10-Q 1 form10q-thirdqtr.txt FOR PERIOD ENDED OCTOBER 1, 2002 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 1, 2002 or ( ) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____ to _____ Commission file number: 333-79419 VOLUME SERVICES AMERICA, INC. ----------------------------- (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 15, 2002, was 100. VOLUME SERVICES AMERICA, INC. INDEX PART I FINANCIAL INFORMATION..........................................................................................1 Item 1. Financial Statements.........................................................................................2 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................17 Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................................21 Item 4. Controls and Procedures PART II OTHER INFORMATION............................................................................................22 Item 1. Legal Proceedings...........................................................................................22 Item 6. Exhibits and Reports on Form 8-K............................................................................22

1 PART I FINANCIAL INFORMATION

3 VOLUME SERVICES AMERICA HOLDINGS, INC.

4 VOLUME SERVICES AMERICA HOLDINGS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY (UNAUDITED) FOR THE PERIOD JANUARY 1, 2002 TO OCTOBER 1, 2002 (In Thousands, Except Share Data)

5 VOLUME SERVICES AMERICA HOLDINGS, INC.

6 VOLUME SERVICES AMERICA HOLDINGS, INC.

7 VOLUME SERVICES AMERICA HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) THIRTY-NINE WEEK PERIODS ENDED OCTOBER 1, 2002 AND OCTOBER 2, 2001 -------------------------------------------------------------------------------- 1. GENERAL Volume Services America Holdings, Inc. ("Volume Holdings," and together with its subsidiaries, the "Company") is a holding company, the principal assets of which are the capital stock of its subsidiary, Volume Services America, Inc. ("Volume Services America"). Volume Holdings' financial information is therefore substantially the same as that of Volume Services America. Volume Services America is also a holding company, the principal assets of which are the capital stock of its subsidiaries, Volume Services, Inc. ("Volume Services") and Service America Corporation ("Service America"). The Company is owned by its senior management, Blackstone Capital Partners II Merchant Banking Fund, L.P. ("BCP II"), and General Electric Capital Corporation ("GE Capital"). 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 1, 2002 are not necessarily indicative of the results to be expected for the fifty-two week fiscal year ending December 31, 2002 due to the seasonal aspects of the business. The accompanying consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the year ended January 1, 2002 included in the Company's annual report on Form 10-K. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Reclassifications - Certain amounts in 2001 have been reclassified, where applicable, to conform to the financial statement presentation used in 2002. New Accounting Standards - In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142 ("SFAS 142") "Goodwill and Other Intangible Assets", which became effective for the Company on January 2, 2002. SFAS 142 requires, among other things, discontinuing amortization of goodwill and identifiable intangible assets with indefinite lives. 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. The Company has adopted SFAS 142 and completed the required transitional impairment test and found there to be no related impairments. In accordance with the standard, the Company discontinued the amortization of goodwill and trademarks, identified intangible assets which management believe have indeterminable lives. A reconciliation of net income (loss) to adjusted net income is as follows: 8

