10-Q

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended October 3, 2006 or


o		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: 001-31904

CENTERPLATE, INC.

(Exact name of registrant as specified in its charter)


Delaware		13-3870167

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

201 East Broad Street, Spartanburg, South Carolina, 29306		(864) 598-8600

(Address of principal executive offices, including zip code)		(Registrant’s telephone number, including area code)

http:www.centerplate.com
(Registrant’s URL)

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.

þYes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (see definition of “accelerated filer” and large accelerated filer” in Rule 12b-2 of the Exchange Act).

o Large accelerated filer þAccelerated filer o Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o yes þNo

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares of common stock of Centerplate, Inc. outstanding as of November 10, 2006 was 22,524,992.

PART I
FINANCIAL INFORMATION

CENTERPLATE, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
OCTOBER 3, 2006 AND JANUARY 3, 2006


	October 3,			January 3,
	2006			2006
	(In thousands, except share data)
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	55,338		$	41,410
Accounts receivable, less allowance for doubtful accounts of $1,090 and $1,049 at October 3, 2006 and January 3, 2006, respectively		28,305			23,459
Merchandise inventories		22,324			16,852
Prepaid expenses and other		3,754			3,141
Deferred tax asset		3,927			3,928


Total current assets		113,648			88,790


PROPERTY AND EQUIPMENT:
Leasehold improvements		41,976			41,969
Merchandising equipment		69,104			63,821
Vehicles and other equipment		17,142			16,493
Construction in process		1,096			218

Total		129,318			122,501
Less accumulated depreciation and amortization		(78,794	)		(72,776	)


Property and equipment, net		50,524			49,725


OTHER LONG-TERM ASSETS:
Contract rights, net		81,150			80,557
Restricted cash		8,926			8,616
Cost in excess of net assets acquired		41,142			41,142
Deferred financing costs, net		13,572			15,499
Trademarks		17,523			17,523
Deferred tax asset		13,114			13,116
Other		4,218			3,057


Total other long-term assets		179,645			179,510


TOTAL ASSETS	$	343,817		$	318,025

See notes to consolidated condensed financial statements.

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CENTERPLATE, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)(UNAUDITED)
OCTOBER 3, 2006 AND JANUARY 3, 2006


	October 3,			January 3,
	2006			2006
	(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:
Current portion of long-term debt	$	1,075		$	1,075
Accounts payable		24,089			16,814
Accrued salaries and vacations		16,176			13,263
Liability for insurance		4,880			6,689
Accrued taxes, including income taxes		7,782			4,205
Accrued commissions and royalties		33,980			15,838
Liability for derivatives		2,261			4,615
Accrued interest		945			988
Accrued dividends		1,487			1,487
Advance deposits		5,803			2,588
Other		3,387			3,260

Total current liabilities		101,865			70,822


LONG-TERM LIABILITIES:
Long-term debt		210,057			210,864
Liability for insurance		8,039			5,874
Other liabilities		386			510


Total long-term liabilities		218,482			217,248


COMMITMENTS AND CONTINGENCIES

COMMON STOCK WITH CONVERSION OPTION, PAR VALUE $0.01, EXCHANGEABLE FOR SUBORDINATED DEBT, NET OF DISCOUNT		14,352			14,352


STOCKHOLDERS’ EQUITY:
Common stock, $0.01 par value — authorized: 100,000,000 shares; issued: 18,463,995 shares without conversion option; outstanding:
18,463,995 shares without conversion option		185			185
issued: 21,531,152 shares with conversion option; outstanding:
4,060,997 shares with conversion option		215			215
Additional paid-in capital		218,331			218,331
Accumulated deficit		(89,695	)		(82,920	)
Accumulated other comprehensive income		1,022			732
Treasury stock — at cost (17,470,153 shares)		(120,940	)		(120,940	)


Total stockholders’ equity		9,118			15,603


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	343,817		$	318,025

See notes to consolidated condensed financial statements.

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CENTERPLATE, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THIRTEEN AND THIRTY-NINE WEEK PERIODS ENDED OCTOBER 3, 2006
AND SEPTEMBER 27, 2005


	Thirteen Weeks Ended						Thirty-nine Weeks Ended
	October 3,			September 27,			October 3,			September 27,
	2006			2005			2006			2005
	(In thousands, except for share data)
Net sales	$	218,929		$	208,619		$	523,133		$	497,910

Cost of sales (excluding depreciation & amortization)		175,999			166,297			425,833			401,738
Selling, general, and administrative		19,588			19,738			51,684			53,388
Depreciation and amortization		7,212			7,332			21,337			21,433
Contract related losses		—			280			100			280


Operating income		16,130			14,972			24,179			21,071
Interest expense		5,502			6,955			18,248			25,478
Other income, net		(501	)		(322	)		(1,164	)		(627	)


Income (Loss) before income taxes		11,129			8,339			7,095			(3,780	)
Income tax provision (benefit)		(1,140	)		3,827			490			(1,386	)


Net income (loss)	$	12,269		$	4,512		$	6,605		$	(2,394	)


Basic and Diluted Net Income (Loss) per share with and without conversion option	$	0.54		$	0.20		$	0.29		$	(0.11	)


Weighted average shares outstanding with conversion option		4,060,997			4,060,997			4,060,997			4,060,997
Weighted average shares outstanding without conversion option		18,463,995			18,463,995			18,463,995			18,463,995

Total weighted average shares outstanding		22,524,992			22,524,992			22,524,992			22,524,992


Dividends declared per share	$	0.20		$	0.20		$	0.59		$	0.59

See notes to consolidated condensed financial statements.

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CENTERPLATE, INC.

CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

FOR THE PERIOD FROM JANUARY 3, 2006 TO OCTOBER 3, 2006 AND THE THIRTEEN AND THIRTY-NINE WEEKS ENDED OCTOBER 3, 2006 AND SEPTEMBER 27, 2005


	Common		Common		Common		Common
	Shares		Stock		Shares		Stock							Accumulated
	without		without		with		with		Additional					Other
	Conversion		Conversion		Conversion		Conversion		Paid-in		Accumulated			Comprehensive		Treasury
	Option		Option		Option		Option		Capital		Deficit			Income		Stock			Total
	(In thousands, except share data)
BALANCE, JANUARY 3, 2006		18,463,995	$	185		21,531,152	$	215	$	218,331	$	(82,920	)	$	732	$	(120,940	)	$	15,603

Foreign currency translation		—		—		—		—		—		—			290		—			290

Dividends declared		—		—		—		—		—		(13,380	)		—		—			(13,380	)

Net income		—		—		—		—		—		6,605			—		—			6,605


BALANCE, OCTOBER 3, 2006		18,463,995	$	185		21,531,152	$	215	$	218,331	$	(89,695	)	$	1,022	$	(120,940	)	$	9,118


	Thirteen Weeks Ended					Thirty-nine Weeks Ended
	October 3,			September 27,		October 3,		September 27,
	2006			2005		2006		2005
	(In thousands)
Net income (loss)	$	12,269		$	4,512	$	6,605	$	(2,394	)

Other comprehensive income (loss) - foreign currency translation adjustment		(23	)		263		290		104


Comprehensive income (loss)	$	12,246		$	4,775	$	6,895	$	(2,290	)

See notes to consolidated condensed financial statements.

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CENTERPLATE, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
THIRTY-NINE WEEK PERIODS ENDED OCTOBER 3, 2006 AND SEPTEMBER 27, 2005


	Thirty-nine Weeks Ended
	October 3,			September 27,
	2006			2005
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	6,605		$	(2,394	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		21,337			21,433
Amortization of deferred financing costs		1,927			2,825
Charge for impaired assets		100			280
Non-cash interest earned on restricted cash		(310	)		(92	)
Derivative non-cash interest		(2,354	)		977
Deferred tax change		3			(1,386	)
Gain on disposition of assets		(32	)		(47	)
Other		290			104
(Increase)/decrease in assets and liabilities:
Accounts receivable		(4,694	)		(4,767	)
Merchandise inventories		(5,472	)		(3,782	)
Prepaid expenses		(613	)		(374	)
Other assets		(1,563	)		(95	)
Accounts payable		3,315			5,132
Accrued salaries and vacations		2,913			5,881
Liability for insurance		356			2,164
Accrued commissions and royalties		16,639			14,265
Other liabilities		6,751			3,789


Net cash provided by operating activities		45,198			43,913


CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(9,604	)		(11,857	)
Proceeds from sale of property and equipment		250			456
Contract rights acquired		(12,405	)		(8,994	)
Return of unamortized capital investment		1,828			—


Net cash used in investing activities		(19,931	)		(20,395	)

See notes to consolidated condensed financial statements.

