SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
FORM 10KSB
[ x ] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended JUNE 30, 2000
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number 0-16196
HOST AMERICA CORPORATION
(Exact Name of Registrant as specified in its Charter)
COLORADO 06-1168423
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(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
TWO BROADWAY
HAMDEN, CONNECTICUT 06518
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code: (203) 248-4100
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $.001 PAR VALUE
WARRANTS TO PURCHASE COMMON STOCK
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
At September 15, 2000, 1,328,122 shares of Common Stock, $.001 par value,
were outstanding. The aggregate market value of the Common Stock held by
non-affiliates of the Registrant on that date was approximately $5,639,408.
Shares of Common Stock held by Officers, Directors and each person who owns
more than 5% of the outstanding Common Stock have been excluded in that
such persons may be deemed affiliates.
DOCUMENTS INCORPORATED BY REFERENCE:
The following documents (or parts thereof) are incorporated by reference
into the following parts of this Form 10KSB:
Proxy Materials for 2000 Annual Meeting of Shareholders to be held on
November 21, 2000 - Items 10, 11, 12 and 13.
Page 1 of 47 pages Exhibits are indexed on page 26.
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PART I
Item 1. DESCRIPTION OF BUSINESS
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GENERAL DEVELOPMENT OF BUSINESS
EXCEPT FOR HISTORICAL INFORMATION, THE FOLLOWING DESCRIPTION OF THE
COMPANY'S BUSINESS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE SET FORTH IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF A
NUMBER OF FACTORS, INCLUDING THOSE SET FORTH IN THIS ANNUAL REPORT UNDER
THE HEADING, "CERTAIN RISK RELATING TO THE COMPANY."
The Company is a regional contract food service management company
specializing in providing full restaurant and employee dining, special
event catering, vending and office coffee service, home food replacement
(fully cooked, home style meals, typically made from scratch, suitable for
take out) and management of corporate dining rooms and cafeterias, in
office complexes and manufacturing plants. The diversity of services
allows the Company's clients to offer their employees full breakfast and
lunch availability, multi-level catering and a variety of complimentary
food service options. The Company currently has operations in Connecticut,
New York, New Jersey and Rhode Island and, in the near future, the Company
intends to expand to Texas.
The Company estimates that the United States food service industry had
annual revenues in excess of approximately $100 billion in 1999 and of
that, $40 billion is concentrated in corporate services, the primary market
niche in which the Company conducts its operations. The balance of
annualized revenues are concentrated in the areas of hospital/health care,
correctional facilities, military facilities and transportation facilities.
Additionally, the home-meal replacement industry is a rapidly growing
industry with annual sales 1999 estimated to range from $80 billion to $150
billion. Industry contracting revenues have continued rising since 1996
and are expected to continue to rise in 2000. The four largest nationals
(Marriott, Aramark, CompassUSA, and Sodexho) have produced double-digit
revenue gains of 15% adding more than 1,500 accounts in since 1997.
Since its formation in 1986, the Company has grown from providing food
service to colleges and preparatory schools in the New England area of the
United States to a regional, full-service, food service provider to major
corporations that have in total over 10,000 employees. With the
acquisition of Lindley Food Services, Inc. ("Lindley") in July 2000, the
Company now offers fresh prepared unitized meals for governmental programs
primarily under fixed-price contracts in Connecticut and Massachusetts.
The Company maintains a number of large, multi-year contracts among its
thirty-one separate operations. Some of the Company's larger contracts
include Pitney Bowes, Inc. of Stamford, Connecticut (currently 6 locations
with over 4,500 employees), Oxford Health Plans, Inc. of White Plains, New
York (currently 5 locations with over 4,000 employees), Ft. James Paper
Co. of Norwalk, Connecticut (with over 1,000 employees), and Stanley Works
of New Britain, Connecticut and East Greenwich, Rhode Island (with over
5,700 employees).
The Company's revenues are derived primarily from sales related to the
management of corporate restaurants and catering in single tenant and
multi-tenant office buildings. The balance
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of revenues are derived from the maintenance of vending machines, office
coffee service and catering of special events at select facilities. The
Company concentrates on medium-size clients generating from $500,000 to $2
million per location in annual food sales. Management believes that these
middle market facilities generally provide greater profit margins and need
a variety of food related services. The Company endeavors to be the
exclusive food provider at the facilities served thereby being able to
control the quality of service and product at each location.
The Company continues to implement its home meal replacement program
(the "HOMEfood MARKET") at select locations. This program provides
employees the ability to purchase fully cooked home style meals for
consumption at home without further preparation or minimal re-heating. The
Company endeavors to offer employees a variety of food selections prepared
to meet the tastes of the entire family. The HOMEfood MARKET also offers
evening employees at certain of its locations such as Priceline.com, the
opportunity to have a quality meal on premises in a cost-effective manner.
Management believes that this additional food service component was an
important factor in acquiring the contracts with Priceline.com.
The Company believes there are significant opportunities to expand its
business through the acquisition of companies in the contract food service
industry, particularly in the education and corporate dining markets. The
Company's first acquisition was Lindley in July 2000 for a total purchase
price of approximately $5,700,000. The Company's Officers and Directors
will continue to be responsible for identifying, pursuing and negotiating
potential acquisition candidates and integrating acquired operations. The
Company believes it can integrate such companies into the Company's
management structure and diversify operations successfully without a
significant increase in general and administrative expenses. In addition,
future acquisitions are expected to enable the Company to lower overhead
costs through centralized geographical office operations and to grow to a
size so that the Company qualifies for bids on larger volume quality
accounts that require asset or purchase programs.
On July 21, 1998, the Company completed a public offering of 1,000,000
shares of its Common Stock and 1,000,000 Common Stock Purchase Warrants.
The Common Stock and Warrants are separately traded and are separately
transferable. Each Warrant entitles the holder thereof to purchase at
$5.50, one share of Common Stock. The Warrants are exercisable until July 21,
2003. The Company received net proceeds from the sale of $3,782,917.
On April 30, 1999, the Company filed Articles of Merger with the State
of Colorado merging Host Delaware into Host Colorado and Host Delaware
ceased as of that date. The Company's Officers and Directors changed the
corporate domicile in order to reduce the amount of franchise tax payable
in the State of Delaware.
The Company's corporate offices are located at Two Broadway, Hamden,
Connecticut 06518. The Company's telephone number is (203) 248-4100.
Lindley's corporate offices are located at 515 Lindley Street, Bridgeport,
Connecticut 06606.
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FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company's activities are confined to contract food service
management, hence the Company has no other industry segments other than as
stated herein. See Financial Statements for additional information
concerning the Company's business.
NARRATIVE DESCRIPTION OF BUSINESS
GENERAL
The Company is a regional contract food service management company.
The majority of corporate revenues are from sales related to the management
of corporate cafeterias and restaurants, home meal replacement and catering
in single tenant and multi-tenant office buildings. The balance of
revenues are derived from the maintenance of vending machines and coffee
service at select facilities. The Company concentrates on small- to
medium-size clients generating from $500,000 to $2 million per location in
annual food sales. Management believes that these middle market facilities
generally provide greater profit margins and present the opportunity to
provide a variety of food related services. The Company endeavors to be
the exclusive food provider at each facility served, thereby being able to
control the quality of food and service at each location.
Various marketing and operating strategies are currently being used by
the Company to provide an umbrella of food services at each customer
facility including basic corporate cafeteria dining, office coffee, vending
machines, special events catering and home meal replacement programs. The
Company believes this strategy has been an important factor in the
Company's growth and in attracting large, corporate clients with multiple
needs. Through its on-site account managers and employees, the Company
endeavors to provide high quality food and client satisfaction while
controlling labor costs and overhead.
The Company will attempt to increase its revenues through acquisition
of small- to medium-size food service providers, similar to Lindley,
currently operating in different geographical locations and dining markets
not currently being served by the Company. The Company believes the
increase in revenues will be coupled with an overall reduction in per unit
food costs and general and administrative expenses. The Company has not,
as of the date of this Report, entered into any agreements in this regard
and no assurance can be given that the Company will be successful in
seeking suitable acquisitions.
The Company currently has operations in Connecticut, Massachusetts,
New York, New Jersey, New Hampshire, Rhode Island and, in the near future,
intends to expand to Texas.
HISTORY
The Company was formed as a Delaware corporation on February 6, 1986
under the name University Dining Services, Inc. Its initial business was
providing complete food service to colleges and preparatory schools in the
New England area. After several years, the Company determined it was more
profitable to provide food to larger, more densely populated customer
bases. Accordingly,
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in 1992, it shifted its focus to becoming a full service food management
company specializing in employee dining in large office complexes and
providing special events catering. In 1996 a home meal replacement
program, the HOMEfood MARKET, was developed to meet the demand from
individuals for complete home meals, to enhance existing corporate dining
facilities and to increase revenues without significantly increasing
overhead costs at each location.
In February 1988, the Company conducted an initial public offering and
sold 5,000,000 shares of its Common Stock to the general public. In
February 1998, the Company effected a 100 to 1 reverse split of its then
outstanding shares and to insure continuity of management, in March 1998,
issued 700,000 shares of Series A Preferred Shares to its Officers and
Directors. In addition, the Company entered into five (5) year employment
agreements with its founders and key employees, Geoffrey W. Ramsey and
David J. Murphy.
On July 21, 1998, the Company completed a public offering of 1,000,000
shares of its Common Stock and 1,000,000 Common Stock Purchase Warrants.
The Company received net proceeds from the sale of $3,782,917. The Company
is utilizing the proceeds of the offering for sales and marketing, product
development, acquisitions and working capital.
On April 30, 1999, the Company filed Articles of Merger with the State
of Colorado merging Host Delaware into Host Colorado and Host Delaware
ceased as of that date. The Company's Officers and Directors did this in
order to reduce the amount of franchise tax required in the State of
Delaware. This move will save the Company approximately $40,000 per year.
On July 28, 2000, the Company acquired all issued and outstanding
shares of Lindley for $3,700,000 and 198,122 shares of the Company's
"restricted" Common Stock. Lindley provides freshly prepared and frozen
unitized meals for large senior food programs, school lunches, and private-
and public-related programs. Lindley is the single largest provider of
fresh, unitized meals in Connecticut. One of its major contracts include
the Boston City school system. Mr. Mark Cerreta and Mr. Gilbert
Rossomando, senior management of Lindley, are responsible for its past
success and are now part of the Company's management team pursuant to four-
year employment agreements. Mr. Rossomando was also appointed a Director of
the Company in July 2000.
