-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WQSE+u0cEJZ556AHecG/gqX0AT3REgPVmywsuaA0Tth8EmYWalItJNjvtrGhZrL9 ISHp+yffrVNr2CAzSd1i0w== 0000950133-99-003129.txt : 19991018 0000950133-99-003129.hdr.sgml : 19991018 ACCESSION NUMBER: 0000950133-99-003129 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990626 FILED AS OF DATE: 19991001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CUISINE SOLUTIONS INC CENTRAL INDEX KEY: 0000737602 STANDARD INDUSTRIAL CLASSIFICATION: CANNED, FROZEN & PRESERVED FRUIT, VEG & FOOD SPECIALTIES [2030] IRS NUMBER: 520948383 STATE OF INCORPORATION: DE FISCAL YEAR END: 0627 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-12800 FILM NUMBER: 99721685 BUSINESS ADDRESS: STREET 1: 85 SOUTH BRAGG STREET STREET 2: SUITE 600 CITY: ALEXANDRIA STATE: VA ZIP: 22312 BUSINESS PHONE: 7034429600 MAIL ADDRESS: STREET 1: 85 SOUTH BRAGG ST STREET 2: SUITE 600 CITY: ALEXANDRIA STATE: VA ZIP: 22312 FORMER COMPANY: FORMER CONFORMED NAME: VIE DE FRANCE CORP DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K (MARK ONE) XX ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - -- ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED: June 26, 1999 ------------- - -- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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 (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
85 South Bragg Street, Suite 600, Alexandria, VA 22312 ------------------------------------------------------ (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (703) 750-9600 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- None None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, par value $.01 per Share -------------------------------------- (TITLE CLASS) 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 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. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of the Common Stock on September 13, 1999 as reported on the NASDAQ/OTC Bulletin Board Market Quotation System, was approximately $4,351,875. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of September 13, 1999, there were 13,255,838 shares outstanding of the Registrant's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Parts of the following document are incorporated by reference in Parts III and IV of this Form 10-K Report: Proxy Statement for Registrant's 1998 Annual Meeting of Stockholders to be filed - - Items 10, 11, 12 and 13. Exhibit Index is located on page. 2 PART I ITEM 1. BUSINESS FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The Company services the Food Service Industry by providing pre-prepared meals to replace meals previously prepared from "scratch". The Company develops, produces and markets chef-created, fully cooked, fully prepared entrees and sauces. The Company has targeted certain customer groups that require superior quality while serving meals in large volumes and has categorized the customer groups into three types, Lodging, On Board Services and New Business Development. The Company also provides management services and consulting to business partners as the Company expands global capabilities through partnerships with limited liability companies. GENERAL The Company develops produces and markets chef-created, fully cooked, fully prepared entrees and sauces for the banquet, on board services, restaurant and home meal replacement industries. The Company's entrees and sauces are slow-cooked and pasteurized in its final packaging for guaranteed safety and award-winning flavor. The Company markets these products to upscale users that demand superior quality and use our product in place of product that was previously prepared by their own chefs. This ability to use pre-prepared product reduces the customers cost in product waste and labor, adds flexibility for last minutes changes and provides a consistent portion size. The Cuisine Solutions key to success is the ability to provide all of these benefits and deliver the level of quality our customers expect. Cuisine Solutions currently serves product through three major sales channels, On Board Services, Lodging and New Business Development. The On Board Services channel, formerly referred to as the Transportation Sales, has a customer base that serves meals while providing transportation services to the general public. The customer base includes airline and rail transportation service companies. Cuisine Solutions has the unique ability to service these companies globally through its multi-national production and distribution facilities providing these carriers with same meal service from two continents. Initial reception of our product into these channels has been favorable due to the quality, cost, and flexibility benefits realized by our customers. Cuisine Solutions has experienced a global sales growth of 73.3% versus fiscal 1998 in this sales channel during fiscal 1999, and currently expects this sales trend to continue through fiscal 2000. The Lodging sales channel serves product to hotels, banquet centers, event caterers and hotel restaurants. The Company saw this market as an untapped opportunity since the competition in this market is "make from scratch" rather than other prepared meal suppliers. Cuisine Solutions is confident that this market will realize the benefits of pre-prepared product as these customer face an growing problem with a tight labor market and increased demand for flexibility. Since the purchasing decision in this market is decentralized, the Company must demonstrate the ability to deliver the level of quality expected to many purchasing decision levels. A process that requires more effort but will deliver a new market and deep, stable customer base for prepared foods. The Company also sees opportunities in event caterers and contract food service suppliers as a potential accelerated growth market. Event caterers are those that supply meals for events such as the Super Bowl, Masters Tournament, World Cup and other major entertainment events. Contract food service companies provide meal solutions to company cafeteria's, hospitals and retirement communities. During fiscal 1999, the Company experienced a 32.7% global sales growth in the Lodging channel versus fiscal 1998, and expects this trend to continue through fiscal 2000. The New Business sales channel currently includes sales to retail in-store deli, military and restaurant distributors. Cuisine Solutions has experienced a growing interest in product demand from supermarkets for use in their in-store deli during fiscal 1999. The Company plans to re-position some sales efforts to explore this opportunity with the existing sales force without loss of service to our existing customer base. During fiscal 1999, the Company 1 3 experienced a global sales growth of 7.4% in the New Business channel versus fiscal 1998, and expects single digit sales growth in this category during fiscal 2000. The Company maintains manufacturing facilities in the United States and Norway, and sells its product in North America and Europe. The company is a partner in a limited liability company with a Brazilian partner, Sanoli Indsutria E Commercio Alimentacao Ltda, which will build a manufacturing facility and market product in the Mercusor market. The partnership includes management services to assist with the design and construction of a manufacturing facility as well as ongoing management service for operations, research and development, marketing and administrative support. The Company opened the USDA-approved food processing plant in Alexandria, Virginia in May 1990, the Hjemeland, Norway plant in August 1994 and expects the Brazilian plant to be operational by August 2000. The Company has signed a letter if intent to acquire a manufacturing facility in France to provide Cuisine Solutions "same meal solution" on both sides of the Atlantic. Nouvelle Carte currently serves some airline and banquet customers but the majority of the business is supplying home meal replacement products, fresh and frozen, to retail customers. The Company expects to complete the transaction by late fall, 1999. The production process uses a method of food preparation, developed in France, which cooks meats, seafood, poultry, sauces and vegetables over longer periods of time using low heat. Before the cooking process begins, the product is vacuum-sealed in special plastic pouches that better maintain the food's flavor and moisture as compared to other methods of cooking. The cooking temperature as well as the cooling temperature are strictly controlled via computerized process control systems that are key to consistent high quality products. Following the completion of the cooking process, the product can be either frozen or refrigerated for distribution. Currently, all of the Company's products are frozen. Cuisine Solutions, Inc. was incorporated in the State of Delaware in 1974. Its principal executive offices are located at 85 South Bragg Street, Suite 600, Alexandria, VA 22312 and its telephone number at that location is (703) 750-9600. 2 4 The Company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Therefore, this report contains forward looking statements that are subject to risks and uncertainties, including, but not limited to, the reliance on key customers, fluctuations in operating results and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. These risks could cause the Company's actual results for 1999 and beyond to differ materially from those expressed in any forward looking statements made by, or on behalf of, the Company. BACKGROUND The Company commenced operations in 1972 as a wholesale producer of French bread for daily delivery to the Washington, DC area. The Company expanded its markets throughout the 1970s. In fiscal year 1979, the Company began offering its product through Company-owned retail bakeries where the products could be freshly baked throughout the day. During the 1980s, the Company expanded its frozen dough product line and developed processes to facilitate the baking of these products at the point-of-sale. As of May 1994, the Company owned and operated 31 retail units. The Company sold the Bakery Division and the Restaurant Division to Vie de France Bakery Yamazaki, Inc. in 1991 and 1994, respectively. The Company began development of the Culinary division business in 1987, in conjunction with research performed previously by Nouvelle Carte France, a related French Company. As a result of the growth in the application of high quality frozen products in Europe, the Board authorized the establishment of the Vie de France Culinary Corporation for the express purpose of the research into and development of high quality frozen products for the U.S. market. This Company was formed in 1987, and was later merged into Vie de France Corporation. In 1989, construction began on a 30,000 square foot plant in Alexandria, Virginia designed to manufacture its sous vide product line under the trade name Vie de France Culinary. The Culinary plant began operations in May 1990, and expanded into a 50,000 square feet building. During fiscal years 1991 through 1996, the Culinary Division successfully built its sales volume from zero to over $2 million in fiscal year 1991, and by fiscal year 1996 to $16 million. The Company restructured its sales organization and refocused its strategy on sales to the banquet industry (hotels, convention centers, casinos, airlines and other banquet providers) during fiscal year 1997. Because of sales and marketing disruptions related to this transition, sales declined during fiscal year 1997 to about $14 million. During fiscal year 1998 the Company continued its reorganization while sales remained steady at $14 million. The focused sales and marketing efforts began to show results as sales revenue increased to $21 million during fiscal 1999. The Company initially depended upon a national direct sales operation, which was formally organized in 1992. In fiscal year 1997 the emphasis shifted to a more focused sales organization that included an internal sales group, segmented by customer type, and additional sales support from a network of brokers and distribution organizations located in key markets nationwide. A sales program that includes trade advertising, promotions and far more frequent contact with a broader range of existing and potential high-volume customers was put into effect late in fiscal year 1997 and continued through fiscal year 1998. Those efforts have been duplicated during fiscal 1999 resulting in deeper penetration into key accounts as well as the addition of new customers. During the second quarter of fiscal year 1998, the Company purchased a parcel of land through bank financing for approximately $700,000 plus applicable fees. During the fourth quarter of fiscal year 1998, the Company re-negotiated the lease on the current facility, received significant cost reductions, and decided to expand capacity on the existing plant through capital investment and additional shifts. During fiscal 1999 the Company sold the property at a gain of $132,000. The Company intends to reap the benefits of its existing plant via high production volume while minimizing overhead costs. Management plans to initiate detailed analysis on production capabilities and location planning during fiscal 2000 to determine maximum capacity capabilities and long term production planning to meet future customer demand forecasts. 