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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED JUNE 30, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO ____________
Commission File number 333-66221
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R.A.B. HOLDINGS, INC. R.A.B. ENTERPRISES, INC.
- ------------------------------------------------------------- -----------------------------------------------------------
(Exact name of registrant as specified in its charter) (Exact name of registrant as specified in its charter)
DELAWARE DELAWARE
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(State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization)
13-3893246 13-3988873
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(I.R.S. Employer identification No.) (I.R.S. Employer identification No.)
444 Madison Avenue, New York, New York 10022
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 688-4500
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N/A
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(Former name, former address and former fiscal year, if changed since last report)
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
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R.A.B. HOLDINGS, INC. AND SUBSIDIARIES
R.A.B. ENTERPRISES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - June 30, 2002 (Unaudited)
and March 31, 2002 1
Condensed Consolidated Statements of Operations - Three months ended
June 30, 2002 and 2001 (Unaudited) 2
Condensed Consolidated Statements of Cash Flows - Three months ended
June 30, 2002 and 2001 (Unaudited) 3
Notes to Condensed Consolidated Financial Statements (Unaudited) 4-9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17-18
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
R.A.B. HOLDINGS, INC. AND SUBSIDIARIES
R.A.B. ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except for share and per share data)
- -----------------------------------------------------------------------------------------------------------------------------------
June 30, 2002 March 31, 2002
----------------------------- -----------------------------
Holdings Enterprises Holdings Enterprises
------------- -------------- ------------- --------------
ASSETS (Unaudited)
Current assets:
Cash $ 2,861 $ 2,804 $ 4,526 $ 4,456
Accounts receivable, net 29,248 29,248 38,058 38,058
Inventories 64,653 64,653 58,353 58,353
Other current assets 9,543 14,308 11,649 15,889
------------- -------------- ------------- --------------
Total current assets 106,305 111,013 112,586 116,756
------------- -------------- ------------- --------------
Noncurrent assets:
Other assets 4,745 3,596 5,134 3,433
Property, plant and equipment, net 28,321 28,321 29,486 29,486
Intangibles, net 89,972 89,972 114,245 114,245
------------- -------------- ------------- --------------
Total assets $229,343 $232,902 $261,451 $263,920
============= ============== ============= ==============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Current maturities of long-term debt $ 1,973 $ 1,973 $ 2,767 $ 2,767
Accounts payable 44,185 44,185 40,768 40,768
Other current liabilities 19,828 20,589 22,945 22,809
------------- -------------- ------------- --------------
Total current liabilities 65,986 66,747 66,480 66,344
------------- -------------- ------------- --------------
Noncurrent liabilities:
Long-term debt 162,223 138,393 165,825 140,825
Deferred income taxes 9,436 9,436 7,640 7,640
Other liabilities 16,282 16,282 16,253 16,253
------------- -------------- ------------- --------------
Total noncurrent liabilities 187,941 164,111 189,718 164,718
------------- -------------- ------------- --------------
Stockholders' (deficit) equity:
Preferred stock, $500 par value, 100,000 shares authorized,
24,875 shares of Series A issued and outstanding 12,344 - 12,344 -
1,000 shares of Series B issued and outstanding 500 - 500 -
Common stock, $.01 and $1.00 par value, 1,000,000 shares
and 200 shares authorized, issued 105,100 shares and
200 shares 1 - 1 -
Notes receivable from stock sales (198) - (195) -
Additional paid-in capital 2,959 39,482 373 39,482
Retained earnings (deficit) (38,620) (35,869) (6,197) (5,052)
Accumulated other comprehensive loss (1,569) (1,569) (1,572) (1,572)
------------- -------------- ------------- --------------
(24,583) 2,044 5,254 32,858
Less common stock in treasury - 600 shares 1 - 1 -
------------- -------------- ------------- --------------
Total stockholders' (deficit) equity (24,584) 2,044 5,253 32,858
------------- -------------- ------------- --------------
Total liabilities and stockholders' (deficit) equity $229,343 $232,902 $261,451 $263,920
============= ============== ============= ==============
See notes to Condensed Consolidated Financial Statements
-1-
R.A.B. HOLDINGS, INC. AND SUBSIDIARIES
R.A.B. ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
------------------------------------ -------------------------------------
Holdings Enterprises Holdings Enterprises
------------------- --------------- --------------------- --------------
(Unaudited) (Unaudited)
Revenues $ 131,222 $ 131,222 $ 139,305 $ 139,305
Costs and expenses:
Cost of sales 102,324 102,324 103,304 103,304
Selling 10,058 10,058 14,521 14,521
Distribution and warehousing 11,699 11,699 14,314 14,314
General and administrative 6,521 6,514 6,655 6,652
Amortization of intangibles 43 43 1,059 1,059
------------------- --------------- --------------------- --------------
Total costs and expenses 130,645 130,638 139,853 139,850
------------------- --------------- --------------------- --------------
Operating income (loss) 577 584 (548) (545)
Interest expense, net 4,172 3,540 4,970 4,110
------------------- --------------- --------------------- --------------
