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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, 2003
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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
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Commission File number 333-66221
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R.A.B. HOLDINGS, INC. R.A.B. ENTERPRISES, INC.
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(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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Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act) Yes No X
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The registrant's common stock is not publicly held or publicly traded.
R.A.B. HOLDINGS, INC. AND SUBSIDIARIES
R.A.B. ENTERPRISES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - June 30, 2003 (Unaudited)
and March 31, 2003 1
Condensed Consolidated Statements of Operations - Three months ended
June 30, 2003 and 2002 (Unaudited) 2
Condensed Consolidated Statements of Cash Flows - Three months ended
June 30, 2003 and 2002 (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
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
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)
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June 30, 2003 March 31, 2003
------------------------------- -------------------------------
Holdings Enterprises Holdings Enterprises
-------------- --------------- -------------- --------------
ASSETS (Unaudited)
Current assets:
Cash $ 2,624 $ 2,602 $ 6,452 $ 6,444
Accounts receivable, net 26,117 26,117 38,352 38,352
Inventories 54,983 54,983 50,960 50,960
Other current assets 6,278 12,053 6,653 12,205
-------------- --------------- -------------- --------------
Total current assets 90,002 95,755 102,417 107,961
-------------- --------------- -------------- --------------
Other assets 4,376 3,274 4,453 3,318
Property, plant and equipment, net 24,432 24,432 25,285 25,285
Goodwill 50,010 50,010 50,010 50,010
Intangibles, net 39,962 39,962 39,962 39,962
-------------- --------------- -------------- --------------
Total assets $208,782 $213,433 $222,127 $226,536
============== =============== ============== ==============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable $ 33,401 $ 33,401 $ 34,347 $ 34,347
Other current liabilities 20,088 21,166 22,288 22,944
-------------- --------------- -------------- --------------
Total current liabilities 53,489 54,567 56,635 57,291
-------------- --------------- -------------- --------------
Noncurrent liabilities:
Long-term debt 158,743 132,928 165,327 140,340
Deferred income taxes 10,912 10,912 10,662 10,662
Other liabilities 17,825 17,825 17,874 17,874
-------------- --------------- -------------- --------------
Total noncurrent liabilities 187,480 161,665 193,863 168,876
-------------- --------------- -------------- --------------
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 (92) - (92) -
Additional paid-in capital 2,622 39,482 2,622 39,482
Retained earnings (deficit) (43,389) (38,113) (39,564) (34,936)
Accumulated other comprehensive loss (4,168) (4,168) (4,177) (4,177)
-------------- --------------- -------------- --------------
(32,182) (2,799) (28,366) 369
Less common stock in treasury - 4,600 shares 5 - 5 -
-------------- --------------- -------------- --------------
Total stockholders' (deficit) equity (32,187) (2,799) (28,371) 369
-------------- --------------- -------------- --------------
Total liabilities and stockholders' (deficit) equity $208,782 $213,433 $222,127 $226,536
============== =============== ============== ==============
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)
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Three Months Ended Three Months Ended
June 30, 2003 June 30, 2002
----------------------------- -----------------------------
Holdings Enterprises Holdings Enterprises
------------- -------------- ------------- --------------
(Unaudited) (Unaudited)
Revenues $114,906 $114,906 $131,222 $131,222
Costs and expenses:
Cost of sales 88,131 88,131 102,324 102,324
Selling 9,640 9,640 10,058 10,058
Distribution and warehousing 10,501 10,501 11,699 11,699
General and administrative 6,217 6,168 6,521 6,514
Amortization of intangibles - - 43 43
Debt modification costs - - 500 -
------------- -------------- ------------- --------------
Total costs and expenses 114,489 114,440 131,145 130,638
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Operating income 417 466 77 584
Interest expense, net 3,954 3,393 4,172 3,540
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Loss before provision for income taxes (3,537) (2,927) (4,095) (2,956)
Provision for income taxes 288 250 4,098 3,631
------------- -------------- ------------- --------------
Loss before cumulative effect of change in
accounting principle (3,825) (3,177) (8,193) (6,587)
Cumulative effect of change in accounting principle - - (24,230) (24,230)
------------- -------------- ------------- --------------
Net loss $(3,825) $ (3,177) $ (32,423) $(30,817)
============= ============== ============= ==============
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)
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Three Months Ended Three Months Ended
June 30, 2003 June 30, 2002