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CENTERPLATE, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)(UNAUDITED)
THIRTY-NINE WEEK PERIODS ENDED OCTOBER 3, 2006 AND SEPTEMBER 27, 2005


	Thirty-nine Weeks Ended
	October 3,			September 27,
	2006			2005
	(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments — revolving loans	$	(5,000	)	$	(44,250	)
Borrowings — revolving loans		5,000			44,250
Principal payments on long-term debt		(807	)		(269	)
Proceeds from long-term debt		—			107,500
Retirement of existing long-term borrowings		—			(65,000	)
Payments of financing costs		—			(7,247	)
Dividend payments		(13,380	)		(13,380	)
Increase in bank overdrafts		2,848			1,332


Net cash (used in) provided by financing activities		(11,339	)		22,936


INCREASE IN CASH AND CASH EQUIVALENTS:		13,928			46,454

CASH AND CASH EQUIVALENTS:
Beginning of period		41,410			24,777


End of period	$	55,338		$	71,231


SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	18,718		$	21,608
Income taxes paid	$	232		$	13

SUPPLEMENTAL NON CASH FLOW INVESTING AND FINANCING ACTIVITIES:
Capital investment commitment	$	2,046		$	475
Dividends declared and unpaid	$	1,487		$	1,487

See notes to consolidated condensed financial statements.

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CENTERPLATE, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
THIRTY-NINE WEEK PERIODS ENDED OCTOBER 3, 2006 AND SEPTEMBER 27, 2005

1. GENERAL

Centerplate, Inc. (“Centerplate,” and together with its subsidiaries, the “Company”) is a holding company, the principal assets of which are the capital stock of its subsidiary, Volume Services America, Inc. (“Volume Services America”). Volume Services America is also a holding company, the principal assets of which are the capital stock of its subsidiaries, Volume Services, Inc. (“Volume Services”) and Service America Corporation (“Service America”).

The accompanying financial statements of Centerplate have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete annual financial statements. However, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods.

The results of operations for the 39 week period ended October 3, 2006 are not necessarily indicative of the results to be expected for the 52 week fiscal year ending January 2, 2007 due to the seasonal aspects of the business. The accompanying consolidated condensed financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the year ended January 3, 2006 included in the Company’s annual report on Form 10-K.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

There have not been any changes in our significant accounting policies from those disclosed in the Company’s annual report for fiscal year 2005 on Form 10-K for the year ended January 3, 2006.

Cost in Excess of Net Assets Acquired and Trademarks – The Company performed its annual impairment tests of goodwill and trademarks as of April 4, 2006 in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, and determined that no impairment existed. There have been no events since April 4, 2006 that would cause the Company to have to reassess the carrying value of these assets.

Insurance – At the beginning of fiscal 2002, the Company adopted a high deductible insurance program for general liability, auto liability, and workers’ compensation risk. Prior to that time, the Company had a premium-based insurance program for these risks. The Company self-insures its employee health plans. Management establishes a reserve for the high deductible insurance and self-insurance obligations considering a number of factors, including historical experience and an actuarial assessment of the liabilities for reported claims and claims incurred but not reported. The estimated liabilities for these programs, except for employee health insurance, are then discounted using rates of approximately 4.4% and 4.8% at January 3, 2006 and October 3, 2006, respectively, to their present value based on expected loss payment patterns determined by experience. The total discounted high deductible liabilities recorded by the Company at January 3, 2006 and October 3, 2006 were $10,804,000 and $11,022,000, respectively. The related undiscounted amounts were $11,673,000 and $12,625,000, respectively.

The employee health self-insurance liability is based on claims filed and estimates for claims incurred but not reported. The total liability recorded by the Company at January 3, 2006 and October 3,

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2006 was $1,594,000 and $1,677,000, respectively.

As disclosed in the Company’s annual report on Form 10-K for the year ended January 3, 2006, four of the venues at which the Company operated were impacted by Hurricane Katrina. The Company maintains property and business interruption insurance to cover the loss of property and income for events such as Hurricane Katrina. During the thirteen weeks ended October 3, 2006, the net amount of $0.7 million was recorded in selling, general and administrative expenses on the Company’s statement of operations for insurance proceeds related to losses incurred from Hurricane Katrina.

Accounting Treatment for Income Deposit Securities (“IDSs”), Common Stock Owned by Initial Equity Investors and Derivative Financial Instruments — The Company’s IDSs are composed of common stock and subordinated notes, the latter of which have three embedded derivative features. The embedded derivative features include a call option, a change of control put option, and a term-extending option. The call option allows the Company to repay the principal amount of the subordinated notes after the fifth anniversary of the issuance, provided that we also pay all of the interest that would have been paid during the initial 10-year term of the notes, discounted to the date of repayment at a risk-free rate. Under the change of control put option, the holders have the right to cause the Company to repay the subordinated notes at 101% of face value upon a change of control, as defined in the indenture governing the subordinated notes. The term-extending option allows the Company to unilaterally extend the term of the subordinated notes for two five-year periods at the end of the initial 10-year period provided that it is in compliance with the requirements of the indenture. The Company has accounted for these embedded derivatives in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted. Based on SFAS No. 133, as amended and interpreted, the call option and the change of control put option are required to be separately valued. As of October 3, 2006, the fair value of these embedded derivatives was determined to be insignificant. The term-extending option was determined to be inseparable from the underlying subordinated notes. Accordingly, it has not been separately accounted for in the accompanying consolidated financial statements.

In connection with Centerplate’s initial public offering (“IPO”) in December 2003, those investors who held stock prior to the IPO (the “Initial Equity Investors”) entered into an Amended and Restated Stockholders Agreement dated as of December 10, 2003 with the Company (“Amended Stockholders Agreement”), which provides that, upon any post-offering sale of common stock by the Initial Equity Investors, at the option of the Initial Equity Investors, the Company will exchange a portion of such common stock for subordinated notes at an exchange rate of $9.30 principal amount of subordinated notes for each share of common stock. The purpose of the exchange feature is to enable the Initial Equity Investors to hold shares of common stock and subordinated notes in the appropriate proportions to represent integral numbers of IDSs. In order to determine the number of shares of common stock that the Initial Equity Investors could convert into subordinated debt, the Company divided the exchange rate of $9.30 by the original issue price of the IDSs of $15.00 at December 4, 2003 (the quotient equals 0.62). This quotient was then multiplied by the total number of shares owned by the Initial Equity Investors (4,060,997 shares) to determine the number of IDSs that the Initial Equity Investors would own after conversion (2,517,817 IDSs, each comprised of one share of stock and a subordinated note). The number of shares owned by the Initial Equity Investors before conversion (4,060,997) was subtracted from the number of shares they would own after conversion (2,517,817) to determine the number of shares of common stock to be converted into subordinated debt (1,543,180 shares) at the exchange rate of $9.30 per share resulting in approximately $14.4 million described further below.

The Company has concluded that the portion of the Initial Equity Investors’ common stock exchangeable for subordinated debt as calculated above should be classified on its consolidated balance sheet according to the guidance provided by Accounting Series Release No. 268 (FRR Section 211), “Redeemable Preferred Stocks”. Accordingly, at both October 3, 2006 and January 3, 2006, the Company has recorded approximately $14.4 million as “Common stock with conversion option

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exchangeable for subordinated debt” on the accompanying consolidated balance sheets. Because the Initial Equity Investors were not allowed to convert any shares into subordinated notes during the first 180 days after the IPO, a discount (initially $0.4 million) was applied to the amount recorded as “Common stock with conversion option exchangeable for subordinated debt” during this 180-day period. This discount was accreted to the face amount due of approximately $14.4 million using the effective interest method over the life of the Initial Equity Investors minimum required 180-day holding period. The accretion of approximately $317,000 in fiscal 2004 was a deemed dividend to the Initial Equity Investors. In addition, the Company has determined that the option conveyed to the Initial Equity Investors to exchange common stock for subordinated debt in order to form IDSs is an embedded derivative in accordance with Paragraph 12 of SFAS No. 133. The Company has recorded a liability for the fair value of this embedded derivative of approximately $2.3 million as of October 3, 2006, a decrease of $2.4 million from January 3, 2006. Changes in the fair value are recorded in interest expense in the accompanying consolidated statement of operations.

