report on Form 8-K during the last quarter
of our 2001 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 reference to Exhibit 3.8 to the Form S-4.
51
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.
52
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.
10.9.1 Letter agreement dated January 5, 2001 by Volume Services America, Inc., amending terms of the Employment
Agreement by and between Volume Services, Inc. and Kenneth R. Frick.
10.10 Employment 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.
10.10.1 Letter agreement dated January 5, 2001 by Volume Services America, Inc, amending terms of the Employment Agreement
by and between VSI Acquisition Corporation and Janet L. Steinmayer.
*12 Computation of Ratio of Earnings to Fixed Charges
*21 List of Subsidiaries
------------------
*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 2001 fiscal year.
53
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 28, 2002.
Volume Services America, Inc.
By: /s/ Kenneth R. Frick
-----------------------------------------------------
Name: Kenneth R. Frick
Title: Executive 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 28, 2002.
Signature Title
/s/ John T. Dee Chief Executive Officer and Chairman
- -------------------------------------------------------
John T. Dee (Principal Executive Officer)
/s/ Kenneth R. Frick Executive Vice President and Chief Financial
- -------------------------------------------------------
Kenneth R. Frick Officer (Principal Financial Officer)
/s/ Howard A. Lipson
- -------------------------------------------------------
Howard A. Lipson
/s/ David Blitzer
- ------------------------------------------------------- Directors
David Blitzer
/s/ Peter Wallace
- -------------------------------------------------------
Peter Wallace
54
VOLUME SERVICES AMERICA, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Income (loss) from continuing
operations before income taxes,
extraordinary item and cumulative
effect of change in accounting
principle (2,787) (2,220) (6,068) (5,507) (4,032)
Add Fixed Charges:
Interest Expense 7,562 10,771 21,554 25,066 21,998
Amortization of loan costs 354 551 1,475 1,511 1,431
Interest factor in rents 352 338 643 878 812
Total earnings as defined 5,481 9,440 17,604 21,948 20,209
Fixed Charges:
Interest Expense 7,562 10,771 21,554 25,066 21,998
Amortization of loan rents 354 551 1,475 1,511 1,431
Interest factor in rents 352 338 643 878 812
8,268 11,660 23,672 27,455 24,241
Ratio of Earnings to Fixed Charges - - - - -
Deficiency in the coverage of fixed
charges (2, 787 (2,220) (6,068) (5,507) (4,032)
55
Exhibit 21
List of Subsidiaries of Volume Services America, Inc.
JURISDICTION OF INCORPORATION
SUBSIDIARY
Events Center Catering, Inc. Wyoming
Service America Concessions Corporation Maryland
Service America Corporation Delaware
Service America Corporation of Wisconsin Wisconsin
Service America of Texas, Inc. Texas
Servo-Kansas, Inc. Kansas
Servomation Duchess, Inc. California
Servomation, Inc. Quebec, Canada
SVM of Texas, Inc. Texas
Volume Services, Inc. Delaware
Volume Services, Inc. Kansas
V.S.I. of Maryland, Inc. Maryland
56