<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-K
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(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________.
Commission File Number: 333-37475
CATERAIR INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 52-1640561
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
524 East Lamar Boulevard, Arlington, Texas 76011
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (817) 792-2123
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES |X| NO |_|
[Cover page 1 of 2 pages]
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant. The aggregate market value
shall be computed by reference to the price at which the common equity was sold,
or the average bid and asked prices of such common equity, as of a specified
date within 60 days prior to the date of the filing.
Not applicable.
As of March 30, 1998, the Registrant had outstanding 10,000 shares of
common stock, $.01 par value per share.
Documents incorporated by reference: None.
[Cover page 2 of 2 pages]
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INDEX
<TABLE>
<CAPTION>
Page
Part I
<S> <C> <C>
Item 1. Business.................................................................................. 1
Item 2. Properties................................................................................ 6
Item 3. Legal Proceedings......................................................................... 6
Item 4. Submission of Matters to a Vote of Security Holders....................................... 7
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..................... 7
Item 6. Selected Financial Data................................................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 11
Item 8. Financial Statements and Supplementary Financial Data..................................... 16
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure...... 16
Part III
Item 10. Directors and Officers................................................................... 16
Item 11. Executive Compensation................................................................... 17
Item 12. Security Ownership of Certain Beneficial Owners and Management........................... 19
Item 13. Certain Relationships and Related Transactions........................................... 19
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................... 21
</TABLE>
<PAGE> 4
Part I.
Item 1. Business
Introduction
On September 29, 1995, Caterair International Corporation (the "Company"),
Caterair Holdings Corporation (the parent of the Company, "Caterair Holdings")
and Onex Food Services, Inc. ("OFSI") entered into a series of agreements
whereby OFSI and an affiliate of OFSI exchanged common stock and warrants of
OFSI for certain stock and debt held by Caterair Holdings' shareholders and
creditor, as a result of which OFSI and its affiliate acquired more than 50% of
the total outstanding voting shares, and more than 25% of the total outstanding
non-voting shares, of Caterair Holdings. Concurrent with such transaction,
subsidiaries of OFSI, including SC International Services, Inc. ("SCIS"),
through its wholly-owned operating subsidiaries, Sky Chefs, Inc. ("Sky Chefs")
and Caterair International, Inc. (II) ("CII"), leased, subleased, licensed or
acquired substantially all of the worldwide business and assets of the Company
(collectively, the "Combination"). See "Certain Relationships and Related
Transactions -- The Combination." Prior to September 29, 1995, the Company was
primarily engaged in the business of providing airline catering services.
Following the consummation of the Combination, the Company discontinued
substantially all of its airline catering operations, and primarily engages in
the business of leasing, subleasing and licensing its assets to subsidiaries of
SCIS.
Following the consummation of the Combination, the Company retained
certain operations relating to customer contracts for which consents to the
Combination were not obtained. Such consents were obtained during the second
quarter of 1996 and such operations were leased, subleased and licensed to SCIS
and its subsidiaries at such time.
The Company is a Delaware corporation, incorporated in December 1989 when
it acquired the airline catering business of Marriott Corporation ("Marriott")
through a buy-out involving senior management and The Carlyle Group, L.P., a
private investment firm. The Company's executive offices are located at 524 East
Lamar Boulevard, Arlington, Texas 76011.
Leasing and Licensing Operations
Leasing Operations
In connection with the Combination, Sky Chefs and CII leased or subleased
substantially all of the Company's real and personal tangible domestic assets
for a six-year term (expiring 2001) (the "Domestic Leases"). In the event the
Company's lease of such assets is for a shorter period than six years, the
applicable Domestic Lease is for such shorter period. Sky Chefs and CII each
have options to purchase all or a portion of the assets covered by the Domestic
Leases for amounts determined under formulas in the Domestic Leases that were
intended to result in exercise prices equal to the estimated fair market value
of such assets at the time or times of exercise of such options. The options are
exercisable until the date which is 30 days after the termination of the
applicable Domestic Lease. It is not certain that such purchase options will be
exercised. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Financial Statements and notes thereto included
elsewhere in this Annual Report on Form 10-K.
Licensing Operations
In connection with the Combination, pursuant to license agreements between
the Company and each of Sky Chefs and CII, respectively (the "License
Agreements"), Sky Chefs and CII obtained the rights under certain of the
Company's customer contracts for a six-year term (expiring 2001). Sky Chefs and
CII have options to purchase all or a portion of the customer contract rights
covered by the License Agreements for amounts determined under formulas in the
License Agreements that were intended to result in exercise prices equal to the
estimated fair market value of such rights at the time or times of exercise of
such options. The options are exercisable at any time until the date which is
90 days after the termination of the applicable License Agreement. It is not
certain whether such purchase options will
<PAGE> 5
be exercised. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and notes thereto
included elsewhere in this Annual Report on Form 10-K.
The loss of the business with Sky Chefs and/or CII (or a significant
portion thereof) would have a material adverse effect on the Company, as Sky
Chefs and CII currently provide substantially all of the Company's revenues.
Employees
The Company currently operates one airline catering kitchen outside of the
United States, employing approximately 117 persons as of December 31, 1997, of
which approximately 100 are unionized. The Company considers its relationship
with its employees and their respective union representatives to be good. Other
than with respect to the operations relating to that kitchen, the Company is
involved in the business of leasing and licensing its domestic assets to Sky
Chefs and CII.
Government Regulation
General. Each of the Company's United States kitchens is subject to
federal, state and local laws and regulations, governing health, sanitation,
safety, customs and security. In addition, the design and construction of new
kitchens are affected by federal, state and local laws and regulations regarding
food and health matters, environmental matters, zoning and land use. The
Company's kitchen outside the United States is subject to various foreign laws
and regulations. None of these laws and regulations has had a material adverse
effect on the Company's leasing, licensing, or other operations taken as a
whole, and the Company has not experienced any significant difficulties in
obtaining material licenses and approvals necessary to its operations. More
stringent and varied laws, regulations and requirements (particularly at the
local level), however, could result in increases in costs at kitchens. There can
be no assurance that the Company will in the future be able to obtain necessary
licenses and approvals or that it will remain in compliance with applicable laws
and regulations or that such laws and regulations will not have a material
adverse effect on the Company's operations.
Environmental. Under various federal, state and local laws and
regulations, a current or previous owner or operator, manager or developer of
real estate may be liable for the costs of removing and remediating certain
hazardous or toxic substances on the property. These laws often impose liability
without regard to whether the owner or operator knew of, or was responsible for,
the presence of the hazardous or toxic substances. The costs of removing or
remediating these substances may be substantial and the presence of these
substances, or the failure to remediate conditions affected by the substances
promptly, may adversely affect the owner's or operator's ability to sell or
lease the real estate or to borrow using the real estate as collateral. Persons
who arrange for the disposal or treatment of hazardous or toxic substances may
also be liable for the costs of removing or remediating the substances at the
disposal or treatment facility. Certain laws impose liability for the release of
asbestos into the air and owners or operators of real properties may be sued for
personal injury associated with alleged exposure to asbestos. In connection with
its discontinued operations previously conducted at its properties, and the
ownership or leasing and operation of its properties, the Company may be
potentially liable for these costs. In addition, the presence of hazardous or
toxic substances at a site adjacent to or in the vicinity of a property could
require the property owner or user to participate in remediation activities in
certain cases or could have an adverse effect on the value of such property. The
Company believes that it is in substantial compliance in all material respects
with applicable federal, state and local regulations regarding hazardous or
toxic substances and is not subject to liability thereunder which would have a
material adverse effect on its business or financial condition.
The Company maintains underground storage tanks used to store fuel for
trucks at a number of kitchens located in the United States and other countries.
Under federal and state regulations, the Company is subject to various
requirements applicable to underground fuel storage tanks, including
requirements for upgrading tanks, operating standards, release detection
requirements, and financial responsibility requirements. In the past, a number
of the Company's underground storage tanks have discharged fuel. The Company has
removed all tanks where it was aware of such discharges and remediated, or is in
the process of remediating, any contamination resulting from such discharges
and has removed all but one of its remaining underground storage tanks located
in the United States. The Company is
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not aware of any liability that it has in connection with the existing or
previous ownership or operation of underground storage tanks that would have a
material adverse effect on the Company's business or financial condition.
The government regulations described above apply to the current leasing
and licensing operations of the Company as well as to other operations conducted
by the Company.
Former Operations
Discontinued Catering Operations
The following description relates to the business conducted by the Company
prior to the consummation of the Combination on September 29, 1995. For a more
detailed description of the Combination, see "Certain Relationships and Related
Transactions -- The Combination."
Prior to the consummation of the Combination, the Company operated or
managed, directly or indirectly through joint ventures, 106 kitchens located at
or adjacent to 85 airports in 24 countries.
The Company conducted airline catering services out of kitchens at or near
airports for airline customers which included: (i) designing and planning menus;
(ii) purchasing food products, beverages and other items in accordance with
customer specifications; (iii) preparing and assembling individual meals; (iv)
stocking liquor and beverage service carts; (v) loading meals and service carts
onto trucks which transport them from the kitchen to the airplane; (vi)
unloading and cleaning plates, utensils and other accessories from airplanes on
which meals have been served; (vii) providing linens, ice and duty free items;
and (viii) providing inventory management and storing airline-owned dining
equipment, which includes plates, utensils, trays, carts, glasses and various
other items.
In the United States, a substantial portion of the food products,
non-alcoholic beverages and other items used by the Company were purchased under
contracts negotiated and specified by airlines and, generally, the cost of food
products, non-alcoholic beverages and such other items were passed through to
airline customers without profit. However, in the Company's international
operations, food products, beverages and other items were generally purchased
locally under contracts negotiated by the Company.
For information relating to the amounts of revenues, operating profit or
loss and identifiable assets attributable to each of the Company's geographic
areas, see the Financial Statements and notes thereto included elsewhere in this
Annual Report on Form 10-K. In connection with the Combination on September 29,
1995, the Company discontinued its airline catering operations, and sold
substantially all of its foreign operations to SCIS and its subsidiaries.
Domestic Operations. In connection with the Combination, the Company
leased, subleased and licensed substantially all of its real, personal and
tangible domestic assets to Sky Chefs and CII. The Company had 1997 domestic
revenues of approximately $76 million, derived from the Company's leasing and
licensing operations. Prior to the consummation of the Combination, the Company
owned or leased 60 kitchens serving 42 airports in the United States.
International Operations. In connection with the Combination, the Company
sold substantially all of its foreign operations to SCIS and its subsidiaries.
Prior to consummation of the Combination, outside the United States, the Company
operated or managed, directly or indirectly through joint ventures, 46 kitchens
at or near 43 airports in 23 countries, including England, France, Spain,
Australia, Venezuela, Brazil, Argentina, Canada, Chile and Russia, and kitchens
in Central America and the Caribbean for which the Company had technical
services or management agreements. The Company generally initiated and conducted
its international operations through acquisitions of existing catering
businesses and joint ventures with airline carriers or other local partners,
including Qantas Airlines in Australia, Aeroflot in Russia, Goddard Enterprises
Ltd. in the Caribbean, and a consortium of Persian Gulf carriers in England.
A typical joint venture arrangement with an airline provided for initial
capital investments by the Company and its joint venture partner for
construction of a kitchen and for a long-term management agreement under which
the
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Company received a fee for operating the kitchen as well as a long-term
catering contract with the customer/partner. The joint venture arrangement
permitted the Company to service other carriers as well as its joint venture
partner. In most cases, the airline joint venture partner committed to purchase
all of its airline catering requirements from the Company at the airports
covered by the joint venture.
Discontinued Non-Airline Catering Operations
Prior to consummation of the Combination, the Company was also involved in
non-airline catering operations which accounted for a relatively small portion
of its sales. Such operations in the United States involved primarily the
preparation and delivery of meals to healthcare facilities and convenience
stores. These activities were conducted from the Company's kitchens. Outside the
United States, the Company principally operated employee cafeterias at
industrial plants, office buildings and other facilities.
In connection with the acquisition of the Company in 1989, Caterair
Holdings and Marriott Corporation entered into a non-competition agreement which
prohibits the Company, subject to certain limited exceptions, from participating
in the food, beverage, merchandise and duty free shop businesses and similar
businesses operated in airport terminals or related facilities and certain food
and service management businesses conducted by Marriott Corporation in 1989,
other than the airline catering service business, until December 15, 2001.
Customers
Prior to the consummation of the Combination, the Company provided airline
catering services to over 170 airlines. The Company's largest North American
customers included American Airlines ("American"), Delta Air Lines, Northwest
Airlines, United Airlines and Canadian Airlines International and the Company's
five largest international customers included Qantas Airways, Japan Air Lines,
Iberia Airlines, Lufthansa and Cathay Pacific Airlines. The Company's current
contract with American (the "American Contract") runs through the end of 2001,
subject to adjustment based on performance. The American Contract was terminated
in 1994 as a result of the Company's financial difficulties. However, prior to
the consummation of the Combination, American continued to conduct business with
the Company as if such contract had remained in effect. In connection with the
Combination, American consented to the reinstatement of the American Contract
and the licensing of such contract by the Company to Sky Chefs and CII.
The American Contract also specifies pricing and quality performance
standards; failure to comply with these standards may result in financial
penalties or termination of the contract at the affected airport (or in some
case at a comparable airport), and, under certain circumstances, the purchase of
the kitchen at the affected airport by American. During 1997, American
terminated SCIS' services at six of the kitchens formerly operated by the
Company due to SCIS' failure to comply with these quality standards. Based on
current service levels, the Company estimates that such terminations will result
in reductions of annual revenues to SCIS of approximately $34 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." In September, 1997, Mr. Robert Crandall, the Chairman and Chief
Executive Officer of AMR, the parent of American, was reported to have stated to
financial analysts that in his opinion American's contracts with the SCIS'
(including the Company's American Contract which is licensed to Sky Chefs and
CII) "[produce] a cost disadvantage relative to other caterers" and that
American will seek to eliminate its perceived cost disadvantage. SCIS and
American periodically discuss issues surrounding the terms of these contracts
and such discussions have continued following Mr. Crandall's remarks. From time
to time the contracts with American have been amended and/or extended, and such
contracts maybe further amended and/or extended in the future.
Only one customer (American at 12%) accounted for more than 10% of the
Company's 1995 revenues. The loss of the business with American licensed to Sky
Chefs and CII would indirectly have a material adverse effect on the business of
the Company.
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Competition
The airline catering industry is highly competitive. Several large United
States and international caterers, as well as a number of small caterers
operating at one or more locations and, at certain locations, airport terminal
concession operations, compete for airline catering business. Furthermore, there
are few competitive restraints for a new caterer or an airline to begin catering
in any market. Prior to the consummation of the Combination, the Company
competed primarily with other independent caterers, and to some extent with
captive caterers, on the basis of price, service and performance. The Company's
principal competitors in the United States were Dobbs International Services,
Inc., a subsidiary of Viad Inc, Ogden Allied Aviation Services Division, a
subsidiary of Ogden Corporation, and Sky Chefs. The Company's principal
competitors outside the United States were Alpha Airport Group PLC, Gate
Gourmet, the airline catering subsidiary of Swissair, and other captive
caterers.
The busiest airports have numerous kitchens operated by major caterers. At
some of these airports, unutilized capacity exists, which leads to increased
competition among caterers and gives airlines leverage in negotiating contracts
with all caterers with facilities located there. On the other hand, some other
airports are serviced by only one caterer. Competitive constraints in the
airports where there is only one caterer include the airlines' ability to cater
their planes at other airports and the possibility that other caterers may be
encouraged to enter that particular airport if the existing caterer is not
competitive.
Airline catering at most major airports outside the United States was
traditionally dominated by the local flag carriers, which typically maintained
their own catering operations to serve locations where they had a significant
share of air passenger traffic. In recent years, however, governments generally
have reduced their control over local flag carriers and increased the landing
privileges of other airlines.
In connection with the acquisition of the Company in 1989, Marriott
Corporation and Caterair Holdings entered into a non-competition agreement which
prohibits Marriott Corporation, subject to certain exceptions, from
participating in the airline catering business until December 15, 2001.
In connection with the consummation of the Combination, the Company and
Sky Chefs entered into a non-competition agreement which prohibits the Company,
subject to certain exceptions, from engaging in the airline catering business
until September 29, 2001.
Government Regulation
In addition to the government regulations applicable to the current
operations of the Company, the former airline catering operations of the Company
were subject to the following regulations. See "Business -- Leasing and
Licensing Operations -- Government Regulation" and "Certain Relationships and
Related Transactions -- The Combination."
Federal Regulation of Food Services. In addition to applicable state and
local regulations, the Company's former operations at domestic kitchens were
subject to regulation and inspection by the United States Food and Drug
Administration (the "FDA"). Every kitchen in the United States was required to
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. Leftover and
discarded food arriving in the United States on incoming international flights
was required to be disposed of in accordance with requirements established by
the United States Department of Agriculture.
Customs and Security. The Company and its former operations were subject
to certain federal laws and regulations which are designed to prevent certain
criminal activities, primarily smuggling and terrorism. In an effort to prevent
such activities, the Federal Aviation Administration requires a five-year
background investigation of all employees of the Company who have access to the
airport ramps and loading docks from which meals are delivered and boarded onto
aircraft. The United States Customs Service, in addition to requiring a similar
background
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investigation, has the right to inspect all items removed from incoming
international flights, including food trays and related equipment.
Item 2. Properties.
United States Properties.
At December 31, 1997, the Company owned or leased 57 kitchens, at or near
41 major airports throughout the United States with approximately 2.5 million
square feet of building area. The Company owns 1 of its kitchens, the remaining
56 are leased. The kitchens are located at or near major airports and range in
size from approximately 12,000 square feet to 130,000 square feet of building
area and operate 20 to 24 hours a day. The size and structure of the Company's
kitchens vary depending upon the number of meals to be produced by each kitchen.
Most of the Company's kitchens are leased on a long-term basis from airport
authorities, TriNet Corporate Realty Trust, Inc. and its affiliates, and other
third parties (generally for initial terms of 10 to 20 years).
The Company presently leases and subleases substantially all of its
properties located in the United States to Sky Chefs and CII pursuant to the
Domestic Leases. See "Business -- Leasing Operations" and "Certain Relationships
and Related Transactions -- The Combination."
The Company's leasehold improvements with respect to these properties
revert to the lessors upon termination of the leases, except to the extent the
Company has and exercises a purchase option with respect to the leased property.
Nearly all kitchen leases on airport property in the United States require
the Company to pay ground rent, which ranges from an annual rate of $0.50 to
$14.57 per square foot. Most kitchen leases with airport authorities require the
payment of a percentage concession or royalty fee generally ranging from 2.0% to
13.8% of gross revenues. Approximately one-half of the Company's kitchen leases
in the United States require the payment of the greater of the percentage fee or
the ground rent amount. Most of the other kitchen leases require the payment of
ground rent plus the percentage fee. Many of the fixed rental kitchen leases
have escalation clauses that provide for periodic increases tied to the consumer
price index. The majority of kitchen leases entered into by the Company during
the past ten years provide for periodic adjustment of ground rent which is
either fixed or is based upon an appraisal. The Company also pays building rent
in connection with several of its kitchen leases in the United States. The
Company is currently negotiating or renegotiating certain of its kitchen leases.
The Company leases and subleases until 2004 approximately 44,866 square
feet at 6550 Rock Spring Drive, Bethesda, Maryland 20817 (which is subleased to
SCIS).
The Company owns or leases, a fleet of special-purpose catering and
utility vehicles which it formerly used to deliver its catering services to
airplanes in the United States prior to the consummation of the Combination. The
Company presently leases and subleases substantially all such vehicles to Sky
Chefs and CII.
The Company also owns or leases land or facilities at locations in
California, Hawaii, New York and Florida that are either not in operation or are
currently being subleased.
International Properties.
In connection with the Combination, the Company sold substantially all of
its foreign properties and operations to SCIS and it subsidiaries, except for
one kitchen. Such kitchen is not material to the Company's operations.
Item 3. Legal Proceedings.
On June 3, 1991, the Teamsters Union (the "Union") went on strike at the
Company's three Los Angeles kitchens, and the Company hired replacement workers.
On August 26, 1992, a National Labor Relations Board (the "NLRB") Administrative
Law Judge (the "ALJ") ruled against the Company on unfair labor practice
charges, including
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refusal to bargain with the Union on the grounds that it no longer represented a
majority of the employees. On December 15, 1992, the NLRB in Washington, D.C.,
adopted, without substantive modification or comment, the ALJ's Recommended
Decision and Order. The U.S. Supreme Court refused to hear the case in November
1994. While the Company reinstated striking employees to the extent reasonably
possible, the NLRB determined that the amount of back pay payable by the Company
to settle the suit was approximately $4.5 million. Such payment was made in
early 1997.
