ITEM 1. BUSINESS.
OVERVIEW
Volume Services America, Inc. ("Volume Services America"), a Delaware corporation, operates through its subsidiaries as a leading provider of food and beverage concession, high-end catering and merchandise services for sports facilities, convention centers and other entertainment facilities throughout the United States. We currently provide services at 122 client facilities, typically pursuant to long-term contracts that grant us the exclusive right to provide various food and beverage (and, under some contracts, merchandise) products and services within the facility. The breakdown of facilities that we serve by primary client category is as follows: 61 sports facilities, 28 convention centers and 33 other entertainment facilities. At one facility, we also provide full facility management services.
SERVICES AND CLIENT CATEGORIES
Sports Facilities
We currently have contracts to provide services, including food and beverage concessions and, in some cases, the selling of merchandise, at 61 such facilities, including stadiums and arenas. At some of these facilities, we also provide high-end catering services for premium seating, luxury suites and in-stadium restaurants. These facilities host sports teams as well as other forms of entertainment, such as concerts and other large civic events. These facilities may also host conventions, trade shows and meetings.
Concession-style sales of food and beverages represent the majority of our business at sports facilities. High-end catering for premium seating, luxury suites and in-stadium restaurants is responsible for a significantly smaller, but growing, portion of net sales at sports facilities.
Our contracts with sport facilities are typically for terms ranging from five to twenty years. In general, stadium and, to a lesser extent, arena contracts require a larger up-front or committed future capital investment than contracts for convention centers and other entertainment facilities, and typically have a longer contract term.
At one arena, we provide full facility management services. These services include licensing the arena (and its suites and premium seats) for events, providing parking operations, security and ushering, maintaining the arena and preparing it for events, distributing tickets, printing programs and selling advertising.
The following chart lists some of our major contracts within the sports facilities category:
Convention Centers
We currently have contracts to provide services, including banquet catering and food court operations, to 28 convention centers, two of which are located in Canada. Convention centers typically host conventions, industrial and trade shows, company meetings, banquets, receptions and consumer exhibitions, such as auto, boat or computer shows.
The services that we provide at convention centers typically include catering services, including planning, preparing and serving banquets, providing food court operations, assisting in planning events, and marketing clients' facilities.
Our contracts with convention centers are typically for terms ranging from two to five years. In general, convention center contracts are for a shorter contract term than contracts for sports facilities, but typically require less up-front or committed future capital investment. The following chart lists some of our major contracts within the convention center category:
Other Entertainment Facilities
We have contracts to provide a wide range of services to 33 other entertainment facilities located throughout the United States. Such facilities include horse racing tracks, music amphitheaters, motor speedways, state parks, skiing facilities, theme parks and zoos.
While the services that we provide can vary widely depending on the type of facility concerned, we primarily provide concession services at theme parks, zoos and music amphitheaters, high-end concession services at music amphitheaters, and in-facility restaurants, concession services, food court operations and high-end catering services at horse racing tracks.
The duration, level of capital investment required and commission or management fee structure of the contracts for these other entertainment facilities varies from facility to facility.
The following chart lists examples of our contracts within the other entertainment facilities category:
Significant Clients. One of our clients, Yankee Stadium, accounted for 11.1% of our revenues in 1999.
CONTRACTS
We typically enter into one of three types of contract with our clients:
o Profit and Loss Contracts;
o Profit Sharing Contracts; and
o Management Fee Contracts.
Each of our contracts falls into these three categories. However, any particular contract may contain elements of any of the other types as well as other features specific to that contract.
In general, our contract categories differ in the amount of risk that we bear and potential reward (profits or fees) we can receive. For example, in our Profit and Loss Contracts, we generally retain most profits and are responsible for most losses; this offers the highest potential upside and downside of our contracts. In our Profit Sharing Contracts, we generally receive a share of profits, and sometimes a fee, and receive no payments if there are losses. In our Management Fee Contracts, we generally earn a fee (but no profits) and are not responsible for losses; both our upside and downside potential are low.
Profit and Loss Contracts. Under Profit and Loss Contracts, we receive all of the revenues and bear all of the expenses of the provision of our services at a facility. These expenses include commissions paid to the client. Some of our Profit and Loss Contracts contain minimum guaranteed commissions or equivalent payments to the client in connection with our right to provide services within the particular facility, regardless of the level of sales at the facility or whether a profit is being generated at the facility. As of December 28, 1999, we served 99 facilities under Profit and Loss Contracts.
Profit Sharing Contracts. Under Profit Sharing Contracts, also commonly referred to in the industry as incentive bonus contracts, we receive a percentage of any profits earned from the provision of our services at a facility after deducting expenses. These expenses include commissions payable to the client. In addition, under some Profit Sharing Contracts, we receive a fixed fee prior to the determination of profits under the contract. Under Profit Sharing Contracts, we generally do not bear responsibility for any losses incurred in connection with the provision of our services as we are reimbursed for our on-site expenses. However, if a loss is incurred, we typically will receive no payments under the contract other than reimbursement of our expenses and our fixed fee, if any. As of December 28, 1999, we served 15 facilities under Profit Sharing Contracts.
Management Fee Contracts. Under Management Fee Contracts, we receive a management fee, typically calculated as a fixed dollar amount and/or a fixed or variable percentage of various categories of sales. In addition, some Management Fee Contracts entitle us to incentive fees based upon our performance under the contract, as measured by factors such as revenues or operating costs. We are reimbursed for all of our on-site expenses under these contracts. As of December 28, 1999, we served 8 facilities under Management Fee Contracts.
Under one of our Management Fee Contracts, we provide full facility management services in addition to food and concession services. For these services, we receive a base fee and an incentive fee. We have also agreed to lend the facility owner any amount by which the facility's net revenues fall below specified benchmarks.
Substantially all of our contracts limit our ability to raise prices on the food, beverages and merchandise we sell within the particular facility without the client's consent.
When we enter into new contracts, or extend or renew existing contracts (particularly for sports facilities), we are often required to make some form of up-front or committed future capital investment to help finance facility construction or renovation. This expenditure typically takes the form of investment in leasehold improvements, food service equipment and/or grants to owners or operators of facilities. At the end of the contract term, all capital investments that we have made typically remain the property of the client, but generally the client must reimburse us for any undepreciated or unamortized capital investments if the contract is terminated early (other than due to our default).
Commission and management fee rates vary significantly among contracts based primarily upon the amount of capital that we invest, the type of facility involved, the term of the contract and the services we provide.
In general, within each client category, the level of capital investment and commission are related, such that the greater the capital investment that we make, the lower the commission we pay to the client. Our Profit Sharing Contracts generally provide that we are reimbursed each year for the amortization of our capital investments prior to determining the profits under the contract.
The length of contracts that we enter into with clients varies. Contracts in connection with sports facilities generally require the highest capital investments but have correspondingly longer terms, typically of five to twenty years. Convention center contracts generally require lower capital investments and have average terms of two to five years. While our contracts are generally terminable only in limited circumstances, some of our contracts give the client the right to terminate the contract with or without cause on little or no notice.
COMPETITION
The recreational food service industry is highly fragmented and competitive, with several national food service providers as well as a large number of smaller independent businesses serving discrete local and regional markets and/or competing in distinct areas. Those companies that lack a full-service capability, because, for example, they cannot cater for luxury suites at stadiums and arenas, often bid for contracts in conjunction with one of the other national food service companies that can offer such services.
We compete for contracts against a variety of food service providers. However, our major competitors are other national food service providers, including ARAMARK, Delaware North Corporation, Ogden Corporation, Fine Host Corporation and Levy Restaurants. We also face competition from regional and local service contractors, some of which are better established within a specific geographic region. Existing or potential clients may also elect to "self operate" their food services, eliminating the opportunity for us to compete for the account.
Contracts are generally gained and renewed through a competitive bidding process. We selectively bid on contracts to provide services at both privately owned and publicly controlled facilities. The privately negotiated transactions are generally competitive in nature, with several other large national competitors submitting proposals. Contracts for publicly controlled facilities are generally awarded pursuant to a request-for-proposal process. Successful bidding on contracts for such publicly controlled facilities often requires a long-term effort focused on building relationships in the community in which the venue is located. We compete primarily on the following factors:
o the ability to make capital investments;
o profit and loss, profit sharing or management fee structure;
o service innovation;
o quality and breadth of products and services; and
o reputation within the industry.
Based on the number of facilities that we serve, we have a substantial market position. Management believes that our position in the market is a competitive strength because it increases the likelihood that we will be invited to bid for new contracts to supply food and beverage services to recreational facilities. Another competitive strength is our ability to make significant capital investments in clients' facilities, which has become an important competitive factor in the bidding process for contracts to serve some facilities, particularly sports facilities.
However, some of our competitors may be prepared to accept less favorable financial returns than we are when bidding for contracts. A number of our competitors also have substantially greater financial and other resources than us. Furthermore, we have more indebtedness than some of our competitors, which could place us at a competitive disadvantage.
PURCHASING
We have a national distribution contract with SYSCO to cover our operations. We also have a number of national purchasing programs with major product suppliers that enable our general managers to receive discounted pricing on certain items. The purchase of other items, the most significant of which are alcoholic beverages that must, by law, be purchased in-state, is handled on a local basis.
We generally purchase any equipment that we require directly from the manufacturer. We typically obtain several bids when filling our food service equipment requirements.
EMPLOYEES
As of December 28, 1999, we had approximately 1,600 full-time employees. During calendar 1999, approximately 29,800 employees were part-time or hired on an event-by-event basis. The number of part-time employees at any point in time varies significantly due to the seasonal nature of the business.
As of December 28, 1999, approximately 40% of our employees, including full and part-time employees, were covered by collective bargaining agreements with several different unions. We have not experienced any significant interruptions or curtailments of operations due to disputes with our employees, and we consider our labor relations to be good. We have hired, and expect to continue to hire, a large number of qualified, temporary workers at particular events. At some locations, local charitable groups raise funds by working at our concessions operations in exchange for a percentage of gross revenues.
SEASONALITY
Our net sales and operating results have varied, and are expected to continue to vary, from quarter to quarter as a result of factors which include:
o seasonal patterns within the industry;
o the unpredictability in the number, timing and type of new contracts;
o the timing of contract expirations and special events; and
o the level of attendance at facilities that we serve.
Business at the principal types of facilities that we serve is seasonal in nature. MLB and minor league baseball sales are concentrated in the second and third quarters, the majority of NFL activity occurs in the third and fourth quarters and convention centers and arenas generally host fewer events during the summer months. Consequently, our results of operations for the first quarter are typically substantially lower than in other quarters and our results of operations for the third quarter are typically higher than in other quarters. Results of operations for any particular quarter may not be indicative of results of operations in the future.
INTELLECTUAL PROPERTY
We have the patents, trademarks, trade names and licenses that are necessary for the operation of our business as we currently conduct it. We do not consider our patents, trademarks, trade names and licenses to be material to the operation of our business.
GOVERNMENT REGULATION
Our operations are subject to various governmental regulations, such as those governing:
o the service of food and alcoholic beverages;
o minimum wage regulations;
o employment;
o environmental protection; and
o human health and safety.