------------------------------- -------------------------------
Holdings Enterprises Holdings Enterprises
-------------- -------------- -------------- ---------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $ (3,825) $ (3,177) $(32,423) $(30,817)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,390 1,278 1,623 1,547
Modification of debt - - 500 -
Cumulative effect of change in accounting principle - - 24,230 24,230
Deferred income taxes 250 250 4,098 3,631
Changes in assets and liabilities:
Accounts receivable 12,235 12,235 8,810 8,810
Inventories (4,023) (4,023) (6,300) (6,300)
Accounts payable (946) (946) 3,417 3,417
Other assets and liabilities (1,361) (1,911) (1,872) (2,861)
-------------- -------------- -------------- ---------------
Net cash provided by operating activities 3,720 3,706 2,083 1,657
-------------- -------------- -------------- ---------------
Cash flows from investing activities:
Acquisitions of plant and equipment (136) (136) (83) (83)
-------------- -------------- -------------- ---------------
Cash flows from financing activities:
Payment of debt modification costs - - (439) -
Repayments under Credit Agreement (7,412) (7,412) (3,226) (3,226)
-------------- -------------- -------------- ---------------
Net cash used in financing activities (7,412) (7,412) (3,665) (3,226)
-------------- -------------- -------------- ---------------
Net decrease in cash (3,692) (3,706) (1,582) (1,569)
Cash, beginning of period 6,452 6,444 4,526 4,456
-------------- -------------- -------------- ---------------
Cash, end of period $ 2,760 $ 2,738 $ 2,944 $ 2,887
============== ============== ============== ===============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 5,247 $ 5,117 $ 5,427 $ 5,296
Income taxes $ 3 $ 3 $ 2 $ 2
Non-cash financing activities:
Additional indebtedness due to deferred interest
payment on 6% Senior Notes $ 757 $ - $ 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)
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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").
Millbrook is one of the nation's largest, independent value-added distributors
of specialty foods, health and beauty care products and general merchandise.
Manischewitz manufactures (i) processed kosher and other ethnic foods including,
among others, matzos, cake mixes, cookies, soups, noodles and processed fish
products under its Manischewitz(R) brand; (ii) canned fish, vegetables and other
specialty food products under its Season(R) brand; and (iii) organic baked
tortilla chips, bean dips, salsas and other specialty food products under its
Guiltless Gourmet(R) brand.
These condensed consolidated financial statements should be read in conjunction
with the Company's consolidated financial statements as of March 31, 2003 and
2002 contained in the Company's Form 10-K filed with the Securities and Exchange
Commission. The information related to March 31, 2003 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 (consisting only of recurring
adjustments) necessary to present fairly the financial position of the Company
as of June 30, 2003, and the results of operations and cash flows for the
periods ended June 30, 2003 and 2002.
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,
2003 2003
----------------- -----------------
Raw materials $ 1,630 $ 1,849
Finished goods 53,353 49,111
----------------- -----------------
$ 54,983 $ 50,960
================= =================
-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
Effective April 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("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 (accumulated amortization was $2,038,000 at June
30, 2002) still required to be amortized under SFAS No. 142.
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 require an annual assessment of goodwill and intangibles to determine
any possible future impairment. The Company elected to perform this annual
assessment as of March 31 of each year. As of March 31, 2003, the Company's
annual assessment of each reporting unit indicated that goodwill and intangibles
were not impaired.
-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 effect of adopting the new standard on net loss for the three month periods
ended June 30, 2003 and 2002 is as follows (in thousands):
2003 2002
------------------------------- -------------------------------
Holdings Enterprises Holdings Enterprises
--------------- -------------- -------------- ---------------
Net Loss $ (3,825) $ (3,177) $ (32,423) $ (30,817)
Less: cumulative effect of change in
accounting principle - - 24,230 24,230
--------------- -------------- -------------- ---------------
Net Loss, excluding cumulative effect of
change in accounting principle (3,825) (3,177) (8,193) (6,587)
Add: valuation allowances recorded as a
result of SFAS No. 142 1,348 1,186 5,697 5,022
--------------- -------------- -------------- ---------------
Net Loss, excluding cumulative effect of
change in accounting principle and
valuation allowances $ (2,477) $ (1,991) $ (2,496) $ (1,565)
=============== ============== ============== ===============
NOTE D - Related Party Transactions
For each of the three month periods ended June 30, 2003 and 2002, the Company
paid $510,000 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 the Company's
behalf.