The Company is also involved in routine litigation, including a number of
workers' compensation and related claims, that have arisen in the ordinary
course of business. The Company does not believe that the routine litigation is
material to its financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
Part II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
There exists no established public trading market for the Company's common
stock, $.01 par value per share. As of March 30, 1998, all the outstanding and
issued shares of the Company's common stock were held by Caterair Holdings. The
Company did not pay any dividends on its common stock during 1997. Each of (i)
the Credit Agreement, dated as of September 29, 1995, and amended and restated
as of August 28, 1997, by and among the Company, Caterair Holdings, OFSI, SCIS,
the guarantors named therein, the lenders party thereto, Bankers Trust Company,
Morgan Guaranty Trust Company of New York and Goldman, Sachs & Co., as
Co-Arrangers, Goldman, Sachs & Co., as Documentation Agent, Bankers Trust
Company, as Syndication Agent, Morgan Guaranty Trust Company of New York, as
Administrative Agent, and The Bank of New York, as Co-Agent (as amended, the
"Revolving Credit Agreement"), (ii) the Term Loan Agreement, dated as of August
28, 1997, among the Company and SCIS, as borrowers, the guarantors named
therein, the lenders party thereto from time to time, Bankers Trust Company and
J.P. Morgan Securities Inc., as Co-Arrangers, Bankers Trust Company, as
Syndication Agent, and Morgan Guaranty Trust Company of New York, as
Administrative Agent (the "Term Loan Agreement"), and (iii) the Indenture, dated
as of August 15, 1997, among SCIS, as Issuer, the Company and certain other
entities, as guarantors, and The Bank of New York, as trustee (the "Indenture"),
limit the Company's ability to pay dividends on its capital stock. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Income Statement Data (1)
Revenues $ -- $ -- $ 18,953 $ 77,958 $ 75,832
Cost of operations -- -- 7,649 30,416 30,185
--------- --------- --------- --------- ---------
Gross profit -- -- 11,304 47,542 45,675
Depreciation and amortization -- -- 3,400 11,806 10,676
Selling, general and administrative -- -- 125 1,393 713
--------- --------- --------- --------- ---------
Operating income (loss) -- -- 7,779 34,343 34,258
Interest income -- -- (264) (208) (741)
Interest expense -- -- 4,979 18,450 17,376
Other (income) expense -- -- -- -- (764)
Income tax provision (benefit) (2) -- -- (50,380) 8,044 8,751
--------- --------- --------- --------- ---------
Income from continuing operations -- -- 53,444 8,057 9,636
Income (loss) from discontinued (251,745) (23,847) 27,244 1,682 (444)
operations
Extraordinary loss, net of tax (3) -- -- (4,319) -- (4,219)
--------- --------- --------- --------- ---------
Net income (loss) $(251,745) $ (23,847) $ 76,369 $ 9,739 $ 4,973
========= ========= ========= ========= =========
Balance Sheet Data
Total assets $ 498,734 $ 498,828 $ 94,277 $ 177,280 $ 160,504
Total debt and capital lease 407,968 416,714 225,542 211,031 206,353
obligations (4)
Stockholder's deficit (129,558) (155,908) (111,752) (101,990) (97,017)
</TABLE>
(1) In connection with the Combination, the Company discontinued most of its
airline catering services business and engaged in the business of leasing,
subleasing and licensing domestic property to its affiliates, Sky Chefs
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and CII. See "Certain Relationships and Related Transactions -- The
Combination." Accordingly, all operations prior to September 30, 1995 have
been reflected as discontinued. Identifiable revenues and expenses from
discontinued operations have been reclassified on the table above
presenting summary historical financial data from their historical
classification to separately identify them as discontinued operations for
the five years
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ended December 31, 1997. Discontinued operations include allocations of
general and administrative and interest expenses that were determined to
be directly related to such operations. Summary operating results for the
discontinued operations are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total Revenues $ 1,056,598 $ 1,023,143 $ 773,243 $ 31,169 $ 3,837
Cost of operations 953,914 916,422 698,689 27,854 4,080
----------- ----------- ----------- ----------- -----------
Gross profit 102,684 106,721 74,554 3,315 (243)
Depreciation and amortization 49,296 30,890 21,821 -- --
Selling, general and 46,055 42,803 27,698 1,057 38
administrative
Goodwill write-off and 192,311 -- -- -- --
----------- ----------- ----------- ----------- -----------
restructuring charges
Operating income (loss) (184,978) 33,028 25,035 2,258 (281)
Interest expense, net 44,829 50,962 45,626 18 15
Other 5,266 890 (674) 920 444
----------- ----------- ----------- ----------- -----------
Income (loss) before income (235,073) (18,824) (19,917) 1,320 (740)
taxes
Provision (benefit) for income 16,672 5,023 5,513 416 (296)
taxes
Cumulative effect of change in
accounting -- -- -- -- --
----------- ----------- ----------- ----------- -----------
principal
Income (loss) from discontinued (251,745) (23,847) (25,430) 904 (444)
operations
Gain on disposition of -- -- 52,674 778 --
----------- ----------- ----------- ----------- -----------
discontinued operations
Income (loss) from discontinued
operations $ (251,745) $ (23,847) $ 27,244 $ 1,682 $ (444)
=========== =========== =========== =========== ===========
</TABLE>
Operating income in 1993 includes the impact of a $181.9 million
impairment of the Company's goodwill related to United States operations
and $10.4 million in charges for restructuring costs from a management
reorganization and kitchen consolidation, consisting primarily of
severance and early retirement expense.
(2) In connection with the Combination, the Company evaluated the potential
for the realization of its deferred tax assets and subsequently recognized
a deferred income tax benefit of $50.5 million in 1995 for the realization
of a portion of the net deferred tax assets. The deferred benefit was
offset by $0.1 million of current tax expense.
(3) In connection with the Combination, the Company repaid all of its
indebtedness outstanding prior to the Combination. The Company recorded an
extraordinary loss of $4.3 million in 1995 consisting of the difference
between amounts paid to lenders for full extinguishment of debt and the
carrying amounts of debt including deferred financing costs and accrued
interest. The extraordinary loss of $4.2 million for the year ended
December 31, 1997 was due to the write off of deferred financing fees as a
result of the retirement of the Company's term loan indebtedness under the
Old Credit Agreement (as defined).
(4) Total debt and capital lease obligations represent current portion of
long-term debt, current portion of obligations under capital leases,
long-term debt, obligations under capital leases and the note payable by
the Company to SCIS made in connection with the Combination. See "Certain
Relationships and Related Transactions -- The Combination."
10
<PAGE> 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
The discussion and analysis below relates to (i) the historical condensed
consolidated financial statements and results of operations of the Company and
its subsidiaries for the periods presented below and (ii) the liquidity and
capital resources of the Company. The following discussion should be read in
conjunction with the Financial Statements and the notes thereto included
elsewhere in this Annual Report on Form 10-K.
On September 29, 1995, the Company and Caterair Holdings, the parent of
the Company, consummated the Combination with OFSI, pursuant to which the
Company sold, licensed, leased and subleased substantially all of its worldwide
business and assets to Sky Chefs and CII, both of which are subsidiaries of SCIS
(which is a subsidiary of OFSI). However, after consummation of the Combination,
the Company retained certain operations relating to customer contracts for which
consents to the Combination were not obtained. Such consents were obtained
during the second quarter of 1996 and such operations were leased, subleased and
licensed to SCIS and its subsidiaries at such time. Prior to September 29, 1995,
the Company was primarily engaged in the business of providing airline catering
services. Following the consummation of the Combination, the Company
discontinued most of its airline catering operations and primarily engages in
the business of licensing, leasing and subleasing its domestic tangible
property.
In connection with the Combination, the Company sold substantially all of
its foreign operations, its trade name and domestic working capital to Sky Chefs
and CII and Sky Chefs and CII assumed certain of the Company's liabilities.
In connection with the Combination, pursuant to the Domestic Leases, the
Company leased and subleased to Sky Chefs and CII substantially all of its
domestic tangible assets for a six-year term (expiring in 2001). In the event
that the Company's lease of such assets was for less than six years, the
applicable Domestic Lease is for such shorter period. Sky Chefs and CII have
options to purchase all or a portion of the assets of the Company covered by the
Domestic Leases for amounts determined under formulas in the Domestic Leases
that were intended to result in exercise prices equal to the estimated fair
market value of such assets at the time or times of exercise of any such
options. The options are exercisable until the date which is 30 days after
termination of the applicable Domestic Lease. It is not certain that such
purchase options will be exercised. See "Certain Relationships and Related
Transactions -- The Combination."
In addition, in conjunction with the Combination, pursuant to the License
Agreements, the Company licensed its rights under certain customer contracts to
Sky Chefs and CII for a six-year term (expiring in 2001). Sky Chefs and CII have
options to purchase all or a portion of the assets of the Company covered by the
License Agreements for amounts determined under formulas in the License
Agreements that were intended to result in exercise prices equal to the
estimated fair market value of such assets at the time or times of exercise of
any such options. The options are exercisable until the date which is 90 days
after termination of the applicable License Agreement. It is not certain that
such purchase options will be exercised. See "Certain Relationships and Related
Transactions -- The Combination."
In addition, in connection with the Combination, pursuant to a non-compete
agreement, the Company agreed not to compete with Sky Chefs in the airline
catering business for a six-year term (expiring in 2001) and Sky Chefs is
obligated to pay the Company $4.0 million per year.
The commencement date for the leasing, subleasing and licensing business
was September 30, 1995.
Results of Operations
The Company's discontinued operations for the reporting periods presented
are not readily comparable to one another. Fiscal year 1995 discontinued
operations reflect the termination of substantially all of the Company's former
domestic airline catering operations and disposition of substantially all of the
Company's former international airline catering operations and assets, its trade
name and domestic working capital in connection with the Combination effective
September 29, 1995.
11
<PAGE> 15
In connection with the Combination, the Company sold, licensed, leased and
subleased substantially all of its worldwide business to SCIS and its
subsidiaries. Consequently, the Company's principal source of revenues is the
receipt of rents, royalties and non-compete related payments from subsidiaries
of SCIS under the Domestic Leases, the License Agreements and the non-compete
agreement. See "-- General" and "Certain Relationships and Related Transactions
- -- The Combination." For further information regarding SCIS and its subsidiaries
and their respective operations, see SCIS' Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
1997 Compared with 1996
Total Revenues. Total revenues for 1997 decreased $2.2 million to $75.8
million from $78.0 million in 1996. This decrease in total revenues was
primarily due to a reduction in rental income under the Domestic Leases as
certain leases expired or lease terms changed.
Cost of Operations. Cost of operations for 1997 decreased $0.2 million to
$30.2 million from $30.4 million in 1996 primarily due to reduction in the rent
expense for leased kitchens as certain leases expired or lease terms changed.
Selling, General and Administrative. Selling, general and administrative
expenses were $0.7 million for 1997 compared to $1.4 million in 1996. These
expenses consist primarily of fees paid to SCIS for corporate and administrative
services.
Depreciation and Amortization. Depreciation and amortization expenses were
$10.7 million for 1997 compared to $11.8 million in 1996.
Operating Income. Operating Income remained constant at $34.3 million for
1997 and 1996 primarily as a result of the factors discussed above.
Interest Income. Interest income increased $0.5 million to $0.7 million
for 1997 from $0.2 million in 1996.
Interest Expense. Interest expense decreased $1.1 million to $17.4 million
for 1997 from $18.5 million in 1996.
Other (Income) Expense. Other income of $0.7 million for 1997 was the
result of the gain on the disposal of certain fixed assets. No other income or
expenses were realized during 1996.
Income Tax Provision (Benefit). The income tax provision increased
slightly to $8.8 million for 1997 from $8.0 million in 1996 as a result of
increased income from continuing operations.
Income (Loss) from Discontinued Operations. The Company incurred a $0.4
million loss on discontinued operations for 1997 compared to $1.7 million of
income in 1996. The Company realized approximately $1.3 million of income in
1996 from the assumption by SCIS on May 31, 1996 of liabilities associated with
certain discontinued operations (consisting of the two kitchens leased/licensed
by SCIS) and approximately $0.8 million of gain on the disposal of assets
relating to discontinued operations. The remaining losses from discontinued
operations of $0.4 million and $0.4 million for 1997 and 1996, respectively, are
related to the Company's operations in Portugal which have been reclassified as
discontinued.
Extraordinary Loss. The extraordinary loss of $4.2 million for 1997 was a
result of the write off of deferred financing fees relating to the retirement of
the Company's indebtedness under the Old Credit Agreement (as defined) in
connection with the Caterair Refinancing (as defined).
Net Income (Loss). The Company's net income for 1997 decreased $4.7
million to $5.0 million from $9.7 million in 1996, primarily as a result of the
factors discussed above.
12
<PAGE> 16
1996 Compared with 1995
Operating results for 1996 reflect a full year of leasing and licensing
operations. Operating results for 1995 include leasing and licensing operations
for only three months and one day, after the effective date of the Combination
on September 29, 1995. The results for the first nine months of 1995 are
presented as discontinued operations. As such, the operating results for these
two years are not comparable. Therefore, 1996 operating results presented below
are compared to the annualized results for 1995 as if the leasing and licensing
operations were in effect for the full year.
Total Revenues. Actual total revenues were $78.0 million in 1996 versus
actual total revenues of $19.0 million in 1995. Annualized total revenues for
1995 would have been $75.8 million. The increase in 1996 total revenues over
annualized 1995 total revenues was primarily due to payments received by the
Company from SCIS in 1996 under the License Agreements relating to the
operations of two kitchens subleased/licensed by SCIS from the Company on May
31, 1996.
Cost of Operations. Actual cost of operations increased to $30.4 million
in 1996 from $7.6 million in 1995. Annualized cost of operations for 1995 would
have been $30.6 million.
Selling, General and Administration. Actual selling, general and
administrative expenses were $1.4 million in 1996 compared to $0.1 million in
1995. Annualized 1995 selling, general and administrative expenses would have
been $0.5 million. The increase in actual 1996 selling, general and
administrative expenses over the annualized 1995 selling, general and
administrative expenses was due to additional legal and consulting fees incurred
in 1996 related to the Combination.
Depreciation and Amortization. Actual depreciation and amortization
expenses increased to $11.8 million in 1996 from $3.4 million in 1995.
Annualized 1995 depreciation and amortization expenses would have been $13.6
million. The decrease in actual 1996 depreciation and amortization expenses from
annualized 1995 depreciation and amortization expenses is due to certain assets
of the Company becoming fully depreciated during 1996.
Operating Income. Actual operating income increased to $34.3 million from
$7.8 million in 1995. Annualized operating income for 1995 would have been $31.1
million. The increase in actual 1996 operating income from annualized 1995
operating income is primarily attributable to increased revenues derived under
the License Agreements and lower depreciation and amortization expenses during
1996 than 1995 as certain assets of the Company became fully depreciated during
1996.
Interest Income. Actual interest income decreased $0.1 million to $0.2
million in 1996 from $0.3 million in 1995.
Interest Expense. Actual interest expense increased to $18.5 million in
1996 from $5.0 million in 1995. Annualized 1995 interest expense would have been
$20.0 million. The decrease in actual interest expense in 1996 from annualized
interest expense for 1995 is a result of the reduction of outstanding debt due
to repayments made during 1996.
Income (Loss) from Discontinued Operations. Income from discontinued
operations decreased $25.5 million to $1.7 million in 1996 from $27.2 million in
1995. The decrease in income from discontinued operations is primarily the
result of the gain from the sale during 1995 of most of the net assets and
liabilities of the Company in connection with the Combination.
Income Tax Provision (Benefit). The income tax provision for 1996 was $8.0
million compared to an income tax benefit of $50.4 million recorded in 1995.
Prior to the Combination, the Company had a valuation allowance to fully reserve
for its gross deferred tax assets because of the uncertainties surrounding the
losses of operations to be sustained for income tax reporting purposes. In
connection with the Combination, the Company evaluated the potential for the
realization of a portion of all of the deferred tax assets. The Company
determined, based upon the weight of the evidence, it was more likely than not
that a portion of the deferred tax assets would be realized. In the fourth
quarter
13
<PAGE> 17
of 1995, the Company recognized an income tax benefit of $50.5 million for the
realization of a portion of the net deferred tax assets.
Net Income (Loss). The Company's net income for 1996 decreased $66.6
million to $9.7 million from $76.4 million in 1995, primarily due to the factors
discussed above.
Liquidity and Capital Resources
On August 28, 1997, the Company repaid and retired all of its outstanding
indebtedness under the Credit Agreement, dated as of September 29, 1995, among
SCIS, the Company, Caterair Holdings, OFSI and the lenders named therein (the
"Old Credit Agreement") (approximately $155.9 million) with borrowings under the
senior secured Term Loan Agreement (the "Caterair Refinancing"). Concurrently,
SCIS, the Company, certain other parties and certain lenders entered into the
$90.0 million senior secured Revolving Credit Agreement (the Revolving Credit
Agreement, together with the Term Loan Agreement, the "Senior Bank Financing").
Pursuant to the Senior Bank Financing, certain lenders provided (i) SCIS
with loans under the Revolving Credit Agreement in an amount up to $90.0 million
(including a sub-limit of $50.0 million for letters of credit) on a revolving
credit basis for working capital and general corporate purposes of SCIS, the
Company and their respective subsidiaries (such Revolving Credit Agreement
expires on August 28, 2002), (ii) the Company with a nine and one-half year term
loan under the Term Loan Agreement in an aggregate principal amount of $160.0
million for purposes of refinancing the Company's indebtedness under the Old
Credit Agreement and funding payment of related transaction costs (such loan has
a final maturity in 2007) and (iii) SCIS with a nine and one-half year term loan
under the Term Loan Agreement in an aggregate principal amount of $90.0 million
for purposes of financing, in part, SCIS' repurchase of its 13% Senior
Subordinated Notes due 2005, funding payment of related transaction costs and
general corporate purposes (such loan has a final maturity in 2007).
All of the indebtedness under the Revolving Credit Agreement and the Term
Loan Agreement is senior secured indebtedness. The Revolving Credit Agreement
does not require scheduled amortization or scheduled commitment reductions. The
Term Loan Agreement requires scheduled amortization payments. Each of the
Revolving Credit Agreement and the Term Loan Agreement, under certain
circumstances, requires SCIS or the Company, as the case may be, to make
mandatory prepayments and commitment reductions. In addition, each of SCIS and
the Company may make optional prepayments and commitment reductions pursuant to
the terms of the Revolving Credit Agreement and the Term Loan Agreement, as the
case may be.
Obligations of the Company under the Senior Bank Financing are jointly and
severally guaranteed by OFSI (on a limited basis), an affiliate of OFSI (on a
limited basis), SCIS, Sky Chefs, CII and certain other domestic subsidiaries of
SCIS and obligations of SCIS under the Senior Bank Financing are jointly and
severally guaranteed by OFSI (on a limited basis), an affiliate of OFSI (on a
limited basis), the Company, Sky Chefs, CII and certain domestic subsidiaries of
SCIS. In addition, obligations under the Senior Bank Financing are secured by
(i) first priority security interests in virtually all tangible and intangible
assets of SCIS, the Company, and their respective wholly-owned domestic
subsidiaries and (ii) pledges of all capital stock of SCIS and the Company, and
all capital stock and notes owned by SCIS, the Company, and their respective
domestic subsidiaries (limited in the case of capital stock of foreign
subsidiaries to 65% of such capital stock).
Each of the loans under the Senior Bank Financing bears interest at
specified margins over the applicable Eurodollar rate or base rate.
Effective September 12, 1997, the Company entered into an interest swap
agreement to reduce interest rate exposure on its long-term debt. The agreement
covers a notional amount of $160.0 million at December 31, 1997 and has a stated
maturity of September 15, 2002.
The Company's principal sources of liquidity are expected to be cash flows
from rents, royalties and non-compete related payments from Sky Chefs and CII
under the Domestic Leases, the License Agreements and the non-
14
<PAGE> 18
compete agreement described herein. For further information regarding SCIS and
its subsidiaries and their respective operations, see SCIS' Annual Report on
Form 10-K for the fiscal year ended December 31, 1997.
As a result of the Combination and the Senior Bank Financing, the Company
is highly leveraged. At December 31, 1997, the aggregate amount of outstanding
indebtedness of the Company (including borrowings and guarantees of SCIS'
indebtedness but excluding the loan by SCIS to the Company and $22.0 million of
letters of credit) was $551.2 million. In connection with the Combination, SCIS
loaned the Company $37.8 million. This loan bears interest at the rate of 8.0%
per annum (payable-in-kind), matures in 2001 and is secured by a lien on all of
the Company's assets, which is subordinated to the lien securing the obligations
under the Senior Bank Financing. As of December 31, 1997, the outstanding
principal amount of this loan was $45.0 million. During the year ending December
31, 1998, the Company will be required to make approximately $19.7 million in
respect of lease payments. The Company anticipates that no capital expenditures
will be made during 1998.
The Revolving Credit Agreement, which contains the most restrictive
covenants, the indenture relating to SCIS' 9 1/4% Senior Subordinated Notes due
2007 as well as the Term Loan Agreement contain a number of covenants that,
among other things, restrict the ability of the Company and its subsidiaries to
dispose of assets, incur additional indebtedness, guarantee obligations, repay
indebtedness or amend debt instruments, pay dividends, create liens on assets,
make investments, make acquisitions, engage in mergers or consolidations, make
capital expenditures, and otherwise restrict corporate activities. In addition,
such agreements require compliance with specified financial tests based on the
combined financial position of SCIS and the Company.
The continuation of the Company's operations is substantially dependent
upon Sky Chef's and CII's ability to make payments under the Domestic Leases,
the License Agreements and the non-compete agreement. The Term Loan Agreement
under the Senior Bank Financing provides the Company with $160.0 million of
senior secured term loans, and the Senior Bank Financing provides SCIS with up
to $180.0 million of senior secured financing, consisting of $90.0 million of
term loans under the Term Loan Agreement and up to $90.0 million of availability
under the Revolving Credit Agreement (including up to $50.0 million of
availability for letters of credit). As of December 31, 1997, approximately
$22.0 million of letters of credit, issued primarily to insurance carriers
providing workers' compensation and related surety bonds and leases, were
outstanding under the Revolving Credit Agreement. The Company as well as Sky
Chefs, CII and certain other SCIS' domestic subsidiaries have guaranteed, on a
joint and several basis, SCIS' obligations under SCIS' $300.0 million principal
amount of 9 1/4% Senior Subordinated Notes due 2007 (the "Notes").
For a discussion of the application of the proceeds received by SCIS from
the sale of the Notes and certain other information regarding the Notes and
certain related transactions, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" at Item 7 of SCIS' Annual Report on Form 10-K for the fiscal year
ended December 31, 1997. Such Item 7 is incorporated by reference herein.
Based upon the current levels of operations after the Combination, the
Offering and the Senior Bank Financing, the Company believes that cash flow from
operations will be adequate to meet anticipated requirements for working
capital, debt services and lease payments. There can be no assurance, however,
that cash flows will be sufficient to meet such obligations.