In addition, our facilities and products are subject to periodic inspection by federal, state, and local authorities. The cost of regulatory compliance is subject to additions to or changes in federal or state legislation, or changes in regulatory implementation. If we fail to comply with applicable laws, we could be subject to civil remedies, including fines, injunctions, recalls, or seizures, as well as potential criminal sanctions.
The United States Food and Drug Administration (the "FDA") regulates and inspects our kitchens. Every commercial kitchen in the United States must meet the FDA's minimum standards relating to the handling, preparation and delivery of food, including requirements relating to the temperature of food and the cleanliness of the kitchen and the hygiene of its personnel. We are also subject to various state, local and federal laws regarding the disposition of property and leftover foodstuffs. The cost of compliance with FDA regulations is subject to additions to or changes in FDA regulations.
We serve alcoholic beverages at many facilities, and are subject to the "dram-shop" statutes of the states in which we serve alcoholic beverages. "Dram-shop" statutes generally provide that serving alcohol to an intoxicated or minor patron is a violation of law. In most states, if one of our employees sells alcoholic beverages to an intoxicated or minor patron, we may be liable to third parties for the acts of the patron. We sponsor regular training programs in cooperation with state authorities to minimize the likelihood of serving alcoholic beverages to intoxicated or minor patrons, and we maintain general liability insurance that includes liquor liability coverage.
We are also subject to licensing with respect to the sale of alcoholic beverages in the states in which we serve alcoholic beverages. Failure to receive or retain, or the suspension of, liquor licenses or permits would interrupt or terminate our ability to serve alcoholic beverages at those locations. A few of our contracts require us to pay liquidated damages during any period in which our liquor license for the relevant facility is suspended and most contracts are subject to termination in the event that we lose our liquor license for the relevant facility.
GENERAL INFORMATION
Volume Services America was formed on December 31, 1992. Its principal offices are at 201 East Broad Street, Spartanburg, SC 29306, and its telephone number is (864) 598-8600. Volume Services America is the wholly-owned subsidiary of Volume Services America Holdings, Inc. ("Volume Holdings"), a Delaware corporation. Volume Holdings' subsidiaries include Volume Services, Inc. ("Volume Services") and Service America Corporation ("Service America"), each a Delaware corporation.
We have no operations or assets in any foreign country other than Canada. During 1999, our Canadian revenues and Canadian assets were less than 5% of our total revenues and assets, respectively.
ITEM 2.
ITEM 2. PROPERTIES.
We lease our corporate headquarters of approximately 19,300 square feet in Spartanburg, South Carolina, the headquarters of Service America in Stamford, Connecticut of approximately 12,600 square feet, and a regional office in Fords, New Jersey. We are currently trying to sublease much of the office space in Stamford.
We currently provide our services at 122 client facilities, all of which are owned or leased by our clients. Our contracts with our clients generally permit us to use certain areas within the facility to perform our administrative functions and fulfill our warehousing needs, as well as provide food and beverage services.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
On June 12, 1998, Service America commenced arbitration proceedings through the American Arbitration Association in New York, New York against Silver Huntington Realty LLC and Silver Huntington Enterprises LLC (collectively, "Silver"). Service America alleged fraud, misrepresentation, negligent misrepresentation, breach of contract and breach of the covenant of good faith and fair dealing in connection with Service America's Exclusive Catering Services Agreement with Silver dated November 21, 1997, and sought damages in excess of $1 million. Silver subsequently filed counterclaims that alleged breach of contract, sought an accounting and asserted that Service America had commenced the proceeding and acted in bad faith. Silver claims damages for injury to its business in an amount in excess of $11 million. In light of our meritorious defenses, we do not believe that Silver's claims are well-founded in fact or law. We are vigorously pursuing our claim and defending against the counterclaims. The evidentiary proceeding has closed, the parties have made their final arguments in the arbitration and we are awaiting the arbitrator's decision.
In addition, we are from time to time involved in various legal proceedings incidental to the conduct of our business.
In the opinion of management, any liability arising out of any currently pending proceeding will not have a material adverse effect on our financial condition or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We did not submit any matters to a vote of security holders during the fourth quarter of our 1999 fiscal year.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Each registrant, other than Volume Holdings, is a direct or indirect wholly-owned subsidiary of Volume Holdings. There is no established public trading market for the equity securities of Volume Holdings. As of March 23, 2000, the latest practicable date, there were four holders of Volume Holdings' common stock. In connection with the offering of Volume Service America's senior notes in 1999, Volume Service America paid a dividend to Holdings in the amount of $50.0 million. Holdings used the dividend to repay a $500,000 note to General Electric Capital Corporation ("GE Capital") and to repurchase 194 shares of its stock from its shareholders. During our 1999 fiscal year, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data is that of Volume Holdings, Volume Services America's parent company. Volume Holdings is a guarantor of the senior notes issued by Volume Services America in 1999 and has no substantial operations or assets other than its investment in Volume Services America. As a result, the consolidated financial condition and results of operations of Volume Holdings are substantially the same as those of Volume Services America. This table contains selected financial data and is qualified by the more detailed consolidated financial statements, including notes to the financial statements, of Volume Holdings. The selected financial data should be read in conjunction with the consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this Annual Report on Form 10-K.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
FISCAL 1999 COMPARED TO FISCAL 1998
Net sales. Net sales increased 52.2% or $148.1 million from $283.4 million in fiscal 1998 to $431.5 million in fiscal 1999. The increase was primarily due to the August 24, 1998 acquisition of Service America (the "Acquisition") which resulted in the inclusion of $186.8 million in net sales for fiscal 1999 as compared to $75.5 million in fiscal 1998. Excluding the effect of the Acquisition, net sales increased by $36.7 million as a result of the addition of eight new contracts, including two NFL facilities, Adelphia Coliseum, home of the Tennessee Titans, and the Louisiana Superdome and Arena; one MLB venue, Safeco Field, home of the Seattle Mariners; and two minor league baseball stadiums, which together generated $41.3 million in net sales. The improvement was partially offset by the loss of net sales associated with the closure of several accounts, including one NFL facility, the Trans World Dome.
Cost of sales. Cost of sales of $342.5 million in fiscal 1999 increased $120.0 million from fiscal 1998 primarily due to the Acquisition and to the overall increase in net sales. Cost of sales as a percentage of net sales increased from 78.5% in fiscal 1998 to 79.4% in fiscal 1999 primarily reflecting the higher variable costs, especially commissions, associated with two service contracts acquired by Service America.
Selling, general and administrative. Selling, general and administrative expenses increased $13.2 million from $29.5 million in fiscal 1998 to $42.7 million in fiscal 1999, primarily due to the Acquisition. As a percentage of net sales, selling, general and administrative expenses declined from 10.4% in fiscal 1998 to 9.9% in fiscal 1999. Overhead expense, one of the elements of selling, general and administrative expenses, declined substantially due to the savings achieved through the elimination of duplicate costs. Offsetting these savings was an increase in other elements of selling, general and administrative expenses primarily due to the increased cost structure associated with operating convention centers, the primary component of Service America's business.
Depreciation and amortization. Depreciation and amortization increased 47.4% from $18.2 million in fiscal 1998 to $26.8 million in fiscal 1999. Of the $8.6 million increase, $4.8 million was due to an increase in amortization arising from the application of purchase accounting related to the Acquisition. The remaining $3.8 million increase was primarily due to depreciation as a result of the assets acquired in the Acquisition and fiscal 1999 capital expenditures of $26.3 million.
Transaction related expenses. We incurred $1.5 million in transaction related expenses in fiscal 1999 as compared to $3.1 million in fiscal 1998. These expenses relate to personnel costs, rental costs and professional fees associated with the downsizing of the Stamford, Connecticut office in connection with the Acquisition.
Contract related losses. We incurred non-cash contract related losses of $1.4 million in both fiscal 1999 and fiscal 1998. The $1.4 million recognized in fiscal 1999 resulted primarily from our determination that certain contracts that we intend to continue operating are impaired, in that the future undiscounted cash flows of these contracts is estimated to be insufficient to recover the related carrying value of the property and equipment and contract rights associated with the contracts. As a result, we have written down the carrying value of these contracts to our estimate of fair value based on the present value of the discounted future cash flows. The $1.4 million in fiscal 1998 relates to the write-off of assets relating to three terminated concession contracts.
Operating income. Operating income increased $7.8 million from $8.7 million in 1998 to $16.5 million in fiscal 1999. The increase was primarily due to the factors discussed above.
FISCAL 1998 COMPARED TO FISCAL 1997
Net sales. Net sales increased 44.6% from $196.0 million in fiscal 1997 to $283.4 million in fiscal 1998. The increase was primarily due to the to the Acquisition which resulted in the inclusion of $75.5 million in revenues for the period from August 25, 1998 to the end of the fiscal year. In addition, net sales at MLB venues serviced by us increased by $11.6 million as a result of post-season playoff games and a 20.7% increase in average attendance at one client facility.
Cost of sales. Cost of sales increased 41.7% from $157.0 million in fiscal 1997 to $222.5 million in fiscal 1998, primarily as a result of the Acquisition. As a percentage of net sales, cost of sales declined from 80.1% in fiscal 1997 to 78.5% in fiscal 1998 principally due to the inclusion of Service America whose cost of sales was 76.7% for the eighteen weeks ended December 29, 1998, compared to Volume Holdings' percentage of 79.0% excluding Service America. Other factors contributing to the decrease in cost of sales percentage are directly related to the net sales increase at Volume Holdings' MLB facilities. The increased attendance at MLB regular season and playoff games is incrementally more profitable due to the ability of the employment base to service more customers without a corresponding increase in labor costs. In addition, Volume Holdings secured a new service contract in 1998 that had a lower commission rate than the average of its other contracts contributing to the reduction in cost of sales as a percentage of net sales.
Selling, general and administrative expenses. Selling, general and administrative expenses increased 56.1% from $18.9 million in fiscal 1997 to $29.5 million in fiscal 1998, primarily as a result of the Acquisition. The percentage of selling, general and administrative expenses as a percentage of net sales increased from 9.6% in fiscal 1997 to 10.4% in fiscal 1998. The increase as a percentage of net sales is due to the Acquisition, with such expenses representing 13.4% of its net sales.
Depreciation and amortization. Depreciation and amortization increased 41.1% from $12.9 million in fiscal 1997 to $18.2 million in fiscal 1998. The dollar increase was due to:
o Service America's depreciation and amortization from August 24, 1998 to the end of the fiscal year of $2.4 million;
o amortization of trademark fees, step-up value of location contracts and costs in excess of fair value of net assets acquired of $2.6 million resulting from the application of the purchase method of accounting for the Acquisition; and
o amortization of capital investments made in connection with six new contracts of $1.3 million.
Transaction related expenses. Transaction related expenses of $3.1 million in fiscal 1998 primarily include non-recurring severance expense and non-recurring expenses principally for Volume Services in connection with the Acquisition.
