10-Q 1 b321262_10q.txt QUARTERLY REPORT 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 SEPTEMBER 30, 2002 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 -------------------------

Registrant's telephone number, including area code (212) 688-4500 --------------- N/A -------------------------------------------------------------------------------- (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 --- --- R.A.B. HOLDINGS, INC. AND SUBSIDIARIES -------------------------------------- R.A.B. ENTERPRISES, INC. AND SUBSIDIARIES ----------------------------------------- TABLE OF CONTENTS

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) --------------------------------------------------------------------------------

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) --------------------------------------------------------------------------------

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 OPERATIONS (In thousands) --------------------------------------------------------------------------------

See notes to Condensed Consolidated Financial Statements -3- R.A.B. HOLDINGS, INC. AND SUBSIDIARIES R.A.B. ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) --------------------------------------------------------------------------------

See notes to Condensed Consolidated Financial Statements -4- 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 September 30, 2002, and the results of operations and cash flows for the periods ended September 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): September 30, March 31, 2002 2002 ----------------- ----------------- Raw materials $ 2,238 $ 1,821 Finished goods 59,006 56,532 ----------------- ----------------- $ 61,244 $ 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 six month period ended September 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. -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) 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 six month period ended September 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 SFAS No. 142 on net loss for the six month periods ended September 30, 2002 and 2001 are as follows (in thousands):

-6- 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 six month period ended September 30, 2002, including the effect of adopting SFAS No. 142 are as follows (in thousands):

At September 30, 2002, Manischewitz' intangible assets were comprised of trademarks and tradenames. NOTE D - Related Party Transactions For each of the six month periods ended September 30, 2002 and 2001, the Company paid $1,020,000 and $1,005,000, 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):

-7- 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. With 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 an impairment is recognized for tax purposes. 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 and second 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' loss from continuing operations. NOTE F - Comprehensive Loss For the three and six month periods ended September 30, 2002 the comprehensive loss was ($5,563,000) and ($37,983,000) for Holdings and ($5,006,000) and ($35,820,000) for Enterprises as compared to ($3,598,000) and ($7,114,000) for Holdings and ($3,099,000) and ($6,094,000) for Enterprises for the three and six month periods ended September 30, 2001. -8- 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.

-9- R.A.B. HOLDINGS, INC. AND SUBSIDIARIES R.A.B. ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Concluded) (Unaudited) -------------------------------------------------------------------------------- NOTE H - 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 the amended 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 six month period ended September 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. On November 1, 2002, the Company elected to defer the cash payment of interest on its 6% Notes. 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. 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. -10- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Revenues. Revenues for the three month period ended September 30, 2002 decreased $14.1 million or 10.6% to $119.3 million as compared to $133.4 million for the three month period ended September 30, 2001. Revenues for the six month period ended September 30, 2002 decreased $22.2 million or 8.1% to $250.5 million as compared to $272.7 million for the six month period ended September 30, 2001. Revenues include: (i) Millbrook's revenues of $110.9 million and $235.6 million for the three and six month periods ended September 30, 2002 as compared to $125.1 million and $258.3 million for the three and six month periods ended September 30, 2001; (ii) Manischewitz' revenues of $10.2 million and $17.8 million for the three and six month periods ended September 30, 2002 as compared to $10.1 million and $17.5 million for the three and six month periods ended September 30, 2001; and (iii) intersegment sales, which are eliminated in consolidation, of ($1.8) million and ($2.9) million for the three and six month periods ended September 30, 2002 as compared to ($1.8) million and ($3.1) million for the three and six month periods ended September 30, 2001. Millbrook's revenues decreased $14.2 million and $22.7 million or 11.4% and 8.8% for the three and six month periods ended September 30, 2002 as compared to the comparable periods of the prior year. The decrease in revenues for the three and six month periods 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. The customer financial difficulties include Ames Department Stores, one of Millbrook's significant customers, announcing its decision to liquidate under Chapter 7 of the Bankruptcy Code in August, 2002. Manischewitz' revenues increased $0.1 million and $0.3 million or 0.9% and 1.5% for the three and six month periods ended September 30, 2002 as compared to the comparable periods of the prior year. The increase in revenues for the three and six month periods is principally due to increased sales of Manischewitz and Guiltless Gourmet brand products, partially offset by decreased sales of Season brand products. Gross Profit. Gross profit for the three and six month periods ended September 30, 2002 were $26.2 million and $55.1 million as compared to $33.2 million and $69.2 million for the three and six month periods ended September 30, 2001, a decrease of $7.0 million and $14.1 million or 20.9% and 20.3%. As a percentage of revenues, the gross profit margin was 22.0% for the three and six month periods ended September 30, 2002 as compared to 24.9% and 25.4% for the three and six month periods ended September 30, 2001. The decrease in gross profit dollars and its impact on gross profit margin for the three and six month periods is principally due to the following: (i) decreased gross profit dollars associated with Millbrook's lower revenues ($6.2 million and $13.2 million, respectively) and decreased gross profit margin (2.2% and 3.0%, respectively) 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; and (ii) decreased gross profit margin (0.7% and 0.4%, respectively) at Manischewitz resulting from increased promotional allowances, including those associated with the launch of several new Guiltless Gourmet products and the shift in the sales mix from manufactured to co-packed products resulting in the underabsorption of manufacturing overhead. -11- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Operating Expenses. Distribution and warehousing expenses for the three and six month periods ended September 30, 2002 were $11.4 million and $23.1 million as compared to $13.3 million and $27.6 million for the three and six month periods ended September 30, 2001. As a percentage of revenues, distribution and warehousing expenses decreased to 9.5% and 9.2% for the three and six month periods ended September 30, 2002 as compared to 10.0% and 10.1% in the comparable periods of the prior year. Distribution and warehousing costs for the three and six month periods 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 and during the three month period ended September 30, 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. Selling, general and administrative expenses for the three and six month periods ended September 30, 2002 were $16.1 million and $32.7 million, as compared to $19.9 million and $41.1 million for the three and six month periods ended September 30, 2001. As a percentage of revenues, selling, general and administrative expenses decreased to 13.5% and 13.1% for the three and six month periods ended September 30, 2002 as compared to 14.9% and 15.1% for the comparable periods of the prior year. The decrease in selling, general and administrative costs for the three and six month periods are 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 and new radio advertising campaigns for Manischewitz and Season brand products. Amortization of intangibles was approximately $43,000 for the six month period ended September 30, 2002, as compared to $1.1 million and $2.1 million for the three and six month periods ended September 30, 2001. There was no amortization of intangibles during the three months ended September 30, 2002, as the Company did not have any remaining intangible assets with definite lives. This decline resulted from the adoption of SFAS No. 142, which provides that only intangible assets with definite lives continue to be amortized. Interest Expense. Interest expense for the three and six month periods ended September 30, 2002 was $4.3 million (consisting of $0.6 million for Holdings and $3.7 million for Enterprises, respectively) and $8.4 million (consisting of $1.1 million for Holdings and $7.3 million for Enterprises, respectively) as compared to $4.9 million (consisting of $0.9 million for Holdings and $4.0 million for Enterprises, respectively) and $9.8 million (consisting of $1.6 million for Holdings and $8.2 million for Enterprises, respectively) for the three and six month periods ended September 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. -12- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Taxes. The provision for income taxes for the six month period ended September 30, 2002 was $4.1 million for Holdings and $3.6 million for Enterprises as compared to an income tax benefit of $2.3 million and $4.3 million for Holdings and $2.0 million and $3.6 million for Enterprises for the three and six month periods ended September 30, 2001. As a result of the adoption of SFAS No. 142, Holdings and Enterprises recorded valuation allowances to offset their respective first and second 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' loss from continuing operations. For the three and six month periods ended September 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. 