Net cash provided by operating activities for 1997 declined to $23.8
million from $31.7 million in 1996, primarily as a result of lower net income in
1997. Net cash provided by (used in) investing activities increased to $1.2
million during 1997 from ($7.8) million during 1996, primarily as a result of
lower capital expenditures and lower advances to affiliates. Net cash used in
financing activities decreased to $10.6 million during 1997 from $17.6 million
during 1996 due to lower repayments of debt.
Recent Accounting Standards
During June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 130 ("SFAS 130"), "Reporting
Comprehensive Income," effective for financial statements for fiscal years
beginning after December 15, 1997. SFAS 130 mandates that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The Company will adopt SFAS
130 effective January 1, 1998.
15
<PAGE> 19
Also during June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 "Disclosures About Segments
of an Enterprise and Related Information," effective for financial statements
for fiscal years beginning after December 15, 1997. Preliminary analysis of this
new standard by the Company indicates that the standard will not have a material
impact on its financial statements.
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 132 ("SFAS 132"), "Employers'
Disclosures About Pensions and Other Postretirement Benefits," effective for
financial statements for fiscal years beginning after December 15, 1997. This
statement significantly changes current financial statement disclosure
requirements for pensions and other postretirement benefits. The Company will
adopt SFAS 132 effective January 1, 1998.
Year 2000 Issue
The "Year 2000" issue concerns the potential exposures related to the
automated generation of business and financial misinformation resulting from the
application of computer systems which have been written using two digits, rather
than four, to define the applicable year of business transactions.
In connection with the Combination, on September 29, 1995, SCIS and its
subsidiaries leased, licensed and subleased substantially all of the Company's
domestic assets, and since such date, have operated such assets, including the
computer systems and related computer programs located at the Company's
domestic kitchens. Accordingly, SCIS has assumed operational and financial
responsibility for addressing the Year 2000 issue with respect to such computer
systems and computer programs. Further, it is the operations of SCIS and its
subsidiaries, rather than those of the Company that would be adversely affected
by any material costs, problems or uncertainties associated with causing such
systems to become Year 2000 compliant.
Accordingly, the Company does not anticipate that it will experience any
direct material costs, problems or uncertainties as a result of the Year 2000
issue. However, lease, license and royalty payments from SCIS are the Company's
principal source of revenue; accordingly, the operations of the Company could be
materially and adversely affected if the operations of SCIS and its
subsidiaries were to be materially and adversely affected due to material
costs, problems or uncertainties relating to becoming Year 2000 compliant. For
a discussion of SCIS' status with respect to the Year 2000 issue, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" at Item 7 of SCIS' Annual Report
on Form 10-K for the fiscal year ended December 31, 1997.
Item 8. Financial Statements and Supplementary Financial Data.
The financial statements and supplementary data set forth in the Index to
Financial Statements on page F-1 are filed as part of this Annual Report on Form
10-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
Part III.
Item 10. Directors and Officers of the Company.
The following table sets forth the name, age and position of each
person who serves as an executive officer or director of the Company:
<TABLE>
<CAPTION>
Name Age Position
- --------------------------------------------------------------------------------
<S> <C> <C>
Anthony R. Melman 50 Director
Daniel J. Altobello 56 Chief Executive Officer and President
</TABLE>
- -----------------
Anthony R. Melman was elected as the sole member of the Company's board of
directors on September 29, 1995. Mr. Melman has been Vice President of Onex
Corporation for more than five years and has held various executive offices at
Onex Corporation since its formation. Mr. Melman serves on the board of
directors of ProSource, Inc. Mr. Melman also serves on the boards of certain
wholly-owned indirect subsidiaries of SCIS. Onex Corporation indirectly owns or
controls more than a majority of the voting capital stock and more than 25% of
the non-voting capital stock, of Caterair Holdings, the parent of the Company.
Onex Corporation also has voting control of a substantial majority of the voting
capital stock of OFSI, which in turn, is the parent of SCIS (which in turn, is
the parent of Sky Chefs and CII). Information regarding the relationships
between the Company and Caterair Holdings, on the one hand, and OFSI, SCIS, Sky
Chefs or CII (and certain affiliates of the foregoing), on the other hand, is
set forth in Items 1, 2, 6, 7, 8, and 13 of this Annual Report on Form 10-K.
Daniel J. Altobello has been President and Chief Executive Officer of the
Company and Caterair Holdings since December 1989. He also served as Chairman of
the Board of Directors of the Company and Caterair Holdings from December 1989.
Prior thereto, Mr. Altobello worked at Marriott Corporation, where he served as
Executive Vice President of Marriott Corporation and Chief Operating Officer of
Marriott Corporation's airline catering business. Mr.
16
<PAGE> 20
Altobello serves as a director of American Management Systems, Inc., Colorado
Prime Corp. and Blue Cross Blue Shield of Maryland, as a member of the advisory
board of Thayer Capital Partners and as a trustee of Loyola Foundation, Inc.,
Mt. Holyoke College, Suburban Hospital Foundation, Inc. and the Woodstock
Theological Center at Georgetown University. From September 29, 1995 through
September 29, 1997, Mr. Altobello served as Chairman of the Board of OFSI and
SCIS. Mr. Altobello has been a director of SCIS and OFSI since September 29,
1995. See "Certain Relationships and Related Transactions -- Employment
Arrangements with Affiliates."
Directors of the Company are elected at each annual meeting of
stockholders to serve for one year or until their successors are elected and
qualified. Executive officers hold their offices for such terms as determined by
the board of directors of the Company and until their respective successors are
chosen and qualified.
Item 11. Executive Compensation.
The following Summary Compensation Table sets forth information concerning
annual and long-term compensation (for 1997, 1996 and 1995) awarded to, earned
by, or paid to the Company's chief executive officer (the "Named Executive
Officer").
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
---------------------------------------------------------
Other
Annual All Other
Name and Salary Bonus Compensation Compensation
Principal Position Year ($) (1) ($) ($)
<S> <C> <C> <C> <C> <C>
Daniel J. Altobello 1997 431,254 -- 45,000(3) -- (5)
Chief Executive Officer 1996 525,000 -- 45,000(3) 982,572(6)
and President(2) 1995 414,306 -- 33,750(4) 1,503,822(7)
</TABLE>
- ----------
(1) Amounts shown include the dollar value of base salary (cash and noncash)
earned and received by Mr. Altobello.
(2) Includes compensation paid to Mr. Altobello through September 29, 1995 by
the Company. Excludes $131,250 paid to Mr. Altobello from September 30,
1995 through December 31, 1995 by OFSI for services performed by Mr.
Altobello under his employment contract with OFSI. Subsequent to September
29, 1995, Mr. Altobello has been compensated by OFSI. See "-- Employment
Agreements" and "Certain Relationships and Related
Transactions -- Employment Arrangements with Affiliates."
(3) Pursuant to Mr. Altobello's employment agreement with OFSI, he is entitled
to $45,000 in respect of an annual perquisites allowance.
(4) Reflects payments made under the Caterair International Flexible
Perquisite Plan and Caterair's contributions to the Retirement Savings and
Investment Plan (401(k) Plan). Excludes $11,250 paid to Mr. Altobello from
September 30, 1995 through December 31, 1995 by OFSI as a perquisite
allowance under his employment contract with OFSI. See "-- Employment
Agreements" and "Certain Relationships and Related
Transactions--Employment Arrangements with Affiliates."
(5) Excludes contributions to be made by SCIS pursuant to Sky Chefs'
Retirement Savings and Investment Plan (401(k) Plan) for 1997;
contributions for 1997 have not yet been determined. See " -- Defined
Contribution Plans."
(6) Includes a $978,822 payment made to Mr. Altobello by OFSI on January 1,
1996 in respect of severance payments otherwise due under Mr. Altobello's
former employment agreement with the Company and $3,750 of contributions
made by SCIS pursuant to Sky Chefs' Retirement Savings and Investment Plan
(401(k) Plan). See "-- Employment Agreements," "-- Employee Plans,"
"Certain Relationships and Related Transactions -- Employment Arrangements
with Affiliates" and "-- Defined Contribution Plans."
17
<PAGE> 21
(7) Includes (i) a $525,000 restructuring payment pursuant to the Caterair Key
Employee Retention Plan and (ii) a $978,822 severance payment under Mr.
Altobello's former employment contract with the Company. See "--
Employment Agreements," "-- Employee Plans" and "Certain Relationships and
Related Transactions -- Employment Arrangements With Affiliates."
Compensation of Directors
Mr. Melman, the sole director of the Company since September 29, 1995,
does not receive compensation for serving on the Company's board of directors.
Compensation Committee Interlocks and Insider Participation in Compensation
Decision
No member of the Company's board of directors during the year ended
December 31, 1997 was an officer of employee of the Company or was formerly an
officer of the Company. The Company's board of directors is currently
responsible for establishing the levels of compensation and benefits for the
Company's officers.
Employment Agreements
Mr. Altobello had an employment agreement with the Company which was
terminated on September 29, 1995. Mr. Altobello received a change of control
payment of $525,000 pursuant to the Caterair Key Employee Retention Plan and a
severance payment of $978,822 under his former employment contract with the
Company upon the consummation of the Combination. In addition, on January 1,
1996, Mr. Altobello received an additional $978,822 payment from OFSI in respect
of severance payments otherwise due under Mr. Altobello's former employment
agreement with the Company. See "-- Employee Plans" and "-- Summary Compensation
Table." In connection with the Combination, Mr. Altobello entered into a new
employment agreement with OFSI. See "Certain Relationships and Related
Transactions -- Employment Arrangements with Affiliates."
Employee Plans
In September 1994, the board of directors of the Company adopted the
Caterair Key Employee Retention Plan in order to provide an incentive to certain
officers and other key executive and management employees to remain in the
employ of the Company while the Company attempted to restructure its debt and
equity. Each eligible participant in the Caterair Key Employee Retention Plan
was entitled to receive certain severance benefits if (i) a change of control
occurred, and (ii) during the three years following such change of control, the
participant was terminated other than for cause or resigned with good reason.
Severance benefits for eligible persons ranged from six months to two years of
the participant's salary and benefits. Payments relating to severance under the
Caterair Key Employee Retention Plan, to the extent they exceeded amounts
payable under any participant's employment agreement, were in lieu of any
payments due under such employment agreement. The consummation of the
Combination constituted a change in control as such term was defined under the
Caterair Key Employee Retention Plan. In connection with the Combination,
severance benefits in the aggregate amount of approximately $2.7 million were
paid by the Company. In connection with the consummation of the Combination,
SCIS assumed the Company's, post-Combination obligations under the Caterair Key
Employee Retention Plan. As of December 31, 1997, the maximum additional
amount payable by SCIS under the Caterair Key Employee Retention Plan was $0.5
million (assuming all remaining eligible participants terminated their
employment prior to September 29, 1998 in a manner which would entitle them to
payments thereunder). All amounts payable under the Caterair Key Employee
Retention Plan were accrued as of December 31, 1997.
In connection with the Combination, retention payments to certain Caterair
employees in the aggregate amount of $2.8 million were paid by Caterair under
the Caterair Key Employee Retention Plan.
Defined Contribution Plans
Mr. Altobello participates in the Sky Chefs' 401(k) Money$mart Savings and
Retirement Plan (the "Sky Chefs 401(k) Plan"), a defined contribution retirement
plan with a cash or deferral arrangement as described in Section 401(k) of the
Internal Revenue Code of 1986, as amended (the "Code"). The Sky Chefs 401(k)
Plan is intended to be qualified under Section 401(a) of the Code. All regular
employees who are at least 21 years old, work at least 1,000 hours a year and
are not excluded by a bargaining agreement are eligible to participate in the
Sky Chefs 401(k) Plan. The Sky Chefs 401(k) Plan provides that each participant
may elect to make pre-tax elective contributions from 1.0% to 15.0% of his or
her compensation, subject to statutory limits. With respect to union employees
who were hired subsequent to June 30, 1995, are not eligible to participate in
the Sky Chefs HEREIU Pension Plan and satisfy certain other eligibility
criteria, Sky Chefs will make a contribution equal to 1.0% of such union
employee's compensation for such year. With respect to non-union employees,
who were hired subsequent to September 30, 1995, are not eligible to
participate in the Sky Chefs Non-Union Pension Plan and satisfy certain other
eligibility criteria, Sky Chefs will make a contribution equal to 1.0% of such
non-union employee's compensation for such year or such other percentage as may
be determined by Sky Chefs' Plan Administration Committee for such year. All
contributions made by participants are fully vested and are not subject to
forfeiture. Generally, subject to limited exceptions, a participant vests in 50%
of any contributions made by Sky Chefs after three years of completed service,
in 75% of such Sky Chefs contributions following four years of completed
service and in 100% of such Sky Chefs contributions following five years or
more of completed service. Each participant's entire Sky Chefs 401(k) Plan
account is distributed to the participant or his or her beneficiary, without
regard to vesting, upon retirement, death, disability, or termination of
employment with Sky Chefs after the completion of four years of service. The
trustee under the Sky Chefs 401(k) Plan, at the direction of each participant,
invests such participant's share of the assets of the Sky Chefs 401(k) Plan in
a number of investment options.
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<PAGE> 22
Item 12. Security Ownership of Certain Beneficial Owners and Management.
All of the Company's issued and outstanding shares of common stock, $.01
par value per share, are owned by Caterair Holdings.
Caterair Holdings has pledged all of the issued and outstanding shares of
the Company, to secure certain obligations under the Revolving Credit Agreement
and the Term Loan Agreement.
Item 13. Certain Relationships and Related Transactions.
The Combination
On September 29, 1995, OFSI, SCIS, the Company and Caterair Holdings
consummated the Combination whereby (i) SCIS, through Sky Chefs and CII,
acquired, licensed, leased and subleased substantially all of the worldwide
business and assets of the Company, (ii) OFSI and an affiliate thereof exchanged
common stock and warrants to acquire common stock of OFSI for certain stock and
debt held by Caterair Holdings' shareholders and creditor, as a result of which
OFSI and its affiliate acquired more than 50% of the total outstanding voting
shares, and 25% of the total outstanding nonvoting shares, of Caterair Holdings,
(iii) SCIS and the Company repaid approximately $392.3 million of Caterair's
outstanding indebtedness (excluding accrued interest) and SCIS and its
subsidiaries assumed certain other liabilities of Caterair, (iv) SCIS extended a
$37.8 million loan to the Company (which will mature in 2001, bears interest at
8% per annum (payable in kind) and is secured by a second priority lien), (v)
Caterair Holdings' indebtedness was restructured and (vi) the Company agreed not
to compete with Sky Chefs in the airline catering business for a six-year term
(expiring in 2001) and Sky Chefs agreed to pay the Company $4.0 million per year
in respect of such agreement. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements and
notes thereto included elsewhere in this Annual Report on Form 10-K.
In connection with the Combination, pursuant to the Domestic Leases, Sky
Chefs and CII leased and subleased from the Company substantially all of its
domestic tangible assets for a six-year term (expiring in 2001). In the event
that the Company's lease of such assets was for less than six years, the
applicable Domestic Lease is for such shorter period. Sky Chefs and CII each
have options to purchase all or a portion of the assets of the Company covered
by the Domestic Leases for amounts determined under formulas in the Domestic
Leases that were intended to result in exercise prices equal to the estimated
fair market value of such assets at the time or times of exercise of any such
options. The options are exercisable until the date which is 30 days after
termination of the applicable Domestic Lease. It is not certain that such
purchase options will be exercised. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements and
notes thereto included elsewhere in this Annual Report on Form 10-K.
In connection with the Combination, pursuant to the License Agreements,
Sky Chefs and CII licensed the Company's rights under certain customer contracts
for a six-year term (expiring in 2001). Sky Chefs and CII each have options to
purchase all or a portion of the customer contract rights covered by the License
Agreements for amounts determined under formulas in the License Agreements that
were intended to result in exercise prices equal to the estimated fair market
value of such rights at the time or times of exercise of any such options. The
options are exercisable at any time until the date which is 90 days after
termination of the applicable License Agreement. It is not certain that such
purchase options will be exercised. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements and
notes thereto included elsewhere in this Annual Report on Form 10-K.
In connection with the Combination, the Company paid Marriott
International, Inc. $4.2 million to satisfy Caterair Holdings' obligations
relating to accrued payments under a non-competition agreement entered into in
connection with the acquisition of Caterair in 1989. In addition, the Company
and OFSI agreed to pay approximately $4.8 million (plus interest thereon) to
Marriott International, Inc. over a six-year period, which is the balance of
amounts
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<PAGE> 23
payable under such non-competition agreement. Amounts paid to Marriot
International, Inc. during 1997 under this agreement were $1.3 million.
As part of the Combination, SCIS, the Company, OFSI and Caterair Holdings
entered into the Old Credit Agreement with certain lenders. The Company,
Caterair Holdings, OFSI (on a limited basis), an affiliate of OFSI (on a limited
basis) and certain subsidiaries of SCIS guaranteed SCIS' obligations under the
Old Credit Agreement and SCIS, Caterair Holdings, OFSI (on a limited basis), an
affiliate of OFSI (on a limited basis) and certain of subsidiaries of SCIS
guaranteed Caterair's obligations thereunder. The indebtedness under the Old
Credit Agreement was repaid on August 27, 1997. Additionally, Caterair (and Sky
Chefs and CII) guaranteed SCIS' obligations under SCIS' 13% Senior Subordinated
Notes due 2005 (which were retired in September 1997). Effective as of December
29, 1995, SCIS entered into an interest rate swap agreement to reduce interest
rate exposure on long-term debt. The agreement covered a notional amount of $351
million at December 31, 1996, and had a stated maturity in 2001. The Company
assumed a ratable participating interest (based upon the respective principal
amounts of term loans outstanding under the Old Credit Agreement) in SCIS'
rights and obligations under the interest swap. This agreement was terminated as
of September 10, 1997.
Subsequent to the consummation of the Combination, the Company continued
to provide airline catering services at certain kitchens where consents to the
Combination had not been obtained. Sky Chefs and the Company entered into a
management services agreement with respect to the operations conducted at these
kitchens whereby the Company continued to operate such kitchens using its own
employees with Sky Chefs providing management and administrative services in
exchange for a management fee equal to 4.0% of the net sales from such kitchens
and the reimbursement of expenses incurred in connection with the performance of
such services. However, during the second quarter of 1996, the Company obtained
the necessary consents and on May 31, 1996 Sky Chefs leased/licensed such
kitchens from the Company pursuant to the Domestic Leases and the License
Agreements.
Subsequent to the consummation of the Combination, SCIS rendered certain
corporate and administrative services for the Company. During 1997, the Company
paid SCIS $0.5 million for such services.
At the time of the Combination, Caterair Holdings had approximately $343.4
million of outstanding indebtedness owing to Host Marriott Corporation,
including a $280.0 million debenture (the "Holdings Debenture") issued in
connection with the acquisition of the Company in 1989. In connection with the
consummation of the Combination, the Holdings Debenture was restructured to
consist of a $236.2 million senior secured note (the "Caterair Holdings Secured
Note") and an unsecured senior debenture (the "Holdings Unsecured Debenture") in
an amount equal to $43.8 million. The Holdings Secured Note was secured by a
bank certificate of deposit owned by Caterair Holdings in an amount sufficient
to provide for the payment of the interest on and the principal of such Note.
Following this restructuring, OFSI purchased the Holdings Unsecured Debenture
and the unsecured debentures ("Interest Debentures") previously issued in
payment of interest on such indebtedness (approximately $63.4 million at June
30, 1995) from Host Marriott Corporation in exchange for 8,497.66 shares of OFSI
Class A Common Stock and warrants to acquire 8,937.56 shares of OFSI Class A
Common Stock. OFSI pledged the Holdings Unsecured Debenture to the lenders under
the Senior Bank Financing as security for outstanding obligations of SCIS and
its subsidiaries thereunder.
In December 1995, OFSI sold the Holdings Unsecured Debenture and all of
the then outstanding Interest Debentures to Renex Corporation ("Renex") for a
purchase price of $4,181,100. Renex paid $250,000 in cash and $3,931,100 by
issuing to OFSI a promissory note with a maturity date of December 15, 2001.
Renex pledged the Holdings Unsecured Debenture to OFSI as security for its
obligations under such promissory note. Contemporaneously with the sale of the
Holdings Unsecured Debenture to Renex, Caynex, Inc., an affiliate of OFSI
("Caynex"), purchased, for a price of $310,000, an option to purchase the
Holdings Unsecured Debenture from Renex at an exercise price of $4,675,000. Such
option is exercisable by Caynex at any time until November 15, 2001. As security
for its obligations to Caynex in connection with such option, Renex granted to
Caynex a security interest in the Holdings Unsecured Debenture subordinate to
the security interest held by OFSI in connection with the promissory note.
Employment Arrangements with Affiliates
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<PAGE> 24
Concurrently with the consummation of the Combination, Daniel J. Altobello
entered into an employment contract with OFSI. Such employment agreement, as
amended, expires on September 30, 2000. The agreement, as amended, provides that
Mr. Altobello, as Chairman of the Board of OFSI and an officer of certain
related companies, shall receive an annual salary of $150,000 and certain fringe
benefits. In connection with the consummation of the Combination, Mr. Altobello
received (i) from the Company, on September 29, 1995, a $525,000 restructuring
payment under the Company's Key Employee Retention Plan, (ii) from the Company,
on September 29, 1995, a $978,822 severance payment pursuant to the
change-of-control provision of his former employment agreement with the Company
and (iii) from OFSI, on January 1, 1996, $978,822 in respect of severance
payments otherwise due under Mr. Altobello's former employment agreement with
the Company.
In connection with the Combination, Mr. Altobello and the Altobello Family
Limited Partnership exchanged all of the shares of common and preferred stock of
Caterair Holdings held by them for 435.71 shares of OFSI Class A Common Stock.