Loss before provision (benefit) for income taxes (3,595) (2,956) (5,518) (4,655)
Provision (benefit) for income taxes 4,098 3,631 (1,977) (1,635)
------------------- --------------- --------------------- --------------
Loss before extraordinary item and cumulative
effect of change in accounting principle (7,693) (6,587) (3,541) (3,020)
Extraordinary loss on modification of debt (500) - - -
------------------- --------------- --------------------- --------------
Loss before cumulative effect of change in
accounting principle (8,193) (6,587) (3,541) (3,020)
Cumulative effect of change in accounting principle (24,230) (24,230) - -
------------------- --------------- --------------------- --------------
Net loss $ (32,423) $ (30,817) $ (3,541) $ (3,020)
=================== =============== ===================== ==============
See notes to Condensed Consolidated Financial Statements
-2-
R.A.B. HOLDINGS, INC. AND SUBSIDIARIES
R.A.B. ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
----------------------------- -----------------------------
Holdings Enterprises Holdings Enterprises
------------ -------------- ------------- --------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $ (32,423) $(30,817) $(3,541) $ (3,020)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Extraordinary loss on modification of debt 500 - - -
Cumulative effect of change in accounting principle 24,230 24,230 - -
Depreciation and amortization 1,623 1,547 2,622 2,596
Deferred income taxes 4,098 3,631 - -
Changes in assets and liabilities:
Accounts receivable 8,810 8,810 25,132 25,132
Inventories (6,300) (6,300) 2,104 2,104
Accounts payable 3,417 3,417 (4,067) (4,067)
Other assets and liabilities (1,872) (2,861) 816 852
------------ -------------- ------------- --------------
Net cash provided by operating activities 2,083 1,657 23,066 23,597
------------ -------------- ------------- --------------
Cash flows from investing activities:
Acquisitions of plant and equipment (83) (83) (1,632) (1,632)
------------ -------------- ------------- --------------
Net cash used in investing activities (83) (83) (1,632) (1,632)
------------ -------------- ------------- --------------
Cash flows from financing activities:
Payment of debt modification costs (439) - - -
Payments from Interest Escrow Account - - 1,625 -
Repayments under Credit Agreement (3,226) (3,226) (25,138) (25,138)
Proceeds from issuance and
(repurchase of) common stock - - (33) -
------------ -------------- ------------- --------------
Net cash used in financing activities (3,665) (3,226) (23,546) (25,138)
------------ -------------- ------------- --------------
Net decrease in cash (1,665) (1,652) (2,112) (3,173)
Cash, beginning of period 4,526 4,456 9,522 9,520
------------ -------------- ------------- --------------
Cash, end of period $ 2,861 $ 2,804 $ 7,410 $ 6,347
============ ============== ============= ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 5,427 $ 5,296 $ 7,640 $ 6,015
Income taxes $ 2 $ 2 $ 4 $ 4
Non-cash financing activities:
Additional indebtedness due to deferred interest
payment in connection with debt modification $ 1,495 $ - $ - $ -
See notes to Condensed Consolidated Financial Statements
-3-
R.A.B. HOLDINGS, INC. AND SUBSIDIARIES
R.A.B. ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE A - Basis of Presentation
The condensed consolidated financial statements include the accounts of R.A.B.
Holdings, Inc. ("Holdings") and its wholly-owned subsidiary, R.A.B. Enterprises,
Inc. ("Enterprises") and its wholly-owned subsidiaries (collectively, the
"Company"). Holdings is a holding company with no substantial assets or
operations other than its investment in Enterprises. Enterprises is a holding
company with no substantial assets or operations other than its investments in
Millbrook Distribution Services Inc. ("Millbrook") and The B. Manischewitz
Company, LLC ("Manischewitz").
These condensed consolidated financial statements should be read in conjunction
with the Company's consolidated financial statements as of March 31, 2002 and
2001 contained in the Company's Form 10-K filed with the Securities and Exchange
Commission. The information related to March 31, 2002 contained herein has been
derived from the Company's audited consolidated financial statements. Certain
reclassifications have been made in the prior year financial statements to
conform with the current year presentation.
All significant intercompany transactions and balances are eliminated in
consolidation. The results of operations for any interim period are not
necessarily indicative of the results to be expected for the full fiscal year.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of the Company as of June 30, 2002, and the results of
operations and cash flows for the periods ended June 30, 2002 and 2001.
NOTE B - Inventories
Inventories are valued at the lower of cost or market. Cost is determined by the
last-in, first-out ("LIFO") method. Inventories consisted of the following (in
thousands):
June 30, March 31,
2002 2002
----------- ------------
Raw materials $ 1,961 $ 1,821
Finished goods 62,692 56,532
----------- ------------
$ 64,653 $ 58,353
=========== ============
NOTE C - Intangibles
Effective April 1, 2002, the Company adopted SFAS No. 142 "Goodwill and Other
Intangible Assets". Under this standard, goodwill and intangibles with
indefinite useful lives, including trademarks and tradenames are no longer
systematically amortized. Instead, they are reviewed for impairment and written
down and charged to results of operations when their carrying amount exceeds
their estimated fair values. Amortization expense for the three month period
ended June 30, 2002 was approximately $43,000 representing the amortization of
the remaining net book value of identified intangibles still required to be
amortized under SFAS No. 142.