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 six month period ended September 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 the amended 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 six month period ended September 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. -13- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Net Loss. As a result of the foregoing, the net loss for the three and six month periods ended September 30, 2002 was $5.6 million and $38.0 million for Holdings and $5.0 million and $35.8 million for Enterprises as compared to $3.6 million and $7.2 million for Holdings and $3.1 million and $6.1 million for Enterprises for the three and six month periods ended September 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-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. 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. 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. 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 six months ended September 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 $6.0 million for Holdings and $5.0 million for Enterprises. Operations for the six months ended September 30, 2001, excluding non-cash charges for depreciation and amortization, utilized cash of $1.9 million for Holdings and $0.9 million for Enterprises. During the six month period ended September 30, 2002, other changes in assets and liabilities resulting from operating activities provided cash of $4.6 million for Holdings and $3.1 million for Enterprises as compared to providing $22.6 million for Holdings and $23.2 million for Enterprises for the six month period ended September 30, 2001, resulting in net cash utilized by operating activities of $1.4 million for Holdings and $1.9 million for Enterprises and $20.7 million for Holdings and $22.3 million for Enterprises, respectively. Investing activities, which principally consisted of the acquisitions of property and equipment resulted in a use of cash of $0.3 million and $1.7 million for the six month periods ended September 30, 2002 and 2001 for each of Holdings and Enterprises, respectively. -14- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) During the six month period ended September 30, 2002, financing activities, which principally consisted of borrowings under the Credit Agreement and the payment of deferred debt modification costs by Holdings, utilized cash of $0.5 million for Holdings and $0.1 million for Enterprises. During the six month period ended September 30, 2001, financing activities, which principally consisted of the repayment of $27.4 million under the Credit Agreement offset by $1.6 million of payments from the Interest Escrow Account by Holdings, utilized cash of $25.8 million for Holdings and $27.4 million for Enterprises. At September 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 an impairment is recognized for tax purposes. 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 September 30, 2002, Millbrook and Manischewitz had approximately $2.3 million of cash and approximately $9.3 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. On November 1, 2002, the Company elected to defer the cash payment of interest on its 6% 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 customer financial difficulties include Ames Department Stores, one of Millbrook's significant customers, announcing its decision to liquidate under Chapter 7 of the Bankruptcy Code in August 2002. 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 six months ended September 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 market opportunities as they arise. 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. -15- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Concluded) Critical Accounting Policies The condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results may differ significantly from the estimates previously applied by the Company which were based on different assumptions and conditions. The significant accounting principles which we believe are the most important to aid in fully understanding the financial results are the following: Concentration of Credit Risk - Trade accounts receivable potentially subject the Company to credit risk. The Company extends credit to its customers, principally in the U.S. supermarket industry, based upon an evaluation of the customer's financial condition and credit history and generally does not require collateral. The Company's allowances for doubtful accounts are based upon the expected collectability of trade accounts receivable. Inventories - Inventories are stated at the lower of cost or market. Cost is determined by the last-in, first-out ("LIFO") method. Revenue Recognition - Revenue is recognized when products are shipped or services are provided to customers. Provisions for returns and allowances and bad debts are based upon historical experience and known events. 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. -16- ITEM 4. CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures that are designed to ensure (1) that information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's ("SEC") rules and regulations, and (2) 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 November 2002, 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 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 November 2002 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. -17- PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K: a. Exhibits None b. No reports were filed on Form 8-K during the quarter for which this report is filed. -18- 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. November 13, 2002 /s/ Richard A. Bernstein ------------------------ Richard A. Bernstein Chief Executive Officer November 13, 2002 /s/ Steven M. Grossman ---------------------- Steven M. Grossman Chief Financial Officer R.A.B. ENTERPRISES, INC. November 13, 2002 /s/ Richard A. Bernstein ------------------------ Richard A. Bernstein Chief Executive Officer November 13, 2002 /s/ Steven M. Grossman ---------------------- Steven M. Grossman Chief Financial Officer -19- 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 September 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 September 30, 2002. R.A.B. HOLDINGS, INC. November 13, 2002 /s/ Richard A. Bernstein ------------------------ Richard A. Bernstein Chief Executive Officer November 13, 2002 /s/ Steven M. Grossman ---------------------- Steven M. Grossman Chief Financial Officer R.A.B. ENTERPRISES, INC. November 13, 2002 /s/ Richard A. Bernstein ------------------------ Richard A. Bernstein Chief Executive Officer November 13, 2002 /s/ Steven M. Grossman ---------------------- Steven M. Grossman Chief Financial Officer -20- CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Richard A. Bernstein, certify that: 1. I have reviewed this quarterly report on Form 10-Q for the quarter ended September 30, 2002 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"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's Board of Directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. November 13, 2002 /s/ Richard A. Bernstein --------------------------- Richard A. Bernstein Chief Executive Officer -21- CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Steven M. Grossman, certify that: 1. I have reviewed this quarterly report on Form 10-Q for the quarter ended September 30, 2002 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"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's Board of Directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. November 13, 2002 /s/ Steven M. Grossman ---------------------- Steven M. Grossman Chief Financial Officer -22-

RAB HOLDINGS INC 10-Q