In August 2001, the FASB issued SFAS No. 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 No. 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 No. 144 became effective for the Company on January 2, 2002. The adoption of SFAS 144 had no significant impact on the Company's financial position or results of operations. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. First, SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that statement, SFAS No. 64, Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements. Because of the rescission of SFAS No. 4, the gains and losses from the extinguishment of debt are no longer required to be classified as extraordinary items. SFAS No. 64 amended SFAS No. 4 and is no longer needed because SFAS No. 4 is rescinded. Second, SFAS No. 145 rescinds SFAS No. 44, Accounting for Intangible Assets of Motor Carriers. This statement was originally issued to establish accounting requirements for the effects of transition to the provisions of the Motor Carrier Act of 1980. As those transitions are complete, SFAS No. 44 is no longer needed. Third, SFAS No. 145 amends SFAS No. 13, Accounting for Leases, to require sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The amendment of SFAS No. 13 is effective for transactions occurring after May 15, 2002. There has been no impact on the Company due to the amendment of SFAS No. 13. Lastly, SFAS No. 145 makes various technical corrections to existing pronouncements that are not substantive in nature. The Company has not yet evaluated the impact of the rescission on its financial position or results of operations of SFAS No. 4, 44 and 64 and the other technical corrections prescribed by this statement, all of which become effective for the Company in fiscal 2003. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability Recognition for Certain Employees Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring). The Company has not yet evaluated the impact of this statement on its financial position or results of operations. Contract rights - During the thirty-nine weeks ended October 1, 2002, the Company entered into contracts to provide specified concession and other services. Contract rights of approximately $35.9 million were purchased and will be amortized on a straight line basis over the lives of the agreements. Insurance - At the beginning of fiscal 2002, the Company adopted a high deductible insurance program for general liability, auto liability and workers' compensation risk supplemented by stop-loss type insurance policies. During the fiscal years 1999 through 2001, the Company had a premium-based insurance program for general liability, automobile liability and workers' compensation risk. Prior to fiscal 1999, the Company was primarily self-insured for general liability, automobile liability and workers' compensation risks, supplemented by 9 stop-loss type insurance policies. Management determines the estimate of the reserve for the deductible and self-insurance considering a number of factors, including historical experience and actuarial assessment of the liabilities for reported claims and claims incurred but not reported. The Company became self-insured for employee health insurance in December 1999. Prior to December 1999, the Company had a premium-based insurance program. The reserve for the employee health self-insurance liability is based on claims filed and estimates for claims incurred but not reported. Income Taxes - The provision for income taxes includes federal, state and foreign taxes currently payable, and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. A valuation allowance is established for deferred tax assets when it is more likely than not that the benefits of such assets will not be realized. Income taxes for the thirty-nine weeks ended October 1, 2002 and October 2, 2001 are calculated using the projected effective tax rate for fiscal 2002 and 2001, respectively, which in fiscal 2002 includes the reversal of approximately $0.8 million of valuation allowances on deferred tax assets and the utilization of approximately $0.9 million of wages and tip credits. 3. CONTRACT RELATED LOSSES Contract related losses for the thirty-nine weeks ended October 1, 2002 reflect an impairment charge of approximately $0.7 million for the write-down of contract rights. For the thirty-nine weeks ended October 2, 2001, contract related losses consist of approximately $1.8 million for the write-down of property and equipment and a receivable reserve of $2.3 million related to two of the Company's customers which filed for reorganization under Chapter 11 of the Bankruptcy Code. 4. COMMITMENTS AND CONTINGENCIES The Company is from time to time involved in various legal proceedings incidental to the conduct of its business. In the opinion of management, any liabilities arising out of any currently pending proceedings will not have a material adverse effect on our financial condition or results of operations. 5. EXECUTIVE EMPLOYMENT AGREEMENT Effective April 15, 2002, the Company entered into an Executive Employment Agreement (the "Agreement") with its Chief Executive Officer, Lawrence E. Honig. The Agreement provides for the grant of stock options equal to three percent of the total outstanding number of shares of Volume Holdings on the option issuance date pursuant to a stock option plan that was to be adopted within 180 days of the effective date of the Agreement. As of November 15, 2002, The Company and the Chief Executive Officer are working to develop the stock option plan, which they anticipate will be completed in the near future. The exercise price is to be equivalent to the fair value of the common stock as established by the board of directors on the grant date and the stock options will vest 20% per year during a period of five years. The stock options will terminate ten years from the grant date. The Company plans to measure compensation cost, if any, associated with the stock options based upon the intrinsic value of the stock options measured at the grant date, in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". 10 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 consolidated financial statements of Volume Holdings, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries as of October 1, 2002 and January 1, 2002 (in the case of the balance sheets), for the thirteen and thirty-nine week periods ended, October 1, 2002 and October 2, 2001 (in the case of the statements of operations and comprehensive income (loss)) and for the thirty-nine week periods ended, October 1, 2002 and October 2, 2001 (in the case of the statements of cash flows).

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 quarter (a quarter is comprised of thirteen or fourteen weeks), 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 we serve. Business at the principal types of facilities 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. 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 the first three quarters of fiscal 2002 and four quarters of fiscal 2001 and fiscal 2000: 2002 2001 2000 ---- ---- ---- 1st Quarter....... $87,840 $ 83,194 $ 80,120 2nd Quarter....... $166,421 $157,646 $143,637 3rd Quarter....... $195,100 $177,559 $188,289 4th Quarter....... - $124,714 $110,487 RESULTS OF OPERATIONS THIRTEEN WEEKS ENDED OCTOBER 1, 2002 COMPARED TO THE THIRTEEN WEEKS ENDED OCTOBER 2, 2001 Net sales - Net sales of $195.1 million for the thirteen weeks ended October 1, 2002 increased by $17.5 million (approximately 10%) from $177.6 million in the prior year period. The Company's results for the thirteen week period of 2001 were adversely impacted by the events of September 11, 2001 which are estimated to have reduced net sales during the period by 7%. The postponement of 28 MLB games until the 4th fiscal quarter and four NFL games until fiscal 2002 had the most significant impact on the Company's net sales. For the current year period, 28 more MLB games were played including one playoff game resulting in higher net sales of approximately $7.1 million at the Company's MLB accounts. Net sales at NFL venues generated an additional $5.1 million due primarily to 4 additional games. Finally, a successful summer music amphitheater season contributed an increase in net sales of $3.4 million during the period. 17 Cost of sales - Cost of sales of $156.5 million for the thirteen week ended October 1, 2002 increased by $13.0 million from $143.5 million from the prior year period due primarily to the increase in sales volume. Cost of sales as a percentage of net sales decreased by approximately 1% from the prior year period to 80%. This decrease was due mainly to efficiencies associated with the greater sales volume and an overall lower commission rate arising from a change in sales mix from contracts with high commission rates in the prior year period to those with slightly lower rates in the current period. Selling, general and administrative expenses - Selling, general and administrative expenses of $16.0 million increased approximately .8% as a percentage of net sales from the prior year period. The increase was primarily the result of higher insurance costs due to dramatic price increases in the insurance market following September 11, 2001, higher corporate overhead expenses related to the addition of management positions and an increase in professional fees. Depreciation and amortization - For the thirteen weeks ended October 1, 2002, depreciation and amortization was $6.7 million compared to $6.1 million in the prior year period. The increase was principally attributable to higher amortization expense related to investments for the renewal and/or acquisition of certain contracts, partially offset by a decline in amortization as a result of the discontinuation of goodwill and trademark amortization ($.6 million) in accordance with Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets." Contract related losses - The prior year period reflects an impairment charge in the amount of $.9 million relating primarily to the write-down of equipment and leasehold improvements for certain contracts. Operating income - Operating income increased approximately $2.0 million from the prior year period due to the factors described above. Interest expense - Interest expense decreased by $.4 million from the prior year period due primarily to lower interest rates on the Company's variable rate debt. Income taxes - Management has evaluated the available evidence about future taxable income and other possible sources of realization of deferred tax assets. Income taxes for the thirteen weeks ended October 1, 2002 and October 2, 2001 are calculated using the projected effective tax rate for fiscal 2002 and 2001, respectively, which in fiscal 2002 includes the reversal of approximately $0.8 million of valuation allowances on deferred tax assets and the utilization of approximtely $0.9 million of wage and top credits. THIRTY-NINE WEEKS ENDED OCTOBER 1, 2002 COMPARED TO THIRTY-NINE WEEKS ENDED OCTOBER 2, 2001 Net sales - Net sales of $449.4 million for the thirty-nine weeks ended October 1, 2002 increased by $31.0 million (approximately 7%) from $418.4 million in the prior year period. The Company's results for the thirty-nine week period of 2001 were adversely impacted by the events of September 11, 2001 which are estimated to have reduced net sales during the period by 3%. As discussed above, the postponement of NFL and MLB games had the most significant impact on the Company's net sales. As of the thirty-nine week period ended October 1, 2002, nine additional NFL games have been played as compared to the prior year period. Five of the games were played during the first thirteen weeks of the period, including four games which were postponed due to the events of September 11, 2001, and Super Bowl XXXVI, which was hosted by a venue served by the Company. In the prior year period, two NFL playoff games were played at facilities served by the Company. In the aggregate, net sales attributable to NFL activity were $8.0 million greater in the current period as compared to the prior year period. MLB games including one playoff game contributed $4.3 million to the increase primarily as a result of an increase in the number of games played in the 2002 period due to the postponement of games in the prior year period. In addition, newly acquired service contracts generated net sales of $6.6 million and a successful summer music amphitheatre season contributed an increase in net sales of $2.5 million during the period. 