Mr. Altobello's employment contract provides that Mr. Altobello shall hold such
shares subject to certain restrictions on transfer contained in the Management
Shareholders Agreement, dated as of May 29, 1986, as amended, among OFSI, an
affiliate thereof, and certain management employees of OFSI and its
subsidiaries. On February 27, 1997, the Altobello Family Limited Partnership (of
which Mr. Altobello is the general partner) sold 420.90 shares of OFSI Class A
Common Stock to Onex U.S. LLC, the direct parent of OFSI, for $877,997.40.
21
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Part IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. and 2. Financial Statements.
The financial statements set forth in the Index to Financial Statements
and Financial Statement Schedules on page F-1 are filed as part of this
Annual Report on Form 10-K. All schedules are omitted since the required
information is not present, or is not present in amounts sufficient to
require submission of the schedules, or because the information required
is included in the consolidated financial statements and notes thereto.
3. See subitem (c) below.
(b) Reports on Form 8-K.
No reports on Form 8-k have been filed during the last quarter of
the period covered by this Annual Report on Form 10-K
(c) List of Exhibits.
Exhibit
Number Description of Exhibit
- ------- --------------------------------------------------------------------
2.1 Master Agreement, dated as of April 26, 1995, among Onex Food
Services, Inc., Caterair Holdings Corporation and Caterair
International Corporation. Incorporated by reference to Exhibit 2.1
of SC International Services, Inc.'s Registration Statement on Form
S-l, Registration No. 33-94572.
2.1.1 Amendment No. 1 to Master Agreement, dated as of September 29, 1995,
among Onex Food Services, Inc., Caterair Holdings Corporation and
Caterair International Corporation. Incorporated by reference to
Exhibit 2.2 of SC International Services, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1995.
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<PAGE> 26
2.2 Sublease Agreement, dated as of September 29, 1995, between Sky
Chefs, Inc. and Caterair International Corporation, together with
Schedule of additional Subleases between such parties. Incorporated
by reference to Exhibit 10.26 of SC International Services, Inc.'s
Annual Report on Form 10-K for the year ended December 31, 1995.
2.3 Sublease Agreement, dated as of September 29, 1995, between Caterair
International, Inc. (II) and Caterair International Corporation,
together with Schedule of additional Subleases between such parties.
Incorporated by reference to Exhibit 10.27 of SC International
Services, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1995.
2.4 License Agreement, dated as of September 29, 1995, between Sky
Chefs, Inc. and Caterair International Corporation. Incorporated by
reference to Exhibit 10.24 of SC International Services, Inc.'s
Annual Report on Form 10-K for the year ended December 31, 1995.
2.5 License Agreement, dated as of September 29, 1995, between Caterair
International, Inc. (II) and Caterair International Corporation.
Incorporated by reference to Exhibit 10.25 of SC International
Services, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1995.
3.1 Certificate of Incorporation of Caterair International Corporation.
Incorporated by reference to Exhibit 3.1 of Caterair International
Corporation's Registration Statement on Form S-1, Registration No.
33-30918.
3.2 Bylaws of Caterair International Corporation. Incorporated by
reference to Exhibit 3.2 of Caterair International Corporation's
Registration Statement on Form S-1, Registration No. 33-30918.
4.1 Indenture, dated as of August 15, 1997, among SC International
Services, Inc., as Issuer, The Bank of New York, as Trustee,
Caterair International Corporation and the other Guarantors named
therein. Incorporated by reference to Exhibit 4.1 of SC
International Services, Inc.'s Registration Statement on Form S-4,
Registration Number 333-37475.
4.2 Form of Notes (both Exchange Notes and Restricted Notes) issued
under the Indenture, dated as of August 15, 1997 (included in
Exhibit 4.1).
4.3 Form of Guarantee (of both Exchange Notes and Restricted Notes)
issued under the Indenture, dated as of August 15, 1997 (included in
Exhibit 4.1).
10.1 Purchase Agreement, dated as of August 22, 1997, among SC
International Services, Inc., Caterair International Corporation and
the other Guarantors named therein, and BT Securities Corporation,
J.P. Morgan Securities Inc., Credit Suisse First Boston Corporation,
Goldman, Sachs & Co., Smith Barney, Inc. and Bankers Trust
International PLC, as Initial Purchasers. Incorporated by reference
to Exhibit 10.1 of SC International Services, Inc.'s Registration
Statement on Form S-4, Registration Number 333-37475.
10.2 Registration Rights Agreement, dated as of August 28, 1997, among SC
International Services, Inc., the Guarantors named therein, and BT
Securities Corporation, J.P. Morgan Securities Inc., Credit Suisse
First Boston Corporation, Goldman, Sachs & Co., Smith Barney, Inc.,
and Bankers Trust International PLC. Incorporated by reference to
Exhibit 10.2 of SC International Services, Inc.'s Registration
Statement on Form S-4, Registration Number 333-37475.
10.3 Dealer Manager Agreement, dated August 25, 1997, among SC
International Services, Inc., Sky Chefs, Inc., Caterair
International, Inc. (II), Caterair International Corporation and BT
Securities Corporation. Incorporated by reference to Exhibit 10.3 of
SC International Services, Inc.'s Registration Statement on Form
S-4, Registration Number 333-37475.
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<PAGE> 27
10.4 Phantom Stock Plan for Management Employees of Onex Food Services,
Inc. and its Subsidiaries. Incorporated by reference to Exhibit 10.6
of Caterair International Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995.
10.5 Caterair Noncompetition Agreement, dated as of December 15, 1989,
between Caterair International Corporation, Caterair Holdings
Corporation, Marriott Corporation and Host International, Inc.
Incorporated by reference to Exhibit 10.24 of Caterair International
Corporation's Registration Statement on Form S-1, Registration
Statement No. 33-31309.
10.6 Marriott Noncompetition Agreement, dated as of December 15, 1989,
among Marriott Corporation, Host International, Inc., Caterair
Holdings Corporation and Caterair International Corporation.
Incorporated by reference to Exhibit 10.25 of Caterair International
Corporation's Registration Statement on Form S-l, Registration No.
33-31309.
10.7 Caterair Key Employee Retention Plan. Incorporated by reference to
Exhibit 10.11 of SC International Services, Inc.'s Registration
Statement on Form S-1, Registration No. 33-94572.
10.8 Amendment No. 1 to Caterair Key Employee Retention Plan.
Incorporated by reference to Exhibit 10.11.1 of SC International
Services, Inc.'s Registration Statement on Form S-1, Registration
No. 33-94572.
10.9 Caterair International Corporation Transition Severance Plan.
Incorporated by reference to Exhibit 10.26 of SC International
Services, Inc.'s Registration Statement on Form S-l, Registration
No. 33-94572.
10.10 Tax Sharing Agreement, dated as of December 15, 1989, among Caterair
Holdings Corporation, Caterair International Corporation and
Marriott Corporation. Incorporated by reference to Exhibit 10.25 of
SC International Services, Inc.'s Registration Statement on Form
S-l, Registration No. 33-94572.
10.11 Credit Agreement, dated as of September 29, 1995, and amended and
restated as of August 28, 1997, among SC International Services,
Inc., as borrower, Onex Food Services, Inc., Caterair Holdings
Corporation, Caterair International Corporation, the guarantors
named therein, the lenders party thereto from time to time, Bankers
Trust Company and J.P. Morgan Securities, Inc., as co-arrangers,
Bankers Trust Company, as syndication agent, The Bank of New York,
as co-agent, and Morgan Guaranty Trust Company of New York, as
administrative agent. Incorporated by reference to Exhibit 10.34 of
SC International Services, Inc.'s Registration Statement on Form
S-4, Registration Number 333-37475.
10.12 Term Loan Agreement, dated as of August 28, 1997, among Caterair
International Corporation and SC International Services, Inc., as
borrowers, the guarantors named therein, the lenders party thereto
from time to time, Bankers Trust Company and J.P. Morgan Securities
Inc., as co-arrangers, Bankers Trust Company, as syndication agent,
and Morgan Guaranty Trust Company of New York, as administrative
agent. Incorporated by reference to Exhibit 10.35 of SC
International Services, Inc.'s Registration Statement on Form S-4,
Registration Number 333-37475.
10.13 Noncompetition Agreement, dated as of September 29, 1995, between
Caterair International Corporation and Sky Chefs, Inc. Incorporated
by reference to Exhibit 10.16 of Caterair International
Corporation's Annual Report on Form 10-K for the year ended December
31, 1995.
10.14 Promissory Note, dated September 29, 1995, by Caterair International
Corporation payable to the order of SC International Services, Inc.
Incorporated by reference to Exhibit 10.18 of Caterair International
Corporation's Annual Report on Form 10-K for the year ended December
31, 1995.
10.15 Agreement, dated as of February 19, 1995, between SC International
Services, Inc. and Caterair International Corporation relating to an
interest swap transaction. Incorporated by reference to Exhibit
10.19 of Caterair International Corporation's Annual Report on Form
10-K for the year ended December 31, 1995.
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<PAGE> 28
10.16 Advisory and Administrative Services Agreement, dated as of
September 29, 1995, between Caterair International Corporation and
Sky Chefs, Inc. Incorporated by reference to Exhibit 10.20 of
Caterair International Corporation's Annual Report on Form 10-K for
the year ended December 31, 1995.
10.17 Lease Agreement, dated as of May 15, 1993, between TriNet Essential
Facilities X, Inc. and Caterair International Corporation, together
with Schedule of additional Lease Agreements between such parties.
Incorporated by reference to Exhibit 10.27 of SC International
Services, Inc.'s Registration Statement on Form S-4, Registration
No. 333-37475.
10.17.1 First Amendment to Lease Agreement, dated as of September 22, 1995,
between TriNet Essential Facilities X, Inc. and Caterair
International Corporation. Incorporated by reference to Exhibit
10.27.1 of SC International Services, Inc.'s Registration Statement
on Form S-4, Registration No. 333-37475.
10.17.2 Second Amendment to Lease Agreement, dated as of December 1, 1995,
between TriNet Essential Facilities X, Inc. and Caterair
International Corporation. Incorporated by reference to Exhibit
10.27.2 of SC International Services, Inc.'s Registration Statement
on Form S-4, Registration No. 333-37475.
10.17.3 Third Amendment to Lease Agreement, dated as of June 1, 1996,
between TriNet Essential Facilities X, Inc. and Caterair
International Corporation. Incorporated by reference to Exhibit
10.27.3 of SC International Services, Inc.'s Registration Statement
on Form S-4, Registration No. 333-37475.
10.17.4 Fourth Amendment to Lease Agreement, dated as of December 23, 1996,
between TriNet Essential Facilities X, Inc. and Caterair
International Corporation. Incorporated by reference to Exhibit
10.27.4 of SC International Services, Inc.'s Registration Statement
on Form S-4, Registration No. 333-37475.
10.17.5 Fifth Amendment to Lease Agreement, dated as of June 23, 1997,
between TriNet Essential Facilities X, Inc. and Caterair
International Corporation. Incorporated by reference to Exhibit
10.27.5 of SC International Services, Inc.'s Registration Statement
on Form S-4, Registration No. 333-37475.
10.17.6 Sixth Amendment to Lease Agreement, dated as of August 22, 1997,
between TriNet Essential Facilities X, Inc. and Caterair
International Corporation. Incorporated by reference to Exhibit
10.27.6 of SC International Services, Inc.'s Registration Statement
on Form S-4, Registration No. 333-37475.
10.17.7 Limited Waiver dated as of August 22, 1997, by TriNet Essential
Facilities X, Inc. in favor of Caterair International Corporation.
Incorporated by reference to Exhibit 10.27.7 of SC International
Services, Inc.'s Registration Statement on Form S-4, Registration
No. 333-37475.
10.18 Lease Agreement, dated as of May 15, 1993, between TriNet Essential
Facilities VIII R, Inc. and Caterair International Corporation,
together with Schedule of additional Lease Agreements between such
parties. Incorporated by reference to Exhibit 10.28 of SC
International Services, Inc.'s Registration Statement on Form S-4,
Registration No. 333-37475.
10.18.1 First Amendment to Lease Agreement, dated as of September 22, 1995,
between TriNet Essential Facilities VIII R, Inc. and Caterair
International Corporation. Incorporated by reference to Exhibit
10.28.1 of SC International Services, Inc.'s Registration Statement
on Form S-4, Registration No. 333-37475.
10.18.2 Second Amendment to Lease Agreement, dated as of December 1, 1995,
between TriNet Essential Facilities VIII R, Inc. and Caterair
International Corporation. Incorporated by reference to Exhibit
10.28.2 of SC International Services, Inc.'s Registration Statement
on Form S-4, Registration No. 333-37475.
10.18.3 Third Amendment to Lease Agreement, dated as of June 1, 1996,
between TriNet Essential Facilities VIII R, Inc. and Caterair
International Corporation. Incorporated by reference to Exhibit
10.28.3 of SC International Services, Inc.'s Registration Statement
on Form S-4, Registration No. 333-37475.
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<PAGE> 29
10.18.4 Fourth Amendment to Lease Agreement, dated as of December 23, 1996,
between TriNet Essential Facilities VIII R, Inc. and Caterair
International Corporation. Incorporated by reference to Exhibit
10.28.4 of SC International Services, Inc.'s Registration Statement
on Form S-4, Registration No. 333-37475.
10.18.5 Fifth Amendment to Lease Agreement, dated as of June 23, 1997,
between TriNet Essential Facilities VIII R, Inc. and Caterair
International Corporation. Incorporated by reference to Exhibit
10.28.5 of SC International Services, Inc.'s Registration Statement
on Form S-4, Registration No. 333-37475.
10.18.6 Sixth Amendment to Lease Agreement, dated as of August 22, 1997,
between TriNet Essential Facilities VIII R, Inc. and Caterair
International Corporation. Incorporated by reference to Exhibit
10.28.6 of SC International Services, Inc.'s Registration Statement
on Form S-4, Registration No. 333-37475.
10.18.7 Limited Waiver, dated as of August 22, 1997, by TriNet Essential
Facilities VIII R, Inc. and in favor of Caterair International
Corporation. Incorporated by reference to Exhibit 10.28.7 of SC
International Services, Inc.'s Registration Statement on Form S-4,
Registration No. 333-37475.
10.19 Guaranty, dated as of September 22, 1995, by SC International
Services, Inc., Sky Chefs, Inc., Onex Food Services, Inc. and
Caterair International, Inc. (II) for the benefit of TriNet
Essential Facilities VIII R, Inc. Incorporated by reference to
Exhibit 10.29 of SC International Services, Inc.'s Registration
Statement on Form S-4, Registration No. 333-37475.
10.20 Guaranty, dated as of September 22, 1995, by SC International
Services, Inc., Sky Chefs, Inc., Onex Food Services, Inc. and
Caterair International, Inc. (II) for the benefit of TriNet
Essential Facilities X, Inc. Incorporated by reference to Exhibit
10.30 of SC International Services, Inc.'s Registration Statement on
Form S-4, Registration No. 333-37475.
10.21 Indenture, dated as of September 15, 1995, among SC International
Services, Inc., as Issuer, the guarantors named therein and The Bank
of New York, as trustee, relating to SC International Services,
Inc.'s 13% Senior Subordinated Notes due 2005, with form of Senior
Subordinated Note and Guarantee included therewith. Incorporated by
reference to Exhibit No. 10.23 of SC International Services, Inc.'s
Annual Report on Form 10-K for the fiscal year ended December 31,
1997.
21.1 Subsidiaries of Caterair International Corporation. Incorporated by
reference to Exhibit 21.1 of SC International Services, Inc.'s
Registration Statement on Form S-4, Registration No. 333-37475.
27. Financial Data Schedule for Caterair International Corporation and
consolidated subsidiaries for the fiscal year ended December 31,
1997.
99. Item 7 of SC International Services, Inc.'s Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
26
<PAGE> 30
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.
No annual report to security holders covering the registrant's last fiscal
year or proxy statement, form of proxy or other soliciting materials with
respect to any annual or other meeting of security-holders has been sent
to any of the registrant's security holders.
27
<PAGE> 31
INDEX TO FINANCIAL STATEMENTS
Page
----
Caterair International Corporation and Subsidiaries:
Report of Independent Accountants for the three years in
the period ended December 31, 1997.............................. F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996..... F-3
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 1997........................... F-4
Consolidated Statements of Shareholder's Equity for each of the
three years in the period ended December 31, 1997............... F-5
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1997........................... F-6
Notes to Consolidated Financial Statements....................... F-7
F - 1
<PAGE> 32
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Caterair International Corporation:
We have audited the accompanying consolidated balance sheets of Caterair
International Corporation and Subsidiaries as of December 31, 1997 and 1996 and
the related consolidated statements of operations, shareholder's deficit and
cash flows for each of the three years in the period ended December 31, 1997.
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 generally accepted auditing
standards. 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Caterair
International Corporation and Subsidiaries as of December 31, 1997 and 1996 and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand, L.L.P.
Dallas, Texas
February 12, 1998
F - 2
<PAGE> 33
CATERAIR INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31,
-----------------------
ASSETS 1997 1996
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 21,201 $ 6,847
Accounts receivable (net of allowance for doubtful accounts of
$523 and $994 in 1997 and 1996, respectively) 12,821 15,874
Current portion of amount due from affiliate under non-competition agreement 3,037 3,130
Advances to affiliate 3,970 4,505
Deferred income taxes 785 920
Prepaid expenses and other 1,136 1,312
--------- ---------
Total current assets 42,950 32,588
Property and equipment, net 68,782 79,395
Deferred income taxes 30,235 38,458
Deferred financing cost, net 2,549 4,875
Due from affiliate under non-competition agreement 9,752 12,458
Other assets 6,236 9,506
--------- ---------
Total assets $ 160,504 $ 177,280
========= =========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accounts payable and accrued liabilities $ 14,068 $ 24,841
Current portion of deferred revenue under non-competition agreement 3,037 3,130
Current portion of long-term debt 1,600 17,206
Current portion of obligations under capital leases 110 105
--------- ---------
Total current liabilities 18,815 45,282
Obligations under capital leases 1,678 1,788
Long-term debt 158,000 150,298
Note payable to affiliate 44,965 41,634
Deferred revenue under non-competition agreement with affiliate 8,701 11,738
Net liabilities of discontinued operations 3,419 3,332
Other long-term liabilities and deferred credit 21,943 25,198
--------- ---------
Total liabilities 257,521 279,270
Commitments and contingencies -- --
Shareholder's deficit:
Common stock, $.01 par value; 10,000 shares authorized and issued -- --
Additional paid-in capital 173,596 173,596
Advance to parent (38,947) (38,947)
Cumulative translation adjustment 23 23
Accumulated deficit (231,689) (236,662)
--------- ---------
Total shareholder's deficit (97,017) (101,990)
--------- ---------
Total liabilities and shareholder's deficit $ 160,504 $ 177,280
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 3
<PAGE> 34
CATERAIR INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues from affiliates:
License income $ 32,545 $ 34,349 $ 8,001
Rental income 40,157 40,479 10,169
Income under non-competition agreement 3,130 3,130 783
-------- -------- --------
Total revenues 75,832 77,958 18,953
-------- -------- --------
Operating expenses:
Cost of operations 30,185 30,416 7,649
Selling, general and administrative 713 1,393 125
Depreciation and amortization 10,676 11,806 3,400
-------- -------- --------
Total operating expenses 41,574 43,615 11,174
-------- -------- --------
Operating income 34,258 34,343 7,779
Interest income (741) (208) (264)
Interest expense 17,376 18,450 4,979
Other income (764) -- --
-------- -------- --------
Income from continuing operations before income taxes 18,387 16,101 3,064
Income tax provision (benefit) 8,751 8,044 (50,380)
-------- -------- --------
Income from continuing operations 9,636 8,057 53,444
-------- -------- --------
Discontinued operations, net of taxes:
Income (loss) from discontinued operations (444) 904 (25,430)
Gain on disposition of discontinued operations -- 778 52,674
-------- -------- --------
Income (loss) from discontinued operations (444) 1,682 27,244
-------- -------- --------
Income before extraordinary item 9,192 9,739 80,688
Extraordinary loss from early extinguishment of debt (4,219) -- (4,319)
-------- -------- --------
Net income $ 4,973 $ 9,739 $ 76,369
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 4
<PAGE> 35
CATERAIR INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S DEFICIT
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Common Stock Additional Advance Cumulative
------------------- Paid-In to Translation Accumulated
Shares Amount Capital Parent Adjustment Deficit Total
------ --------- ---------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 10,000 $ -- $ 173,596 $ -- $ -- $(322,700) $(149,104)
Net income -- -- -- -- -- 76,369 76,369
Dividend -- -- -- -- -- (70) (70)
Advance to parent -- -- -- (38,947) -- -- (38,947)
------ --------- --------- --------- --------- --------- ---------
Balance, December 31, 1995 10,000 -- 173,596 (38,947) -- (246,401) (111,752)
Cumulative translation adjustment -- -- -- -- 23 -- 23
Net income -- -- -- -- -- 9,739 9,739
------ --------- --------- --------- --------- --------- ---------
Balance, December 31, 1996 10,000 -- 173,596 (38,947) 23 (236,662) (101,990)
Net income -- -- -- -- -- 4,973 4,973
------ --------- --------- --------- --------- --------- ---------
Balance, December 31, 1997 10,000 $ -- $ 173,596 $ (38,947) $ 23 $(231,689) $ (97,017)
====== ========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 5
<PAGE> 36
CATERAIR INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,973 $ 9,739 $ 76,369
Adjustments to reconcile net income from continuing
operations to net cash provided by operating activities:
Depreciation and amortization 10,676 11,806 3,400
Deferred income taxes 8,358 8,485 (50,480)
Interest on note payable to affiliate settled in-kind 3,331 3,090 756
Noncash interest expense 771 1,017 254
Extraordinary loss from early extinguishment of debt 4,219 -- 4,319
Bad debt expense (476) 994 --
Gain on sale of fixed assets (764) -- --
Gain on disposition of discontinued operations -- (778) (52,674)
Change in working capital items (Note 14) (7,068) (6,469) (9,852)
Change in other assets and liabilities (262) -- --
Proceeds from insurance carrier from loss on capital assets -- 1,200 --
Net effect of discontinued operations 87 2,581 (39,683)
--------- --------- ---------
Net cash provided by (used in) operating activities 23,845 31,665 (67,591)
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures -- (2,300) (6,128)
Proceeds from sale of discontinued operations -- -- 208,300
Proceeds from sale of fixed assets 619 -- --
(Advances to) repayments from affiliates 535 (5,548) --
Net effect of discontinued operations -- -- (5,417)
--------- --------- ---------
Net cash provided by (used in) investing activities 1,154 (7,848) 196,755
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 160,000 -- 185,000
Repayments of long-term debt and capital lease obligations (168,009) (17,601) (301,854)
Repayments on the revolving credit facility -- -- (62,500)
Proceeds from note payable to affiliate -- -- 37,788
Deferred financing costs (2,636) -- --
--------- --------- ---------
Net cash used in financing activities (10,645) (17,601) (141,566)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 14,354 6,216 (12,402)
Cash and cash equivalents, beginning of period 6,847 631 13,033
--------- --------- ---------
Cash and cash equivalents, end of period $ 21,201 $ 6,847 $ 631
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 16,186 $ 15,268 $ 67,610
Income taxes -- -- 6,945
Supplemental disclosure of noncash financing and investing
activities:
Liabilities assumed by purchaser upon disposition of
discontinued operations $ -- $ 4,464 $ 44,048
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F - 6
<PAGE> 37
CATERAIR INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF CONSOLIDATION
Caterair International Corporation ("Caterair" or the "Company") is a
wholly-owned subsidiary of Caterair Holdings Corporation ("Holdings").
