CUISINE SOLUTIONS INC - 10-Q Quarterly Report

Form 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)


(X)		QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 3, 2004


( )		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 0-12800

CUISINE SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)


DELAWARE (State or other jurisdiction of incorporation or organization)		52-0948383 (IRS Employer Identification Number)

85 S Bragg Street, Suite 600, Alexandria, VA 22312

(Address of principal executive offices) (Zip Code)

(Registrant’s telephone number, including area code) (703) 270-2900

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934, during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes (X) No ( )

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of May 18, 2004.


Common Stock 0.01 par value		Number of Shares
Class A		15,834,788
Class B		None

CUISINE SOLUTIONS, INC.

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

The accompanying unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the United States Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of the Company, all adjustments necessary for the fair presentation of the Company’s results of operations, financial position and changes therein for the periods presented have been included.

CUISINE SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)


	April 3,			June 28,
	2004			2003
ASSETS
Current Assets
Cash and cash equivalents	$	1,093,000		$	1,357,000
Accounts receivable, trade		4,129,000			3,479,000
Inventory		4,708,000			4,056,000
Prepaid expenses		331,000			450,000
Notes receivable, related party		76,000			32,000
Other current assets		684,000			450,000

TOTAL CURRENT ASSETS		11,021,000			9,824,000
Investments		1,149,000			1,331,000
Fixed assets, net		5,070,000			5,264,000
Other assets		65,000			9,000

TOTAL ASSETS	$	17,305,000		$	16,428,000

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current portion of long-term debt		1,982,000			1,970,000
Accounts payable and accrued expenses		4,770,000			3,950,000
Accrued payroll and related liabilities		1,444,000			1,351,000

Total current liabilities		8,196,000			7,271,000
Long-term debt, less current portion		2,064,000			1,691,000

TOTAL LIABILITIES		10,260,000			8,962,000

Stockholders’ equity
Common Stock
Class A Stock - $.01 par value, 20,000,000 shares authorized, 15,834,788 shares issued and outstanding at April 3, 2004 and 15,834,788 shares issued and outstanding at June 23, 2003		159,000			159,000
Class B Stock - $.01 par value, 175,000 shares authorized, none issued		—			—
Additional paid-in capital		26,340,000			26,284,000
Accumulated deficit		(20,166,000	)		(19,486,000	)
Accumulated Other Comprehensive Income
Unrealized gain (loss) on debt and equity investments		52,000			59,000
Cumulative translation adjustment		660,000			450,000

TOTAL STOCKHOLDERS’ EQUITY		7,045,000			7,466,000

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	17,305,000		$	16,428,000

See accompanying notes to consolidated financial statements.

F-3

CUISINE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)


	Third Quarter						Year to Date
	Sixteen Weeks Ended						Forty Weeks Ended
	April 3,			April 5,			April 3,			April 5,
	2004			2003			2004			2003
Net sales	$	11,169,000		$	7,593,000		$	27,357,000		$	20,614,000
Cost of goods sold		9,053,000			6,380,000			21,943,000			17,154,000

Gross margin		2,116,000			1,213,000			5,414,000			3,460,000
Selling and administration		2,503,000			2,464,000			5,619,000			6,040,000
Depreciation and amortization		123,000			151,000			348,000			410,000

Loss from operations		(510,000	)		(1,402,000	)		(553,000	)		(2,990,000	)

Nonoperating income (expense)
Investment income		19,000			37,000			50,000			105,000
Interest expense		(53,000	)		(112,000	)		(109,000	)		(211,000	)
Other income (expense)		(18,000	)		—			(68,000	)		(2,000	)

Total nonoperating (expense) income		(52,000	)		(75,000	)		(127,000	)		(108,000	)

Loss before income tax		(562,000	)		(1,477,000	)		(680,000	)		(3,098,000	)
Provision for income tax benefit (expense)		—			—			—			—

Net Loss		(562,000	)		(1,477,000	)		(680,000	)		(3,098,000	)

Basic and diluted net loss per share:
Net loss per common share-basic and diluted		($0.04	)		($0.09	)		($0.04	)		($0.20	)
Weighted average shares outstanding-basic and diluted		15,826,931			15,824,788			15,825,645			15,824,788

See accompanying notes to consolidated financial statements.

F-4

CUISINE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


	Year to date
	Forty weeks ended
	April 3,			April 5,
	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss	$	(680,000	)	$	(3,098,000	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization		632,000			744,000
Gain on sales of investments		(1,000	)		(52,000	)
Stock based compensation		49,000			—
Changes in assets and liabilities:
(Increase) Decrease in accounts receivable trade, net		(650,000	)		195,000
Increase in inventory		(652,000	)		(139,000	)
Decrease in prepaid expenses		119,000			1,000
(Decrease) Increase in notes receivable, related party		(44,000	)		39,000
Increase in other assets		(290,000	)		(52,000	)
Increase in accounts payable and accrued expenses		820,000			904,000
Increase (Decrease) in accrued payroll and related liabilities		93,000			(38,000	)

Net cash used in operating activities		(604,000	)		(1,496,000	)

CASH FLOWS FROM INVESTING ACTIVITIES
Sale of investments		176,000			970,000
Capital expenditures		(438,000	)		(831,000	)

Net cash provided by investing activities		(262,000	)		139,000

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock		7,000			—
Borrowing on notes payable		971,000			457,000
Payments on notes payable		(586,000	)		(293,000	)

Net cash provided by financing activities		392,000			164,000
Effect of exchange rates on cash and cash equivalents		210,000			176,000

Net decrease in cash and cash equivalents		(264,000	)		(1,017,000	)
Cash and cash equivalents, beginning of period		1,357,000			1,958,000

CASH and CASH EQUIVALENTS, END OF PERIOD	$	1,093,000		$	941,000

See accompanying notes to consolidated financial statements

F-5

Cuisine Solutions, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)


								Unrealized Gains
			Additional					(Losses) on Debt			Cumulative		Total
	Common		Paid-In		Accumulated			and Equity			Translation		Stockholders’
	Stock		Capital		Deficit			Investments			Adjustment		Equity
Balance, June 28, 2003	$	159,000	$	26,284,000	$	(19,486,000	)	$	59,000		$	450,000	$	7,466,000

Issuance of unregistered common stock				7,000										7,000
Granting of options				49,000										49,000
2004 net loss						(680,000	)							(680,000	)
Other comprehensive income/(loss)
Unrealized loss on debt														—
and equity investments									(7,000	)				(7,000	)
Translation adjustment				—								210,000		210,000
Other comprehensive income/(loss)														203,000

Comprehensive Loss														(477,000	)

Balance, April 3, 2004	$	159,000	$	26,340,000	$	(20,166,000	)	$	52,000		$	660,000	$	7,045,000


								Unrealized Gains
			Additional					(Losses) on Debt		Cumulative		Total
	Common		Paid-In		Accumulated			and Equity		Translation		Stockholders’
	Stock		Capital		Deficit			Investments		Adjustment		Equity
Balance, June 29, 2002	$	159,000	$	26,284,000	$	(15,394,000	)	$	10,000	$	97,000	$	11,156,000

2003 net loss						(3,098,000	)						(3,098,000	)
Other comprehensive income/(loss)													—
Unrealized gain on debt													—
and equity investments									31,000				31,000
Translation adjustment				—							176,000		176,000
Other comprehensive income(loss)													207,000

Comprehensive Loss													(2,891,000	)

Balance, April 5, 2003	$	159,000	$	26,284,000	$	(18,492,000	)	$	41,000	$	273,000	$	8,265,000

F-6

Cuisine Solutions, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1) Financial Statements

2) Fiscal Periods

The Company utilizes a 52/53 week fiscal year which ends on the last Saturday in June. The first, second and fourth quarters, of fiscal years 2004 and 2003 contain 12 weeks, and the third quarter contains 16 weeks.

3) Inventory

Inventories are valued at the lower of cost, determined by the first-in, first-out method (FIFO), or market. Included in inventory costs are raw materials, labor and manufacturing overhead.

Inventory consists of:


	April 3, 2004			June 28, 2003
Raw materials	$	1,462,000		$	1,140,000
Frozen product & other finished goods		2,725,000			2,892,000
Packing materials & supplies		695,000			449,000

		4,882,000			4,481,000
Less obsolescence reserve		(174,000	)		(425,000	)

	$	4,708,000		$	4,056,000

4) Dividends - None.

5) Commitments and Contingencies

From time to time, the Company is engaged in ordinary and routine litigation incidental to its business. Management does not anticipate that any amounts that it may be required to pay by reason thereof will have a material effect on the Company’s financial position or results of operations.

6) Transaction with Related Parties

As of April 3, 2004, the Company accrued a liability in the amount of $267,000 to Food Research Corporation. The liability was previously with SOMDIAA. SOMDIAA is a holding company which is majority owned by Secria, S.A. and Secria Europe, S.A. Both enterprises are owned by the Jean-Louis Vilgrain family (“JLV”); and Food Research Corporation (“FRC”) is owned by Secria Europe, S.A. SOMDIAA provides the administration of French Social Security healthcare and retirement plans for individuals who work within the JLV group. The primary portion of the accrual is related to amounts billed from SOMDIAA for separate health and retirement plans for the President of the Company and two other non-officer key employees. The accrual at April 3, 2004 includes coverage for previous year’s benefits.

On June 12, 2001, the Company signed an agreement with Farmers Market Landhandel GMBH, Inversiones Continex Limitada, and Iso Tech Holding Limitada to create a joint venture to build a sous-vide processing facility in Chile. The purpose of the facility would be to produce high quality, value priced whitefish, shellfish and salmon products in Chile for the Global Retail and Foodservice markets. That agreement was terminated, however, the parties continued to develop the facility in Chile and have agreed that Cuisine Solutions, Inc. will continue to hold 10% of the total outstanding shares of Cuisine Solutions Chile S.A. A marketing agreement to market certain sous-vide products was signed between the parties in June 2003 and a commercial agreement to commit to the purchase of certain raw materials from Cuisine Solutions Chile was signed in August 2003. The facility is scheduled to open in June 2004.

On October 22, 2003, the Company entered into a six month term loan in the amount of $500,000 with Food Investors Corporation (“FIC”) to provide short term working capital necessary to expand operations for fiscal year 2004. The loan accrues interest of 5% per annum and is payable upon maturity. In April 2004, FIC agreed to extend the loan to October 22, 2004. Total outstanding borrowings on the loan at April 3, 2004 were $455,000.

On November 10, 2003, the Company entered into a three-year term loan in the amount of $500,000 with FRC to provide short term working capital necessary to expand operations. The loan, which bears interest of 5% per annum, requires payment of interest on a quarterly basis beginning in April 2004, and provides for a balloon payment for the total amount due three years from the origination of the loan. FIC and FRC are 100 percent owned by Cuisine Solutions majority shareholder, the JLV group.

7) Income (Loss) Per Share

Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share also includes common equivalent shares outstanding during the period if dilutive. The Company’s common stock equivalents consist of stock options. The weighted average number of shares outstanding related to stock options was 2,252,730 and 1,680,375 for the 40 weeks ended April 3, 2004, and April 5, 2003, respectively, and 2,760,074 and 1,680,375 for the 16 weeks ended April 3, 2004, and April 5, 2003, respectively. The assumed exercise of the Company’s outstanding stock options are not included in the calculation as the effect would be anti-dilutive.

8) Accounting for stock-based compensation

The Company accounts for employee stock option grants using the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25 “Accounting for Stock Issued to Employees” and accordingly associated compensation expense, if any, is measured as the excess of the underlying stock price over the exercise price on the date of grant. The Company complies with the disclosure option of Statement of Financial Accounting Standards (SFAS) No. 123 “Accounting for Stock Based Compensation”, as amended by SFAS No. 148 “Accounting for Stock-Based Compensation—Transition and Disclosure” which requires pro-forma disclosure of compensation expense associated with stock options under the fair value method.

Had compensation cost been recognized based on the fair values of options at the grant dates consistent with the provisions of SFAS No. 123, the Company’s net loss and basic and diluted net loss per common share would have been as follows:

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

This filing contains forward-looking statements within the meaning of Section 27A of The Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Those statements reflect the intent, belief or current expectations of the Company and members of the management team. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties and that actual results may differ materially from those contemplated by such forward-looking statements reflecting changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Judgments and assessments of uncertainties are required in applying the Company’s accounting policies in many areas. Actual results may differ from such estimates.

The Company recognizes revenue at the time products are shipped to the customers. Reserves against customer receivables are established as necessary, based upon an evaluation of the customer’s current financial condition and past experience and relationship.

Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of”, requires management judgments regarding the future operating and disposition plans for underperforming assets, and estimates of expected realizable values for assets to be sold. Long-lived assets are assessed for possible impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable, or whenever management has committed to a plan to dispose of the assets. Assets to be held and used affected by such an impairment loss are depreciated or amortized at their new carrying amount over the remaining estimated useful life; assets to be sold or otherwise disposed of are not subject to further depreciation or amortization. Management determines the depreciable lives based on estimates of the period over which the assets will be of economic benefit to the Company and management periodically reviews the remaining depreciable lives based upon actual experience and expected future utilization.

Inventories are valued at the lower of cost, determined by the first-in, first-out method, or market. Included in inventory costs are raw materials, labor and manufacturing overhead. Obsolete or unusable inventories are reflected at their estimated realizable values.

The Company accounts for corporate income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”, which requires and asset and liability approach. This approach results in the recognition of deferred tax assets (future tax benefits) and liabilities for the expected future tax consequences of temporary timing differences between the book carrying amounts and the tax basis of assets and liabilities. Future tax benefits are subject to a valuation allowance to the extent of the likelihood that the deferred tax assets may not be realized. The Company has fully reserved its deferred tax asset as a result of recurring losses and current projections of future operating results.

RESULTS OF OPERATIONS

Revenue in the third quarter of fiscal 2004 increased from $7,593,000 to $11,169,000, a 47.1% increase compared to the same quarter of the previous fiscal year primarily due to stronger sales in all sales channels in the USA. Retail sales in the USA increased 267.1%, the national restaurant chain (New Business) channel in the USA grew 186.5%, while Foodservice gained 55.4%, compared to the third quarter of Fiscal 2003.

Cuisine Solutions, Inc. reported a decrease in net loss of $915,000 or 62% from $1,477,000 to $562,000 for the third quarter Fiscal 2004 compared to the same quarter the previous fiscal year. The decrease in net loss was primarily due to a 47.1% increase in sales and a 74.4% increase in gross margin while selling and administration expenses remained comparable.

NET SALES

Third quarter 2004 revenue of $11,169,000 increased as described above by 47.1% compared to the previous fiscal years’ third quarter revenue of $7,593,000. USA sales grew 71.8% compared to the same quarter Fiscal 2003. Information as to Cuisine Solution sales by geographical locations are as follows (Norway inter-company sales are eliminated):


	Q3 Fiscal 2004		Q3 Fiscal 2003		$ Change		% Change
USA	$	6,916,000	$	4,026,000	$	2,890,000		71.8	%
Norway		256,000		130,000		126,000		96.9	%
France		3,997,000		3,437,000		560,000		16.3	%

Total Net Sales	$	11,169,000	$	7,593,000	$	3,576,000		47.1	%

USA SALES

Fiscal year 2004 third quarter sales in the USA increased $2,890,000 to $6,916,000, a 71.8% increase from the previous fiscal year third quarter sales of $4,026,000.

Cuisine Solutions USA Fiscal Years 2004 and 2003 third quarter sales by sales channel are as follows:


	Q3 FY04		Q3 FY03		$ Change		% Change
Food Service	$	1,786,000	$	1,149,000	$	637,000		55.4	%
On Board Services		2,579,000		2,050,000		529,000		25.8	%
Retail		1,762,000		480,000		1,282,000		267.1	%
Military		216,000		147,000		69,000		46.9	%
New Business/NRC		573,000		200,000		373,000		186.5	%

Total	$	6,916,000	$	4,026,000	$	2,890,000		71.8	%

Third quarter fiscal 2004 sales to the USA Foodservice channel increased 55.4% in the USA to $1,786,000 from the previous year third quarter sales of $1,149,000. The increase was driven by increased sales of low carb menu items to hotels and convention centers. Also, occupancy rates were higher and businesses held more banquet events compared to the previous year. The Foodservice channel focuses sales efforts on key accounts and large events, and uses distributors to manage lower volume opportunities.

Management has and will continue to employ further cost reduction programs and product line changes to meet the changing needs of this channel.

Fiscal 2004 third quarter sales to the On Board services channel totaled $2,579,000 versus previous year third quarter sales of $2,050,000, an increase of $529,000 or 25.8%. Sales to the On Board Services channel increased in third quarter as US airlines and passenger rails continued their recovery from the last two years. The on board services channel continued to increase the numbers of passengers, and food products are returning with some carriers who discontinued them in late 2001.

Retail sales for the third quarter of fiscal 2004 increased $1,282000 to $1,762,000 from $480,000 an increase of 267.1% compared to the same period of the previous fiscal year due to the additional product roll-out of premium branded and private label frozen food products to North-American retailers.

Military sales for the third quarter 2004 increased 46.9% to $216,000 from $147,000 compared to the same period in fiscal 2003 primarily due to slightly increased demand from the US Navy carriers. Navy sales are conducted through an arrangement with a broker. The Company is further supporting the growing opportunity for this sales channel has dedicated a direct sales person to focus on the US Army, Air Force and Marine Corps.

New Business (National Restaurant Chain) sales for the third quarter of fiscal year 2004 totaled $573,000, up from $200,000 from fiscal 2003. The sales increase of $373,000 is attributed to increased sales to national restaurant chains. The Company will further pursue its role as a supplier for national restaurant chains that have determined that the Company’s product quality and ease of use makes an attractive alternative for providing promotional menu items.

NORWAY SALES

During the third quarter of fiscal 2004, total Norwegian sales volume decreased 11.7% to 6,761,000 Norwegian Kroner from 7,657,000 Norwegian Kroner for the third quarter of fiscal 2003. The sales amount converted to US Dollars amounted to $996,000 in the third quarter of fiscal 2004 and $1,089,000 during the third quarter of fiscal 2003 before the elimination of inter-company balances. Also, Cuisine Solutions started using salmon from its new partners in Chile. Inter-company sales from Cuisine Solutions Norway are eliminated and reported as sales from either Cuisine Solutions France or Cuisine Solutions USA. Inter-company sales to the USA and France account for 74.4% compared to 88.9% for the same period in the previous fiscal year. Total production and inter-company sales measured in US Dollars were down 8.5% during the third quarter of fiscal 2004 versus the same period in the previous year.

Total Norwegian sales before inter-company eliminations in both US dollars and Norwegian Kroners were as follows:


	Fiscal 2004		Fiscal 2003
	Norway Q3 Sales		Norway Q3 Sales		$ Change			% Change
Sales in US Dollars		996,000		1,089,000		(93,000	)		(8.5	%)
Sales in Norwegian Kroners		6,761,000		7,657,000		(896,000	)		(11.7	%)
Average Exchange Rate		6.788		7.031

FRANCE SALES

The total fiscal year 2004 third quarter sales in US Dollars were $3,997,000 versus previous year sales of $3,437,000, an increase of $560,000 or 16.3%. Sales in EURO during the same period were €3,207,000 versus €3,243,000 respectively, a decrease of 1.1%. The differences are due to the US dollar-EURO fluctuations in the exchange rate for the respective periods and slower sales in the retail private label packaged products.

Cuisine Solutions France’s fiscal year 2004 third quarter sales compared to prior year third quarter and respective exchange rates are as follows:


	Fiscal 2004		Fiscal 2003
	France Q3 Sales		France Q3 Sales		$ Change			% Change
Sales in US Dollars		3,997,000		3,437,000		560,000			16.3	%
Sales in EURO		3,207,000		3,243,000		(36,000	)		(1.1	%)
Average Exchange Rate		0.802		0.943

Cuisine Solutions France Fiscal Year 2004 third quarter sales by sales channel were as follows:


	Apr. 3, 2004			Apr. 5, 2003
Net loss applicable to common shareholders	$	(680,000	)	$	(3,098,000	)
Add: Stock-based compensation expense included in reported net loss	$	49,000			—
Less: Total stock-based compensation expense determined under the fair value method	$	(202,000	)	$	(128,000	)
Pro forma net loss	$	(833,000	)	$	(3,226,000	)
Loss per common share:
Basic and diluted – as reported	$	(0.04	)	$	(0.20	)
Basic and diluted – pro forma	$	(0.05	)	$	(0.20	)
Weighted average common shares outstanding:
Basic and diluted		15,825,645			15,824,788