NOTE E - Income Taxes
The provision for income taxes for the three month periods ended June 30, 2003
and 2002 consisted of the following (in thousands):
2003 2002
------------------------------- -------------------------------
Holdings Enterprises Holdings Enterprises
--------------- -------------- -------------- ---------------
Income Tax Benefit $ (1,060) $ (936) $ (1,399) $ (1,191)
Valuation Allowances recorded as a
result of SFAS No. 142:
Valuation Allowance related to continuing
operations for the three months ended
June 30, 2003 and 2002 1,348 1,186 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 for Income Taxes $ 288 $ 250 $ 4,098 $ 3,631
=============== ============== ============== ===============
-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, 2003,
Holdings and Enterprises had net deferred tax liabilities before the impact of
SFAS No. 142 of approximately $2.9 million and $4.3 million, respectively; each
including a deferred tax liability for taxable temporary differences resulting
from different amortization periods for identified intangibles of approximately
$10.7 million.
With the adoption of SFAS No. 142 in the first quarter of fiscal 2003, 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 resulting from different
amortization periods for identified intangibles will not reverse unless the
underlying assets are sold or an impairment is recognized for tax purposes.
Without this deferred tax liability, Holdings and Enterprises would have had net
deferred tax assets of approximately $7.8 million and $6.4 million,
respectively, as of March 31, 2003.
Historically, the Company did not need a valuation allowance (with the exception
of Holdings' state tax loss carryforwards) for the portion of the tax effect of
net operating losses equal to the amount of tax-deductible amortization of
identified intangibles expected to occur during the carryforward period of the
net operating losses based upon the timing of the reversal of other temporary
differences. As a result of the adoption of SFAS No. 142, the reversal will
probably not occur during the carryforward period of the net operating losses.
For the three month periods ended June 30, 2003 and 2002, Holdings and
Enterprises recorded non-cash deferred income tax expense of approximately $1.3
million and $1.2 million and approximately $5.5 million and $4.8 million,
respectively, which would not have been required prior to SFAS No. 142.
NOTE F - Comprehensive Loss
For the three month periods ended June 30, 2003 and 2002, Holdings' and
Enterprises' comprehensive loss was ($3,816,000) and ($3,168,000) and
($32,420,000) and ($30,814,000), 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 periods ended June 30, 2003 2002
- ------------------------------------------ ------------------------- -----------------------
(in thousands) Holdings Enterprises Holdings Enterprises
----------- ----------- ---------- -----------
Revenues
Millbrook ...................... $ 108,741 $ 108,741 $ 124,789 $ 124,789
Manischewitz ................... 7,839 7,839 7,573 7,573
--------- --------- --------- ---------
Total segment revenues ...... 116,580 116,580 132,362 132,362
Corporate items, principally
the elimination of
intercompany sales ........... (1,674) (1,674) (1,140) (1,140)
--------- --------- --------- ---------
$ 114,906 $ 114,906 $ 131,222 $ 131,222
========= ========= ========= =========
Operating income
Millbrook ...................... $ 1,907 $ 1,907 $ 2,152 $ 2,152
Manischewitz ................... 326 326 279 279
--------- --------- --------- ---------
Total segment operating
income .................. 2,233 2,233 2,431 2,431
Corporate items and
eliminations ................ (1,816) (1,767) (2,354) (1,847)
--------- --------- --------- ---------
$ 417 $ 466 $ 77 $ 584
========= ========= ========= =========
Identifiable assets
Millbrook ...................... $ 87,677 $ 87,677 $ 104,567 $ 104,567
Manischewitz ................... 30,350 30,350 32,463 32,463
--------- --------- --------- ---------
Total segment assets ........ 118,027 118,027 137,030 137,030
Corporate items, principally
intangibles not allocated
to segments ................. 90,755 95,406 95,872 92,313
--------- --------- --------- ---------
$ 208,782 $ 213,433 $ 232,902 $ 229,343
========= ========= ========= =========
-8-
R.A.B. HOLDINGS, INC. AND SUBSIDIARIES
R.A.B. ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
(Unaudited)
- --------------------------------------------------------------------------------
NOTE H - Debt Modification Costs
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 deferral of the 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 a component of
operating income 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 debt issuance costs was offset by a valuation allowance required by the
adoption of SFAS No. 142, as described in Note E - Income Taxes. On November 1,
2002 and May 1, 2003, the Company elected to defer the cash payment of interest
on its 6% Notes.
NOTE I - New Accounting Pronouncements
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. Effective April 1, 2003, the Company adopted SFAS
No. 145. As a result, the Company reclassified $500,000 of debt modification
costs to operating expense in its condensed consolidated statement of operations
for the three months ended June 30, 2002.
SFAS No. 149 "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" was issued in April 2003 and is effective for contracts entered into
or modified after June 30, 2003 and for hedging relationships designated after
that date. SFAS No. 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities under SFAS No. 133. The adoption of SFAS No.
149 will not have any impact on our financial position or overall trends in
results of operations.
SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity" was issued in May 2003 and is effective for
instruments entered into or modified after May 15, 2003. SFAS No. 150 requires
that certain financial instruments including mandatorily redeemable instruments
and forward purchase contracts be reported as liabilities by their issuers. The
adoption of SFAS No. 150 did not have any impact on our financial position or
overall trends in results of operations.
-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, 2003 decreased
$16.3 million or 12.4% to $114.9 million as compared to $131.2 million for the
three month period ended June 30, 2002. Revenues include:
(i) Millbrook's revenues of $108.7 million for the three month
period ended June 30, 2003 as compared to $124.8 million for
the three month period ended June 30, 2002;
(ii) Manischewitz' revenues of $7.8 million for the three month
period ended June 30, 2003 as compared to $7.6 million for the
three month period ended June 30, 2002; and
(iii) intersegment sales, which are eliminated in consolidation, of
($1.6) million for the three month period ended June 30, 2003
as compared to ($1.2) million for the three month period ended
June 30, 2002.
Millbrook's revenue decreased $16.1 million or 12.9% for the three month period
ended June 30, 2003 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 resulting from customer bankruptcies and a decision made by a
former customer in the beginning of fiscal 2002 to phase out its purchases from
Millbrook as it moved to self-distribution. Customer bankruptcies include the
closure of Ames Department Stores ("Ames") in August, 2002. The three month
period ended June 30, 2003 represents the final negative sales comparison with
respect to the former customer's self-distribution decision.
Manischewitz' revenues increased $0.2 million or 3.5% for the three month period
ended June 30, 2003 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 Manischewitz brand products ($1.3 million) resulting from the
conclusion of the Passover holiday in April 2003, new product introductions and
product packaging innovation. The Manischewitz brand increase was substantially
offset by lower sales of Guiltless Gourmet ($0.6 million) and Season ($0.5
million) brand products resulting from competitive pressures and reduced
promotional selling periods.
Gross Profit. Gross profit for the three month period ended June 30, 2003 was
$26.8 million as compared to $28.9 million for the three month period ended June
30, 2002, a decrease of $2.1 million or 7.3%. As a percentage of revenues, the
gross profit margin was 23.3% for the three month period ended June 30, 2003 as
compared to 22.0% for the three month period ended June 30, 2002.
The decrease in gross profit dollars and the increase in gross profit margin is
primarily due to the following:
(i) decreased gross profit dollars associated with Millbrook's
lower revenues ($2.3 million) and increased gross profit
margin (1.1%) resulting from the shift in Millbrook's customer
base from non-serviced to serviced customers and a shift in
product mix from lower margin health and beauty care products
to higher margin specialty food products; partially offset by
(ii) increased gross profit dollars associated with Manischewitz'
higher revenues ($0.2 million) and increased gross profit
margin (0.2%) due to improved utilization of Manischewitz'
manufacturing facilities resulting in higher absorption of
manufacturing overhead.
-10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Operating Expenses. Distribution and warehousing expenses for the three month
period ended June 30, 2003 were $10.5 million, as compared to $11.7 million for
the three month period ended June 30, 2002. As a percentage of revenues,
distribution and warehousing expenses increased to 9.1% for the three month
period ended June 30, 2003 as compared to 8.9% in the comparable period of the
prior year. Distribution and warehousing costs for the three month period were
impacted by the following:
(i) lower warehousing and distribution headcount directly related
to the loss of Ames during fiscal 2003 and additional
headcount reductions realized from the implementation of a
cost reduction program which more efficiently deployed
warehouse personnel; and
(ii) lower transportation costs realized from the implementation of
a cost reduction program which achieved more efficient routing
and enhanced utilization of Millbrook's truck fleet.
Selling, general and administrative expenses for the three month period ended
June 30, 2003 were $15.9 million, as compared to $16.6 million for the three
month period ended June 30, 2002. As a percentage of revenues, selling, general
and administrative expenses increased to 13.8% for the three month period ended
June 30, 2003 as compared to 12.6% for the comparable period of the prior year.
The decrease in selling, general and administrative expenses for the three month
period is principally due to the following:
(i) lower headcount in Millbrook's salesforce due to reductions
made during the year ended March 31, 2003 directly related to
customer losses; and
(ii) lower headcount in Millbrook's selling, general and
administrative functions realized from the implementation of a
cost reduction program which streamlined Millbrook's
workforce.
Amortization of intangibles for the three month period ended June 30, 2002 was
approximately $43,000. The Company adopted SFAS No. 142, which provides that
only intangible assets with definite lives continue to be amortized. As of June
30, 2002, the Company did not have any remaining unamortized intangible assets
with definite lives.
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 deferral of the 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 a component of
operating income 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 debt issuance costs was offset by a valuation allowance required by the
adoption of SFAS No. 142.
Interest Expense. Interest expense for the three month period ended June 30,
2003 was $4.0 million (consisting of $0.6 million for Holdings and $3.4 million
for Enterprises, respectively) as compared to $4.2 million (consisting of $0.7
million for Holdings and $3.5 million for Enterprises, respectively) for the
three month period ended June 30, 2002. 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Taxes. The provision for income taxes for the three month period ended June 30,
2003 was $0.3 million for each of Holdings and Enterprises as compared to $4.1
million for Holdings and $3.6 million for Enterprises for the three month period
ended June 30, 2002. Historically, the Company did not need a valuation
allowance (with the exception of Holdings' state tax loss carryforwards) for the
portion of the tax effect of net operating losses equal to the amount of
tax-deductible amortization of identified intangibles expected to occur during
the carryforward period of the net operating losses based upon the timing of the
reversal of other temporary differences. As a result of the adoption of SFAS No.
142, the reversal will probably not occur during the carryforward period of the
net operating losses. For the three month period ended June 30, 2003 and 2002,
Holdings and Enterprises recorded non-cash deferred income tax expense of
approximately $1.3 million and $1.2 million and approximately $5.5 million and
$4.8 million, respectively, which would not have been required prior to SFAS No.
142.
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. 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.
Net Income (Loss). As a result of the foregoing, the net loss for the three
month period ended June 30, 2003 was $3.8 million for Holdings and $3.2 million
for Enterprises as compared to $32.4 million for Holdings and $30.8 million for
Enterprises for the three month period ended June 30, 2002.
Impact of New Accounting Pronouncements. 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. Effective April 1, 2003, the Company adopted SFAS No. 145. As a
result, the Company reclassified $500,000 of debt modification costs to
operating expense in its condensed consolidated statement of operations for the
three months ended June 30, 2002.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Impact of New Accounting Pronouncements (Continued). SFAS No. 149 "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities" was issued in
April 2003 and is effective for contracts entered into or modified after June
30, 2003 and for hedging relationships designated after that date. SFAS No. 149
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities under
SFAS No. 133. The adoption of SFAS No. 149 will not have any impact on our
financial position or overall trends in results of operations.
SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity" was issued in May 2003 and is effective for
instruments entered into or modified after May 15, 2003. SFAS No. 150 requires
that certain financial instruments including mandatorily redeemable instruments
and forward purchase contracts be reported as liabilities by their issuers. The
adoption of SFAS No. 150 did not have any impact on our financial position or
overall trends in results of operations.
Financial Condition, Liquidity and Capital Resources
Operations for the three months ended June 30, 2003, excluding non-cash charges
for depreciation and amortization and deferred income taxes, utilized cash of
$2.2 million for Holdings and $1.7 million for Enterprises. Operations for the
three months ended June 30, 2002, excluding non-cash charges for depreciation
and amortization, modification of debt at Holdings, cumulative effect of a
change in accounting principle and deferred income taxes, utilized cash of $2.0
million for Holdings and $1.4 million for Enterprises. During the three month
period ended June 30, 2003, other changes in assets and liabilities resulting
from operating activities provided cash of $5.9 million for Holdings and $5.4
million for Enterprises as compared to $4.1 million for Holdings and $3.1
million for Enterprises for the three month period ended June 30, 2002,
resulting in net cash provided by operating activities of $3.7 million for each
of Holdings and Enterprises and $2.1 million for Holdings and $1.7 million for
Enterprises, respectively.
Investing activities, which principally consisted of the acquisitions of plant
and equipment resulted in a use of cash of $0.1 million for each of the three
month periods ended June 30, 2003 and 2002 for each of Holdings and Enterprises,
respectively.
During the three month period ended June 30, 2003, financing activities, which
principally consisted of repayments under the Credit Agreement utilized cash of
$7.4 million for each of Holdings and Enterprises. During the three month period
ended June 30, 2002, financing activities, which principally consisted of
repayments under the Credit Agreement and the payment of debt modification costs
by Holdings, utilized cash of $3.7 million for Holdings and $3.2 million for
Enterprises.
At June 30, 2003, the Company's balance sheet includes a $10.9 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 become
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)
Financial Condition, Liquidity and Capital Resources (Continued)
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, 2003, Millbrook and Manischewitz had
approximately $2.6 million of cash and approximately $13.4 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. The Company's Credit Agreement expires
October 28, 2004. It is management's belief that it will either negotiate an
extension to its current facility or enter into a new facility on terms
acceptable to the Company, although there can be no assurance that such
extension or new facility will be completed. Absent the completion of an
extension or new facility, the Company's outstanding borrowings under its
current facility would be classified as a current liability in its condensed
consolidated balance sheet as of December 31, 2003.
From a distribution perspective, Millbrook's business continues to be impacted
by the instability of the U.S. supermarket industry, the financial condition of
its customers and changes in the competitive landscape as a number of grocery
and wholesale distribution companies are no longer in existence. The Company
expects some further revenue decline during fiscal 2004, absent new customer
growth or expanded distribution to existing customers. 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. Management continues to believe in its overall strategy.
Further, Millbrook's management effectively implemented a number of cost
reduction programs during fiscal 2003 which have reduced its operating costs in
order to address and react to the demands of its changing markets. From a
branded food products perspective, Manischewitz' operations (principally
consisting of its Manischewitz, Season and Guiltless Gourmet brands) 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, 2003 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 financial condition of customers, the action of
current and potential new competitors, the continuing instability of the U.S.
supermarket industry, changes in technology and economic conditions.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure (i) that information required to be disclosed in the reports filed or
submitted under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized, and reported within the time periods specified in the
Securities and Exchange Commission's ("SEC") rules and regulations, and (ii)
that this information is accumulated and communicated to management, including
the Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure. In June 2003, under the
supervision and review of the Chief Executive Officer and Chief Financial
Officer, an evaluation of the effectiveness of the Company's disclosure controls
and procedures was conducted. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that disclosure controls and
procedures are effective in alerting them in a timely manner to material
information regarding the Company (including its consolidated subsidiaries) that
is required to be included in the Company's periodic reports to the SEC. In
addition, there have been no significant changes in the Company's internal
controls or in other factors that could significantly affect those controls
since the June 2003 evaluation. However, there can be no assurance that the
system of disclosure controls and procedures will always achieve its stated
goals under all future conditions, no matter how remote.
-15-
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
a. Index to Exhibits
Exhibit No. Description of Document
----------- -----------------------
31.1 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 by Chief Executive Officer.
31.2 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 by Chief Financial Officer.
32.1 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 by Chief Executive Officer.
32.2 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 by Chief Financial Officer.
b. No reports were filed on Form 8-K during the quarter for which
this report is filed.
-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 14, 2003 /s/ Richard A. Bernstein
------------------------
Richard A. Bernstein
Chairman
August 14, 2003 /s/ Steven M. Grossman
----------------------
Steven M. Grossman
Chief Financial Officer
R.A.B. ENTERPRISES, INC.
August 14, 2003 /s/ Richard A. Bernstein
------------------------
Richard A. Bernstein
Chairman
August 14, 2003 /s/ Steven M. Grossman
----------------------
Steven M. Grossman
Chief Financial Officer
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