Centerplate's evolution from Volume Services America in food service management

¶ … Services America Holdings, Inc.

The services provided by this company are unique in a number of ways, and America is probably the only country in the world that has companies of this size in such services spread all over the country. The company has been in the business for forty years, and that is quite a long time for service organizations. None of them remain on top for very long as the nature of business that is required to be on top changes. The services of the company have been to provide catering services, concessions, management and merchandizing services in many important avenues in America. (Centerplate: Creating something Special) The business is thus not for the facility itself, but from the fans and the guests who visit these grounds. At every level, the matter is dealing with individuals, and even the cause for the organizational troubles is due to individuals. All these make it interesting to know and understand about the organization.

Analysis

The nature of the service

Just when there is going to be a high number of people at a ground, it does not mean that there is only one thing that they are interested in. Certainly the main focus of their attention is going to be on the game, if it is a sports ground that is the reason why they have come. At the same time, they retain their human nature and would require all their normal facilities while at the ground and one of the primary requirements is food and drinks. Since the audience is enjoying themselves at that time, they would like to feel that they are the kings of all that they survey at that time. This reflects into their behavior and they would be expecting the best of foods and drinks. To serve them, the organization serving them also must have special expertise.

Earlier all individual grounds had their own facilities, and one could almost say which ground they were at through the food that they got. The nature of individuals has changed and most people are now exposed to international food and drinks, and they would think of their experiences in terms of their novelty in that respect. This situation is true not only for sports grounds, but also conventions and entertainment centers, and Centerplate has gathered a very high reputation for itself in their ability to serve premier, high volume food and drinks at such meetings. (Centerplate: Creating something Special)

The change of name question comes directly now, and that is why there is a discussion about Centerplate, when the discussion is supposed to be about Volume Services America. Volume Services America was known as one of the leading food and management services organizations for sports, conventions and entertainment centers, and has been so for more than forty years. In 2003, February, that organization became known as Centerplate, as per the announcement of its then chief executive officer, Mr. Lawrence E. Honig. The timing of the announcement was very appropriate as the annual national meeting of the company was going on then at the Louisiana Superdome. (Volume Services America is Now Centerplate; New Name Conveys Core Brand Identity)

This is again a ground where many activities of Centerplate or Volume Services America take place. The announcement of the new name was an occasion of great pride and pleasure for the company and there were many changes behind the change of name. The primary reason for the change of name was that it was supposed to reflect the strong commitment of the company to preparing dishes of the highest quality. The center of the plate is where the main items of the dish or meal are placed when the item is placed in front of the person for whom it is being served. This is thus the center of action and it was hoped that with the change of name, the company will also become the center of attention for the users whom it serves. The changed name is also expected to convey the types of venues where the organization serves and most of the places are sports and convention facilities. These are also the centers of the concerned communities.

The change of name was not an isolated event, as it also involved the development of different lines of activity of the company. The concerned different lines are still separated into catering, concessions, management and merchandizing. With the change of name, the aim was to make the company also the center of attention of the consumers in these areas. Separate units were developed and objective was to increase the expertise in each of these areas. According to Mr. Lawrence E. Honig, the aim of the change of name was also to tell the clients that the company was trying to develop in all these four areas. The development was to provide the best of qualities in these aspects. Though no specific developments had been made, the aim of the company was to soon develop along all four lines. The change of name was in a way a change of brand and this exercise took the better part of three quarters, having started from the middle of the previous year - 2002. (Volume Services America is Now Centerplate; New Name Conveys Core Brand Identity) The organization also has a number of prestigious operating centers among the total of 130 that it has for use. A large proportion is conventions and civic centers including the Sane Diego Convention Center and the Jacob K. Javits Center. Many other venues are also served by the company and they are inclusive of horse racing tracks, motor speedways, zoos and ski resorts. (Centerplate, Inc.: Overview)

The change of name is not an activity that could be done in isolation by the company, but there were many branding experts involved with the suggestion of changes. Naturally before each change, there were a lot of activities required for research in both internal and external spheres. Combined with the change was the use of a large number of tools that are used in marketing, as also those tools used for communication. Ultimately the change will affect all the accounts of the company that it has developed and acquired over the four decades of its functioning - a total of 130 in number. This sort of a change takes time and is expected to take the better part of several months. Only at the end of all this conversion are the results expected to be seen. (Volume Services America is Now Centerplate; New Name Conveys Core Brand Identity)

The company knows the importance of this change of name, and the announcement was made by chief executive officer, Mr. Lawrence E. Honig on the first day of the four day convention that was going on in the Louisiana Superdome. There were many attendees for the function and that means a total of 400 managers, suppliers and guests. It was a full show for which the company is famous and that is the reason why even a tradeshow was included and the tradeshow featured goods from 150 suppliers of Centerplate. The company is already well-known for providing catering, concessions, merchandise and facilities management in many of America's best known sports, convention, and entertainment and recreation venues. (Volume Services America is Now Centerplate; New Name Conveys Core Brand Identity) The biggest question remains as to what effectiveness the change of name had on the financial fortunes of the company.