On September 29, 1995, the Company, Holdings, SC International
Services, Inc. and its subsidiaries ("SCIS") and its parent, Onex Food
Services, Inc. ("OFSI") consummated transactions with the shareholders
and creditor of Holdings (the "Transactions") whereby OFSI and an
affiliate of OFSI exchanged common stock and warrants of OFSI, valued
in the aggregate amount of $38,947, for certain stock and debt held by
Holdings' shareholders and creditor, as a result of which OFSI and its
parent acquired more than 50% of the total outstanding voting shares of
Holdings and approximately 25% of the total outstanding nonvoting
shares of Holdings. In addition, as part of the Transactions, SCIS
acquired, licensed, leased and subleased most of the worldwide business
and assets of the Company (other than with respect to certain
operations which were temporarily retained as described in Note 2).
The proceeds from the Transactions were approximately $247,247 which
consisted of $208,300 in cash and approximately $38,947 in common
stock and warrants of OFSI (See Note 2). The Company recognized a
$52,674 gain, net of transaction fees, on the disposition of
discontinued operations. There was no tax effect on this gain.
Prior to the Transactions, the Company was principally engaged in
providing international and domestic airline catering services.
Subsequent to the Transactions (other than with respect to certain
operations which were temporarily retained as described in Note 2),
the Company is principally engaged in the business of leasing,
subleasing and licensing domestic property to SCIS and its
subsidiaries. The accompanying consolidated financial statements
include the accounts of the Company and all remaining wholly-owned and
majority owned subsidiaries. All significant intercompany transactions
have been eliminated.
MANAGEMENT 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 consolidated financial statements and the reported amount
of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
REVENUE RECOGNITION
License income is recognized as services are provided under the various
license agreements. Rental income is recognized on a straight-line
basis over the lease period.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, all highly liquid debt
instruments purchased with an original maturity of three months or less
are considered to be cash equivalents. Cash flows from swap
transactions are classified in the same category as the items being
hedged.
The Company maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts.
INTEREST RATE SWAP AGREEMENTS
The differential to be paid or received on interest rate swap
agreements is accrued as interest rates change and is recognized over
the life of the agreement.
F - 7
<PAGE> 38
CATERAIR INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
PROPERTY AND EQUIPMENT
The provision for depreciation and amortization of property and
equipment is computed using the straight-line method. The estimated
useful lives are as follows:
<TABLE>
<S> <C>
Buildings 25 years
Leasehold improvements Term of the lease or estimated useful
life, whichever is less
Furniture and equipment 4 to 10 years
Vehicles 4 to 10 years
</TABLE>
Gains and losses from disposals of property and equipment are reflected
in the results of operations in the period of disposal.
Property and equipment under capital leases are amortized over the
lives of the leases or the estimated useful lives of the assets,
whichever is less.
INTANGIBLE ASSETS
Intangible assets consisting primarily of rights, licenses and
non-competition agreements are recorded at cost. These assets are being
amortized over their estimated useful lives using the straight-line
method.
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
DISPOSED OF
On March 31, 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." The Company adopted this standard effective January 1,
1996, which did not have a material impact on the Company's financial
position or results of operations.
NON-COMPETITION AGREEMENTS
Revenues under a non-competition agreement are recognized ratably over
the terms of the agreement.
DEFERRED FINANCING COSTS
Costs incurred related to the issuance of debt are deferred and
amortized over the life of the related debt using the effective
interest rate method. Deferred financing costs related to debt
outstanding prior to the Transactions (described in Note 2) were
written off as a component of the extraordinary loss from early
extinguishment of debt. The Company amortized $771, $1,017 and $254 of
these costs in 1997, 1996 and 1995, respectively, which are reflected
in interest expense.
INCOME TAXES
The accounts of the Company are included in the consolidated federal
income tax return of Holdings. Current and deferred income taxes are
allocated to the Company as if it were a separate taxpayer.
Deferred income tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between the
income tax and financial reporting carrying amounts of assets and
liabilities.
F - 8
<PAGE> 39
CATERAIR INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
RECLASSIFICATION OF PRIOR PERIOD AMOUNTS
Certain prior period amounts have been reclassified to conform to the
current year presentation.
RECENT ACCOUNTING STANDARDS
During June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income," effective for financial statements
for fiscal years beginning after December 15, 1997. This Statement
requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as
other financial statements. The Company will adopt SFAS 130 effective
January 1, 1998.
Also during June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 "Disclosures about
Segments of an Enterprise and Related Information," effective for
financial statements for fiscal years beginning after December 15,
1997. Preliminary analysis of this new standard by the Company
indicates that the standard will not have a material impact on its
financial statements.
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132 ("SFAS 132"),
"Employers' Disclosures about Pensions and Other Postretirement
Benefits," effective for financial statements for fiscal years
beginning after December 15, 1997. This statement significantly changes
current financial statement disclosure requirements for pensions and
other postretirement benefits. The Company will adopt SFAS 132
effective January 1, 1998.
2. DISCONTINUED OPERATIONS
As described in Note 1, the Company consummated the Transactions on
September 29, 1995 whereby it discontinued most of its airline catering
services business and primarily engaged in the business of leasing,
subleasing and licensing domestic property to affiliates, Sky Chefs,
Inc. ("Sky Chefs") and Caterair International, Inc. (II) ("CII"), both
wholly-owned subsidiaries of SCIS. Accordingly, all operations prior to
September 30, 1995 have been reflected as discontinued.
The Company was unable to obtain certain consents to the Transactions
with respect to certain of the Company's kitchens at which one airline
is the major customer. Such consents with respect to these operations
were obtained during the second quarter of 1996 and such operations
were leased, subleased and licensed to SCIS and its subsidiaries. Prior
to obtaining this consent, the Company and SCIS entered into a
management agreement for the operations at these kitchens whereby the
Company continued to operate them with its employees and SCIS provided
management and administration support services in exchange for a
management fee equivalent to 4% of the kitchen's net sales. Management
fees paid under this arrangement amounted to $1,057 and $604 for the
period ended December 31, 1996 and 1995, respectively.
F - 9
<PAGE> 40
CATERAIR INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
2. DISCONTINUED OPERATIONS--(CONTINUED)
Concurrent with the Transactions, the Company borrowed $185,000 from a
consortium of lenders and $37,788 from SCIS (see Note 5). The
borrowings, as well as the cash proceeds ($208,300, net) from the
Transactions, were utilized to repay indebtedness outstanding under the
Company's prior credit agreement, senior notes and debentures in the
aggregate amount of approximately $364,000 plus accrued interest, and
to pay certain expenses relating to the Transactions. The Company
recorded an extraordinary loss of $4,319 consisting of the difference
between amounts paid to lenders for full extinguishment of debt and
carrying amounts of debt including deferred financing costs and accrued
interest. There was no tax effect on this extraordinary loss.
Identifiable revenues and expenses from discontinued operations have
been reclassified on the accompanying consolidated statements of
operations from their historical classification to separately identify
them as discontinued operations. Discontinued operations include
allocations of general and administrative and interest expenses that
were determined to be directly related to such operations. Summary
operating results for discontinued operations follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenues $ 3,837 $ 31,169 $ 773,243
Cost of operations 4,080 27,854 698,689
Selling, general and administrative expenses 38 1,057 27,698
Depreciation and amortization -- -- 21,821
--------- --------- ---------
Operating income (loss) (281) 2,258 25,035
Interest expense, net 15 18 45,626
Other 444 920 (674)
--------- --------- ---------
Income (loss) before income taxes (740) 1,320 (19,917)
Income provision (benefit) (296) 416 5,513
--------- --------- ---------
Income (loss) from discontinued operations $ (444) $ 904 $ (25,430)
========= ========= =========
</TABLE>
The identifiable assets and liabilities of discontinued operations have
been reclassified on the accompanying consolidated balance sheet at
December 31, 1997 and 1996 from their historical classification to
separately identify them as net assets or liabilities of discontinued
operations. The Company leased, subleased or licensed these operations
to Sky Chefs during the second quarter of 1996. The following
represents assets and liabilities relating to discontinued operations:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
------- -------
<S> <C> <C>
Current assets $ 531 $ 333
Other current liabilities (3,947) (3,662)
Noncurrent liabilities (3) (3)
------- -------
Net liabilities of discontinued operations $(3,419) $(3,332)
======= =======
</TABLE>
F - 10
<PAGE> 41
CATERAIR INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
2. DISCONTINUED OPERATIONS--(CONTINUED)
Information concerning operations by geographic area is presented
below:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net sales:
United States $ -- $ 26,859 $ 384,677
International 3,837 4,310 388,566
--------- --------- ---------
$ 3,837 $ 31,169 $ 773,243
========= ========= =========
Operating income (loss):
United States $ -- $ 2,562 $ 18,413
International (281) (304) 6,622
--------- --------- ---------
$ (281) $ 2,258 $ 25,035
========= ========= =========
Identifiable assets:
United States $ -- $ -- $ 2,180
International 531 333 2,296
--------- --------- ---------
$ 531 $ 333 $ 4,476
========= ========= =========
</TABLE>
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Land $ 10 $ 305
Buildings and leasehold improvements 120,170 117,687
Machinery and equipment 58,955 60,330
Construction in progress 40 2,532
-------- --------
179,175 180,854
Less accumulated depreciation and amortization 110,393 101,459
-------- --------
$ 68,782 $ 79,395
======== ========
</TABLE>
As of December 31, 1997 and 1996, substantially all property and
equipment has been leased or subleased to Sky Chefs and CII.
F - 11
<PAGE> 42
CATERAIR INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
4. OTHER ASSETS
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1996
------ ------
<S> <C> <C>
Casualty insurance loss deposits $5,239 $8,051
Lease deposits 144 144
Intangible assets acquired 853 1,137
Other -- 174
------ ------
$6,236 $9,506
====== ======
</TABLE>
5. LONG-TERM DEBT AND NOTE PAYABLE TO AFFILIATE
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Term Loan bearing interest at 1.50% above the Eurodollar borrowing rate,
or 0.50% above the lender's prime rate, due in quarterly installments
of $400 of principal beginning in December 1997 through December
2006, with a final maturity payment of $145,200 in March 2007 $159,600 $ --
Term loans retired in 1997 -- 167,500
Other long-term debt -- 4
-------- --------
Total debt 159,600 167,504
Less current portion of long-term debt 1,600 17,206
-------- --------
Long-term debt $158,000 $150,298
======== ========
Senior Subordinated Note due SCIS in 2001 $ 44,965 $ 41,634
======== ========
</TABLE>
F - 12
<PAGE> 43
CATERAIR INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
5. LONG-TERM DEBT AND NOTE PAYABLE TO AFFILIATE--(CONTINUED)
In connection with the Transactions, the Company, OFSI, SCIS and
Holdings entered into a $500,000 Senior Secured Credit Agreement with a
consortium of lenders (the "Credit Agreement"). The Credit Agreement
provides the Company with $185,000 of term loans and provides SCIS with
$315,000 of financing consisting of $225,000 of term loans and up to
$90,000 of revolving loans (including up to $50,000 available for
letters of credit). SCIS paid $6,147 of fees related to the
Transactions on behalf of the Company. These fees were recorded as
deferred financing costs in the Company's financial statements.
Caterair repaid these fees to SCIS in 1996.
In connection with the Transactions, SCIS issued $125,000 of 13% Senior
Subordinated Notes due October 1, 2005 (the "Notes"). The Notes were
guaranteed on a joint and several senior subordinated basis by Sky
Chefs, CII and Caterair.
On August 28, 1997, SCIS consummated an offering of $300,000 of its
9.25% Senior Subordinated Notes due 2007 (the "New Notes") in a
transaction exempt from the registration requirements of the Securities
Act of 1933, as amended (the "Offering"). The price to investors of the
New Notes was $299,600 in the aggregate. The New Notes are guaranteed
on a joint and several senior subordinated basis by Sky Chefs, CII and
certain other wholly owned domestic subsidiaries of SCIS and the
Company. The New Notes (and the related guarantees) are subordinate to
payment of all senior debt (as described in the Indenture relating
thereto) of SCIS and the guarantors of the New Notes. The New Notes may
be redeemed at the option of SCIS commencing on September 1, 2002 at
prices ranging from 104.635% to 100% of face value plus accrued and
unpaid interest. Up to $105,000 of the New Notes may also be redeemed
with proceeds obtained through certain public equity offerings of
capital stock of OFSI or SCIS. The Indenture for the New Notes contains
covenants which, among other things, limit SCIS', the guarantors' and
the Company's ability to pay dividends, make stock repurchases, incur
additional indebtedness, engage in or use the proceeds of asset sales,
create liens or engage in certain other transactions.
The net proceeds to SCIS from the Offering, after deduction of
discounts and offering expenses, were approximately $289,900. SCIS used
$209,400 of the net proceeds to repay and retire all of its outstanding
term loan indebtedness under the Credit Agreement.
On August 25, 1997, SCIS commenced a tender offer for all of the Notes.
In connection therewith, SCIS offered to purchase all of the notes at
a price equal to 117% of the principal amount thereof plus accrued and
unpaid interest to the date of purchase and solicited consents to
certain amendments (the "Existing Indenture Amendments") to the
Indenture relating to the Notes from the holders thereof (collectively,
the "Offer to Purchase"). Holders of the Notes who consented to the
Existing Indenture Amendments received a payment equal to 2% of the
principal amount of the Notes from which a consent was delivered.
The Offer to Purchase expired on September 24, 1997. All of the Notes
were tendered by the holders thereof and accepted for payment by SCIS
in connection with the "Existing Notes" Offer to Purchase. SCIS paid
$148,750 (excluding $7,850 of accrued interest) in the aggregate in
consideration of the repurchase of the Notes and the related consents.
SCIS used approximately $80,500 of the net proceeds from the Offering
and approximately $68,250 of borrowings under the Term Loan Agreement
(as defined herein) to fund such payments.
On August 28, 1997, SCIS, certain other parties and certain lenders
entered into a senior secured revolving credit agreement (the
"Revolving Credit Agreement") and the Company, SCIS, certain other
parties and certain lenders entered into a senior secured credit
agreement (the "Term Loan Agreement" and together with the Revolving
Credit Agreement, the "Senior Bank Financing").
Concurrently with the Offering, the Company repaid and retired all of
its outstanding indebtedness under the Credit Agreement (approximately
$155,900) with borrowings under the Term Loan Agreement.
F - 13
<PAGE> 44
CATERAIR INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
5. LONG-TERM DEBT AND NOTE PAYABLE TO AFFILIATE--(CONTINUED)
Pursuant to the Senior Bank Financing, Bankers Trust Company, Morgan
Guaranty Trust Company of New York and certain other lenders provided
(i) SCIS with loans under the Revolving Credit Agreement in an amount
up to $90,000 (including a sub-limit of $50,000 for letters of credit)
on a revolving credit basis for working capital and general corporate
purposes of SCIS, the Company and their respective subsidiaries (such
Revolving Credit Agreement expires on August 28, 2002), (ii) the
Company with a nine and one-half year term loan under the Term Loan
Agreement in an aggregate principal amount of $160,000 (and with final
maturity in 2007) for purposes of refinancing the Company's
indebtedness under the Credit Agreement and funding payment of related
transaction costs and (iii) SCIS with a nine and one-half year term
loan under the Term Loan Agreement in an aggregate principal amount of
$90,000 (and with final maturity in 2007) for purposes of financing, in
part, SCIS' Offer to Purchase, funding payment of related transaction
costs and general corporate purposes. Caterair and SCIS had $159,600
and $89,775, respectively, of borrowings outstanding under the Term
Loan Agreement at December 31, 1997. At December 31, 1997,
approximately $21,911 of bank letters of credit were issued under the
Revolving Credit Agreement to SCIS (on behalf of the Company) and
approximately $75 were issued directly to the Company, to primarily
collateralize the Company's insurance carriers providing workers'
compensation coverage as well as for surety bonds, leases and
requirements of the Company for environmental remediation of certain
assets previously sold.
All of the indebtedness under the Revolving Credit Agreement and the
Term Loan Agreement is senior secured indebtedness. The Revolving
Credit Agreement does not require scheduled amortization or scheduled
commitment reductions. The Term Loan Agreement requires scheduled
amortization payments. Each of the Revolving Credit Agreement and the
Term Loan Agreement, under certain circumstances, require SCIS or the
Company, as the case may be, to make mandatory prepayments and
commitment reductions. In addition, each of SCIS and the Company may
make optional prepayments and commitment reductions pursuant to the
terms of the revolving Credit Agreement or the Term Loan Agreement, as
the case may be.
SCIS's obligations under the Senior Bank Financing are jointly and
severally guaranteed by OFSI (on a limited basis), an affiliate of OFSI
(on a limited basis), the Company, Sky Chefs, CII and certain other
domestic subsidiaries of SCIS (including the guarantors of the New
Notes). The Company's obligations under the Senior Bank Financing are
jointly and severally guaranteed by OFSI (on a limited basis), an
affiliate of OFSI (on a limited basis), SCIS, Sky Chefs, CII and
certain other domestic subsidiaries of SCIS (including the guarantors
of the New Notes). In addition, obligations under the Senior Bank
Financing are secured by (i) first priority security interests in
virtually all tangible and intangible assets of SCIS, the Company and
their respective wholly owned domestic subsidiaries (including the
guarantors of the New Notes) and (ii) pledges of all capital stock of
SCIS and the Company and all capital stock and notes owned by SCIS, the
Company and their respective domestic subsidiaries (limited in the case
of capital stock of foreign subsidiaries to 65% of such capital stock).
The Company's obligations under the Term Loan Agreement bear interest
at 1.50% above the Eurodollar borrowing rate or 0.5% above the lender's
base rate. The actual rate charged on each credit instrument is
dependent on the selection of either the 30, 60, 90, 180 day Eurodollar
borrowing rate or the base rate. Interest is payable quarterly for all
loans and also at the end of each interest period for Eurodollar
borrowings. The interest rate in effect at December 31, 1997 on the
Company's indebtedness under the Term Loan Agreement was 7.44%.
Effective September 12, 1997, the Company entered into an interest rate
swap agreement to reduce interest rate exposure on long-term debt. The
agreement covers a notional amount of $160,000 at December 31, 1997 and
has a stated maturity of September 15, 2002.
F - 14
<PAGE> 45
CATERAIR INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
5. LONG-TERM DEBT AND NOTE PAYABLE TO AFFILIATE--(CONTINUED)
The documents governing the Senior Bank Financing contain a number of
covenants that, among other things, restrict the ability of the
Company, SCIS and their respective subsidiaries to dispose of assets,
incur additional indebtedness, incur guarantee obligations, repay
indebtedness or amend debt instruments, pay dividends, create liens on
assets, make investments, make acquisitions, engage in mergers or
consolidations, make capital expenditures or engage in certain
transactions with subsidiaries or affiliates or otherwise engage in
certain corporate activities. In addition, the documents governing the
Senior Bank Financing requires compliance with financial tests based on
combined results of the Company and SCIS. The Company and SCIS were in
compliance with these financial covenant requirements at December 31,
1997.
SCIS loaned Caterair approximately $37,788 in connection with the
Transactions. The loan matures in 2001, bears interest at 8% per annum
(payable in-kind) and is collateralized by a second lien on the assets
of Caterair representing collateral under the Credit Agreement and the
Senior Bank Financing. The cumulative amounts due under this loan were
$44,965 and $41,634 at December 31, 1997 and 1996, respectively.
Interest expense related to this loan of $3,331, $3,090 and $756, is
included in interest expense for the years ended December 31, 1997,
1996 and 1995, respectively.
The combined aggregate amounts of maturities for all long-term
borrowings, excluding the Subordinated Secured Note due to SCIS, for
each of the next five years and thereafter are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
1998 $ 1,600
1999 1,600
2000 1,600
2001 1,600
2002 1,600
Thereafter 151,600
--------
$159,600
========
</TABLE>
6. OTHER LONG-TERM LIABILITIES AND DEFERRED CREDIT
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
------- -------
<S> <C> <C>
Casualty insurance losses $ 5,055 $ 7,103
Deferred gain on TriNet sale and leaseback 11,319 11,824
Other 5,569 6,271
------- -------
$21,943 $25,198
======= =======
</TABLE>
In 1993, the Company sold 12 of its off-airport fee-owned properties to
TriNet Corporate Capital ("TriNet") and simultaneously entered into a
lease with TriNet on those properties with a primary term of 25 years
and with four renewal options of five years each. These leases are
classified as operating leases and are included in the properties
subleased to Sky Chefs and CII. The gain on the sale of approximately
$13,800 was deferred and is being amortized over the life of the
operating leases as a reduction of operating lease rental expense.
F - 15
<PAGE> 46
CATERAIR INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
7. LEASES
The Company leases various types of property, including airline
catering kitchens and equipment, vehicles and office facilities, most
of which have been subleased to Sky Chefs and CII in connection with
the Transactions.
Rent expense for all operating leases from continuing operations for
the periods ended December 31, 1997, 1996 and 1997 was comprised of the
following:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Minimum rent $ 30,691 $ 30,922 $ 3,298
Contingent rent -- -- 4,489
Less deferred gain on sale and leaseback (506) (506) (138)
-------- -------- --------
Total rent expense $ 30,185 $ 30,416 $ 7,649
======== ======== ========
</TABLE>
Contingent rent represents percentage rent based on gross revenue in
excess of minimum levels.
The future minimum lease payments required under capital leases
(together with the present value of the minimum lease payments) and
future minimum lease payments required under operating leases that have
an initial or remaining lease term in excess of one year as of December
31, 1997, are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- --------
<S> <C> <C>
Year ending December 31,
1998 $ 254 $ 19,475
1999 256 18,859
2000 253 18,929
2001 254 17,656
2002 254 15,468
Thereafter 1,578 149,366
-------- --------
Total minimum lease payments 2,849 $239,753
========
Less imputed interest 1,061
--------
Present value of minimum lease payments 1,788
Less current portion 110
--------
Long-term portion of minimum lease payments $ 1,678
========
</TABLE>
Most leases have initial terms of from 10 to 20 years and contain one
or more renewal options.
In accordance with Statement of Financial Accounting Standards No. 13,
"Accounting for Leases," certain leases for kitchen facilities at
airports owned by governmental units of authorities are being accounted
for as operating leases because special provisions in the lease
agreements make the economic life of such facilities essentially
indeterminate.
F - 16
<PAGE> 47
CATERAIR INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
7. LEASES--(CONTINUED)
In connection with the Transactions, pursuant to several leases (the
"Domestic Leases"), Sky Chefs and CII leased and subleased from
Caterair substantially all of its domestic assets for a six-year term.
In the event that Caterair's lease of such assets was for less than six
years, the applicable Domestic Lease is for such shorter period. Sky
Chefs and CII have the option to purchase the assets of Caterair
covered by the Domestic Leases for an amount determined under formulas
in the Domestic Leases that were intended to result in an exercise
price equal to the estimated fair market value of such assets at the
time of exercise of such option. The option is exercisable until the
date which is 30 days after the termination of the applicable Domestic
Lease. The Company is not certain whether such options will be
exercised. Total future revenues under the Domestic Leases at December
31, 1997 and 1996, were approximately $108,958 and $135,117,
respectively, of which approximately $37,500 and $47,500, respectively,
relates to lease payments for leasehold improvements and equipment.
The minimum rental income amounts, excluding contingent rents based on
sales, under the above noted operating leases from SkyChefs and CII as
of December 31, 1997, are as follows:
<TABLE>
<CAPTION>
Operating
Leases
---------
<S> <C>
Period ended December 31,
1998 $ 29,729
1999 29,115
2000 29,182
2001 20,932
2002 --
Thereafter --
--------
Total minimum rental income $108,958
========
</TABLE>
8. INCOME TAXES
Taxes on income are based on income from continuing operations before
income taxes. The components of the income tax provision (benefit) for
the years ended December 31, 1997 and 1996, respectively, are as
follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal $ 393 $ 325 $ --
State and local -- -- 100
-------- -------- --------
393 325 100
-------- -------- --------
Deferred:
Federal 7,313 6,754 (44,170)
State and local 1,045 965 (6,310)
-------- -------- --------
8,358 7,719 (50,480)
-------- -------- --------
Total income tax provision (benefit) $ 8,751 $ 8,044 $(50,380)
======== ======== ========
</TABLE>
F - 17
<PAGE> 48
CATERAIR INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
8. INCOME TAXES--(CONTINUED)
Components of deferred tax assets and liabilities of continuing
operations recognized in the consolidated financial statements as of
December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
-------- --------
<S> <C> <C>
Benefit of federal and state net operating loss carryforwards $ 29,395 $ 31,343
Property and equipment 6,045 3,977
Intangible assets acquired 4,136 4,039
Payroll accruals 79 154
Casualty insurance 6,577 6,918
Benefit of federal targeted jobs tax credit carryforwards 1,075 978
Reserves -- 1,803
Other items 1,048 1,415
-------- --------
48,355 50,627
Valuation allowance (14,147) (8,319)
-------- --------
Total deferred tax assets, net of valuation allowance 34,208 42,308
Deferred tax liabilities (3,188) (2,930)
-------- --------
Net deferred tax asset $ 31,020 $ 39,378
======== ========
</TABLE>
At December 31, 1994, the Company had a valuation allowance of $68,349
to fully reserve for its gross deferred tax assets because of the
uncertainties surrounding the losses on operations to be sustained for
income tax reporting purposes. Subsequent to the Transactions, the
Company evaluated the potential for realization of a portion or all of
the deferred tax assets. The Company determined, based upon the weight
of evidence, it is more likely than not that a portion of the deferred
tax assets would be realized. The valuation allowance for deferred tax
assets increased by $5,828 and $1,213 in 1997 and 1996, respectively,
due to the changes in the Company's gross deferred tax assets and
liabilities. The valuation allowance for deferred tax assets decreased
by $58,626 in 1995 due to the changes in the Company's gross deferred
tax assets and liabilities and the realization of a portion of the
Company's net deferred tax assets.
The Company has the following NOL and tax credit carryforwards
available to offset future U.S. Federal taxable income and income tax:
<TABLE>
<CAPTION>
Year Amount of Year of
Generated NOL Credits Expiration
--------- --------- ------- ----------
<S> <C> <C> <C>
1990 $18,584 $ 11 2005
1991 15,490 243 2006
1992 4,148 161 2007
1993 -- 146 2008
1994 35,267 92 2009
1995 -- -- 2010
1996 -- 307 2011
1997 -- 115 2012
------- -------
Total $73,489 $ 1,075
======= =======
</TABLE>
F - 18
<PAGE> 49
CATERAIR INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
8. INCOME TAXES--(CONTINUED)
A reconciliation of the U.S. Federal income tax statutory rate and the
provision for income taxes on income from continuing operations for the
year ended December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Tax at statutory rate $ 7,355 $ 6,440 $ 1,226
State taxes -- -- 100
Permanent differences (2,432) 391 --
Utilization of NOL (312) -- (1,226)
Change in valuation allowance 4,140 1,213 (50,480)
-------- -------- --------
Provision (benefit) for income taxes $ 8,751 $ 8,044 $(50,380)
======== ======== ========
</TABLE>
9. RELATED PARTY TRANSACTIONS
In connection with the Transactions, the Company licensed to SCIS most
of its rights under certain customer contracts for a six-year period
(the "License Agreements"). However, after the consummation of the
Transactions Caterair retained certain operations relating to customer
contracts for which consents to assignment were not obtained. Such
consents with respect to these operations were obtained during the
second quarter of 1996 and such operations were leased, subleased and
licensed to SCIS and its subsidiaries. Sky Chefs and CII each have the
option to purchase the customer contract rights covered by the License
Agreements for an amount determined under formulas in the License
Agreements that were intended to result in an exercise price equal to
the fair market value of such rights at the time of the exercise of
such option. The option is exercisable at any time until the date which
is 90 days after the termination of the applicable License Agreement.
It is not certain whether such options will be exercised. Caterair
agreed, subject to certain exceptions, not to compete with Sky Chefs in
the airline catering business for a six year term and Sky Chefs is
obligated to pay Caterair $4,000 per year. Lease, license and
noncompete revenues for these arrangements with Caterair for the
periods ended December 31, 1997, 1996 and 1995 included in total
expenses, amounted to $75,832, $77,958 and $18,953 respectively.
To facilitate the various transactions with Caterair, SCIS performs
certain management and support functions on behalf of Caterair.
Caterair paid management fees to SCIS for these services of $500, $500
and $125 for the periods ended December 31, 1997, 1996 and 1995,
respectively, which were included in selling, general and
administrative expenses.
10. EMPLOYEE SEVERANCE
In September 1994, the Company implemented the Caterair International
Corporation Key Employee Retention Plan (the "Plan"). The Plan was
designed to ensure the Company of the continued employment and
attention to duty of certain key employees while the Company pursued a
financial restructuring or the sale of the Company. As a result of the
Transactions, $2,843 in bonuses were paid in 1995. Except for employees
in airport kitchens temporarily retained by the Company (see Note 2),
all employees of the Company were terminated on September 29, 1995 in
connection with the Transactions. The employees temporarily retained by
Caterair were terminated in the second quarter of 1996. Most of the
employees terminated by Caterair were subsequently hired by SCIS.
Additional severance benefits accrued relative to the Plan may be paid
in future periods upon the termination of key employees.
In July 1995, the Company adopted the Caterair International Transition
Severance Plan (the "Severance Plan"). Benefits were paid to eligible
employees who continued working for the Company or SCIS, until at least
September 30, 1995, and to employees whose employment with the Company
or SCIS was involuntarily terminated between October 1, 1995 and
September 30, 1996. Total severance charges under this plan of $1,800
were included in discontinued operations in 1995.
F - 19
<PAGE> 50
CATERAIR INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
10. EMPLOYEE SEVERANCE--(CONTINUED)
The Company's retirement savings and investment plan was a voluntary
defined contribution plan that was fully funded at September 29, 1995
through an insurance company. In accordance with the terms of the
Transactions, the plan was transferred along with substantially all of
the Company participants to subsidiaries of SCIS and the Company has no
further obligations with respect to this plan.
11. COMMITMENTS AND CONTINGENCIES
TAXES
The Company is involved in a number of claims from taxing authorities,
including sales tax assessments, value added tax assessments and other
related claims. The Company believes the ultimate resolution of those
claims will not have a material adverse effect on the operating
results, financial position or cash flows of the Company.
LITIGATION
The Company is involved in routine litigation, including a number of
worker's compensation and related claims, that arise in the ordinary
course of its business. The Company does not believe that any of this
litigation is material to its financial position, results of operations
or cash flows.
One June 3, 1991, the Teamsters Union (the "Union") went on strike at
the Company's three Los Angeles kitchens and the Company hired
replacement workers. On August 26, 1992, a National Labor Relations
Board ("NLRB") Administrative Law Judge ("ALJ") ruled against the
Company on unfair labor practice charges, including refusal to bargain
with the Union on the grounds that it no longer represented a majority
of the employees. On December 15, 1992, the NLRB in Washington, D.C.,
adopted, without substantive modification or comment, the ALJ's
Recommended Decision and Order. In 1994, the ruling was reviewed by the
U.S. Court of Appeals, which supported the ALJ's Recommended Decision
and Order. The U.S. Supreme Court refused to hear the case in November
1994. The NLRB's compliance officer is in the process of determining
the back pay due the affected employees. While the Company reinstated
striking employees to the extent reasonably possible, the Company
estimates that the liability for back pay and related losses is
approximately $6,400. In accordance with the Statement of Financial
Accounting Standards No. 5 "Accounting for Contingencies" the Company
accrued this liability. The amount payable to settle this liability in
full was subsequently determined to be approximately $4,500 and payment
was made in early 1997. The remaining $1,900 was credited to
discontinued operations in 1996.
CASUALTY INSURANCE LOSSES
Casualty insurance losses were charged to operating expenses of
discontinued operations as incurred. The losses are being paid out over
several years. The Company reflects the discounted value of the
estimated unpaid losses as a liability. At December 31, 1997 and 1996,
the discount rate used was 7% and the unpaid balance amounted to $7,650
and $15,056, respectively.
12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure related to the estimated fair-value of
financial instruments has been determined by the Company using
available market information and appropriate valuation methodologies.
However, considerable judgment is required in interpreting market data
to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange.
F - 20
<PAGE> 51
CATERAIR INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED)
The carrying amounts of cash and cash equivalents, accounts receivable,
other payables and accrued liabilities are reasonable estimates of
their fair values. Letters of credit are included in the estimated fair
value of accrued expenses and other liabilities. The estimated fair
values and carrying amount of other financial instruments at December
31, 1997 are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------
1997
---------------------
Estimated Carrying
Fair Value Amount
---------- --------
<S> <C> <C>
Assets:
Interest rate swap agreement (a) $ 1,415 $ --
Liabilities:
Term loan (b) 159,600 159,600
Senior subordinated note due to affiliate (c) 44,965 44,965
</TABLE>
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument.
(a) INTEREST RATE SWAP AGREEMENT
At December 31, 1997 the Company had interest rate swap instruments
(used for hedging purposes) which were not included in the Company's
consolidated balance sheet. The estimated fair value of this swap
agreement was positive (representing an asset) to the Company at
December 31, 1997 and 1996, as a result of fluctuations in projected
futures interest rate swap transaction values subsequent to the trade
date of December 27, 1995.
(b) TERM LOAN
The fair value of the term loan approximates the carrying value since
the interest rate is variable.
(c) SENIOR SUBORDINATED NOTE DUE TO AFFILIATE
The Company's senior subordinated note due to SCIS in 2001 bears a
fixed rate of interest of 8% (payable in-kind) and was executed
September 29, 1995 in connection with the Transactions. This note is
with a related party and as such there is no market activity.
Accordingly, the carrying values approximate estimated fair value.
These disclosures relate to financial instruments only. The fair value
assumptions were based upon estimates of market conditions and
perceived risks of the financial instruments at December 31, 1997.
13. DISCLOSURE OF SIGNIFICANT RISKS AND UNCERTAINTIES
The Company's financial instruments expose the Company to market and
credit risks and may at times be concentrated with certain
counterparties or groups of counterparties. The credit worthiness of
counterparties is subject to continuing review and full performance is
anticipated unless otherwise specifically disclosed.
F - 21
<PAGE> 52
CATERAIR INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
13. DISCLOSURE OF SIGNIFICANT RISKS AND UNCERTAINTIES--(CONTINUED)
DEPENDENCE ON KEY CUSTOMERS
As described in Note 2, the Company's revenues subsequent to September
29, 1995, are principally derived from rents, royalties and income
under a non-competition agreement from SCIS and as such the Company is
dependent upon SCIS's financial performance. In addition, the Company
has guaranteed certain indebtedness of SCIS as more fully described in
Note 5.
14. CHANGES IN WORKING CAPITAL ITEMS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
(Increase) decrease in accounts receivable $ 3,529 $ (3,014) $ (4,352)
Decrease in prepaid expenses and other 176 2,009 4,891
Decrease in accounts payable and accrued liabilities (10,773) (5,464) (10,391)
-------- -------- --------
Change in working capital items $ (7,068) $ (6,469) $ (9,852)
======== ======== ========
</TABLE>
F - 22
<PAGE> 53
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.
CATERAIR INTERNATIONAL CORPORATION
Date: March 26, 1998 By: /s/ Daniel J. Altobello
-------------------------------------
Daniel J. Altobello
President and Chief Executive 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 the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
President and Chief March 26, 1998
/s/ Daniel J. Altobello Executive Officer (principal
- --------------------------------- executive, financial and
Daniel J. Altobello accounting officer)
/s/ Anthony R. Melman
- ---------------------------------
Anthony R. Melman Director March 26, 1998
</TABLE>
<PAGE> 54
EXHIBIT INDEX
-------------
Exhibit
Number Description of Exhibit
- ------- --------------------------------------------------------------------
2.1 Master Agreement, dated as of April 26, 1995, among Onex Food
Services, Inc., Caterair Holdings Corporation and Caterair
International Corporation. Incorporated by reference to Exhibit 2.1
of SC International Services, Inc.'s Registration Statement on Form
S-l, Registration No. 33-94572.
2.1.1 Amendment No. 1 to Master Agreement, dated as of September 29, 1995,
among Onex Food Services, Inc., Caterair Holdings Corporation and
Caterair International Corporation. Incorporated by reference to
Exhibit 2.2 of SC International Services, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1995.
2.2 Sublease Agreement, dated as of September 29, 1995, between Sky
Chefs, Inc. and Caterair International Corporation, together with
Schedule of additional Subleases between such parties. Incorporated
by reference to Exhibit 10.26 of SC International Services, Inc.'s
Annual Report on Form 10-K for the year ended December 31, 1995.
2.3 Sublease Agreement, dated as of September 29, 1995, between Caterair
International, Inc. (II) and Caterair International Corporation,
together with Schedule of additional Subleases between such parties.
Incorporated by reference to Exhibit 10.27 of SC International
Services, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1995.
2.4 License Agreement, dated as of September 29, 1995, between Sky
Chefs, Inc. and Caterair International Corporation. Incorporated by
reference to Exhibit 10.24 of SC International Services, Inc.'s
Annual Report on Form 10-K for the year ended December 31, 1995.
2.5 License Agreement, dated as of September 29, 1995, between Caterair
International, Inc. (II) and Caterair International Corporation.
Incorporated by reference to Exhibit 10.25 of SC International
Services, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1995.
3.1 Certificate of Incorporation of Caterair International Corporation.
Incorporated by reference to Exhibit 3.1 of Caterair International
Corporation's Registration Statement on Form S-1, Registration No.
33-30918.
3.2 Bylaws of Caterair International Corporation. Incorporated by
reference to Exhibit 3.2 of Caterair International Corporation's
Registration Statement on Form S-1, Registration No. 33-30918.
4.1 Indenture, dated as of August 15, 1997, among SC International
Services, Inc., as Issuer, The Bank of New York, as Trustee,
Caterair International Corporation and the other Guarantors named
therein. Incorporated by reference to Exhibit 4.1 of SC
International Services, Inc.'s Registration Statement on Form S-4,
Registration Number 333-37475.
4.2 Form of Notes (both Exchange Notes and Restricted Notes) issued
under the Indenture, dated as of August 15, 1997 (included in
Exhibit 4.1).
4.3 Form of Guarantee (of both Exchange Notes and Restricted Notes)
issued under the Indenture, dated as of August 15, 1997 (included in
Exhibit 4.1).
<PAGE> 55
10.1 Purchase Agreement, dated as of August 22, 1997, among SC
International Services, Inc., Caterair International Corporation and
the other Guarantors named therein, and BT Securities Corporation,
J.P. Morgan Securities Inc., Credit Suisse First Boston Corporation,
Goldman, Sachs & Co., Smith Barney, Inc. and Bankers Trust
International PLC, as Initial Purchasers. Incorporated by reference
to Exhibit 10.1 of SC International Services, Inc.'s Registration
Statement on Form S-4, Registration Number 333-37475.
10.2 Registration Rights Agreement, dated as of August 28, 1997, among SC
International Services, Inc., the Guarantors named therein, and BT
Securities Corporation, J.P. Morgan Securities Inc., Credit Suisse
First Boston Corporation, Goldman, Sachs & Co., Smith Barney, Inc.,
and Bankers Trust International PLC. Incorporated by reference to
Exhibit 10.2 of SC International Services, Inc.'s Registration
Statement on Form S-4, Registration Number 333-37475.
10.3 Dealer Manager Agreement, dated August 25, 1997, among SC
International Services, Inc., Sky Chefs, Inc., Caterair
International, Inc. (II), Caterair International Corporation and BT
Securities Corporation. Incorporated by reference to Exhibit 10.3 of
SC International Services, Inc.'s Registration Statement on Form
S-4, Registration Number 333-37475.
10.4 Phantom Stock Plan for Management Employees of Onex Food Services,
Inc. and its Subsidiaries. Incorporated by reference to Exhibit 10.6
of Caterair International Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995.
10.5 Caterair Noncompetition Agreement, dated as of December 15, 1989,
between Caterair International Corporation, Caterair Holdings
Corporation, Marriott Corporation and Host International, Inc.
Incorporated by reference to Exhibit 10.24 of Caterair International
Corporation's Registration Statement on Form S-1, Registration
Statement No. 33-31309.
10.6 Marriott Noncompetition Agreement, dated as of December 15, 1989,
among Marriott Corporation, Host International, Inc., Caterair
Holdings Corporation and Caterair International Corporation.
Incorporated by reference to Exhibit 10.25 of Caterair International
Corporation's Registration Statement on Form S-l, Registration No.
33-31309.
10.7 Caterair Key Employee Retention Plan. Incorporated by reference to
Exhibit 10.11 of SC International Services, Inc.'s Registration
Statement on Form S-1, Registration No. 33-94572.
10.8 Amendment No. 1 to Caterair Key Employee Retention Plan.
Incorporated by reference to Exhibit 10.11.1 of SC International
Services, Inc.'s Registration Statement on Form S-1, Registration
No. 33-94572.
10.9 Caterair International Corporation Transition Severance Plan.
Incorporated by reference to Exhibit 10.26 of SC International
Services, Inc.'s Registration Statement on Form S-l, Registration
No. 33-94572.
10.10 Tax Sharing Agreement, dated as of December 15, 1989, among Caterair
Holdings Corporation, Caterair International Corporation and
Marriott Corporation. Incorporated by reference to Exhibit 10.25 of
SC International Services, Inc.'s Registration Statement on Form
S-l, Registration No. 33-94572.
<PAGE> 56
10.11 Credit Agreement, dated as of September 29, 1995, and amended and
restated as of August 28, 1997, among SC International Services,
Inc., as borrower, Onex Food Services, Inc., Caterair Holdings
Corporation, Caterair International Corporation, the guarantors
named therein, the lenders party thereto from time to time, Bankers
Trust Company and J.P. Morgan Securities, Inc., as co-arrangers,
Bankers Trust Company, as syndication agent, The Bank of New York,
as co-agent, and Morgan Guaranty Trust Company of New York, as
administrative agent. Incorporated by reference to Exhibit 10.34 of
SC International Services, Inc.'s Registration Statement on Form
S-4, Registration Number 333-37475.
10.12 Term Loan Agreement, dated as of August 28, 1997, among Caterair
International Corporation and SC International Services, Inc., as
borrowers, the guarantors named therein, the lenders party thereto
from time to time, Bankers Trust Company and J.P. Morgan Securities
Inc., as co-arrangers, Bankers Trust Company, as syndication agent,
and Morgan Guaranty Trust Company of New York, as administrative
agent. Incorporated by reference to Exhibit 10.35 of SC
International Services, Inc.'s Registration Statement on Form S-4,
Registration Number 333-37475.
10.13 Noncompetition Agreement, dated as of September 29, 1995, between
Caterair International Corporation and Sky Chefs, Inc. Incorporated
by reference to Exhibit 10.16 of Caterair International
Corporation's Annual Report on Form 10-K for the year ended December
31, 1995.
10.14 Promissory Note, dated September 29, 1995, by Caterair International
Corporation payable to the order of SC International Services, Inc.
Incorporated by reference to Exhibit 10.18 of Caterair International
Corporation's Annual Report on Form 10-K for the year ended December
31, 1995.
10.15 Agreement, dated as of February 19, 1995, between SC International
Services, Inc. and Caterair International Corporation relating to an
interest swap transaction. Incorporated by reference to Exhibit
10.19 of Caterair International Corporation's Annual Report on Form
10-K for the year ended December 31, 1995.
10.16 Advisory and Administrative Services Agreement, dated as of
September 29, 1995, between Caterair International Corporation and
Sky Chefs, Inc. Incorporated by reference to Exhibit 10.20 of
Caterair International Corporation's Annual Report on Form 10-K for
the year ended December 31, 1995.
10.17 Lease Agreement, dated as of May 15, 1993, between TriNet Essential
Facilities X, Inc. and Caterair International Corporation, together
with Schedule of additional Lease Agreements between such parties.
Incorporated by reference to Exhibit 10.27 of SC International
Services, Inc.'s Registration Statement on Form S-4, Registration
No. 333-37475.
10.17.1 First Amendment to Lease Agreement, dated as of September 22, 1995,
between TriNet Essential Facilities X, Inc. and Caterair
International Corporation. Incorporated by reference to Exhibit
10.27.1 of SC International Services, Inc.'s Registration Statement
on Form S-4, Registration No. 333-37475.
10.17.2 Second Amendment to Lease Agreement, dated as of December 1, 1995,
between TriNet Essential Facilities X, Inc. and Caterair
International Corporation. Incorporated by reference to Exhibit
10.27.2 of SC International Services, Inc.'s Registration Statement
on Form S-4, Registration No. 333-37475.
<PAGE> 57
10.17.3 Third Amendment to Lease Agreement, dated as of June 1, 1996,
between TriNet Essential Facilities X, Inc. and Caterair
International Corporation. Incorporated by reference to Exhibit
10.27.3 of SC International Services, Inc.'s Registration Statement
on Form S-4, Registration No. 333-37475.
10.17.4 Fourth Amendment to Lease Agreement, dated as of December 23, 1996,
between TriNet Essential Facilities X, Inc. and Caterair
International Corporation. Incorporated by reference to Exhibit
10.27.4 of SC International Services, Inc.'s Registration Statement
on Form S-4, Registration No. 333-37475.
10.17.5 Fifth Amendment to Lease Agreement, dated as of June 23, 1997,
between TriNet Essential Facilities X, Inc. and Caterair
International Corporation. Incorporated by reference to Exhibit
10.27.5 of SC International Services, Inc.'s Registration Statement
on Form S-4, Registration No. 333-37475.
10.17.6 Sixth Amendment to Lease Agreement, dated as of August 22, 1997,
between TriNet Essential Facilities X, Inc. and Caterair
International Corporation. Incorporated by reference to Exhibit
10.27.6 of SC International Services, Inc.'s Registration Statement
on Form S-4, Registration No. 333-37475.
10.17.7 Limited Waiver dated as of August 22, 1997, by TriNet Essential
Facilities X, Inc. in favor of Caterair International Corporation.
Incorporated by reference to Exhibit 10.27.7 of SC International
Services, Inc.'s Registration Statement on Form S-4, Registration
No. 333-37475.
10.18 Lease Agreement, dated as of May 15, 1993, between TriNet Essential
Facilities VIII R, Inc. and Caterair International Corporation,
together with Schedule of additional Lease Agreements between such
parties. Incorporated by reference to Exhibit 10.28 of SC
International Services, Inc.'s Registration Statement on Form S-4,
Registration No. 333-37475.
10.18.1 First Amendment to Lease Agreement, dated as of September 22, 1995,
between TriNet Essential Facilities VIII R, Inc. and Caterair
International Corporation. Incorporated by reference to Exhibit
10.28.1 of SC International Services, Inc.'s Registration Statement
on Form S-4, Registration No. 333-37475.
10.18.2 Second Amendment to Lease Agreement, dated as of December 1, 1995,
between TriNet Essential Facilities VIII R, Inc. and Caterair
International Corporation. Incorporated by reference to Exhibit
10.28.2 of SC International Services, Inc.'s Registration Statement
on Form S-4, Registration No. 333-37475.
10.18.3 Third Amendment to Lease Agreement, dated as of June 1, 1996,
between TriNet Essential Facilities VIII R, Inc. and Caterair
International Corporation. Incorporated by reference to Exhibit
10.28.3 of SC International Services, Inc.'s Registration Statement
on Form S-4, Registration No. 333-37475.
10.18.4 Fourth Amendment to Lease Agreement, dated as of December 23, 1996,
between TriNet Essential Facilities VIII R, Inc. and Caterair
International Corporation. Incorporated by reference to Exhibit
10.28.4 of SC International Services, Inc.'s Registration Statement
on Form S-4, Registration No. 333-37475.
10.18.5 Fifth Amendment to Lease Agreement, dated as of June 23, 1997,
between TriNet Essential Facilities VIII R, Inc. and Caterair
International Corporation. Incorporated by reference to Exhibit
10.28.5 of SC International Services, Inc.'s Registration Statement
on Form S-4, Registration No. 333-37475.
<PAGE> 58
10.18.6 Sixth Amendment to Lease Agreement, dated as of August 22, 1997,
between TriNet Essential Facilities VIII R, Inc. and Caterair
International Corporation. Incorporated by reference to Exhibit
10.28.6 of SC International Services, Inc.'s Registration Statement
on Form S-4, Registration No. 333-37475.
10.18.7 Limited Waiver, dated as of August 22, 1997, by TriNet Essential
Facilities VIII R, Inc. and in favor of Caterair International
Corporation. Incorporated by reference to Exhibit 10.28.7 of SC
International Services, Inc.'s Registration Statement on Form S-4,
Registration No. 333-37475.
10.19 Guaranty, dated as of September 22, 1995, by SC International
Services, Inc., Sky Chefs, Inc., Onex Food Services, Inc. and
Caterair International, Inc. (II) for the benefit of TriNet
Essential Facilities VIII R, Inc. Incorporated by reference to
Exhibit 10.29 of SC International Services, Inc.'s Registration
Statement on Form S-4, Registration No. 333-37475.
10.20 Guaranty, dated as of September 22, 1995, by SC International
Services, Inc., Sky Chefs, Inc., Onex Food Services, Inc. and
Caterair International, Inc. (II) for the benefit of TriNet
Essential Facilities X, Inc. Incorporated by reference to Exhibit
10.30 of SC International Services, Inc.'s Registration Statement on
Form S-4, Registration No. 333-37475.
10.21 Indenture, dated as of September 15, 1995, among SC International
Services, Inc., as Issuer, the guarantors named therein and The Bank
of New York, as trustee, relating to SC International Services,
Inc.'s 13% Senior Subordinated Notes due 2005, with form of Senior
Subordinated Note and Guarantee included therewith. Incorporated by
reference to Exhibit No. 10.23 of SC International Services, Inc.'s
Annual Report on Form 10-K for the fiscal year ended December 31,
1997.
21.1 Subsidiaries of Caterair International Corporation. Incorporated by
reference to Exhibit 21.1 of SC International Services, Inc.'s
Registration Statement on Form S-4, Registration No. 333-37475.
27. Financial Data Schedule for Caterair International Corporation and
consolidated subsidiaries for the fiscal year ended December 31,
1997.
99. Item 7 of SC International Services, Inc.'s Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF CATERAIR INTERNATIONAL CORPORATION SET
FORTH IN THE ANNUAL REPORT ON FORM 10-K TO WHICH THIS SCHEDULE IS AN EXHIBIT AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 23,210
<SECURITIES> 0
<RECEIVABLES> 175,836
<ALLOWANCES> 14,365
<INVENTORY> 19,761
<CURRENT-ASSETS> 231,763
<PP&E> 332,794
<DEPRECIATION> 136,656
<TOTAL-ASSETS> 859,919
<CURRENT-LIABILITIES> 258,477
<BONDS> 300,000
0
0
<COMMON> 59,579
<OTHER-SE> (52,157)
<TOTAL-LIABILITY-AND-EQUITY> 859,919
<SALES> 1,602,823
<TOTAL-REVENUES> 1,602,823
<CGS> 1,444,189
<TOTAL-COSTS> 1,444,189
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52,357
<INCOME-PRETAX> (11,267)
<INCOME-TAX> 5,273
<INCOME-CONTINUING> (16,570)
<DISCONTINUED> 0
<EXTRAORDINARY> (20,745)
<CHANGES> 0
<NET-INCOME> (37,285)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
The discussion and analysis below relates to (i) the historical
consolidated financial statements and results of operations of SCIS and its
subsidiaries for the periods presented below and (ii) the liquidity and capital
resources of SCIS. The following discussion should be read in conjunction with
the Financial Statements and notes thereto included elsewhere in this Annual
Report on Form 10-K.
On September 29, 1995, the Company, OFSI, Caterair and its parent,
Caterair Holdings, consummated the Combination pursuant to which SCIS and its
subsidiaries acquired, licensed, leased and subleased substantially all of the
worldwide business and assets of Caterair. SCIS and CII, a wholly-owned
operating subsidiary of SCIS, were formed in connection with the Combination.
Sky Chefs (including its subsidiaries) was the only direct subsidiary of SCIS
which conducted substantial operations prior to September 29, 1995. Thus, unless
otherwise indicated, the discussion of results of operations below relates to
the operations of Sky Chefs for periods prior to September 29, 1995 and
operations of SCIS and its subsidiaries thereafter. The acquisition of
substantially all of the foreign operations of Caterair, Caterair's tradename
and domestic working capital and the assumption of certain Caterair liabilities
in the Combination was accounted for using the purchase method of accounting.
Accordingly, the historical consolidated financial statements for financial
reporting periods after September 29, 1995 include the acquired assets and
liabilities and airline catering operations of the business formerly conducted
by Caterair. The Combination resulted in a material change in the financial
position of SCIS. See "Certain Relationships and Related Transactions -- The
Combination."
In connection with the Combination, pursuant to several leases (the
"Domestic Leases"), Sky Chefs and CII leased and subleased from Caterair
substantially all of its domestic tangible assets for a six-year term (expiring
in 2001). In the event that Caterair's lease of such assets was for less than
six years, the applicable Domestic Lease is for such shorter period. Sky Chefs
and CII have options to purchase all or a portion of the assets of Caterair
covered by the Domestic Leases for amounts determined under formulas in the
Domestic Leases that were intended to result in exercise prices equal to the
estimated fair market value of such assets at the time or times of exercise of
any such options. The options are exercisable until the date which is 30 days
after termination of the applicable Domestic Lease. It is not certain that such
purchase options will be exercised. See "Certain Relationships and Related
Transactions -- The Combination."
In addition, in connection with the Combination, pursuant to license
agreements (the "License Agreements"), Sky Chefs and CII licensed Caterair's
rights under certain customer contracts for a six-year term (expiring in 2001).
Sky Chefs and CII each have options to purchase all or a portion of the customer
contract rights covered by the License Agreements for amounts determined under
formulas in the License Agreements that were intended to result in exercise
1
<PAGE> 2
prices equal to the estimated fair market value of such rights at the time or
times of exercise of any such options. The options are exercisable until the
date which is 90 days after termination of the applicable License Agreement. It
is not certain that such purchase options will be exercised. See "Certain
Relationships and Related Transactions -- The Combination."
In addition, in connection with the Combination, pursuant to a non-compete
agreement, Caterair agreed not to compete with Sky Chefs in the airline catering
business for a six-year term (expiring in 2001) and Sky Chefs is obligated to
pay Caterair $4.0 million per year.
Over the past several years there has been a significant reduction in food
service levels on domestic flights which has affected all domestic airline
caterers, including the Company. Despite a decline in total airline food
expenditures in the United States from 1992 to 1996, the Company has been able
to increase its revenues and profitability due to (i) increases in volume
attributable to passenger growth, (ii) new business awards, (iii) price
increases related to inflation and (iv) the implementation of its operating
improvement plan. In 1992, Sky Chefs implemented the Total Cycle Time(TM)
program and other programs, as part of an extensive operating improvement plan,
which reduced annual operating costs by approximately $47 million in 1994 as
compared with 1992. The Total Cycle Time(TM) program is a methodology designed
to raise efficiency levels. The program is based on measuring, monitoring, and
improving the total cycle time (i.e., the time necessary to complete a business
process) of various processes throughout an organization - the total elapsed
time from when work commences on a project through completion; such as the time
elapsed from taking the first steps to prepare a meal to delivery of the meal to
an airplane. The total cycle time approach was designed to enable the Company to
significantly increase the efficiency with which it utilizes labor and other
resources and to allow increased flexibility to react to customer needs. Due in
large part to its operating improvement plan, Sky Chefs increased EBITDA from
$29 million in 1992 to $59 million in 1994 and improved EBITDA as a percentage
of revenues from 6.1% to 12.6% over the same period. As part of the Combination
which was consummated on September 29, 1995, management estimated that
approximately $55 million of net cost savings on an annualized basis (from the
combined business of Sky Chefs and the business formerly conducted by Caterair)
were achievable by the end of the third year of combined operations of Sky Chefs
and Caterair. Management believes that as of December 31, 1997 a significant
portion of these net cost savings have been achieved. See "Selected Financial
Data." These net cost savings have been achieved through, among other things,
increasing labor productivity and reducing labor and employee costs at certain
of the Caterair Kitchens; consolidating certain corporate level management and
administrative functions of Sky Chefs and Caterair; reducing food waste,
spoilage and shrinkage at certain of the Caterair Kitchens; eliminating
redundant kitchens; and reducing other kitchen operating expenses at certain of
the Caterair Kitchens. In order to achieve these net cost savings, the Company
incurred approximately $57 million in non-recurring costs through December 31,
1997, principally relating to (i) severance payments and other employee costs,
(ii) external consulting services primarily associated with the implementation
of labor savings programs and (iii) other items in connection with the
integration of the business of Sky Chefs and Caterair. See "Selected Financial
Data" and "Certain Relationships and Related Transactions -- The Combination."
Integration costs were primarily incurred as a result of the Combination
and the implementation of the Company's operating improvement plan at the
Caterair Kitchens. The severance payments, which were a portion of these
integration costs, included compensation paid to non-hourly management and
administrative employees whose jobs were terminated due to efficiencies
generated by the Company's operating improvement plan and to eliminate redundant
positions resulting from the Combination. Integration costs also related to the
movement of management personnel between Company locations. Further integration
costs included expenses relating to external consultants who provided services
in connection with the implementation of the Company's operating improvement
plan and the evaluation, training, and replacement of management employees. As a
result of the Combination, SCIS determined that certain of its idle facilities
would not be utilized in the future and accelerated the recognition of rent
expense relating to these facilities and wrote-down related property and
equipment. These items were also included in integration costs. Due to the large
number and geographic diversity of the Caterair Kitchens, the implementation of
the Company's operating improvement plan at the Caterair Kitchens has been a
lengthy process, conducted in various stages. Thus, integration costs have been
incurred since September 29, 1995, the date on which the Combination was
consummated. As a result of the implementation of the Company's operating
improvement plan at the Caterair Kitchens, SCIS has increased its general and
administrative staff at headquarters for training employees and increased
expenditures for safety and other
2
<PAGE> 3
operating programs. The costs associated with these matters will be included in
general and administrative expenses commencing with periods after December 31,
1997.
Results of Operations
1997 Compared with 1996
Revenues. Revenues for 1997 increased $73.0 million or by 4.8% to $1,602.8
million from $1,529.8 million in 1996. This increase was primarily the result of
$69.4 million in additional revenues generated during 1997 from new airline
catering contracts and business, $13.6 million from additional non-airline
catering business and $13.2 million attributable to price increases. In
addition, revenues from two kitchens subleased/licensed from Caterair on May 31,
1996 increased revenue by $22.1 million in 1997 as compared to 1996 as only
seven months of revenues from these kitchens was included in 1996. This increase
in revenues was offset by a $45.3 million decline in revenues related to lost
business and other factors, including a $27.2 million decrease in revenues
relating to American's termination during 1997 of the Company's services at six
Caterair Kitchens due to the Company's failure to comply with quality standards
specified in Caterair's contract with American (which was licensed to Sky Chefs
and CII). Based on current service levels, the Company estimates that the
terminations by American at the six Caterair Kitchens will result in a reduction
of revenues on an annualized basis of approximately $34.0 million. In September,
1997, Mr. Robert Crandall, the Chairman and Chief Executive Officer of AMR, the
parent of American, was reported to have stated to financial analysts that in
his opinion American's contracts with the Company "[produce] a cost disadvantage
relative to other caterers" and that American will seek to eliminate its
perceived cost disadvantage. The Company and American periodically discuss
issues surrounding the terms of these contracts and such discussions have
continued following Mr. Crandall's remarks. The loss of the business with
American, or a large portion of such business, could have a material adverse
effect on SCIS' financial condition, results of operations and cash flows. See
"Business--Customers--Contracts."
Cost of Operations. Cost of operations increased $68.1 million or by 4.9%
to $1,444.2 million in 1997 from $1,376.1 million in 1996, primarily as a result
of increased business activities and a $25.1 million one-time charge incurred in
1997 relating to bonuses expected to be paid during 1998 and 1999 to certain
Company employees and officers. Cost of operations as a percentage of revenues
increased to 90.1% in 1997 from 90.0% in 1996. Without the expense relating to
the bonus program, cost of operations as a percentage of revenues would have
decreased to 88.5% of revenue in 1997 from 90.0% in 1996, primarily as a result
of a decrease in labor costs due to the Company's ongoing operating improvement
plan.
Depreciation and Amortization. Depreciation and amortization expenses
increased $4.3 million or by 11.3% to $42.2 million for 1997 from $37.9 million
in 1996. This increase is a result of additional capital expenditures of $33.6
million made during 1997.
Selling, General and Administrative. Selling, general and administrative
expenses increased $3.5 million or by 7.2% to $52.4 million for 1997 from $48.9
million in 1996. The Company incurred an additional $1.3 million of selling,
general and administrative costs related to the inclusion of a full year of
expenses in 1997 for two kitchens subleased/licensed from Caterair on May 31,
1996 compared to only seven months in 1996. In 1997, the Company also incurred
$1.3 million of costs related to acquisitions and $0.8 million in consulting
fees related to year 2000 information system conversion issues.
Integration Expenses. Integration expenses decreased $12.4 million or by
40.8% to $18.0 million for 1997 from $30.4 million in 1996. The integration
expenses were significantly higher for 1996 as SCIS focused on integrating
Caterair's operations immediately following the Combination. See "-- General."
Operating Income. Operating income increased $9.5 million or by 26.0% to
$46.1 million for 1997 from $36.6 million in 1996, primarily as a result of the
factors discussed above.
Interest Income. Interest and dividend income decreased $1.4 million to
$6.5 million for 1997 from $7.9 million in 1996.
3
<PAGE> 4
Interest Expense. Interest expense increased $2.0 million to $52.4 million
for 1997 from $50.4 million in 1996.
Minority Interest. Minority interest expense increased $2.6 million to
$5.6 million in 1997 from $3.0 million in 1996, primarily as a result of the
recapitalization of a subsidiary and increased profits in the Company's
Australian operations.
Other Income (Expense). Other expenses for 1997 increased by $4.2 million
to $5.9 million from $1.7 million in 1996. This increase is primarily due to a
$3.8 million increase in foreign exchange losses.
Earnings (Loss) Before Income Taxes. The Company's loss before income
taxes increased by $0.7 million to $11.3 million for 1997 from $10.6 million in
1996 primarily as a result of the factors discussed above.
Provision (Benefit) for Income Taxes. The provision for income taxes was
$5.3 million for 1997 compared to $0.4 million in 1996. This fluctuation in
income taxes was primarily a result of the increase in operating income and
operating losses generated by certain foreign operations which the Company has
been unable to utilize to offset income taxes relating to income generated by
other operations. Management expects to incur operating losses in the
foreseeable future at certain foreign locations for which it will not recognize
tax benefits.
Extraordinary Loss. The extraordinary loss of $20.7 million for 1997 was
the result of the write off of $6.4 million of deferred financing fees (net of a
$4.3 million tax benefit) relating to the retirement of the Old Notes and SCIS'
term loan indebtedness under the Old Credit Agreement and the premium paid to
retire the Old Notes of $14.3 million (net of a $9.5 million tax benefit).
Net Income (Loss). SCIS' net loss increased $26.3 million to $37.3 million
for 1997 from $11.0 million in 1996 primarily as a result of the factors
discussed above.
1996 Compared with 1995
Revenues. Revenues for 1996 increased $790.7 million or by 107.0% to
$1,529.8 million from $739.1 million in 1995. The primary reason for this
increase was the inclusion of revenues from the operations acquired, licensed,
leased and subleased from Caterair for a full year in 1996 versus only three
months in 1995. Also included in the 1996 revenue increase was $38.6 million
derived from two kitchens which were subleased/licensed from Caterair on May 31,
1996. Revenues from three domestic kitchens acquired from a subsidiary of LSG in
August and November 1995 (the "LSG Acquisition") increased $25.9 million in 1996
over 1995 primarily as a result of the inclusion of these operations for a full
year in 1996 versus only a partial year in 1995.
Cost of Operations. Cost of operations increased $711.8 million or by
107.2% to $1,376.1 million in 1996 from $664.3 million in 1995. The primary
reason for this increase was the inclusion of the cost of operations of the
business acquired, licensed, leased and subleased from Caterair for a full year
in 1996 versus only three months in 1995. In addition, costs of operations
increased $35.4 million in 1996 as compared to 1995 due to the inclusion of
operating costs associated with the two kitchens subleased/licensed from
Caterair on May 31, 1996. Further, operating costs of the three kitchens
acquired from LSG in 1995 increased $25.8 million in 1996 over 1995 primarily as
a result of the inclusion of these operations for a full year in 1996 versus
only a partial year in 1995.
Depreciation and Amortization. Depreciation and amortization expenses
increased $16.6 million or by 77.9% to $37.9 million in 1996 from $21.3 million
in 1995 primarily due to the inclusion for the full year of 1996 of depreciation
and amortization expenses for the assets acquired from Caterair versus only
three months in 1995. SCIS also incurred approximately $7.2 million of capital
expenditures related to the deferred maintenance of the assets acquired from
Caterair of which a portion was depreciated in 1996.
Selling, General and Administrative. Selling, general and administrative
expenses increased $20.9 million or by 74.0% to $49.0 million in 1996 from $28.1
million in 1995 primarily as a result of the inclusion of a full year of
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operating expenses associated with the operations acquired, licensed, leased and
subleased from Caterair in 1996 versus only three months of 1995.
Integration Expenses. Integration expenses increased $1.8 million or by
6.3% to $30.4 million for 1996 from $28.6 million in 1995. The increase is
primarily due to a full year's expenses recognized in 1996 compared to only
three months in 1995. Offsetting the increase was a one-time charge to
integration expenses of $17.2 million in 1995 relating to the acceleration of
the recognition of rent expense relating to idle kitchens and the write-down of
related fixed assets. See "-- General."
Operating Income. SCIS' operating income increased $39.8 million to $36.6
million in 1996 from a $3.2 million loss in 1995 primarily as a result of the
factors discussed above.
Interest Income. Interest and dividend income increased $5.4 million to
$7.9 million in 1996 from $2.5 million in 1995 primarily as a result of interest
income on the $37.8 million loan made by SCIS to Caterair in connection with the
Combination and higher average investment balances throughout 1996.
Interest Expense. Interest expense increased $30.7 million to $50.4
million in 1996 from $19.7 million in 1995 primarily as a result of increased
debt balances related to the Combination being outstanding for the entire year
in 1996 versus only three months in 1995.
Minority Interest. Minority interest expense increased $1.9 million to
$3.0 million in 1996 from $1.1 million in 1995, primarily as a result of the
inclusion of a full year of operations held by minority interests acquired from
Caterair versus only three months in 1995.
Other Income (Expense). Other expenses increased $0.7 million to $1.7
million in 1996 from $1.0 million in 1995 primarily as a result of the inclusion
of a full year of other expenses associated with the operations acquired,
licensed, leased and subleased from Caterair versus only three months in 1995.
Earnings (Loss) Before Income Taxes. SCIS' loss before income taxes
decreased $12.0 million to $10.6 million in 1996 as compared to a loss before
income taxes of $22.6 million in 1995 primarily as a result of the factors
discussed above.
Provision (Benefit) for Income Tax. The income tax expense for 1996 was
$0.4 million compared to an income tax benefit of $6.5 million in 1995. The
increase in income tax expense in 1996 versus 1995 is attributable to increased
pre-tax earnings in domestic United States operations and at certain foreign
subsidiaries, for which income taxes are payable and the expense has been
recorded, offset by losses in other foreign subsidiaries where SCIS has been
unable to recognize tax benefits. The majority of the foreign subsidiaries were
acquired at September 29, 1995, and therefore, their results are included for
three months of 1995 versus a full year in 1996. This limited ability to
recognize tax benefits results in a disproportionate increase in consolidated
income tax expense relative to the improvement in consolidated pre-tax earnings.
Net Income (Loss). SCIS' net loss decreased $5.0 million to $11.0 million
in 1996 as compared to a net loss of $16.0 million in 1995 primarily as a result
of the factors discussed above.
Liquidity and Capital Resources
On August 28,1997, SCIS and certain subsidiaries and affiliates thereof
issued (the "Offering"), $300.0 million principal amount of SCIS' 9 1/4% Senior
Subordinated Notes due 2007, Series A (the "Private Notes"), and related
guarantees to BT Securities Corporation, J.P. Morgan & Co., Credit Suisse First
Boston, Goldman, Sachs & Co., Smith Barney, Inc. and Bankers Trust International
PLC (the "Initial Purchasers"), pursuant to a Purchase Agreement, dated August
22, 1997, between SCIS, the Guarantors (as defined) and the Initial Purchasers,
in a transaction exempt from the registration requirements of the Securities Act
of 1933, as amended (the "Securities Act"), in reliance upon Rule 144A and
Regulation S promulgated by the Securities and Exchange Commission thereunder.
On February 4, 1998,
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as required pursuant to a Registration Rights Agreement entered into by SCIS in
connection with the Offering, SCIS consummated an exchange offer (the "Exchange
Offer") pursuant to which $297.8 million of SCIS' 9 1/4% Senior Subordinated
Notes due 2007, Series B (the "Exchange Notes" and together with the Private
Notes, the "Notes"), which Exchange Notes have substantially identical terms as
the Private Notes, are guaranteed on a joint and several basis by the
Guarantors, and were registered under the Securities Act, were exchanged for a
like principal amount of Private Notes. Such Exchange Offer was made solely by
means of a prospectus.
The registration statement (Registration No. 333-37475) relating to the
Exchange Offer (and $300.0 million principal amount of Exchange Notes and the
related guarantees of the Guarantors) became effective under the Securities Act,
on December 19, 1997. The Exchange Offer commenced on December 31, 1997 and was
consummated at 5:00 p.m. on February 4, 1998. No underwriter was involved in the
Exchange Offer. From the effective date of the registration statement through
December 31, 1997, approximately $200,000 of expenses were incurred by SCIS and
the Guarantors in connection with the issuance and distribution of the Exchange
Notes (and the related guarantees). No such expenses were paid, directly or
indirectly, to directors or officers of SCIS or any Additional Registrant or any
of their respective associates, or to any person owning 10% or more of any class
of equity securities of SCIS or any Additional Registrant. No underwriting
discounts or commissions, finders fees or other expenses were paid to
underwriters in connection with the Exchange Offer.
The net proceeds to SCIS from the Offering, after the deduction of
discounts and offering expenses, were approximately $289.9 million. The
aggregate offering price to investors of the Private Notes was $299.6 million
and the aggregate Initial Purchasers' discount was approximately $8.4 million.
SCIS used $209.4 million of the net proceeds to repay and retire all of its
outstanding term loan indebtedness under the Credit Agreement, dated as of
September 29, 1995, among SCIS, Caterair, Caterair Holdings, OFSI and the
lenders named therein (the "Old Credit Agreement"). The indebtedness of SCIS
under the Old Credit Agreement which was repaid had maturities ranging from
September 15, 1997 to September 15, 2003, and accrued interest at fluctuating
rates (an average weighted rate of 8.7% at August 21, 1997).
Interest on the Notes will be payable semi-annually on March 1 and
September 1 of each year commencing March 1, 1998, at the rate of 9 1/4% per
annum. The Notes will be redeemable, in whole or in part, at the option of SCIS,
at any time on or after September 1, 2002, at prices ranging from 104.635%
(during the 12-month period beginning September 1, 2002) to 100% (on or after
September 1, 2006) of the outstanding principal amount thereof, together with
accrued interest, if any, to the date of redemption. In addition, on or prior to
September 1, 2000, SCIS may redeem in the aggregate up to $105 million in
principal amount of the Notes with the net cash proceeds of certain public
equity offerings by SCIS or OFSI at a redemption price of 109.25% of the
principal amount of such Notes, plus accrued interest, if any, to the date of
redemption; provided that at least $195 million in principal amount of the Notes
remains outstanding immediately after any such redemption. The Notes are jointly
and severally guaranteed by Caterair, Sky Chefs, CII and the other Additional
Registrants (collectively, the "Guarantors").
On August 25, 1997, SCIS commenced a tender offer for all of its $125.0
million principal amount of 13% Senior Subordinated Notes due 2005 (the "Old
Notes"). In connection therewith, SCIS offered to purchase all of the Old Notes
at a price equal to 117% of the principal amount thereof plus accrued and unpaid
interest to the date of purchase and solicited consents to certain amendments
(the "Old Indenture Amendments") to the Indenture relating to the Old Notes from
the holders thereof (collectively, the "Offer to Purchase"). Holders of Old
Notes who consented to the Old Indenture Amendments received a payment equal to
2% of the principal amount of the Old Notes for which a consent was delivered.
Holders of Old Notes were not permitted to tender their Old Notes without
consenting to the Old Indenture Amendments or to consent to the Old Indenture
Amendments without tendering their Old Notes.
The Offer to Purchase expired on September 24, 1997. All of the Old Notes
were tendered by the holders thereof and accepted for payment by SCIS in
connection with the Offer to Purchase. SCIS paid $148.8 million (excluding $7.9
million of accrued interest) in the aggregate in consideration of the repurchase
of the Old Notes and the related consents. SCIS used approximately $80.5 million
of the net proceeds from the Offering and $68.3 million of borrowings under the
Term Loan Agreement to fund such payments.
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In connection with the Offering, SCIS, certain other parties and certain
lenders entered into the senior secured Revolving Credit Agreement, and
Caterair, SCIS, certain other parties and certain lenders entered into the
senior secured Term Loan Agreement, (the Term Loan Agreement and the Revolving
Credit Agreement, are collectively referred to as the "Senior Bank Financing").
Concurrently with the Offering, Caterair, repaid and retired all of its
outstanding indebtedness under the Old Credit Agreement (approximately $155.9
million) with borrowings under the Term Loan Agreement (the "Caterair
Refinancing").
Pursuant to the Senior Bank Financing, Bankers Trust Company, Morgan
Guaranty Trust Company of New York and certain other lenders provided (i) SCIS
with loans under the Revolving Credit Agreement in an amount up to $90.0 million
(including a sub-limit of $50.0 million for letters of credit) on a revolving
credit basis for working capital and general corporate purposes of SCIS,
Caterair and their respective subsidiaries (such Revolving Credit Agreement
expires on August 28, 2002), (ii) Caterair with a loan under the Term Loan
Agreement in an aggregate principal amount of $160.0 million for purposes of
refinancing Caterair's indebtedness under the Old Credit Agreement and funding
the payment of related transaction costs (such loan has a final maturity in
2007) and (iii) SCIS with a term loan under the Term Loan Agreement in an
aggregate principal amount of $90.0 million for purposes of financing, in part,
the Offer to Purchase the Old Notes, funding payment of related transaction
costs and general corporate purposes (such loan has a final maturity in 2007).
All of the indebtedness under the Revolving Credit Agreement and the Term
Loan Agreement is senior secured indebtedness. The Revolving Credit Agreement
does not require scheduled amortization or scheduled commitment reductions. The
Term Loan Agreement does require scheduled amortization payments. Each of the
Revolving Credit Agreement and the Term Loan Agreement, under certain
circumstances, requires SCIS or Caterair, as the case may be, to make mandatory
prepayments and commitment reductions. In addition, each of SCIS and Caterair
may make optional prepayments and commitment reductions pursuant to the terms of
the Revolving Credit Agreement and the Term Loan Agreement, as the case may be.
Obligations of SCIS under the Senior Bank Financing are jointly and
severally guaranteed by OFSI (on a limited basis), an affiliate of OFSI (on a
limited basis), Caterair, Sky Chefs, CII and certain other domestic subsidiaries
of SCIS and obligations of Caterair under the Senior Bank Financing are jointly
and severally guaranteed by OFSI (on a limited basis), an affiliate of OFSI (on
a limited basis), SCIS, Sky Chefs, CII and certain domestic subsidiaries of
SCIS. In addition, obligations under the Senior Bank Financing are secured by
(i) first priority security interests in virtually all tangible and intangible
assets of SCIS, Caterair, and their respective wholly-owned domestic
subsidiaries and (ii) pledges of all capital stock of SCIS and Caterair and all
capital stock and notes owned by SCIS, Caterair and their respective domestic
subsidiaries (limited in the case of capital stock of foreign subsidiaries to
65% of such capital stock).
Each of the loans under the Senior Bank Financing bear interest at
specified margins over the applicable eurodollar rate or base rate.
Effective, September 12, 1997, SCIS entered into an interest swap
agreement to reduce interest rate exposure on its long-term debt. The agreement
covers a notional amount of $89.8 million at December 31, 1997 and has a stated
maturity of September 15, 2002.
SCIS' principal sources of liquidity are expected to be cash flow from
operations and amounts available under the Revolving Credit Agreement. It is
anticipated that SCIS' principal uses of liquidity will be to provide working
capital, to finance capital expenditures, to meet debt service requirements, to
fund non-recurring costs associated with the Combination and to pay for acquired
businesses. In addition, SCIS expects to use approximately $11.6 million in the
second quarter of 1998 and approximately $13.5 million in the first quarter of
1999 to fund management bonuses approved in the fourth quarter of 1997 by SCIS'
board of directors. There can be no assurance that these bonuses will be paid or
as to the amounts thereof.
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As a result of the Combination, the Offering, and the Senior Bank
Financing, SCIS is highly leveraged. At December 31, 1997, the aggregate amount
of outstanding indebtedness of SCIS (including borrowings and guarantees under
the Senior Bank Financing, but excluding $22.0 million of letters of credit) was
approximately $586.1 million. As of December 31, 1997, approximately $22.0
million of letters of credit, issued primarily to insurance carriers providing
worker's compensation coverage and related to surety bonds and leases, was
outstanding under the Revolving Credit Agreement. During 1998 SCIS expects to
make approximately $62.5 million in capital expenditures, which are more
significant than in prior periods. This increase in capital expenditures will
primarily relate to the expansion, improvement and maintenance of SCIS'
kitchens, particularly those located at international gateway airports, and the
upgrade of SCIS' information systems.
The Revolving Credit Agreement, which is the most restrictive of SCIS'
indebtedness agreements, the Indenture relating to the Notes as well as the Term
Loan Agreement contain a number of covenants that, among other thing, restrict
the ability of SCIS and Caterair to dispose of assets, incur additional
indebtedness, guarantee obligations, repay indebtedness or amend debt
instruments, pay dividends, create liens on assets, make investments, make
acquisitions, engage in mergers or consolidations, make capital expenditures,
and otherwise restrict certain corporate activities. The Senior Bank Financing
also contains provisions which limit Sky Chefs', CII's and the other Guarantors'
(excluding Caterair) ability to make distributions to SCIS other than in the
form of cash dividends and, under certain circumstances, capital stock. SCIS
does not expect that such provisions will have a material impact on the ability
of SCIS to meet its cash obligations. In addition, the Revolving Credit
Agreement requires compliance with specified financial tests based on the
combined financial position of SCIS and Caterair. Certain other agreements of
SCIS and the Guarantors require SCIS and/or the Guarantors to maintain certain
financial ratios and satisfy certain financial tests. Management believes SCIS
and the Guarantors are currently in compliance with all material covenants and
restrictions contained in all material agreements to which SCIS and/or a
Guarantor is a party.
Based upon current levels of operations, SCIS believes that cash flow from
operations, together with available borrowings under the Revolving Credit
Agreement, will be adequate to meet anticipated requirements for working
capital, capital expenditures, debt service requirements, Combination-related
costs and to pay for acquired businesses. There can be no assurance, however,
that SCIS will continue to generate cash flow at or above current levels or SCIS
will be able to meet its anticipated needs for working capital, capital
expenditures, debt service, Combination-related costs or funding to pay for
acquired businesses.
SCIS expects to use approximately $3.3 million in connection with the
implementation of a new management stock plan. There can be no assurance that
the management stock plan will be implemented.
Net cash provided by operating activities for 1997 declined to $18.4
million from $35.6 million in 1996, primarily as a result of lower than usual
levels of accounts payable and accrued expenses at December 31, 1995. Net cash
used in investing activities increased to $69.4 million during 1997 from $31.4
million during 1996, primarily as a result of acquisitions of businesses during
the twelve months ended December 31, 1997. Net cash provided by (used in)
financing activities increased to $30.9 million during 1997 from ($10.4) million
during 1996, primarily as a result of the Senior Bank Financing.
In connection with the Combination, LSG was granted the option to acquire
a 50% interest in the catering business acquired by the Company from Caterair in
Europe for a price to be negotiated on a basis to be consistent with the
valuation of the entire Caterair business implicit in the Combination. This
option has expired. However, LSG and The Company are engaged in discussions with
a view to reaching agreement for the sale by the Company to LSG of 50% of the
Company's European catering business for a price estimated to be $50 million.
There can be no assurance that such sale will occur or if it does occur as to
the timing, price or other terms thereof.
On March 6, 1998, Sky Chefs entered into a non-binding letter of intent
with a third party pursuant to which Sky Chefs agreed to purchase the airline
catering operations conducted by such third party. The consummation of such
acquisition is subject to the completion of legal, business and financial due
diligence, receipt of any necessary government and other third party approvals,
and the negotiation and execution by the parties of a mutually acceptable
definitive acquisition agreement. Sky Chefs currently expects to fund the
purchase price for such operations through additional borrowings. There is no
assurance that such acquisition (or related borrowings) will be consummated
and, if consummated, as to the terms and conditions upon which such transaction
(or related borrowings) will be effected.
Seasonality
During 1997, the Company recognized 23.4%, 24.9%, 26.4% and 25.3% of its
revenues and 18.1%, 41.0%, 64.6% and (23.7)% of its operating income during the
first, second, third and fourth quarter, respectively.
During 1996, the Company recognized 22.6%, 24.5%, 27.5% and 25.4% of its
revenues and (10.1)%, 10.5%, 66.9% and 32.7% of its operating income during the
first, second, third and fourth quarter, respectively.
Impact of Inflation
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SCIS' food, labor and other operating costs are affected by a number of
factors beyond SCIS' control, including inflation. SCIS generally is able to
recover increases in food costs due to inflation from its customers. However, it
may not be able to recover similar increases in labor or other operating costs
from such customers.
SCIS operates in a number of countries that experience high rates of
inflation. SCIS generally has been successful in mitigating the adverse effects
of such inflation through measures such as indexing contractual price rates to
inflation and providing for payments in local currencies. There can be no
assurance that SCIS will not be adversely affected when it seeks to exchange
funds in local currencies of countries with high rates of inflation into United
States currency.
Recent Accounting Standards
During June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 130 ("SFAS 130"), "Reporting
Comprehensive Income," effective for financial statements for fiscal years
beginning after December 15, 1997. SFAS 130 mandates that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The Company will adopt SFAS
130 beginning January 1, 1998.
Also during June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 "Disclosures About Segments
of an Enterprise and Related Information," effective for financial statements
for fiscal years beginning after December 15, 1997. Preliminary analysis of this
new standard by the Company indicates that the standard will not have a material
impact on the Company's financial statements.
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 132 ("SFAS 132"), "Employers'
Disclosures About Pensions and Other Postretirement Benefits," effective for
financial statements for fiscal years beginning after December 15, 1997. This
statement significantly changes current financial statement disclosure
requirements for pensions and other postretirement benefits. The Company will
adopt SFAS 132 effective January 1, 1998.
Year 2000 Issue
The "Year 2000" issue concerns the potential exposures related to the
automated generation of business and financial misinformation resulting from the
application of computer programs which have been written using two digits,
rather than four, to define the applicable year of business transactions. The
Company has established a team to complete an awareness program and assessment
project to address the Year 2000 issue. Such assessment has been completed with
respect to the Company's corporate systems, and the Company has determined that
it will be required to modify or replace portions of such computer programs so
that its computer systems will properly utilize dates beyond December 31, 1999.
In certain instances, the Company had existing plans to replace or upgrade such
computer programs for corporate purposes not related to the Year 2000 issue. The
Company expects to achieve Year 2000 compliance with respect to its corporate
systems by December 1998. The Company presently believes that the total cost to
become Year 2000 compliant with respect to its corporate systems will be between
$2.5 million and $3.0 million (excluding between $0.5 million and $0.8 million
relating to computer system upgrades not directly related to Year 2000
compliance issues). With respect to non-corporate systems located at the
Company's domestic and international kitchens, an assessment of Year 2000
compliance has not yet been completed; the Company anticipates that such
assessment will be completed no later than April, 1998.
The Company presently believes that with modifications to existing
software and conversions to new software, the Year 2000 issue can be mitigated,
and the Company does not anticipate any material costs, problems or
uncertainties associated with becoming Year 2000 compliant. However, until the
Company's assessment of Year 2000 compliance with respect to software at its
domestic and international kitchens has been completed, there can be no
assurance that significant efforts or expenditures will not be required to
ensure Year 2000 compliance. Further, there can be no assurance that the systems
of other companies on which the Company may rely will be timely converted or
that the failure to convert by another company would not have an adverse effect
on the Company. Failure of the Company to adequately address the Year 2000
issue; could materially and adversely affect the Company's business operations,
however, the Company does not anticipate such result.
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