INDUSTRY OVERVIEW
In 1999, the United States food service industry had annual revenues
in excess of approximately $100 billion and $40 billion in the corporate
services and educational markets. The balance of annualized revenues are
concentrated in the areas of hospital/health care, correctional facilities,
military facilities and transportation facilities. Additionally, the home-
meal replacement industry is rapidly growing with annual sales estimated to
range from $80 billion to $150 billion. Industry contracting revenues have
continued rising since 1996 and are expected to continue to rise in 1999.
The United States food service market is characterized by a large
concentration of corporate and industry populations in a multitude of
strategic geographical locations. The Company's primary geographical area
of operations is located in southern New England, New York and northern New
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Jersey. These areas are believed to contain the largest financial segment
of the industry, with a high population density, numerous corporate office
parks, industrial facilities and a high concentration of mid-size and large
corporations.
BUSINESS STRATEGY
The Company has developed a program known as "Food Serve 2000," which
is a comprehensive plan of evaluating all existing food operations, in an
attempt to maximize customer satisfaction. Management, on a monthly basis,
studies the basic elements of its food service at each location, including
traffic flows, waiting times, food presentation, menu variety, nutritional
assessment, work preparation and labor qualifications. In addition, on-site
food managers maintain strict cost containment policies, nutritional
programs for better health, custom designed menus to meet regional and
ethnic tastes and facilities enhancement with state-of-the-art equipment.
Each facility is then reviewed by management and the client to select the
best possible combination of food and service.
In addition to the acquisition strategy described below, the Company
anticipates adding new sales representatives in metro New York, New Jersey
and Pennsylvania to actively promote the Company's innovative marketing
program including the home-meal replacement program, the "HOMEfood MARKET."
The Company believes the HOMEfood MARKET gives it a strategic time
advantage over its national competitors who have not developed home-meal
programs tied to their client contracts. To increase the existing client
base, the Company is actively seeking customers in contiguous geographical
locations.
The Company continues to evaluate and improve its internal operational
procedures and develop new procedures for product presentation. Often
times this requires retaining existing personnel or acquiring specialized
equipment such as pizza ovens. The Company attempts to achieve a
continuing level of employee satisfaction through training programs by
providing high wages and retirement benefits, establishing a seniority
system, and promoting stable working conditions. The Company believes
employee satisfaction will result in improved and more consistent service
for its clients.
OPERATIONS
The Company's primary emphasis is on large corporate accounts. These
types of accounts present the opportunity to provide a wide variety of food
services in a single location to a select group, ranging from vending
machines to cafeteria services to special event catering. Typically, the
Company is the exclusive provider of all available food and beverages and
is responsible for the hiring and training of personnel at each location.
On-site managers are selected for each facility, who work closely with the
Company's management to ensure continuing food quality and customer
satisfaction.
Each new account is assigned to a member of management who develops a
comprehensive plan to meet the client's specific needs. For example, the
HOMEfood MARKET was developed as a direct response to the need of certain
clients to feed several work shifts with different types of
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quality food, at times of the day when a normal cafeteria operation would
not be available. After extensive interviews and on-site visits an
operating strategy is then formulated. Various factors are considered to
maximize the Company's profits without sacrificing client satisfaction.
Each strategy includes a thorough review of labor and product costs,
facility design, menu design, training and recruiting, specialized needs
and equipment needs. Thereafter, the strategy is continually reviewed to
monitor client employee satisfaction, changing food requirements and
quality of food and service. Additional services are added as demand
changes, including the addition of vending machines, catering facilities
and food selection upgrades.
Typically, the Company is required to grant credit to its customers to
fund the purchase of equipment and supplies at its various food service
operations. To minimize losses, management receives a customer's credit
history and establishes an allowance for accounts based upon factors
surrounding the credit risk of specific customers, industry historical
trends and other types of credit information such as payment history. To
reduce the risk of default, the Company's client contracts provide for
buyback provisions wherein each customer agrees to buy the equipment and
supplies in the event of an early termination of the contract.
MARKETING
The Company selectively bids for privately owned facility contracts
and contracts awarded by governmental and quasi-governmental agencies.
Other potential food service contracts come to the Company's attention
through direct contact with a customer, by mail and telephone, from
conversations with suppliers, such as purveyors and vending machine
suppliers, and state listings. New clients require the Company to submit a
bid and make a proposal encompassing, among other things, a capital
investment and other financial terms. In certain cases, a private-facility
owner may choose to negotiate with the Company exclusively for a period of
time and during the bidding process, the Company expends a great deal of
time and effort preparing proposals and negotiating contracts.
To attract typical office buildings as clients, the Company is
constantly attempting to upgrade its food service and provide upscale,
quality foods. To the extent employees are able to satisfy their food
needs at their employer's location, the less time those employees are away
from their office setting, resulting in an increase in corporate and
individual productivity. Further, if the Company can satisfy the employees
with diverse and high-quality food items, employers are often willing to
subsidize a portion of the costs.
The Company does not believe that food service contracting in its
business segments is saturated. The Company believes that it can compete
with the largest of its competitors because it provides direct personal
contact with its clients two or three times a week, offers flexible menus
to meet customer's desires, and intensively trains its unit managers.
HOMEfood MARKET
In February 1996, the Company introduced the HOMEfood MARKET program
as its version of home meal replacement for client employees and building
tenants working different shifts and as
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a convenience to employees on their way home. Home meal replacement is
broadly defined as a retail food service that replaces home cooked meals
with those prepared out of the home, but which are made from scratch and
have the convenience of fast food. This type of food service ranges from
parts of meals, like salads, to complete meals such as a turkey dinner with
gravy and side dishes. Home-style meals also require some sort of further
processing by the customer, such as reheating or finishing, at home.
HOMEfood MARKET provides a convenient way to assemble fresh,
convenient meals at home which are fully prepared and ready to heat and
serve. The Company prepares part of the menu in its on-site kitchen while
a number of branded items are made off-site, like DeLuca Italian entrees,
then placed in microwavable containers that can be heated and served
quickly. The menu offers a variety of branded Italian entrees, whole
rotisserie chickens, chicken dinners, sandwich roll-ups, sandwiches and
salad entrees.
The Company believes that the availability of the HOMEfood MARKET was
instrumental in the Company obtaining its contract with Priceline.com in
Norwalk, CT. The HOMEfood MARKET provides Priceline's daytime employees
the opportunity to have a pre-cooked meal for dinner and its late shift
employees with a complete meal.
The Company believes that variety and freshness are the primary
factors influencing customer satisfaction and frequency of visits.
Accordingly, the Company continually evaluates the HOMEfood MARKET menu in
an attempt to maximize the success of the program.
MAJOR CONTRACTS
The Company has a number of large, multi-year contracts among its
thirty-five (35) separate customers. Some of the larger contracts include
Pitney Bowes, Inc., of Stamford, Connecticut (currently 6 locations with
over 4,500 employees), Oxford Health Plans, Inc., of White Plains, New York
(currently 5 locations with over 4,000 employees), Ft. James Paper Co., of
Norwalk, Connecticut (with over 1,000 employees) and Stanley Works of New
Britain, Connecticut and East Greenwich, Rhode Island (with over 5,700
employees).
In 1995, the Company entered into a contract with the town of Hamden,
Connecticut to manage a banquet facility and club bar at the Laurel View
Country Club, a full service country club and golf course. Laurel View
provides an excellent location for large banquet service events such as
weddings, class reunions and other large events. Revenues from this
facility increase significantly in the summer months due to weddings and
golfing events. The Company's original one-year contract was extended for
a three-year period commencing June 1996. The Company is currently
negotiating with the Town of Hamden for a new contract and anticipates
continuing as the manager of this facility.
RECENT DEVELOPMENTS
During the fiscal year ended June 30, 2000, the Company opened sixteen
new dining facilities, most of which offer dining, catering, coffee and
snack services, and vending machines. The
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Company's clients include Stanley Products, Bayer Pharmaceuticals, Oxford
Health Plans, Priceline.com, New York City Housing Authority, Stolt-Nielson
Transportation Group, Konover and Associates, and Trumpf, Inc.. Of the
sixteen centers, eleven are located in Connecticut, two are located in
Rhode Island and New Hampshire, one in New Jersey and one in New York City.
At Priceline.com, the internet service that lets you "name your own price",
the Company provides a dinner meal in addition to breakfast and lunch.
Priceline.com stated that one of the major reasons for choosing the Company
was because of the Company's Homefood Market program.
The tremendous growth from opening these new centers is a reflection
of the Company's continued commitment and focus on growing its business
into a dominant provider of quality corporate dining solutions.
The Company was featured in several articles during the year ended
June 30, 2000. In the November, 1999 issue of the Food Management magazine,
the Company's HOMEfood MARKET program was featured. The February 28, 2000
issue of Nation's Restaurant News included an article - "dot.com dining"
which details the Company's corporate dining facility services and HOMEfood
MARKET program. The March, 2000 issue of Total Food Service announced the
opening of the corporate dining facility at Konover & Associates in
Farmington, Connecticut. On March 15, 2000, the Food Service Director
listed the Company in its 1999 results of "How Contract Firms are
Performing." The Company had the highest growth rate of the firms listed
at 62%. On April 5, 2000, the New Haven Register featured the Company in
an article in the business section of the newspaper as "a Hamden firm in
national spotlight." Management believes that these articles indicate that
the food service industry recognizes the Company's level of expertise and
reputation for quality delivery of corporate dining facility solutions.
On July 31, 2000, the Company purchased all of the issued and
outstanding shares of Lindley Food Service Corporation (Lindley), resulting
in a total purchase price, including acquisition costs, of approximately
$5,700,000 consisting of $3.7 million in cash and 198,122 shares of the
Company's "restricted" Common Stock. The acquisition was partially
financed by a $2,500,000 five-year term loan. Lindley is engaged in the
preparation of meals for various governmental programs primarily under
fixed-price contracts. Lindley provides unitized meals which are prepared
fresh and delivered to the customer distribution centers. The acquisition
was accounted for using the purchase method of accounting and, accordingly,
the purchase price has been allocated to the assets purchased and the
liabilities assumed based upon their fair values at the date of
acquisition. The excess of the purchase price over the fair value of the
net assets acquired was approximately $4,542,000, and has been recorded as
goodwill. Historically, Lindley has demonstrated consistent profitability
along with high operating margins. The senior management of Lindley is
responsible for its past success and is now part of the Company's
management team. The Company's management team is focused and committed to
achieving long-term sustainable growth and profitability.