3 5 PRODUCTS The Company develops produces and markets chef-created fully cooked prepared entrees and sauces for the banquet, transportation, restaurant and home meal replacement industries. The Company's entrees and sauces are slow-cooked and pasteurized in its final packaging for guaranteed safety and award-winning flavor. The Company offers a wide range of high quality frozen entrees, side dishes, and sauces. The entree items consist of a variety of seafood, pork, beef and poultry items. Side dishes and sauces range from vegetables and rice to cream or tomato-based sauces, which allow the Company to plate thousands of signature combinations. The Company packages its products in two ways. Most products are vacuum-sealed and frozen in either single or multi-serving packaging and then case-packed. Single-pack items provide maximum customer flexibility, while multi-serving packs provide additional efficiency and economy for banquets. Both individual and multiple-serving vacuum packages seal the product prior to the cooking process and remain sealed until they are ready to be heated for serving. This maximizes the food quality and safety factor since the product is not exposed to elements or handled after the cooking process until opened by the chef. The sous vide preparation process also provides for long shelf lives minimizing the risk of product obsolescence and providing additional flexibility in production panning. A second packaging method, for customers wishing to use single serving portions, is Individually Quick Frozen packaging. In this method, individual servings of products are cooked, frozen, removed from vacuum package and sealed inside a plastic lined corrugated box for easy customer access to single servings. The Company invested in an enrobed pasta line during fiscal 1998 and initiated product development during fiscal 1999. The enrobed pasta process production coats the pasta using special technology to provide uniform coverage and prevent the sauce from running off the product. Cooked pasta/sauce products with combinations of protein and/or vegetables are very appealing to our customer base due to the popularity of pasta among the general public. The flexibility in preparation of products to meet specific customer needs, and the cost to our customer to serve a meal versus the cost of a meals with poultry, meat or seafood, makes pasta an attractive alternative meal. This new product accounted for 2.4% of total Company revenue during fiscal 1999 and management believes it has tremendous sales and profit potential during fiscal 2000. DISTRIBUTION The USA manufacturing facility distributes its products frozen to U.S. customers. The Company's wholly-owned Norwegian subsidiary produces product for sales in Europe and the USA. During fiscal year 1999, the Company continued to establish important new relationships with third party distribution warehouses to increase distribution capabilities throughout the United States. The Company currently manages fourteen outside warehouses strategically located throughout the USA. Internal MIS control systems monitor inventory levels at all warehouses with real-time information and provide DRP and MRP information for production and distribution planning The Company expanded distribution into the European markets in fiscal year 1995 in conjunction with the opening of the Norwegian production facility in 1994. Its products are stored in a number of regional frozen warehouses as well as at the Alexandria, Virginia plant. In fiscal year 1996 the Company improved its distribution of Norwegian Salmon to US customers by offering "direct ship" capabilities from the Norwegian plant directly to the customer. The Company intends to adopt alternative distribution means, as their customers need them. Export products are transported in frozen containers via ship. RAW MATERIAL STATUS The Company buys its raw materials from a number of suppliers at market prices. While these prices may fluctuate during the year, the Company does not believe that availability poses a material risk to its business. The majority of product sales are subject to price revision to reflect shifts in the price of raw materials. 4 6 PATENTS AND TRADEMARKS AND OTHER ITEMS IMPORTANT TO OPERATING SEGMENTS The Company believes that its Cuisine Solutions, Inc. and Vie de France Corporation, trademarks are important to its business success. Accordingly, it takes the necessary steps to protect them. During fiscal year 1998 the Company assured its protection by changing the name on all trademarks it owns to Cuisine Solutions, Inc in addition to maintaining the Vie de France Corporation trademark. The Company and Vie de France Bakery Yamazaki, Inc. entered into a Trademark and Service Mark License Agreement in 1991 and, in conjunction with the sale of the Restaurant Division, amended and restated this agreement. In fiscal year 1996 the Company was in the process of securing a new packaging trademark called MicroRoast(TM) and MicroRoti(TM) to be used in the U.S. and European market, respectively. However, it was during fiscal year 1997 the Company secured the use of these two trademarks. This new packaging is designed for use in microwave ovens and imparts a roasted quality to our value-added entrees. CUSTOMER DEPENDENCY Due to the decentralized purchase decision process of customers within the Lodging channel, management does not believe any single customer creates a dependency relationship. The On Board Services channel has sales to two airline catering companies that represent 32.6% of total Company sales in fiscal 1999 and the same two caterers accounted for 37% of total Company sales during fiscal 1998. One of the two caterers account for 22.9% of total Company sales in fiscal 1999 and 23.3% in fiscal 1998. SEASONALLY Due to the increase in sales across in the On Board Services and Lodging sales channels, seasonality has been diluted. Currently sales trends do not reflect any significant seasonal trend. COMPETITION The Company primarily competes for sales by replacing product prepared by Cuisine Solutions versus "in-house prepared from scratch". Cuisine Solutions is attempting to create new global markets for its products and currently experiences little direct competition. RESEARCH & DEVELOPMENT For continuing operations, the Company invested $266,000, $269,000 and $169,000 in research and development activities in fiscal years 1999, 1998 and 1997, respectively. The Company invests in development on an ongoing basis in order to maintain the vitality of its product lines and to build sales. REGULATION The Company is subject to various Federal, state and local laws affecting its business, including health, sanitation and safety regulations. The U.S. plant operates under USDA supervision over the handling and labeling of its products. The Company believes its operations comply in all material respects with applicable laws and regulations. The Company's Norwegian plant meets European Community standards and regulations. The Norwegian products, along with certain raw materials, are subject to import regulations. EMPLOYEES The Company employs approximately 130 people including full-time and part-time workers and corporate staff. GEOGRAPHIC SALES 5 7 The Company's sales are primarily focused in the United States, with sales representing 82%, 89.8% and 91.2% of total sales for fiscal years 1999, 1998 and 1997, respectively. ITEM 2. PROPERTIES The Company leases its offices and its two manufacturing facilities. The U.S. plant, located in Alexandria, Virginia, is approximately 50,000 square feet. The Norway plant, located in Hjelmeland, Norway, is approximately 20,000 square feet. The Company's Norway plant is structured as a twenty-year capital lease whereby the Company will own the facility at the end of the lease term. The Company owns substantially all of the equipment used in its facilities. Lease commitments and future minimum lease payments are shown in Notes 5 and 8 to the Consolidated Financial Statements, which is included in this Form 10-K. ITEM 3. LEGAL PROCEEDINGS The Company is engaged in ordinary and routine litigation incidental to its business, but management does not believe that any amounts it may be required to pay by reason thereof will have a material effect on the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 6 8 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS COMMON STOCK The Company's capital stock is divided into two classes: Common Stock and Class B Stock. The Class B Stock, which is reserved for issuance to employees under stock options plans, is identical in all respects to the Common Stock except that the holders thereof have no voting rights unless otherwise required by law. The Company's Common Stock is traded in the over-the-counter market on the NASDQ/OTC Bulletin Board National Market System under the symbol CUIS. The following table sets forth for the quarters indicated the high and low sales prices per share as reported on the National Market System:
Year ended June 26, 1999 High Low First Quarter..................................... $ .938 $ .638 Second Quarter.................................... 1.00 .3750 Third Quarter..................................... 1.500 .500 Fourth Quarter.................................... 1.562 1.000 Year ended June 27, 1998 High Low First Quarter..................................... $ 1.438 $ .938 Second Quarter.................................... 1.688 1.000 Third Quarter..................................... 1.063 1.000 Fourth Quarter.................................... 1.125 .875 Year ended June 28, 1997 High Low First Quarter..................................... $ 2.688 $ 1.938 Second Quarter.................................... 2.563 1.375 Third Quarter..................................... 2.000 1.063 Fourth Quarter.................................... 1.500 1.063
AS OF SEPTEMBER 13, 1999 THERE WERE APPROXIMATELY 686 HOLDERS OF RECORD OF THE COMPANY'S COMMON STOCK. No dividends were paid during fiscal year 1999, 1998 and 1997. On November 30, 1998, the Company was notified by NASDAQ that it no longer met the minimum $1.00 bid requirement to be included in the NASDAQ National Market and was delisted. The Company currently trades on the OTC Bulletin Board. 7 9 ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR SUMMARY (in thousands, except per share amounts) 1999 1998 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- Net Sales $ 20,722 $ 14,007 $ 13,987 $ 16,078 $ 15,707 Loss from continuing operations (3) (733) (3,121) (934) (2,224) (706) Net income (loss) (1); (2); (3); (3) (733) (3,121) (466) (1,714) 24 Loss from continuing operations per share (.05) (0.23) (0.07) (0.16) (0.05) Net income (loss) per share (.05) (0.23) (0.04) (0.13) - Total assets 22,818 24,959 22,712 27,035 29,911 Long term debt, including current portion 2,081 3,024 2,575 2,300 2,981 Stockholders' equity 17,607 19,503 18,125 22,782 24,481 Dividends per share - - - - -
(1) Includes benefit from cumulative effect of change in accounting principle of $197 in 1996. (2) Includes gains from sale on discontinued operations of $468, $313, $730, in 1997, 1996, and 1995 respectively. (3) Includes loss on equity method investment of $1,500 in 1996. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Fiscal 1999 revenue reflects a consolidated sales increase of 47.9% to $20,722,000 from fiscal year 1998 revenue of $14,007,000 and an increase of 48.2% versus fiscal 1997 revenue of $13,987,000. The consolidated fiscal 1999 increase in sales was driven by a 31.4% increase in US sales and a 159.2% increase in sales to Europe and revenue from management services versus fiscal 1998 revenue. Loss from continuing operations for fiscal 1999 was $733,000 versus $3,121,000 for fiscal 1998 and $466,000 for fiscal 1997. The loss reduction for fiscal 1999 was due to the increased sales volume and related volume efficiencies in manufacturing production costs. 8 10 SALE AND GROSS MARGINS The Company's sales of high-quality frozen foods have been to lodging, airlines and other food service providers who order direct and/or through their distributor networks. In fiscal year 1999 total Lodging sales represented 30.8%, On Board Services 50.2%, New Business customers 16.6%, and 2.4% in management services. A comparison of net sales, gross margin percentages and losses from operations as follows:
Year Ended June 26, June 27, June 28, 1999 1998 1997 ---- ---- ---- Net Sales $ 20,722,000 $ 14,007,000 $ 13,987,000 Gross margin percentage 24% 17% 14% Loss from operations $ (1,620,000) $ (4,269,000) $ (2,366,000)
Execution of strategic sales planning led to revenue of $20,722,000 in fiscal 1999, up 47.9% from fiscal 1998 revenue of $14,007,000 and up 48.1% from fiscal 1997 revenue of $13,987,000. The Company experienced an explosive growth in the On Board services channel during fiscal 1999, accounting for 65.6% of the total Company increase in sales revenue. This growth is attributed to the second year results of a focused strategy by the On Board Services Sales Group to penetrate the passenger airline and rail transportation services market that was initiated in 1997. The Company anticipates fiscal 2000 sales growth in this channel to meet or exceed fiscal 1999 levels. Lodging sales increase accounted for 23.4% of the total company sales growth. This increase was also the impact of a vision to create a new market by replacing items prepared "in house" with pre-prepared frozen entrees. The Company anticipates marginally increasing sales each year as the marketing efforts begin produce results. The Company anticipates fiscal 2000 sales growth to meet or exceed fiscal 1999 levels in this channel. New Business revenue increases accounted for 3.5% of the total increase through improvements in the retail channel and management services to Brazil accounted for 7.5% of the increase. Total sales to Europe from the Norwegian facility were $3,717,000 during fiscal 1999, $1,429,000 in fiscal 1998 and $1,231,000 in fiscal 1997. The sales growth rates were 160% in fiscal 1999 versus 16% in fiscal 1998. The increase in Norway's European activity is a direct result of increased efforts at penetrating strategic customer accounts. Gross margins as a percent of sales increased to 24% for fiscal 1999 compared to 17% in fiscal 1998 and 14% in fiscal 1997. The increase is attributed to manufacturing efficiencies related to volume versus overhead costs and strategic contract purchasing of raw materials. Management service fees created 1.6% of the improvement via revenue without cost of goods, 1.4% was due to depreciation reductions due to equipment reaching its expected life and 4% of the improvement was created by volume efficiencies and strategic purchasing. SELLING AND ADMINISTRATION EXPENSES: A comparison of selling and general administrative costs follows:
Year Ended June 26, June 27, June 28, 1999 1998 1997 Selling costs $4,181,000 $4,377,000 $2,441,000 General administrative costs 2,476,000 2,220,000 1,816,000 ---------- ---------- ---------- $6,657,000 $6,597,000 $4,257,000