-4-
R.A.B. HOLDINGS, INC. AND SUBSIDIARIES
R.A.B. ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
- --------------------------------------------------------------------------------
NOTE C - Intangibles (Continued)
With the assistance of an independent professional appraisal firm, the Company
performed impairment tests on the excess of cost over net assets acquired
("goodwill") and intangibles. The previous method for determining impairment
prescribed by SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of," utilized an undiscounted cash flow
approach for the impairment assessment, while SFAS No. 142 utilizes a fair value
approach. The Company has two reporting units (Millbrook and Manischewitz) with
goodwill and intangibles, which also represent the Company's reporting segments.
Goodwill and intangibles were reviewed for impairment at the level of each
reporting unit. This review indicated that the goodwill recorded at the
Company's Manischewitz subsidiary was impaired as the carrying value of the
subsidiary was in excess of its estimated fair value. In determining the amount
of the goodwill writedown, SFAS No. 142 requires an allocation of the estimated
fair value to Manischewitz' net assets. This allocation resulted in a
significant increase in the value of the subsidiary's trademarks and tradenames,
which under the provisions of SFAS No. 142 may not be written up from their
historical carrying value. Since the allocation process utilizes the increased
value of the trademarks and tradenames in arriving at the remaining amount of
goodwill to be compared to the historical carrying value of goodwill, the amount
of the goodwill writedown is increased. As a result, the Company recorded a
$24.2 million non-cash charge as a cumulative effect of a change in accounting
principle for the writedown of goodwill to its estimated fair value during the
three month period ended June 30, 2002. The goodwill writedown was not
deductible for income taxes and, as a result, no income tax benefit was recorded
in relation to the charge.
The cumulative impact of adopting this change in accounting principle is
reflected in the accompanying statement of operations, but does not affect the
Company's operations and has no impact on its cash flows. The provisions of SFAS
No. 142 requires an annual assessment of goodwill and intangibles, which the
Company will perform to determine any possible future impairment.
The effect of adopting the new standard on net loss for the three month periods
ended June 30, 2002 and 2001 are as follows (in thousands):
2002 2001
--------------------------- ----------------------------
Holdings Enterprises Holdings Enterprises
--------- ----------- --------- -----------
Net Loss $ (32,423) $ (30,817) $ (3,541) $ (3,020)
Less: cumulative effect of change in
accounting principle 24,230 24,230 - -
--------- ----------- --------- -----------
Net Loss, excluding cumulative effect of
change in accounting principle (8,193) (6,587) (3,541) (3,020)
Add: amortization of indefinite-lived
intangible assets, net of tax - - 726 726
Add: valuation allowances recorded as a
result of adoption of SFAS No. 142 5,697 5,022 - -
--------- ----------- --------- -----------
Net Loss, excluding cumulative effect of
change in accounting principle and
valuation allowances in 2002 and
amortization of indefinite-lived
intangible assets in 2001 $ (2,496) $ (1,565) $ (2,815) $ (2,294)
========= =========== ========= ===========
-5-
R.A.B. HOLDINGS, INC. AND SUBSIDIARIES
R.A.B. ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
- --------------------------------------------------------------------------------
NOTE C - Intangibles (Continued)
The changes in the carrying amount of goodwill and intangible assets during the
three month period ended June 30, 2002, including the effect of adopting the new
accounting standard is as follows (in thousands):
Millbrook Manischewitz
--------------- ---------------------------------
Intangible
Goodwill Goodwill Assets Total
--------------- --------------- --------------- ----------------
Balance at March 31, 2002, net of
accumulated amortization $ 15,103 $ 59,137 $ 40,005 $ 114,245
Goodwill writedown recognized as a
cumulative effect of change in
accounting principle - 24,230 - 24,230
Goodwill amortization - - 43 43
--------------- --------------- --------------- ----------------
Balance at June 30, 2002, net of
accumulated amortization $ 15,103 $ 34,907 $ 39,962 $ 89,972
=============== =============== =============== ================
At June 30, 2002, Manischewitz' intangible assets were comprised of trademarks
and tradenames.
NOTE D - Related Party Transactions
For each of the three month periods ended June 30, 2002 and 2001, the Company
paid $510,000 and $502,500, respectively, to P&E Properties, Inc., an affiliated
entity of which the Company's Chairman and Chief Executive Officer is the sole
shareholder, for management fees, services provided and expenses incurred on its
behalf.
NOTE E - Income Taxes
The provision (benefit) for income taxes consisted of the following (in
thousands):
2002 2001
--------------------------- ----------------------------
Holdings Enterprises Holdings Enterprises
-------- ----------- -------- -----------
Income Tax Benefit for the three months
ended June 30, 2002 $ (1,399) $ (1,191) $ (1,977) $ (1,635)
Valuation Allowances established pursuant
to the adoption of SFAS No. 142:
Valuation Allowance related to continuing
operations for the three months ended
June 30, 2002 1,399 1,191 - -
Additional Valuation Allowance resulting
from deferred tax assets in excess
of deferred tax liabilities, excluding
identified intangibles 4,098 3,631 - -
-------- ----------- -------- -----------
Provision (benefit) for income taxes $ 4,098 $ 3,631 $ (1,977) $ (1,635)
======== =========== ======== ===========
-6-
R.A.B. HOLDINGS, INC. AND SUBSIDIARIES
R.A.B. ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
- --------------------------------------------------------------------------------
NOTE E - Income Taxes (Continued)
SFAS No. 109, "Accounting for Income Taxes", requires that deferred tax assets
be reduced by a valuation allowance, if based on available evidence, it is more
likely than not that the deferred tax assets will not be realized. Under
generally accepted accounting principles, available evidence includes the
reversal of existing taxable temporary differences. As of March 31, 2002,
Holdings and Enterprises had net deferred tax liabilities of approximately $5.3
million and $5.8 million, respectively; each including a deferred tax liability
for taxable temporary differences caused by different amortization periods for
identified intangibles of approximately $9.4 million.
Upon the adoption of SFAS No. 142 in the first quarter of fiscal 2003 (See Note
C), the Company can no longer amortize tax deductible goodwill and
indefinite-lived intangible assets for financial reporting purposes. Therefore,
the deferred tax liability related to the taxable temporary differences caused
by different amortization periods for identified intangibles will not reverse
unless the underlying assets are sold or a tax impairment is recorded. Without
this deferred tax liability, Holdings and Enterprises had net deferred tax
assets of approximately $4.1 million and $3.6 million, respectively as of March
31, 2002. As the Company is currently in a net operating loss position, Holdings
and Enterprises recorded valuation allowances to offset their respective first
quarter income tax benefits from operations as well as the amount by which their
deferred tax assets exceeded their deferred tax liabilities, excluding the
deferred tax liability related to identified intangibles as of March 31, 2002.
Further, since SFAS No. 142 does not provide for the valuation allowances that
resulted from its adoption to be recorded as a component of the cumulative
effect of a change in accounting principle, they are reflected as a non-cash
provision for income taxes in Holdings' and Enterprises' income (loss) from
continuing operations.
NOTE F - Comprehensive (Loss) Income
For the three month periods ended June 30, 2002 and 2001, Holdings' and
Enterprises' comprehensive (loss) income was ($32,420,000) and ($30,814,000) and
($3,516,000) and ($2,995,000), respectively.
-7-
R.A.B. HOLDINGS, INC. AND SUBSIDIARIES
R.A.B. ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
- --------------------------------------------------------------------------------
NOTE G - Segment Reporting
The following information is presented in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", which
established standards for reporting information about operating segments in the
Company's interim financial statements.
For the three month
period ended June 30, 2002 2001
- --------------------- ----------------------------- -----------------------------
(in thousands) Holdings Enterprises Holdings Enterprises
------------- -------------- ------------- -------------
Revenues
Millbrook .................. $ 124,789 $ 124,789 $ 133,241 $ 133,241
Manischewitz ............... 7,573 7,573 7,397 7,397
--------- --------- --------- ---------
Total segment revenues .. 132,362 132,362 140,638 140,638
Corporate items, principally
the elimination of
intercompany sales ...... (1,140) (1,140) (1,333) (1,333)
--------- --------- --------- ---------
$ 131,222 $ 131,222 $ 139,305 $ 139,305
========= ========= ========= =========
Operating income
Millbrook .................. $ 2,152 $ 2,152 $ 1,660 $ 1,660
Manischewitz ............... 279 279 775 775
--------- --------- --------- ---------
Total segment operating
income .............. 2,431 2,431 2,435 2,435
Corporate items and
eliminations ........ (1,854) (1,847) (2,983) (2,980)
--------- --------- --------- ---------
$ 577 $ 584 $ (548) $ (545)
========= ========= ========= =========
NOTE H - Extraordinary Item - Modification of Debt
Effective May 1, 2002, Holdings amended the Indenture underlying 92% ($23.0
million) of its 13% Notes outstanding. The amendment (i) reduced the interest
rate to 6% per annum, (ii) extended their maturity date from May 1, 2008 to May
1, 2010 and (iii) increased the aggregate outstanding principal by approximately
$1.5 million, representing the deferred May 2002 interest payment. Holders of
these Notes received warrants granting them the right to purchase up to
approximately 5% of the Company's common stock. The Company, at its option, may
defer the payment of cash interest on the 6% Notes for ten semi-annual interest
payment dates through May 1, 2007. The changes contained in the amendment
constitute a material modification of the Indenture requiring the historical
deferred debt issuance costs to be written off. Accordingly, debt issuance costs
of $0.5 million were written off and reported as an extraordinary item in the
accompanying statement of operations during the three month period ended June
30, 2002. The income tax benefit of $0.2 million related to the extraordinary
item was offset by a valuation allowance required by the adoption of SFAS No.
142, as described in Note E - Income Taxes.
-8-
R.A.B. HOLDINGS, INC. AND SUBSIDIARIES
R.A.B. ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
(Unaudited)
- --------------------------------------------------------------------------------
NOTE I - New Accounting Pronouncements
SFAS No. 143 "Accounting for Asset Retirement Obligations" was issued in August
2001 and is effective for fiscal years beginning after June 15, 2001. SFAS No.
143 establishes accounting standards for recognition and measurement of a
liability for an asset retirement obligation and the associated asset retirement
cost. SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets" was issued in October 2001 and is effective for fiscal years beginning
after December 15, 2001. SFAS No. 144 addresses financial accounting and
reporting for the impairment of long-lived assets. The Company adopted SFAS No.
143 and 144 effective April 1, 2002. The adoption of SFAS No. 143 and 144 did
not have a material impact on the Company's financial position or overall trends
in results of operations.
SFAS No. 145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" was issued in April 2002 and is
effective for fiscal years beginning after May 15, 2002. SFAS No. 145 eliminates
the requirement to classify gains and losses from the extinguishment of debt as
extraordinary, requires certain lease modifications to be treated the same as a
sale-leaseback transaction and makes other non-substantive technical corrections
to existing pronouncements. The Company will adopt SFAS No. 145 when it becomes
effective. Management is currently evaluating the impact that this statement
will have on the Company's financial statements.
SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities"
was issued in June 2002 and is effective prospectively for exit or disposal
activities initiated after December 31, 2002, with earlier adoption encouraged.
SFAS No. 146 requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Examples of costs covered by the
standard include lease termination costs and certain employee severance costs
that are associated with a restructuring, discontinued operations, plant
closing, or other exit or disposal activities. As the provisions of SFAS No. 146
are required to be applied prospectively after the adoption date, management
cannot determine the potential effects that adoption of SFAS No. 146 will have
on the Company's consolidated financial statements.
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Revenues. Revenues for the three month period ended June 30, 2002 decreased $8.1
million or 5.8% to $131.2 million as compared to $139.3 million for the three
month period ended June 30, 2001. Revenues include:
(i) Millbrook's revenues of $ 124.8 million for the three month
period ended June 30, 2002 as compared to $133.2 million for
the three month period ended June 30, 2001;
(ii) Manischewitz' revenues of $7.6 million for the three month
period ended June 30, 2002 as compared to $7.4 million for the
three month period ended June 30, 2001; and
(iii) intersegment sales, which are eliminated in consolidation, of
($1.2) million for the three month period ended June 30, 2002
as compared to ($1.3) million for the three month period ended
June 30, 2001.
Millbrook's revenues decreased $8.4 million or 6.3% for the three month period
ended June 30, 2002 as compared to the comparable period of the prior year. The
decrease in revenues for the three month period is principally due to decreased
sales to certain customers as a result of several factors, including a decision
made by a prior customer to move to self-distribution; customer financial
difficulties and bankruptcies during fiscal 2002; customer losses; and an
overall decline in specialty food revenues resulting from lower than expected
retail sales at a number of Millbrook's customers, the aggregate of which
exceeded the growth of sales to certain other customers.
Manischewitz' revenues increased $0.2 million or 2.4% for the three month period
ended June 30, 2002 as compared to the comparable period of the prior year. The
increase in revenues for the three month period is principally due to increased
sales of Season brand products.
Gross Profit. Gross profit for the three month period ended June 30, 2002 was
$28.9 million as compared to $36.0 million for the three month period ended June
30, 2001, a decrease of $7.1 million or 19.7%. As a percentage of revenues, the
gross profit margin was 22.0% for the three month period ended June 30, 2002 as
compared to 25.8% for the three month period ended June 30, 2001.
The decrease in gross profit dollars and its impact on gross profit margin for
the three month period is principally due to decreased gross profit dollars
associated with Millbrook's lower revenues ($7.1 million) and decreased gross
profit margin resulting from the shift in Millbrook's customer base from
serviced to non-serviced customers and a shift in product mix from higher margin
specialty food products to lower margin health and beauty care products (3.8 %).
Operating Expenses. Distribution and warehousing expenses for the three month
period ended June 30, 2002 were $11.7 million and $14.3 million for the three
month period ended June 30, 2001. As a percentage of revenues, distribution and
warehousing expenses decreased to 8.9% for the three month period ended June 30,
2002 as compared to 10.3% in the comparable period of the prior year.
Distribution and warehousing costs for the three month period were impacted by
the following:
(i) lower transportation costs realized from cost reduction
programs implemented by Millbrook's management to achieve more
efficient routing and enhanced utilization of its fleet; and
(ii) lower warehousing headcount due to reductions made during the
second half of fiscal 2002 directly related to customer losses
and additional headcount reductions realized from a cost
reduction program implemented by Millbrook's management to
more efficiently deploy warehouse personnel.
-10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Operating Expenses. (Continued) Selling, general and administrative expenses for
the three month period ended June 30, 2002 were $16.6 million, as compared to
$21.2 million for the three month period ended June 30, 2001. As a percentage of
revenues, selling, general and administrative expenses decreased to 12.6% for
the three month period ended June 30, 2002 as compared to 15.2% for the
comparable period of the prior year. The decrease in selling, general and
administrative costs for the three month period is principally due to the
following:
(i) lower headcount in Millbrook's salesforce due to reductions
made during the second half of fiscal 2002 directly related to
customer losses and the shift in Millbrook's customer base
from serviced to non-serviced customers;
(ii) lower headcount in Millbrook's selling, general and
administrative functions realized from a cost reduction
program implemented by Millbrook's management to streamline
its workforce; partially offset by
(iii) increased trade materials and promotion costs associated with
the launch of several new Guiltless Gourmet products during
the three month period ended June 30, 2002.
Amortization of intangibles for the three month period ended June 30, 2002 was
approximately $43,000, as compared to $1.1 million for the three month period
ended June 30, 2001. This decline resulted from the adoption of SFAS No. 142,
which provided that only intangible assets with definite lives would continue to
be amortized. As of June 30, 2002, the Company does not have any remaining
intangible assets with definite lives.
Interest Expense. Interest expense for the three month period ended June 30,
2002 was $4.2 million (consisting of $0.7 million for Holdings and $3.5 million
for Enterprises, respectively) as compared to $5.0 million (consisting of $0.9
million for Holdings and $4.1 million for Enterprises, respectively) for the
three month period ended June 30, 2001. The decrease in interest expense is
primarily attributable to lower interest rates on lower levels of debt
outstanding under the Company's Credit Agreement and the amendment by Holdings
of the Indenture underlying 92% ($23.0 million) of its 13% Notes outstanding.
The amendment, among other things, reduced the interest rate to 6% per annum and
increased the aggregate outstanding principal by approximately $1.5 million,
representing the deferred May 2002 interest payment.
Taxes. The provision for income taxes for the three month period ended June 30,
2002 was $4.1 million for Holdings and $3.6 million for Enterprises as compared
to an income tax benefit of $2.0 million for Holdings and $1.6 million for
Enterprises for the three month period ended June 30, 2001. As a result of the
adoption of SFAS No. 142, Holdings and Enterprises recorded valuation allowances
to offset their respective first quarter income tax benefits from operations as
well as the amount by which their deferred tax assets exceeded their deferred
tax liabilities, excluding the deferred tax liability related to identified
intangibles as of March 31, 2002. Further, since SFAS No. 142 does not provide
for the valuation allowances that resulted from its adoption to be recorded as a
component of the cumulative effect of a change in accounting principle, they are
reflected as a non-cash provision for income taxes in Holdings' and Enterprises'
income (loss) from continuing operations. For the three month period ended June
30, 2001, the income tax benefits principally related to the results of
operations.
Cumulative Effect of Change in Accounting Principle. Effective April 1, 2002,
the Company adopted SFAS No. 142 "Goodwill and Other Intangible Assets". Under
this standard, goodwill and intangibles with indefinite useful lives, including
trademarks and tradenames are no longer systematically amortized. Instead, they
are reviewed for impairment and written down and charged to results of
operations when their carrying amount exceeds their estimated fair values.
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Cumulative Effect of Change in Accounting Principle. (Continued) With the
assistance of an independent professional appraisal firm, the Company performed
impairment tests on the excess of cost over net assets acquired ("goodwill") and
intangibles. The previous method for determining impairment prescribed by SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," utilized an undiscounted cash flow approach for the
impairment assessment, while SFAS No. 142 utilizes a fair value approach. The
Company has two reporting units (Millbrook and Manischewitz) with goodwill and
intangibles, which also represent the Company's reporting segments. Goodwill and
intangibles were reviewed for impairment at the level of each reporting unit.
This review indicated that the goodwill recorded at the Company's Manischewitz
subsidiary was impaired as the carrying value of the subsidiary was in excess of
its estimated fair value. In determining the amount of the goodwill writedown,
SFAS No. 142 requires an allocation of the estimated fair value to Manischewitz'
net assets. This allocation resulted in a significant increase in the value of
the subsidiary's trademarks and tradenames, which under the provisions of SFAS
No. 142 may not be written up from their historical carrying value. Since the
allocation process utilizes the increased value of the trademarks and tradenames
in arriving at the remaining amount of goodwill to be compared to the historical
carrying value of goodwill, the amount of goodwill writedown is increased. As a
result, the Company recorded a $24.2 million non-cash charge as a cumulative
effect of a change in accounting principle for the writedown of goodwill to its
estimated fair value during the three month period ended June 30, 2002. The
goodwill writedown was not deductible for income taxes and, as a result, no
income tax benefit was recorded in relation to the charge.
Extraordinary Item - Modification of Debt. Effective May 1, 2002, Holdings
amended the Indenture underlying 92% ($23.0 million) of its 13% Notes
outstanding. The amendment (i) reduced the interest rate to 6% per annum, (ii)
extended their maturity date from May 1, 2008 to May 1, 2010 and (iii) increased
the aggregate outstanding principal by approximately $1.5 million, representing
the deferred May 2002 interest payment. Holders of these Notes received warrants
granting them the right to purchase up to approximately 5% of the Company's
common stock. The Company, at its option, may defer the payment of cash interest
on the 6% Notes for ten semi-annual interest payment dates through May 1, 2007.