ACQUISITION STRATEGY
The Company believes there are significant opportunities to further
expand its business through the acquisition of companies in the contract
food service industry, particularly in the education and corporate dining
markets. The Company's Officers and Directors are responsible for
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identifying, pursuing and negotiating potential acquisition candidates and
integrating acquired operations. The Company believes it can integrate
such companies into the Company's management structure and diversify
operations successfully without a significant increase in general and
administrative expenses. In addition, future acquisitions are expected to
enable the Company to lower overhead costs through centralized geographical
office operations and to grow to a size so that the Company qualifies for
bids on larger volume quality accounts that require asset or purchase
programs. There can be no assurance, however, that the Company's
acquisition strategy will be successful.
COMPETITION
The Company encounters significant competition in each area of the
contract food service market in which it operates. Food service companies
compete for clients on the basis of quality and service standards, local
economic conditions, innovative approaches to food service facility design
and maximization of sales and price (including the making of loans,
advances and investments in client facilities and equipment). Competition
may result in price reductions, decreased gross margins and loss of market
share. Certain of the Company's competitors compete with the Company on a
national basis and have greater financial and other resources than the
Company. In addition, existing or potential clients may elect to "self
operate" their food service, eliminating the opportunity for the Company to
compete for the account. There can be no assurance that the Company will
be able to compete successfully in the future or that competition will not
have a material adverse effect on the Company's business, financial
condition or results of operations.
GOVERNMENT REGULATION
The Company's business is subject to various governmental regulations
including environmental, employment and safety regulations. In addition,
the Company is subject to state health department regulations and yearly
inspections. Food service operations at the various locations are subject
to various sanitation and safety standards, and state and local licensing
of the sale of food products. Cost of compliance with these various
regulations is not material; however, there can be no assurance that
additional federal and state legislation or changes in regulatory
environment will not limit the activities of the Company in the future or
increase the cost of regulatory compliance.
In addition, the Company has a liquor license at its Laurel View
facility and, accordingly is subject to the liquor license requirements in
the state of Connecticut. Typically, liquor licenses must be renewed
annually and may be revoked or suspended for cause at any time. Alcoholic
beverage control regulations relate to numerous aspects of the Company's
operations, including minimum age of patrons and employees, hours of
operation, advertising, wholesale purchasing, inventory control and
handling, and storage and dispensing of alcoholic beverages. The Company
has not encountered any material problems relating to its liquor license to
date. The failure to retain the liquor license at Laurel View could
adversely affect the Company's business and ability to obtain such a
license elsewhere.
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The Company is also subject to the "dram-shop" statute in Connecticut.
This type of statute generally provides to a person injured by an
intoxicated person the right to recover damages from an establishment which
wrongfully served alcoholic beverages to the intoxicated individual. The
Company carries liquor liability coverage as part of its existing
comprehensive general liability insurance which it believes is adequate.
While the Company maintains such insurance, there can be no assurance that
such insurance will be adequate to cover any potential liability or that
such insurance will continue to be available on commercially acceptable
terms. See "RISK FACTORS - Government Regulation."
CERTAIN RISKS RELATING TO THE COMPANY
RETENTION AND RENEWAL OF CUSTOMER CONTRACTS. The Company's success
depends on its ability to retain and renew existing client contracts and to
obtain and successfully negotiate new client contracts. Certain of the
Company's corporate dining contracts representing approximately 42% of the
Company's annual sales are from two major customers. There can be no
assurance that the Company will be able to retain and renew existing client
contracts or obtain new contracts or that such contracts will be
profitable. The Company's failure to retain and renew existing contracts
or obtain new contracts could have a material adverse effect on the
Company's business, financial condition and results of operations.
INVESTMENT IN CLIENT CONTRACTS. Typically the Company is required to
invest a substantial amount of money in a client's facility for equipment
and initial start-up expenses. Historically, the Company has funded these
expenditures from cashflow and short-term borrowings. To the extent the
Company is unable to be reimbursed for a part of these costs or enter into
long-term contracts or is unable to retain existing clients, the Company
could experience short-term cashflow problems or be required to seek
additional outside financing. Additional financing may not be available on
favorable terms or at all.
DEPENDENCE ON BUILDING OWNERS TO RETAIN TENANTS. The Company's
customers consist primarily of tenants in large office complexes and
buildings in the northeastern United States. Accordingly, the Company is
dependent, in a large part, on the building owners to attract and retain
quality tenants by offering competitive rental rates, favorable locations
and adequate maintenance services. To the extent these entities fail to
provide a favorable rental atmosphere and retain existing tenants, the
Company may lose customers, revenues, and potentially a food service
contract irrespective of the quality of its food service facility. If the
Company were to lose customers due to building vacancies, it could have an
adverse material effect on the Company's operations and financial condition.
FLUCTUATING FOOD PRICES AND SHORTAGES. The Company is subject to
fluctuating food prices and availability of certain food items which varies
by location. Although the Company's contracts with its clients allow for
certain adjustments due to rising prices over a specified period of time,
often times the Company must take a reduced margin to insure the
availability of certain required food groups and avoid customer
dissatisfaction. Although most shortages last only a short period of time,
shortages in certain items may adversely affect the quality and variety of
food offered at a given location. The Company attempts to anticipate
shortages by centralized buying for its various
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locations, by placing large orders with reliable suppliers and following
trends in product availability and price.
COMPETITION IN TAKE-HOME PREPARED MEAL MARKET; DEPENDENCE ON CUSTOMERS
WITH DISPOSABLE INCOME. At certain of its locations, the Company offers
tenant employees the opportunity to purchase fully cooked homestyle meals
which can be served at home with little or no additional preparation. The
Company's fully prepared, take home meals compete with many other forms of
home replacement meals, including a variety of ethnic foods. The Company's
take home meals are generally purchased by upper middle class employees who
have the disposable income to purchase such meals. If a down turn in the
economy were to occur, it is likely that this source of revenues would be
adversely affected.
DEPENDENCE ON KEY PERSONNEL. The Company's future success depends to
a significant extent on the efforts and abilities of its founders and
executive Officers, Geoffrey W. Ramsey and David J. Murphy. Although the
Company has five (5) year employment agreements with these two individuals,
the loss of the services of these individuals could have a material adverse
effect on the Company's business, financial condition and results of
operations. The Company believes that its future success also will depend
significantly upon its ability to attract, motivate and retain additional
highly skilled managerial personnel. Competition for such personnel is
intense, and there can be no assurance that the Company will be successful
in attracting, assimilating and retaining the personnel it requires to grow
and operate profitability. On July 21, 1998, the Company obtained a
$1,000,000 key man life insurance policy on Messrs. Ramsey and Murphy, of
which the Company will be the beneficiary.
LABOR SHORTAGES. From time to time, the Company must hire and train
a number of qualified food service managers and temporary workers to
provide food service at a new corporate location or scheduled events at the
Laurel View Country Club and other locations. The Company may encounter
difficulty in hiring sufficient numbers of qualified individuals to staff
these events, which could have a material adverse effect on its business,
financial condition and results of operations. These shortages occur most
often during the summer months when a large number of events are planned at
the Laurel View Country Club.
COMPETITION. The Company encounters significant competition in each
area of the contract food service market in which it operates. Certain of
the Company's competitors compete with the Company on both a national and
local basis and have significantly greater financial and other resources
than the Company. Competition may result in price reductions, decreased
gross margins and loss of market share. In addition, existing or potential
clients may elect to "self operate" their food service, thereby eliminating
the opportunity for the Company to compete for the account. There can be
no assurance that the Company will be able to compete successfully in the
future or that competition will not have a material adverse effect on the
Company's business, financial condition or results of operations.
INFLATION RISK. Although most of the Company's contracts provide for
minimum annual price increases for products and services provided by the
Company, the Company could be adversely
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<PAGE>
impacted during inflationary periods if the rate of contractual increases
are lower than the inflation rate.
ACQUISITION RISKS. A component of the Company's strategy is to pursue
acquisitions of related businesses. There can be no assurance, however,
that the Company will be able to identify, negotiate and consummate
acquisitions or that acquired businesses can be operated profitably or
integrated successfully into the Company's operations. In addition,
acquisitions by the Company are subject to various risks generally
associated with the acquisition of businesses, including the financial
impact of expenses associated with the integration of acquired businesses.
There can be no assurance that the Company's historic or future
acquisitions will not have an adverse impact on the Company's business,
financial condition or results of operations. If suitable opportunities
arise, the Company anticipates that it would finance future acquisitions
through available cash, bank lines of credit or through additional debt or
equity financing. There can be no assurance that such debt or equity
financing would be available to the Company on acceptable terms when, and
if, suitable strategic opportunities arise. If the Company were to
consummate one or more significant acquisitions in which part or all of the
consideration consisted of equity, stockholders of the Company could suffer
a significant dilution of their interests in the Company. In addition,
many of the acquisitions the Company is likely to pursue, if accounted for
as a purchase, would result in substantial amortization charges to the Company.
GOVERNMENT REGULATION. The Company's business is subject to various
governmental regulations incidental to its operations, such as
environmental, employment, and health and safety regulations. The Company
also holds a liquor license at one facility and is subject to the liquor
license requirements of the state of Connecticut, including its "dram-shop"
statute. "Dram-shop" statutes generally provide a person injured by an
intoxicated person the right to recover damages from an establishment that
wrongfully served alcoholic beverages to the intoxicated person. While the
Company maintains insurance for such liability, there can be no assurance
that such insurance will be adequate to cover any potential liability or
that such insurance will continue to be available on commercially
acceptable terms. The loss of its liquor license could have a material
adverse effect on the Company's business, financial condition or results of
operations. There can be no assurance that additional federal or state
regulation would not limit the activities of the Company in the future or
significantly increase the cost of regulatory compliance.
EFFECTIVE CONTROL BY CURRENT OFFICERS AND DIRECTORS AND SIGNIFICANT
SALES BY OFFICERS AND DIRECTORS COULD HAVE A NEGATIVE IMPACT ON SHARE
PRICE. The Company's current Officers, Directors and family members
beneficially own approximately 66.6% of the voting Common Stock and voting
Series A Preferred Stock outstanding. The Company's Articles of
Incorporation do not authorize cumulative voting in the election of
directors and as a result, the Company's Officers and Directors currently
are, and in the foreseeable future will continue to be, in a position to
have a significant impact on the outcome of substantially all matters on
which shareholders are entitled to vote, including the election of
Directors. In addition, based on the large number of shares currently
owned by management, any sales of significant amounts of shares by the
Company's Officers and Directors, or the prospect of such sales, could
adversely affect the market price of the Company's Common Stock. All
Officers and Directors are currently subject to five-year lock-up
agreements which commenced in July 1998 with respect to certain of their
shares. In addition, these individuals,
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<PAGE>
if and when they sell their shares, are subject to the volume limitations
imposed by Rule 144 with respect to sales by affiliates.
NO DIVIDENDS. The Company has paid no cash dividends on its Common
Stock and has no present intention of paying cash dividends in the
foreseeable future. It is the present policy of the Board of Directors to
retain all earnings to provide for the growth of the Company. Payment of
cash dividends in the future will depend, among other things, upon the
Company's future earnings, requirements for capital improvements, the
operating and financial conditions of the Company and other factors deemed
relevant by the Board of Directors.
HISTORICALLY THE COMPANY'S STOCK PRICE HAS BEEN VOLATILE, WHICH MAY
MAKE IT MORE DIFFICULT TO RESELL SHARES AT PRICES THAT ARE ATTRACTIVE. The
trading price of the Company's Common Stock and Warrants has been and may
continue to be subject to wide fluctuations. The Company's stock price may
fluctuate in response to a number of events and factors, such as quarterly
variations in operating results, announcements of management innovations or
new customer accounts and acquisitions by the Company or its competitors,
changes to financial estimates and recommendations by securities analysts,
the operating and stock price performance of other companies that investors
may deem comparable, and news reports relating to trends in the Company's
markets. In addition, the stock market in general, and the market prices
for related companies in particular, have experienced volatility that often
has been unrelated to the operating performance of such companies. These
broad market and industry fluctuations may adversely affect the price of
the Company's stock, regardless of its operating performance.
ANTI-TAKEOVER PROVISIONS COULD MAKE IT MORE DIFFICULT FOR A THIRD
PARTY TO ACQUIRE THE COMPANY. The Company's Board of Directors has the
authority to issue up to 20,000,000 shares of preferred stock and to
determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action
by the stockholders. The rights of the holders of common stock may be
subject to, and may be adversely affected by, the rights of the holders of
any preferred stock that may be issued in the future. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change of control of the Company without further action by the stockholders
and may adversely affect the voting and other rights of the holders of
common stock. The Company has no present plans to issue shares of
preferred stock. Further, certain provisions of the Company's charter
documents, including provisions eliminating the ability of stockholders to
raise matters at a meeting of stockholders without giving advance notice,
may have the effect of delaying or preventing changes in control or
management of the Company. In addition, the Company's charter documents do
not permit cumulative voting, which may make it more difficult for a third
party to gain control of our Board of Directors.
NASDAQ MAINTENANCE REQUIREMENTS AND EFFECTS OF POSSIBLE DELISTING;
RISKS RELATED TO LOW-PRICED STOCKS. Although the Company's Common Stock
and Warrants are listed on the Nasdaq Small-Cap Market, the Company must
continue to meet certain maintenance requirements in order for such
securities to continue to be listed on Nasdaq. Nasdaq has implemented new
entry and maintenance requirements for companies traded on the Nasdaq
Small-Cap Market, including increased financial standards and requiring the
companies to have at least two independent directors and an audit
committee, a majority of which are independent directors. There can be no
assurance
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<PAGE>
that the Company will continue to meet such new requirements. If the
Company's securities are delisted from Nasdaq, this could restrict
investors' interest in the Company's securities and could materially and
adversely affect any trading market and prices for such securities. In
addition, if the Company's securities are delisted from Nasdaq, and if the
Company's net tangible assets do not exceed $2 million, and if the Common
Stock is trading for less than $5.00 per share, then the Company's Common
Stock and Warrants would each be considered a "penny stock" under federal
securities law. Additional regulatory requirements apply to trading by
broker-dealers of penny stocks which could result in the loss of effective
trading markets, if any, for the Company's Common Stock and Warrants.
RISK OF LOW-PRICED STOCKS. If the Company's Securities were delisted
from Nasdaq, and no other exclusion from the definition of a "penny stock"
under applicable Securities and Exchange Commission regulations was
available, such Securities would be subject to the penny stock rules. A
"penny stock" is defined as a stock that has a price of $5.00 or less. The
rules relating to "penny stocks" impose additional sales practice
requirements on broker-dealers who sell such securities to persons other
than established customers and accredited investors (generally defined as
investors with net worth in excess of $1,000,000 or annual income exceeding
$200,000, or $300,000 together with a spouse). For example, the broker-
dealer must deliver to its customer prior to effectuating any transaction,
a risk disclosure document which sets forth information as to the risks
associated with "penny stocks," information as to the salesperson,
information as to the bid and ask prices of the "penny stock," the
importance of the bid and ask prices to the purchaser, and investor's
rights and remedies if the investor believes he/she has been defrauded.
Also, the broker-dealer must disclose to the purchaser its aggregate
commission received on the transaction, current quotations for the
securities and monthly statements which provide information as to market
and price information. In addition, for transactions covered by these
rules, the broker-dealer must make a special suitability determination for
the purchase and must have received the purchaser's written consent to the
transaction prior to sale. Consequently, delisting from Nasdaq, if it were
to occur, could affect the ability of broker-dealers to sell the Company's
Securities and the ability of purchasers in the Offering to sell their
Securities in the secondary market.
RESTRICTIONS ON EXERCISE OF WARRANTS; POSSIBLE REDEMPTION OF WARRANTS.
Investors owning Warrants may not be able to exercise the Warrants unless
at the time of exercise, there is a current Registration Statement, or a
new registration statement registering the Common Stock issuable upon
exercise of the Warrants is effective and such shares have been registered
and/or qualified or deemed to be exempt from registration and/or
qualification under the securities laws of the state of residence of the
holder of the Warrants. The Company does not intend to advise holders of
the Warrants of their inability to exercise the Warrants other than in
response to a specific written inquiry to the Company. The value of the
Warrants may be greatly reduced if a current registration statement
covering the shares of Common Stock underlying the Warrants is not
effective or if such Common Stock is not registered or exempt from
registration in the states in which the holders of the Warrants reside.
The Warrants are subject to redemption by the Company on 30 days prior
written notice provided that the daily trading price for the shares is
above $10.00 for at least 30 consecutive trading days ending within ten
days prior to the date of the notice of redemption. If the Warrants are
redeemed, Warrant holders will lose their right to exercise the Warrants
except during such 30 day
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<PAGE>
redemption period. Any redemption of the Warrants during the one-year
period commencing on July 21, 1998 shall require the written consent of the
Underwriter.
PRINCIPAL PRODUCTS PRODUCED AND SERVICE RENDERED AND PRINCIPAL
MARKETS. The Company is a contract food management organization which
specializes in providing full service restaurant and employee dining,
special event catering, vending and office coffee service to business and
industry accounts located in the Northeast. The Company will seek to open
other geographical markets during the upcoming fiscal year.
STATUS OF NEW PRODUCTS OR INDUSTRY SEGMENTS. The Company has not
announced a new product or industry segment which would require the
investment of a material amount of the Company's assets, or which otherwise
is material. However with the acquisition of Lindley, the Company will now
offer fixed price meals to governmental agencies such as schools and other
governmental institutions. The Company anticipates this new product line
to significantly add to our current operations.
SOURCES AND AVAILABILITY OF RAW MATERIALS. The Company, as a
service orientated entity, is not dependant on the availability of raw
materials. However, the Company is dependant on the availability of
qualified, trained manpower.
PATENTS, TRADEMARKS, LICENSES, FRANCHISES AND CONCESSIONS. The
Company does not own any patents, trademarks, licenses, franchises, or
concessions.
SEASONAL NATURE OF BUSINESS. The Company's business is somewhat
seasonal in nature. Many of the Company's corporate customers are less
busy in the summer months due to vacation schedules of their employees and
shift reductions. Special events catering tends to peak at various times
of the year depending on corporate meetings, holiday parties and the
frequency of weddings and special events. The Company adjusts its labor
staffing and inventories as necessary during these periods.
MAJOR CUSTOMERS. The following table sets forth information
concerning customers, or any group of customers under common control, or
customers which are affiliates of each other, to which sales were made by
the Company during the fiscal year ended June 30, 2000, in an amount which
equals 10% or more of the Company's revenue and the Company's relationship
to each:
RELATIONSHIP PERCENT
TO AMOUNT OF OF TOTAL
CUSTOMER COMPANY REVENUE REVENUE
-------- ------- ------- -------
Pitney Bowes, Inc. None $2,263,788 18%
Oxford Health Plans, Inc. None $2,265,277 18%
The Company believes that if it should lose any of its present major
customers, such loss would have a material adverse effect on the Company.
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<PAGE>
RENEGOTIATION OR TERMINATION OF GOVERNMENTAL CONTRACTS. Except
for liquor licenses discussed below, no portion of the Company's business
is subject to renegotiation of profits or termination of contracts or
subcontracts at the election of the Government.
COMPETITION. The Company encounters significant competition in
each area of the contract food service market in which it operates.
Certain of the Company's competitors compete with the Company on both a
national and local basis and have significantly greater financial and other
resources than the Company. Competition may result in price reductions,
decreased gross margins and loss of market share. In addition, existing or
potential clients may elect to "self operate" their food service, thereby
eliminating the opportunity for the Company to compete for the account.
There can be no assurance that the Company will be able to compete
successfully in the future or that competition will not have a material
adverse effect on the Company's business, financial condition or results of
operations.
RESEARCH AND DEVELOPMENT. The Company has not engaged and does
not currently engage in any research and development activities.
GOVERNMENT REGULATION. The Company's business is subject to
various governmental regulations incidental to its operations, such as
environmental, employment, and health and safety regulations. The Company
also holds a liquor license at one facility and is subject to the liquor
license requirements of the state of Connecticut, including its "dram-shop"
statute. "Dram-shop" statutes generally provide a person injured by an
intoxicated person the right to recover damages from an establishment that
wrongfully served alcoholic beverages to the intoxicated person. While the
Company maintains insurance for such liability, there can be no assurance
that such insurance will be adequate to cover any potential liability or
that such insurance will continue to be available on commercially
acceptable terms. The loss of its liquor license could have a material
adverse effect on the Company's business, financial condition or results of
operations. There can be no assurance that additional federal or state
regulation would not limit the activities of the Company in the future or
significantly increase the cost of regulatory compliance.
EMPLOYEES. As of September 15, 2000, the Company has 251 full-
time employees, including Geoffrey Ramsey, David Murphy and Anne Ramsey,
Officers and Directors of the Company and 24 part-time employees employed
for special occasions and seasonal busy times. None of the Company's
employees are represented by a union. Lindley, the Company's wholly-owned
subsidiary, has 67 full-time employees including its founders, Mark Cerreta
and Gilbert Rossomando, and 7 part-time employees. In addition, the
Company employs district managers with strong sales and administrative
backgrounds. These managers are responsible for overseeing the accounts in
their region, as well as forecasting the budget for each account and
assisting each district manager as a food service director in each
cafeteria. The food service director is responsible for the day-to-day
activities of the account. In the smaller accounts, a chef/manager will
perform these duties. The supporting cast in each cafeteria may include an
executive chef, sous chef, grill cook, deli servers, cashiers, dishwashers,
catering personnel and general kitchen help.
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<PAGE>
The hiring philosophy for the Company is to employ managers, chefs and
cooks who have obtained experience from larger food service organizations,
graduates of a culinary school or graduates with a degree in Hotel and
Restaurant management. Other employees are hired locally and are trained
on-site by the Company's food service directors, chef/managers and/or
district mangers.
Item 2. DESCRIPTION OF PROPERTIES
-----------------------------------
The Company leases its office facility under the terms of a month-to-
month lease agreement with a monthly payment of $2,875. The Company also
maintains food service facilities at a number of locations pursuant to its
contracts with the building owners. Lindley leases its office facility
pursuant to a five (5) year lease which commenced on April 1, 2000 with a
monthly payment of $10,831. Lindley leases this facility from Messrs.
Cerreta and Rossomando, affiliates of the Company. The Company believes
this lease is on terms competitive with other similar facilities in
Bridgeport, Connecticut. In addition, the Company also pays monthly rental
charges of $2,675 to the Town of Hamden for use of the Laurel View Country
Club food service and banquet facility.
Item 3. LEGAL PROCEEDINGS
---------------------------
The Company knows of no pending or threatened legal proceeding to
which it is or will be a party which, if successful, might result in a
material adverse change in the business, properties, or financial condition
of the Company or its subsidiaries.
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
-----------------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal June 2000. The Company anticipates holding its
Annual Shareholders Meeting on November 21, 2000 for the election of
Directors and such other matters as may properly come before the meeting.
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<PAGE>
PART II
Item 5. MARKET PRICE AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY AND
-----------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS
---------------------------
The Company's Common Stock is quoted on the NASDAQ Small Cap Market
System under the symbol CAFE. The following table sets forth the range of
high and low closing sales prices for the last two fiscal years and for
each period indicated.
2000 1999
-------------- --------------
High Low High Low
--------------------------------------------
First Quarter $3.38 $2.00 $5.88 $2.00
Second Quarter $4.38 $3.06 $2.63 $1.81
Third Quarter $5.38 $3.43 $2.75 $1.25
Fourth Quarter $5.75 $3.88 $2.75 $1.88
The Company's Warrants to purchase Common Stock are quoted on the
NASDAQ Small Cap Market System under the symbol CAFEW. The following table
sets forth the range of high and low closing sales prices for the last two
fiscal years and for each period indicated.
2000 1999
-------------- --------------
High Low High Low
--------------------------------------------
First Quarter $0.5625 $0.25 $1.31 $0.28
Second Quarter $0.895 $0.375 $0.75 $0.28
Third Quarter $1.3425 $0.75 $0.625 $0.25
Fourth Quarter $1.3125 $0.875 $0.562 $0.25
The Company had approximately 665 stockholders of record as of
September 15, 2000. The Company has not declared or paid any cash
dividends on its Common Stock and presently intends to retain its future
earnings, if any, to fund the development and growth of its business and,
therefore, does not anticipate paying any cash dividends in the foreseeable
future.
The Company made the following unregistered sales of the Company's
common Stock during July 2000 in connection with its acquisition of Lindley.
<TABLE>
<CAPTION>
Name of Persons or Class of
Transaction Amount of Underwriter or Consideration Persons to Whom the Exemptions from
Date Securities Sold Placement Agent Received Securities Were Sold Registration Claimed
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
7/31/00 198,122 Shares None (1) Shareholders of Lindley Section 4(2) of the
Foods Services, Inc. Securities Act of 1933,
as amended
</TABLE>
(1) The shares were issued to the two principals of Lindley pursuant to
the Share Purchase Agreement between the Company and the two (2)
Lindley shareholders dated July 31, 2000.
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<PAGE>
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The following review should be read in conjunction with the financial
statements and notes thereto.
FORWARD-LOOKING STATEMENTS MAY NOT PROVE ACCURATE
Statements made in this report which are not based on historical facts
are forward-looking and, accordingly, involve risks and uncertainties that
could cause actual results to differ materially from those discussed.
Forward-looking statements may be identified by the use of forward-looking
words such as "believes," "may," "intends," "anticipates," "plans,"
"estimates" and analogous or similar expressions. Any forward-looking
statements are intended to be as of the date on which such statement is
made. In connection with the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, we are providing a number of
important factors that could cause actual results to differ materially from
provided forward-looking information. These important factors include
future economic conditions in the regional and national markets, state and
federal regulation, financial market conditions (including, but not limited
to, changes in interest rates), inflation rates, increased competition
(including, but not limited to, the entry of new competitors), ability to
carry out marketing and sales plan, ability to achieve planning goals,
ability to enter new markets successfully and capitalize on growth
opportunities, adverse changes in applicable laws, regulations or rules
governing the food service industry and tax or accounting matters. This
list of factors may not be all-inclusive since it is not possible for us to
predict all possible factors.
RECENT DEVELOPMENTS
During the fiscal year ended June 30, 2000, the Company opened sixteen
new dining facilities most of which offer dining, catering, coffee, snack
services, and vending. The clients include Stanley Products, Bayer
Pharmaceuticals, Oxford Health Plans, Priceline.com, New York City Housing
Authority, Stolt-Nielson Transportation Group, Konover and Associates, and
Trumpf, Inc.. Of the sixteen centers, eleven are located in Connecticut,
two are located in Rhode Island and New Hampshire, one in New Jersey and
one in New York City. At Priceline.com, the internet service that lets you
"name your own price", the Company provides a dinner meal in addition to
breakfast and lunch. Priceline.com stated that one of the major reasons
for choosing the Company was due to its HOMEfood Market program. The
Company is gratified that the evidence of the potential success of this
program is beginning to become apparent.
In August, 1999, the Company determined it would be best to terminate
the contracts at the Twin Rinks and Cummings Center. The Company spent
considerable time and resources attempting to restructure these accounts,
however it was determined by management that it would be more advantageous
to focus the Company's resources on the core business.
The tremendous growth from opening these new centers is a reflection
of the Company's continued commitment and focus on growing the business
into a dominant provider of quality corporate center dining solutions.
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<PAGE>
The Company was featured in several articles during the year ended
June 30, 2000. In the November, 1999 issue of the Food Management magazine,
the Company's HOMEfood MARKET program was prominently featured. The
February 28, 2000 issue of Nation's Restaurant News included an article -
"dot.com dining" which details the Company's corporate dining facility
services and HOMEfood MARKET program. The March, 2000 issue of Total Food
Service announced the opening of the corporate dining facility at Konover
& Associates in Farmington, Connecticut. On March 15, 2000, the Food
Service Director listed the Company in its 1999 results of "How Contract
Firms are Performing". The Company had the highest growth rate of the
firms listed at 62%. On April 5, 2000, the New Haven Register featured the
Company in an article in the business section of the newspaper as "a Hamden
firm in national spotlight." Management believes that these articles
indicate that the food service industry recognizes the Company's level of
expertise and reputation for quality delivery of corporate dining facility
solutions.
On July 31, 2000, the Company purchased all of the issued and
outstanding shares of Lindley Food Service Corporation (Lindley), resulting
in a total purchase price, including acquisition costs, of approximately
$5,700,000. The acquisition was partially financed by a $2,500,000 five-year
term loan. Lindley is engaged in the preparation of meals for various
governmental programs primarily under fixed-price contracts. The
acquisition was accounted for using the purchase method of accounting and,
accordingly, the purchase price has been allocated to the assets purchased
and the liabilities assumed based upon their fair values at the date of
acquisition. The excess of the purchase price over the fair value of the
net assets acquired was approximately $4,542,000, and has been recorded as
goodwill. Historically, Lindley has demonstrated consistent profitability
along with high operating margins. The senior management of Lindley is
responsible for its past success and is now part of the Company's
management team and Mr. Gilbert Rossmando has joined the Company's Board of
Directors in July 2000.
RESULTS OF OPERATIONS - FOR THE YEAR ENDED JUNE 30, 2000 COMPARED TO THE
YEAR ENDED JUNE 25, 1999.
Net revenues aggregated $13,019,800 for the year ended June 30, 2000,
representing an increase of $4,299,522 or 49% over the year ended June 25,
1999. Further, when the net revenues for the year ended June 30, 2000 are
compared with the amount of net revenues two years ago of $7,001,637 for
fiscal 1998 the increase is $6,018,163 or 86%. The Company has continued
an aggressive program of adding new facilities under its food management
programs as well as enhanced revenues at existing facilities. The Company
added sixteen new locations during fiscal year 2000 which accounted for
approximately $3,300,000 of the overall increase. The remaining increase
of approximately $1,000,000 results from expansion of food and vending
items offered for sale as well as continued refining of the mix of products
sold to maximize sales per location.
Cost of sales increased $3,799,913 for the year ended June 30, 2000
when compared to the year ended June 25, 1999, representing an increase
consistent with the percentage increase in net revenues.
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<PAGE>
Selling, general and administrative expenses increased $431,178 or 25%
in fiscal year 2000 when compared to fiscal year 1999. The increase
relates primarily to the hiring of additional employees to support the
expansion of the Company's operation.
RESULTS OF OPERATIONS - FOR THE YEAR ENDED JUNE 25, 1999 COMPARED TO THE
YEAR ENDED JUNE 28, 1998
Net revenues aggregated $8,720,278 for the year ended June 25, 1999,
representing an increase of $1,718,641 or 25% over the year ended June 28,
1998. The Company added eight new locations during fiscal year 1999 which
accounted for approximately $1,500,000 of the overall increase. The
remaining increase of approximately $200,000 results from expansion of food
and vending items offered for sale as well as continued refining of the mix
of products sold to maximize sales per location.
Cost of sales increased $1,459,377 for the year ended June 25, 1999
when compared to the year ended June 28, 1998, representing an increase of
23% consistent with the percentage increase in net revenues.
Selling, general and administrative expenses decreased $2,497,858 or
59% in fiscal year 1999 when compared to fiscal year 1998. The significant
decrease in general and administrative expense is primarily due to a
special stock incentive given to management and directors of $3,500,000
during the year ended June 28, 1998. The remaining increase relates to the
hiring of additional employees to support the growing operation.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity as evidenced by its current ratio has
decreased. The current ratio at June 30, 2000 and June 25, 1999 was 2.67
and 5.61, respectively. This decline is due mainly to the use of working
capital to support the Company's rapid expansion.
Cash flows used in operating activities for the year ended June 30,
2000 amounted to $461,113, primarily resulting from the net loss. Cash
used in investing activities totaled $259,507 and was primarily due to
property and equipment additions at the Company's sixteen new locations.
Cash flows from financing activities amounted to $(149,488) primarily
resulting from the payment of currently due principal of long-term debt.
Cash flows used in operating activities for the year ended June 25,
1999 amounted to $1,364,865 primarily resulting from the net loss and the
payment of liabilities which had accumulated prior to the public offering.
Cash used in investing activities totaled $243,842 and was due to property
and equipment additions at the Company's eight new locations. Cash flows
from financing activities amounted to $4,149,693 primarily resulting from
the net proceeds received from the Company's public stock offering.
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<PAGE>
IMPACT OF THE YEAR 2000 ISSUE
Many computer systems and software programs were written to accept and
process only two digit entry codes for the year when storing dates.
Beginning with the year 2000 these entry codes will need to accept four
digit entries to distinguish 21st century dates from the 20th century
dates. As a result, computer systems and software programs may need to be
updated to solve this problem and avoid incorrect or lost data.
To date the Company has not experienced any material problems
attributable to the inability to recognize dates beginning with the year
2000 in our products or internal systems. The Company faces risks
associated with the year 2000 issue if we encounter undetected errors or
defects. The Company's operations could be adversely affected if systems
do not correctly recognize date information when the year changes to 2000.
The Company faces risks primarily in the following areas:
* systems used by the Company to run our business
including information systems, equipment and facilities;
* systems used by the Company's suppliers; and
* potential warranty or other claims from the Company's customers.
The Company continues to evaluate and mitigate our exposure in these
areas where appropriate.
-23-
<PAGE>
Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-----------------------------------------------------
Information with respect to this item is contained in the financial
statements appearing on Item 14 of this Report. Such information is
incorporated herein by reference.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
-24-
<PAGE>
PART III
The information required by Part III of Form 10KSB is incorporated
herein by reference to Registrant's definitive Proxy to be filed in
connection with the Annual Meeting of Shareholders to be held on
November 21, 2000.
-25-
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
-------------------------------------------------------------------------
(a) (1) The following Financial Statements are filed as part of this Report:
Page
----
Independent Auditors' Report. . . . . . . . . . . . . . . . . . .F-1
Balance Sheets, June 30, 2000 and June 25, 1999 . . . . . . . . .F-2
Statements of Operations, Years ended June 30, 2000 and
June 25, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . .F-3
Statements of Changes in Stockholders' Equity, Years ended
June 30, 2000 and June 25, 1999 . . . . . . . . . . . . . . . . .F-4
Statements of Cash Flows, Years ended June 30, 2000 and
June 25, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . .F-5
Notes to Financial Statements . . . . . . . . . . . . . . . . . .F-6
(a) (2) All schedules have been omitted because the required information
is inapplicable or is shown in the notes to the financial statements.
(a) (3) Exhibits:
1.1 Form of Underwriting Agreement between the Company and Barron
Chase Securities, Inc.(1)
1.2 Form of Selected Dealers Agreement.(1)
1.3 Form of Underwriter's Warrant Agreement and Form of Warrant
Certificate.(1)
3.1 Certificate of Incorporation dated July 31, 1986 and Amendments
thereto.(1)
3.2 Bylaws.(1)
3.3 Form of Specimen Common Stock Certificate.(1)
3.4 Form of Specimen Warrant Certificate.(1)
4.0 Warrant Agreement between the Company and American Securities
Stock Transfer, Inc.(1)
-26-
<PAGE>
10.1 Agreement of Manual and Vending Food and Refreshment Service
between Oxford Health Plans and the Company dated December 28,
1993.(1)
10.2 Agreement for Cafeteria and Special Events Food and Vending
Services with Pitney Bowes, Inc. and the Company dated June 26,
1995.(1)
10.3 Agreement of Manual and Vending Food and Refreshment Service
with James River Paper Company, Inc. and the Company dated July 13,
1990.(1)
10.4 Agreement for Banquet Food and Beverage Services between the
Town of Hamden and the Company dated June 18, 1997.(1)
10.5 Employment Agreement between the Company and Geoffrey W.
Ramsey.(1)
10.6 Employment Agreement between the Company and David J.
Murphy.(1)
10.7 Form of Financial Advisory Agreement.(1)
10.8 Form of Merger and Acquisition Agreement.(1)
10.9 Agreement with Bloomingdales By Mail and the Company dated
January 1998.(1)
10.10 Agreement with New Leaf Cafe and the Company dated March 1998.(1)
10.11 Agreement with Tyco Submarine Systems Ltd. and the Company
dated March 24, 1998.(1)
10.12 Agreement with Tyco Submarine Systems Ltd. and the Company
dated May 1, 1998.(1)
10.13 Agreement between RivCan and the Company dated August 3, 1998.(2)
10.14 Adoption Agreement to the Host America Corporation Defined
Contribution And Trust Agreement Form 401(K) Plan.(3)
10.15 Agreement for Food Services with Casual Corner Group, Inc. and
the Company dated October 30, 1998.(5)
10.16 Food Services Agreement with The Stanley Works and the Company
dated August 20, 1999.(5)
10.17 Share Purchase Agreement between Host America Corporation,
Lindley Food Service Corporation, and Gilbert J. Rossomando and
Mark J. Cerreta, dated July 31, 2000.(4)
-27-
<PAGE>
10.18 Non-Competition, Non-Solicitation and Employment Agreement
between Host America Corporation and Gilbert J. Rossomando,
August 1, 2000. (4)
10.19 Non-Competition, Non-Solicitation and Employment Agreement
between Host America Corporation and Mark J. Cerreta, dated
August 1, 2000. (4)
10.20 Registration Rights Agreement between Host America Corporation
and Gilbert J. Rossomando and Mark J. Cerreta, dated July 31,
2000. (4)
10.21 Agreement for Food Service with Crown Milford LLC dated
August 20, 1999.(6)
10.22 Agreement for Food Services with Priceline.com Incorporated
dated November 15, 1999.(6)
10.23 Agreement for Food Services with Trumpf, Inc. dated September 30,
1999. (6)
10.24 Agreement for Food Services with Munson Road, LLC Dated
February 17, 2000.(6)
10.25 Lease Agreements with Metro Four Associates dated September 30,
1999.(6)
24.1 Consent of DiSanto Bertoline & Company, P.C.(6)
27.1 Financial Data Schedule.(6)
________________
(1) The documents identified are incorporated by reference from the
Company's Registration Statement on Form SB-2 (No. 333-50673).
(2) The documents identified are incorporated by reference from the
Company's Form10KSB dated June 28, 1998.
(3) The documents identified are incorporated by reference from the
Company's January 4, 1999 Form S-8.
(4) The documents identified are incorporated by reference from the
Company's July 31, 2000 Form 8-K.
(5) The documents identified are incorporated by reference from the
Company's Form 10KSB dated June 25, 1999.
(6) Filed herewith.
(b) Reports on Form 8-K:
On August 7, 2000, the Company filed an 8-K with the SEC for the
acquisition of Lindley Food Services Corporation.
-28-
<PAGE>
HOST AMERICA CORPORATION
FINANCIAL STATEMENTS
AS OF JUNE 30, 2000 AND JUNE 25, 1999
TOGETHER WITH
INDEPENDENT AUDITORS' REPORT
<PAGE>
HOST AMERICA CORPORATION
TABLE OF CONTENTS
PAGE
----
INDEPENDENT AUDITORS' REPORT F1
FINANCIAL STATEMENTS
Balance Sheets F2
Statements of Operations F3
Statements of Changes in Stockholders' Equity F4
Statements of Cash Flows F5
Notes to Financial Statements F6
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Host America Corporation
We have audited the accompanying balance sheets of Host America Corporation
(the Company) as of June 30, 2000 and June 25, 1999, and the related
statements of operations, changes in stockholders' equity, and cash flows
for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Host America
Corporation as of June 30, 2000 and June 25, 1999, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ DiSanto Bertoline & Company, P.C.
Glastonbury, Connecticut
August 21, 2000
-F1-
<PAGE>
HOST AMERICA CORPORATION
BALANCE SHEETS
JUNE 30, 2000 AND JUNE 25, 1999
ASSETS
<TABLE>
<CAPTION>
June 30, 2000 June 25, 1999
---------------- ----------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,720,407 $ 2,590,515
Accounts receivable, net of allowance for
doubtful accounts of $21,000 at June 30, 2000
and June 25, 1999 934,202 447,191
Inventory 258,977 221,704
Prepaid expenses and other 152,588 137,787
------------ ------------
Total current assets 3,066,174 3,397,197
PROPERTY AND EQUIPMENT, net 670,263 516,363
------------ ------------
$ 3,736,437 $ 3,913,560
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 145,035 $ 126,601
Accounts payable 690,532 362,527
Accrued expenses 313,452 116,450
------------ ------------
Total current liabilities 1,149,019 605,578
LONG-TERM DEBT, less current portion included above 152,162 219,075
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value,
20,000,000 shares authorized 700 700
Common stock, $.001 par value,
80,000,000 shares authorized 1,139 1,130
Additional paid-in capital 7,546,566 7,526,175
Deficit (5,113,149) (4,439,098)
------------ ------------
Total stockholders' equity 2,435,256 3,088,907
------------ ------------
$ 3,736,437 $ 3,913,560
============ ============
</TABLE>
The accompanying notes are an integral part of these
financial statements.
-F2-
<PAGE>
HOST AMERICA CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2000 AND JUNE 25, 1999
<TABLE>
<CAPTION>
For the years ended
-----------------------------------
June 30, 2000 June 25, 1999
---------------- ----------------
<S> <C> <C>
NET REVENUES $ 13,019,800 $ 8,720,278
COST OF GOODS SOLD 11,652,380 7,852,467
------------ ------------
Gross profit 1,367,420 867,811
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,138,667 1,707,489
------------ ------------
Loss from operations (771,247) (839,678)
OTHER INCOME (EXPENSE)
Other, net 129,481 148,385
Interest expense (32,285) (28,589)
------------ ------------
97,196 119,796
------------ ------------
Loss before provision for income taxes (674,051) (719,882)
PROVISION FOR INCOME TAXES - -
------------ ------------
Net loss $ (674,051) $ (719,882)
============ ============
LOSS PER COMMON SHARE $ (0.59) $ (0.69)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 1,136,712 1,039,590
============ ============
</TABLE>
The accompanying notes are an integral part of these
financial statements.
-F3-
<PAGE>
HOST AMERICA CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2000 AND JUNE 25, 1999
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Total
-------------------- -------------------- Paid-in Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
-------- -------- -------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
June 28, 1998 700,000 $ 700 130,000 $ 130 $ 3,744,258 $(3,719,216) $ 25,872
Issuance of common
stock and warrants
in connection with
public offering, net
of issuance costs
of $634,146 - - 1,000,000 1,000 3,718,917 - 3,782,917
Net loss - - - - - (719,882) (719,882)
-------- ------- ---------- --------- ----------- ----------- -----------
Balance,
June 25,1999 700,000 700 1,130,000 1,130 7,526,175 (4,439,098) 3,088,907
Issuance of common
stock - - 8,895 9 20,391 - 20,400
Net loss - - - - - (674,051) (674,051)
-------- ------- ---------- --------- ----------- ----------- -----------
Balance,
June 30, 2000 700,000 $ 700 1,138,895 $ 1,139 $ 7,546,566 $(5,113,149) $ 2,435,256
======== ======= ========== ========= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
-F4-
<PAGE>
HOST AMERICA CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2000 AND JUNE 25, 1999
<TABLE>
<CAPTION>
For the years ended
-----------------------------------
June 30, 2000 June 25, 1999
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (674,051) $ (719,882)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 227,016 134,880
Changes in operating assets and liabilities:
Increase (decrease) in accounts payable 328,005 (507,476)
Increase (decrease) in accrued expenses 197,002 (168,410)
(Increase) decrease in prepaid expenses
and other (14,801) 10,122
Increase in inventory (37,273) (47,897)
Increase in accounts receivable (487,011) (66,202)
------------ ------------
Net cash used in operating activities (461,113) (1,364,865)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment 17,694 -
Purchases of property and equipment (277,201) (243,842)
------------ ------------
Net cash used in investing activities (259,507) (243,842)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock
and warrants, net 20,400 3,782,917
Proceeds from demand note payable and long-term debt - 118,762
Decrease in deferred offering costs - 486,029
Decrease in due to officer/director - (17,041)
Principal payments on long-term debt (169,888) (220,974)
------------ ------------
Net cash (used in) provided by
financing activities (149,488) 4,149,693
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (870,108) 2,540,986
CASH AND CASH EQUIVALENTS, beginning of year 2,590,515 49,529
------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 1,720,407 $ 2,590,515
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 32,285 $ 28,589
Income taxes - -
Non-cash investing and financing activities:
Long-term debt incurred to acquire
property and equipment 121,409 83,147
</TABLE>
The accompanying notes are an integral part of these
financial statements.
-F5-
<PAGE>
HOST AMERICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 AND JUNE 25, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Host America Corporation (the Company) was incorporated in
Delaware on February 6, 1986 with the name University Dining
Services, Inc. On March 9, 1998, the Company filed a
certificate of amendment changing its name to Host America
Corporation, and during fiscal 1999 changed its state of
incorporation from Delaware to Colorado. The Company is a
contract food management organization which specializes in
providing full service restaurant and employee dining, special
event catering, vending and office coffee service to business
and industry accounts located in the Northeast. Approximately
95% of sales are directly related to the management of
corporate restaurants and catering, with the remaining 5% of
sales attributable to vending operations.
FISCAL YEAR
The Company's fiscal year ends on the last Friday in June. The
fiscal year ended June 30, 2000 contains fifty-three weeks.
The fiscal year ended June 25, 1999 contains fifty-two weeks.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results
could differ from those estimates.
CASH EQUIVALENTS
For the purpose of the statement of cash flows, the Company
defines cash equivalents as highly liquid instruments with an
original maturity of three months or less. The Company had
cash equivalents totaling $1,805,600 and $2,281,000 at June 30,
2000 and June 25, 1999, respectively.
INVENTORY
Inventory consists primarily of food supplies and is stated at
the lower of cost or market, with cost determined on a first-in,
first-out basis.
-F6-
<PAGE>
HOST AMERICA CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
JUNE 30, 2000 AND JUNE 25, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Upon retirement or
disposition of depreciable properties, the cost and related
accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in the results of
operations. Depreciation and amortization are computed by
applying the straight-line method over the estimated useful
lives of the related assets, which range from three to ten years.
Maintenance, repairs and minor renewals are charged to
operations as incurred. Expenditures which substantially
increase the useful lives of the related assets are capitalized.
REVENUE RECOGNITION
The Company's revenue is recognized at the point of sale of
food and merchandise items and upon delivery of service for
catering, restaurant management and related services.
INCOME TAXES
The Company recognizes deferred tax liabilities and assets for
the expected future tax consequences of events that have been
included in the financial statements or tax returns. Deferred
tax liabilities and assets are determined based on the
differences between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse.
ADOPTION OF ACCOUNTING STANDARDS
EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting
Standards (SFAS) No. 128, EARNINGS PER SHARE. SFAS No. 128
simplifies the standards for computing earnings per share (EPS)
and replaces the presentation of primary and fully-diluted EPS
with a presentation of basic and diluted EPS. Implementation
of SFAS No. 128 did not have any impact on the Company's
calculation of EPS.
Net loss per common share was computed based upon 1,136,712 and
1,039,590 weighted average shares outstanding during the years
ending June 30, 2000 and June 25, 1999, respectively. Dilutive
earnings per share was not presented as the potentially
dilutive convertible preferred stock and stock purchase options
are anti-dilutive.
-F7-
<PAGE>
HOST AMERICA CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
JUNE 30, 2000 AND JUNE 25, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has adopted Statement of Financial Accounting
Standards (SFAS) No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, which establishes a fair value based method of
accounting for an employee stock option or similar equity
instrument. SFAS No. 123 gives entities a choice of
recognizing related compensation expense by adopting the new
fair value method or to continue to measure compensation using
the intrinsic value approach under Accounting Principles Board
(APB) Opinion No. 25, the former standard. If the former
standard for measurement is elected, SFAS No. 123 requires
supplemental disclosure to present the effects of using the new
measurement criteria. The Company intends to continue using
the measurement prescribed by APB Opinion No. 25, and
accordingly, this pronouncement will not affect the Company's
financial position or results of operations.
SEGMENT INFORMATION
Statement of Financial Accounting Standards (SFAS) No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, was issued effective for fiscal years ending after
December 15, 1998. The Company's primary operating segments
are the management of corporate restaurants and catering and
vending operations. The vending operations do not meet the
quantitative thresholds of SFAS No. 131 and therefore, the
Company has not adopted the reporting requirements of this Statement.
NOTE 2 - FINANCIAL INSTRUMENTS
CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to
concentrations of credit risk consist primarily of cash and
cash equivalents and accounts receivable.
* Cash and cash equivalents - The Company places its cash
and temporary cash investments with high credit quality
institutions. At times, such investments may be in excess
of the FDIC insurance limit. The Company has cash
balances on deposit with banks at June 30, 2000 and June 25,
1999 that exceeded federal depository insurance limits
by $1,853,318 and $ 2,763,043, respectively.
* Accounts receivable - The Company grants credit to its
customers, substantially all of whom are provided full
service restaurant and employee dining services. Four
major customers comprise 41% and 71% of accounts
receivable as of June 30, 2000 and June 25, 1999,
respectively. Net revenues from individual customers which
exceeded ten percent of total net revenues during the
years ended June 30, 2000 and June 25, 1999 aggregated 36%
(2 customers) and 42% (2 customers), respectively. The
Company reviews a customer's credit history before
extending credit and establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of
specific customers, historical trends, and other
information. Such losses have been within management's
expectations.
-F8-
<PAGE>
HOST AMERICA CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
JUNE 30, 2000 AND JUNE 25, 1999
NOTE 2 - FINANCIAL INSTRUMENTS (Continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107,
FAIR VALUE OF FINANCIAL INSTRUMENTS, requires disclosure of the
fair value of financial instruments for which the determination
of fair value is practicable. SFAS No. 107 defines the fair
value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between
willing parties.
The carrying amount of the Company's financial instruments
approximates their fair value as outlined below:
* Cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses - The carrying amounts
approximate their fair value because of the short maturity
of those instruments.
* Long-term debt - The carrying amount approximates fair
value as the interest rates on the various notes
approximate the Company's current incremental borrowing rate.
The Company's financial instruments are held for other than
trading purposes.
NOTE 3 - PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows:
June 30, June 25,
2000 1999
-------- --------
Equipment and fixtures $ 878,599 $ 786,450
Vehicles 138,513 200,924
Leasehold improvements 1,402 8,491
---------- ----------
1,018,514 995,865
Less: accumulated depreciation
and Amortization 348,251 479,502
---------- ----------
$ 670,263 $ 516,363
========== ==========
Depreciation and amortization expense for the years ended June 30,
2000 and June 25, 1999 totaled $227,016 and $134,880, respectively.
-F9-
<PAGE>
HOST AMERICA CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
JUNE 30, 2000 AND JUNE 25, 1999
NOTE 4 - LONG-TERM DEBT
Long-term debt consists of the following as of June 30, 2000
and June 25, 1999:
2000 1999
-------- --------
Various equipment notes payable at
interest rates ranging from 10% to
10.25%, maturing through December,
2002. The notes are secured by
the related equipment. $117,337 $123,134
Note payable to bank at 8.25%
interest, payable in monthly
installments of principal and
interest totaling $2,680, final
payment due April, 2002. The note
is secured by all assets of the
company. 80,894 105,133
Various vehicle notes payable at
interest rates ranging from 8.75%
to 10.5%, maturing through January,
2003. The notes are secured by
the related vehicles. 65,216 68,660
Note payable to bank with monthly
principal payments of $1,250 plus
interest at 10%, maturing September
10, 2002. 33,750 48,749
-------- --------
297,197 345,676
Less: current portion 145,035 126,601
-------- --------
$152,162 $219,075
======== ========
Maturities of long-term debt for each of the fiscal years
succeeding June 30, 2000 are as follows:
2001 $ 145,035
2002 97,086
2003 44,679
2004 8,094
2005 2,303
----------
$ 297,197
==========
-F10-
<PAGE>
HOST AMERICA CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
JUNE 30, 2000 AND JUNE 25, 1999
NOTE 5 - STOCKHOLDERS' EQUITY
STOCK OPTIONS
In August, 1997, the Company granted stock purchase options to
certain officers and directors of the Company, extending the
right to purchase up to 12,000 shares of the Company's common
stock at an exercise price determined by the Company's Board of
Directors to be five dollars per share.