Selling and administration costs as a percentage of sales were 32% in fiscal 1999, 47% in fiscal 1998 and 30.4% in fiscal 1997. The fiscal 1999 decrease reflects the impact of increased sales while minimizing additional 9 11 expenditures. The increase in fiscal 1998 versus 1997 reflects the initial investment in sales personnel and marketing programs required to support the long term sales and marketing strategy .The fiscal 1999 increase in general administrative costs were driven by depreciation on new information systems, additional legal expenditures related to the NASDAQ delisting and trademark maintenance for Cuisine Solutions worldwide and travel related to Norway activity and investigation into potential acquisitions. The fiscal 1998 general and administration expenses reflect an increase in travel and depreciation costs associated with new information systems DEPRECIATION AND AMORTIZATION The fiscal year 1999 depreciation and amortization costs decreased by $126,000 over fiscal year 1998 to $879,000 as a result of equipment and leasehold improvements nearing the end of its useful life, netted against investments in capital assets for its operations. Actual fiscal year 1998 depreciation and amortization costs decreased by $191,000 over fiscal year 1997 to $1,058,000. Actual fiscal year 1997 depreciation and amortization costs increased by $55,000 over fiscal year 1996 to $1,249,000 as a result of investments in capital assets for its operations. NON-OPERATING INCOME AND EXPENSE Interest expense relates to the borrowings relating to the Company's U.S. and Norwegian subsidiary, including the Norwegian capital lease. At June 26, 1999, the Company had borrowings of $1,457,000, bearing interest at rates ranging from 6.9% to 8.5%. The majority of these borrowings of $1,428,00 were through its Norwegian facility. It is anticipated that these borrowings will remain outstanding during the upcoming fiscal year. The Company's U.S. operations represent $18,000 of these borrowings. Non-operating income for fiscal 1999 of $1,084,000 related to interest income and capital gains earned on the investments held by the Company. DISCONTINUED OPERATIONS The gain from sale of discontinued operations for fiscal year 1997 relates to reversal of certain accruals related to the former Bakery and Restaurant Divisions of $154,000 due to the settlement of certain leases relating to the former restaurants and bakeries, of which $60,000 was recorded in the fourth quarter of 1997, and income tax benefits applied of $314,000, of which $110,000 was recorded in the fourth quarter of 1997. During fiscal year 1999, the Company reversed the $72,000 accrual related to a lease. IMPACT OF INFLATION AND THE ECONOMY Inflation in labor and ingredient costs can significantly affect the Company's operations. Many of the Company's employees are paid hourly rates related to, but generally higher than the federal minimum rates. The Company's sales pricing structure allows for the fluctuation of raw material prices. As a result, market price variations do not significantly affect the gross margin realized on product sales. Customer sensitivity to price changes can influence the overall sales of individual products. The Company performs price reviews and publishes changes each calendar quarter. LIQUIDITY AND CAPITAL RESOURCES In fiscal year 1999, the Company experienced an increase in its liquidity through the sale of securities for capital gains, the collection of the federal income tax receivable and the sale of the real estate. Inventory and receivables increased due to the higher sales volume and requirements to have adequate inventory on hand to meet customer demand resulting in an increase in cash tied up in inventory and receivables. The combined total of the cash and short-term investment balances was $2,211,000 and $1,610,000 at June 26, 1999 and June 27, 1998, respectively. Additionally, the Company held investments of $7,950,000 and $10,600,000 at June 26, 1999 and June 27, 1998, respectively, with maturities greater than one year. 10 12 In fiscal year 1998, the Company experienced an increase in its liquidity due to the payment in full all notes receivables from Food Research Corporation (FRC) its majority shareholder. The combined total of the cash and short-term investment balances was $1,610,000 (of which $645,000 is restricted) and $1,451,000 at June 27, 1998 and June 28, 1997, respectively. Additionally, the Company held investments of $10,600,000 and $10,217,000 at June 27, 1998 and June 28, 1997, respectively, with maturities greater than one year. In fiscal year 1997, the Company experienced a decline in its liquidity. The combined total cash and short-term investment balances was $1,451,000 and $9,520,000 at June 28, 1997 and June 29, 1996, respectively. Additionally, the Company held investments of $10,217,000 and $5,598,000 at June 28, 1997 and June 29, 1996, respectively, with maturities greater than one year. Cash used by operations in fiscal year 1999 amounted to $560,000 compared to cash used in fiscal 1998 of $3,040,000, and cash used in fiscal year 1997 of $1,308,000. The cash used in fiscal year 1999 relates to the funds needed to finance the Company's operations and increase inventory. The cash used in fiscal year 1998 relates to the funds needed to finance the Company's operations, along with increases in trade and income tax receivable. The cash used in fiscal year 1997 relates to the funds needed to finance the Company's operations along with increases in trade, income tax and notes receivable. Cash in the amount of $2,048,000 was provided by investing activities in fiscal year 1999. During fiscal year 1999 the company sold securities for capital gains and the property purchased for the plant relocation. Cash in the amount of 3,564,000 was provided by investing activities in fiscal year 1998. During fiscal year 1998 the Company received payment in full of $4,399,000 of notes receivable and accrued interest from it majority shareholder, FRC. Cash in the amount of $5,791,000 was used by investing activities in fiscal year 1997. During 1997, the Company funded a loan to its majority shareholder, FRC in the amount of $2,441,000. In addition to these loans, three loans from FRC totaling $1,966,000 were outstanding as of June 29, 1997 and June 29, 1996, with maturity dates ranging from July 1, 1997 through October 1, 1997. The three loans that were outstanding as of June 29, 1996 are secured by assets of FRC. All of the notes due from FRC were paid in full during fiscal year 1998. During fiscal year 1999 the Company made capital expenditures of $220,000. These investments involved small equipment purchases, personal computers and software upgrades. The Company had net purchases totaling $716,000 in fiscal year 1998 related to manufacturing and systems upgrades. During fiscal year 1997, the Company made capital expenditures of $413,000. In fiscal year 1999, cash used by financing activities totaled $943,000. The majority of these funds we applied against the bank note of $645,000 which was used to finance the purchase of land with and the remaining cash were applied to the Norwegian debt. Fiscal year 1998,cash in the amount of $196,000 was used by financing activities, which is attributable to the debt acquired by the Norwegian facility in the amount of $115,000, offset by payments of $311,000. In fiscal year 1997, cash in the amount of $590,000 was provided by financing activities, which is attributable to the debt acquired by the Norwegian and U.S. facilities in the amount of $713,000 and $31,000, respectively, offset by payments of $154,000. During the second quarter of fiscal year 1998, the Company purchased a parcel of land using bank financing for approximately $700,000 plus applicable fees. The purchase, initiated as part of an expansion plan, included financing through an approved $8.2 million industrial revenue bond. During the fourth quarter of fiscal year 1998, the Company re-negotiated the lease on the current facility, received significant cost reductions, and decided to expand capacity at the existing plant through capital investment and additional shifts. During fiscal 1999, the land was sold. The Company's Norwegian subsidiary has secured a working capital commitment for its liquidity needs in Norway in the form of an overdraft facility. As of June 26, 1999 $623,000 was outstanding under this overdraft facility. During fiscal year 1996, CSI Norway increased its overdraft facility balance, and can borrow up to $800,000 under this commitment. The overdraft facility is protected by a letter of credit posted by the U.S. operations banking institution and renewed annually. 11 13 FUTURE PROSPECTS In fiscal year 2000, the Company intends to remain focused on the objective of becoming the preferred global supplier to the Lodging and On Board Services channel. The continued investment in sales and marketing awareness spending, initiated during fiscal 1998, is expected to continue to produce the double digit sales growth through fiscal year 2000. Armed with a full line of products and expanded capabilities due to the proposed acquisition of Nouvelle Carte, the Company will continue to pursue sales growth in the European markets. The additional production capabilities obtained through the acquisition of Nouvelle Carte will provide the Company with the ability to offer airlines expanded same meal service on both sides of the Atlantic, as well as flights to countries other than the USA. Nouvelle Carte's successful retail channel and solid relationship with major retailers such as Carrefour will provide the company with the contacts and capabilities to expand this success to the South American retail market. Fiscal 2000 will also produce an additional manufacturing facility in Brazil to service the Mercusor markets for Airline, Lodging and other foods service channels in additional to retail and export opportunities. Brazil is currently scheduled to begin producing product by June 2000. Customers have expressed a strong interest in the Cuisine Solutions enrobed pasta line. The company has prepared initial orders and allocated the required production resources to plan on substantial demand for this product line. The current production facility has planned adequate resources to produce up to $17 million in annual sales of this product line. Cuisine Solutions has expanded it current facility to operate two shifts to meet current and future sous vide production demands. Management has initiated a project to evaluate the current facility to determine revised maximum capabilities and begin the planning process to determine the size and equipment lines to meet long term demand. The Company plans to have these plans completed by the close of fiscal 2000. The Company has undertaken a comprehensive Year 2000 compliance program. This program addresses the Company's products they sell as well as the Customer Service and Technical support functions. The Company is aware of the issues associated with the programming code in existing computer systems as the millennium (year 2000) approaches. During fiscal year 1998 the Company made investments in capital expenditures of $716,000. These expenditures represent $360,000 of manufacturing equipment, and $345,000 of hardware and software programs. The equipment, hardware and software purchased have been tested for year 2000 compliance. The Company is currently utilizing both internal and external resources to identify, correct or reprogram, and test any other systems it has for the year 2000 compliance. The Company has completed testing of its internal systems and all systems, except a package labeling system are year 2000 compliant. The package labeling system will be replaced by new equipment by late October 1999. The Company has establish procedures to inventory all of its automated computer based systems, developed a team to implement a plan for year 2000 conversion, confirmed with the manufacturers of equipment, computer and software that its systems will function properly in the year 2000 and contacted vendors and customers to request an update of their Year 2000 preparations. The Company has already received assurance from its banking institution of its initiatives in place for year 2000 compliance. Management does not expect the year 2000 conversion to have a material effect on its financial position or results of operations. . ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The principal market risks (i.e., the risk of loss arising from adverse changes in market rates and prices) to which we are exposed are: Interest rates,and Foreign exchange rates. Interest Rates: 12 14 The Company's exposure to market risk for changes in interest rates relate primarily to the Company's investment and debt portfolio. The Company has not used derivative financial instruments in its investment portfolio. The Company places its investments with high quality issuers. A portion of the debt portfolio has fluctuating interest rates that change with changes in the market. Information about the Company's investment portfolio is set forth in Footnote 1 of Item 14(a) of the Form 10-k. Foreign Currency Risk International operations constitute 18% of fiscal year 1999 Company sales. The majority of the Company's sales are denominated in U.S. dollars, thereby limiting the Company's risk to changes in foreign currency rates. The Norwegian subsidiary's sales are denominated in Norwegian kroner. As currency exchange rates change, translation of the income statements of the Norway operations into U.S. dollars affects year-over-year comparability of operating results. Sales, which are subject to these foreign currency fluctuations, are approximately 18% of the Company's sales. The net assets of the subsidiary are approximately 3.7% of the Company's net assets. The Company does not enter into hedges to minimize volatility of reported earnings because it does not believe the exposure or the cost justifies it. Information about the Company's foreign currency translation policy is set forth in Footnote 1 of Item 14(a)(1) of this Form 10-K. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item 8 is included at Item 14(a)(1) and (2). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Effective on October 28, 1998, the Registrant's Board of Directors elected to retain Grant Thornton LLP as its independent auditor and to dismiss KPMG LLP ("KPMG"). Heretofore KPMG had acted as the Registrant's independent auditor. The decision to change auditors was approved by the Registrant's Audit Committee and Board of Directors. The audit reports of KPMG on the consolidated financial statements of the Registrant and its subsidiaries as of and for the years ended June 27, 1998 and June 28, 1997, did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. However, the audit reports of KPMG on the consolidated financial statements of the Registrant and its subsidiaries as of and for the years ended June 27, 1998 and June 28, 1997 referred to a change in accounting method for certain inventory costs. During the Registrant's two most recent fiscal years ended June 27, 1998 and June 28, 1997, and through the subsequent interim period through October 28, 1998, there were no disagreements with KPMG on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements if not resolved to the satisfaction of the former accountant, would have caused them to make a reference to the subject matter of the disagreements in connection with its report; nor has KPMG ever presented a written report, or otherwise communicated in writing to the Registrant or its Board of Directors the existence of any "disagreement" or "reportable event" within the meaning of Item 304 of Regulation S-K. KPMG has provided the Registrant with a letter addressed to the SEC, as required by Item 304(a)(3) of Regulations S-K, so that the Registrant can file such letter with the SEC. 13 15 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required under this Item 10 is shown in the Proxy Statement to be filed under Regulation 14A, under the caption "Election of Directors", and such information is incorporated herein by reference. EXECUTIVE OFFICERS The following list and narrative sets forth the name and age of each present executive officer of the Company, all positions held by the person with the Company, the year in which the person first became an officer, and the principal occupations of each person named since 1988.