The reasons for success

Most individual organizations that end up being successful ascribe the reasons for their success to some reason or the other. This is often not understood by individuals from outside the organization and they are quite often envious of the success of the organization. The truth is known to the organization, and according to Centerplate, they have a unique capacity to understand the specialty of each facility. This may also be called the spirit of the ground. Their trick for success is to add new items to the menu and make certain that some of the items are local favorites. Certainly there will at least some locals in the function, whatever it may be, and these individuals will be very happy to find some favorites. Even if the rest of the crowd does not know the specialty of that dish, these individuals will make certain that they know about it. For other items that are sold in the team stores and souvenir kiosk, there are also ordinary items and special ones. The ability of Centerplate is to produce special merchandize for every function. This requires a lot of effort, but a special item will always be remembered by the crowd and remind them about the service organization in the future. (Centerplate: Creating something Special)

Developing all this has not been easy as this is the objective of all organizations who are trying to service customers or attendees at similar events, and Centerpoint has to stand out among all of them to continue in their business. What this organization has is a culinary leadership and this is not present in many similar organizers of events. This leadership enables all the partner venues to benefit and the collective talent and creativity of the entire culinary staff is spread all over the organization, in all areas. An organization like this cannot grow in isolation and has to coordinate and facilitate the sharing of ideas, techniques and award winning recipes for the preparation of different items. This has to take place not only within the organization, but also among the total community of chefs, even if they are working in other organizations.

This requires close coordination and for final and regular preparation of the items there has to be standards, increased efficiencies and total improvement of menus and services. Only through a close attention to detail, it is possible to provide the best that is available to the clients. The organization has performed well in the past and is internally very proud of its own achievements. This is the reason, as can be seen from an external point-of-view, why it is called upon to serve thousands of guests, and that is not an easy task for any organization. Some of the very important functions that they have done it are nine Super Bowls, twenty five World Series and nine Presidential Inaugural Balls.

Centerplate: Creating something Special)

Changes in management

All organizations require management and changes in management often cause a lot of trouble to the organization. Whether this organization is called Centerplate or Volume Services America, there are always troubles when new management takes over in the organization. There has to be a gradual passing on of the responsibility, and that cannot be done with just a change of designation. The problems come when there are unplanned changes. In this case, the problem of the organization started with the removal of John T. Dee from the organization. His first move was out of the company from being the Chairman of the company due to health reasons. At that time, the new Chief Executive Officer Lawrence E. Honig said "John has been a prominent leader in our industry for more than 35 years and he will be greatly missed. John has been an inspiration to those of us who have had the privilege to work with him. We offer him our sincerest appreciation for his years of service and our thoughts are with him as he focuses on more personal matters." (Centerplate Chairman John T. Dee Resigns)

This was an incident that took place on August 28, 2003, and the troubles did not end then - the company was compelled to announce the passing away of Mr. Dee on 8th September, 2003. This was a very sad incident as there was very little time for the new management to even properly take over, and it is quite likely that Mr. Dee was not being able to perform his full duties even earlier. He was only 65 when he passed away, and was effectively running the organization from 1993. He was first a director of Service and then as chief executive officer from August 1998 to April 2002. Even earlier, he was the chief executive officer of one of the subsidiary companies. (Former Centerplate Chairman John T. Dee Passes Away)

More important is however to look at his career, and he had been in the foodservice industry from almost the beginning of his career, from 1968. He was then in Aramark Corporation and he slowly grew up in the organization. He was in the management positions and rose to the level of becoming the vice president of sales and the president of the leisure services division of the company. The continuation of his career was also in the same line and he continued in the same industry. His competence can be clearly understood from the fact that he was employed by another company, Sportservice as a senior officer in 1979 and even given the position of president. Yet he did not continue in that company, but came back to Aramark and became the group president in 1980. His responsibilities had always been connected with the leisure foodservice business and its public restaurant operations. That was always his specialty and he also joined Top Food Services, Inc. As the president, till he was brought into Service America. (Former Centerplate Chairman John T. Dee Passes Away)

Thus his capacities were clearly for development in the food industry. Unfortunately, his life itself was cut short, and this brought in another person at the top level of the organization. Apart from all other difficulties, it takes quite some time for any individual to understand the nature of business for any business, apart from understanding the culture of the organization. That is the reason why we have two positions of chief executive officer and chairman of the board. The responsibility of the chief executive officer is to take all required action, while the chairman is in an advisory capacity. He also is able to give the benefit of his experience to the other members of the board. This is probably one of the main reasons for the consequent drop in the fortunes of the organization.

Financing methods

It is been witnessed that the organization is not making reasonable profits and today most of the changes which are occurring within the organization are however in a desperate search for bringing about the profits. To this date, the company had been making use of a primary loan available from that of General Electric Finance. But it is seen that the funds which are being collected in that form are not quite sufficient, or that more of the funds from another means are being needed for the company in order to attain its independence levels. For this purpose, the company has adopted a new financing method called IDS or Income Deposit Securities. This is a new type of security that has started on Amex, and there are differences in the terms and conditions of each and every issue. At the same time, some general benefits will have to be offered by every IDS. The first benefit of these securities is that they are designed in a manner so that the investor can get a monthly income. The monthly income will have two components which will consist of an interest payment on the note that the investor has taken up and a monthly dividend on the common stock that he holds. (What are income deposit securities?)

The second important point of these instruments is that they are designed to distribute almost the total free cash flow of the company to the investors as these instruments permit the direct flow through of dividends and interest income to the holders of these instruments. The flow takes place every month and is also announced every month, thus there is very little chance of the funds being held back for development. The third point to note is that these instruments are suited for mature and generally stable businesses. The method is suited for companies which generate large cash flows and is not suited for high growth companies. While looking at all these aspects, one should remember that there could be a number of internal and external factors influencing cash flow and thus reduce or even remove the ability of the issuing company's capacity to pay the interest and principal on these notes as also the dividends for the stock that is represented in these IDS.

Like any other loan instrument, these are also subject to the risk of loss of the principal. The instrument is a relatively new instrument and some aspects of the United States Federal Income Tax regarding these instruments are still not clear. Thus even for investment there has to be a consultation with an income tax advisor before making the investment. (What are income deposit securities?) The organization already has sizeable loans from a reliable lender and the loans are also increasing almost every year. The solutions to the company's problems are not in the area of getting loans, but in the area of being able to generate enough funds so that the general financial position of the company improves.

IDS and Centerplate

It may be clear to all that the organization is not proving to be successful, but on the other hand is failing, and it is necessary to find out the defects and pitfalls which are present in the organization and to work upon them, in place of finding new forms of financing the organization. If the finances are being spent in the same manner as compared to how the earlier finances have been spent over, it is quite unlikely that the new amount of funds will really progress towards any development or growth of the organization concerned. Centerplate has taken up the loans during the period of December 2003. The issue of the Income Deposit Securities of the company was that of a public offering having a single underlying share of common stock and that of a subordinated note. (Centerplate Announces Cash Payments on Income Deposit Securities)

The last payment for these securities has been made by the company on August 29, 2005. The payment consists of $0.13 per Income Deposit Security to the holders as on September 9, 2005. The payment has been made on September 20, 2005. The payment was at the rate of $0.066 per share of common stock held with the IDS for the monthly period which began on August 20, 2005 and ended on September 19, 2005 and another simultaneous payment of $0.064 for the subordinate note. The terms of the payment were according to the ones mentioned in the note. (Centerplate Announces Cash Payments on Income Deposit Securities) It is clear that the payments have been made as per the terms agreed upon, and the taking of the loan is in line with the stock exchange of which the organization is a member, Amex. The question is not of taking the loan as no organization can survive or develop without the facility of loans, but the help that this loan provided to the organization.

Current development

The IDS has been organized for the company more than 20 months ago and payments have also been made, but the question remains as to what benefit this instrument has it given the company. Ultimately, in terms of business operations, let us remember that the functions of production and marketing are the links of the company with the outside world and finance and personnel are the supporting services that enable the company to continue functioning. In terms of reports that are available now, the situation of the company has not improved much and it has reported a net loss of $2.5 million for the second quarter of the current year which has ended June 28, 2005. This should be compared to an income of $5.4 million for 2004, for the comparable period, though that may have had an element of window dressing. In terms of the full six-month period in the years, the company reported a net loss of $6.9 million during 2005 and that may be compared with a loss of $3.6 million during 2004. The company itself reports that "The primary reasons for the declines were the prepayment fees and other costs associated with refinancing the company's senior credit facility." (Centerplate Reports Continued Revenue Growth for Second Quarter 2005)

The main question to be asked is that the impact of the financial arrangements were known to the senior management, then why did they make these arrangements when it would not lead to any improvement in the situation of the company? There is no benefit for the share holders as the situation in 2005 reflects a loss of $0.11 for the second quarter as compared to an income of $0.23 for the previous year. The net sales increased by $8.3 million and this was a growth by 4.8% when the figures are compared to the same period of 2004 - sales of $182.1 million as compared sales of $173.7 million that was achieved in 2004. The sales increased in most areas of activity of the company - by $3.5 million in sales during basketball games of which six more were played and by $5.8 million in sales at convention centers due to additional number of events held there. There were also new accounts which added another $1.5 million to the turnover. At the same time, there were also declines in revenues of $4.1 million as some of the contracts of the company ended and an amount of $5.6 million as a result of the lower concert activities at some of the facilities. (Centerplate Reports Continued Revenue Growth for Second Quarter 2005)

Well the reporting is certainly good and fairly detailed, though the accuracy will be known only by an auditor, but what should the management be given credit for? What action has the management taken to solve the situation of the company? It is clear that some of the activities which were profitable to the company are no longer popular and thus slowly dying out, leading to less and less income or profits for the company. The corrective action has to be taken by the management as they can ensure that corrective action is taken.

Frustration and lack of hope

The results are clear and units of the company which are not directly owned are being offered for sale. One of these units with gross revenue of 11.5 million dollars and a cash flow of 1 million dollars has been offered for sale at a price 5 million dollars. This unit was established in 1993 and is now a mid-tier leader in the industry. According to claims, the company has an excellent infrastructure for organization and operation which has been fine tuned by the present owner. This is supposed to be serving a high end market with a wide product selection and processing which can be tailor made for the requirement of each client. The unit produces a fresh list of items available which is informed to its customers by phone, fax or e-mail every day. The unit has 40 employees, in leased or rented space costing $16,500 with an area of 16,000 sq ft, an inventory worth $221,728; furniture, fixtures and equipment claimed to be worth $682,572 and associated real estate worth $2,200,000 which is to be dealt with separately. (Centerplate Food Distribution Company) It is clear that the rats have decided that the ship is sinking and thought that it was time to desert it.

What is to be done?

Part of the reason for the problem is that the present chief operating officer and generally acting chief executive officer is a lawyer and thinks like a lawyer. That thinking process is to be expected, and thus the efforts have led to a situation where the organization now probably has a cheaper loan with the ability to default on the loan without serious consequences for the top management. That would require the opinion of a legal expert and the objective of this article is not on legal judgment. The difficulty is that the organization is in different types of a situation and to solve its problems it would require an expert in the food trade. It has to change its present method of operations in a manner that would make its fare more profitable and in demand with customers. This is a personnel problem and has to be solved through proper recruitment.

Conclusion:

One of the basic theories of development of organizations states that there are growth, maturity and decline stages for every organization. According to that theory, this organization is in decline and the solution can lie only in drastic action to revitalize it, and this requires dynamic management.

Appendix

CENTERPLATE, INC.

CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)

In thousands, except share data)

Thirteen Weeks Ended

Fifty-two Weeks Ended

Dec. 28,

Dec. 30,

Net sales

Cost of sales

Selling, general and Administrative

Depreciation and Amortization

Transaction related expenses

Contract related losses

Operating income (loss)

Interest expense, net

Other income, net

Income (loss) before Income taxes

Income tax benefit

Net income (loss)

Accretion of conversion

Option

Net income (loss) available to common stock with or without the Conversion option

Basic net income (loss) per share with Conversion option

Diluted net income (loss) per share with Conversion option

Basic net income (loss) per share without Conversion option

Diluted net income (loss) per share

Without conversion option

Weighted average shares outstanding with Conversion option

Weighted average shares outstanding without Conversion option

18,463,995 14,755,220 18,463,995 13,898,426

Total weighted average

Shares outstanding

22,524,992 16,214,170 22,524,992 14,263,164

Dividends declared per Share

CENTERPLATE, INC.

RECONCILIATION OF NET INCOME (LOSS) TO ADJUSTED EARNINGS BEFORE INTEREST, INCOME TAXES, DEPRECIATION, AND AMORTIZATION (UNAUDITED)

In thousands)

Thirteen Weeks

Fifty-two Weeks

Ended

Dec. 28, Dec. 30, Dec. 28 Dec. 30

Net income (loss)

370 $(11,423)

Income tax benefit

967) (6,337)

Income (loss) before income taxes

Adjustments:

Interest expense (1)

Depreciation and amortization

EBITDA (2)

The following adjustments to EBITDA were made to compute Adjusted EBITDA:

EBITDA

Adjustments:

Transaction related expenses (3)

Contract related losses (4)

Non-cash compensation

Management fees paid to affiliates of Blackstone and GE Capital (5)

Adjusted EBITDA (2)

1) Included in interest expense for the 13 and 52-week periods ended December 28, 2004 is $0.9 million and $2.0 million, respectively, related to the change in the fair value of our derivatives. In addition, included in the 52 weeks ended December 28, 2004 is $1.5 million in expenses related to the repurchase of the remaining $12.3 million senior subordinated notes issued in 1999 of which $0.3 million is amortization expense. Included in interest expense for the 13 and 52 weeks ended December 30, 2003 is a $5.3 million non-cash charge related to the refinancing of our credit facility and $7.2 million in expenses related to the repurchase of the senior subordinated notes issued in 1999.

2) EBITDA is not a measure in accordance with GAAP. EBITDA is not intended to represent cash flows from operations as determined by GAAP and should not be used as an alternative to income (loss) before taxes or net income (loss) as an indicator of operating performance or to cash flows as a measure of liquidity. We believe that EBITDA is an important measure of the cash returned on our investment in capital expenditures under our contracts. Adjusted EBITDA as defined in the indenture governing our subordinated notes issued in 2003, is determined as EBITDA as adjusted for transaction related expenses, contract related losses, other non-cash charges, and the former annual management fee paid to affiliates of Blackstone and GE Capital, less any non-cash credits. We present Adjusted EBITDA because covenants in the indenture governing our 2003 notes contain ratios based on this measure and it is used by management to among other things evaluate our ability to make interest and dividend payments.

3) Transaction related expenses in fiscal 2003 include certain expenses related to executive compensation associated with our 2003 Initial Public Offering of IDSs.

4) Contract related losses reflect non-cash charges incurred for the write-off of assets for certain accounts.

5) Management fees in the fiscal 2003 period represent fees paid to former majority owners for certain administrative and management functions.

CENTERPLATE, INC.

SELECTED CONSOLIDATED CASH FLOW DATA (UNAUDITED)

In thousands)

Thirteen Weeks

Fifty-two Weeks

Ended

Dec. 28, Dec. 30, Dec. 28

Dec. 30

CASH FLOWS FROM OPERATING

ACTIVITIES:

Net income (loss)

370 $(11,423)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

Depreciation and Amortization

Amortization of deferred

Financing costs

Contract related losses

Non-cash compensation

Derivative non-cash interest

Deferred tax change

Gain (loss) on disposition

Of assets

Changes in assets and Liabilities

Net cash provided by (used in) operating

Activities

CASH FLOWS FROM INVESTING

ACTIVITIES:

Purchase of property and Equipment

Proceeds from sale of Property and equipment

Purchase of contract rights (8,221)

2,532) (15,900) (16,029)

Return of unamortized

Capital investment

Net cash used in Investing activities

CASH FLOWS FROM FINANCING

ACTIVITIES:

Net repayments - revolving

Loans

Principal payments on long-

Term debt

Proceeds from issuance of Long-term debt

Proceeds from issuance of Stock, net

Proceeds from issuance of Subordinated notes

Payment of existing

Subordinated notes

87,750) (12,250) (87,750)

Repurchase of stock

Proceeds from loans to Related parties

Payments of debt issuance

Costs

267) (12,837)

Restricted cash

Payments of financing costs

Increase (decrease) in bank

Overdrafts

Loans to related parties

Dividend payments

Net cash provided by (used in) financing

Activities

INCREASE (DECREASE) IN CASH

CASH AND CASH EQUIVALENTS:

Beginning of period

End of period

CENTERPLATE, INC.

SELECTED CONSOLIDATED BALANCE SHEET DATA (UNAUDITED)

In thousands)

December 28,

December 30,

ASSETS

Current assets

Property and equipment, net

Contract rights, net

Cost in excess of net assets acquired

Deferred financing costs, net

Other assets

TOTAL ASSETS

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities

Long-term debt

Other liabilities

Common Stock with conversion option, par value $0.01, exchangeable for Subordinated debt, net of discount

Total stockholders' equity

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

Appendix Retrieved from Centerplate Reports Continued Revenue Growth for Second Quarter 2005. Retrieved at http://sev.prnewswire.com/food-beverages/20050801/CLM04201082005-1.html. Accessed 20 October, 2005