Contract related losses. We incurred non-cash contract related losses of $1.4 million in fiscal 1998 as compared to $2.5 million in fiscal 1997. The $1.4 million in fiscal 1998 relates to the write-off of assets relating to three terminated concession contracts. The $2.5 million in fiscal 1997 relates to the closure and subsequent write-off of assets in connection with our contract with Ericsson Stadium.
Operating income. Operating income increased 81.2% from $4.8 million, or 2.4% of net sales, in fiscal 1997 to $8.7 million, or 3.1% of net sales, in fiscal 1998. The increase was primarily due to the factors as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
For fiscal 1999, net cash provided by operating activities was $16.1 million compared to $2.5 million provided by operating activities for fiscal 1998. The $13.6 million increase in cash provided by operating activities was primarily due to increased operating activity, mainly as the result of the Acquisition and higher overall sales due to the addition of new NFL and MLB venues and a $3.9 million net increase in working capital.
For fiscal 1999, net cash used in investing activities was $25.4 million compared to $5.3 million in fiscal 1998. The primary components of net cash used in investing activities were the purchase of property and equipment and investment in contract rights in connection with acquiring or renewing contracts. In fiscal 1999, Volume Holdings made $14.6 million in investments in acquiring new contract rights for Pacific Bell Park, Louisiana Superdome and Arena and Adelphia Stadium and $1.3 million in contract renewals as compared to $6.2 million in fiscal 1998. Investments made in the purchase of property and equipment were $10.4 million in fiscal 1999 as compared to $12.6 million in fiscal year 1998. These investments were partially offset by proceeds from the sale of property and equipment which were $.9 million and $15.9 million in fiscal years 1999 and 1998, respectively. Of the $15.9 million in proceeds for fiscal 1998, $12.6 million was due to the termination of the Ericsson Stadium contract.
For fiscal 1999, net cash provided by financing activities was $12.8 million compared to $6.3 million in fiscal 1998. The 1999 figure reflects the issuance of $100.0 million of senior subordinated notes, and the use of proceeds to retire $45.0 million of senior secured debt and $0.5 million of debt to GE Capital, redeem $49.5 million of stock, and pay related fees of $6.2 million. Excluding this financing, $9.5 million was borrowed under the revolving credit facility to fund working capital and capital expenditures and bank overdrafts increased $7.4 million. This is compared to $6.9 million in borrowings under the revolving credit facility, a $1.8 million decline in bank overdrafts and the receipt of $3.5 million of cash equity from two Blackstone partnerships (BCP Volume, L.P. and BCP Offshore Volume L.P.) in fiscal 1998.
For fiscal 1998, net cash provided by operating activities was $2.5 million compared to $15.3 million provided by operating activities for fiscal 1997. The $12.9 million decrease in cash provided by operating activities was primarily due to an increase of $2.1 million in net loss and a net increase in working capital of $10.1 million, primarily as a result of the acquisition of Service America. This was partially offset by a $5.3 million increase in depreciation and amortization and a $1.5 million extraordinary loss.
For fiscal 1998, net cash used in investing activities was $5.3 million compared to $31.0 million for fiscal 1997. The primary components of net cash used in investing activities for these periods were purchases of property and equipment and investments in contract rights in connection with acquiring or renewing contracts. Volume Holdings used $12.6 million and $26.0 million in the purchase of property and equipment and $6.2 million and $11.6 million for investment in contract rights, for fiscal 1998 and fiscal 1997, respectively. The difference in the amount of net cash used in investing activities in these two periods was primarily due to the large capital investments which were made in FedEx Field (formerly Jack Kent Cooke Stadium), Tropicana Field and Pacific Bell Park in fiscal 1997. In addition, in fiscal 1998, we received $12.6 million in proceeds from assets held for sale after the termination of the Ericsson Stadium contract.
For fiscal 1998, net cash provided by financing activities was $6.3 million compared to $15.9 million in fiscal 1997. The $9.6 million decrease in cash provided by financing activities was primarily due to decreased borrowings under our revolving credit facilities and lower capital investments made to retain contracts or to acquire new contracts. This decrease was partially offset by additional borrowings net of debt repayments and payment of financing costs.
Our liquidity is generated from cash flows from operations as described above and from revolving credit borrowings available through our credit facility. In December 1998, we entered into this credit facility with Chase Manhattan Bank, Goldman Sachs Credit Partners and other lenders to refinance the pre-Acquisition debt of Volume Services and Service America. At closing of the facility, we borrowed $160.0 million in term loans to refinance that debt, and we repaid $45.0 million of these term loans from the proceeds of our senior notes issuance in 1999. The credit facility also includes a $75.0 million revolving credit facility.
We use the money we borrow under the revolving credit facility to fund our working capital needs and for the capital investments we make in connection with our contracts. Revolving credit borrowings may be made at prime rate or at a LIBO rate (available for various interest periods) plus, in each case, the applicable margin. All borrowings under the credit facility are secured by substantially all the assets of Volume Holdings and most of its subsidiaries, including Volume Services and Service America.
At December 28, 1999, $53.3 million of the revolving credit facility was available to be borrowed under our credit facility. At that date, there were $9.5 million in outstanding borrowings and $12.2 million of outstanding, undrawn letters of credit reducing availability.
FUTURE LIQUIDITY AND CAPITAL RESOURCES
We believe that cash flow from operating activities, together with borrowings available under the revolving credit facility, will be sufficient to fund our currently anticipated capital investment requirements, interest and principal payment obligations and working capital requirements. We are currently committed under client contracts to fund capital investments of approximately $6.3 million and $0.6 million in 2000 and 2001, respectively.
We anticipate total capital investments of $15.0 million in fiscal 2000. In addition, we are currently in negotiations for two potential new contacts. If we enter into these contracts, we will be required to fund additional capital investments of approximately $5.7 million in fiscal 2001 and $8.0 million in fiscal 2002.
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137. This statement establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities on the balance sheet and measures those instruments at fair value. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative. For us, this new standard will become effective for our fiscal 2001 financial statements. We have not yet completed our analysis of the effects of this new standard on our results of operations or financial position. The new statement may not be applied retroactively.
YEAR 2000
Volume Services has experienced no business or service disruptions from Year 2000 related issues as of mid-March 2000. However, there is no guarantee that there will not be any Year 2000 issues in the future. We have budgeted $5,000 for Year 2000-related contractor support in the event that Tear 2000 issues arise during 2000.
FORWARD LOOKING AND CAUTIONARY STATEMENTS
Except for the historical information and discussions contained herein, statements contained in this Form 10-K may constitute "forward looking statements" within the meaning of the Private Securities 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 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to interest rate volatility with regard to existing issuances of variable rate debt. We use interest rate swaps to reduce interest rate volatility to achieve a desired proportion of variable versus fixed rate debt, based on current and projected market conditions. The table below provides information about our derivative financial instruments and other financial instruments that are sensitive to changes in interest rates, including interest rate swaps and debt obligations. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. For interest rate swaps and caps, the table presents notional amounts and weighted average interest rates by expected (contractual) maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted average variable rates are based on implied forward rates in the yield curve at the reporting date.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See index to financial statements at page.
ITEM 9.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table provides information about each of our directors and executive officers.
John T. Dee, Chief Executive Officer and Chairman of the Board of Directors. Mr. Dee has served as Chief Executive Officer and Chairman of the Board of Directors of Volume Services America since August 1998. Mr. Dee has served as President, Chief Executive Officer and a director of Service America since January 1993 and as a consultant to Service America from November 1992 to January 1993. He has been Chairman of the Board of Directors of Service America since January 1997. From 1989 to 1992, Mr. Dee was President of Top Food Services, Inc., a company engaged in the food service business. From 1980 to 1989, he was Group President at ARAMARK (a food service company) with responsibility for ARAMARK's recreational food service and public restaurant operations. From 1979 to 1980, he held senior positions, including President, at Sportservice Corporation (a food service company), and was responsible for concessions and merchandise operations at airports, theaters, stadiums, arenas and racetracks. From 1968 to 1979, he held various positions at ARAMARK, including Vice President-Sales and President of the Leisure Services Group, a division of ARAMARK engaged in the recreational food service industry.
Kenneth R. Frick, Vice President and Chief Financial Officer. Mr. Frick has served as Chief Financial Officer of Volume Services America since August 1998 and as Chief Financial Officer of Volume Services since 1995. Mr. Frick has 18 years of experience in the recreational food service industry, 14 of them with Volume Services. Prior to becoming Chief Financial Officer of Volume Services in 1995, Mr. Frick was the Controller for Volume Services, and for seven years was Assistant Controller and Southeast Regional Controller of Volume Services. Mr. Frick is a certified public accountant.
Janet L. Steinmayer, Vice President, General Counsel and Secretary. Ms. Steinmayer has been Vice President, General Counsel and Secretary of Volume Services America since August 1998. Ms. Steinmayer has been Corporate Vice President, General Counsel and Secretary of Service America since November 1993. From 1992 to 1993, she was Senior Vice President-External Affairs and General Counsel of Trans World Airlines, Inc. ("TWA"). From 1990 to 1991, she served as Vice President-Law, Deputy General Counsel and Corporate Secretary at TWA. Ms. Steinmayer was a partner at the Connecticut law firm of Levett, Rockwood & Sanders, P.C. from 1988 to 1990.
Howard A. Lipson, Director. Mr. Lipson is Senior Managing Director of The Blackstone Group L.P., referred to in this Annual Report on Form 10-K as the "Blackstone Group", which he joined in 1988. He has been a director of Volume Services America since 1995. Prior to joining the Blackstone Group, Mr. Lipson was a member of the Mergers and Acquisitions Group of Salomon Brothers Inc. He currently serves on the Board of Directors of Allied Waste Industries, Inc., AMF Group Inc., Ritvik Holdings Inc., Prime Succession Inc. and Roses, Inc. and is a member of the Advisory Committee of Graham Packaging Company.
David Blitzer, Director. Mr. Blitzer is a Senior Managing Director of the Blackstone Group, which he joined in 1991. He has been a director of Volume Services America since 1995. Mr. Blitzer is also a director of Haynes International, Inc., Republic Engineered Steels, Inc., Bar Technologies, Inc. and The Imperial Home Decor Group Inc.
Peter Wallace, Director. Mr. Wallace has been associated with the Blackstone Group since 1997. He has been a director of Volume Services America since October 1999.
The discussion of the amended stockholders' agreement in "Certain Relationships and Related Transactions - Amended Stockholders' Agreement" below (with respect to the rights of management and various Blackstone entities to appoint directors) and the discussion of the employment agreements in "Executive Compensation" below, are incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
The table below provides information concerning the total compensation of the Chief Executive Officer and all other executive officers of Volume Services America based on 1999 salary and bonuses. These officers are referred to together as the "Named Executives".
(1) Bonuses are made pursuant to Volume Service America's bonus plan for general managers and senior management personnel. Eligible personnel qualify for bonus payments in the event that Volume Services America exceeds annual financial performance targets or at the discretion of the board of directors. (2) Perquisites and other personal benefits did not exceed the lesser of $50,000 or 10% of the total salary and bonus of any Named Executive for the years shown. (3) All other compensation for Mr. Dee and Ms. Steinmayer consists of the dollar value of insurance premiums paid by the registrant for that Named Executive. For Mr. Frick, all other compensation consists of $699 in insurance premiums paid for him, $392 in interest on investor notes and $1,761 in employer matching contributions to our 401(k) plan.