NAME AGE OFFICE HELD WITH COMPANY SINCE - ---- --- ------------------------ ----- Stanislas Vilgrain 40 President and Chief Executive Officer 1994 Carl M. Youngman 57 Treasurer 1996 Michael McCloud 36 Executive Vice President 1997 Robert Murphy 36 Vice President and Chief Financial Officer 1998
Mr. Vilgrain was appointed President and Chief Executive Officer in October 1993, having served as President and Chief Operating Officer since June 1991 and as a director since 1991. He served as President of the Vie de France Culinary Division from July 1987 to June 1991. Previously, he was employed by Vie de France Corporation as Director of Staff Operations from August 1986 through June 1987. He was Manager of the Vie de France Corporation's San Francisco bakery from January 1986 through August 1986, after having served as Assistant Manager of the Denver bakery from July 1984 through December 1985. Prior to joining Vie de France Corporation, he was Assistant to the Director of Research & Development for the Bakery Division of Grands Moulins de Paris from June 1983 to July 1984, and was Regional Manager of Operations and Sales from July 1982 through May 1983 for O.F.U.P., a publication distributor in Paris, France. Mr. Youngman was appointed Acting Chief Financial Officer in February 1996 and Treasurer in October 1996. Mr. Youngman has over twenty five years of experience in executive-level positions. During this period he has been an executive in over twenty companies and an advisor to over fifty other companies. From 1993 to the present, Mr. Youngman has been senior partner of Youngman and Charm, a professional firm which specializes in corporate renewal and corporate finance. Mr. Youngman hold a BS degree in Electrical Engineering from Worcester Polytechnic Institute and a Master's Degree from Harvard Business School. He is a member of the Audit, Stock Option and Compensation Committees. Mr. Youngman was replaced by Mr. Murphy as Chief Financial Officer in November 1997. Mr. McCloud came to the Company in October 1996. Prior to joining the Company, Mr. McCloud was Vice President of Sales for Edwards Baking Company since July 1994. He previously served as Edwards' Vice President of Marketing, and as that Company's Director of Marketing. Before joining Edwards, Mr. McCloud was Director of Marketing for Borden, Inc.'s snacks and international consumer products division. He has also held sales and marketing positions with units of Coca-Cola, USA and Proctor & Gamble. Mr. McCloud holds a BS degree in Management. Mr. Murphy joined the Company in November 1997 and was appointed Vice President and Chief Financial Officer. Mr Murphy has 20 years of food experience, 14 of which are in the manufacturing sector. Prior to joining the Company, Mr. Murphy was the Senior Director of Acquisitions and Integration for Edwards Baking Company. 14 16 He also held the positions of Operations Controller and Manager of Financial Systems and Development. Prior to Edwards, Mr. Murphy was a Controller with Bunge Foods working in the Bakery and Dairy Industrial Ingredient Divisions. ITEM 11. EXECUTIVE COMPENSATION The information required under this Item 11 is shown in the Proxy Statement to be filed under Regulation 14A, under the caption "Executive Compensation", and such information, except for the information required by Item 402(k) and Item 402(l) of Regulation S-K, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required under this Item 12 is shown in the Proxy Statement to be filed under Regulation 14A, under the caption "Voting Securities and Principal Holders Thereof", and such information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required under this Item 13 is shown in the Proxy Statement to be filed under Regulation 14A, under the caption "Certain Transactions", and such information is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K (a) Index to Financial Statements
Page ---- (1) Financial Statements: Report of Independent Accountants................................................ Grant Thornton LLP.as of and for the year ended June 26, 1999............... F-1 KPMG LLP as of June 27, 1998 and for the years ended June 27, 1998 and June 28, 1997 Consolidated Balance Sheets - June 26, 1999 and June 27, 1998.................... F-2 Consolidated Statements of Operations - Fiscal Years Ended June 26, 1999, June 27, 1998, and June 28, 1997............................. F-3 Consolidated Statements of Changes in Stockholders' Equity - Fiscal Years Ended June 26, 1999, June 27, 1998, and June 28, 1997................. F-4 Consolidated Statements of Cash Flows - Fiscal Years Ended June 26, 1999, June 27, 1998 and June 28, 1997.............................. F-5 Notes to Consolidated Financial Statements - June 26, 1999....................... F-6 (2) Financial Statement Schedule:.................................................... Schedule II--Valuation and Qualifying Accounts................................... F-7
15 17 All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (3) Exhibits: The following exhibits are incorporated in this report by reference from identically numbered exhibits to the Company's Amendment to its Annual Report for the year ended June 27, 1992 on Form 8 dated February 26, 1993: Exhibit No. Description of Exhibit 3-A The Certificate of Incorporation of the Company, as amended to date. 3-B The By-Laws of the Company, as amended to date. The following exhibits are incorporated in this report by reference from an identically numbered exhibit to the Company's Annual Report on Form 10-K for the year ended June 29, 1991: 10.46 The Company's Proxy Statement for a Special Meeting of Stockholders, dated June 7, 1991, together with a conformed copy of the Asset Purchase Agreement between Cuisine Solutions, Inc.and Vie de France Bakery Yamazaki, Inc. dated May 7, 1991. The following exhibits are incorporated in this report by reference from the Company's two Registration Statements on Form S-8, dated April 5, 1993: 10.52 The Company's 1986 Stock Option Plan, as amended. 10.53 The Company's 1992 Stock Option Plan. The following exhibits are filed as exhibits to this report in the indicated sections. 23.2 Consent of Independent Accountants- KPMG LLP 27 Financial Data Schedule (b) Reports on Form 8-K: 16 18 None (c) Exhibits: Exhibits required to be filed in response to this paragraph of Item 14 are listed above in subparagraph (a)(3). (d) Financial Statement Schedule: Schedules and reports thereon by independent accountants required to be filed in response to this paragraph of Item 14 are listed in Item 14(a)(2). 17 19 SIGNATURES 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. CUISINE SOLUTIONS, INC. (Registrant) By: /s/ Stanislas Vilgrain ---------------------- Stanislas Vilgrain President and Chief Executive Officer (Principal Executive Officer) 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/ Jean-Louis Vilgrain Chairman of the Board September 17, 1999 - ------------------------------------------------ ------------------ Jean-Louis Vilgrain /s/ Stanislas Vilgrain President, September 17, 1999 - ------------------------------------------------ Chief Executive Officer ------------------ Stanislas Vilgrain /s/ Carl Youngman Director September 17, 1999 - ------------------------------------------------ Treasurer ------------------ Carl M. Youngman /s/ Bruno Goussault Director September 17, 1999 - ------------------------------------------------ ------------------ Bruno Goussault /s/ Alexandre Vilgrain Director September 17, 1999 - ------------------------------------------------ ------------------ Alexandre Vilgrain /s/ Charles McGettigan Director September 17, 1999 - ------------------------------------------------ ------------------ Charles McGettigan /s/ David Jordan Director September 17, 1999 - ------------------------------------------------ ------------------ David Jordan /s/ Nancy Schaefer Director September 17, 1999 - ------------------------------------------------ ------------------ Nancy Schaefer /s/ Michael McCloud Executive Vice President September 17, 1999 - ------------------------------------------------ ------------------ Michael McCloud /s/ Robert Murphy Vice President & September 17, 1999 - ------------------------------------------------ Chief Financial Officer ------------------ Robert Murphy (Principal Financial and Accounting Official)
18 20 \ Independent Auditors' Report The Board of Directors and Stockholders CUISINE SOLUTIONS, INC.: We have audited the accompanying consolidated balance sheet of Cuisine Solutions, Inc. and subsidiaries as of June 26, 1999, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the year then ended. In connection with our audit of the consolidated financial statements we also have audited the financial statement schedule for the year ended June 26, 1999, as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cuisine Solutions, Inc., and subsidiaries as of June 26, 1999, and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule for the year ended June 26, 1999, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. . GRANT THORNTON LLP Vienna, Virginia September 10, 1999 19 21 The Board of Directors and Stockholders CUISINE SOLUTIONS, INC.: We have audited the accompanying consolidated balance sheet of Cuisine Solutions, Inc. and subsidiaries as of June 27, 1998, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for years then ended June 27, 1998 and June 28, 1997. In connection with our audits of the consolidated financial statements we also have audited the financial statement schedule for the years ended June 27, 1998 and June 28, 1997, as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cuisine Solutions, Inc., and subsidiaries as of June 27, 1998, and the results of their operations and their cash flows for the years ended June 27, 1998 and June 28, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule for the years ended June 27, 1998 and June 28, 1997, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. . KPMG LLP Washington, D.C. September 29, 1998 20 22 CUISINE SOLUTIONS, INC. CONSOLIDATED BALANCE SHEETS
----------------------------------------------- June 26, June 27, 1999 1998 --------------------- --------------------- ASSETS Current Assets Cash and cash equivalents $ 1,225,000 $ 681,000 Investments, current (including restricted investments of $0 and $645,000, respectively) 986,000 929,000 Accounts receivable, trade 3,469,000 2,986,000 Inventory 4,132,000 2,385,000 Prepaid expenses 242,000 560,000 Current portion of notes receivable, related party 34,000 41,000 Income tax receivable - 1,062,000 Other current assets 682,000 365,000 --------------------- --------------------- TOTAL CURRENT ASSETS 10,770,000 9,009,000 Investments, noncurrent 7,950,000 10,600,000 Land held for sale - 730,000 Fixed assets, net 3,238,000 3,902,000 Note receivable, officer and related party, including accrued interest, less current portion 479,000 462,000 Other assets 381,000 256,000 --------------------- --------------------- TOTAL ASSETS $ 22,818,000 $ 24,959,000 ===================== ===================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current portion of long-term debt $ 623,000 $ 1,399,000 Accounts payable and accrued expenses 2,129,000 1,549,000 Accrued payroll and related liabilities 993,000 788,000 Accrued store closings - 72,000 Other accrued taxes 9,000 23,000 --------------------- --------------------- Total current liabilities 3,754,000 3,831,000 Long-term debt, less current portion 1,457,000 1,625,000 --------------------- --------------------- Total liabilities 5,211,000 5,456,000 --------------------- --------------------- Commitments and Contingencies - - Stockholders' equity Common stock - $.01 par value, 20,000,000 shares authorized, 14,078,620 shares issued and 13,285,838 and 13,822,543 shares outstanding at June 26, 141,000 141,000 1999 and June 27, 1998 respectively Class B Stock - $.01 par value, 175,000 shares authorized, none issued - - Additional paid-in capital 21,352,000 21,352,000 Retained earnings (accumulated deficit) (1,407,000) (674,000) Accumulated Other Comprehensive Income Unrealized (losses) gains on debt and equity investments (513,000) 106,000 Cumulative translation adjustment 51,000 18,000 Treasury stock, at cost (792,782 and 256,077shares (2,017,000) (1,440,000) at June 26, 1999 and June 27, 1998 respectively) --------------------- --------------------- Total stockholders' equity 17,607,000 19,503,000 --------------------- --------------------- --------------------- --------------------- Total liabilities and stockholders' equity $ 22,818,000 $ 24,959,000 ===================== =====================
