Host America Corporation

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Host America Corporation

2 Broadway
Hamden, Connecticut 06518
U.S.A.
Telephone: (203) 248-4100
Fax: (203) 230-8667
Web site: http://www.hostamericacorp.com

Public Company
Incorporated: 1986 as University Dining Service, Inc.
Employees: 470
Sales: $26.83 million (2004)
Stock Exchanges: Pink Sheets
Ticker Symbol: CAFÉ
NAIC: 722320 Caterers; 541330 Engineering Services; 541620 Environmental Consulting Services; 541690 Other Scientific and Technical Consulting Services; 561210 Facilities Support Services; 561790 Other Services to Buildings and Dwellings

Host America Corporation operates in two different business areas, foodservice management and energy and electrical services. The former consists of Host America Business Dining, which runs foodservice operations for the employees of more than 30 clients including Pitney Bowes and Oxford Health Plans; and Lindley Food Service Corp., which provides single serving and group meals to schools, senior citizen centers, Meals on Wheels, and emergency food programs. The company's electrical division, RS Services, Inc., manufactures and installs LightMasterPlus, a device that reduces energy usage of fluorescent light fixtures with minimal light loss. In the summer of 2005 the U.S. Securities and Exchange Commission began an investigation of the firm after a company press release that exaggerated its relationship with Wal-Mart Stores, Inc. caused the stock price to soar. Its stock was subsequently removed from the NASDAQ and CEO Geoffrey Ramsey was dismissed by the firm's board.

BEGINNINGS

Host America's roots date to 1986, when Geoffrey Ramsey and David Murphy founded University Dining Service, Inc. in New Haven, Connecticut. Both had worked for ARA Services and at several institutional dining facilities, and were then running the campus dining operations of New Haven University and teaching in its hotel/restaurant school. Together they had developed a new meal program called a declining balance system, in which students' meals were charged against a prepaid account rather than paying for a set number each week.

University Dining Service was founded to manage dining services for schools and colleges. Contracts were initially signed with only a few institutions, however, primarily small community colleges that yielded minimal revenues and had frequent down times, making labor retention difficult. Needing a steadier source of income, the firm soon began to seek work managing corporate dining facilities, which operated year-round.

In 1988 the company sold five million shares of stock to the general public, with Murphy and Ramsey retaining controlling interest. The year 1990 saw the firm add vending and office coffee services, and two years later it began to focus exclusively on business dining. During the early 1990s the company (which had shortened its name to UDS) signed several Fortune 500 accounts, and by 1997 its annual revenues had grown to almost $6 million.

UDS now managed about two dozen corporate and manufacturing plant dining facilities in Connecticut, New Jersey, and New York, as well as providing them with vending, coffee, home meal replacement, and special event catering services. Its largest client was an office complex in Edison, New Jersey, called Twin Towers, which accounted for $1 million in revenue per year, and it was also running the foodservice operations of Pitney Bowes. Seeking further growth, in 1998 UDS management decided to make another public offering of stock. After effecting a 100-to-1 reverse split, in July the newly renamed Host America Corporation sold one million shares on the NASDAQ for $5 each, netting $3.8 million. President Geoffrey Ramsey and Executive Vice-President David Murphy continued to hold sizable stakes.

In the fall of 1998 the company formed a sports and recreational division, which subsequently opened dining facilities at an ice rink in Stamford, Connecticut. In 1999 new accounts were signed with the publisher of the Hartford Courant, Tyco Submarine Systems, Bayer Pharmaceutical, Oxford Health Plans, Staples, The Stanley Works, Trumpf, Inc., and Priceline.com. The latter had reportedly chosen the firm in part because of its home meal replacement program, which accommodated the long working hours of the new e-commerce firm's staff. Host America was now bidding on two contracts per week and winning about one in four.

ACQUISITION OF LINDLEY IN 2000

In July 2000 the firm bought Lindley Food Service Corp. for approximately $6.1 million, which was partially funded by a new $2.5 million loan from Webster Bank. Founded in 1982 by Gil Rossomando and Mark Cerreta, who would continue to run it after the acquisition, Lindley was the largest supplier of fresh and frozen single-serving meals for schools, day care centers, senior centers, and similar organizations in Connecticut. Some food was delivered via "Meals on Wheels" programs, and some served at large dining centers. Lindley's annual revenues of $8.4 million doubled Host America's total earnings, while positioning it for growth as the large baby boomer segment of the U.S. population neared retirement age.