DIRECTOR COMPENSATION
Directors of Volume Services America do not receive compensation, except in their capacity as officers or employees.
EMPLOYMENT AND SEVERANCE AGREEMENTS
We have entered into the following arrangements with our directors and executive officers:
On August 24, 1998, Volume Holdings entered into an employment agreement with Mr. Dee. The agreement provides that Mr. Dee will be employed by Volume Holdings at an annual base salary of $465,000 for a term of five years, subject to earlier termination by Volume Holdings for or without Cause, or by Mr. Dee for Good Reason, each as defined in the agreement. Mr. Dee is entitled to a bonus at the discretion of the Board of Directors of Volume Holdings and to participate in any executive bonus plan and all employee benefit plans maintained by Volume Holdings. The agreement provides for severance pay in the case of a termination by Volume Holdings without Cause or by Mr. Dee for Good Reason in an amount equal to Mr. Dee's annual base salary for the balance of the term of employment and ancillary benefits. During and for two years after Mr. Dee's employment, Mr. Dee has agreed that, without the written consent of Volume Holdings, he will not:
o be engaged, in any capacity, in any business that competes with Volume Holdings' business; or
o solicit any person who was employed by Volume Holdings during the 12 months preceding such solicitation.
On November 17, 1995, Volume Services entered into an employment agreement with Mr. Frick. The agreement provides that Mr. Frick will be employed by Volume Services until he resigns or is dismissed by Volume Services for or without Cause, as defined in the agreement. Mr. Frick's base salary under the contract is $195,000 subject to annual review. Mr. Frick is also entitled to receive an annual bonus pursuant to any management incentive compensation plan established by Volume Services. In the case of termination of employment due to resignation, Mr. Frick will receive his salary up to the 30th day following his resignation and any accrued but unpaid bonus. In the case of termination without Cause by Volume Services, Mr. Frick will receive a one-time payment of two times his base annual salary plus any accrued but unpaid bonus. During and for two years after his employment, Mr. Frick has agreed not to:
o solicit employees of Volume Services to cease such employment without the written consent of Volume Services; or
o have any involvement in any capacity in any contract concessions business similar to that of Volume Services in those states in the United States in which Volume Services does business and over which Mr. Frick has had supervisory responsibility.
On September 29, 1998, Volume Holdings entered into an employment agreement with Ms. Steinmayer. The agreement provides that Ms. Steinmayer will be employed by Volume Holdings at an annual base salary of $180,000, plus $250 per hour for each hour that she works in excess of 24 hours per week, until the agreement is terminated by Volume Holdings for or without Cause, or by Ms. Steinmayer for Good Reason, each as defined in the agreement. Ms. Steinmayer is entitled to a bonus at the discretion of the Board of Directors of Volume Holdings and to participate in any executive bonus plan and all employee benefit plans maintained by Volume Holdings. The agreement provides for severance pay in the case of a termination by Volume Holdings without Cause or by Ms. Steinmayer for Good Reason in an amount equal to two times her compensation in the one year period prior to the date of termination (annualized in the case of termination prior to the end of the first year), plus ancillary benefits. During and for two years after Ms. Steinmayer's employment, she has agreed that she will not, without the prior written consent of Volume Holdings:
o have any involvement in any enterprise which provides food services, as defined in the agreement in any of the states in the United States in which Volume Holdings operates; or
o solicit any employee of Volume Holdings to leave its employment.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Volume Services America is a wholly owned subsidiary of Volume Holdings. The following table and accompanying footnotes set forth certain information concerning the beneficial ownership of the Volume Holdings common stock. Except as disclosed below, none of our officers or directors beneficially owns any of our stock. Except as indicated in the footnotes to this table, we believe that the persons named in the table have sole voting and investment power with respect to all shares shown as beneficially owned by them.
(1) Blackstone Management Associates II L.L.C. ("BMA II") is one of two managing members of VSI Management I, L.L.C. ("VSI I"), BMA II is also the general partner of Blackstone Capital Partners II Merchant Banking Fund L.P. ("BCP II") and the investment general partner of Blackstone Offshore Capital Partners II L.P. ("BOC II"). BMA II thus exercises shared voting and dispositive power with respect to VSI I (see note (3)) and sole voting and dispositive authority with respect to BCP II and BOC II. BCP II is the general partner of BCP Volume L.P and exercises sole voting and dispositive power with respect to its shares. BOC II is the general partner for BCP Offshore Volume L.P. and exercises sole voting and dispositive power with respect to its shares. VSI I is the general partner for VSI Management Direct L.P. and exercises sole voting and dispositive power with respect to its shares. Messrs. Peter G. Peterson and Stephen A. Schwarzman are members of BMA II, which has or shares investment and voting control over the shares held or controlled by each of the foregoing entities. Each of these individuals disclaims beneficial ownership of such shares.
(2) Recreational Services L.L.C. ("Recreational Services") is a limited liability company, the managing member of which is GE Capital.
(3) VSI Management Direct L.P. is a limited partnership, the general partner of which is VSI I. The managing members of VSI I are Kenneth R. Frick, our Vice President and Chief Financial Officer, and BMA II, and they exercise shared voting and dispositive power over the shares owned by VSI Management Direct L.P. Mr. Frick disclaims beneficial ownership of such shares.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ASSIGNMENT AND ASSUMPTION AGREEMENT
Pursuant to an assignment and assumption agreement, Service America assigned the promissory notes and common stock of Compass Group PLC ("Compass") received from the sale to Compass of Service America's institutional vending and dining business, which were valued by the parties at $108.4 million, to GE Capital in consideration for:
o the forgiveness of $17.9 million of debt and interest and $3.8 million of accrued dividends owed by Service America to GE Capital; and
o the assumption by GE Capital of a percentage of certain categories of liabilities on Service America's balance sheet as of the closing date of the Compass transaction. These percentages represented an approximation of the amount of each category of liabilities attributable to all institutional vending and dining operations sold by Service America on or prior to September 27, 1996.
Pursuant to the assignment and assumption agreement, Service America serves as GE Capital's agent for purposes of paying and discharging all of such assumed liabilities, and these transactions with GE Capital are reflected in Service America's financial statements. Certain liabilities assumed by GE Capital are subject to an aggregate maximum of approximately $16.3 million, but this amount does not apply to:
o certain anticipated or contingent liabilities, which were assumed 100% by GE Capital;
o casualty insurance, including worker's compensation;
o medical insurance; and
o certain accrued taxes.
In addition, GE Capital agreed to reimburse Service America for its part of the compensation for one of its employees between August 1998 and August 1999. The total amount that GE Capital paid Service America during 1999 for this reimbursement was $175,000.
As of December 28, 1999, GE Capital had assumed accrued liabilities of $16.3 million subject to the limit. We do not believe that outstanding liabilities subject to the limit will exceed the $0.6 million which remains available, but we cannot assure you that this will be the case. If such liabilities do exceed the limit, we will be liable for them. As of December 28,1999, approximately $2.0 million of liabilities not subject to the limit were outstanding. GE Capital will be solely responsible for these liabilities until April 20, 2000. On April 20, 2000, GE Capital will pay us a sum equal to 125% of the total liabilities that we agree with GE Capital to be then outstanding. After this payment, we will be responsible for the entire actual amount of all liabilities.
TAX INDEMNITY AGREEMENT
Service America ceased being a member of the General Electric Company consolidated group, referred to as the "GE Consolidated Group", for federal income tax purposes by reason of the Acquisition. Accordingly, Service America and GE Capital in January 1997 entered into a tax indemnity agreement. Under this agreement:
o GE Capital agreed to indemnify Service America for, and became entitled to any refund of, all consolidated or combined federal, state and local income taxes payable while Service America was a member of the GE Consolidated Group; and
o as authorized by the consolidated return Treasury Regulations, the GE Consolidated Group became entitled to re-attribute to itself the portion of Service America's net operating losses that did not exceed the amount of "disallowed losses" (as defined in those regulations) which GE Capital realized in connection with the recapitalization of Service America effected in January 1997 by GE Capital and some members of Service America's management
LETTERS OF CREDIT
Upon entering into the senior credit facilities in December 1998, Volume Services America obtained two letters of credit in favor of GE Capital for $1.1 million and $6.8 million, respectively. These letters of credit were obtained to reimburse GE Capital for any liability that it may incur pursuant to its guarantee of certain letters of credit provided to support obligations of Service America prior to the acquisition of Service America by Volume Holdings and which were then still outstanding. During 1999, the maximum aggregate outstanding amount of these letters of credit was $7.9 million. Both letters of credit were cancelled by August 1999.
AMENDED STOCKHOLDERS' AGREEMENT
On December 21, 1995, VSI Management Direct L.P. ("VSI Management"), BCP Volume L.P., BCP Offshore Volume L.P. and Volume Holdings entered into a stockholders' agreement. On August 24, 1998, these parties, together with GE Capital and Recreational Services, entered into an amended and restated stockholders' agreement. In the discussion of the stockholders' agreement below, we refer to BCP Volume L.P. and BCP Offshore Volume L.P. collectively as "Blackstone".
Management; Board of Directors. The Board of Volume Holdings will be comprised of a Chairman, one director appointed by VSI Management (provided that the Chairman is not a partner of VSI Management and that VSI Management consults with Blackstone prior to the appointment) and three directors appointed by Blackstone (provided that Blackstone is the sole Controlling Stockholder, defined in the agreement). If Blackstone ceases to be the sole Controlling Stockholder, each of Blackstone and GE Capital will have the right to appoint two directors. Until GE Capital is entitled to appoint a director, it is entitled to appoint an Observer, as defined in the agreement, who is not entitled to vote on any Board matters.
Transfers of Shares. No transfers of the shares of Volume Holdings' common stock, referred to as the "Shares", may be made by any stockholder, as defined in the agreement, within one year from the date of the amended stockholders' agreement other than:
o to a defined category of persons affiliated with or successors in title to existing stockholders, each of whom agrees to be bound by the terms of the amended stockholders' agreement, each referred to as a "Permitted Transferee";
o pursuant to a public offering of the Shares; or
o in accordance with the exercise of the drag-along or tag-along rights discussed below.
If either of Blackstone or Recreational Services, for these purposes, referred to as the "Transferring Stockholder", intends to transfer its Shares while the amended stockholders' agreement is in effect (other than by way of a public offering or pursuant to Rule 144 under the Securities Act or to a Permitted Transferee) and the Transferring Stockholder still beneficially owns at least one-third of the number of Shares on a fully diluted basis that it held at the date of the amended stockholders' agreement, then each other stockholder will have the right to require the purchaser of such Transferring Stockholder's Shares to purchase the same proportion of the Shares that such stockholder owns, on the same terms as those offered to the Transferring Stockholder, referred to as the "tag-along right".
If all of the Controlling Stockholders accept an offer by a party other than a stockholder, referred to as a "Third Party", to purchase all of the Shares owned by the stockholders (and the Controlling Stockholder to whom the offer was made still owns at least one-third of the Shares owned by it at the date of the amended stockholders' agreement), then each stockholder is obliged to transfer its Shares to the Third Party on the same terms as those accepted by the Controlling Stockholders, referred to as the "drag-along right".
After one year from the date of the amended stockholders' agreement, a stockholder may also transfer Shares:
o pursuant to a transfer that is exempt from the registration requirements of the Securities Act; or
o if such stockholder is not a Controlling Stockholder, after offering the Shares first to Volume Holdings and then to each of Blackstone and Recreational Services in proportion to their respective holdings of Shares.
Unless a stockholder transfers Shares pursuant to a public offering, Rule 144 under the Securities Act or the drag-along right, all transferees are required to become bound by the terms of the amended stockholders' agreement.
Restrictions on Corporate Action. For so long as Recreational Services owns at least 20% of the Shares, we may not take certain fundamental corporate actions without the consent of each of Recreational Services and Blackstone, including the amendment of the certificate of incorporation or by-laws of Volume Holdings or the modification of any stock option, bonus or benefit plan. Similarly, as long as Recreational Services owns at least 20% of the Shares, Volume Holdings may not enter into any transaction with Blackstone, or its affiliates, without the consent of Recreational Services, except for:
o the payment of regular fees or expenses to its directors;
o transactions that are reasonable in the light of industry practice and that are of a value not greater than $500,000 individually and $1,000,000 in the aggregate in any one year;
o the payment of the monitoring fee discussed below; or
o transaction fees up to 1% of the value of a company being acquired by Volume Holdings, as long as GE Capital also receives a proportional fee based on Recreational Services' Share ownership relative to Blackstone's Share ownership.
Annual Fees. The amended stockholders' agreement permits the payment of annual monitoring fees by Volume Holdings of $250,000 to Blackstone and $167,000 to GE Capital. The fees payable to Blackstone and GE Capital have been accounted for as an expense, but not yet paid.
Registration Rights. Blackstone has the right to demand registration of the Shares by Volume Holdings under the Securities Act at any time, subject to a maximum of three such registrations. Recreational Services has the right to demand such registration on one occasion only, at any time on or after the third anniversary of the date of the amended stockholders' agreement.
Financings. The amended stockholders' agreement also obliged Volume Holdings to use its reasonable best efforts to consummate a financing by August 24, 1999. The proceeds of the financing were to be applied to pay related fees and expenses, to repay debt of Volume Holdings and to repurchase Shares from the holders in accordance with a formula set out in the exchange agreement with respect to our senior notes. Volume Holdings satisfied this requirement by consummation of the senior credit facilities and the issuance of Volume Service America's senior notes.
LEASING SERVICES
GE Capital and its affiliates provided us leasing and financing services during 1999 on arms-length terms. Payments to GE Capital and its affiliates during 1999, net of discounts earned, were approximately $185,000.
LOANS TO VSI PARTNERSHIPS
During 1999, VSI Management and VSI Management II, L.P. ("VSI Management II") repurchased some of their partnership interests from some former members of management. To fund this purchase, Volume Services America loaned $854,000 to VSI Management and $65,000 to VSI Management II. The loans were on arms-length terms, with interest accruing at the applicable federal rate, and the full amount of the loans remained outstanding at December 28, 1999.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) See index to financial statements at page.
(b) We did not file any Current Report on Form 8-K during the last quarter of our 1999 fiscal year.
(c) Exhibits:
No. Description --- -----------
2. See Exhibit 10.1
3.1 Restated Certificate of Incorporation of Volume Services America, Inc. Incorporated by reference to Exhibit 3.1 to our Registration Statement on Form S-4, Commission File No. 333-79419 (the "Form S-4").
3.2 By-laws of Volume Services America, Inc. Incorporated by reference to Exhibit 3.2 to the Form S-4.
3.3 Restated Certificate of Incorporation of Volume Services America Holdings, Inc. Incorporated by reference to Exhibit 3.3 to the Form S-4.
3.4 By-laws of Volume Services America Holdings, Inc. Incorporated by reference to Exhibit 3.4 to the Form S-4.
3.5 Restated Certificate of Incorporation of Volume Services, Inc. Incorporated by reference to Exhibit 3.5 to the Form S-4.
3.6 By-laws of Volume Services, Inc. Incorporated by reference to Exhibit 3.6 to the Form S-4.
3.7 Restated Certificate of Incorporation of Service America Corporation. Incorporated by reference to Exhibit 3.7 to the Form S-4.
3.8 By-laws of Service America Corporation. Incorporated by re ference to Exhibit 3.8 to the Form S-4.
3.9 Articles of Incorporation of Events Center Catering, Inc. Incorporated by reference to Exhibit 3.9 to the Form S-4.
3.10 Articles of Incorporation of Service America Concessions Corporation. Incorporated by reference to Exhibit 3.10 to the Form S-4.
3.11 By-laws of Service America Concessions Corporation. Incorporated by reference to Exhibit 3.11 to the Form S-4.
3.12 Articles of Incorporation of Service America Corporation of Wisconsin. Incorporated by reference to Exhibit 3.12 to the Form S-4.
3.13 By-laws of Service America Corporation of Wisconsin. Incorporated by reference to Exhibit 3.13 to the Form S-4.
3.14 Articles of Incorporation of Servo-Kansas, Inc. Incorporated by reference to Exhibit 3.14 to the Form S-4.
3.15 By-laws of Servo-Kansas, Inc. Incorporated by reference to Exhibit 3.15 to the Form S-4.
3.16 Articles of Incorporation of Servomation Duchess, Inc. Incorporated by reference to Exhibit 3.16 to the Form S-4.
3.17 By-laws of Servomation Duchess, Inc. Incorporated by reference to Exhibit 3.17 to the Form S-4.
3.18 Articles of Incorporation of SVM of Texas, Inc. Incorporated by reference to Exhibit 3.18 to the Form S-4.
3.19 By-laws of SVM of Texas, Inc. Incorporated by reference to Exhibit 3.19 to the Form S-4.
3.20 Certificate of Incorporation of Volume Services, Inc. Incorporated by reference to Exhibit 3.20 to the Form S-4.
3.21 By-laws of Volume Services, Inc. Incorporated by reference to Exhibit 3.21 to the Form S-4.
4.1 Indenture, dated as of March 4, 1999, between Volume Services America, Inc. and Norwest Bank Minnesota, National Association. Incorporated by reference to Exhibit 4.1 to the Form S-4. 4.2 Exchange and Registration Rights Agreement, dated March 4, 1999, between Volume Services America, Inc., Chase Securities Inc. and Goldman, Sachs & Co. Incorporated by reference to Exhibit 4.2 to the Form S-4.
10.1 Purchase Agreement, dated February 25, 1999, between Volume Services America, Inc., Chase Securities Inc. and Goldman, Sachs & Co. Incorporated by reference to Exhibit 1 to the Form S-4.
10.2 Share Exchange Agreement, dated as of July 27, 1998, among VSI Acquisition II Corporation, as Buyer, the Stockholders of the Buyer and the Sellers specified therein. Incorporated by reference to Exhibit 10.1 to the Form S-4.
10.3 Amended and Restated Stockholders' Agreement, dated as of August 24, 1998, among VSI Acquisition II Corporation, BCP Volume L.P., BCP Offshore Volume L.P., VSI Management Direct L.P., General Electric Capital Corporation and Recreational Services L.L.C. Incorporated by reference to Exhibit 10.2 to the Form S-4.
10.4 Credit Agreement, dated as of December 3, 1998, among Volume Services America, Inc., Volume Services America Holdings, Inc., certain financial institutions as the Lenders, Goldman Sachs Credit Partners L.P., Chase Securities Inc., Chase Manhattan Bank Delaware and The Chase Manhattan Bank. Incorporated by reference to Exhibit 10.3 to the Form S-4.
*10.4.1. First Amendment, dated as of February 8, 1999 to the Credit Agreement, dated as of December 3, 1998, among Volume Services America, Inc., Volume Services America Holdings, Inc., certain financial institutions as the Lenders, Goldman Sachs Credit Partners, L.P., Chase Securities, Inc., Chase Manhattan Bank Delaware and The Chase Manhattan Bank.
10.5 Volume Services, Inc., Deferred Compensation Plan, Enrollment Information and Forms. Incorporated by reference to Exhibit 10.4 to the Form S-4.
10.6 Volume Services America, 1999 Bonus Plan. Incorporated by reference to Exhibit 10.5 to the Form S-4.
10.7 Service America Corporation, Deferred Compensation Plan, effective as of February 9, 1999. Incorporated by reference to Exhibit 10.6 to the Form S-4.
10.8 Employment Agreement dated as of August 24, 1998, by and between VSI Acquisition II Corporation and John T. Dee. Incorporated by reference to Exhibit 10.7 to the Form S-4.
10.9 Employment Agreement dated as of November 17, 1998, by and between Volume Services, Inc. (a Delaware corporation) and Kenneth R. Frick. Incorporated by reference to Exhibit 10.8 to the Form S-4.
10.10Employment Agreement, dated as of September 29, 1998, by and between VSI Acquisition Corporation and Janet L. Steinmayer. Incorporated by reference to Exhibit 10.10 to the Form S-4.
*12 Computation of Ratio of Earnings to Fixed Charges
*21 List of Subsidiaries
*27.1 Financial Data Schedule
------------------ *Filed herewith
(d) Financial Statement Schedules
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
We have not sent to shareholders any annual report to security holders, proxy statement, form of proxy or other proxy soliciting material during or with respect to our 1999 fiscal year.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 21, 2000.
Volume Services America, Inc.
By: /s/ Kenneth R. Frick ------------------------- Name: Kenneth R. Frick Title: Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of each registrant and in the capacities indicated on March 21, 2000.
Signature Title
/s/ John T. Dee Chief Executive Officer and Chairman - ------------------------- John T. Dee (Principal Executive Officer)
/s/ Kenneth R. Frick Vice President and Chief Financial Officer - ------------------------- Kenneth R. Frick (Principal Financial Officer)
/s/ Howard A. Lipson - -------------------- Howard A. Lipson
/s/ David Blitzer Directors - ---------------------- David Blitzer
/s/ Peter Wallace - ----------------- Peter Wallace
[GRAPHIC OMITTED] Volume Services America Holdings, Inc. Consolidated Financial Statements for the Years Ended December 29, 1998 and December 28, 1999 and Independent Auditors' Report
INDEPENDENT AUDITORS REPORT
To the Board of Directors and Shareholders of Volume Services America Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Volume Services America Holdings, Inc. and subsidiaries (the "Company") as of December 29, 1998 and December 28, 1999, and the related consolidated statements of operations and comprehensive loss, stockholders' equity (deficiency), and cash flows for each of the three years in the period ended December 28, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 29, 1998 and December 28, 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 28, 1999 in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche ---------------------
March 10, 2000 Greenville, South Carolina
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VOLUME SERVICES AMERICA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS DECEMBER 29, 1998 AND DECEMBER 28, 1999 (IN THOUSANDS)
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VOLUME SERVICES AMERICA HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 29, 1998 AND DECEMBER 28, 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA)
See notes to consolidated financial statements.
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VOLUME SERVICES AMERICA HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS YEARS ENDED DECEMBER 30, 1997, DECEMBER 29, 1998 AND DECEMBER 28, 1999 (IN THOUSANDS)
See notes to consolidated financial statements.
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VOLUME SERVICES AMERICA HOLDINGS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) YEARS ENDED DECEMBER 30, 1997, DECEMBER 29, 1998 AND DECEMBER 28, 1999 (IN THOUSANDS, except per share data)
See notes to consolidated financial statements
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VOLUME SERVICES AMERICA HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 30, 1997, DECEMBER 29, 1998 AND DECEMBER 28, 1999 (IN THOUSANDS)
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VOLUME SERVICES AMERICA HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 30, 1997, DECEMBER 29, 1998 AND DECEMBER 28, 1999 (IN THOUSANDS)
See notes to consolidated financial statements.
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VOLUME SERVICES AMERICA HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 30, 1997, DECEMBER 29, 1998 AND DECEMBER 28, 1999
1. GENERAL
Volume Services America Holdings, Inc. ("Volume Holdings," and together with its subsidiaries, the "Company"), formerly VSI Acquisition II Corporation and subsidiaries ("VSI"), is a holding company, the principal assets of which are the capital stock of its subsidiary, Volume Services America, Inc. ("Volume Services America"). Volume Holdings' financial information is therefore substantially the same as that of Volume Services America. Volume Services America is also a holding company, the principal assets of which are the capital stock of its subsidiaries, Volume Services, Inc. ("Volume Services") and Service America Corporation ("Service America"). The Company is owned by its senior management, Blackstone Capital Partners II Merchant Banking Fund, L.P. ("BCP II"), and General Electric Capital Corporation ("GE Capital"). GE Capital, which as of December 28, 1999 controlled 36.4% of the Company through its controlling interest in Recreational Services LLC, was the majority stockholder (on a fully diluted basis) of Service America prior to the acquisition of Service America by Volume Holdings on August 24, 1998. As of December 28, 1999, the remainder of the Company's capital stock was owned by limited partnerships controlled by BCP Volume L.P. and BCP Offshore Volume L.P. ("Blackstone") (59.4%) and by current and former management employees of Volume Services (4.2%). At December 28, 1999, the Company had approximately 122 contracts to provide specified concession services, including catering and novelty merchandise items at stadiums, sports arenas, convention centers and other entertainment facilities at various locations in the United States and Canada. Contracts to provide these services were generally obtained through competitive bids. In most instances, the Company has the right to provide these services in a particular location for a period of several years, with the duration of time often a function of the required investment in facilities or other financial considerations. The contracts vary in length generally from one to twenty years. Certain of the contracts contain renewal clauses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of the Company, and its wholly owned subsidiaries, Volume Services America, Volume Services and Service America. All significant intercompany transactions have been eliminated.
FISCAL YEAR - The Company has adopted a 52-53 week period ending on the Tuesday closest to December 31 as its fiscal year end. The 1997, 1998 and 1999 fiscal years consisted of 52 weeks.
CASH AND CASH EQUIVALENTS - The Company considers temporary cash investments purchased with a maturity of three months or less to be cash.
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REVENUE RECOGNITION - The Company typically enters into one of three types of contracts: 1) profit and loss contracts, 2) profit sharing contracts and 3) management fee contracts. Under profit and loss and profit sharing contracts revenue from food and beverage concessions and catering contract food services is recognized as the services are provided. Management fee contracts provide the Company with a fixed fee or a fixed fee plus an incentive fee and the Company bears no profit or loss risk, only the amount of the fees received are included in net sales when earned. The total revenue received by the Company from services provided to the end users of the products without regard to the type of contract is defined as "managed revenues". The Company's total managed revenues for fiscal years 1997, 1998 and 1999 were approximately $234,783,000, $315,728,000 and $452,679,000, respectively.
MERCHANDISE INVENTORIES - Merchandise inventories consist of food, beverage, and team and other merchandise. Inventory is valued primarily at the lower of cost or market, determined on the first-in, first-out basis.
DEPRECIATION - Property and equipment is stated at cost and is depreciated on the straight-line method over the lesser of the estimated useful life of the asset and the term of the contract at the site where such property and equipment is located. Following are the estimated useful lives of the property and equipment:
- Leasehold improvements - esimated useful life limited by the lease term (contract term)
- Merchandising equipment - five to ten years limited by the contract term
- Vehicles and other equipment - two to ten years limited by the contract term
CONTRACT RIGHTS - Contract rights, net of accumulated amortization, of approximately $72,935,000 at December 29, 1998 and $73,808,000 at December 28, 1999 consist primarily of certain directly attributable costs incurred by the Company in obtaining or renewing contracts with clients and the fair value of contract rights acquired related to the acquisitions of VSI in 1995 and Service America in 1998. These costs for the Company are amortized over the contract life of each such contract, including optional renewal periods where the option to renew rests solely with the Company. Accumulated amortization was approximately $12,947,000 at December 29, 1998 and $22,163,000 at December 28, 1999.
COST IN EXCESS OF NET ASSETS ACQUIRED - Cost in excess of net assets acquired (goodwill) is being amortized on the straight-line basis over 30 years. Amortization expense was approximately $291,000 in fiscal 1997, $790,000 in fiscal 1998, and $1,817,000 in fiscal 1999. Accumulated amortization was approximately $1,389,000 at December 29, 1998 and $3,206,000 at December 28, 1999.
TRADEMARKS - Trademarks consist of the net book value of the trademarks of the Company of $19,108,000 at December 29, 1998 and $18,422,000 at December 28, 1999 and are being amortized on a straight-line basis over 30 years. Accumulated amortization was approximately $1,492,000 at December 29, 1998 and $2,178,000 at December 28, 1999.
DEFERRED FINANCING COSTS - The net book value of deferred financing costs of $7,783,000 at December 29, 1998 and $11,459,000 at December 28, 1999 is being amortized as interest expense over the life of the respective debt using the interest method. Accumulated amortization was approximately $76,000 at December 29, 1998 and $1,550,000 at December 28, 1999.
IMPAIRMENT OF LONG-LIVED ASSETS AND CONTRACT LOSSES- The Company accounts for impairment of long-lived assets in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for the Long-Lived Assets to be Disposed of". SFAS No. 121 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. In accordance with
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SFAS No. 121, the Company estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of an impairment loss for long-lived assets and identifiable intangibles is based on the estimated fair value of the asset determined by future discounted net cash flows.
DERIVATIVE FINANCIAL INSTRUMENTS - The Company uses derivative financial instruments, including interest rate swaps, caps and floors as a means of hedging exposure to interest rate risks. All hedging instruments are designated as hedges and are highly correlated to the underlying risk as required by generally accepted accounting principles. Instruments that do not qualify for hedge accounting are marked-to-market with changes recognized in current earnings. The Company is the end-user and does not utilize these instruments for speculative purposes. The Company has rigorous standards regarding the financial stability and credit standing of its major counterparties.
Interest rate swaps and caps involve the periodic exchange of payments without the exchange of underlying principal or notional amounts. Net payments are recognized as an adjustment to interest expense. Should the swaps or caps be terminated, unrealized gains or losses are deferred and amortized over the shorter of the remaining original term of the hedging instrument or the remaining life of the underlying debt instrument.
INSURANCE - At the beginning of fiscal 1999, the Company adopted a premium based insurance program for general liability, automobile liability and workers' compensation risk. Prior to fiscal 1999, the Company was primarily self-insured for general liability, automobile liability, and workers' compensation risks, supplemented by stop-loss type insurance policies. Management determines its estimate of the reserve for self-insurance considering a number of factors, including historical experience and actuarial assessment of the liabilities for reported claims and claims incurred but not reported. The self-insurance liabilities for estimated incurred losses were discounted using rates between 4.51% and 4.68% at December 29, 1998 and 5.14% and 5.98 % at December 28, 1999, to their present value based on expected loss payment patterns determined by experience. The total discounted self-insurance liabilities recorded by the Company at December 29, 1998 and December 28, 1999 were $5,390,000 and $3,398,000, respectively. The related undiscounted amounts were $5,803,000 and $3,884,000, respectively.
CASH OVERDRAFTS - The Company has included in accounts payable on the accompanying consolidated balance sheets cash overdrafts totaling $3,857,000 and $9,420,000 at December 29, 1998 and December 28, 1999, respectively.
FOREIGN CURRENCY - The balance sheet and results of operations of the Company's Canadian subsidiary (a subsidiary of Service America) are measured using the local currency as the functional currency. Assets and liabilities have been translated into United States dollars at the rates of exchange at the balance sheet date. Revenues and expenses are translated into United States dollars at the average rate during the period. The exchange gains and losses arising on transactions are charged to income as incurred. Translation gains and losses arising from the use of differing exchange rates from year to year are included in accumulated other comprehensive loss.
TRANSACTION RELATED EXPENSES - Transaction related expenses primarily include personnel costs, rental costs and professional fees associated with downsizing Service America Corporation's Stamford, CT office (see Note 5).
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INCOME TAXES - The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. A valuation allowance is established for deferred tax assets when it is more likely than not that the benefits of such assets will not be realized.
SEGMENT REPORTING - The combined operations of the Company's contracts comprises one operating segment.
RECLASSIFICATIONS - Certain amounts in 1997 and 1998 have been reclassified, where applicable, to conform to the financial statement presentation used in 1999.
NEW ACCOUNTING STANDARDS - In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities as amended by SFAS No. 137. This statement establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities on the balance sheet and measures those instruments at fair value. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative. It will become effective for the Company for the fiscal year 2001 financial statements. The Company has not yet completed its analysis of the effects of this new standard on its results of operations or financial position. The statement may not be applied retroactively.
3. CHANGE IN ACCOUNTING PRINCIPLE
The Company adopted the provisions of the American Institute of Certified Public Accountants Statement of Position 98-5, Reporting on the Costs of Start-up Activities, which requires that costs of start-up activities be expensed as incurred, as of December 30, 1998. As a result, the Company recorded a charge of $256,000 net of tax (approximately $170,000) reflecting the effect of the change in accounting principle during fiscal year 1999.
4. SIGNIFICANT RISKS AND UNCERTAINTIES
USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company's most significant financial statement estimates include the estimate of the recoverability of contract rights and related assets, potential litigation claims and settlements, the liability for self- insured claims and the allowance for doubtful accounts. Actual results could differ from those estimates.
CERTAIN RISK CONCENTRATIONS - Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of cash equivalents, short-term investments and accounts receivable. The Company places its cash equivalents and short-term investments with high-credit qualified financial institutions and, by practice, limits the amount of credit exposure to any one financial institution.
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Concentrations of credit risk with respect to accounts receivable are limited due to many customers comprising the Company's customer base and their dispersion across different geographic areas. For the fiscal years ended December 30, 1997, December 29, 1998 and December 28, 1999, the Company had one customer that accounted for approximately 16.4%, 15.8%, and 11.1% of operating revenues, respectively.