In August 1998, the Company adopted the 1998 Stock Option Plan.
In July, 1999 and May, 2000, the Company granted 90,000 and
110,000 options, respectively at an exercise price determined
by the Company's Board of Directors to be $2.25 and $4.00 per
share, respectively. The stock purchase options are subject to
certain adjustment provisions in the event of any stock
dividends, reverse splits and/or reclassifications of common
stock, and expire ten years from the date of the grant.
A summary of the status of the Company's stock options and
changes during the year is presented below:
<TABLE>
<CAPTION>
June 30, 2000 June 25, 1999
---------------------- ----------------------
Outstanding Price Outstanding Price
----------- ----- ----------- -----
<S> <C> <C> <C> <C>
Outstanding at
beginning of year $ 12,000 $ 5.00 $ 12,000 $ 5.00
Granted 200,000 2.25-4.00 - -
Exercised - - - -
Canceled - - - -
--------- ---------- ---------- ----------
Outstanding at end of
year $ 212,000 $2.25-5.00 $ 12,000 $ 5.00
========= ========== ======== ==========
</TABLE>
The Company has adopted Statement of Financial Accounting
Standards (SFAS) No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION. As discussed in Note 1, the Company applies APB
Opinion No. 25 in accounting for its stock option plans and,
accordingly, does not recognize compensation cost at the grant
date. If the Company had elected to recognize compensation
cost based on the fair value of the options granted at the
grant date as prescribed by SFAS No. 123, net income and
earnings per common share would have been adjusted to the pro
forma amounts indicated below:
June 30, 2000 June 25, 1999
------------- -------------
Net loss - as reported $ (674,051) $ (719,882)
Net loss - pro forma (1,172,351 (719,882)
Loss per common share - as reported (.59) (.69)
Loss per common share - pro forma (1.03) (.69)
The fair value of each option grant is estimated on the date of
grant with the following assumptions:
Expected dividend yield 0%
Expected volatility N/A
Risk-free interest rate 6.5%
Expected life of options 120 months
-F11-
<PAGE>
HOST AMERICA CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
JUNE 30, 2000 AND JUNE 25, 1999
NOTE 5 - STOCKHOLDERS' EQUITY (Continued)
PREFERRED STOCK
On March 1, 1998, the Company issued 700,000 shares of
preferred stock to certain officers and directors of the
Company. Each share of preferred stock is convertible into one
share of common stock at a conversion value of $5.00 per share.
The conversion price can potentially decrease should the
Company meet certain revenue and pre-tax earnings incentives
over the next three years and in the event the Company does not
attain any of the incentives, each share of Series A preferred
stock then outstanding shall automatically convert, at no
additional cost to the holder into one (1) share of common
stock at the end of five (5) years. The preferred shares have
been valued by the Board of Directors at $5.00 per share based
on the stock's conversion value. The preferred shares are
entitled to vote on all matters that the common stock is
entitled to vote on the basis of one vote per share.
NOTE 6 - INCOME TAXES
The provision for income taxes consists of the following for
the years ending June 30, 2000 and June 25, 1999:
2000 1999
------- -------
Current
Federal $ - $ -
State - -
Deferred - -
------- -------
$ - $ -
======= =======
The Company has federal net operating loss carryforwards of
approximately $987,387 expiring in fiscal 2020.
Expected tax expense based on the federal statutory rate is
reconciled with the actual expense for the years ended June 30,
2000 and June 25, 1999 as follows:
2000 1999
------- -------
Statutory federal income tax 34% 34%
Other 1 1
Change in valuation allowance (35) (35)
------- -------
- -
======= =======
-F12-
<PAGE>
HOST AMERICA CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
JUNE 30, 2000 AND JUNE 25, 1999
NOTE 6 - INCOME TAXES (Continued)
The significant components of the deferred tax provision are as
follows:
2000 1999
----------- -----------
Net operating loss - federal $ (411,000) $ (246,000)
Net operating loss - state (75,000) (89,000)
Allowance for doubtful accounts - (4,000)
Valuation allowance 486,000 339,000
---------- ----------
$ - $ -
========== ==========
The components of the deferred tax asset account as of June 30,
2000 and June 25, 1999 are as follows:
2000 1999
-------- --------
Deferred tax assets:
Issuance of preferred stock $ 980,000 $ 980,000
Net operating loss - federal 687,000 276,000
Net operating loss - state 165,000 90,000
Allowance for doubtful accounts 6,000 6,000
Valuation allowance (1,808,000) (1,322,000)
----------- -----------
Total deferred tax asset $ 30,000 $ 30,000
=========== ===========
The Company establishes a valuation allowance in accordance
with the provisions of SFAS No. 109, ACCOUNTING FOR INCOME
TAXES. The Company continually reviews the adequacy of the
valuation allowance and recognizes a benefit from income taxes
only when reassessment indicates that it is more likely than
not that the benefits will be realized. In fiscal 2000, the
Company increased the valuation allowance by approximately
$486,000 based upon reasonable and prudent tax planning strategies.
NOTE 7 - COMMITMENTS
OPERATING LEASES
The Company leases its office facility under a verbal agreement
with a monthly payment of $2,875. The verbal agreement is an
extension of a three year lease agreement which expired in
October, 1997 and required a monthly payment of $1,575. Rent
expense charged to operations under this and preceding leases
aggregated $34,500 and $32,750 for the years ended June 30,
2000 and June 25, 1999, respectively.
-F13-
<PAGE>
HOST AMERICA CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
JUNE 30, 2000 AND JUNE 25, 1999
NOTE 7 - COMMITMENTS (Continued)
OPERATING LEASES (Continued)
The Company is also leasing various equipment under certain
other operating leases which expire within one to two years.
In certain cases, the cost of leasing the equipment is billed
to customers in connection with the Company's cafeteria
services. Rent expense for these operating leases for
equipment aggregated $16,475 and $19,264 for the years ended
June 30, 2000 and June 25, 1999, respectively.
Lastly, the Company leases food service and banquet facilities
under various lease agreements expiring through December, 2004.
Rent expense charged to operations under these various lease
agreements aggregated $154,626 and $90,636 for the years ended
June 30, 2000 and June 25, 1999, respectively.
Future minimum lease payments on all operating leases for each
of the fiscal years succeeding June 30, 2000 are as follows:
2001 $ 187,392
2002 188,892
2003 188,892
2004 191,442
2005 207,604
2006 and thereafter 207,604
----------
$1,171,826
==========
EMPLOYMENT CONTRACTS
On February 19, 1998, the Company entered into five-year
employment agreements with its officers/directors. Under the
terms of the agreements, the President and Vice President of
the Company are to receive annual salaries of $85,000 and
$80,000, respectively, which may be increased by the Company's
Compensation Committee or the Board of Directors, but shall not
be decreased without the consent of the employee. Both
individuals receive an expense account, an automobile expense
allowance, related business expenses and all other benefits
afforded other employees. The Company also provides health,
disability and insurance to each of these individuals. On May
17, 2000, the Board of Directors approved an increase in the
annual salaries of the President and Vice President to $140,000
and $135,000, respectively.
NOTE 8 - ADVERTISING
The Company expenses the production costs of advertising the
first time the advertising takes place. Advertising expense
was $35,338 and $23,073 for the years ended June 30, 2000 and
June 25, 1999, respectively.
-F14-
<PAGE>
HOST AMERICA CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
JUNE 30, 2000 AND JUNE 25, 1999
NOTE 9 - 401K PLAN
The Company has adopted a 401(k) defined contribution pension
plan which covers all participating employees who have a
minimum of one year of service. The Company matches employee
contributions at a rate of twenty-five percent up to a maximum
of three percent of the participating employees' gross
earnings. Employees become fully vested in the Company's
contribution after six years of service. The Company's
contributions for the years ended June 30, 2000 and June 25,
1999 totaled $15,459 and $3,048, respectively.
NOTE 10 - SUBSEQUENT EVENT - ACQUISITION
On July 31, 2000, the Company purchased all of the issued and
outstanding shares of Lindley Food Service Corporation
(Lindley), plus acquisition costs, resulting in a total
purchase price of approximately $5,700,000. The acquisition
was partially financed by a $2,500,000 five-year term loan.
Lindley is engaged in the manufacturing of meals for various
governmental programs primarily under fixed-price contracts.
The acquisition was accounted for using the purchase method of
accounting and, accordingly, the purchase price has been
allocated to the assets purchased and the liabilities assumed
based upon their fair values at the date of acquisition. The
excess of the purchase price over the fair value of the net
assets acquired was approximately, $4,542,000, and has been
recorded as goodwill.
-F15-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 28th day of September, 2000.
HOST AMERICA CORPORATION
By: /s/ GEOFFREY W. RAMSEY
---------------------------------
Geoffrey W. Ramsey
President, Chief Executive Officer
and Director
By: /s/ DAVID J. MURPHY
---------------------------------
David J. Murphy
Executive Vice President, Chief
Financial and Accounting Officer and
Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Geoffrey W. Ramsey and David J.
Murphy, his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendments to this Report on
Form 10-KSB, and to file the same, with Exhibits thereto and other
documents in connection therewith with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or substitute or substitutes may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange act of 1934,
this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ ANNE L. RAMSEY Secretary and Director September 28, 2000
--------------------------
Anne L. Ramsey
/s/ THOMAS P. EAGAN, JR. Director September 28, 2000
--------------------------
Thomas P. Eagan, Jr.
/s/ PATRICK J. HEALY Director September 28, 2000
--------------------------
Patrick J. Healy
<PAGE>
/s/ JOHN D'ANTONA Director September 28, 2000
--------------------------
John D'Antona
/s/ GILBERT ROSSOMANDO Director September 28, 2000
--------------------------
Gilbert Rossomando
