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 (OTC) market 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 OTC Bulletin Board:

As of September 17, 2004 there were approximately 578 holders of record of the Company’s Common Stock.

No dividends were paid during fiscal year 2004, 2003 and 2002.

The information required under this Item 5 about equity compensation plans is shown in the Proxy Statement for its annual meeting for fiscal 2004 to be filed with the Securities and Exchange Commission under Regulation 14A, under the caption “Executive Compensation” and such information is incorporated herein by reference

On November 30, 1998, the Company was notified by NASDAQ that its common stock no longer met the minimum $1.00 bid requirement to be included in the NASDAQ National Market and was delisted. The Company’s common stock currently trades on the OTC Bulletin Board.

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In May 2003, FASB issued SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS 150 improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity and requires that those instruments be classified as liabilities (or assets in certain circumstances) in statements of financial position. SFAS 150 also requires disclosures about alternative ways of settling the instruments and the capital structure of entities all of whose shares are mandatory redeemable. SFAS 150 is generally effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Currently the Company has no financial instruments with characteristics of both liabilities and equity, and therefore the adoption of SFAS 150 did not have a material impact on the Company’s financial position or results of operations.

Impairment of Long-Lived Assets

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

Allowance for Doubtful Accounts

Trade receivables are reported in the consolidated balance sheets net of the allowance for doubtful accounts. Generally, the Company considers receivables past due 30 days subsequent to the billing date. The Company performs ongoing credit evaluations of its customers and generally extends credit without requiring collateral. The Company maintains an allowance for doubtful accounts, which is determined based on historical experience and management’s expectations of future losses. Generally, losses have historically been within management’s expectations. As of June 26, 2004 and June 28, 2003, the Company maintained an allowance for doubtful accounts of approximately $68,000 and $62,000, respectively.

Inventory Reserves

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. Management evaluates inventory levels on a regular basis and establishes reserves to reflect inventory at its estimated realizable value.

Valuation Allowance

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

RESULTS OF OPERATIONS

NET SALES

Net sales by region for fiscal year 2004 and 2003 are as follows (Norway inter-company sales are eliminated):

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Fiscal year 2004 revenue of $36,721,000 reflects a consolidated sales increase of 32.0% from fiscal year 2003 revenue of $27,812,000. Revenue for fiscal year 2002 was $28,616,000. The increase in sales in FY 2004 was attributable to a 37.9% increase in US sales and a 25.3% increase in sales from France compared to fiscal year 2003. All five sales channels in the US grew in revenue in fiscal year 2004 as well as all three sales channels in France. Norway operations had a 17.0% increase in non-intercompany sales, however, its gross sales in US dollars decreased by 3.6% while gross sales in Norwegian Kroner decreased by 6.5%. Approximately 68.8% of the sales from Cuisine Solutions Norway are inter-company sales to the USA and French entities, and eliminated during the financial consolidation process.

The Company’s sales of high-quality foods are sold to airlines, retail supermarkets, hotel and convention center restaurants and banquets, passenger rail lines and harbor cruise lines restaurants, restaurant chains, and the US military. In fiscal year 2004 US sales accounted for 58.9% of total revenue compared to 56.4 % of total revenue in fiscal year 2003, while France and Norway accounted for 37.3% and 3.8 % in fiscal year 2004 and 39.3% and 4.3%, and 31.0% and 2.3% in fiscal 2003 and 2002 respectively after eliminating inter-company sales. Norway produces product for both France and the US and total Norwegian salmon production accounted for approximately 7.7% of total Company sales in fiscal year 2004 as compared to 11.0% and 8.4% in fiscal year 2003 and 2002 respectively.

Net sales by sales channel for fiscal year 2004 and 2003 are as follows:

The Company’s net sales increased by 32.0% to $36,721,000 in fiscal year 2004 as compared to $27,812,000 in fiscal 2003 and from $28,616,000 in fiscal 2002 due to the improved economy and the successful implementation of new Cuisine Solutions sales strategies resulting in higher demand and sales of the products. The current year sales increases were in all Cuisine Solutions sales channels and were driven by the improving economy, particularly in the US, and greater consumer demand for upscale fully cooked products. Fiscal year 2004 On Board Services and Foodservices sales increased by 22.3% and 21.9%, respectively. Military sales increased by 15.9% while the Retail channel and restaurant chains channel sales grew by 55.1% and 114.2% respectively during fiscal 2004.