18 Cost of sales - Cost of sales of $365.5 million for the thirty-nine weeks ended October 1, 2002 increased by $23.0 million from $342.5 million from the prior year period due primarily to the increase in sales volume. Cost of sales as a percentage of net sales decreased by approximately 0.5% from the prior year period to 81%. This decrease was due mainly to efficiencies associated with the greater sales volume. Selling, general and administrative expenses - Selling, general and administrative expenses of $42.6 million increased approximately 1% as a percentage of net sales from the prior year period. The increase was primarily the result of higher insurance costs due to dramatic price increases in the insurance market post September 11, 2001, higher corporate overhead expenses related to the addition of management positions and an increase in professional fees. Depreciation and amortization - For the thirty-nine weeks ended October 1, 2002, depreciation and amortization was $19.0 million compared to $18.2 million in the prior year period. The increase was principally attributable to higher amortization expense related to investments for the renewal and/or acquisition of certain contracts, partially offset by a decline in amortization as a result of the discontinuation of goodwill and trademark amortization ($1.8 million) in accordance with Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets." Contract related losses - Contract related losses in the thirty-nine weeks ended October 1, 2002, of $.7 million reflect an impairment charge related to a write-down of contract rights. In the prior year period, contract related losses reflect an impairment charge in the amount of $1.8 million and a receivable reserve of $2.3 million related to two of the Company's customers which filed for reorganization under Chapter 11 of the Bankruptcy Code. Operating income - Operating income increased approximately $3.6 million from the prior year period due to the factors described above. Interest expense - Interest expense decreased by $2.4 million from the prior year period due primarily to lower interest rates on the Company's variable rate debt. Other income, net - The Company's wholly-owned subsidiary, Service America Corporation, received approximately $1.4 million during the thirty-nine week period ended October 1, 2002 from funds previously set aside to satisfy creditors pursuant to a plan of reorganization approved in 1993. Under the plan of reorganization, the company was required to deposit funds with a disbursing agent for the benefit of its creditors. Any funds which remained unclaimed by its creditors after a period of two years from the date of distribution were forfeited and all interest in those funds reverted back to Service America. Counsel has advised that Service America has no obligation to escheat such funds. Income taxes - Management has evaluated the available evidence about future taxable income and other possible sources of realization of deferred tax assets. Income taxes for the thirty-nine weeks ended October 1, 2002 and October 2, 2001 are calculated using the projected effective tax rate for fiscal 2002 and 2001, respectively, which in fiscal 2002 includes the reversal of approximately $0.8 million of valuation allowances on deferred tax assets and the utilization of approximtely $0.9 million of wage and top credits. LIQUIDITY AND CAPITAL RESOURCES For the thirty-nine weeks ended October 1, 2002, net cash provided by operating activities was $48.0 million compared to net cash provided by operating activities of $26.1 million in the prior year period. The $21.9 million increase from the prior year period was principally attributable to a decrease of $7.1 million in net losses, mainly as the result of the $3.6 million improvement in operating income, a $2.4 million decline in interest expense and the recovery of $1.4 million in funds by Service America, as discussed above. Additionally, the Company's working capital decreased as compared to the prior year period chiefly due to timing of payments to vendors and employees and higher accrued commissions and other contractual obligations related to the Company's MLB and NFL clients. 19 Net cash used in investing activities was $41.1 million in the thirty-nine weeks ended October 1, 2002 compared to $22.5 million in the prior year period. This primarily reflects a higher level of investment in contract rights and property and equipment associated with renewals of existing contracts in the current period. For the thirty-nine weeks ended October 1, 2002, net cash used in financing activities was $11.5 million as compared to $1.3 million in the prior year period. This primarily reflects higher net repayments of funds borrowed under the Company's revolving credit facility. 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 net capital investments of $46.1 million in fiscal 2002 of which $41.1 million has been invested to date. At October 1, 2002, $58.6 million of the Company's $75.0 million revolving credit facility was available to be borrowed with $16.4 million of outstanding, undrawn letters of credit reducing availability. NEW ACCOUNTING STANDARDS In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, which became effective for the Company on January 2, 2002. SFAS No. 142 requires, among other things, discontinuing amortization of goodwill and identifiable intangible assets with indefinite lives. 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. The Company has adopted SFAS No. 142 and completed the required transitional impairment test and found there to be no related impairments. In accordance with the standard, the Company discontinued the amortization of goodwill and trademarks, identified intangible assets which management believe have indeterminable lives. In August 2001, the FASB issued SFAS No. 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 No. 144 superseded SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 144 became effective for the Company on January 2, 2002. The adoption of SFAS No. 144 had no significant impact on the Company's financial position or results of operations. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. First, SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that statement, SFAS No. 64, Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements. Because of the rescission of SFAS No. 4, the gains and losses from the extinguishment of debt are no longer required to be classified as extraordinary items. SFAS No. 64 amended SFAS No. 4 and is no longer needed because SFAS No. 4 is rescinded. Second, SFAS No. 145 rescinds SFAS No. 44, Accounting for Intangible Assets of Motor Carriers. This statement was originally issued to establish accounting requirements for the effects of transition to the provisions of the Motor Carrier Act of 1980. As those transitions are complete, SFAS No. 44 is no longer needed. Third, SFAS No. 145 amends SFAS No. 13, Accounting for Leases, to require sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sales-leaseback transactions. The amendment of SFAS No. 13 is effective for transactions occurring after May 15, 2002. There has been no impact on the Company due to the amendment of SFAS No. 13. Lastly, SFAS No. 145 makes various technical corrections to existing pronouncements that are not substantive in nature. The Company has not yet evaluated the impact on 20 its financial position or results of operations of the rescission of SFAS No. 4, 44 and 64 and the other technical corrections prescribed by this statement, all of which become effective for the Company in fiscal 2003. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability Recognition for Certain Employees Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring). The Company has not yet evaluated the impact of this statement on its financial position or results of operations. 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 actions taken by our suppliers over which we have no control; o any future changes in management; o the risk of weaker economic conditions within the United States; o the risk of events similar to those of September 11, 2001; o general risks associated with the food industry; o any future changes in government regulation; and o any changes in local government policies and practices regarding facility construction, taxes and financing. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Interest Rate Risk - We are exposed to interest rate volatility with regard to existing issuances of variable rate debt. 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 1, 2002 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. As of October 1, 2002, there hs been no material changes in the quantitative and qualitative disclosures about market risk than were presented in the Company's Form 10-K for the year ended January 1, 2002. 21 ITEM 4. CONTROLS AND PROCEDURES. Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures within 90 days of the filing date of this quarterly report, and, based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are effective. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As disclosed in the Company's report on Form 10-K for the fiscal year ended January 1, 2002, the City of Bridgeport, Connecticut asserted a claim against the Company of approximately $2.1 million for certain construction charges the City incurred in building an arena in the City. In August 2002, the Company and the City entered into a final settlement agreement, pursuant to which the Company will pay the City approximately $58,000. 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. 22 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, 2002. VOLUME SERVICES AMERICA, INC. By: /s/ Kenneth R. Frick --------------------------------- Name: Kenneth R. Frick Title: Executive Vice President and Chief Financial Officer 23 CERTIFICATION I, Lawrence E. Honig, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Volume Services America, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function); (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. November 15, 2002 /s/ Lawrence E. Honig ------------------------------------------ Lawrence E. Honig Chief Executive Officer 24 CERTIFICATION I, Kenneth R. Frick, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Volume Services America, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function); (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 15, 2002 /s/ Kenneth R. Frick ---------------------------------- Kenneth R. Frick Chief Financial Officer 25

VOLUME SERVICES AMERICA INC 10-Q