10-Q 1 form10q-october22001.txt FOR PERIOD ENDING OCTOBER 2, 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 October 2, 2001 or ( ) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____ to _____ Commission file number: 333-79419 VOLUME SERVICES AMERICA, INC. ----------------------------- (Exact name of registrant as specified in its charter) Delaware 57-0969174 ------------------------------- ---------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 201 East Broad Street, Spartanburg, South Carolina 29306 -------------------------------------------------- ----------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (864) 598-8600 --------------------- N/A ------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (X) YES ( ) NO APPLICABLE ONLY TO CORPORATE ISSUERS: The number of shares outstanding of the registrant's Common Stock, par value $.01 per share, at November 13, 2001, was 100.

i PART I FINANCIAL INFORMATION Item 1. Financial Statements.

6 VOLUME SERVICES AMERICA HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) THIRTY-NINE WEEK PERIOD ENDED OCTOBER 2, 2001 AND FORTY WEEK PERIOD ENDED OCTOBER 3, 2000 -------------------------------------------------------------------------------- 1. GENERAL Volume Services America Holdings, Inc. ("Volume Holdings," and together with its subsidiaries, the "Company") is a holding company, the principal assets of which are the capital stock of its subsidiary, Volume Services America, Inc. ("Volume Services America"). Volume Holdings' financial information is therefore substantially the same as that of Volume Services America. Volume Services America is also a holding company, the principal assets of which are the capital stock of its subsidiaries, Volume Services, Inc. ("Volume Services") and Service America Corporation ("Service America"). The Company is owned by current and former members of management, Blackstone Capital Partners II Merchant Banking Fund, L.P. ("BCP II"), and General Electric Capital Corporation ("GE Capital"). The accompanying financial statements of Volume Holdings have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods. The results of operations for the thirty-nine week period ended October 2, 2001 are not necessarily indicative of the results to be expected for the fifty-two week fiscal year ending January 1, 2002 due to the seasonal aspects of the business. The consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the year ended January 2, 2001. 2. NEW ACCOUNTING STANDARDS In 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 137 and SFAS No. 138. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133, as amended, became effective for the Company on January 3, 2001 and the adoption of this statement, as amended, had an insignificant impact on the Company's financial position. In July 2001, the FASB issued SFAS No. 141 ("SFAS 141") "Business Combinations" which requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company is currently assessing, but has not yet determined the impact of SFAS 141 on its financial position and results of operations. In July 2001, the FASB issued SFAS No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective for the Company on January 2, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, 7 reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS 142 also requires that the company complete a transitional goodwill impairment test six months from the date of adoption and then annually thereafter. The Company is currently assessing but has not yet determined the impact of SFAS 142 on its financial position and results of operations. Goodwill amortization (pre-tax) for the thirteen and thirty-nine weeks ended October 2, 2001 was approximately $443,000 and $1.3 million, respectively. In October 2001, the FASB issued SFAS No. 144 ("SFAS 144") "Accounting for the Impairment or Disposal of Long-Lived Assets", which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. FAS 144 superseded Statement of Financial Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS 144 will be effective for the Company on January 2, 2002. The Company is currently assessing but has not yet determined the impact of adopting SFAS 144 on its financial position and results of operations. 3. CONTINGENCIES On March 15, 2001 and April 20, 2001, respectively, two of the Company's customers filed for Chapter 11 bankruptcy. The Company had approximately $1.2 million of equipment and leasehold improvements and $3.2 million of receivables and leasehold improvements, respectively, recorded at the time of the filings relating to these customers. The proceedings of the March 15, 2001 filing are substantially completed. Based on the most recent information, the Company recorded an asset impairment of approximately $900,000 of the $1.2 million of equipment and leasehold improvements in the second quarter. In addition, the Company has entered into a concession agreement with the new owner of the facility. The proceedings of the April 20, 2001 filing are in the preliminary stages; however, based on the most recent information, the Company wrote-off $2.3 million of other assets primarily representing long term receivables in the second quarter. The Company had approximately $841,000 in equipment and leasehold improvements recorded at October 2, 2001. 4. TRANSACTION RELATED EXPENSES Transaction related expenses for the forty weeks ended October 3, 2000 consist primarily of non-recurring strategic corporate costs. 5. CONTRACT RELATED LOSSES Contract related losses for the thirty-nine weeks ended October 2, 2001 consist of an impairment charge of approximately $933,000 recorded in the third quarter relating primarily to the write-down of equipment and leasehold improvements for certain contracts which the Company continues to operate. In addition, in the 2nd quarter, the Company recorded an impairment charge of $900,000 for equipment and leasehold improvements and a $2.3 million charge for the write-down of other assets, as described in Note 3. Contract related losses for the forty weeks ended October 3, 2000 represent an impairment charge of approximately $1.5 million for certain contracts that the Company continues to operate. The impairment charge is comprised of approximately $1.2 million for the write-off of property and equipment and contract rights and $269,000 of other assets. Contract related losses for the period ended October 3, 2000 also reflects the write-off of a receivable in the amount of $754,000 and $305,000 in related legal fees for a terminated service contract. 8 6. NON-GUARANTOR SUBSIDIARIES FINANCIAL STATEMENTS The Company's $100 million in 11 1/4% senior subordinated notes due 2009 are jointly and severally, guaranteed by Volume Holdings and all of the subsidiaries of Volume Service America (the "Guarantor Subsidiaries") except for certain non-wholly owned U.S. subsidiaries and one non-U.S. subsidiary (together the "Non-Guarantor Subsidiaries"). The following table sets forth the condensed consolidating financial statements of Volume Holdings, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries as of October 2, 2001 and January 2, 2001 (in the case of the balance sheets) and for the thirteen and thirty-nine week periods ended October 2, 2001 and the fourteen and forty week periods ended October 3, 2000 (in the case of the statements of operations) and for the thirty-nine week period ended October 2, 2001 and the forty week period ended October 3, 2000 (in the case of the statement of cash flows).

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations SEASONALITY AND QUARTERLY RESULTS The Company's sales and operating results have varied and are expected to continue to vary, from quarter to quarter, as a result of factors which include: o seasonal patterns within the industry; o the unpredictability in the number, timing and type of new contracts; o the timing of contract expirations and events; and o the level of attendance at the facilities which we serve. 14 Business at the principal types of facilities which we serve is seasonal in nature with Major League Baseball ("MLB") and minor league baseball sales concentrated in the second and third quarter, the majority of National Football League ("NFL") activity occurring in the fourth quarter and convention centers and arenas generally hosting fewer events during the summer months. The Company's results are typically impacted to a greater degree by the above factors than a change in the number of weeks in a reporting period as was the case in the thirteen and thirty-nine weeks ended October 2, 2001 versus the fourteen and forty weeks ended October 3, 2000. Results of operations for any particular quarter may not be indicative of results of operations for future periods. Set forth below are comparative net sales by quarter (in thousands) for fiscal 2001, through the 3rd Quarter, fiscal 2000 and 1999: 2001 2000 1999 ---- ---- ---- 1st Quarter $ 83,194 $ 80,120 $ 66,290 2nd Quarter $157,646 $143,637 $116,341 3rd Quarter $177,559 $188,289 $147,058 4th Quarter - $110,487 $101,764 RESULTS OF OPERATIONS QUARTER ENDED OCTOBER 2, 2001 COMPARED TO THE QUARTER ENDED OCTOBER 3, 2000 Net Sales - Net sales of $177.6 million for the quarter ended October 2, 2001 decreased $10.7 million (approximately 6%) from $188.3 million in the prior year period. The Company's results for the third quarter have been adversely impacted by weaker economic conditions and by the September 11, 2001 terrorist attacks. We estimate that the impact of the terrorist attacks reduced our consolidated net sales by approximately 7% for the third quarter from the level of sales we would have expected absent such conditions; however, we believe that approximately 57% of these sales are recoverable in future periods as discussed below. The Company's MLB accounts generated lower sales than prior year (approximately 5%) mainly attributable to fewer scheduled games for the third quarter of fiscal 2001 as compared to the prior year period and MLB's decision to postpone games the week of September 11, 2001. Twenty-eight games at facilities the Company serves were impacted by this postponement and will be reported in the Company's fourth quarter. Four NFL games were also postponed at Company serviced venues and were rescheduled to be played during fiscal 2002. At convention center accounts, the Company had been experiencing an increase in event cancellations and downsizing of events prior to September 11, 2001 which we believe was attributable to the economic slowdown. The events of September 11, 2001 further adversely impacted the convention center results. We estimate consolidated net sales were reduced by approximately 3%, excluding one non-recurring catering event, from the level we would have expected absent such cancellations. The decline in consolidated net sales was partially offset by the addition of fifteen new accounts (approximately 5%, net of closed accounts). Cost of sales - Cost of sales of $143.5 million for the quarter decreased $8.3 million from $151.8 million in the prior year period due to the decline in the overall sales volume. Cost of sales as a percentage of net sales remained constant at approximately 81% for both periods. 15 Selling, general and administrative expenses - Selling, general and administrative expenses of $13.2 million declined slightly as a percentage of net sales from the prior year period as a result of effective cost controls. Depreciation and amortization - Depreciation and amortization of $6.1 million for the third quarter of fiscal 2001 declined $0.7 million from the prior year quarter. The decrease was primarily due to a decline in amortization which was the result of the expiration of the initial contract term of certain service contracts. Contract related losses - Contract related losses of $0.9 million for the third quarter of fiscal 2001 and $0.5 million in the 2000 period reflect impairment charges for the write-down of equipment, leasehold improvements and location contracts for certain service contracts which the Company continues to operate. Operating income - Operating income decreased $1.1 million from the prior year period primarily due to the factors discussed above. Interest expense - Interest expense declined $1.2 million from the prior year period chiefly associated with lower interest rates on the Company's adjustable rate debt. Income taxes - Management has evaluated the available evidence about future taxable income and other possible sources of realization of deferred tax assets and based on its best current estimates believes that no taxable income or benefit will be realized in fiscal 2001. THREE QUARTERS ENDED OCTOBER 2, 2001 COMPARED TO THE THREE QUARTERS ENDED OCTOBER 3, 2000 Net Sales - Net sales of $418.4 million for the three quarters ended October 2, 2001 increased $6.4 million or 2% from $412.0 million in the prior year period. The increase was primarily due to net new accounts (approximately 3%) and an increase in MLB sales (approximately 2%). The MLB sales increase was attributable to higher attendance and per capita spending at certain facilities, but was partially offset by the postponement of twenty-eight games until the Company's fourth fiscal quarter as a result of the September 11, 2001 terrorist attacks. The increases were, in part, offset by a decline in NFL sales (approximately 2%) due primarily to eight fewer NFL games in the first quarter of fiscal 2001 as compared to the prior year period and the postponement of four NFL games until fiscal 2002 due to the terrorist attacks. Additionally, sales at the Company's convention centers have declined (approximately 2%, excluding one non-recurring catering event) due to the cancellation and downsizing of events, most notably by the business sector, which management attributes to the economic downturn and which have been further adversely impacted by the events of September 11, 2001. Cost of sales - Cost of sales of $342.5 million for the three quarters ended October 2, 2001 increased $10.7 million from $331.8 million in the prior year period. Cost of sales as a percentage of net sales increased 1% from the prior year. The primary component of the increase was commission costs associated with the increase in sales volume at MLB facilities and new accounts that have higher commission structures. Selling, general and administrative expenses - Selling, general and administrative expenses of $35.8 million decreased $1.1 million or as a percentage of net sales declined approximately .4% as a result of effective cost controls. Depreciation and amortization - Depreciation and amortization of $18.2 million for the three quarters ended October 2, 2001 declined $1.8 million from the prior year period. The decrease was primarily due to a decline in amortization 16 which was the result of the expiration of the initial contract term of certain service contracts. Transaction related expenses - Non-recurring strategic corporate costs of $0.8 million were incurred during the prior year period. Contract related losses - Contract related losses of $4.1 million for the three quarters ended October 2, 2001 reflects an impairment charge of $1.8 million for the write-off of equipment, leasehold improvements and location contracts. Additionally, the Company recorded a receivable reserve of $2.3 million related to two of the Company's customers which filed for Chapter 11 Bankruptcy. At one of the two customer locations, the Company has entered into a service contract with the new owner. The Company is currently still operating at the other location; however, our ability to continue to operate at this location depends on the final outcome of contract negotiations and the bankruptcy proceedings. The company has approximately $841,000 in equipment and leasehold improvements recorded for this location. Management is unable to predict the ultimate outcome or whether there will be additional losses related to this contract. Contract related losses of $2.5 million in the prior year period includes an impairment charge of approximately $1.5 million relating to certain contracts which the Company continues to operate and a $0.7 million charge for the write-off of a customer receivable and $0.3 million in related legal fees for a terminated service contract. Operating income - Operating income declined $2.2 million from the prior year period primarily due to the factors discussed above. Interest expense - Interest expense declined $1.8 million from the prior year period chiefly associated with lower interest rates on the Company's adjustable rate debt. Income taxes - Management has evaluated the available evidence about future taxable income and other possible sources of realization of deferred tax assets and based on its best current estimates believes that no taxable income or benefit will be realized in fiscal 2001. LIQUIDITY AND CAPITAL RESOURCES For the three quarters ended October 2, 2001, net cash provided by operating activities was $26.1 million compared to $36.8 million in the prior year period. The $10.7 million decrease from the prior year period was primarily due to an increase in working capital chiefly attributable to a $11.6 million increase in accrued commissions during the 2000 period as compared to only a $4.0 million increase in the 2001 period. The Company' working capital as of October 2, 2001 has declined approximately $3.9 million from fiscal year ended January 2, 2001 primarily due to seasonal fluctuations as a result of the number and timing of events. Net cash used in investing activities was $22.5 million in the three quarters ended October 2, 2001 compared to $10.5 million in the prior year period. The $12.0 million increase in cash used in investing activities primarily reflects a higher level of investment in contract rights and property and equipment associated with new accounts during the first three quarters of fiscal 2001 versus the prior year period. Net cash used in financing activities was $1.3 million in the three quarters ended October 2, 2001 as compared to $9.9 million in the prior year period. The $8.6 million decrease primarily reflects net repayments of $2.0 million borrowed under the Company's revolving credit facility in the current period as compared to the $9.5 million repaid in the prior year period. 17 FUTURE LIQUIDITY AND CAPITAL RESOURCES We believe that cash flow from operating activities, together with borrowings available under the revolving credit facility, will be sufficient to fund our currently anticipated capital investment requirements, interest and principal payment obligations and working capital requirements. We anticipate total capital investments of $32.5 million in fiscal 2001. At October 2, 2001, $54.5 million of the Company's revolving credit facility was available to be borrowed. At that date, there were $4.0 million in outstanding revolving credit borrowings and $16.5 million of outstanding, undrawn letters of credit reducing availability. NEW ACCOUNTING STANDARDS In 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 137 and SFAS No. 138. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133, as amended, became effective for the Company on January 3, 2001 and the adoption of this statement, as amended, had an insignificant impact on the Company's financial position. In July 2001, the FASB issued SFAS No. 141 ("SFAS 141") "Business Combinations" which requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company is currently assessing, but has not yet determined the impact of SFAS 141 on its financial positions and results of operations. In July 2001, the FASB issued SFAS No. 142 ("SFAS 142") "Goodwill and Other Intangible Assets" which is effective for the Company on January 2, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS 142 also requires that the company complete a transitional goodwill impairment test six months from the date of adoption and then annually thereafter. The Company is currently assessing but has not yet determined the impact of SFAS 142 on its financial position and results of operations. Goodwill amortization (pre-tax) for the thirteen and thirty-nine weeks ended October 2, 2001 was approximately $443,000 and $1.3 million, respectively. In October 2001, the FASB issued SFAS No. 144 ("SFAS 144") "Accounting for the Impairment or Disposal of Long-Lived Assets" which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 superseded Statement of Financial Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS 144 will be effective for the Company on January 2, 2002. The Company is currently assessing but has not yet determined the impact of adopting SFAS 144 on its financial position and results of operations. 18 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. As of October 2, 2001, the interest rate cap and swap agreements that the Company had been party to have matured. The Company does not expect to enter into any similar agreements. Interest Rate Risk - The Company's financial instruments with market risk exposure consist of its term loans and revolving credit facility borrowings. A change in interest rates of one percent on the outstanding borrowings as of October 2, 2001 would cause a change in annual interest expense of approximately $1.1 million. The Company's Senior Subordinated Notes are fixed interest rate debt obligations. Forward Looking and Cautionary Statements Except for the historical information and discussions contained herein, statements contained in this form 10-Q may constitute "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including, among other things: o our high degree of leverage and significant debt service obligations; o our history of net losses; o the level of attendance at events held at the facilities at which we provide our services and the level of spending on the services that we provide at such events; o the risk of labor stoppages affecting sports teams at whose facilities we provide our services; o the risk of sports facilities at which we provide services losing their sports team tenants; o our ability to retain existing clients or obtain new clients; o the highly competitive nature of the recreational food service industry; o any future changes in management; o general risks associated with the food industry; and o future changes in government regulation. 19 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: None (b) No reports on Form 8-K have been filed during the quarter for which this report is filed. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 15, 2001. VOLUME SERVICES AMERICA, INC. By: /s/ Kenneth R. Frick -------------------------------------- Name: Kenneth R. Frick Title: Executive Vice President and Chief Financial Officer 20

VOLUME SERVICES AMERICA INC 10-Q