Cuisine Solutions USA’s fiscal year 2004 and 2003 sales by sales channel are as follows:

Net sales grew by 37.8% in the US in fiscal year 2004 as compared to fiscal year 2003. Net Sales increased by more than 15% in each of the five sales channels in the US in fiscal year 2004 as compared to fiscal year 2003. This is primarily due to increased product demand resulting from a more diversified sales focus on each of the channels and the improvement in the US economy.

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Cuisine Solutions France’s fiscal year 2004 and 2003 sales by sales channel are as follows:

Net sales grew by 25.3% in the France in fiscal year 2004 as compared to fiscal year 2003. Net Sales increased by more than 23% in each of the three sales channels in the France in fiscal year 2004 as compared to fiscal year 2003. This is primarily due to increased product demand.

Cuisine Solutions Norway’s fiscal year 2004 and 2003 sales by sales channel are as follows (excluding inter-company sales):

Direct sales for the Norwegian facility grew by 17.1% primarily as a result of increased demand for salmon products to new airline customers. Food Service sales declined in Norway in fiscal 2004 as a result of more direct sales of the Norwegian products by the French operation, as well as a decrease in demand resulting from magazine articles describing potential health risks from consuming farm raised salmon.

GROSS MARGIN

Gross margin increased 60.5% in fiscal year 2004 compared to fiscal year 2003. Gross margin as a percent of sales increased to 21.6% for fiscal 2004 compared to 17.8% in fiscal 2003, and 16.4% in fiscal 2002. Gross margin increased due to significantly higher sales accompanied by lower overhead cost in relation to those sales. Cuisine Solutions has strategically built other sales channels over the past few years to include military and retail accounts and meals for passenger rail lines, and has seen consistent results in its French subsidiary. Gross margin as a percentage of sales should continue to increase as sales continue to increase as more fixed costs are being absorbed.

A comparison of net sales, gross margin percentages and net losses from operations for fiscal year 2004, 2003 and 2002 follows:

Net loss for fiscal year 2004 was reduced by $3,088,000 or 75.5% from $4,092,000 in fiscal year 2003 to $1,004,000 in fiscal year 2004. Net loss in fiscal 2002 was $6,027,000. This reduction in loss is due primarily to a slight reduction in selling and administrative expenses to $8,665,000 in fiscal 2004 from $8,757,000 and $8,702,000 in Fiscal 2003 and 2002 respectively while increasing sales significantly due to greater product demand.

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Net income (loss) by regions are as follows:

Cuisine Solutions US reduced its net loss in fiscal year 2004 by $2,797,000 or 80.0% from $3,498,000 in fiscal year 2003 to $701,000 in fiscal year 2004. This reduction is due primarily to a 10% reduction in selling and administration expenses and a 74.8% increase in gross margin. US losses in fiscal year 2002 were $6,092,000.

Cuisine Solutions France had its fifth consecutive profitable year since the acquisition by Cuisine Solutions in 1999, increasing profits in fiscal year 2004 by $219,000, or 157.6%, from fiscal year 2003. Profits in France in fiscal year 2003 and 2002 were $139,000 and $85,000 respectively. In spite of the lackluster economy during the last three years in Europe, the French subsidiary reported profitable results and double-digit growth in the Foodservice channel in France. Management credits both the thirty-five hour work week rule and its impact on labor cost in France for the increase in demand for the Foodservice channel as well as aggressive cost control for the delivery of a positive net income in France.

Cuisine Solutions Norway recorded a loss of$661,000 in fiscal year 2004 compared to a loss of $733,000 for fiscal year 2003 and a loss of $19,000 in fiscal year 2002. The loss was due to the decreased demand of the Norway product line after the economic slowdown and concerns raised about farm raised salmon; consequently fixed overhead costs were spread over smaller production quantities, which resulted in higher cost of sales and lower net results. The Company placed the Norwegian operations under the management of Cuisine Solutions France to implement initiatives to improve operating results and liquidity of the subsidiary. Subsequent to June 26, 2004, management began a process of evaluating the continued operation of the Norway facility. Although a formal plan to discontinue operations in Norway has not been discussed and approved by the Board of Directors, management has taken certain actions to facilitate such a plan. In September, 2004 the Company curtailed production and gave employees notice of termination as required by local law. A formal decision to discontinue operations is expected to be made in October, 2004. However, there can be no assurance that such an action will be approved.

SELLING AND ADMINISTRATION EXPENSES

Selling and administration costs as a percentage of sales were 23.6% in fiscal 2004, 31.5% in fiscal 2003, 30.4% in fiscal 2002. The percentage decrease in selling and general administrative expenses from fiscal 2004 versus fiscal 2003 is a result of cost of continued cost cutting by management and the significant increase in sales. Selling and administration costs in fiscal 2004 also included a $295,000 write-off resulting from the bankruptcy of one of our airline distributors.

DEPRECIATION AND AMORTIZATION

The fiscal year 2004 depreciation and amortization expense decreased by $55,000 over fiscal year 2003 to $952,000 as a result of an increased amount of machinery and equipment becoming fully depreciated during 2004. The portions of depreciation and amortization expense that are included in the cost of goods sold are $783,000 and $750,000 in fiscal year 2004 and 2003, respectively.

NON-OPERATING INCOME AND EXPENSE

The Company held long term investments of $1,114,000 and $1,331,000 at June 26, 2004 and June 28, 2003 respectively. Management maintains these funds in a trust account with the majority of the funds invested in government securities. The Company realized a gain of $3,000 and $67,000 on the sale of investments during fiscal year 2004 and 2003, respectively.

The non-operating expense for fiscal 2004 of $110,000 was primarily due to interest expenses relating to the borrowings of the Company’s Norwegian and French subsidiaries, including the Norwegian capital lease, which was partially offset by investment income from funds invested in corporate bonds and treasury bills.

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. However, most customers require a sixty-day notice for price changes in order to update their internal systems and evaluate the impact of price changes. Therefore, in the event of a continuous accelerated commodity price increase, the Company must either absorb the price increase during that sixty day period or discontinue sales to the customer, and risk losing the long term business relationship.

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LIQUIDITY AND CAPITAL RESOURCES

The Company held cash and cash equivalents of $1,491,000 and $1,357,000 at June 26, 2004 and June 28, 2003 respectively. Additionally, the Company held long term investments of $1,114,000 and $1,331,000 at June 26, 2004 and June 28, 2003 respectively. Long term investments of $1,114,000 and $25,000 cash in deposit secure the overdraft credit facility of the Norwegian subsidiary at June 26, 2004.

Cash flows from operations was essentially break-even for fiscal year 2004, which was an improvement over the prior year cash flow deficit from operations of approximately $1.9 millions. This improvement is a direct result of revenue growth and cost cutting initiatives affected in fiscal year 2003.

The Company made capital expenditures of $681,000 and $1,150,000 during fiscal year 2004 and 2003, respectively. During fiscal years 2004 and 2003, the EURO gained about 12% and 15% of its value versus the US Dollar, which made these investments more expensive when converted to US Dollars.

At June 26, 2004, the Company had borrowings of $4,273,000, bearing interest at rates ranging from 3.3% to 6.6%. These borrowings include $2,370,000 in debt of the Company’s Norwegian subsidiary. Currently Norway has an outstanding principal of $1,196,000 for the capital lease on the building in Norway and $1,098,000 outstanding under a working capital overdraft line of credit with Den norske Bank. The overdraft facility increased during the fiscal year from $1,047,000 to $1,098,000. The overdraft facility is secured by a letter of credit posted by the U.S. operations banking institution that is renewed semi-annually. Long term investments of $1,114,000 and a $25,000 cash deposit are used to secure the letter of credit.

In December 2000, Cuisine Solutions France entered into a five-year capital lease obligation for a cooking machine with an initial principal amount of $435,000 and 6% interest on the outstanding balance of the loan. The current portion of this loan is $98,000 and the total outstanding principal amounts to $131,000 at June 26, 2004. In October 2002, Cuisine Solutions France entered into a ten year term loan to finance the acquisition of land and a building to be used as a distribution plant in the amount of € 190,000 or $217,000. This loan bears interest of 5.7% and is due in October 2012. The current portion of this loan is $18,000 and the total outstanding principal amounts to $202,000 at June 26, 2004. In March 2003, Cuisine Solutions France entered into a five year term loan to further expand the facility in the amount of € 280,000 or $320,000. This loan bears interest of 3.3% and the total outstanding principal amounts to $277,000 at June 26, 2004, with a current portion of $64,000. In June 2004, Cuisine Solutions France entered into a four year term loan to finance its new computer server and packaging line equipment in the amount of € 57,000 or $69,000. The loan bears interest of 3.95% and the total outstanding principal is $69,000 at June 26, 2004.

On October 22, 2003, the Company entered into a six month term loan in the amount of $500,000 with Food Investors Corporation (“FIC”) to provide short term working capital necessary to expand operations for fiscal year 2004. The loan bears interest of 5% per annum and was payable upon maturity. In April 2004, the loan was extended to October 22, 2004. Total outstanding principal was $424,000 at June 26, 2004. In addition, on November 10, 2003, the Company entered into a three-year term loan in the amount of $500,000 with Food Research Corporation (“FRC”) to provide short term working capital necessary to expand operations. The loan bears interest of 5% per annum and is payable upon maturity. Under this loan, Cuisine Solutions pays interest on a quarterly basis beginning in April 2004, with a balloon payment for the total amount due three years from the origination of the loan. In June 10, 2004, the Company entered into an additional $300,000 six month working capital loan with Food Investors Corporation (“FIC”). The loan bears interest of 6% per annum, payable at maturity, or 90 days after close of a company line of credit, and will mature on December 10, 2004. The outstanding balance principal was $300,000 at June 26, 2004. FIC and FRC are 100 percent owned by Cuisine Solutions majority shareholder, the JLV group.

On July 10, 2004, the Company entered into an agreement with the Bank of Charles Town in West Virginia for a $2,500,000 line of credit to finance its working capital requirements in the US. The line of credit will be secured by the Company’s US accounts receivable and inventory and further guaranteed with a real estate owned by Food Research Corporation (“FRC”). This line of credit bears an interest rate of 0.5% over the prime interest rate.

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Contractual Obligations and Commercial Commitments

The Company’s significant contractual obligations as of June 26, 2004 are for debt and operating leases. Debt by year of maturity and future rental payments under operating lease agreements are presented below. As of June 26, 2004, the Company has an outstanding balance on its line of credit for the Norwegian subsidiary in the amount of $1,097,000 but does not have any purchase obligations. The Company has not engaged in off-balance sheet financing, commodity contract trading or significant related party transactions besides the accrued amount of $257,000 to SOMDIAA related to health and retirement plans for certain employees.

LIQUIDITY AND OPERATIONS

The Company’s cash position increased in fiscal year 2004. Assuming that there are no significant changes to the Company’s business plan, management also anticipates generating cash flow positive results during fiscal year 2005. Management believes that the combination of cash on hand, cash flows from operations, available credit facilities, and outside funding if required will provide sufficient liquidity to meet the Company’s ongoing cash requirements. With the restructuring of US operations in May 2003 and the increase in sales in fiscal year 2004, Management has taken steps that it believes were necessary to improve the Company’s ability to meet its cash flow needs for fiscal year 2004 and thereafter. Management closely reviews the Company’s operations and plans and will implement additional cost cutting programs to reduce the Company’s operating expenses further if necessary. However, there can be no assurance that the Company can or will obtain sufficient funds from operations or from additional financings on terms acceptable to the Company.

FUTURE PROSPECTS

During fiscal year 2004, the Company continued its focus on the existing sales channels obtaining further penetration into the airline industry, obtaining a large portion of the market share of the passenger rail market, and gaining a larger share of the hotel and convention center restaurant, room service, and banquet business. The Company also focused on expanding as a retail supplier via the in-store-deli market as well as supplier for premium frozen food products, and also growth in the national restaurant chain and military channels. The goal was to continue to be diversified into multiple channels so if there is a disruption in one or more channels, the Company would not suffer the way it did after the September 11, 2001 tragedy. The Company will continue to focus on retail, restaurant chain, and military channels to achieve the growth in these newer channels in fiscal year 2005.

Although there was significant growth in fiscal 2004, the Company believes that it only has a small fraction of the potential business in what the Company considers an early adopter market for its products. The Company sees growing demand for its products as consumers continue to demand convenience and quality and operators do not have or cannot afford to pay the skilled workers necessary to supply the variety and quantity of food products demanded by their customers.

The Company will continue to expand its sales efforts in the airline business in fiscal 2005 by a continued push for new US accounts and a new focus on the European airline market. While there are increased concerns in the market place, management will continue to strengthen the business relationships with most of the major airlines, passenger rail lines and harbor cruise lines through continued value and increase in service by offering flexible solutions upon the current demand in the industry.

The Company will continue to focus its efforts on large foodservice contractors and event planners rather than sales to individual smaller hotels. Demand for foodservice products in the US increased significantly during fiscal 2004 and continued growth is expected for fiscal 2005 due to the continued customer satisfaction with the quality and variety of products offered by Cuisine Solutions. Foodservice operators in France are forced to deal with the thirty-five hour work week constraint and have discovered that the Cuisine Solutions’ product line offers a solution to the limited availability and higher cost of labor created as a result of the mandatory work hour rules. Customers in the Foodservice sales channel place high value on the labor savings, quality, consistency and food safety associated with Cuisine Solutions product. Management believes this value increases in the current economic and political situation challenging today’s business environment. In the meantime, Management has and will continue to initiate aggressive cost reduction programs and product line changes to meet the changing needs of the industry. The Company will focus on trying new distribution methods in fiscal 2005 to improve its ability to get its products to all the national account customers.

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The Retail Sales channel was formally created during fiscal year 2000 with the objective of penetrating the In-Store Deli category of major North American retailers. The sales channel and related growth is following a strategy plan for large volume opportunities with high quality products. Cuisine Solutions is providing retailers with a heat and serve program that allows supermarkets to upgrade the variety and quality of meals offered. The Company is working with retailers to develop the best methodology to execute larger scale roll-outs of the program and has already introduced the idea to some of the largest retailers in the US. The Company has also placed premium private label products successfully into the retail industry, which is experiencing a significant increase in frozen food sales versus the traditional demand for fresh products. Fiscal 2004 showed significant growth in the Company’s retail sales program, particularly with the club retailers, and it is beginning to allow the Company to capture the high volume benefits of US retail without the marketing investment usually required in doing business with US retailers. Cuisine Solutions is also beginning to gain brand awareness from its premium frozen foods sales. Cuisine Solutions will continue to introduce new product offerings to retail in fiscal 2005 and hopes to see significant growth in this channel during the fiscal year.

The US Military channel continues to be managed via a broker/distributor, adding very little in terms of sales and administrative expenses. Sales in this channel for fiscal 2004 did grow with the Navy, but the goal is increasing the product penetration to other parts of the over $7 billion annual US military food budget. The Company has been working for 1 1/2 years to place items into the Army Unitized Group Rations A (UGR-A) program. Two Cuisine Solutions items were tested and selected for a 14 entrée rotating menu to start in October, 2004. There is no guarantee that the Army will purchase the items from the Company, but the menu is scheduled to start in early fiscal 2005 and could lead to significant growth in this channel. The Company will also attempt to get its product on other US military menus during fiscal 2005.

The Company will further pursue its role as a supplier for national restaurant chains that have found that the Company’s products quality and ease of use makes an attractive alternative for providing promotional menu items. The Company had significant sales growth in this channel in fiscal 2004, and has added one additional sales person to this channel to help increase its growth in 2005. Although the Company’s products are high in cost for many chains, management believes there is a significant untapped market for our upscale fully cooked products for the same reasons such products are appealing to the hotel and resort restaurants.

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, foreign exchange rates, sales and marketing.

Interest Rate Exposure:

The Company’s exposure to market risk for changes in interest rates relates 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 6 of Item 15 of the Form 10-k.

Foreign Currency Rate Exposure:

International operations constitute 41.1% of fiscal year 2004 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 while the French subsidiary reports in EURO. As currency exchange rates change, translation of the income statements of the Norway and French operations into U.S. dollars affects year-over-year comparability of operating results. Sales that are subject to these foreign currency fluctuations are approximately 41% of the Company’s sales. The net assets of the subsidiaries are approximately 44% of the Company’s net assets. The Company does not enter into hedges to minimize volatility of reported earnings because it does not believe it is justified by the exposure or the cost. Information about the Company’s foreign currency translation policy is set forth in Footnote 1 of Item 15 of this Form 10-K.

Sales and Marketing Risks:

The future performance of the Company’s efforts will depend on a number of factors. One is the complete recovery of the travel industry, and specifically the airlines, which have been a major source of Cuisine Solutions revenue and formal business strategy. The others involve the introduction and roll-out of new product lines into the Retail sector restaurant chains and the military. Although the economic situation with the airlines is believed to be temporary, Management cannot forecast the length and total impact of the current economic cycle. Cuisine Solutions will position itself to provide maximum value to our airline partners during this difficult period and remain prepared to resume business growth when the industry recovers. Cuisine Solutions Management has placed additional focus on the opportunities available in the retail sector and the other channels and the success rate will be contingent upon market acceptance of the product line, price points and execution of its marketing strategy.

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