The firm was also expanding its corporate foodservice work at a rapid rate, and in 2000 and early 2001 signed contracts to feed employees of JDS/Uniphase and Tellium, Inc., for whom it would provide cafeteria service, office coffee, and home meal replacement. As with Priceline.com, both offered products tied to the rise of the Internet and were building plush dining facilities in anticipation of rapid growth. Investors were already beginning to dump Internet stocks, however, and these firms soon cut back on amenities as their sales forecasts were downgraded.

August saw the purchase of Contra-Pak, Inc. of Dallas, Texas, a maker of shelf-stable meals that were used by Meals on Wheels and emergency feeding programs around the United States. Nearly 60 percent of its business came from the Northeast, and those orders were subsequently filled via Lindley's production facilities in New Haven, Westport, and Bridgeport, Connecticut. The firm had paid $160,000 in cash and 57,000 shares of stock.

In October Host America reached an agreement to buy SelectForce, Inc. of Oklahoma City for 700,000 shares of stock. SelectForce (which had annual revenues of $1.8 million) was an employee screening firm that looked into criminal histories and driving records, performed credit and employment verification, and later began administering drug tests. Its primary clients were healthcare and temporary staffing agencies. Continuing under its established management, SelectForce would perform work for corporate clients as well as become a part of Host America's dining service offerings, enabling the firm to certify to its clients that employees were of a high standard. For the fiscal year ended in June, Host America posted revenues of $21.6 million and a loss of $42,000.

COMPANY PERSPECTIVES

Host America utilizes sophisticated technologies in its management services and energy conservation software products and systems. These products and systems enable us to design solutions to problems and develop cost reduction answers for building owners and managers. Host America employs a professional sales and marketing force that services both national and individual accounts and is headed up by a Management Team that has many years experience in food service and energy conservation management.

In early 2002 several major contracts to provide food to senior citizens and children's Head Start programs in Indiana were signed, which would bring in $1.2 million per year. The company had also recently completed a restructuring of its operations, which was expected to save $250,000 annually.

In the fall of 2002 Host America defaulted on its loan from Webster Bank, and the company's auditor expressed doubts that it would remain a going concern. A new loan agreement was later reached, however. Earnings for the fiscal year ended in June had totaled $24.4 million, with a profit of $70,000 recorded. The firm was continuing to win new work from senior programs in Massachusetts, Rhode Island, and Florida, where it opened an additional office.

PURCHASE OF ENERG Y BUSINESS IN 2003

In August 2003 Host America announced an agreement to acquire GlobalNet Energy Investors, Inc. in exchange for 550,000 shares of stock. GlobalNet manufactured and sold products and software licensed from Energy-Nsync, Inc. that reduced the energy usage in fluorescent lighting systems with minimal loss of visible light. In the fall the company also signed agreements to manage the foodservice operations of seven businesses in the Northeast, Florida, and Texas, including Honeywell's New Jersey facility.

Early 2004 saw acquisition of patents to a product called Fan Saver, which reduced the energy consumption of fans in refrigeration systems. The company's Lindley subsidiary also continued to win new work around the United States, including a five-year, $12.5 million contract to provide 3,500 meals per day in Massachusetts. For the year ended in June the firm reported revenues of $26.8 million and a loss of $4.9 million.

The company began installing its lighting energy conservation technology in test sites, including warehouses, a dormitory, and several chain restaurants. In July Host America received $8 million in new financing from Laurus Master Fund Ltd., after which it bought RS Services, Inc. of Duncan, Oklahoma, for $4.6 million. Founded in 2000 by Ronald Sparks, RS was an electrical installation company that employed 60 and would install Host America's energy management products, as well as perform contract work for outside firms. After the purchase, the GlobalNet name was dropped and the company's energy unit became known as RS Services.

In November the firm bought the assets and accounts of Food Brokers, Inc., a Bridgeport, Connecticut-based foodservice company, and early 2005 saw a joint venture formed with Innovative Performance Contracting of Texas and Oklahoma. The latter would market LightMasterPlus, as the firm's energy-saving technology was now known.

In the spring, Host America sold employment screening unit SelectForce to T.E.D., Inc. for $2.1 million. The company also announced that a U.S. Department of Energy test of LightMasterPlus had found it reduced electricity usage by 15 to 30 percent but had no negative effect on fluorescent fixtures and ballasts. May saw RS Services win a $6 million-plus contract to install Eaton Cutler-Hammer electrical controls in 400 Wal-Mart stores.

KEY DATES

1986:: David Murphy and Geoffrey Ramsey found University Dining Service.
1992:: Firm decides to focus exclusively on business dining.
1998:: Company is renamed Host America Corp.; stock begins trading on NASDAQ.
2000:: Lindley Food Service Corp. is acquired.
2001:: SelectForce, Inc. and Contra-Pak are purchased.
2003:: Energy management firm GlobalNet Investors is acquired.
2004:: Electrical company RS Services and assets of Food Brokers, Inc. are purchased.
2005:: SelectForce is sold; SEC inquiry is launched, stock is delisted, and Ramsey is fired.

STOCK CONTROVERSY IN SUMMER OF 2005

On July 12, 2005, Host America issued a press release announcing that the firm would begin surveying ten Wal-Mart stores in preparation for installing LightMasterPlus in each, also filing an 8-K form with the Securities and Exchange Commission (SEC), which typically denoted an important material development. The press release quoted CEO Ramsey as saying, "This is a major event for our company, which we have been working towards since last year. We expect this prestigious customer will like the savings they receive from this first-phase roll-out and believe that the next phase will involve a significant number of stores." Investors jumped on the implication that Wal-Mart might install LightMasterPlus in many of its 3,725 U.S. stores, and the firm's stock price doubled to $6.35 that same day and topped $14 within a week.

After several of Host America's largest shareholders sold portions of their holdings, the SEC requested documents from the company supporting the claims of the July 12 press release, citing concerns that it had been "misleading." On July 22 trading was suspended for two weeks and a formal investigation was begun. The NASDAQ subsequently extended the trading suspension past the SEC's resumption date, while numerous lawsuits were filed against Host America, its top management, and certain shareholders, alleging misrepresentation. They were later consolidated into a class-action suit.

On August 31 the company admitted in a press release that the Wal-Mart agreement had been an "oral understanding" with no written contract, that the stores to be surveyed had not yet been determined, and that no agreement to buy LightMasterPlus had been reached. CEO and President Geoffrey Ramsey was then placed on administrative leave without pay, and resigned as board member and chairman. His place was taken on an acting basis by CFO David Murphy.

When the NASDAQ allowed Host America's stock to resume trading on September 1, its price plunged by 74 percent to $3.71 and kept falling thereafter. Two weeks later the stock was delisted by the exchange and began trading on the Pink Sheets information service. The firm subsequently notified the SEC that it would delay filing its annual report and the next quarterly report, citing the ongoing investigation and lawsuits. In late November the company fired Ramsey; his administrative assistant and wife, Debra Ramsey; and his sister Anne Ramsey, the company's human resources director and secretary (though she would remain a board member until the firm's shareholders met). News had recently surfaced that the fateful July 12 press release had been issued a day after the company granted stock options to its directors and top executives, exercisable immediately, though most had not sold any shares before trading was suspended.

In January 2006 Geoffrey Ramsey filed a $2.5 million claim against the company with the American Arbitration Association, alleging wrongful dismissal. His sister Anne and wife Debra also filed for a total of $2 million. In March, the firm issued a letter to shareholders vowing better future communication, though numerous matters continued to be unresolved including the Ramsey arbitration and the SEC investigation.

The 20-year history of Host America Corporation had seen the company branch out into several different business areas in an effort to become profitable. Reverberations from a 2005 stock scandal were still being felt, and its future status would depend to a large extent on management's ability to surmount a host of legal difficulties and a tarnished reputation among investors.