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.

VOLUME SERVICES AMERICA, INC. INDEX ~~Part~~PART I ~~Financial~~FINANCIAL ~~Information~~INFORMATION..........................................................................................2 ---------------------------- Item 1. Financial Statements ~~(unaudited)-- Volume Services America Holdings, Inc~~. ~~and Subsidiaries~~...................~~2 Consolidated Balance Sheets as of October 3, 2000 and December 28, 1999~~......................................2 Consolidated Statements of Operations and Comprehensive Income (Loss) for the Fourteen and Forty Week Period Ended October 3, 2000 and for the Thirteen and Thirty-Nine Week Period Ended September 28, 1999...............................~~.................4~~2 ~~Consolidated~~------- ~~Statement~~--------------------- ofItem ~~Stockholders~~2. Management's ~~Deficiency~~Discussion ~~for~~and ~~the~~Analysis ~~Period December 29, 1999 to October 3, 2000...........................................................................................5 Consolidated Statements~~ of ~~Cash~~Financial ~~Flows~~Condition ~~for the Forty Week Period Ended October 3, 2000~~ and ~~for~~Results ~~the~~of ~~Thirty-Nine Week Period Ended September 28, 1999~~Operations........................~~.........................6~~17 ~~Notes~~--------------------------------------------------------------------------------------------- toItem ~~Consolidated Financial Statements for the Forty Week Period Ended October~~ 3,. ~~2000~~Quantitative and ~~for~~Qualitative ~~the~~Disclosures ~~Thirty-Nine~~about ~~Week~~Market ~~Period Ended September 28, 1999~~Risk.................................................8..21 ~~Part~~------------------------------------------------------------------- PART II ~~Other~~OTHER ~~Information~~INFORMATION...........................................................................................~~22 Item 1~~.21 ~~Legal~~------------------------- ~~Proceedings.........................................................................................22~~ Item 6. Exhibits and Reports on Form 8-K.............................................................................~~.22~~21 -----------------------------------------

1 PART I FINANCIAL INFORMATION

VOLUME SERVICES AMERICA HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) ~~OCTOBER~~JULY 3, ~~2000~~2001 AND ~~DECEMBER~~JANUARY 282, ~~1999~~2001 (IN THOUSANDS, EXCEPT PER SHARE DATA) --------------------------------------------------------------------------------------------------------------------------- ~~OCTOBER~~JULY 3, ~~DECEMBER~~JANUARY 282, ASSETS ~~2000~~2001 ~~1999~~2001 ----------------- ----------------- CURRENT ASSETS: Cash and cash equivalents $ 2824,~~669~~607 $ 1214,~~281~~726 Accounts receivable, less allowance for doubtful accounts of $~~878~~916 and $~~1,348~~876 at ~~October~~July 3, ~~2000~~2001 and ~~December~~January 282, ~~1999~~2001, respectively 2018,~~911~~771 1619,~~935~~386 Merchandise inventories 1416,~~221~~029 1011,~~947~~524 Prepaid expenses and other 32,~~657~~470 62,~~870~~524 Deferred tax asset 32,~~756~~064 32,~~756~~064 -------------- -------------- Total current assets 7163,~~214~~941 50,~~789~~224 -------------- -------------- PROPERTY AND EQUIPMENT: Leasehold improvements 4647,~~848~~131 4447,~~518~~036 Merchandising equipment 4345,~~673~~197 43,~~261~~746 Vehicles and other equipment 7,~~562~~808 67,~~953~~473 Construction in process ~~376~~1,158 ~~474~~203 -------------- --------------- Total 98101,~~459~~294 9598,~~206~~458 Less accumulated depreciation and amortization (3440,~~017~~394) (2535,~~805~~770) -------------- -------------- Property and equipment, net 6460,~~442~~900 6962,~~401~~688 -------------- --------------- OTHER ASSETS: Contract rights, net 7274,~~127~~866 7370,~~808~~793 Cost in excess of net assets acquired, net 4847,~~671~~343 5048,~~000~~228 Deferred financing costs, net 109,~~305~~232 119,~~459~~948 Trademarks, net 17,~~907~~392 1817,~~422~~735 Other 5,~~737~~024 46,~~742~~080 -------------- -------------- Total other assets ~~154~~153,~~747~~857 ~~158~~152,~~431~~784 -------------- -------------- TOTAL ASSETS $ ~~290~~278,~~403~~698 $ ~~278~~265,~~621~~696 ============== ==============

VOLUME SERVICES AMERICA HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) ~~OCTOBER~~JULY 3, ~~2000~~2001 AND ~~DECEMBER~~JANUARY 282, ~~1999~~2001 (INIn ~~THOUSANDS~~Thousands, ~~EXCEPT~~Except ~~PER~~Per ~~SHARE~~Share ~~DATA~~Data) --------------------------------------------------------------------------------------------------------------------------~~----------~~ ~~OCTOBER~~July 3, ~~DECEMBER~~January 282, LIABILITIES AND STOCKHOLDERS' DEFICIENCY ~~2000~~2001 ~~1999~~2001 ----------------- ----------------- CURRENT LIABILITIES: Short-term note payable $ 2,500 $ 1,000 Current maturities of long-term debt $ 1,150 $ 1,150 Current maturities of capital lease obligation ~~220~~306 ~~206~~225 Accounts payable 2221,~~118~~719 1714,~~116~~838 Accrued salaries and vacations 139,~~105~~167 8,~~050~~707 Liability for ~~self-insured~~insurance ~~claims~~ 2,~~340~~380 2,~~186~~522 Accrued taxes, including income taxes 53,~~365~~579 2,~~706~~536 Accrued commissions and royalties 2124,~~812~~165 1012,~~258~~332 Accrued interest 13,~~073~~953 34,~~873~~005 Other 58,~~245~~625 43,~~304~~164 --------~~-------~~ --------~~-------~~ Total current liabilities 7277,~~428~~544 4950,~~849~~479 ~~--------------- ---------------~~ LONG TERM LIABILITIES: Long -term debt ~~211~~210,~~838~~975 ~~222~~216,~~200~~550 Capital lease obligation ~~249~~- ~~416~~191 Deferred income ~~tax~~taxes 52,~~198~~242 52,~~091~~242 Liability for ~~self-insured~~insurance ~~claims~~ 1,~~786~~804 1,~~370~~608 Other liabilities 1,090 21,~~081~~135 --------~~-------~~ --------~~-------~~ Total long term liabilities ~~220~~216,~~161~~111 ~~231~~221,~~158~~726 --------~~-------~~ --------~~-------~~ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIENCY: Common stock, $0.01 par value: ~~Authorized~~ - authorized: 1,000 shares; issued: 526 ~~at October 3, 2000 and December 28, 1999~~shares; outstanding: 332 atshares ~~October 3, 2000 and December 28, 1999~~ - - Additional paid-in capital 66,~~474~~861 66,~~474~~754 Accumulated deficit (1730,~~854~~939) (1822,~~243~~462) Accumulated other comprehensive loss (~~297~~305) (~~198~~262) Treasury stock - at cost (194 shares ~~at October 3, 2000 and December 28, 1999~~) (49,500) (49,500) ~~Other~~Loans to related parties (1,~~009~~074) (~~919~~1,039) --------~~-------~~ --------~~-------~~ Total stockholders' deficiency (214,~~186~~957) (26,~~386~~509) --------~~-------~~ --------~~-------~~ TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ ~~290~~278,~~403~~698 $ ~~278~~265,~~621~~696 ========~~=======~~ ========~~=======~~ See notes to consolidated financial statements.