The changes contained in the amendment constitute a material modification of the
Indenture requiring the historical deferred debt issuance costs to be written
off. Accordingly, debt issuance costs of $0.5 million were written off and
reported as an extraordinary item in the accompanying statement of operations
during the three month period ended June 30, 2002. The income tax benefit of
$0.2 million related to the extraordinary item was offset by a valuation
allowance required by the adoption of SFAS No. 142.
Net Income (Loss). As a result of the foregoing, the net loss for the three
month period ended June 30, 2002 was $32.4 million for Holdings and $30.8
million for Enterprises as compared to $3.5 million for Holdings and $3.0
million for Enterprises for the three month period ended June 30, 2001.
Impact of New Accounting Pronouncements. SFAS No. 143 "Accounting for Asset
Retirement Obligations" was issued in August 2001 and is effective for fiscal
years beginning after June 15, 2001. SFAS No. 143 established accounting
standards for recognition and measurement of a liability for an asset retirement
obligation and the associated asset retirement cost. SFAS No. 144 "Accounting
for the Impairment or Disposal of Long-Lives Assets" was issued in October 2001
and is effective for fiscal years beginning after December 15, 2001. SFAS No.
144 addresses financial accounting and reporting for the impairment of
long-lived assets. The Company adopted SFAS No. 142, 143 and 144 effective April
1, 2002. The adoption of SFAS No. 143 and 144 did not have a material impact on
the Company's financial position or overall trends in results of operations.
-12-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Impact of New Accounting Pronouncements. (Continued) SFAS No. 145 "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections" was issued in April 2002 and is effective for fiscal
years beginning after May 15, 2002. SFAS No. 145 eliminates the requirement to
classify gains and losses from the extinguishment of debt as extraordinary,
requires certain lease modifications to be treated the same as a sale-leaseback
transaction and makes other non-substantive technical corrections to existing
pronouncements. The Company will adopt SFAS No. 145 when it becomes effective.
Management is currently evaluating the impact that this statement will have on
the Company's financial statements.
SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities"
was issued in June 2002 and is effective prospectively for exit or disposal
activities initiated after December 31, 2002, with earlier adoption encouraged.
SFAS No. 146 requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Examples of costs covered by the
standard include lease termination costs and certain employee severance costs
that are associated with a restructuring, discontinued operations, plant
closing, or other exit or disposal activities. As the provisions of SFAS No. 146
are required to be applied prospectively after the adoption date, management
cannot determine the potential effects that adoption of SFAS No. 146 will have
on the Company's financial statements.
Financial Condition, Liquidity and Capital Resources
Operations for the three months ended June 30, 2002, excluding non-cash charges
for the loss on modification of debt at Holdings, the cumulative effect of a
change in accounting principle, depreciation and amortization and deferred
income taxes, utilized cash of $2.0 million for Holdings and $1.4 million for
Enterprises. Operations for the three months ended June 30, 2001, excluding
non-cash charges for depreciation and amortization, utilized cash of $0.9
million for Holdings and $0.4 million for Enterprises. During the three month
period ended June 30, 2002, other changes in assets and liabilities resulting
from operating activities provided cash of $4.1 million for Holdings and $3.1
million for Enterprises as compared to providing $24.0 million for each of
Holdings and Enterprises for the three month period ended June 30, 2001,
resulting in net cash provided by operating activities of $2.1 million for
Holdings and $1.7 million for Enterprises and $23.1 million for Holdings and
$23.6 million for Enterprises, respectively.
Investing activities, which principally consisted of the acquisitions of
property and equipment resulted in a use of cash of $0.1 million and $1.6
million for the three month periods ended June 30, 2002 and 2001 for each of
Holdings and Enterprises, respectively.
During the three month period ended June 30, 2002, financing activities, which
principally consisted of repayments under the Credit Agreement and the payment
of deferred debt modification costs by Holdings, utilized cash of $3.7 million
for Holdings and $3.2 million for Enterprises. During the three month period
ended June 30, 2001, financing activities, which principally consisted of the
repayment of $25.1 million under the Credit Agreement offset by $1.6 million of
payments from the Interest Escrow Account by Holdings, utilized cash of $23.5
million for Holdings and $25.1 million for Enterprises.
At June 30, 2002, the Company's balance sheets include a $9.4 million deferred
income tax liability related to the taxable temporary differences caused by
different amortization periods for identified intangibles. With the adoption of
SFAS No. 142, the Company's tax deductible goodwill and indefinite-lived
intangible assets are no longer amortized for financial reporting purposes.
Therefore, this deferred income tax liability will not reverse and be payable
unless the underlying assets are sold or a tax impairment is recorded.
-13-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Concluded)
The primary sources of liquidity for Holdings and Enterprises are the cash flows
from the operations of Millbrook and Manischewitz and borrowings under the
Company's Credit Agreement. At June 30, 2002, Millbrook and Manischewitz had
approximately $2.8 million of cash and approximately $18.6 million of available
borrowing capacity under the Credit Agreement. The Company is currently in
compliance with the covenants contained in the Credit Agreement and the
indentures relating to its senior notes.
From a distribution perspective, Millbrook's business continues to be impacted
by industry consolidation of retail customers, a decision made by a prior
customer to move to self-distribution, customer financial difficulties and
bankruptcies. The Company expects some further revenue decline during fiscal
2003, absent new customer growth or expanded distribution to existing customers,
as a result of the aforementioned factors. Millbrook continues to focus its
strategy on expanding the specialty food category while taking advantage of
market opportunities in its health and beauty care and general merchandise
categories. Millbrook's operating results for the three months ended June 30,
2002 are, on the one hand, out of step from a strategy execution perspective as
specialty food revenues declined. However, on the other hand, the growth in
health and beauty care revenues reflects Millbrook's success in taking advantage
of a market opportunity that arose. Management continues to believe in its
overall strategy. Further, Millbrook's management has instituted a number of
cost reduction programs designed to streamline its organization to reduce its
operating costs and better meet the demands of its changing markets. From a
branded food products perspective, Manischewitz' operations are impacted by the
amount of retail space devoted to its products and the consumer acceptance of
those products. Although there can be no assurance, Holdings and Enterprises
believe that its operating cash flows and borrowings under its Credit Agreement
will be sufficient to meet its obligations and remain in compliance with its
covenants. The ability of Holdings and Enterprises to meet those obligations and
maintain compliance will depend on a number of factors, including those
discussed above, general economic conditions and other factors beyond Holdings'
and Enterprises' control.
-14-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Item 7a of the Company's Form 10-K for the year ended March
31, 2002 filed with the Securities and Exchange Commission.
The foregoing discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains "forward-looking" statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Additionally,
written materials issued and oral statements made from time to time by Holdings
and Enterprises may contain forward-looking statements. Forward-looking
statements can be identified by the fact that they do not relate strictly to
historical or current facts and by their use of words such as "goals",
"expects", "plans", "believes", "estimates", "forecasts", "projects", "intends"
and other words of similar meaning. Execution of business and acquisition
strategies, expansion of product lines and increase of distribution networks or
product sales are areas, among others, whose future success may be difficult to
predict. They are based on management's then-current information, assumptions,
plans, expectations, estimates and projections regarding the food and wholesale
distribution industries. However, such statements are not guarantees of future
performance, and actual results and outcomes may differ materially from what is
expressed depending on a variety of factors, many of which are outside of
Holdings' and Enterprises' control. Given these uncertainties, current and
prospective investors are cautioned not to place undue reliance on such
forward-looking statements. We undertake no obligation to update or revise any
forward-looking statements or to publicly announce the result of any revisions
to any of the forward-looking statements herein to reflect future events or
developments.
Among the factors that could cause actual outcomes or results to differ
materially from what is expressed in these forward-looking statements are
changes in the demand for, supply of, and market prices of Holdings' and
Enterprises' products, the actions of current and potential new competitors,
changes in technology and economic conditions.
-15-
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Sales of unregistered securities during the quarter. During the quarter
ended June 30, 2002, Holdings issued warrants granting holders the right to
purchase 5,060 shares of its common stock. The warrants were valued at
approximately $2.7 million and were issued in conjunction with Holdings'
amendment of the Indenture underlying its 13% Notes. All of these warrants were
granted to holders of the 13% Notes consenting to the Indenture amendment. These
shares have not been registered with the Securities and Exchange Commission in
reliance on the exemption provided in Section 3(a)(9) of the Securities Act of
1933, as amended.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
a. Exhibits
None
b. Form 8-K dated as of May 1, 2002.
-16-
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
R.A.B. HOLDINGS, INC.
August 13, 2002 /s/ Richard A. Bernstein
------------------------
Richard A. Bernstein
Chairman
August 13, 2002 /s/ Steven M. Grossman
----------------------
Steven M. Grossman
Chief Financial Officer
R.A.B. ENTERPRISES, INC.
August 13, 2002 /s/ Richard A. Bernstein
------------------------
Richard A. Bernstein
Chairman
August 13, 2002 /s/ Steven M. Grossman
----------------------
Steven M. Grossman
Chief Financial Officer
-17-
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002 (the "Report") by R.A.B. Holdings, Inc., a Delaware
corporation ("Holdings"), and R.A.B. Enterprises, Inc., a Delaware corporation
("Enterprises" and, together with Holdings, the "Registrant"), each of the
undersigned hereby certifies, to his knowledge, that:
1. The Report fully complies with the requirements of Sections
13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
2. The information contained in the Report fairly presents, in
all material respects, the financial condition, results of
operations and cash flows of the Registrant for the quarter
ended June 30, 2002.
R.A.B. HOLDINGS, INC.
August 13, 2002 /s/ Richard A. Bernstein
------------------------
Richard A. Bernstein
Chairman
August 13, 2002 /s/ Steven M. Grossman
----------------------
Steven M. Grossman
Chief Financial Officer
R.A.B. ENTERPRISES, INC.
August 13, 2002 /s/ Richard A. Bernstein
------------------------
Richard A. Bernstein
Chairman
August 13, 2002 /s/ Steven M. Grossman
----------------------
Steven M. Grossman
Chief Financial Officer
-18-