The common stock held by the Initial Equity Investors was initially treated as a separate class of common stock for presentation of earnings per share. Although the common stock held by the Initial Equity Investors is part of the same class of stock as the common stock included in the IDSs for purposes of Delaware corporate law, the right to convert that is granted in our Amended and Restated Stockholders Agreement as described above causes the stock held by the Initial Equity Investors to have features of a separate class of stock for accounting purposes. In fiscal 2004, the deemed dividend of approximately $317,000 conveyed to the Initial Equity Investors discussed above requires a two class earnings per share calculation. Accordingly, the Company had shown separate earnings per share for the stock held by the Initial Equity Investors and the stock included in the IDSs. However, at October 3, 2006 and September 27, 2005, earnings per share for common stock with and without conversion rights were equal and therefore no separate presentation was required.

Income Taxes –The provision (benefit) for income taxes includes federal, state and foreign taxes currently payable, and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. A valuation allowance is established for deferred tax assets when it is more likely than not that the benefits of such assets will not be realized.

Income taxes for the 39 weeks ended October 3, 2006 and September 27, 2005 were calculated using the projected annual effective tax rate for fiscal 2006 and 2005, respectively, in accordance with SFAS No. 109 “Accounting for Income Taxes” and APB No. 28 “Interim Financial Reporting”. Currently, the Company estimates that in the fiscal year ending January 2, 2007, it will have an effective annual tax rate of approximately 6%. In determining the effective annual tax rate, the Company’s book income, permanent tax adjustments, and tax credits have been factored into the calculation. In the previous year, the Company estimated that its annual effective tax rate for the fiscal year ended January 3, 2006 would be 37%. The decrease in the projected annual effective tax rate is primarily due to the non-cash interest charge related to the Company’s derivatives which is a permanent adjustment (as it increases the effective tax rate decreases). The interim income tax provision (or benefit) can fluctuate considerably from quarter to quarter as a result of changes in the projected annual effective tax rate.

The Company accounted for its issuance of IDS units in December 2003 by allocating the proceeds for each IDS unit to the underlying stock and subordinated notes based upon the relative fair values of each at that time. Accordingly, the portion of the aggregate IDSs outstanding that represents subordinated notes has been accounted for by the Company as long-term debt bearing a stated interest rate of 13.5% maturing on December 10, 2013. During the 39 weeks ended October 3, 2006, the Company accounted for a planned deduction of interest expense of approximately $10.7 million on the subordinated notes from taxable income for U.S. federal and state income tax purposes. Although to date the Company has not been notified that the notes should be treated as equity rather than debt for U.S. federal and state income tax purposes, there can be no assurances that the Internal Revenue Service or the courts will not seek to challenge the treatment of these notes as debt or the amount of interest expense deducted. If the notes were reclassified as equity, the cumulative interest expense associated with the

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notes of approximately $40.0 million would not be deductible from taxable income. Since issuance of the IDS units in December 2003, the cumulative amount of additional tax due to the federal and state tax authorities would be approximately $9.0 million based on management’s opinion that the Company should be able to utilize net operating losses and tax credits to offset a portion of its tax liability. Such reclassification, however, would also cause the Company to utilize at a faster rate more of its deferred tax assets than it otherwise would. The additional tax due to the federal and state authorities for the 39 week period ending October 3, 2006 would be approximately $5.9 million. The calculation reflects the year-to-date exposure and can fluctuate from quarter to quarter based on the Company’s net income or loss which is driven by a number of factors including the seasonality of the business. The Company has not recorded a liability for any potential disallowance of this deduction.

Reclassifications – The Company has corrected its presentation within the statement of cash flows of activity related to borrowings and repayments under its revolving credit facility. Such borrowings and repayments, formerly presented on a net basis, are now shown in their gross amounts. This correction had no effect on total cash flows from financing activities.

New Accounting Standards - In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”) an interpretation of FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not (i.e. a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also requires expanded disclosures including identification of tax positions for which it is reasonably possible that total amounts of unrecognized tax benefits will significantly change in the next twelve months, a description of tax years that remain subject to examination by major tax jurisdiction, a tabular reconciliation of the total amount of unrecognized tax benefits at the beginning and end of each annual reporting period, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate and the total amounts of interest and penalties recognized in the statements of operations and financial position. FIN 48 will be effective for public companies for fiscal years beginning after December 15, 2006. The Company has not yet determined the impact, if any, of the recognition and measurement requirements of FIN 48 on our existing tax positions. Upon adoption, the cumulative effect of applying the recognition and measurement provisions of FIN 48, if any, will be reflected as an adjustment to the opening balance of retained earnings.

In September 2006, FASB issued Statement of Financial Accounting Standards No. 157 (SFAS 157), “Fair Value Measurements”. In addition to defining fair value, SFAS 157 provides a framework for the measurement of fair value and expands disclosure requirements about fair value measurements. SFAS 157 will be effective for fiscal years beginning after November 15, 2007. The Company has yet to evaluate the impact of SFAS 157 on its financial statements.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”). SAB 108 was issued to provide interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The provisions of SAB 108 are effective for fiscal years ending after November 15, 2006. The Company has yet to evaluate the impact of SAB 108 on its financial statements.

3. COMMITMENTS AND CONTINGENCIES

The Company is from time to time involved in various legal proceedings incidental to the conduct of its business. As previously reported, two private corporations, Pharmacia Corp. (“Pharmacia”) and Solutia,

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Inc. (“Solutia”), asserted a claim in the United States District Court for the Southern District of Illinois (the “Court”) under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”) against Service America which was settled in December 2004. This settlement resolved all of Service America’s alleged liability regarding the Illinois site involved with this claim. A Joint Motion seeking approval of this settlement agreement, dismissing Service America from the case and granting Service America contribution protection to prevent any entity from asserting a contribution claim against Service America with respect to the Illinois site received approval by the Court on June 9, 2005.

As we also previously reported, a related potential claim was made in August 2005 by the United States Department of Justice, on behalf of the United States Environmental Protection Agency. In July 2006, the parties to this claim reached a settlement agreement in principle which remained subject to the successful negotiation of a consent decree. The parties have successfully negotiated and executed a consent decree which was filed with the Court on October 4, 2006. The consent decree provides for a 30-day review period from time of publication, which was on October 18, 2006. After expiration of this notice period, the consent decree will be presented to the Court for final approval.

As was also previously reported, the settlement agreement resolving the purported class action entitled Holden v. Volume Services America, Inc. et al., against the Company in the Superior Court of California for the County of Orange, received final court approval on June 26, 2006. After expiration of the required appeals period, the judgment became final as of August 26, 2006. Consequently, the purported class action, Perez v. Volume Services Inc, d/b/a Centerplate, filed in the Superior Court for Yolo County, California has also now been resolved with the Holden case.

In addition to the matters described above, there are various claims and pending legal actions against or directly involving the Company that are incidental to the conduct of our business. It is the opinion of management, after considering a number of factors, including but not limited to the current status of any pending proceeding (including any settlement discussions), the views of retained counsel, the nature of the litigation, prior experience and the amounts that have been accrued for known contingencies, that the ultimate disposition of any of these pending proceedings or contingencies will not have a material adverse effect on our financial condition or results of operations.

4. SUBSEQUENT EVENTS

On October 25, 2006, the Company announced that Kevin F. McNamara was named Executive Vice President and Chief Financial Officer of the Company. Mr. McNamara will join the Company by November 27, 2006. Hadi K. Monavar, the Company’s Senior Vice President-Financial Planning, will serve as interim principal financial officer until Mr. McNamara joins the Company. In connection with Mr. McNamara’s appointment as Executive Vice-President and Chief Financial Officer, Kenneth R. Frick’s service as the Company’s Executive Vice President and Chief Financial Officer ended on October 25, 2006. Mr. Frick’s departure is not the result of any dispute with the Company’s management. In connection with his departure, Mr. Frick resigned from all his positions with the Company and its subsidiaries.

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5. NON-GUARANTOR SUBSIDIARIES FINANCIAL STATEMENTS

The $105,245,000 original principal amount of Centerplate’s 13.5% subordinated notes are jointly and severally and fully and non-conditionally guaranteed by each of Centerplate’s direct and indirect 100% owned subsidiaries, except for certain non-wholly owned U.S. subsidiaries and one non-U.S. subsidiary. The following table sets forth the condensed consolidating financial statements of Centerplate as of October 3, 2006 and January 3, 2006 (in the case of the balance sheets) and for the 13 and 39 week periods ended October 3, 2006 and September 27, 2005 (in the case of the statements of operations) and for the 39 week periods ended October 3, 2006 and September 27, 2005 (in the case of the statement of cash flows).