See accompanying notes to consolidated financial statements. F-2 23 CUISINE SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended ------------------------------------------------------------ June 26, June 27, June 28, 1999 1998 1997 ----------------- ------------------ --------------------- NET SALES $20,722,000 $14,007,000 $13,987,000 COST OF GOODS SOLD 15,670,000 11,558,000 12,015,000 ----------------- ------------------ --------------------- GROSS MARGIN 5,052,000 2,449,000 1,972,000 SELLING AND ADMINISTRATION 6,657,000 6,597,000 4,257,000 DEPRECIATION AND AMORTIZATION 226,000 136,000 110,000 OTHER OPERATING INCOME (211,000) (15,000) (29,000) ----------------- ------------------ --------------------- LOSS FROM OPERATIONS (1,620,000) (4,269,000) (2,366,000) ----------------- ------------------ --------------------- NONOPERATING INCOME (EXPENSE) INVESTMENT INCOME 1,084,000 955,000 1,093,000 INTEREST EXPENSE (208,000) (110,000) (105,000) OTHER INCOME (EXPENSE) 17,000 (7,000) 5,000 ----------------- ------------------ --------------------- TOTAL NONOPERATING INCOME 893,000 838,000 993,000 ----------------- ------------------ --------------------- LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES, DISCONTINUED OPERATIONS, (727,000) (3,431,000) (1,373,000) PROVISION FOR INCOME TAX BENEFIT (EXPENSE) (6,000) 310,000 439,000 ----------------- ------------------ --------------------- LOSS FROM CONTINUING OPERATIONS BEFORE DISCONTINUED OPERATIONS NET OF TAXES (733,000) (3,121,000) (934,000) GAIN FROM SALE OF DISCONTINUED OPERATIONS, NET OF TAXES - 0 468,000 ----------------- ------------------ --------------------- NET LOSS $ (733,000) $ (3,121,000) $ (466,000) ================= ================== ===================== BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE: CONTINUING OPERATIONS, BEFORE DISCONTINUED OPERATIONS, NET OF TAXES $ (0.05) $ (0.23) $ (0.07) DISCONTINUED OPERATIONS - - 0.03 ----------------- ------------------ --------------------- NET LOSS PER COMMON SHARE $ (0.05) $ (0.23) $ (0.04) ================= ================== ===================== WEIGHTED AVERAGE SHARES OUTSTANDING 13,625,430 13,822,543 13,822,543 ================= ================== =====================
See accompanying notes to consolidated financial statements. F-3 24 CUISINE SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Retained Additional Earnings Cumulative Common Paid-In (Accumulated Translation Stock Capital Deficit) Adjustment ------------------ ------------------ ----------------- --------------- ------------------ ------------------ ----------------- --------------- BALANCE, JUNE 29,1996 141,000 21,352,000 2,789,000 50,000 COMPREHENSIVE INCOME/(LOSS) 1997 NET LOSS - - (466,000) - OTHER COMPREHENSIVE INCOME UNREALIZED GAINS ON DEBT AND EQUITY INVESTMENTS - - - - TRANSLATION ADJUSTMENT - - - (37,000) OTHER COMPREHENSIVE INCOME/(LOSS) COMPREHENSIVE INCOME/(LOSS) LOAN TO MAJORITY SHAREHOLDER, INCLUDING ACCRUED INTEREST,NET - - - - ------------------ ------------------ ----------------- --------------- BALANCE, JUNE 28,1997 $ 141,000 $ 21,352,000 $ 2,323,000 $ 13,000 COMPREHENSIVE INCOME/(LOSS) 1998 NET LOSS - - (3,121,000) - OTHER COMPREHENSIVE INCOME UNREALIZED GAINS ON DEBT AND EQUITY INVESTMENTS - - - - TRANSLATION ADJUSTMENT - - - 5,000 OTHER COMPREHENSIVE INCOME/(LOSS) COMPREHENSIVE INCOME/(LOSS) REPAYMENT OF LOAN TO MAJORITY SHAREHOLDER INCLUDING ACCRUED INTEREST, NET - - 124,000 - ------------------ ------------------ ----------------- --------------- BALANCE, JUNE 27,1998 $ 141,000 $ 21,352,000 $ (674,000) $ 18,000 ================== ================== ================= =============== COMPREHENSIVE INCOME/(LOSS) 1999 NET LOSS (733,000) OTHER COMPREHENSIVE INCOME UNREALIZED LOSSES ON DEBT AND EQUITY INVESTMENTS TRANSLATION ADJUSTMENT 33,000 OTHER COMPREHENSIVE INCOME/(LOSS) COMPREHENSIVE INCOME/(LOSS) TREASURY SHARES PURCHASES ------------------ ------------------ ----------------- --------------- BALANCE, JUNE 26,1999 $ 141,000 $ 21,352,000 $ (1,407,000) $ 51,000 ================== ================== ================= =============== Note Receivable Unrealized Gains From Majority (Losses) on Debt Shareholder, Total and Equity Treasury Including Stockholders' Investments Stock Accrued Interest Equity ----------------- ------------------ -------------------- ------------------ ----------------- ------------------ -------------------- ------------------ BALANCE, JUNE 29,1996 (110,000) (1,440,000) - 22,782,000 COMPREHENSIVE INCOME/(LOSS) 1997 NET LOSS - - - (466,000) OTHER COMPREHENSIVE INCOME UNREALIZED GAINS ON DEBT AND EQUITY INVESTMENTS 121,000 - - 121,000 TRANSLATION ADJUSTMENT - - - (37,000) ------------------ OTHER COMPREHENSIVE INCOME/(LOSS) 84,000 COMPREHENSIVE INCOME/(LOSS) (382,000) LOAN TO MAJORITY SHAREHOLDER, INCLUDING ACCRUED INTEREST,NET - - (4,275,000) (4,275,000) ----------------- ------------------ -------------------- ------------------ BALANCE, JUNE 28,1997 $ 11,000 $ (1,440,000) $ $ (4,275,000) $ 18,125,000 COMPREHENSIVE INCOME/(LOSS) 1998 NET LOSS - - - (3,121,000) OTHER COMPREHENSIVE INCOME UNREALIZED GAINS ON DEBT AND EQUITY INVESTMENTS 95,000 - - 95,000 TRANSLATION ADJUSTMENT - - - 5,000 ------------------ OTHER COMPREHENSIVE INCOME/(LOSS) 100,000 COMPREHENSIVE INCOME/(LOSS) (3,021,000) REPAYMENT OF LOAN TO MAJORITY SHAREHOLDER INCLUDING ACCRUED INTEREST, NET - - 4,275,000 4,399,000 ----------------- ------------------ -------------------- ------------------ BALANCE, JUNE 27,1998 $ 106,000 $ (1,440,000) $ - $ 19,503,000 ================= ================== ==================== ================== COMPREHENSIVE INCOME/(LOSS) 1999 NET LOSS (733,000) OTHER COMPREHENSIVE INCOME UNREALIZED LOSSES ON DEBT AND - - EQUITY INVESTMENTS (619,000) (619,000) TRANSLATION ADJUSTMENT 33,000 ------------------ OTHER COMPREHENSIVE INCOME/(LOSS) (586,000) COMPREHENSIVE INCOME/(LOSS) (1,319,000) - TREASURY SHARES PURCHASES (577,000) (577,000) ----------------- ------------------ -------------------- ------------------ BALANCE, JUNE 26,1999 $ (513,000) $ (2,017,000) $ - $ 17,607,000 ================= ================== ==================== ==================
See accompanying notes to consolidated financial statements. F-4 25 CUISINE SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended ----------------------------------------------------- June 26, June 27, June 28, 1999 1998 1997 ---------------- ---------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (733,000) $ (3,121,000) $ (466,000) Adjustments to reconcile net loss to net cash (used in) provided by operating activities Gain from sale of discontinued operations - - (161,000) Depreciation and amortization 879,000 1,058,000 1,249,000 Gain on disposal of fixed assets - - 10,000 Change in cumulative translation adjustment 33,000 5,000 (37,000) Gain on sale of land held for resale (136,000) - - Income tax benefit - (310,000) - Changes in assets and liabilities, net of effects of non-cash transactions: Increase in accounts receivable trade, net (483,000) (629,000) (981,000) (Increase) decrease in inventory (1,747,000) (386,000) 91,000 Decrease (Increase) in prepaid expenses 318,000 (230,000) (193,000) (Increase) decrease in notes receivable, related party (10,000) 156,000 (305,000) Decrease (Increase) in income tax receivable 1,062,000 1,000 (753,000) (Increase) decrease in other assets (443,000) (4,000) (41,000) Increase in accounts payable and accrued expenses 580,000 354,000 273,000 Increase in accrued payroll and related liabilities 205,000 157,000 87,000 Decrease in accrued store closing costs (72,000) - (64,000) Decrease in other accrued taxes (13,000) (91,000) (17,000) ---------------- ---------------- ---------------- Net cash (used in) provided by operating activities (560,000) (3,040,000) (1,308,000) ---------------- ---------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES Sale of investments 2,031,000 9,305,000 10,660,000 Purchase of investments (57,000) (9,424,000) (13,598,000) Purchase of Treasury Stock (577,000) - - Notes receivable paid by (issued to) majority shareholder - 4,399,000 (2,441,000) Proceeds on disposal of land 871,000 - - Proceeds on disposal of fixed assets - - 1,000 Capital expenditures (220,000) (716,000) (413,000) ---------------- ---------------- ---------------- Net cash provided by (used in) investing activities 2,048,000 3,564,000 (5,791,000) ---------------- ---------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES Additions to debt - 115,000 $ 744,000 Reductions of debt (944,000) (311,000) (154,000) ---------------- ---------------- ---------------- Net cash (used in) provided by financing activities (944,000) (196,000) 590,000 ---------------- ---------------- ---------------- Net increase (decrease) in cash and cash equivalents 544,000 328,000 (6,509,000) Cash and cash equivalents, beginning of period 681,000 353,000 6,862,000 ---------------- ---------------- ---------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,225,000 $ 681,000 $ 353,000 ================ ================ ================ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest $ 206,000 $ 123,000 $ 131,000 Income taxes $ - $ - $ - ================ ================ ================ Non Cash Activities Land purchased under short term note $ - $ 645,000 $ - Unrealized gains (losses) on debt and equity investments $ (619,000) $ 95,000 $ 121,000 ================ ================ ================