The Company's revenues and earnings are dependent on various factors such as attendance levels and the number of games played by the professional football and baseball teams which are tenants at facilities serviced by the Company, which can be favorably impacted if the teams qualify for post-season play, or adversely affected if the teams are on strike.
5. ACQUISITION
On August 24, 1998, Volume Holdings, BCP Volume L.P., BCP Offshore Volume L.P. and VSI Management Direct L.P. ("VSI Management"), together with GE Capital and certain management shareholders of Service America, purchased substantially all of the capital stock of Service America (the "Acquisition"). The purchase price was $32.8 million which consisted of (a) $1,000 in cash (b) 150 newly issued shares of the Volume Holdings Common Stock representing approximately 28.5% of the outstanding common stock of Volume Holdings on a fully diluted basis after giving effect to such issuance (c) the issuance to GE Capital of a 6.0% per annum senior subordinated promissory note, due on December 31, 1999, in an aggregate principal amount of $500,000 and (d) $2.8 million of transaction costs. By December 1998, the Company had purchased the remainder of Service America capital stock and contributed all of the Service America capital stock to Volume Services America. The purchase method of accounting was used to establish and record a new cost basis for the assets acquired and liabilities assumed. The difference between the purchase price and the fair market values of the assets acquired and liabilities assumed was recorded as goodwill in the amount of $44.5 million and is being amortized over 30 years. The results of Service America's operations have been included in the Company's statement of operations beginning August 25, 1998 (date of acquisition).
The following unaudited pro forma financial information presents a summary of consolidated results of operations as if the Service America acquisition had occurred as of January 1, 1997, after giving effect to certain adjustments, including amortization of goodwill, interest expense on acquisition debt and related income tax effects. The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisition been made on that date, nor are they necessarily indicative of results which may occur in the future.
PRO FORMA (IN THOUSANDS) YEAR ENDED ---------- 1997 1998
Net sales $368,900 $ 405,900 Loss before extraordinary item (12,500) (9,900) Net loss (14,300) (11,900)
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6. DEBT
Long Term Debt consists of the following (in thousands): 1998 1999
Term A Borrowings $ 40,000 $ - Term B Borrowings 120,000 113,850 Revolving Credit Facility - 9,500 Senior Subordinated Notes - 100,000 ------- ---------- 160,000 223,350 Less current portion of long-term debt (4,200) (1,150) ------ ------
Total long-term debt $155,800 $222,200 ======== ========
1998 CREDIT AGREEMENT - On December 3, 1998, Volume Services America (the "Borrower") entered into a credit agreement, which provided for $160,000,000 in term loans, consisting of $40,000,000 of Tranche A term loans ("Term Loan A") and $120,000,000 of Tranche B term loans ("Term Loan B" and together with Term Loan A, the "Term Loans") and a $75,000,000 revolving credit facility (the "Revolving Credit Facility"). Borrowings under the Term Loans were used to repay in full all outstanding indebtedness of Volume Services and Service America under their then existing credit facilities and to pay fees and expenses incurred in connection with the acquisition of Service America and the credit agreement. The commitments under the Revolving Credit Facility are available to fund capital investment requirements, working capital and general corporate needs of the Company. In conjunction with the credit agreement, the Company recognized an extraordinary loss of $1,499,000, net of taxes (approximately $999,000) on its statement of operations for the early extinguishment of its previous debt in fiscal year 1998.
On March 4, 1999, the $40,000,000 of Term A borrowings and $5,000,000 of Term B borrowings were repaid with the proceeds from the Senior Subordinated Notes discussed below.
Installments of Term Loan B are due in consecutive quarterly installments on the last day of each fiscal quarter with 25% of the following annual amounts being paid on each installment date: $1,150,000 in each year from 2000 through 2005, and $106,950,000 in 2006.
The Revolving Credit Facility allows the Company to borrow up to $75,000,000 and includes a sub- limit of $35,000,000 for letters of credit which reduce availability under the Revolving Credit Facility and a sub-limit of $5,000,000 for swingline loans. The Revolving Credit Facility will mature on December 3, 2004. At December 28, 1999, $9,500,000 was outstanding under the Revolving Credit Facility and approximately $12,198,000 of letters of credit were outstanding but undrawn.
The credit agreement bears interest at floating rates based upon the interest rate option elected by the Company and the Company's leverage ratio. The interest rates at December 29, 1998 were 8.25% for Term Loan A and 9% for Term Loan B. The interest rates at December 28, 1999 were 9.94% for Term Loan B and 10.5% for the Revolving Credit Facility.
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The Credit Agreement calls for mandatory prepayment of the loans under certain circumstances and optional prepayment without penalty. The Credit Agreement contains covenants that require the Company to comply with certain financial covenants, including a maximum net leverage ratio, an interest coverage ratio and a minimum consolidated cash net worth test. In addition, Volume Services America is restricted in its ability to pay dividends and other restricted payments in an amount greater than approximately $49,500,000 million at December 28, 1999.
SENIOR SUBORDINATED NOTES - On March 4, 1999, Volume Services America completed a private placement of 11 1/4% Senior Subordinated Notes in the aggregate principal amount of $100 million. On September 30, 1999, the Company exchanged the Senior Subordinated Notes for notes which have been registered under the Securities Act of 1933. The notes mature on March 1, 2009 and interest is payable on March 1 and September 1 of each year, beginning on September 1, 1999. Such notes are unsecured, are subordinated to all the existing debt and any future debt of Volume Services America, rank equally with all of the other Senior Subordinated debt of Volume Services America, and senior to all of Volume Services America's existing and subordinated debt. Furthermore, the debt is guaranteed by the Company and all of the subsidiaries of Volume Services America, except for certain non-wholly owned U.S. subsidiaries and one non-U.S. subsidiary.
The proceeds of the notes were used to (i) repay $40,000,000 of Term A Borrowings and $5,000,000 of Term B Borrowings, (ii) fund the repurchase by Volume Holdings of 194 shares of Volume Holdings common stock for $49,500,000 and the repayment by Volume Holdings of a $500,000 note in favor of GE Capital and (iii) pay fees and expenses incurred in connection with the notes and the consent from lenders to an amendment to the Credit Agreement. In conjunction with the notes, Volume Services America recognized an extraordinary loss of $873,000, net of taxes (approximately $570,000) on its statement of operations for the early extinguishment of $45,000,000 of Term Loans in fiscal year 1999.
Aggregate annual maturities of long-term debt at December 28, 1999 are as follows (in thousands):
2000 $ 1,150 2001 1,150 2002 1,150 2003 1,150 2004 10,650 Thereafter 208,100 -------
Total $ 223,350 =========
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7. CAPITAL LEASE OBLIGATION
The Company is obligated to make minimum lease payments under a capital lease agreement. The following is a schedule of future minimum lease payments under the capital lease together with the present value of the net minimum lease payments as of December 28, 1999 (in thousands):
FISCAL YEAR
2000 $ 250 2001 250 2002 196 ---- --- Total minimum lease payments 696 Less: Amount representing interest (74) --- Present value of minimum lease payments 622 Less current portion of capital lease obligation (206) ----
Total long-term capital lease obligation $ 416 =====
Under the terms of the lease agreement, certain equipment is pledged to secure performance as follows (in thousands):
Equipment $ 914 Accumulated depreciation (160) ----
Total $ 754 =====
8. INCOME TAXES
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At December 28, 1999, the Company has $20,388,000 of net operating loss carryforwards, $13,000,000 of which are from the acquisition of Service America. These carryforwards begin to expire in years 2005 through 2018. The Company's future ability to utilize the acquired Service America net operating loss carryforward is limited by section 382 of the Internal Revenue Code of 1986, as amended. The general business credit carryforwards begin to expire in 2005.
As a result of the 1998 acquisition of Service America Corporation, the Company's valuation allowance was reduced for pre-acquisition tax benefits that management considers more likely than not to be realized at the date of acquisition. This valuation allowance reduction was recognized as part of purchase price adjustments and is not reflected in the tax provision for the year.
As of December 28, 1999, there was a change in management's estimate of certain items relating to the basis of tax liabilities that existed at the date of the acquisition of Service America. The effect of adjustments to these liabilities, which approximates $970,000, was applied as a decrease to goodwill attributable to the acquisition.
The provision for income taxes is as follows (in thousands):
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The difference between the statutory federal income tax rate and the effective tax rate on net loss is as follows:
9. EQUITY TRANSACTIONS
SALE OF COMMON STOCK - During 1997, the Company issued 68.6 shares of common stock for $6,857,000. Of the $6,857,000, $457,000 was financed by the Company in the form of investors' notes and the remaining balance was received in cash.
During 1998, the Company issued 37.5 shares of common stock for $3,750,000. Of the $3,750,000 , $250,000 was financed by the Company in the form of investors' notes and the remaining balance was received in cash.
STOCK REDEMPTION - From the proceeds of the Senior Subordinated Notes described in Note 5, Volume Services America paid a $50,000,000 dividend in 1999 to Volume Holdings. Volume Holdings used the proceeds to redeem 194 shares of its common stock (the "Stock Redemption") and to repay a $500,000 note in favor of GE Capital.
OTHER - At December 30, 1997 and December 29, 1998, other equity consisted of investors' notes receivable due from various investors. These nonrecourse notes were due if the Company should undergo a recapitalization as defined by the note agreements. Because the proceeds of the notes were used to buy Company stock, the notes have been reflected as a reduction of stockholders' equity. All notes were repaid during fiscal 1999 with the proceeds received from the stock redemption noted above.
At December 28, 1999, other equity consists of loans by the Company to VSI Management and another partnership which holds an indirect ownership in the Company. The loans were used to fund the repurchase of partnership interests from former members of management. Accordingly, these amounts have been included as a reduction to stockholders' equity.
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10. INTEREST RATE HEDGING ARRANGEMENTS
On January 26, 1998, the Company entered into an interest rate swap transaction with Chase in order to limit its exposure to future fluctuations in London Interbank Offered Rate ("LIBOR") rate related to debt instruments outstanding at that time. The agreement provided for a fixed rate of interest of 5.39% for a period ending January 12, 1999 on a notional amount of $80,000,000. On December 9, 1998, the Company terminated this transaction effective January 12, 1999 and entered into a new interest rate swap transaction providing a fixed interest rate of 5.06% for a two year period on a notional amount of $80,000,000. On March 15, 1999, the Company terminated the interest rate swap effective April 12, 1999 and received $180,000 which was deferred and will be amortized as a reduction to interest expense over the original life of the terminated swap.
Effective April 15, 1999, the Company entered into an interest cap transaction with the Union Bank of California ("UBOC") for a $10,000,000 notional amount for $4,200. The interest rate cap protects the Company if the three month LIBOR exceeds 7.5% through January 16, 2001.
The Company entered into an interest rate swap transaction on April 16, 1999 with UBOC for a $30,000,000 notional amount with no up front cost. This swap provides that the Company pays to UBOC one month LIBOR and that UBOC pays to the Company 5.375% each month until April 20, 2001. On October 20, 1999, the Company sold an interest rate floor on this swap to UBOC and received $34,000, which is being marked-to-market. Consequently, in the event that one month LIBOR is less than 5.375% the Company must instead pay 5.375%.
The counterparties to the Company's interest rate exchange agreements are major financial institutions. Such financial institutions are leading market-makers in the financial derivatives markets and are expected to fully perform under the terms of such exchange agreements.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments and related underlying assumptions are as follows:
LONG-TERM DEBT - The Company estimates that the carrying value at December 29, 1998 and December 28, 1999 approximates the fair value of the Term Loans and Revolving Credit Facility based upon the variable rate of interest and frequent repricing. The Company estimates that the fair value of the Senior Subordinated Notes to be approximately $98,500,000 (book value $100,000,000) based on third party quotations for the same or similar issues.
INTEREST RATE HEDGING ARRANGEMENTS - At December 29, 1998, the Company estimates the fair value of the interest rate swap agreement was a gain of approximately $431,000. At December 28, 1999, the Company estimates the fair values of the interest rate swap, cap and floor are a loss of $450,250, a loss of $5,100 and a gain of $1,900, respectively. These figures represent the estimated amounts the Company would pay or receive to terminate these financial instrument agreements, as quoted by the financial institution.
CURRENT ASSETS AND CURRENT LIABILITIES - The Company estimates the carrying value of these assets and liabilities to approximate their fair value based upon the nature of the financial instruments and their relatively short duration.
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12. COMMITMENTS AND CONTINGENCIES
LEASES AND CLIENT CONTRACTS - The Company operates primarily at its clients' premises pursuant to written contracts. The length of a contract generally ranges from one to twenty years. Certain of these client contracts provide for both fixed and variable commissions and royalties. Aggregate commission and royalty expense under these agreements was $60,402,000 (minimum of approximately $4,500,000) for fiscal 1997 and $86,489,000 (minimum of approximately $3,634,000) for fiscal 1998 and $131,056,000 (minimum of approximately $9,955,000) for fiscal 1999.
The Company leases a number of real properties and other equipment under varying lease terms which are noncancelable. Rent expense for all operating leases was approximately $255,000, $1,317,000 and $1,085,000 in fiscal 1997, fiscal 1998 and fiscal 1999, respectively.
Future minimum commitments for all operating leases and minimum commissions and royalties due under client contracts are as follows (in thousands):
COMMISSIONS OPERATING AND YEAR LEASES ROYALTIES
2000 $ 376 $ 10,222 2001 312 8,630 2002 191 6,409 2003 86 5,249 2004 37 4,510 Thereafter - 24,968 ------ ------
Total $1,002 $59,988 ====== =======
EMPLOYMENT CONTRACTS - The Company has employment agreements and arrangements with its executive officers and certain management personnel. The agreements generally continue until terminated by the executive or the Company, and provide for severance payments under certain circumstances. The agreements include a covenant against competition with the Company, which extends for a period of time after termination for any reason. As of December 28, 1999 if all of the employees under contract were to be terminated by the Company without good cause (as defined) under these contracts, the Company's liability would be approximately $5.0 million.
COMMITMENTS - Pursuant to its contracts with various clients, the Company is committed to spend approximately $6,300,000 during 2000 and $605,000 during 2001 for equipment improvements and location contract rights. In addition, the Company currently is engaged in negotiations pursuant to which it expects to enter into a new contract which will require the Company to fund additional future capital investments of approximately $5,700,000, which would be invested in 2000 and 2001.
The Company has $5,858,000 of letters of credit collateralizing the Company's performance and other bonds, and $4,893,000 in letters of credit collateralizing the self-insurance reserves of the Company, and $1,448,000 in other letters of credit.
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LITIGATION - On June 12, 1998, Service America commenced arbitration proceedings through the American Arbitration Association in New York, New York against Silver Huntington Realty LLC and Silver Huntington Enterprises LLC (collectively, "Silver"). Service America alleged fraud, misrepresentation, negligent misrepresentation, breach of contract and breach of the covenant of good faith and fair dealing in connection with Service America's Exclusive Catering Services Agreement with Silver dated November 21, 1997, and sought damages in excess of $1 million. Silver subsequently filed a counterclaim that alleged breach of contract, sought an accounting and asserted that Service America had commenced the proceeding and acted in bad faith. Silver claims damages for injury to its business in an amount in excess of $11 million. In light of Service America's meritorious defenses, it does not believe that Silver's claims are well-founded in fact or law. Service America is vigorously pursuing its claim and defending against the counterlcaims. The evidentiary proceeding has closed, the parties have made their final arguments in the arbitration and Service America is awaiting the artitrator's decision.
There are various other claims and pending legal actions against or indirectly involving the Company.
It is the opinion of management, after considering a number of factors, including, but not limited to, the current status of the litigation (including any settlement discussions), views of retained counsel, the nature of the litigation, the prior experience of the Company, and the amounts which the Company has accrued for known contingencies, that the ultimate disposition of these matters will not materially affect the financial position or future results of operations of the Company.
13. RELATED PARTY TRANSACTIONS
MANAGEMENT FEES - Certain administrative and management functions were provided to VSI by the Blackstone Group through a monitoring agreement. VSI paid Blackstone Management Partners II L.P., an affiliate of Blackstone, management fees of approximately $250,000 in fiscal 1997. Such amounts are included in selling, general and administrative expenses.
As part of the Acquisition (see Note 5), the Company paid management fees to Blackstone and GE Capital of $250,000 and $167,000, respectively, for consulting, monitoring and financial advisory services provided to the Company. The fee of $250,000 paid to Blackstone Management Partners II L.P. in fiscal 1998 and fiscal 1999 is consistent with the amount paid by the Company in previous years. The Company paid GE Capital management fees of approximately $42,000 and $167,000 for fiscal 1998 and fiscal 1999. Such amounts are included in selling, general and administrative expenses.
The Company also paid fees of $125,000 in July 1998 and $2,275,000 in December 1998 to the Blackstone Group in connection with the Acquisition, in accordance with the terms of an arrangement entered into in May 1998. Such amounts were included in the calculation of goodwill.
GE CAPITAL RECEIVABLE - This receivable represents amounts to reimburse Service America for future estimated liabilities (an equal amount has been included in other long-term liabilities) to be paid by Service America on behalf of GE Capital.
At December 28, 1999, the receivable was $2,061,000 and is included in prepaid and other assets as the receivable is scheduled to be finalized and settled in early 2000. At December 29, 1998, the receivable was $2,364,000 and has been recorded in prepaid and other assets.
In addition, GE Capital agreed to reimburse Service America for its compensation of one of its employees between August 1998 and August 1999. The total amount that GE Capital paid Service America during 1999 for this reimbursement was $175,000.
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LEASING SERVICES - GE Capital and its affiliates provide leasing and financing services to the Company. Payments to GE Capital and its affiliates for fiscal year 1998 and 1999 for such services, net of discounts earned, were approximately $1,900,000 and $185,000 and are included in selling, general and administrative expense on the statement of operations and comprehensive loss.
MANAGEMENT INCENTIVE AGREEMENT - During 1998, the Company introduced a discretionary incentive plan whereby general managers and senior management personnel qualify for incentive payments in the event that the Company has exceeded certain financial performance targets. The Company has accrued approximately $373,000 and $865,000 in accrued salaries and vacations in the accompanying balance sheets at December 29, 1998 and December 28, 1999, respectively, for such incentives payable to certain general managers and senior management personnel.
14. RETIREMENT PLAN
Volume Services has a 40l(k) defined contribution plan which covers substantially all Volume Services employees. Employees may contribute up to 15% of their eligible earnings and the Company will match 25% of employee contributions up to the first 6% of employee compensation. Contributions to the plan were approximately $203,000 for fiscal 1997, $185,000 for fiscal 1998 and $178,000 for fiscal 1999.
Service America has a 401(k) defined contribution plan which covers substantially all Service America employees. Employees may contribute up to 16% of their eligible earnings. The Company's contribution is discretionary. No amounts were contributed by the Company to the plan during fiscal 1998 or 1999.
Effective January 2000, the Volume Service and Service America 40l(k)'s were merged into one plan.
MULTI-EMPLOYER PENSION PLANS - Certain of the Company's union employees are covered by multi- employer defined benefit pension plans administered by unions. Under the Employee Retirement Income Security Act ("ERISA"), as amended, an employer upon withdrawal from a multi-employer pension plan is required to continue funding its proportionate share of the plan's unfunded vested benefits. The Company may incur a withdrawal liability if a recreational services contract is terminated or not renewed. Amounts charged to expense and contributed to the plans were not material for the periods presented.
15. CONTRACT RELATED LOSSES
In March 1998, the Company terminated a concession contract with one of its clients. The Company recognized a loss from this termination of approximately $2,505,000 during fiscal 1997 which includes a $1,100,000 write-down on assets held for sale to their estimated realizable value for the year ended December 30, 1997. As part of the settlement, the Company sold certain assets to the former client. Net proceeds of the sale of these assets totaled $12,575,000 in fiscal 1998.
The Company terminated three additional concession contracts in fiscal 1998. The Company recognized a loss of approximately $1,423,000 for the year ended December 29, 1998, which relates to the write off of assets relating to the contracts.
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During fiscal 1999, several contracts which the Company intends to continue operating were identified as impaired, as the future undiscounted cash flows of each of these contracts was estimated to be insufficient to recover the related carrying value of the property and equipment and contract rights associated with each contract. As such, the carrying values of these contracts were written down to the Company's estimate of fair value based on the present value of the discounted future cash flows. The Company wrote down approximately $573,000 of property and equipment and $448,000 of contract rights in fiscal 1999.
During fiscal 1999, the Company recorded a loss for an underperforming contract with estimated future losses of approximately $401,000.
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarterly operating results for the years ended December 29, 1998 and December 28, 1999 are as follows (in thousands):
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17. NON-GUARANTOR SUBSIDIARIES FINANCIAL STATEMENTS
The senior subordinated notes are jointly and severally, guaranteed by the Company and all of the subsidiaries of Volume Service America, except for certain non-wholly owned U.S. subsidiaries and one non-U.S. subsidiary. The following table sets forth the condensed consolidated financial statements of the Parent Company, Guarantor Subsidiaries and Non-Guarantor Subsidiaries as of and for the fifty-two week period ended December 29, 1998 and December 28, 1999. As the nonguarantor subsidiaries related to Service America which was acquired in 1998, no information as of December 30, 1997 and for the fifty-two week period then ended is provided.
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CONSOLIDATING CONDENSED BALANCE SHEET DECEMBER 29, 1998 (IN THOUSANDS)
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CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS YEAR ENDED DECEMBER 29, 1998 (IN THOUSANDS)
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CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 29, 1998 (IN THOUSANDS)
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CONSOLIDATING CONDENSED BALANCE SHEET DECEMBER 28, 1999 (IN THOUSANDS)
-F27-
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS YEAR ENDED DECEMBER 28, 1999 (IN THOUSANDS)
-F28-
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 28, 1999 (IN THOUSANDS)
-F29-