VOLUME SERVICES AMERICA HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED) ~~FOURTEEN~~THIRTEEN AND ~~FORTY~~TWENTY-SIX WEEK PERIODS ENDED ~~OCTOBER~~JULY 3, ~~2000~~2001 AND ~~THIRTEEN~~JUNE ~~AND THIRTY-NINE WEEK PERIODS ENDED SEPTEMBER 28~~27, ~~1999~~2000 (INIn ~~THOUSANDS~~Thousands) ------------------------------------------------------------------------------------------------------------------------------------ ~~Fourteen~~ Thirteen ~~Forty Thirty-nine~~ Weeks ~~Weeks~~Ended ~~Weeks~~Twenty-six Weeks Ended ~~Ended Ended Ended~~ ------------------------------------------------------------------~~-----------~~ ~~October~~July 3, ~~September~~June 2827, ~~October~~July 3, ~~September~~June 2827, 2001 2000 ~~1999~~2001 2000 ~~1999~~ --------------~~---~~ ----------------- ---------------- ---------------~~----~~ Net sales $ ~~188~~157,~~289~~646 $ ~~147~~143,~~058~~637 $ ~~412~~240,~~046~~840 $ ~~329~~223,~~689~~757 Cost of sales ~~151~~127,~~810~~972 115,~~033~~733 ~~331~~198,~~786~~944 ~~259~~179,~~553~~976 Selling, general, and administrative 1412,~~235~~281 13,~~244~~037 3622,~~849~~603 3322,~~141~~614 Depreciation and amortization 6,~~791~~077 6,~~721~~686 1912,~~966~~085 1913,~~886~~175 Transaction related expenses 9- ~~328~~12 ~~791~~- ~~1,555~~782 Contract related losses ~~510~~3,199 -1,809 3,199 2,~~524~~014 - ------------ ------------- -------------- ------------- Operating ~~profit~~income 148,~~934~~117 116,~~732~~360 204,~~130~~009 155,~~554~~196 Interest expense 6,~~773~~006 6,~~215~~551 1912,~~926~~551 1613,~~770~~153 Other income, net (~~135~~44) (53109) (~~292~~65) (~~268~~157) ------------- ------------- -------------- ------------- ~~Profit~~Income (loss) before income taxes 2,155 (82) (8,~~296~~477) ~~5,570 496~~ (~~948~~7,800) ~~extraordinary item and cumulative effect of change in accounting principle~~ Income tax ~~provision (~~benefit) ~~2,112~~- (~~187~~2,129) ~~107~~- (~~206~~2,005) ----------- --~~---------~~ ---------- ---~~---------~~ ~~Profit (loss) before extraordinary item and cumulative effect of change in accounting principle 6,184 5,757 389 (742) Extraordinary loss on debt~~ - - - ~~873 extinguishment, net of taxes Cumulative effect of change in accounting principle, net of taxes~~ - - - ~~256~~ --------~~---~~ ----------- --~~--------~~ ~~-----------~~ Net ~~profit~~income (loss) 62,~~184~~155 52,~~757~~047 ~~389~~(8,477) (15,~~871~~795) Other comprehensive ~~income~~gain (loss) - foreign currency translation adjustment 149 (5664) 24 (9943) (~~126~~43) ~~adjustment~~ ------------- ------------- -------------- ------------- Comprehensive income (loss) $ 62,~~128~~304 $ 51,~~781~~983 $ ~~290~~(8,520) $ (15,~~997~~838) ============= ============= ============== ============= See notes to consolidated financial statements.

VOLUME SERVICES AMERICA HOLDINGS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY (UNAUDITED) FOR THE PERIOD ~~DECEMBER~~JANUARY 293, ~~1999~~2001 TO ~~OCTOBER~~JULY 3, ~~2000~~2001 (IN THOUSANDS, EXCEPT PER SHARE DATA) ~~--------------------------------------------------------------------------------~~ ACCUMULATED ADDITIONAL OTHER LOANS TO COMMON COMMON PAID-IN ~~TREASURY~~ ACCUMULATED COMPREHENSIVE TREASURY RELATED SHARES STOCK CAPITAL ~~STOCK~~ DEFICIT LOSS ~~OTHER~~STOCK PARTIES TOTAL BALANCE, ~~DECEMBER~~JANUARY 282, ~~1999~~2001 332 $ - $ 66,~~474~~754 $ (4922,~~500~~462) $ (~~18,243~~262) $ (~~198~~49,500) $ (~~919~~1,039) $ (26,~~386~~509) Noncash compensation 107 107 Loan to ~~investors~~related parties - - - - - - (9035) (9035) Foreign currency translation - - - - - (9943) - - (9943) Net ~~profit~~loss - - - (8,477) - ~~389~~ - - ~~389~~(8,477) ---- ---- -------- ---------- ----- ---- ------- --------- --------- BALANCE, ~~OCTOBER~~JULY 3, ~~2000~~2001 332 $ - $ 66,~~474~~861 $ (4930,~~500~~939) $ (~~17,854~~305) $ (~~297~~49,500) $ (1,~~009~~074) $ (214,~~186~~957) ==== ==== ======== ========== ===== ===== ====~~===~~ ========= ========= See notes to consolidated financial statements

VOLUME SERVICES AMERICA HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) ~~FORTY~~TWENTY-SIX WEEK ~~PERIOD~~PERIODS ENDED ~~OCTOBER~~JULY 3, ~~2000~~2001 AND ~~THIRTY-NINE~~JUNE ~~WEEK PERIOD ENDED SEPTEMBER 28~~27, ~~1999~~2000 (IN THOUSANDS) -------------------------------------------------------------------------------------------------------------------~~---~~ ~~Forty Thirty~~TWENTY-~~nine~~SIX ~~Weeks~~WEEKS ~~ended~~ENDED ~~Weeks ended~~ ---------------------------------------~~---~~ ~~October~~JULY 3, ~~September~~JUNE 2827, 2001 2000 ~~1999~~ ---------------- ----------------~~---~~ CASH FLOWS FROM OPERATING ACTIVITIES: Net ~~profit (~~loss) $ ~~389~~(8,477) $ (15,~~871~~795) Adjustments to reconcile net ~~profit (~~loss) to net cash provided by operating activities: ~~Extraordinary item - 873 Cumulative effect of change in accounting principle - 256~~ Depreciation and amortization 1912,~~966~~085 1913,~~886~~175 Amortization of deferred financing costs ~~1,154~~716 ~~844~~796 Contract related losses 23,~~220~~199 -1,709 Noncash compensation 107 Deferred tax change ~~107~~- (~~476~~2,005) (Gain) loss on disposition of assets (611) ~~(15)~~7 Other (9943) (~~126~~43) Changes in assets and liabilities: Decrease (increase) in assets: Accounts and notes receivable ~~(4,743)~~382 (2,~~342~~818) Merchandise inventories (34,~~274~~505) (3,~~481~~451) Prepaid expenses 54 1,~~274~~459 ~~(2,469)~~ Other assets (1,~~452~~097) (~~959~~751) Increase (decrease) in liabilities: Accounts payable 4,~~248~~349 ~~648~~3,686 Accrued salaries and vacations 5460 3,~~055~~293 ~~826~~ Liabilities for self-insurance ~~570~~54 ~~(1,393)~~329 Other liabilities 1117,~~363~~741 910,~~427~~450 --------- -------- Net cash provided by operating activities 3625,~~772~~014 1920,~~628~~041 --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: ~~Payment of acquisition costs (175)~~ Purchase of property and equipment (54,~~311~~361) (73,~~690~~681) Proceeds from sale of property and equipment ~~603~~49 Purchase of contract rights (59,~~825~~133) (134,~~371~~896) --------- --------- Net cash used in investing activities (1013,~~533~~445) (218,~~236~~577) --------- ---------

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

CONSOLIDATING CONDENSED BALANCE SHEET ~~OCTOBER~~JULY 3, ~~2000~~2001 (IN THOUSANDS) COMBINED COMBINED VOLUME GUARANTOR NON-GUARANTOR ASSETS HOLDINGS SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED Current Assets: Cash and cash equivalents $ 2724,~~474~~396 $ ~~1,195~~211 $ 2824,~~669~~607 Accounts receivable 1917,~~490~~080 1,~~421~~691 2018,~~911~~771 Other current assets 2927,~~201~~040 1,~~523~~010 $ (97,~~090~~487) 2120,~~634~~563 --------- -------- ------- -- ------ -------- Total current assets 7668,~~165~~516 42,~~139~~912 (97,~~090~~487) 7163,~~214~~941 Property and equipment 6057,~~717~~611 3,~~725~~289 - 6460,~~442~~900 Contract rights, net 7073,~~452~~833 1,~~675~~033 - 7274,~~127~~866 Cost in excess of net assets acquired, net 4847,~~671~~343 - - 4847,~~671~~343 Investment in subsidiaries $ (214,~~186~~957) - - 214,~~186~~957 - Other assets - 3331,~~845~~641 ~~104~~7 - 3331,~~949~~648 --------- --------- ------- --------- ---------- TOTAL ASSETS $ (214,~~186~~957) $ ~~289~~278,~~850~~944 $ 97,~~643~~241 $ (67,~~904)~~470 $ ~~290~~278,~~403~~698 ========= ========= ======= ========= ========== LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities: Intercompany liabilities $ 97,~~090~~487 $ (97,~~090~~487) Other current liabilities $ 6975,~~478~~699 21,~~950~~845 - $ 7277,~~428~~544 --------- ------- --------- --------- Total current liabilities 6975,~~478~~699 129,~~040~~332 (97,~~090~~487) 7277,~~428~~544 Long-term debt ~~211~~210,~~838~~975 - - ~~211~~210,~~838~~975 Other liabilities 85,~~323~~136 - - 85,~~323~~136 --------- ------- --------- --------- Total liabilities ~~289~~291,~~639~~810 129,~~040~~332 (97,~~090~~487) ~~292~~293,~~589~~655 --------- ------- --------- --------- Stockholders' deficiency: Common stock $ - - - - - Additional paid-in capital 66,~~474~~861 66,~~474~~861 - (66,~~474~~861) 66,~~474~~861 Accumulated deficit (1730,~~854~~939) (1529,~~754~~153) (21,~~100~~786) 1730,~~854~~939 (1730,~~854~~939) ~~Other~~Treasury stock and other (50,~~806~~879) (50,~~509~~574) (~~297~~305) 50,~~806~~879 (50,~~806~~879) --------- --------- -------- -------- ---------- Total stockholders' deficiency (214,~~186~~957) ~~211~~(12,866) (2,~~397~~091) 214,~~186~~957 (214,~~186~~957) --------- --------- -------- -------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ (214,~~186~~957) $ ~~289~~278,~~850~~944 $ 97,~~643~~241 $ (67,~~904)~~470 $ ~~290~~278,~~403~~698 ========= ========= ======== ========= ==========

CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (THIRTEEN ~~LOSS) FOURTEEN~~ WEEK PERIOD ENDED ~~OCTOBER~~JULY 3, ~~2000~~2001 (IN THOUSANDS) COMBINED COMBINED VOLUME GUARANTOR NON-GUARANTOR HOLDINGS SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED Net sales $~~180~~ 151,~~252~~924 $8 5,~~037~~722 $ ~~188~~157,~~289~~646 Cost of sales ~~145~~123,~~037~~122 64,~~773~~850 ~~151~~127,~~810~~972 Selling, general, and administrative 1312,~~337~~302 ~~898~~(21) 1412,~~235~~281 Depreciation and amortization 6,~~126~~047 ~~665~~30 6,~~791~~077 ~~Transaction related expenses 9 - 9~~ Contract related losses - ~~510~~3,199 - - ~~510~~3,199 -------- --------- ------- -------- --------- Operating ~~profit~~income ~~(loss) 15~~7,~~233~~254 ~~(299)~~863 148,~~934~~117 Interest expense 65,~~773~~968 -38 6,~~773~~006 Other income, net - (~~129~~35) (69) - (~~135~~44) -------- --------- ------- -------- --------- ~~Profit~~Income ~~(loss)~~ before income taxes 81,~~589~~321 ~~(293)~~834 ~~8,296 Income tax provision -~~ 2,~~112~~155 ~~- - 2,112 ------ -------- ------- ------- --------- Profit (loss) before extraordinary item 6,477 (293) 6,184 Extraordinary loss -~~ Equity in earnings of subsidiaries $6 2,~~184~~155 - - $ (62,~~184~~155) - -------- --------- ------- -------- --------- Net ~~profit~~income ~~(loss) 6~~2,~~184~~155 61,~~477~~321 ~~(293)~~834 (62,~~184~~155) 62,~~184~~155 Other comprehensive ~~loss~~gain - foreign currency translation adjustment - ~~(56)~~- 149 - ~~(56)~~149 -------- --------- ------- -------- --------- Comprehensive income ~~(loss)~~ $6 2,~~184~~155 $ 61,~~477~~321 $ ~~(349)~~983 $ (62,~~184~~155) $ 62,~~128~~304 ======== ========= ======= ======== =========

~~Consolidating~~CONSOLIDATING ~~Condensed~~CONDENSED ~~Statement~~STATEMENT ofOF ~~Operations~~OPERATIONS ~~and~~AND ~~Comprehensive~~COMPREHENSIVE ~~Income~~LOSS ~~(Loss)~~TWENTY-SIX ~~Forty~~WEEK ~~Week~~PERIOD ~~Period~~ENDED ~~Ended~~JULY ~~October~~ 3, ~~2000~~2001 (inIN ~~thousands~~THOUSANDS) ~~Combined~~COMBINED ~~Combined~~COMBINED ~~Volume~~VOLUME ~~Guarantor~~GUARANTOR ~~Non~~NON-~~guarantor~~GUARANTOR ~~Holdings~~HOLDINGS ~~Subsidiaries~~SUBSIDIARIES ~~Subsidiaries~~SUBSIDIARIES ~~Eliminations~~ELIMINATIONS ~~Consolidated~~CONSOLIDATED Net sales $~~390~~228,~~367~~597 $21 12,~~679~~243 $~~412~~240,~~046~~840 Cost of sales ~~313~~187,~~692~~983 1810,~~094~~961 ~~331~~198,~~786~~944 Selling, general, and administrative 3421,~~396~~831 ~~2,453~~772 3622,~~849~~603 Depreciation and amortization 1811,~~077~~698 ~~1,889~~387 1912,~~966~~085 ~~Transaction related expenses 791 - 791~~ Contract related losses - 23,~~524~~199 - - 23,~~524~~199 ------- --------- -------- ------- -------- Operating ~~profit~~income ~~(loss) 20~~3,~~887~~886 ~~(757)~~123 204,~~130~~009 Interest expense 1912,~~926~~551 - 1912,~~926~~551 Other income, net - (~~266~~46) (2619) - (~~292~~65) ------- --------- -------- ------- -------- ~~Profit~~Income (loss) before income taxes ~~1,227~~ (~~731~~8,619) ~~496~~142 ~~Income tax provision - 107 - - 107 ------ --------- -------- ------- -------- Profit~~ (~~loss) before extraordinary item 1~~8,~~120 (731~~477) ~~389 Extraordinary loss -~~ Equity in ~~earnings~~loss of subsidiaries $(8,477) ~~389~~ - - $ ~~(389)~~8,477 - ------- -------- -------- -------- -------- Net ~~profit~~income (loss) ~~389 1~~(8,~~120~~477) (~~731~~8,619) 142 8,477 (~~389~~8,477) ~~389~~ Other comprehensive loss - foreign currency translation adjustment - - (9943) - (9943) ------- -------- -------- -------- -------- Comprehensive ~~income~~gain (loss) $(8,477) ~~389~~ $ 1(8,~~120~~619) $ ~~(830)~~99 $ ~~(389)~~8,477 $ ~~290~~(8,520) ======= ======== ======== ======== ========

CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS ~~FORTY~~TWENTY-SIX WEEK PERIOD ENDED ~~OCTOBER~~JULY 3, ~~2000~~2001 (IN THOUSANDS) COMBINED COMBINED VOLUME GUARANTOR NON-GUARANTOR HOLDINGS SUBSIDIARIES SUBSIDIARIES CONSOLIDATED Cash Flows from Operating Activities $ - $ 3525,~~712~~348 $~~1,060~~ (334) $ 3625,~~772~~014 ---- -------- ------- --------- Cash Flows from Investing Activities: Purchase of property and equipment - (4,~~849~~338) (~~462~~23) (54,~~311~~361) Proceeds from sale of property and equipment - ~~603~~49 - ~~603~~49 Purchase of contract rights - (59,~~025~~133) ~~(800)~~- (59,~~825~~133) ---- -------- ------- --------- Net cash used in investing activities - (913,~~271~~422) (~~1,262~~23) (1013,~~533~~445) ---- -------- ------- --------- Cash Flows from Financing Activities: Principal payments on long-term debt - (~~862~~575) - (~~862~~575) Net ~~borrowings~~repayments - revolving loans - (93,500) - (93,500) Principal payments on capital lease obligations - (~~153~~110) - (~~153~~110) Increase ~~(decrease)~~ in bank overdrafts - 2,~~246~~532 (1- 2,~~492)~~532 ~~754~~Increase ~~Decrease~~ in ~~other~~loans ~~equity~~to related parties - (9035) - (9035) ---- -------- ------- --------- Net cash used in financing activities - (81,~~359~~688) - (1,~~492~~688) ~~(9,851)~~ ---- -------- ------- --------- Increase (decrease) in cash - 1810,~~082~~238 (~~1,694~~357) 169,~~388~~881 Cash and cash equivalents - beginning of period - 914,~~392~~158 ~~2,889~~568 1214,~~281~~726 ---- -------- ------- --------- Cash and cash equivalents - end of period $ - $ 2724,~~474~~396 $~~1,195~~ 211 $ 2824,~~669~~607 ==== ========= ======= =========

CONSOLIDATING CONDENSED BALANCE SHEET ~~DECEMBER~~JANUARY 282, ~~1999~~2001 (IN THOUSANDS) COMBINED COMBINED ~~VOLUME~~PARENT GUARANTOR NON-GUARANTOR ASSETS ~~HOLDINGS~~COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED Current Assets: Cash and cash equivalents $ 914,~~392~~158 $ ~~2,889~~568 $ 1214,~~281~~726 Accounts receivable 1517,~~619~~272 12,~~316~~114 1619,~~935~~386 Other current assets 2923,~~775~~791 ~~869~~990 $ (98,~~071~~669) 2116,~~573~~112 ---------- -------- --------- ---------- Total current assets 5455,~~786~~221 53,~~074~~672 (98,~~071~~669) 50,~~789~~224 Property and equipment 6559,~~343~~045 43,~~058~~643 ~~- 69~~62,~~401~~688 Contract rights, net 7169,~~814~~506 1,~~994~~287 ~~- 73~~70,~~808~~793 Cost in excess of net assets acquired, net 5048,~~000~~228 ~~- - 50~~48,~~000~~228 Investment in subsidiaries $ (26,~~386~~509) ~~- - 2~~6,~~386~~509 Other assets ~~- 34~~33,~~616~~738 725 ~~- 34~~33,~~623~~763 --------- ---------- -------- --------- ---------- TOTAL ASSETS $ (26,~~386~~509) $ ~~276~~265,~~559~~738 $11 8,~~133~~627 $ (62,~~685~~160) $ ~~278~~265,~~621~~696 ========= ========= ======== ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current Liabilities: Intercompany liabilities $ 98,~~071~~669 $ (98,~~071~~669) Other current liabilities $ 4648,~~220~~331 32,~~629~~148 $ 4950,~~849~~479 ---------- -------- --------- ---------- Total current liabilities 4648,~~220~~331 1210,~~700~~817 (98,~~071~~669) 4950,~~849~~479 Long-term debt ~~222~~216,~~200~~550 ~~- - 222~~216,~~200~~550 Other liabilities 85,~~958~~176 ~~- - 8~~5,~~958~~176 ---------- -------- --------- ---------- Total liabilities ~~277~~270,~~378~~057 1210,~~700~~817 (98,~~071~~669) ~~281~~272,~~007~~205 ---------- -------- --------- ---------- Stockholders' Deficiency: Common stock Additional paid-in capital $ 66,~~474~~754 1666,~~974~~754 - (1666,~~974~~754) 66,~~474~~754 Accumulated deficit (1822,~~243~~462) (1620,~~874~~534) (1,~~369~~928) 1822,~~243~~462 (1822,~~243~~462) ~~Other~~Treasury stock and other (50,~~617~~801) (~~919~~50,539) (~~198~~262) 150,~~117~~801 (50,~~617~~801) --------- ---------- -------- --------- ---------- Total stockholders' deficiency (26,~~386~~509) (~~819~~4,319) (12,~~567~~190) 26,~~386~~509 (26,~~386~~509) --------- ---------- -------- --------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ (26,~~386~~509) $ ~~276~~265,~~559~~738 $11 8,~~133~~627 $ (62,~~685~~160) $ ~~278~~265,~~621~~696 ========= ========== ======== ========= ==========

CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME ( LOSS) THIRTEEN WEEK PERIOD ENDED ~~SEPTEMBER~~JUNE 2827, ~~1999~~2000 (IN THOUSANDS) COMBINED COMBINED VOLUME GUARANTOR NON-GUARANTOR HOLDINGS SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED Net sales $~~139~~ 136,~~827~~429 $ 7,~~231~~208 $ ~~147~~143,~~058~~637 Cost of sales 109,~~219~~836 5,~~814~~897 115,~~033~~733 Selling, general, and administrative 12,~~320~~107 ~~924~~930 13,~~244~~037 Depreciation and amortization 6,~~191~~064 ~~530~~622 6,~~721~~686 Transaction related expenses ~~328~~12 - ~~328~~12 Contract related losses - 1,809 - - 1,809 -------- --------- -------- -------- ---------- Operating ~~profit~~income (loss) 116,~~769~~601 (37241) 116,~~732~~360 Interest expense 6,~~172~~551 43- 6,~~215~~551 Other income, net - (5297) (112) - (53109) -------- --------- -------- -------- ---------- ~~Profit~~Income (loss) before income taxes ~~5,649~~147 (79229) ~~5,570~~(82) Income tax benefit ~~(187)~~ - (~~187~~2,129) -~~-------~~ -~~--------~~ ~~-------- -------- ---------- Loss before extraordinary item and cumulative effect of change in accounting principle 5,836~~ (792,129) ~~5,757 Extraordinary item, net of taxes - Cumulative effect of change in accounting principle, net of taxes -~~ Equity in earnings of subsidiaries $ 52,~~757~~047 - - $ (52,~~757~~047) - --------- --------- -------- --------- --------- Net ~~profit~~income (loss) 52,~~757~~047 52,~~836~~276 (79229) (52,~~757~~047) 52,~~757~~047 Other comprehensive ~~income~~loss - foreign currency translation adjustment - - 24(64) - 24(64) --------- --------- -------- --------- --------- Comprehensive income (loss) $ 52,~~757~~047 $ 52,~~836~~276 $ (55293) $ (52,~~757~~047) $ 51,~~781~~983 ========= ========= ======== ========= =========

CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS ~~THIRTY~~TWENTY-~~NINE~~SIX WEEK PERIOD ENDED ~~SEPTEMBER~~JUNE 2827, ~~1999~~2000 (IN THOUSANDS) COMBINED COMBINED VOLUME GUARANTOR NON-GUARANTOR HOLDINGS SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED Net sales $~~306~~ 210,~~304~~115 $23 13,~~385~~642 $~~329~~223,~~689~~757 Cost of sales ~~240~~168,~~635~~654 1811,~~918~~322 ~~259~~179,~~553~~976 Selling, general, and administrative 3021,~~329~~059 21,~~812~~555 3322,~~141~~614 Depreciation and amortization 1811,~~010~~951 1,~~876~~224 1913,~~886~~175 Transaction related expenses ~~1,555~~782 - 1782 Contract related losses - 2,~~555~~014 - - 2,014 ------- --------- -------- -------- --------- Operating ~~profit~~income (loss) 155,~~775~~655 (~~221~~459) 155,~~554~~196 Interest expense 1613,~~683~~153 87- 1613,~~770~~153 Other income, net - (~~257~~137) (1120) - (~~268~~157) -------- --------- -------- -------- --------- Loss before income taxes (~~651~~7,361) (~~297~~439) (~~948~~7,800) Income tax benefit ~~(206)~~ - (~~206~~2,005) -~~-------~~ -~~--------~~ ~~-------- -------- --------- Loss before extraordinary item and cumulative effect of change in accounting principle~~ (~~445~~2,005) ~~(297) (742) Extraordinary item, net of taxes 873 - 873 Cumulative effect of change in accounting principle, net of taxes 256 - 256~~ Equity in ~~earnings~~loss of subsidiaries $(15,~~871~~795) - - $ 15,~~871~~795 - -------- --------- ------- -------- --------- Net loss (15,~~871~~795) (15,~~574~~356) (~~297~~439) 15,~~871~~795 (15,~~871~~795) Other comprehensive loss - foreign currency translation adjustment - - (~~126~~43) - (~~126~~43) -------- --------- ------- -------- --------- Comprehensive loss $(15,~~871~~795) $ (15,~~574~~356) $ (~~423~~482) $ 15,~~871~~795 $ (15,~~997~~838) ======== ========= ======= ======== =========

CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS ~~THIRTY~~TWENTY-~~NINE~~SIX WEEK PERIOD ENDED ~~SEPTEMBER~~JUNE 2827, ~~1999~~2000 (IN THOUSANDS) COMBINED COMBINED VOLUME GUARANTOR NON-GUARANTOR HOLDINGS SUBSIDIARIES SUBSIDIARIES CONSOLIDATED Cash Flows from Operating Activities $ - $ 1719,~~420~~996 $ ~~2,208~~45 $ 1920,~~628~~041 ---- --------- -------- --------- Cash Flows from Investing Activities: ~~Payment of acquisition costs - (175) - (175)~~ Purchase of property and equipment - (63,~~749~~299) (~~941~~382) (73,~~690~~681) Purchase of contract rights - (124,~~710~~096) (~~661~~800) (134,~~371~~896) ---- --------- -------- --------- Net cash used in investing activities - (197,~~634~~395) (1,~~602~~182) (218,~~236~~577) ---- --------- -------- --------- Cash Flows from Financing Activities: Principal payments on long-term debt - (~~46,362~~575) - (~~46,362~~575) Net ~~borrowings~~repayments - revolving loans - ~~1,750 - 1,750 Proceeds from long-term debt - 100,000 - 100,000 Payments of financing costs -~~ (69,~~108~~500) - (69,~~108~~500) Principal payments on capital lease obligations - (~~140~~100) - (~~140~~100) Increase (decrease) in bank overdrafts - 72,~~563~~140 ~~455 8,018 Redemption of stock~~ (~~49,500~~744) ~~- (49~~1,~~500)~~396 Increase in ~~other~~loans ~~equity~~to related parties - ~~701~~(86) - ~~701~~(86) ---- --------- -------- --------- Net cash ~~provided~~used byin financing activities - 7(8,~~904~~121) ~~455~~(744) (8,~~359~~865) ---- --------- -------- --------- Increase (decrease) in cash - 54,~~690~~480 (1,~~061~~881) 62,~~751~~599 Cash and cash equivalents - beginning of period - 89,~~672~~392 ~~156~~2,889 812,~~828~~281 ---- --------- -------- --------- Cash and cash equivalents - end of period $ - $ 1413,~~362~~872 $ 1,~~217~~008 $ 1514,~~579~~880 ==== ========= ======== =========

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

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