See accompanying notes to consolidated financial statements F-5 26 CUISINE SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS The Company develops produces and markets chef-created fully cooked, fully prepared entrees and sauces for the banquet, transportation, restaurant and home meal replacement industries. The Company targets the Lodging and On Board Services industries. Lodging target customers include hotels, event caterers, food service contractors and other large banquet facilities. On Board Services customers include airline and rail transportation service companies. The Company services the airlines in both the USA and Europe. The Norwegian facility distributes product throughout Europe servicing the Lodging customers through distributors and Nouvelle Carte, a French manufacturer and distributor of sous vide products. Norway production supplies all salmon sales in the USA. The Company manages developing opportunities through a sales channel called New Business Development. This channel currently includes retail, restaurants, military and catalog sales. PRINCIPLES OF CONSOLIDATION The financial statements include the consolidated accounts of Cuisine Solutions, Inc. and its subsidiaries (collectively "the Company"). All significant inter-company transactions have been eliminated in the financial statements. FISCAL YEAR The Company utilizes a 52/53 week fiscal year that ends on the last Saturday in June. Fiscal years 1999, 1998 and 1997 contain 52 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 of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION The Company recognizes revenue at the time products are shipped to its customers, with the exception of some of its United States airline distributors. For U.S. airline distributors that purchase salmon products directly from the Company's Norway facility, the Company recognizes revenue when the customer receives the products. CASH AND CASH EQUIVALENTS Cash equivalents consist of highly liquid investments with original maturities of three months or less. 21 27 INVESTMENTS Investment securities consist of U.S. Treasury, corporate debt and equity securities. The Company has classified its investments as "available-for-sale." Securities classified as available for sale include securities that could be sold in response to changes in interest rates or for general liquidity needs. Such securities are carried at estimated fair value with unrealized gains or losses recorded as a separate component of equity. Investments in affiliates in which the Company has an ownership position providing it with significant influence over the investee, are accounted for by the equity method. Equity method investments are recorded at original cost and are adjusted to recognize the Company's proportionate share of the investees' income or losses after date of investment, and additional contributions made. INVENTORY 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. Inventory consisted of:
JUNE 26, JUNE 27, 1999 1998 -------------------------- --------------------------- Raw material $ 1,016,000 $ 637,000 Frozen product & other finished goods 2,948,000 1,742,000 Packaging 236,000 267,000 -------------------------- --------------------------- 4,200,000 2,646,000 Less obsolescence reserve (68,000) (261,000) -------------------------- --------------------------- $ 4,132,000 $ 2,385,000 ========================== ===========================
FIXED ASSETS Machinery, equipment, computer software, furniture and fixtures are depreciated using the straight-line method over estimated useful lives that range from two to eight years. Leasehold improvements are amortized using the straight-line method over the shorter of terms of the leases that range from four to twenty years, or the estimated useful life of the improvement. Computer software, classified as other assets in fiscal 1998 was reclassed to fixed assets during fiscal 1999. Expenditures for maintenance and repairs are charged to expense, and significant improvements are capitalized. For continuing operations, maintenance and repairs charged to expense approximated $205,000 in 1999, $217,000 in 1998 and $352,000 in 1997. The components of fixed assets were as follows:
JUNE 26, JUNE 27, 1999 1998 -------------------------- --------------------- Machinery & equipment $ 6,493,000 $6,319,000 Furniture & fixtures 170,000 170,000 Computer Software 763,000 730,000 Leasehold improvements 2,203,000 2,215,000 Building under capital lease 1,470,000 1,518,000 Construction in progress 55,000 30,000 -------------------------- --------------------- 11,154,000 10,982,000 Less accumulated depreciation and amortization (7,916,000) (7,080,000) ========================== ===================== $ 3,238,000 $ 3,902,000 ========================== =====================
22 28 INCOME AND OTHER TAXES The Company computes income taxes using the asset and liability method whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF The Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("Statement 121"), on June 30, 1996 (fiscal year 1997). Statement 121 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell. Adoption of this Statement did not have a material impact on the Company's financial position, results of operations, or liquidity. ACCOUNTING FOR STOCK-BASED COMPENSATION Prior to June 30, 1996, the Company accounted for is stock option plan in accordance with the provisions of Accounting Principles Board Opinion No. 25 ("APB Opinion 25"), Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On June 30, 1996 the Company adopted Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("Statement 123"), which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, Statement 123 also allows entities to continue to apply the provisions of APB Opinion 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1996 and future years as if the fair-value based method defined in Statement 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion 25 and provide the pro forma disclosure of the provisions of Statement 123 (see note 7). In addition, in accordance with Statement 123, the Company applies fair value as the measurement basis for transactions in which equity instruments are issued to non-employees. EARNINGS PER SHARE Statement of Financial Accounting Standards No. 128, Earnings Per Share ("Statement 128") became effective for the year ended June 27, 1998, and required restatement of previously reported earnings per share data. Statement 128 provides for the calculation of basic and diluted earnings per share. Basic earnings (loss) per common share is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share exclude common equivalent shares outstanding during the period as the impact would be antidilutive. The Company's common equivalent shares consist of stock options. 23 29 FOREIGN CURRENCY TRANSLATION The statements of operations of the Company's Norwegian subsidiary (the "Subsidiary") have been translated to U.S. dollars using the average currency exchange rates in effect during the year. The Subsidiary's balance sheet has been translated using the currency exchange rate as of the end of the fiscal year. The impact of currency exchange rate changes on the translation of the Subsidiary's balance sheet is charged directly to stockholders' equity. COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("Statement 130"). Statement 130 establishes standards for the reporting and display of comprehensive income and its components in the financial statements. The Company adopted the provisions of the statement during fiscal year 1999. Components of other comprehensive income include foreign currency translation gains and losses and unrealized gains and losses on debt and equity securities. Comprehensive Income is shown on the consolidated statement of changes in stockholders equity. FAIR VALUE OF FINANCIAL INSTRUMENTS Under Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments, "effective for fiscal years that end after December 15, 1996, the Company is required to provide fair value disclosures of its financial instruments. The Company estimates the fair value of its financial instruments using the following methods and assumptions: (1) quoted market prices, when available, are used to estimate the fair value of investments in marketable debt and equity securities; (2) carrying amounts in the balance sheet approximate fair value for cash, notes receivable and short term borrowings. RECLASSIFICATIONS Certain amounts in the 1998 financial statements have been reclassified to conform to the 1999 presentation. NOTE 2 - INVESTMENTS The Company's investments are classified as available-for-sale. These securities are carried at estimated fair value and unrealized gains and losses are reported as a separate component of stockholders' equity. The following is a summary of the Company's investments at June 26, 1999:
ESTIMATED UNREALIZED FAIR COST GAINS LOSSES VALUE ---- ----- ------ ----- U.S. Government and agencies Current 965,000 21,000 $ - 986,000 Non-current 6,019,000 (427,000) 5,592,000 Corporate debt Current - - - - Non-current 2,465,000 - (107,000) 2,358,000 ---------------------------------------------------------------- Total investments $ 9,449,000 $ 21,000 $ (534,000) $ 8,936,000 ================================================================
24 30 The following is a summary of the Company's investments at June 27, 1998:
ESTIMATED UNREALIZED FAIR COST GAINS LOSSES VALUE ---- ----- ------ ----- U.S. Government and agencies Current $ 500,000 $ - $ - $ 500,000 Non-current 7,020,000 86,000 - 7,106,000 Corporate debt Current 448,000 - (19,000) 429,000 Non-current 3,455,000 39,000 - 3,494,000 ---------------------------------------------------------------- Total investments $ 11,423,000 $ 125,000 $ (19,000) $ 11,529,000 ================================================================
NOTE 3 - INCOME TAXES The composition of the provision for income tax expense(benefit) attributable to continuing operations was:
June 26, June 27, June 28, Current: 1999 1998 1997 ---- ---- ---- Federal 6,000 $ (310,000) $ (439,000) State - - - -------------------------------------------- 6,000 (310,000) (439,000) -------------------------------------------- Federal - - - State - - - -------------------------------------------- - - - -------------------------------------------- Total current provision for income tax expense (benefit) continuing operations $ 6,000 $ (310,000) $ (439,000) ============================================
25 31 The benefit for income taxes for fiscal years 1999, 1998 and 1997 has been presented in the consolidated statements of income as continuing operations and discontinued operations as follows:
June 26, June 27, June 28, Tax provision allocated to: 1999 1998 1997 ---- ---- ---- Continuing operations $ 6,000 $ (310,000) $ (439,000) Discontinued operations - - (314,000) ----------------------------------------------- Total provision for income tax (benefit) expense $ 6,000 $ (310,000) $ (753,000) ===============================================
The differences between amounts computed by applying the statutory federal income tax rates to income from continuing operations and the total income tax benefit applicable to continuing operations were as follows:
YEAR ENDED ----------------------------------------------------------------- JUNE 26, JUNE 27, JUNE 28, 1999 1998 1997 ---------------------- --------------------- ---------------- Federal tax benefit at statutory rates $(247,000) $(1,167,000) $(467,000) (Income) Loss from foreign operations (28,000) 55,000 84,000 Period effect of change in valuation allowance 305,000 985,000 (8,000) State income taxes, net (49,000) (196,000) (54,000) Other, net 25,000 13,000 6,000 ----------------------------------------------------------------- Total $6,000 $(310,000) $(439,000) ====================== ===================== ================
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of deferred tax assets are as follows:
JUNE 26, JUNE 27, Deferred tax assets: 1999 1998 ---- ---- Net foreign operating loss carryforwards $ 594,000 $ 614,000 Net operating loss carryforwards 1,481,000 872,000 Accrued losses on discontinued operations - 29,000 Inventory adjustment 108,000 151,000 Other 499,000 735,000 ----------------------------------------- Total deferred tax assets 2,682,000 2,401,000 Less valuation allowance (2,660,000) (2,355,000) Net deferred tax assets 22,000 46,000 ----------------------------------------- Deferred tax liabilities: Property and equipment 22,000 38,000 Inventory - 8,000 ----------------------------------------- Net deferred tax liabilities 22,000 46,000 ----------------------------------------- Net deferred income tax $ - $ - -----------------------------------------
26 32 The net changes in total valuation allowance for the years ended June 26, 1999 and June 27, 1998 were an increase of $305,000 and an increase of $985,000, respectively. The net foreign operating loss carryforward can only be used to offset taxable income in the country where the carryforward was generated. These operating loss carryforwards expire in varying amounts through 2008. At June 26, 1999 the Company has net operating loss carryforwards for federal and state income tax purposes of $3,037,000 which are available to offset future federal and state taxable income, if any, through 2013. During fiscal 1999, the Company received federal income tax refunds relating to carryback of losses from fiscal years 1997, 1996 and 1995 to fiscal year 1994 in the amount of $1,050,000. Such amount is reflected as income tax receivable in the accompanying consolidated balance sheet at June 27, 1998. NOTE 4 - DISCONTINUED OPERATIONS The gain from sale of discontinued operations for fiscal year 1997 relates to reversal of certain accruals related to the former Bakery and Restaurant Divisions of $154,000 due to the settlement of certain leases relating to the former restaurants and bakeries, of which $60,000 was recorded in the fourth quarter of 1997, and income tax benefits applied of $314,000, of which $110,000 was recorded in the fourth quarter of 1997. This amount was received by the Company subsequent to June 27,1998. During fiscal 1999, the remaining accrual of $72,000 was reversed and is included in other operating income. 27 33 NOTE 5 - DEBT Debt, at June 26, 1999 and June 27, 1998 was as follows:
1999 1998 PRINCIPAL PRINCIPAL LENDER DESCRIPTION MATURITY OUTSTANDING OUTSTANDING - ------ ----------- -------- ------------ ----------- Den Norske bank Overdraft Facility Six months, renewable $ 623,000 $ 652,000 Den Norske bank Term Loan August 30, 2000 0 146,000 SND Term Loan February 1, 2006 234,000 225,000 NationsBank Term Loan June 2, 2002 18,000 25,000 NationsBank Term Loan March 31, 1999 0 645,000 Hjelmeland Kommune Capital Lease June 1, 2014 1,205,000 1,331,000 ------------------- --------------- Total $ 2,081,000 $ 3,024,000 Less current portion 623,000 1,399,000 ------------------- --------------- Non-current portion $ 1,457,000 $ 1,625,000 =================== ==============
The Company believes that the carrying values of the amounts outstanding under the above debt instruments approximate fair value. Borrowings under the Den Norske Bank ("DnB") Overdraft Facility are limited to a percentage of Cuisine Solutions Norway AS ("CSI Norway"), inventories and receivables, up to a maximum of $1,000,000 with a floating interest rate equal to the prevailing Norwegian overnight funds rate plus two percentage points. The Den Norske Bank Overdraft Facility interest rate at June 26, 1999 and June 27, 1998 was 8.1 % and 6.90%, respectively. Borrowings of $176,000 were available at June 26, 1999. During fiscal year 1995, CSI Norway was not in compliance with certain of the covenants set forth by DnB. In 1996, DnB agreed to temporarily waive such covenants in exchange for certain guarantees on the part of the Company. These included a guaranty in the form of a renewable six-month stand-by letter of credit issued by the Company in the amount of $600,000, along with the subordination of a $300,000 loan from the Company to CSI Norway. During fiscal year 1997, the stand-by letter of credit was increased to $800,000. Accordingly, DnB has agreed to maintain the overdraft facility and waive its covenant requirements for as long as the stand-by letter of credit is in effect, but it has limited borrowings up to the amount of the guaranty of $800,000. Statens Narings-OgDistriktutvikiingsfond ("SND"), a governmental development agency in Norway, issued to CSI Norway, an eight-year term loan that requires the Company to continue to operate its plant facility. The loan has a variable interest rate which was 6.9% and 7.9% at June 26, 1999 and June 27, 1998 respectively. The loan is required to be repaid through sixteen semi-annual payments of principal and interest beginning August 1, 1996 and ending February 1, 2006. CSI Norway entered into a twenty-year capital lease obligation with an initial principal amount of $1,205,000 and with quarterly payments of $36,000, including principal and interest. At the end of the lease term, ownership of the facility will transfer to CSI Norway. The Company has issued no guarantees with respect to this lease. During fiscal year 1997 the Company entered into a five-year term loan with Nations Bank to finance the purchase of a new refrigerated truck for its US operations. The Nations Bank term loan has a stated interest rate of 8.85% and is required to be repaid through monthly payments of principal and interest beginning June 2, 1997 to June 2, 2002. During fiscal year 1998 the Company entered into a short-term renewable loan with Nations Bank to finance the purchase of the land of $645,000 in Loudoun County, Virginia. During fiscal 1999, the land was sold and the loan was paid. Debt maturities during the next five fiscal years on an aggregate basis at June 26, 1999 were as follows: 2000 - $786,000; 2001 - $161,000; 2002 - $155,000; 2003 - $116,000; 2004 - $115,000; 2005 - $118,000 28 34 and $856,000 thereafter. The maturities for 2000 of $786,000 includes the balance of the $623,000 borrowed under the overdraft facility, $41,000 of short term portion of the DNB, $61,000 of the capital lease obligations and $54,000 of the SND term loan and $6,000 of the Nations Bank vehicle loan. NOTE 6 - STOCKHOLDERS' EQUITY The Company's capital stock is comprised of two classes: Common Stock and Class B Stock. The Class B Stock, which is reserved for issuance to employees under stock option plans, is identical in all respects to the Common Stock except that the holders thereof have no voting rights unless otherwise required by law. There are no shares of Class B Stock outstanding. NOTE 7 - STOCK OPTION AND EMPLOYEE BENEFIT PLANS The Company sponsors a qualified employee savings plan under which employees who meet certain minimum age and service requirements are eligible to participate. The Company matches one-third of the first 6% of eligible employees' voluntary contributions to the plan. The Company expensed, as a component of continuing operations, $ 17,566, $20,000 and $12,000 in fiscal years 1999, 1998 and 1997, respectively, for contributions to the savings and profit sharing plan. In fiscal year 1994, the Company implemented a non-qualified employee savings plan under which senior management employees are eligible to participate. The Company matches one-third of the first 6% of eligible employees' voluntary contributions to the plan. The Company's matching contribution is limited to 6% of the combined contributions into both the qualified and the non-qualified plan. The Company expensed, as a component of continuing operations, $17,558, $34,000 and $12,000 for fiscal year 1999, 1998 and 1997, respectively. The Company expensed $ 69,350 and $42,000 for a separate health and retirement plan for the president of the Company and two other key employees in fiscal year 1999 and 1998, respectively. During fiscal year 1993, the Company established, upon stockholder approval, the 1992 Stock Option Plan which provides for up to 300,000 shares of the Company's Common Stock to be made available to employees at various prices as established by the Board of Directors at the date of grant. During fiscal year 1997 the Company amended its 1992 Stock Option Plan to increase the number of shares in its plan from 300,000 to 1,300,000. During fiscal year 1997, the Company granted to employees 951,460 options under the 1992 Stock Option Plan. During fiscal year 1998 the Company amended its 1992 Stock Option Plan to increase the number of shares in its plan from 1,300,000 to 1,753,000 upon majority shareholder approval. During fiscal year 1998 the Company granted to employees 110,000 options under the 1992 Stock Option Plan. During fiscal year 1999 the Company granted to employees 530,000 options under the 1992 Stock Option Plan. The exercise price of options granted was equal to the market price at the date of grant. The outstanding options expire through fiscal year 2009. 29 35 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1999, 1998 and 1997 as follows:
-------------------------------------------------------- June 26, June 27, June 28, 1999 1998 1997 -------- -------- -------- Expected dividend yield - - - Risk-free interest rate 4.7% 5.1% 6.4% Expected life (in years) 6 6 6 Expected volatility 66% 33% 71%
The Company applies APB Opinion 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plan in the financial statements. Had compensation cost for the Company's stock-based compensation plan been determined based on the fair value at the grant date for awards under those plans consistent with the method of FASB Statement 123, the Company's net loss and loss per share would have been adjusted to the pro forma amounts indicated below:
June 26, June 27, June 28, 1999 1998 1997 ---- ---- ---- Net loss: As reported $ ( 733,000) $ (3,121,000) $ (466,000) Pro forma $ ( 884,000) $ ( 3,276,000) $ ( 653,000) Basic and diluted net loss per share: As reported $ (0.05) $ (0.23) $ (0.04) Pro forma $ (0.06) $ (0.24) $ (0.05)
30 36 Changes in outstanding options were as follows:
Number of Weighted-Average Price Range Options Exercise Price Outstanding at June 29, 1996 $1.63-$4.00 370,750 $2.76 Options granted 1.38 951,460 1.38 Options exercised - - - Options canceled 1.63-4.00 (39,500) 2.80 ------------------------------------ Outstanding at June 28, 1997 1.63-4.00 1,282,710 1.73 Options granted 1.03 - 1.13 110,000 1.06 Options exercised - - - Options canceled 1.38-4.00 (57,500) 2.98 ------------------------------------ Outstanding at June 27, 1998 1.03-4.00 1,335,210 1.63 Options granted .66 530,000 .66 Options exercised - - - Options canceled .66-4.00 (280,210) 1.48 ------------------------------------ Outstanding at June 26, 1999 $.66-$4.00 1,585,000 $1.33 ====================================
The Board of Directors unanimously approved to revalue all stock options issued during fiscal year 1997 to the lower of the market price of $1.38 on June 26, 1997, or the value of the original issue on the date of grant. The original stock grant prices during fiscal year 1997 ranged from $1.38 to $2.13. The date of grant and vesting period was not affected by this revaluation. At June 26, 1999, June 27, 1998 and June 28, 1997, the number of options exercisable was 894,750, 662,970 and 471,802, respectively, and the weighted-average grant date fair value per option for the options granted in fiscal 1999, 1998 and 1997 was $0.50, $0.44 and $2.17, respectively. The weighted-average remaining contractual life is 8 years. THE FOLLOWING TABLE SUMMARIZES INFORMATION ABOUT FIXED STOCK OPTIONS OUTSTANDING AT JUNE 26, 1999:
Stock Options Outstanding Stock Options Exercisable ------------------------- ------------------------- Number Weighted-Average Number Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg. RANGE OF EXERCISE PRICES at 6/26/99 Contractual Yrs. Exercise Price at 6/26/99 Exercise Price - ------------------------ ---------- ---------------- -------------- ---------- -------------- $.66 TO $1.02 480,000 9.33 $ .66 120,000 $ .66 $1.03 TO $1.37 107,500 8.36 $ 1.06 53,750 $ 1.06 $1.38 TO $1.50 770,000 7.91 $ 1.38 493,500 $ 1.38 $1.51 TO $2.00 77,000 1.92 $ 1.75 77,000 $ 1.75 $2.01 TO $2.50 41,500 3.82 $ 2.38 41,500 $ 2.38
31 37 $3.01 TO $3.50 67,000 5.86 $ 3.38 67,000 $ 3.38 $3.51 TO $4.00 42,000 4.51 $ 3.94 42,000 $ 3.94
32 38 THE FOLLOWING TABLE SUMMARIZES INFORMATION ABOUT FIXED STOCK OPTIONS OUTSTANDING AT JUNE 27, 1998:
Stock Options Outstanding Stock Options Exercisable ------------------------- ------------------------- Number Weighted-Average Number Outstanding Remaining Weighted-Avg Exercisable Weighted-Avg RANGE OF EXERCISE PRICES at 6/27/98 Contractual Yrs. Exercise Price at 6/27/98 Exercise Price - ------------------------ ---------- ---------------- -------------- ---------- -------------- $1.03 TO $1.37 110,000 9.35 $ 1.06 27,500 $ 1.06 $1.38 TO $1.50 950,960 8.91 $ 1.38 375,282 $ 1.38 $1.51 TO $2.00 92,000 2.82 $ 1.75 92,000 $ 1.75 $2.01 TO $2.50 50,250 5.08 $ 2.38 43,063 $ 2.38 $3.01 TO $3.50 78,000 6.88 $ 3.37 71,125 $ 3.39 $3.51 TO $4.00 54,000 5.54 $ 3.95 54,000 $ 3.95
NOTE 8 - COMMITMENTS The Company leases office and plant space under operating leases, which expire on various dates through 1999. Certain leases provide for escalations in rent based upon increases in the lessor's annual operating costs or the consumer price index. Future minimum lease payments under these agreements at June 26, 1999 were as follows:
Fiscal Year 2000 335,000 2001 335,000 2002 286,000 2003 245,000 2004 - --------------------- $1,201,000 =====================
Rent expense for continuing operations approximated$325,000, $424,000 and $414,000 for fiscal years 1999, 1998 and 1997, respectively. Lease on the office expires during fiscal year 2001 with option to renew and lease on manufacturing facilities expires during fiscal year 2003. The Company is investigating options for a new manufacturing facility and does not have plans to renew the lease beyond 2003. NOTE 9 - TRANSACTIONS WITH RELATED PARTIES During fiscal year 1998 the Company issued an officer loan in the amount of $375,000. The loan of $375,000 was combined with the loan this officer had outstanding in the amount of $45,000 at the end of fiscal year 1997. The revised loan amount of $420,000 bears interest of at 6.5% per annum and is payable on October 1, 2002 and is collateralized by the officer's home. Payments on the loan will be derived from the equity proceeds from the sale of the officer first residence, a portion of future annual bonuses to be paid to the officer by the Company as negotiated. All outstanding balances of the note, including principal and interest accrued thereon, shall become payable in full on October 1, 2002. At the end of fiscal year 1998 the officer sold his first residence and applied the net proceeds of $26,000 from the sale of the residence as payment towards the loan. $394,000 of the loan was outstanding at June 26, 1999. During fiscal year 1999 the Company issued an officer a loan in the amount of $55,000. The loan of $55,000 was collateralized by the officer's primary residence and bears interest of 6.5% per annum. The note was 33 39 established as part of a relocation agreement and payment of the note is payable from the net equity proceeds on the sale of the collateralized property and shall be deemed payable in full within two years from the date of the note. During fiscal 1999, the property was sold and $23,000 received leaving a balance of $32,000 at June 26, 1999. Subsequent to fiscal 1999, an additional $20,000 was received and the remaining balance is expected to be paid during fiscal 2000. During fiscal 1999 a loan of $85,000 was issued to a key employee and is collateralized by the employee's home. The note bears interest at 6.6% per annum and payment of the note is due and payable in full five years from the date of the loan, or six months after the employee's termination whichever comes first. The Board of Directors agreed to pay one of its Directors a $15,000 annual fee less the amount of consulting fees paid to the member during the fiscal year for services provided on behalf of the Company's Technology Committee. The board member provides engineering consulting services to the Company through the member's own company at his normal billing rates. The Company receives consulting services under an agreement with Food Investors Corporation ("FIC"), which is majority owned by the Secria Europe, S.A. Food Research Corporation ("FRC"), the majority owner of Cuisine Solutions common shares, is also owned by Secria Europe, S.A. Pursuant to the consulting agreement, FIC provides services related to management, planning, strategy development and pursing worldwide interests of the Company. This agreement is renewable by the Company annually. The amount paid by the Company to FIC in fiscal years 1999, 1998 and 1997 was $144,000 per year. During fiscal years 1999, 1998 and 1997, the Company had sales to related parties in the amount of $662,000, $605,000 and $281,000, respectively. During fiscal year 1998 Nouvelle Carte France a majority owned subsidiary of FRC, began purchasing all its salmon product needs from the Norwegian facility. These purchases reflect these salmon sales from Norway. Effective April 1998 the position of Vice President, Culinary Sales was eliminated. The Vice President was employed with the Company for over twenty years in senior positions, was given a three year guaranteed severance package in the amount of $322,000. The remaining liability for this severance package at June 26, 1999 is $218,000. During fiscal 1999, the Company became a partner in a limited liability company with a Brazilian partner, Sanoli Indsutria E Commercio Alimentacao Ltda, which will build a manufacturing facility and market product in the Mercusor market. The Company contributed technology to the partnership in lieu of a cash contribution. The partnership performs management services to assist with the design and construction of the manufacturing facility as well as ongoing management service for operations, research and development, marketing and administrative support. The Company recognized $500,000 in revenue related to these services. Accounts receivable related to this partnership totaling $320,000 at June 26, 1999 is recorded in other assets. NOTE 10 - SALES TO MAJOR CUSTOMERS Due to the decentralized purchase decision process of customers within the Lodging channel, management does not believe any single customer creates a dependency relationship. The On Board Services channel has sales to two airline catering companies that represent 32.6% of total Company sales in fiscal 1999 and the same two caterers accounted for 37% of total Company sales during fiscal 1998.One of the two caterers account for 22.9% of total Company sales in fiscal 1999 and 23.3% in fiscal 1998. 34 40 Foreign sales accounted for approximately 17.9%, 10.2%, and 8.8% of total sales in fiscal years 1999, 1998 and 1997, respectively. Following is the detail of total sales by geographic region.
Region 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- Domestic $17,005 $12,578 $12,756 Europe $ 3,717 $ 1,429 $ 1,231 -------- -------- -------- Total $20,722 $14,007 $13,987
NOTE 11 - LITIGATION The Company is engaged in ordinary and routine litigation incidental to its business. Management does not anticipate that any amounts, which it may be required to pay by reason thereof, will have a material effect on the Company's financial position or results of operations. NOTE 12 - SUBSEQUENT EVENT The Company has signed a letter of intent to acquire Nouvelle Carte, a French manufacturer of sous vide products located in Northern France. Nouvelle Carte is currently owned by Conetrage, a French company owned by the Cuisine Solutions majority shareholder group. A committee of independent board members has been established to evaluate the purchase. Cuisine Solutions plans to issue unregistered stock to acquire Nouvelle Carte. Nouvelle Carte will provide Cuisine Solutions with a European presence, and European Community manufacturing facility and additional technical personnel for future product development and production engineering. Nouvelle Carte had calendar 1998 sales of approximately seven million dollars and a net book value of approximately $2,500,000. 35 41 SCHEDULE II CUISINE SOLUTIONS, INC. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Additions ----------------------------- Balance at Charged to Charged to Balance Beginning Costs and Other at End of Period Expenses Accounts Deductions of Period --------- -------- -------- ---------- --------- Year ended June 28, 1997 Allowance for doubtful accounts $ - $ - $ - $ - ============== ============ ============== ============= Provision for losses on unit closings 287,000 - (215,000) (1,2) 72,000 ============== ============ ======== ======== Allowance for obsolete inventory 51,000 47,000 - 98,000 ============== ============ ============== ========= Year ended June 27, 1998 Allowance for doubtful accounts $ - $ - $ - $ - ============== ============ ============== ============= Provision for losses on unit closings 72,000 - - 72,000 ============== ============ ============== ============= Allowance for obsolete inventory 98,000 163,000 - 261,000 ============== ============ ============== ========== Year ended June 26, 1999 Allowance for doubtful accounts $ - $ 61,000 $ - $ 61,000 ============== ============== ============== ============= Provision for losses on unit closings 72,000 - 72,000-(3) ============== ============ =============== Allowance for obsolete inventory 261,000 192,000- (4) 69,000 ============== ============ =============== ========
(1) Lease termination costs associated with the former Restaurant Division. (2) Recovery of reserves associated with the former Bakery Division. (3) Recovery of reserves associated with the former Restaurant Division (4) Adjust reserve from fiscal 1998. 36 EX-23.2 2 CONSENT OF INDEPENDENT ACCOUNTANTS KPMG LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS The Board of Directors CUISINE SOLUTIONS, INC.: We consent to the incorporation by reference in the registration statements, (Nos. 33-60614 and 33-60616) on Form S-8 of Cuisine Solutions, Inc. of our report dated September 4, 1998, relating to the consolidated balance sheets of Cuisine Solutions, Inc. and subsidiaries as of June 27, 1998, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the years ended June 27, 1998 and June 28, 1997, and related schedule, which report appears in the June 26, 1999 annual report on Form 10-K of Cuisine Solutions, Inc.. KPMG LLP Washington, D.C. September 29, 1999 38 EX-27 3 FINANCIAL DATA SCHEDULE
5 YEAR JUN-26-1999 JUN-28-1998 JUN-26-1999 1,225,000 8,936,000 3,503,000 0 4,132,000 10,770,000 11,154,000 (7,916,000) 22,818,000 3,754,000 1,457,000 0 0 141,000 17,466,000 22,818,000 20,722,000 20,722,000 15,670,000 15,670,000 6,672,000 0 (208,000) (727,000) (6,000) (733,000) 0 0 0 (733,000) (0.05) (0.05)
-----END PRIVACY-ENHANCED MESSAGE-----