Consolidating Condensed Balance Sheet, October 3, 2006


				Guarantor			Non-guarantor
	Centerplate			Subsidiaries			Subsidiaries			Eliminations			Consolidated
	(In thousands)
	ASSETS

Current assets:
Cash and cash equivalents	$	207		$	52,399		$	2,732		$	—		$	55,338
Accounts receivable		—			26,207			2,098			—			28,305
Other current assets		62			28,350			1,593			—			30,005

Total current assets		269			106,956			6,423			—			113,648
Property and equipment, net		—			47,800			2,724			—			50,524
Contract rights, net		75			80,552			523			—			81,150
Cost in excess of net assets acquired		6,974			34,168			—			—			41,142
Intercompany receivable (payable)		120,869			(119,967	)		(902	)		—			—
Investment in subsidiaries		(2,630	)		—			—			2,630			—
Other assets		7,682			48,856			815			—			57,353


Total assets	$	133,239		$	198,365		$	9,583		$	2,630		$	343,817


	LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)

Current liabilities	$	4,524		$	92,028		$	5,313		$	—		$	101,865
Long-term debt		105,245			104,812			—			—			210,057
Other liabilities		—			8,425			—			—			8,425

Total liabilities		109,769			205,265			5,313			—			320,347


Common stock with conversion option, par value $0.01 exchangeable for subordinated debt, net of discount		14,352			—			—			—			14,352

Stockholders’ equity (deficiency):
Common stock		400			—			—			—			400
Additional paid-in capital		218,331			—			—			—			218,331
Accumulated earnings (deficit)		(89,695	)		(6,900	)		3,248			3,652			(89,695	)
Treasury stock and other		(119,918	)		—			1,022			(1,022	)		(119,918	)

Total stockholders’ equity (deficiency)		9,118			(6,900	)		4,270			2,630			9,118


Total liabilities and stockholders’ equity	$	133,239		$	198,365		$	9,583		$	2,630		$	343,817

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Consolidating Condensed Statement of Operations and Comprehensive Income (Loss)

Thirteen Week Period Ended October 3, 2006


				Guarantor			Non-guarantor
	Centerplate			Subsidiaries			Subsidiaries			Eliminations			Consolidated
	(In thousands)
Net sales	$	—		$	207,145		$	11,784		$	—		$	218,929

Cost of sales		—			166,018			9,981			—			175,999
Selling, general, and administrative		420			17,185			1,983			—			19,588
Depreciation and amortization		23			6,844			345			—			7,212
Contract related losses		—			—			—			—			—

Operating income (loss)		(443	)		17,098			(525	)		—			16,130
Interest expense		2,353			3,149			—			—			5,502
Intercompany interest, net		(3,925	)		3,925			—			—			—
Other income, net		(5	)		(444	)		(52	)		—			(501	)

Income (loss) before income taxes		1,134			10,468			(473	)		—			11,129
Income tax provision (benefit)		163			(1,303	)								(1,140	)
Equity in loss of subsidiaries		11,298			—			—			(11,298	)		—

Net income (loss)		12,269			11,771			(473	)		(11,298	)		12,269
Other comprehensive income - foreign currency translation adjustment		—			—			(23	)		—			(23	)


Comprehensive income (loss)	$	12,269		$	11,771		$	(496	)	$	(11,298	)	$	12,246

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Consolidating Condensed Statement of Operations and Comprehensive Income (Loss)

Thirty-nine Week Period Ended October 3, 2006


				Guarantor			Non-guarantor
	Centerplate			Subsidiaries			Subsidiaries			Eliminations			Consolidated
	(In thousands)
Net sales	$	—		$	486,409		$	36,724		$	—		$	523,133

Cost of sales		—			395,325			30,508			—			425,833
Selling, general, and administrative		1,514			45,792			4,378			—			51,684
Depreciation and amortization		71			20,236			1,030			—			21,337
Contract related losses		—			100			—			—			100

Operating income (loss)		(1,585	)		24,956			808			—			24,179
Interest expense		9,272			8,976			—			—			18,248
Intercompany interest, net		(11,775	)		11,775			—			—			—
Other income, net		(8	)		(1,123	)		(33	)		—			(1,164	)

Income before income taxes		926			5,328			841			—			7,095
Income tax provision		148			342			—			—			490
Equity in earnings of subsidiaries		5,827			—			—			(5,827	)		—

Net income (loss)		6,605			4,986			841			(5,827	)		6,605
Other comprehensive income - foreign currency translation adjustment		—			—			290			—			290


Comprehensive income (loss)	$	6,605		$	4,986		$	1,131		$	(5,827	)	$	6,895

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Consolidating Condensed Statement of Cash Flows

Thirty-nine Week Period Ended October 3, 2006


				Guarantor			Non-guarantor
	Centerplate			Subsidiaries			Subsidiaries			Consolidated
	(In thousands)
Cash Flows Provided by (Used in) Operating Activities	$	(417	)	$	41,372		$	4,243		$	45,198


Cash Flows from Investing Activities:
Purchase of property and equipment		—			(9,501	)		(103	)		(9,604	)
Proceeds from sale of property and equipment		—			250			—			250
Contract rights acquired		—			(12,405	)		—			(12,405	)
Return of unamortized capital investment		—			1,828			—			1,828

Net cash used in investing activities		—			(19,828	)		(103	)		(19,931	)


Cash Flows from Financing Activities:
Repayments — revolving loans		—			(5,000	)		—			(5,000	)
Borrowings — revolving loans		—			5,000			—			5,000
Principal payments on long-term debt		—			(807	)		—			(807	)
Dividend payments		(13,380	)		—			—			(13,380	)
Increase in bank overdrafts		—			2,848			—			2,848
Change in intercompany, net		13,805			(10,798	)		(3,007	)		—


Net cash provided by (used in) financing activities		425			(8,757	)		(3,007	)		(11,339	)


Increase in cash		8			12,787			1,133			13,928

Cash and cash equivalents — beginning of period		199			39,612			1,599			41,410


Cash and cash equivalents — end of period	$	207		$	52,399		$	2,732		$	55,338

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Consolidating Condensed Balance Sheet, January 3, 2006


				Guarantor			Non-guarantor
	Centerplate			Subsidiaries			Subsidiaries			Eliminations			Consolidated
							(In thousands)
	ASSETS

Current assets:
Cash and cash equivalents	$	199		$	39,612		$	1,599		$	—		$	41,410
Accounts receivable		—			21,861			1,598			—			23,459
Other current assets		7			22,471			1,443			—			23,921

Total current assets		206			83,944			4,640			—			88,790
Property and equipment, net		—			46,269			3,456			—			49,725
Contract rights, net		147			79,758			652			—			80,557
Cost in excess of net assets acquired		6,974			34,168			—			—			41,142
Intercompany receivable (payable)		134,674			(130,765	)		(3,909	)		—			—
Investment in subsidiaries		(8,747	)		—			—			8,747			—
Other assets		8,511			48,316			984			—			57,811


Total assets	$	141,765		$	161,690		$	5,823		$	8,747		$	318,025


	LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)

Current liabilities	$	6,565		$	61,573		$	2,684		$	—		$	70,822
Long-term debt		105,245			105,619			—			—			210,864
Other liabilities		—			6,384			—			—			6,384

Total liabilities		111,810			173,576			2,684			—			288,070


Common stock with conversion option, par value $0.01, exchangeable for subordinated debt, net of discount		14,352			—			—			—			14,352


Stockholders’ equity (deficiency):
Common stock		400			—			—			—			400
Additional paid-in capital		218,331			—			—			—			218,331
Accumulated earnings (deficit)		(82,920	)		(11,886	)		2,407			9,479			(82,920	)
Treasury stock and other		(120,208	)		—			732			(732	)		(120,208	)

Total stockholders’ equity (deficiency)		15,603			(11,886	)		3,139			8,747			15,603


Total liabilities and stockholders’ equity	$	141,765		$	161,690		$	5,823		$	8,747		$	318,025

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Consolidating Condensed Statement of Operations and Comprehensive Income

Thirteen Week Period Ended September 27, 2005


				Guarantor			Non-guarantor
	Centerplate			Subsidiaries			Subsidiaries			Eliminations			Consolidated
	(In thousands)
Net sales	$	—		$	196,276		$	12,343		$	—		$	208,619

Cost of sales		—			155,995			10,302			—			166,297
Selling, general, and administrative		277			18,125			1,336			—			19,738
Depreciation and amortization		27			6,985			320			—			7,332
Transaction related expenses		—			280			—			—			280

Operating income (loss)		(304	)		14,891			385			—			14,972
Interest expense		4,333			2,622			—			—			6,955
Intercompany interest, net		(3,925	)		3,925			—			—			—
Other income, net		(1	)		(318	)		(3	)		—			(322	)

Income (loss) before income taxes		(711	)		8,662			388			—			8,339
Income tax provision		141			3,686			—			—			3,827
Equity in earnings of subsidiaries		5,364			—			—			(5,364	)		—

Net income		4,512			4,976			388			(5,364	)		4,512
Other comprehensive income - foreign currency translation adjustment		—			—			263			—			263


Comprehensive income	$	4,512		$	4,976		$	651		$	(5,364	)	$	4,775

Consolidating Condensed Statement of Operations and Comprehensive Income (Loss)

Thirty-nine Week Period Ended September 27, 2005


				Guarantor			Non-guarantor
	Centerplate			Subsidiaries			Subsidiaries			Eliminations		Consolidated
	(In thousands)
Net sales	$	—		$	463,561		$	34,349		$	—	$	497,910

Cost of sales		—			373,059			28,679			—		401,738
Selling, general, and administrative		824			48,949			3,615			—		53,388
Depreciation and amortization		80			20,436			917			—		21,433
Contract related losses		—			280			—			—		280

Operating income (loss)		(904	)		20,837			1,138			—		21,071
Interest expense		12,533			12,945			—			—		25,478
Intercompany interest, net		(11,775	)		11,775			—			—		—
Other income, net		(3	)		(614	)		(10	)		—		(627	)

Income (loss) before income taxes		(1,659	)		(3,269	)		1,148			—		(3,780	)
Income tax benefit		(245	)		(1,141	)		—			—		(1,386	)
Equity in earnings of subsidiaries		(980	)		—			—			980		—

Net income (loss)		(2,394	)		(2,128	)		1,148			980		(2,394	)
Other comprehensive income - foreign currency translation adjustment		—			—			104			—		104


Comprehensive income (loss)	$	(2,394	)	$	(2,128	)	$	1,252		$	980	$	(2,290	)

-18-

Consolidating Condensed Statement of Cash Flows

Thirty-nine Week Period Ended September 27, 2005


				Guarantor			Non-guarantor
	Centerplate			Subsidiaries			Subsidiaries			Consolidated
	(In thousands)
Cash Flows Provided by Operating Activities	$	483		$	39,550		$	3,880		$	43,913


Cash Flows from Investing Activities:
Purchase of property and equipment		—			(11,183	)		(674	)		(11,857	)
Proceeds from sale of property and equipment		—			456			—			456
Contract rights acquired		—			(8,994	)		—			(8,994	)

Net cash used in investing activities		—			(19,721	)		(674	)		(20,395	)


Cash Flows from Financing Activities:
Repayments — revolving loans		—			(44,250	)		—			(44,250	)
Borrowings — revolving loans		—			44,250			—			44,250
Principal payments on long-term debt		—			(269	)		—			(269	)
Proceeds from long-term borrowings		—			107,500			—			107,500
Retirement of existing long-term borrowings		—			(65,000	)		—			(65,000	)
Payments of financing costs		—			(7,247	)		—			(7,247	)
Dividend payments		(13,380	)		—			—			(13,380	)
Increase in bank overdrafts		—			1,332			—			1,332
Change in intercompany, net		12,900			(10,498	)		(2,402	)		—


Net cash provided by (used in) financing activities		(480	)		25,818			(2,402	)		22,936


Increase in cash		3			45,647			804			46,454

Cash and cash equivalents — beginning of period		195			24,142			440			24,777


Cash and cash equivalents — end of period	$	198		$	69,789		$	1,244		$	71,231

-19-

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

The following discussion and analysis of our results of operations and financial condition for the 13 and 39 weeks ended October 3, 2006 and September 27, 2005 should be read in conjunction with our audited financial statements, including the related notes, included in our annual report on Form 10-K for the year ended January 3, 2006. The financial data has been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”).

Overview

We are a leading provider of food and related services, including concessions, catering and merchandise services in sports facilities, convention centers and other entertainment facilities. As a part of our food services business, we also provide facility management services at a small number of accounts. We operate throughout the United States and in Canada. Based on the number of facilities served, we are one of the largest providers of food and beverage services to a variety of recreational facilities in the United States.

We believe that the ability to retain existing accounts and to win new accounts are the key drivers to maintaining and growing our net sales. Net sales historically have also increased when there has been an increase in the number of events or attendance at our facilities in connection with major league sports post-season and playoff games. Another key factor is our skill at controlling product costs, cash and labor during the events where we provide our services.

When renewing an existing contract or securing a new contract, we are usually required to make a capital expenditure in our client’s facility and offer to pay the client a percentage of the net sales or profits in the form of a commission. Historically, we have reinvested the cash flow generated by operating activities in order to renew or obtain contracts. We believe that these investments have provided a diversified account base of exclusive, long-term contracts. However, as a result of the changes to our capital structure in 2003, including the dividend and interest payments to our IDS holders, we were limited in our ability to make growth capital expenditures and to grow our business as rapidly as we did prior to our IPO. Consequently, we obtained new senior credit financing in 2005 to permit us to make the growth and maintenance capital expenditures and investments in our infrastructure that we believe will help strengthen our financial position. In addition, in 2005 we also invested in our strategic initiatives, including culinary excellence, speed of service, branded concepts and design initiatives, in order to differentiate ourselves in the market and ultimately strengthen our financial position by operating more profitably. In 2006, we continue to focus on these strategic initiatives while attempting to keep our overhead expenses consistent with fiscal 2005.

Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement date and reported amounts of revenues and expenses, including amounts that are susceptible to change. Our critical accounting policies include accounting methods and estimates underlying such financial statement preparation, as well as judgments around uncertainties affecting the application of those policies. In applying critical accounting policies, materially different amounts or results could be reported under different conditions or using different assumptions. We believe that our critical accounting policies involving significant estimates, uncertainties and susceptibility to change, include the following:

-20-

•		Recoverability of Property and Equipment, Contract Rights, Cost in Excess of Net Assets Acquired and Other Intangible Assets. As of October 3, 2006, net property and equipment of $50.5 million and net contract rights of $81.2 million were recorded. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, we evaluate long-lived assets with definite lives for possible impairment when an event occurs which would indicate that such assets’ carrying amount may not be recoverable. The impairment analysis is made at the contract level and evaluates the net property and equipment as well as the contract rights related to that contract. The undiscounted future cash flows from a contract are compared to the carrying value of the related long-lived assets. If the undiscounted future cash flows are lower than the carrying value, an impairment charge is recorded. The amount of the impairment charge is equal to the difference between the carrying value (or net book value) of the long-lived assets and the future discounted cash flows related to the assets (using a rate based on our incremental borrowing rate). As we base our estimates of undiscounted future cash flows on past operating performance, including anticipated labor and other cost increases, and prevailing market conditions, we cannot make assurances that our estimates are achievable. Different conditions or assumptions, if significantly negative or unfavorable, could have a material adverse effect on the outcome of our evaluation and our financial condition or future results of operations. Events that would trigger an evaluation at the contract level include the loss of a tenant team, intent to cease operations at a facility due to contract termination or other means, the bankruptcy of a client, and the discontinuation of a sports league or a significant increase in competition that could reduce the future profitability of the contract, among others.

		As of October 3, 2006, cost in excess of net assets acquired of $41.1 million and other intangible assets (trademarks) of $17.5 million were recorded. In accordance with SFAS No. 142, on an annual basis, we test our indefinite-lived intangible assets (cost in excess of net assets acquired and trademarks) for impairment. Additionally, cost in excess of net assets acquired is tested between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We have determined that the reporting unit for testing the cost in excess of net assets acquired for impairment is Centerplate. In performing the assessment for the annual cost in excess of net assets acquired assessment, we compare the fair value of Centerplate to its net assets carrying amount, including cost in excess of net assets acquired and trademarks. If the fair value of Centerplate exceeds the carrying amount, then it is determined that cost in excess of net assets acquired is not impaired. If the carrying amount were to exceed the fair value, then we would need to perform the second step in the impairment test to determine the amount of the cost in excess of net assets acquired. Fair value for these tests is determined based upon a discounted cash flow model, using a rate based on our incremental borrowing rate. As we base our estimates of cash flows on past operating performance, including anticipated labor and other cost increases and prevailing market conditions, we cannot make assurances that our estimates are achievable. Different conditions or assumptions, if significantly negative or unfavorable, could have a material adverse effect on the outcome of our evaluation and on our financial condition or future results of operations. In performing the annual trademark assessment, management compares the fair value of the intangible asset to its carrying value. Fair value is determined based on a discounted cash flow model, using a rate based on our incremental borrowing rate. If the carrying amount of the intangible asset exceeds its fair value, an impairment loss will be recognized for the excess amount. If the fair value is greater than the carrying amount, no further assessment is performed. We performed our annual assessments of cost in excess of net assets acquired and trademarks on April 4, 2006 and determined that no impairment exists. Additionally, no factors were noted since April 4, 2006 that would cause us to re-evaluate this assessment.

•

Insurance. We have a high-deductible insurance program for general liability, auto liability and workers’ compensation risk. We are required to estimate and accrue for the amount of losses that we expect to incur. These amounts are recorded in cost of sales and selling, general and administrative expenses on the statement of operations and accrued liabilities and long-term

-21-

		liabilities on the balance sheet. Our estimates consider a number of factors, including historical experience and an actuarial assessment of the liabilities for reported claims and claims incurred but not reported. We discount our estimated liabilities to their present value based on expected loss patterns determined by experience. While we use outside parties to assist us in making these estimates, we cannot provide assurance that the actual amounts will not be materially different than what we have recorded. In addition, we are self-insured for employee medical benefits and related liabilities. Our liabilities are based on historical trends and claims filed and are estimated for claims incurred but not reported. While the liabilities represent management’s best estimate, actual results could differ significantly from those estimates.

•		Accounting Treatment for Income Deposit Securities (“IDSs”), Common Stock Owned by Initial Equity Investors and Derivative Financial Instruments. The Company’s IDSs are composed of common stock and subordinated notes, the latter of which have three embedded derivative features. The embedded derivative features include a call option, a change of control put option, and a term-extending option. The call option allows the Company to repay the principal amount of the subordinated notes after the fifth anniversary of the issuance, provided that the Company also pays all of the interest that would have been paid during the initial 10-year term of the notes, discounted to the date of repayment at a risk-free rate. Under the change of control put option, the holders have the right to cause the Company to repay the subordinated notes at 101% of face value upon a change of control, as defined in the indenture governing the subordinated notes. The term-extending option allows the Company to unilaterally extend the term of the subordinated notes for two five-year periods at the end of the initial 10-year period provided that it is in compliance with the requirements of the indenture. The Company has accounted for these embedded derivatives in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted. Based on SFAS No. 133, as amended and interpreted, the call option and the change of control put option are required to be separately valued. As of October 3, 2006, the fair value of these embedded derivatives was determined to be insignificant. The term-extending option was determined to be inseparable from the underlying subordinated notes. Accordingly, it has not been separately accounted for in the accompanying consolidated financial statements.

		In connection with the Company’s initial public offering (“IPO”) in December 2003, those investors who held stock prior to the IPO (the “Initial Equity Investors”) entered into an Amended and Restated Stockholders Agreement dated as of December 10, 2003 with the Company (“Amended Stockholders Agreement”), which provides that, upon any post-offering sale of common stock by the Initial Equity Investors, at the option of the Initial Equity Investors, the Company will exchange a portion of such common stock for subordinated notes at an exchange rate of $9.30 principal amount of subordinated notes for each share of common stock. The purpose of the exchange feature is to enable the Initial Equity Investors to hold shares of common stock and subordinated notes in the appropriate proportions to represent integral numbers of IDSs. In order to determine the number of shares of common stock that the Initial Equity Investors could convert into subordinated debt, the Company divided the exchange rate of $9.30 by the original issue price of the IDSs of $15.00 at December 4, 2003 (the quotient equals 0.62). This quotient was then multiplied by the total number of shares owned by the Initial Equity Investors (4,060,997 shares) to determine the number of IDSs that the Initial Equity Investors would own after conversion (2,517,817 IDSs, each comprised of one share of stock and a subordinated note). The number of shares owned by the Initial Equity Investors before conversion (4,060,997) was subtracted from the number of shares they would own after conversion (2,517,817) to determine the number of shares of common stock to be converted into subordinated debt (1,543,180 shares) at the exchange rate of $9.30 per share resulting in approximately $14.4 million described further below.

		The Company has concluded that the portion of the Initial Equity Investors’ common stock exchangeable for subordinated debt as calculated above should be classified on its consolidated balance sheet according to the guidance provided by Accounting Series Release No.

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		268(FRR Section 211), “Redeemable Preferred Stocks”. Accordingly, at both October 3, 2006 and January 3, 2006, the Company has recorded approximately $14.4 million as “Common stock with conversion option exchangeable for subordinated debt” on the accompanying consolidated balance sheets. Because the Initial Equity Investors were not allowed to convert any shares into subordinated notes during the first 180 days after the IPO, a discount (initially $0.4 million) was applied to the amount recorded as “Common stock with conversion option exchangeable for subordinated debt” during this 180 day period. This discount was accreted to the face amount due of approximately $14.4 million using the effective interest method over the life of the Initial Equity Investors minimum required 180-day holding period. The accretion of approximately $317,000 in fiscal 2004 was a deemed dividend to the Initial Equity Investors. In addition, the Company has determined that the option conveyed to the Initial Equity Investors to exchange common stock for subordinated debt in order to form IDSs is an embedded derivative in accordance with Paragraph 12 of SFAS No. 133. The Company has recorded a liability for the fair value of this embedded derivative of approximately $2.3 million as of October 3, 2006, a decrease of $2.4 million from January 3, 2006. This option is fair-valued each reporting period with the change in the fair value recorded in interest expense in the accompanying consolidated statement of operations.

		The common stock held by the Initial Equity Investors was initially treated as a separate class of common stock for presentation of earnings per share. Although the common stock held by the Initial Equity Investors is part of the same class of stock as the common stock included in the IDSs for purposes of Delaware corporate law, the right to convert that is granted in our Amended and Restated Stockholders Agreement as described above causes the stock held by the Initial Equity Investors to have features of a separate class of stock for accounting purposes. In fiscal 2004, the deemed dividend of approximately $317,000 conveyed to the Initial Equity Investors discussed above required a two class earnings per share calculation. Accordingly, the Company had shown separate earnings per share for the stock held by the Initial Equity Investors and the stock included in the IDSs. However, at October 3, 2006 and September 27, 2005, earnings per share for common stock with and without conversion rights were equal and therefore no separate presentation was required.

•		Deferred Income Taxes. We recognize deferred tax assets and liabilities based on the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities and the future tax benefits of net operating loss carryforwards and tax credits. Our primary deferred tax assets relate to net operating losses and credit carryovers. The realization of these deferred tax assets depends upon our ability to generate future income. If our results of operations are adversely affected and we do not generate taxable income, not all of our deferred tax assets, if any, may be realized.

		We accounted for the issuance of IDS units in December 2003 by allocating the proceeds for each IDS unit to the underlying stock and subordinated notes based upon the relative fair values of each at that time. Accordingly, the portion of the aggregate IDSs outstanding that represents subordinated notes has been accounted for as long-term debt bearing a stated interest rate of 13.5% maturing on December 10, 2013. Although to date the Company has not been notified that the notes should be treated as equity rather than debt for U.S. federal and state income tax purposes, there can be no assurances that the Internal Revenue Service or the courts will not seek to challenge the treatment of these notes as debt or the amount of interest expense deducted. Such reclassification would result in an additional tax liability and cause Centerplate to utilize at a faster rate more of its deferred tax assets than it otherwise would.

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Seasonality and Quarterly Results

Our net sales and operating results have varied, and are expected to continue to vary, from quarter to quarter (a quarter is comprised of 13 or 14 weeks), as a result of factors which include:

	•		seasonality and variations in scheduling of sporting and other events;

	•		unpredictability in the number, timing and type of new contracts;

	•		timing of contract expirations and special events; and

	•		levels of attendance at the facilities which we serve.

Business at the principal types of facilities we serve is seasonal in nature. Major League Baseball (“MLB”) and minor league baseball related sales are concentrated in the second and third quarters, the majority of National Football League (“NFL”) related activity occurs in the fourth quarter and convention centers and arenas generally host fewer events during the summer months. Results of operations for any particular quarter may not be indicative of results of operations for future periods.

In addition, our need for capital varies significantly from quarter to quarter based on the timing of contract renewals and the contract bidding process.

Set forth below are comparative net sales by quarter (in thousands) for the first three quarters of 2006, fiscal 2005, and fiscal 2004:


	2006		2005		2004
1^st Quarter	$	113,505	$	107,220	$	98,236

2^nd Quarter	$	190,699	$	182,071	$	173,725

3^rd Quarter	$	218,929	$	208,619	$	201,066

4^th Quarter		—	$	145,202	$	134,127

Results of Operations

Thirteen Weeks Ended October 3, 2006 Compared to the 13 Weeks Ended September 27, 2005

Net sales — Net sales of $218.9 million for the 13 weeks ended October 3, 2006 increased $10.3 million, or approximately 4.9%, from $208.6 million in the prior year period. The increase was primarily due to higher sales at our MLB and NFL facilities. MLB sales improved $8.9 million due to eleven additional MLB games that were played during the current period, including two post season games, as well as an increase in per capita spending and attendance at a number of our MLB facilities. In addition, NFL related sales were $6.3 million higher, due primarily to one additional NFL game and higher attendance and per capita spending at a number of the NFL stadiums served by us. Also contributing to the improvement were higher convention center sales of $3.4 million due to an increase in the number of events at these venues. Partially offsetting these improvements was the termination of some of our contracts which accounted for a decline in sales (net of new accounts) of $2.1 million. In addition, sales at our minor league baseball and auto track facilities declined $3.0 million due in part to poor weather conditions on the East Coast during the quarter. Sales at all other facilities decreased $3.2 million.

Cost of sales – Cost of sales of $176.0 million for the 13 weeks ended October 3, 2006 increased approximately $9.7 million from $166.3 million in the prior year period due in part to the higher sales volume. As a percentage of net sales, cost of sales increased by approximately 0.7% from the prior year

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Income taxes – Income taxes for the 13 weeks ended October 3, 2006 and September 27, 2005 were calculated using the projected annual effective tax rate for fiscal 2006 and 2005, respectively, in accordance with SFAS No. 109 “Accounting for Income Taxes”. We currently estimate that in the fiscal year ending January 2, 2007, we will have an annual effective tax rate of approximately 6%. The projected annual effective tax rate at the end of the second quarter was -40%. In the prior year period, we estimated that our annual effective tax rate for the fiscal year ended January 3, 2006 would be 37%. The decrease in the projected annual effective tax rate is primarily due to the non-cash interest charge related to the Company’s derivatives and the change in the Company’s projected taxable income in 2006. Our annual effective tax rate is revised as of the end of each quarter, in accordance with APB Opinion No. 28. As a result, the interim income tax provision (or benefit) can fluctuate considerably from quarter to quarter based on changes in the projected annual effective tax rate. The annual effective tax rate can fluctuate due to many factors including changes in the projected book income, fluctuations in the valuation of the Company’s derivative, permanent tax adjustments and tax credits. The annual effective tax rate is revised at the end of each successive interim period during the fiscal year to our current best estimate in accordance with APB 28. For the 13 weeks ended October 3, 2006, our actual effective tax rate is - -10%. This is the result of the change in our projected annual effective tax rate for fiscal 2006 from the rate calculated at the end of the second quarter 2006. The resulting income tax provision recorded for the 13 weeks ended October 3, 2006 is a product of applying the projected annual effective tax rate to our year to date earnings before income taxes.

Thirty-nine Weeks Ended October 3, 2006 Compared to the 39 Weeks Ended September 27, 2005

Net sales — Net sales of $523.1 million for the 39 weeks ended October 3, 2006 increased by $25.2 million, or approximately 5.1%, from $497.9 million in the prior year period. The increase was primarily due to higher sales at our MLB facilities, convention centers, and arenas of $16.9 million, $12.4 million, and $10.2 million, respectively. At our MLB facilities, 19 additional games were played compared to the prior year period with an overall increase in attendance and per capita spending. The improvement at the convention centers was partially due to an increase in the number of events held at these facilities while arenas were positively impacted by the resolution of the NHL lock-out and college basketball tournaments held at a number of our facilities. Partially offsetting the improvement was a decline in sales of $4.3 million associated with the closure of the Louisiana Superdome and the New Orleans Arena as a result of Hurricane Katrina. Additionally, the termination of some of our contracts accounted for a decline in sales (net of new accounts) of $8.1 million. Net sales at all other facilities declined $1.9 million.

Cost of sales – Cost of sales of $425.8 million for the 39 weeks ended October 3, 2006 increased approximately $24.1 million from $401.7 million in the prior year period due in part to the higher sales volume. As a percentage of net sales, cost of sales increased by approximately 0.7% from the prior year period mainly as a result of an increase in the commissions and royalties paid to our clients. The increase was primarily attributable to commissions associated with certain new contracts and a shift in the sales mix reflecting a higher concentration of sales in our profit sharing accounts, where higher commissions are typically paid. The increase was partially offset by improved product costs related to a change in the sales mix and savings at certain accounts.

Selling, general and administrative expenses – Selling, general and administrative expenses were $51.7 million in the 39 weeks ended October 3, 2006 as compared to $53.4 million in the prior year period, a decline of approximately $1.7 million. As a percentage of net sales, selling, general and administrative costs declined approximately 0.8% from the prior year period. The improvement was primarily due to the impact of lower overhead costs of approximately $1.4 million as compared to the prior year period. Also contributing to the lower selling, general, and administrative expenses were insurance proceeds received related to Hurricane Katrina, which resulted in a net credit of $0.7 million, and a decline in other operating expenses due to operating efficiencies achieved at certain facilities.

Depreciation and amortization – Depreciation and amortization was $21.3 million for the 39 weeks ended October 3, 2006 as compared to $21.4 million in the prior year period. Depreciation and amortization reflects a reduction in the step-up depreciation related to the assets acquired in the 1998 acquisition of Service America Corporation partially offset by an increase principally attributable to investments made in contract acquisitions and renewals.

Contract related losses – For the 39 weeks ended October 3, 2006, a $0.1 million non-cash charge was taken for the write-off of contract rights for a terminated contract as compared to $0.3 million for the write-off of certain assets associated with a terminated contract in the prior year period.

Operating income – Operating income for the 39 weeks ended October 3, 2006 increased approximately $3.1 million from the prior year period due to all the factors described above.

Interest expense – Interest expense was $18.2 million for the twenty-six weeks ended October 3, 2006, compared to $25.5 million in the prior year period. The $7.3 million decline is principally attributable to $5.8 million in non-recurring expenses incurred in the prior year period related to entering into our credit agreement on April 1, 2005. The $5.8 million included a prepayment premium of approximately $4.6 million on the prior credit facility and a $1.2 million non-cash charge for the write-off of deferred financing costs. In addition, the prior year period reflected a non-cash charge of $1.0 million related to the change in the fair value of our derivatives as compared to a credit of $2.4 million in the current period. The remaining increase of $1.9 million is primarily related to higher interest expense for

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the term loan and revolver availability under the current credit agreement ($1.6 million) and higher amortization of the deferred financing costs ($0.3 million)

Other income, net – Other income was $1.2 million in the 39 weeks ended October 3, 2006 as compared to $0.6 million in the prior year period. The increase was principally attributable to higher cash balances in the 2006 period due primarily to our credit agreement entered into in April, 2005.

Income taxes – Income taxes for the 39 weeks ended October 3, 2006 and September 27, 2005 were calculated using the projected annual effective tax rate for fiscal 2006 and 2005, respectively, in accordance with SFAS No. 109 “Accounting for Income Taxes”. We currently estimate that in the fiscal year ending January 2, 2007, we will have an effective annual tax rate of approximately 6%. The provision reflects the tax effect of the permanent reconciliation resulting from the filed income tax return on September 15, 2006 for the fiscal year ended January 3, 2006 as compared to the income tax provision for such fiscal year, which has been accounted for as a discrete adjustment within the quarter. In the prior year period, we estimated that our effective annual tax rate for the fiscal year ended January 3, 2006 would be 37%. The decrease in the projected annual effective tax rate for the 2006 period is primarily due to a reduction in the non-cash interest charge related to the Company’s derivatives. Our annual effective tax rate is revised as of the end of each quarter, in accordance with APB Opinion No. 28. As a result, the interim income tax provision (or benefit) can fluctuate considerably from quarter to quarter based on changes in the projected annual effective tax rate due to many factors including changes in the projected book income, fluctuations in the valuation of the Company’s derivative, permanent tax adjustments and tax credits.

Liquidity and Capital Resources

For the 39 weeks ended October 3, 2006, net cash provided by operating activities was $45.2 million compared to $43.9 million in the prior year period. The increase was primarily due to improved operating income, the non-recurring $4.6 million prepayment premium incurred in the prior year period associated with the refinancing of our credit agreement on April 1, 2005 and fluctuations in working capital, which varies from quarter to quarter as a result of the timing and number of events at the facilities we serve.

Net cash used in investing activities was $19.9 million for the 39 weeks ended October 3, 2006, as compared to $20.4 million in the prior year period. The decline in the 2006 period primarily reflects the return of the unamortized capital investment ($1.8 million) made in connection with a terminated contract. This was partially offset by an increase in capital expenditures of $1.1 million (due to the relatively high percentage of our net sales represented by contracts that are up for renewal in 2006, as discussed below, capital expenditures to extend existing contracts increased approximately $3.0 million; however, capital expenditures to acquire new accounts declined approximately $1.9 million).

Net cash used in financing activities was $11.3 million in the 39 weeks ended October 3, 2006 as compared to net cash provided by financing activities of $22.9 million in the prior year period. The primary difference is due to the refinancing of the credit facility reflected in the 2005 period, with $107.5 million in proceeds from the credit agreement being offset by the payment of $7.2 million in associated financing costs and the repayment of $65.0 million under the prior credit facility.

We are also often required to obtain performance bonds, bid bonds or letters of credit to secure our contractual obligations. As of October 3, 2006, we had requirements outstanding for performance bonds and letters of credit of $17.9 million and $22.7 million, respectively. Under the credit facility, we have an aggregate of $35.0 million available for letters of credit, subject to an overall borrowing limit of $107.5 million. As of October 3 2006, we had approximately $84.8 million available to be borrowed under the revolving portion of the credit facility. At that date there were no outstanding borrowings and $22.7 million of outstanding, undrawn letters of credit reducing availability.

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Sports teams and municipalities have spearheaded efforts to develop new large stadiums. In order to bid successfully on these projects, we will need to be able to commit to making relatively large capital expenditures. For these and other projects, we will also need to demonstrate our ability to provide competitive product and service offerings. We intend to address this through further enhancing our strategic initiatives, including culinary excellence and design, as well as continuing to develop our branded product and speed of service initiatives, all designed to help differentiate us in our market. This in turn will continue to require investment in these initiatives and in the management infrastructure designed to help us manage our business more efficiently.

We believe that cash flow from operating activities, together with borrowings available under the revolving portion of the credit facility, will be sufficient to fund our currently anticipated capital investment requirements, interest, dividend payments and working capital requirements. We currently anticipate total capital investments of approximately $30 million to $35 million in fiscal 2006, of which $22.0 million has been spent to date in investments primarily associated with the renewal and/or acquisition of contracts. The primary driver of the increase in expected capital investments in fiscal 2006, as compared to fiscal 2005, is the relatively high percentage of our net sales represented by contracts that are up for renewal in 2006. In 2006, contracts representing 24.1% of our net sales, or $154.9 million, are up for renewal. Consequently, we anticipate making higher than average capital expenditures on commitments in order to renew these contracts. As of the third quarter ended October 3, 2006, we have renewed contracts representing approximately 20.6% of our net sales up for renewal. As a result of the anticipated contract renewals, borrowings under the revolving portion of our credit facility may increase in the fourth quarter of 2006.

In addition, while the declaration of dividends is at the sole discretion of our board of directors, we expect to pay dividends on our common stock at the same rate as fiscal 2005 (approximately $17.8 million, of which $13.4 million was paid as of October 3, 2006).

New Accounting Standards

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”) an interpretation of FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not (i.e. a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also requires expanded disclosures including identification of tax positions for which it is reasonably possible that total amounts of unrecognized tax benefits will significantly change in the next twelve months, a description of tax years that remain subject to examination by major tax jurisdiction, a tabular reconciliation of the total amount of unrecognized tax benefits at the beginning and end of each annual reporting period, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate and the total amounts of interest and penalties recognized in the statements of operations and financial position. FIN 48 will be effective for public companies for fiscal years beginning after December 15, 2006. We have not yet determined the impact, if any, of the recognition and measurement requirements of FIN 48 on our existing tax positions. Upon adoption, the cumulative effect of applying the recognition and measurement provisions of FIN 48, if any, will be reflected as an adjustment to the opening balance of retained earnings.

In September 2006, FASB issued Statement of Financial Accounting Standards No. 157 (SFAS 157), “Fair Value Measurements”. In addition to defining fair value, SFAS 157 provides a framework for the measurement of fair value and expands disclosure requirements about fair value measurements. SFAS 157 will be effective for fiscal years beginning after November 15, 2007. We have yet to evaluate the impact of SFAS 157 on its financial statements.

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In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”). SAB 108 was issued to provide interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The provisions of SAB 108 are effective for fiscal years ending after November 15, 2006. We have yet to evaluate the impact of SAB 108 on its financial statements.

Cautionary Statement Regarding Forward-looking Statements

Some of the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Quarterly Report on Form 10-Q may be forward-looking statements which reflect our current views with respect to future events and financial performance. These statements may include the words “expect,” “intend,” “plan,” “believe,” “project,” “anticipate” and similar statements of a future or forward-looking nature.

All forward-looking statements address matters that involve risks and uncertainties that could cause actual results to differ materially from those indicated in these statements or that could adversely affect the holders of our securities. Some of these risks and uncertainties are discussed under “Risk Factors” in our Annual Report on Form 10-K for the year ended January 3, 2006.

Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Interest rate risk –We are exposed to interest rate volatility with regard to our revolving credit facility borrowings and term loan. As of October 3, 2006, we had no outstanding borrowings under the revolving portion of our credit facility and a $105.9 million balance on our term loan. A change in interest rate of one percent on these borrowings would cause a change in our annual interest expense of $1.1 million. In order to minimize our exposure to interest rate risk, during the third quarter we entered into a one year interest rate cap agreement for a notional amount of $100 million designed to offset our risk in the event that LIBOR exceeds 6.3% per annum. While our subordinated notes are fixed interest-rate debt obligations, fluctuating interest rates could result in material changes to the fair values of the embedded derivatives in our IDSs.

Market risk – Changing market conditions that influence stock prices could have an impact on the value of our liability for derivatives. As of October 3, 2006, a gain of $2.4 million has been recorded to our consolidated statement of operations to record changes in the fair value of our derivatives. A $1.00 fluctuation in the price of our IDS units would result in an approximate $0.4 million to $0.5 million change in our liability for derivatives.

As of October 3, 2006, there have been no material changes, except as discussed above, in the quantitative and qualitative disclosures about market risk from the information presented in our Form 10-K for the year ended January 3, 2006.

Item 4. Controls and Procedures.

Evaluation of disclosure controls and procedures.

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Interim Principal Financial Officer, as appropriate, to allow timely decisions

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regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management, with the participation of the Chief Executive Officer and the Interim Principal Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of October 3, 2006. Based upon that evaluation and subject to the foregoing, our Chief Executive Officer and Interim Principal Financial Officer concluded that the design and operation of our disclosure controls and procedures provided reasonable assurance that the disclosure controls and procedures are effective to accomplish their objectives. During the period covered by this report there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II
OTHER INFORMATION

Item 1. – Legal Proceedings

See Note 3 in the Notes to the Consolidated Financial Statements.

Item 1A. – Risk Factors

There has been no material change to the Risk Factors discussed in our Annual Report on Form 10-K for the year ended January 3, 2006.

Item 6. Exhibits


(a)	Exhibits:

		31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.

		31.2	Certification of Interim Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

		32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.

		32.2	Certification of Interim Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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/s/ Janet L. Steinmayer
Janet L. Steinmayer
Chief Executive Officer
Date: November 13, 2006

Centerplate, Inc.

/s/ Hadi K. Monavar

Hadi K. Monavar

Interim Principal Financial Officer


PART I — FINANCIAL INFORMATION			2
Item 1. Financial Statements			2
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3. Quantitative and Qualitative Disclosures About Market Risk			29
Item 4. Controls and Procedures			29
PART II — OTHER INFORMATION			30
Item 1. Legal Proceedings			30
Item 1A. Risk Factors			30
Item 6. Exhibits			30
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION