CUISINE SOLUTIONS INC - 10-Q Quarterly Report

Form 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


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

For the quarterly period ended December 11, 2004


		OR

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


		For the transition period from to

Commission File Number 0-12800

CUISINE SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)


DELAWARE		52-0948383

(State or other jurisdiction of		(IRS Employer Identification Number)
incorporation or organization)

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 þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of January 24, 2005.


Common Stock 0.01 par value		Number of Shares

Class A		15,942,538
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)



	December 11,			June 26,
	2004			2004
ASSETS
Current Assets
Cash and cash equivalents	$	610,000		$	1,395,000
Trade accounts receivable, net of reserve of $183,000 and $68,000 as of December 11 and June 26, 2004, respectively		4,539,000			3,754,000
Inventory, net		7,212,000			5,420,000
Prepaid expenses		292,000			140,000
Notes receivable, related party		552,000			58,000
Other current assets		308,000			266,000
Assets held for disposal from discontinued operations		180,000			1,972,000

TOTAL CURRENT ASSETS		13,693,000			13,005,000

Investments		1,489,000			1,114,000
Property and Equipment, net		3,737,000			3,545,000
Other assets		26,000			46,000

TOTAL ASSETS	$	18,945,000		$	17,710,000


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Line of Credit	$	2,024,000		$	—
Current portion of long-term debt		512,000			921,000
Accounts payable and accrued expenses		4,696,000			4,260,000
Accrued payroll and related liabilities		1,235,000			1,340,000
Liabilities from discontinued operations		1,856,000			3,635,000

Total current liabilities		10,323,000			10,156,000
Long-term debt, less current portion		961,000			982,000

TOTAL LIABILITIES		11,284,000			11,138,000


Stockholders’ equity
Common stock — $.01 par value, 20,000,000 shares authorized, 15,932,538 and 15,834,788 shares issued and outstanding at December 11, 2004 and June 26, 2004, respectively.		159,000			159,000
Class B Stock — $.01 par value, 175,000 shares authorized, none issued		—			—
Additional paid-in capital		26,554,000			26,380,000

Accumulated deficit		(19,735,000	)		(20,490,000	)

Accumulated Other Comprehensive Income Unrealized gain on debt and equity investments		18,000			17,000
Cumulative translation adjustment		665,000			506,000

TOTAL STOCKHOLDERS’ EQUITY		7,661,000			6,572,000

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	18,945,000		$	17,710,000

See accompanying notes to consolidated financial statements.

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



	Second Quarter						*Year to Date*
	Twelve Weeks Ended						Twenty Four Weeks Ended
	Dec 11, 2004			Dec 13, 2003			Dec 11, 2004			Dec 13, 2003
NET SALES	$	11,062,000		$	8,764,000		$	19,765,000		$	15,499,000
Cost of goods sold		8,066,000			6,609,000			14,739,000			12,043,000

Gross Margin		2,996,000			2,155,000			5,026,000			3,456,000

Selling and administration		2,314,000			1,868,000			3,943,000			3,101,000
Depreciation and amortization		112,000			110,000			212,000			224,000

Earnings from operations		570,000			177,000			871,000			131,000


Nonoperating income (expense) from continuing operations Investment income		14,000			14,000			28,000			31,000
Interest expense		(46,000	)		(14,000	)		(69,000	)		(18,000	)
Other income (expense)		(6,000	)		(42,000	)		(18,000	)		(51,000	)

Total non-operating expense from continuing operations		(38,000	)		(42,000	)		(59,000	)		(38,000	)


Earnings from continuing operations before income taxes		532,000			135,000			812,000			93,000
Provision for income taxes		—			—			—			—

Earnings from continuing operations before discontinued operations		532,000			135,000			812,000			93,000

Earnings (Loss) from discontinued operations
Earnings (Loss) from operations of CS Norway (net of a gain of $571,000 on disposal of assets)		61,000			(72,000	)		(57,000	)		(211,000	)
Provision for income taxes		—			—			—			—

Net earnings (loss) from discontinued operations		61,000			(72,000	)		(57,000	)		(211,000	)


NET EARNINGS (LOSS)	$	593,000		$	63,000		$	755,000		$	(118,000	)


Basic and diluted earnings (loss) per share:
Earnings from continuing operations per common share-basic and diluted	$	0.03		$	0.01		$	0.05		$	0.01
Earnings (loss) from discontinued operations per common share-basic and diluted		—			($0.01	)		—			($0.01	)
Net earnings per common share-basic and diluted	$	0.03			—		$	0.05			—

Weighted average shares outstanding-basic		15,923,535			15,824,788			15,884,852			15,824,788
Common stock equivalents		1,186,874			170,893			1,060,888			—

Weighted average shares outstanding-diluted		17,110,409			15,995,681			16,945,740			15,824,788

