10-Q 1 form10q-july32001.txt FOR PERIOD ENDING JULY 3, 2001 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED JULY 3, 2001 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____ COMMISSION FILE NUMBER: 333-79419 VOLUME SERVICES AMERICA, INC. (Exact name of registrant as specified in its charter) DELAWARE 57-0969174 ----------------------------- ---------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 201 EAST BROAD STREET, SPARTANBURG, SOUTH CAROLINA 29306 -------------------------------------------------- ----------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (864) 598-8600 --------------------- N/A ------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (X) YES ( ) NO APPLICABLE ONLY TO CORPORATE ISSUERS: The number of shares outstanding of the registrant's Common Stock, par value $.01 per share, at August 15, 2001, was 100.

1 PART I FINANCIAL INFORMATION

7 VOLUME SERVICES AMERICA HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) TWENTY-SIX WEEK PERIODS ENDED JULY 3, 2001 AND JUNE 27, 2000 -------------------------------------------------------------------------------- 1. GENERAL Volume Services America Holdings, Inc. ("Volume Holdings," and together with its subsidiaries, the "Company") is a holding company, the principal assets of which are the capital stock of its subsidiary, Volume Services America, Inc. ("Volume Services America"). Volume Holdings' financial information is therefore substantially the same as that of Volume Services America. Volume Services America is also a holding company, the principal assets of which are the capital stock of its subsidiaries, Volume Services, Inc. ("Volume Services") and Service America Corporation ("Service America"). The Company is owned by current and former members of management, Blackstone Capital Partners II Merchant Banking Fund, L.P. ("BCP II"), and General Electric Capital Corporation ("GE Capital"). The accompanying financial statements of Volume Holdings have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods. The results of operations for the twenty-six week period ended July 3, 2001 are not necessarily indicative of the results to be expected for the fifty-two week fiscal year ending January 1, 2002 due to the seasonal aspects of the business. The consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the year ended January 2, 2001. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES New Accounting Standards - In 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivatives Instruments and Hedging Activities", as amended by SFAS No. 137 and SFAS No. 138. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133, as amended, became effective for the Company on January 3, 2001 and the adoption of this statement, as amended, had an insignificant impact on the Company's financial position. In July 2001, the FASB issued SFAS No. 141 ("SFAS 141") "Business Combinations" which requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company is currently assessing but has not yet determined the impact of SFAS 141 on its financial positions and results of operations. In July 2001, the FASB issued SFAS No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective for the Company January 2, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill 8 amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS 142 also requires that the company complete a transitional goodwill impairment test six months from the date of adoption and then annually thereafter. The Company is currently assessing but has not yet determined the impact of SFAS 142 on its financial position and results of operations. Transaction Related Expenses - Transaction related expenses for the twenty-six weeks ended June 27, 2000 consist primarily of non-recurring strategic corporate costs. 3. COMMITMENTS AND CONTINGENCIES On March 15, 2001 and April 20, 2001, respectively, two of the Company's customers filed for reorganization under Chapter 11 of the bankruptcy code. The Company had approximately $1.2 million of equipment and leasehold improvements and $3.2 million of receivables and leasehold improvements, respectively, recorded relating to these customers. The reorganization proceedings in the wake of the March 15, 2001 filing are substantially completed. Based on the most recent information, the Company recorded an asset impairment of approximately $900,000 of the $1.2 million of equipment and leasehold improvements. The proceedings in the wake of the April 20, 2001 filing have not yet begun; however, based on the most recent information, the Company has written off $2.3 million of other assets primarily representing long term receivables. 4. CONTRACT RELATED LOSSES Contract related losses for the twenty-six weeks ended July 3, 2001 consist of approximately $900,000 for the write-down of property and equipment and $2.3 million of other assets as described in Note 3. Contract related losses for the twenty-six weeks ended June 27, 2000 represent an impairment charge of approximately $955,000 for a contract which the Company continues to operate. The impairment charge is comprised of approximately $686,000 for the write-off of property and equipment and $269,000 of other assets. Contract related losses for the period ended June 27, 2000 also reflects the write-off a receivable in the amount of $754,000 and $305,000 in related legal fees for a terminated service contract. 9 5. NON-GUARANTOR SUBSIDIARIES FINANCIAL STATEMENTS The Company's $100 million in 11 1/4% senior subordinated notes due 2009 are jointly and severally guaranteed by Volume Holdings and all of the subsidiaries of Volume Service America (the "Guarantor Subsidiaries") except for certain non-wholly owned U.S. subsidiaries and one non-U.S. subsidiary (together the "Non-Guarantor Subsidiaries"). The following table sets forth the condensed consolidating financial statements of Volume Holdings, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries as of July 3, 2001 and January 2, 2001 (in the case of the balance sheets) and for the thirteen and twenty-six week periods ended July 3, 2001 and June 27, 2000 (in the case of the statements of operations) and for the twenty-six week periods ended July 3, 2001 and June 27, 2000 (in the case of the statement of cash flows). 10

16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SEASONALITY AND QUARTERLY RESULTS The Company's sales and operating results have varied and are expected to continue to vary, from quarter to, 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 the facilities which we serve. Business at the principal types of facilities which we serve is seasonal in nature with Major League Baseball ("MLB") and minor league baseball sales concentrated in the second and third quarter, the majority of National Football League ("NFL") activity occurring in the fourth quarter and convention centers and arenas generally hosting fewer events during the summer months. Consequently, our results of operations for the first quarter are typically substantially lower than other quarters. Results of operations for any particular quarter may not be indicative of results of operations for future periods. Set forth below are comparative net sales by quarter (in thousands) for fiscal 2000 and 1999: 2000 1999 ---- ---- 1st Quarter $80,120 $66,290 2nd Quarter 143,637 116,341 3rd Quarter 188,289 147,058 4th Quarter 110,487 101,764 17 RESULTS OF OPERATIONS QUARTER ENDED JULY 3, 2001 COMPARED TO THE QUARTER ENDED JUNE 27, 2000 Net Sales - Net sales of $157.6 million for the second quarter of fiscal 2001 increased $14.0 million or 10% from $143.6 million in the prior year period. The increase was primarily due to higher net sales (approximately 10%) at the Company's MLB accounts and is mainly attributable to the timing of games with a higher number of games occurring in the 2nd quarter as compared to the prior year. In addition, net sales increased due to new accounts (approximately 6%) partially offset by a decline (approximately 2%) at convention centers which have experienced an increase in event cancellations and event downsizing which we believe is attributable to the current economic slowdown. Cost of sales - Cost of sales of $128.0 million for the quarter increased $12.3 million from $115.7 million in the prior year period due to the increase in the overall sales volume. Cost of sales as a percentage of net sales remained constant at approximately 81% for both periods. Selling, general and administrative expenses - Selling, general and administrative expenses of $12.3 million declined $0.7 million or 6% from the prior year period as a result of effective cost controls. Depreciation and amortization - Depreciation and amortization of $6.1 million for the second quarter of fiscal 2001 declined $0.6 million from the prior year period. The decrease was primarily due to a decline in amortization associated with the fair value of contract rights acquired related to the acquisitions of Volume Services in 1995 and Service America in 1998 as the result of the expiration of the initial contract term of certain service contracts. Contract related losses - Contract related losses of $3.2 million for the second quarter of fiscal 2001 primarily reflect an impairment charge of $0.9 million and a receivable reserve of $2.3 million related to two of the Company's customers which recently filed for reorganization under Chapter 11 of the Bankruptcy code. The Company is currently still operating at both locations; however, our ability to continue to operate at these locations depends on the final outcome of contract negotiations and the bankruptcy proceedings. Management is unable to predict the ultimate outcome or whether there will be additional losses related to these contracts. Contract related losses of $1.8 million in the 2000 period includes an impairment charge of approximately $1.0 million relating to a contract which the Company continues to operate and a $0.7 million charge for the write-off of a customer receivable and $0.1 million in related legal fees for a terminated account. Operating income - Operating income increased $1.7 million from the prior year period primarily due to the factors discussed above. Income taxes - Management has evaluated the available evidence about future taxable income and other possible sources of realization of deferred tax assets and based on its best current estimates believes that no taxable income or benefit will be realized in fiscal 2001. Interest expense - Interest expense declined $.5 million from the prior year period chiefly associated with lower interest rates on the Company's adjustable rate debt. 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. SIX MONTHS ENDED JULY 3, 2001 COMPARED TO THE SIX MONTHS ENDED JUNE 27, 2000 Net Sales - Net sales of $240.8 million for the first half of fiscal 2001 increased $17.0 million or 8% from $223.8 million in the prior year period. The increase was primarily due to the aforementioned increase at MLB facilities 18 (approximately 8%) and new accounts (approximately 6%) partially offset by a decline in sales (approximately 4%) at accounts hosting NFL games. Facilities that the Company services had ten NFL games, six post-season playoff games and four 1999 regular season games in the first quarter of fiscal 2000, as compared to two NFL playoff games in the first quarter of fiscal 2001. In addition, net sales have declined (approximately 2%) at the Company's convention centers, as previously discussed. Cost of sales - Cost of sales of $198.9 million for the first half of fiscal 2001 increased $18.9 million from $180.0 million in the prior year period. Cost of sales as a percentage of net sales increased 2% from the prior year. The primary component of the increase was commission costs associated with the increase in sales volume at MLB facilities that have higher commission structures. Selling, general and administrative expenses - Selling, general and administrative expenses were $22.6 million for both periods. As a percentage of net sales, selling, general and administrative expenses declined approximately 1% as a result of effective cost controls. Depreciation and amortization - Depreciation and amortization of $12.1 million for the first half of fiscal 2001 declined $1.1 million from the prior year period. The decrease was primarily due to a decline in amortization associated with the fair value of contract rights acquired related to the acquisitions of Volume Services in 1995 and Service America in 1998 as the result of the expiration of the initial contract term of certain service contracts. Transaction related expenses - Non-recurring strategic corporate costs of $0.8 million were incurred in the first half of fiscal 2000. Contract related losses - Contract related losses of $3.2 million in first half of fiscal 2001 primarily reflect an impairment charge of $0.9 million and a receivable reserve of $2.3 million related to two of the Company's customers which recently filed for reorganization under Chapter 11 of the Bankruptcy code. The Company is currently still operating at both locations; however, our ability to continue to operate at these locations depends on the final outcome of contract negotiations and the bankruptcy proceedings. Management is unable to predict the ultimate outcome or whether there will be additional losses related to these contacts. Contract related losses of $2.0 million in the prior year period includes an impairment charge of approximately $1.0 million relating to a contract 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 $1.2 million from the prior year period primarily due to the factors discussed above. Income taxes - As stated above, management has evaluated the available evidence about future taxable income and other possible sources of realization of deferred tax assets and based on its best current estimates believes that no taxable income or benefit will be realized in fiscal 2001. Interest expense - Interest expense declined $.6 million from the prior year period chiefly associated with lower interest rates on the Company's adjustable rate debt. 19 LIQUIDITY AND CAPITAL RESOURCES For the first half of fiscal 2001, net cash provided by operating activities was $25.0 million compared to $20.0 million in the prior year period. The $5.0 million increase was primarily due to a decrease in working capital chiefly attributable to higher accrued commissions as a result of the increase in the sales volume. Net cash used in investing activities was $13.4 million in the first half of fiscal 2001 compared to $8.6 million in the prior year period. The increase in cash used in investing activities primarily reflects a higher level of investment in contract rights and property and equipment associated with the renewal of existing service contracts and new business commitments during the first half of fiscal 2001 versus the prior year period. Net cash used in financing activities was $1.7 million in the first half of fiscal 2001 as compared to $8.9 million in the prior year period. The $7.2 million decrease primarily reflects the repayment of $3.5 million borrowed under the Company's revolving credit facility as compared to the $9.5 million repaid in the prior year period. FUTURE LIQUIDITY AND CAPITAL RESOURCES We believe that cash flow from operating activities, together with borrowings available under the revolving credit facility, will be sufficient to fund our currently anticipated capital investment requirements, interest and principal payment obligations and working capital requirements. We anticipate total capital investments of $32.5 million in fiscal 2001. At July 3, 2001, $53.7 million of the Company's revolving credit facility was available to be borrowed. At that date, there were $2.5 million in outstanding revolving credit borrowings and $18.8 million of outstanding, undrawn letters of credit reducing availability. NEW ACCOUNTING STANDARDS - In 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivatives Instruments and Hedging Activities", as amended by SFAS No. 137 and SFAS No. 138. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133, as amended, became effective for the Company on January 3, 2001 and the adoption of this statement, as amended, had an insignificant impact on the Company's financial position. In July 2001, the FASB issued SFAS No. 141 ("SFAS 141") "Business Combinations" which requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company is currently assessing but has not yet determined the impact of SFAS 141 on its financial positions and results of operations. In July 2001, the FASB issued SFAS No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective for the Company January 2, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS 142 also requires that the company complete a transitional goodwill impairment test six months from the date of adoption and then annually thereafter. The Company is currently assessing but has not yet determined the impact of SFAS 142 on its financial position and results of operations. 20 FORWARD LOOKING AND CAUTIONARY STATEMENTS Except for the historical information and discussions contained herein, statements contained in this form 10-Q may constitute "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including, among other things: o our high degree of leverage and significant debt service obligations; o our history of net losses; o the level of attendance at events held at the facilities at which we provide our services and the level of spending on the services that we provide at such events; o the risk of labor stoppages affecting sports teams at whose facilities we provide our services; o the risk of sports facilities at which we provide services losing their sports team tenants; o our ability to retain existing clients or obtain new clients; o the highly competitive nature of the recreational food service industry; o any future changes in management; o general risks associated with the food industry; and o future changes in government regulation. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. As of July 3, 2001, the interest rate cap and swap agreements that the Company had been party to have matured. The Company does not expect to enter into any similar agreements. Interest Rate Risk - The Company's financial instruments with market risk exposure consist of its term loans and revolving credit facility borrowings. A change in interest rates of one percent on the outstanding borrowings as of July 3, 2001 would cause a change in annual interest expense of approximately $1.1 million. The Company's Senior Subordinated Notes are fixed interest rate debt obligations. PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: None (b) No reports on Form 8-K have been filed during the quarter for which this report is filed. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 15, 2001. VOLUME SERVICES AMERICA, INC. By: /s/ Kenneth R. Frick -------------------------------------------- Name: Kenneth R. Frick Title: Executive Vice President and Chief Financial Officer 21

VOLUME SERVICES AMERICA INC 10-Q