See accompanying notes to consolidated financial statements

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



	Year to date
	Twenty four weeks ended
	Dec 11,			Dec 13,
	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss ) from continuing operations	$	812,000		$	93,000
Net Loss from discontinued operations		(57,000	)		(211,000	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization		356,000			408,000
Allowance for doubtful accounts		115,000			11,000
Inventory obsolescence reserve		45,000			(235,000	)
Stock based compensation		84,000			—
Changes in assets and liabilities:
Increase in accounts receivable trade		(900,000	)		(1,049,000	)
Increase in inventory		(1,837,000	)		(407,000	)
(Increase) Decrease in prepaid expenses		(152,000	)		123,000
Decrease in notes receivable, related party		6,000			6,000
(Increase) Decrease in other assets		(22,000	)		147,000
Increase (Decrease) in accounts payable and accrued expenses		382,000			(101,000	)
Decrease in accrued payroll and related liabilities		(105,000	)		(61,000	)
Increase in other liabilities		54,000			—
Changes in assets and liabilities of discontinued operations		(292,000	)		148,000
Gain on disposal of asset from discontinued operation		(571,000	)

Net cash used in operating activities		(2,082,000	)		(1,128,000	)


CASH FLOWS FROM INVESTING ACTIVITIES
Sale of investments		—			175,000
Capital expenditures		(547,000	)		(293,000	)

Net cash used in investing activities		(547,000	)		(118,000	)


CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on Line-of-credit		2,024,000			—
Borrowings on debt obligations		—			1,527,000
Payments on notes payable		(430,000	)		(586,000	)
Proceeds from issuance of common stock		90,000			—

Net cash provided in financing activities		1,684,000			941,000


Net decrease in cash and cash equivalents		(945,000	)		(305,000	)
Effect of exchange rate on cash		160,000			269,000
Cash and cash equivalents, beginning of period		1,395,000			867,000

CASH and CASH EQUIVALENTS, END OF PERIOD	$	610,000		$	831,000

See accompanying notes to consolidated financial statements

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


								Unrealized Gain
			Additional					(Loss) on Debt		Cumulative		Total
	Common		Paid-In		Accumulated			and Equity		Translation		Stockholders’
	Stock		Capital		Deficit			Investments		Adjustment		Equity


Balance, June 26, 2004	$	159,000	$	26,380,000	$	(20,490,000	)	$	17,000	$	506,000	$	6,572,000

Exercise of common stock options		—		90,000		—			—		—		90,000
Stock-based compensation		—		84,000		—			—		—		84,000
Six periods 2005 net earnings		—		—		755,000			—		—		755,000
Other Comprehensive Income
Unrealized gain on debt and equity investments		—		—		—			1,000		—		1,000
Translation adjustment		—		—		—			—		159,000		159,000
Other Comprehensive Income		—		—		—			—		—		160,000

Comprehensive income													915,000

Balance, December 11, 2004	$	159,000	$	26,554,000	$	(19,735,000	)	$	18,000	$	665,000	$	7,661,000


								Unrealized Gain
			Additional					(Loss) 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

Six periods 2004 net loss		—		—		(118,000	)		—			—		(118,000	)
Other comprehensive income/(loss)
Unrealized loss on debt and equity investments		—		—		—			(9,000	)		—		(9,000	)
Translation adjustment		—		—		—			—			269,000		269,000
Other comprehensive income		—		—		—			—			—		260,000

Comprehensive Income														142,000

Balance, December 13, 2003	$	159,000	$	26,284,000	$	(19,604,000	)	$	50,000		$	719,000	$	7,608,000

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 2005 and 2004 contain 12 weeks, and the third quarters contains 16 weeks.

3) Inventory

Inventories are valued at the lower of cost, determined by the first-in, first-out method (FIFO), or market.

Inventory consists of:


	December 11, 2004			June 26, 2004
Raw materials	$	2,189,000		$	1,586,000
Frozen product & other finished goods		4,321,000			3,335,000
Packing materials & supplies		909,000			661,000

		7,419,000			5,582,000
Less obsolescence reserve		(207,000	)		(162,000	)

	$	7,212,000		$	5,420,000

4) 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.

5) Transactions with Related Parties

As of December 11, 2004, the Company had an accrued liability of $262,000 payable to Food Research Corporation (“FRC”). The liability was previously payable to SOMDIAA and was assumed by FRC. 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 Group”); and 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.

On June 12, 2001, the Company signed an agreement with Inversiones Stefal ltda of Chile, Farmers Market Land of Germany, Inversiones Continex of Chile, and Iso-Tech Ltda of Brazil (the “parties”) to create a partnership, Cuisine Solutions Chile S.A. (“Cuisine Solutions Chile”), to build a sous-vide processing facility in Chile. The Company received a 10% interest in the partnership upon execution of the agreement. The intended purpose of the facility is to produce high quality, value priced whitefish, shellfish and salmon products in Chile for the Global Retail and Foodservice markets.

An agreement to market certain sous-vide products was signed by the parties and a commercial agreement regarding the purchase of certain raw materials from Cuisine Solutions Chile was signed in fiscal year 2004. During the Company’s second quarter 2005, the Company sold equipment from its discontinued facility in Norway in exchange for a note receivable of $500,000 payable in 3 installments, all due before March 2005, and equity in Cuisine Solutions Chile. The fair value of the equity was determined by management to be approximately $375,000. The Company’s 10% equity investment in Cuisine Solutions Chile is accounted for under the cost method as the Company does not have the ability to exercise significant influence over the operating or financial policy of Cuisine Solutions Chile.

Food Investors Corporation (“FIC”) and FRC are owned by the JLV Group. On October 22, 2003, the Company entered into a six month term loan in the amount of $500,000 with FIC to provide short term working capital necessary to expand operations for fiscal year 2004. The loan accrued interest at 5% per annum and was payable upon maturity. In October 2004, the loan was extended to April 22, 2005. Total outstanding principal was $314,000 at December 11, 2004. In addition, on November 10, 2003, the Company entered into a three-year term loan in the amount of $500,000 with FRC to provide working capital necessary to expand operations. The loan bears interest of 5% per annum and is payable upon maturity. Under this loan, Cuisine Solutions has been paying interest on a quarterly basis since April 2004, with a balloon payment for the total amount due three years from the origination of the loan.

On July 10, 2004 the Company entered into an agreement with the Bank of Charles Town in West Virginia for a $2,500,000 line of credit to finance its working capital requirements in the US. The line of credit is secured by the Company’s US accounts receivable and inventory and further guaranteed and secured with real estate owned by FRC. This line of credit bears an interest rate of 0.5% over the prime interest rate (5.50% at December 11, 2004) and is renewable on September 1, 2005. As of December 11, 2004, the outstanding principal was $2,024,000.

6) Discontinued Operations

The Company’s Board of Directors approved a plan to discontinue manufacturing operations in Norway on October 26, 2004 as the Company had incurred consecutive losses from its operations in Norway since inception. The majority of the machinery and equipment used in the Norway facility was sold to Cuisine Solutions Chile in exchange for a note for $500,000, payable to the Company in three installments, all due before March 2005, and equity in Cuisine Solutions Chile. The fair value of the equity was determined by management to be approximately $375,000. The Company recorded a gain of approximately $571,000 as a result of the sale of the equipment in its second quarter of fiscal year 2005. The salmon production from Norway has been replaced by the production of salmon by Cuisine Solutions Chile.

The assets and liabilities from discontinued operations at December 11, 2004 and June 26, 2004 are as follows:


	December 11, 2004		June 26, 2004
Assets of discontinued operations:
Cash	$	158,000	$	96,000
Accounts receivable, net		16,000		83,000
Other assets		6,000		345,000
Fixed assets		—		1,448,000

Total assets of discontinued operations	$	180,000	$	1,972,000


Liabilities of discontinued operations:
Accounts payable and accrued liabilities	$	687,000	$	1,265,000
Note payable		1,169,000		2,370,000

Total liabilities of discontinued operations	$	1,856,000	$	3,635,000

The note payable includes a $1,106,000 outstanding loan on a working capital overdraft line of credit with Den Norske Bank. The overdraft facility is secured by a letter of credit posted by the U.S. operations banking institution that is renewed semi-annually. Long term investments of $1,114,000 and a $56,000 cash deposit have been pledged as collateral to secure the letter of credit. The Company intends to liquidate the investments to satisfy the outstanding debt obligation.

In October 2004, an agreement was signed with Hjelmeland Kommune to release the Company from the building lease in Norway. Since the lease was originally recorded as a capital lease, the capital lease asset of approximately $1,349,000 and related lease liability of $1,291,000 were offset with the difference being charged to discontinued operations.

The Company was required, by local law in Norway, to provide notification of termination to all employees prior to the board of directors approval to discontinue operations. At December 11, 2004, $81,000 was accrued to satisfy serverance payments to such employees.

The following amounts related to Cuisine Solutions Norway have been segregated from continuing operations and reflected as follows:


	Twelve weeks ended						Twenty four weeks ended
	Dec. 11, 2004			Dec. 13, 2003			Dec. 11, 2004			Dec. 13, 2003
Net Sales	$	(1,000	)	$	341,000		$	31,000		$	690,000
Expenses:
Cost of goods sold		—			395,000			113,000			848,000
Selling and administrative expense		1,000			7,000			1,000			16,000
Other operating expense		463,000			—			463,000			—
Interest expense		45,000			11,000			83,000			38,000
Other expense (income)		—			—			(1,000	)		(1,000	)

Loss from discontinued operations		(510,000	)		(72,000	)		(628,000	)		(211,000	)
Gain from disposal of assets		571,000			—			571,000			—

Net earnings (Loss) from discontinued operations	$	61,000		$	(72,000	)	$	(57,000	)	$	(211,000	)

7) Earnings (Loss) Per Share

Basic earnings (loss) per common share is computed by dividing earnings (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share also includes common stock equivalents 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 2,886,687 and 1,681,375 for the 24 weeks ended December 11, 2004, and December 13, 2003, respectively. For the twenty four weeks ended December 13, 2003, 1,681,375 common stock options were not included in the diluted earnings per share calculations 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 related interpretations. Accordingly, 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 provisions 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 earnings (loss) and basic and diluted earnings (loss) per common share would have been as follows: