10-Q 1 b330098_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 DECEMBER 31, 2003 ----------------- 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 --------- R.A.B. HOLDINGS, INC. R.A.B. ENTERPRISES, INC. ------------------------------------------------------------- ----------------------------------------------------------- (Exact name of registrant as specified in its charter) (Exact name of registrant as specified in its charter) DELAWARE DELAWARE ------------------------------------------------------------- ------------------------------------------------------------ (State or other jurisdiction of (State or other jurisdiction of incorporation or organization) incorporation or organization) 13-3893246 13-3988873 ------------------------------------------------------------- ------------------------------------------------------------ (I.R.S. Employer identification No.) (I.R.S. Employer identification No.) 444 Madison Avenue, New York, New York 10022 ------------------------------------------------------------- ------------------------------------------------------------ (Address of principal executive offices) (Zip Code)

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 ----- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes No X --- --- 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

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"). 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 contained in the Company's Form 10-K for the year ended March 31, 2003 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 December 31, 2003, and the results of operations and cash flows for the periods ended December 31, 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): December 31, March 31, 2003 2003 ------------ ----------- Raw materials $ 1,741 $ 1,849 Finished goods 74,570 49,111 -------- -------- $ 76,311 $ 50,960 ======== ======== - 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 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 nine month period ended December 31, 2002 was approximately $43,000 representing the amortization of the remaining net book value of identified intangibles (accumulated amortization was $2,038,000 at December 31, 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 nine month period ended December 31, 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. - 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 effect of adopting SFAS No. 142 on the net loss for the nine month periods ended December 31, 2003 and 2002 is as follows (in thousands):

NOTE D - Related Party Transactions For each of the three month periods ended December 31, 2003 and 2002, the Company paid $532,500 and $510,000, respectively, and for each of the nine month periods ended December 31, 2003 and 2002, the Company paid $1,575,000 and $1,530,000, 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 the Company's behalf. NOTE E - Income Taxes The provision for income taxes for the nine month periods ended December 31, 2003 and 2002 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, 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 nine month periods ended December 31, 2003 and 2002, Holdings and Enterprises recorded non-cash deferred income tax expense of approximately $3.9 million and $3.2 million and approximately $8.9 million and $7.7 million, respectively, which would not have been required prior to SFAS No. 142. NOTE F - Comprehensive Loss For the three and nine month periods ended December 31, 2003, the comprehensive loss was ($2,738,000) and ($11,003,000) for Holdings and ($1,672,000) and ($8,635,000) for Enterprises as compared to ($2,597,000) and ($40,580,000) for Holdings and ($2,019,000) and ($37,839,000) for Enterprises for the three and nine month periods ended December 31, 2002. - 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 - Long-term Debt On October 29, 2003, Enterprises entered into an arrangement with certain holders of its 10.5% Notes to make the November 1, 2003 interest payment through the issuance of additional Notes in lieu of cash. The arrangement provided that each participating holder would receive $1,000 in principal amount of 10.5% Notes for each $500 of interest due. Residual amounts of interest less than $500 would be paid in cash. Holders of approximately 69% of the outstanding 10.5% Notes participated in the arrangement. As a result, Enterprises issued to holders approximately $5.8 million in principal amount of 10.5% Notes in lieu of approximately $2.9 million in cash interest. The remaining holders received their interest payment in cash. 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 Holdings' 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 six month period ended September 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, May 1, 2003 and November 1, 2003, the Company elected to defer the cash payment of interest on its 6% Notes. During the fourth quarter of fiscal 2004, the maturity of the Company's Credit Agreement was extended to January 15, 2005. 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 nine months ended December 31, 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. - 10 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Revenues. Revenues for the three month period ended December 31, 2003 increased $9.7 million or 8.1% to $130.2 million as compared to $120.5 million for the three month period ended December 31, 2002. Revenues for the nine month period ended December 31, 2003 decreased $9.6 million or 2.6% to $361.4 million as compared to $371.0 million for the nine month period ended December 31, 2002. Revenues include: (i) Millbrook's revenues of $121.2 million and $338.8 million for the three and nine month periods ended December 31, 2003 as compared to $111.6 million and $347.3 million for the three and nine month periods ended December 31, 2002; (ii) Manischewitz' revenues of $10.6 million and $27.2 million for the three and nine month periods ended December 31, 2003 as compared to $10.5 million and $28.2 million for the three and nine month periods ended December 31, 2002; and (iii) intersegment sales, which are eliminated in consolidation, of ($1.6) million and ($4.6) million for the three and nine month periods ended December 31, 2003 as compared to ($1.6) million and ($4.5) million for the three and nine month periods ended December 31, 2002. Millbrook's revenues increased $9.6 million or 8.6% for the three month period ended December 31, 2003 and decreased $8.5 million or 2.4% for the nine month period ended December 31, 2003 as compared to the comparable periods of the prior year. The increase for the three month period is principally due to sales to new accounts and expanded distribution to existing customers, partially offset by lower sales to certain customers experiencing financial difficulties and customers negatively impacted by the Midwest grocery workers strike which was settled at the end of October, 2003. The decrease in revenues for the nine 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. This phase out was completed in the first quarter of fiscal 2004. Customer bankruptcies include the closure of Ames Department Stores ("Ames") in August, 2002. This decline in revenues for the nine month period was partially offset by sales to new accounts and expanded distribution to existing customers. Excluding sales made to Ames and the former customer that moved to self-distribution during the nine month period ended December 31, 2002, Millbrook's revenues increased 3.8% for the nine month period ended December 31, 2003. Manischewitz' revenues increased $0.1 million or 1.1% for the three month period ended December 31, 2003 and decreased $1.0 million or 3.8% for the nine month period ended December 31, 2003 as compared to the comparable periods of the prior year. The change in revenues is principally due to the following: (i) decreased sales of Guiltless Gourmet products for the three month period ($0.9 million) and for the nine month period ($1.9 million). This decline is attributable to the aggressive launch of two product lines by established competitors in late 2002 targeted at core Guiltless Gourmet consumers. These introductions have taken shelf space and reduced the number of Guiltless Gourmet product facings at retail. As the promotional launch periods of these introductions has expired, management believes that Guiltless Gourmet will begin to re-establish its shelf position; - 11 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) (ii) increased sales of Manischewitz brand products for the three month period ($0.8 million) and for the nine month period ($1.1 million). This increase consists of increased Passover sales of $1.1 million and $2.1 million for the three and nine month periods, respectively, partially offset by decreased sales other than Passover ("Daily") sales of Manischewitz products of $0.3 million and $1.0 million for the three and nine month periods, respectively. The decline in Daily volume is largely attributable to a strategic decision to shift the promotional focus of the brand from the trade to the consumer. Marketing expenditures that had been previously spent to move product into the distribution channel have been reduced in favor of advertising and consumer promotions. Passover sales for the three and nine month periods continue to exceed the prior year due to the conclusion of the Passover holiday during April 2003 and incremental shipments in December 2003 in anticipation of an earlier Passover 2004; and (iii) increased sales of Season brand products for the three month period ($0.2 million) which partially offset the decreased sales of Season brand products during the first six months of fiscal 2004 of $0.4 million resulting from competitive pressures in its product categories. Gross Profit. Gross profit for the three and nine month periods ended December 31, 2003 was $30.4 million and $84.2 million as compared to $29.1 million and $84.3 million for the three and nine month periods ended December 31, 2002, an increase of $1.3 million or 4.2% in the three month period and a decrease of $0.1 million or 0.1% in the nine month period. As a percentage of revenues, the gross profit margin was 23.3% for each of the three and nine month periods ended December 31, 2003 as compared to 24.2% and 22.7% for the three and nine month periods ended December 31, 2002. The increase in gross profit dollars and decrease in gross profit margin for the three month period is primarily due to the following: (i) Millbrook's lower gross profit margin (1.1%) resulting from the competitive environment in obtaining new customers, partially offset by increased gross profit dollars associated with higher revenues, and (ii) Manischewitz' higher gross profit margin (0.3%) resulting from improved utilization of its manufacturing facilities and increased gross profit dollars associated with incremental December 2003 shipments for Passover 2004. At the beginning of this fiscal year, management implemented a manufacturing cost reduction program as well as a re-alignment of its production schedule which has resulted in lower overall costs and a higher absorption of manufacturing overhead costs. The decrease in gross profit dollars and the increase in gross profit margin for the nine month period is primarily due to the following: (i) decreased gross profit dollars associated with Millbrook's lower revenues ($0.7 million) and increased gross profit margin (0.3%) 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 ($0.6 million) and increased gross profit margin (0.3%) due to improved utilization of Manischewitz' manufacturing facilities resulting in higher absorption of manufacturing overhead. - 12 - 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 nine month periods ended December 31, 2003 were $11.0 million and $32.2 million, as compared to $11.2 million and $34.3 million for the three and nine month periods ended December 31, 2002. As a percentage of revenues, distribution and warehousing expenses were 8.4% and 8.9% for the three and nine month periods ended December 31, 2003 as compared to 9.3% and 9.2% in the comparable periods of the prior year. Distribution and warehousing costs for the three and nine month periods 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 and nine month periods ended December 31, 2003 were $17.3 million and $49.7 million, as compared to $16.1 million and $48.8 million for the three and nine month periods ended December 31, 2002. As a percentage of revenues, selling, general and administrative expenses decreased to 13.3% for the three month period and increased to 13.8% for the nine month period ended December 31, 2003 as compared to 13.4% and 13.2% for the comparable periods of the prior year. The increase in selling, general and administrative expenses for the three and nine month periods is principally due to the following: (i) Millbrook's increased provision for doubtful accounts resulting from customer bankruptcies; and (ii) professional fees and related expenses with respect to the Company's discussions with its bondholders and advisors regarding possible debt modifications and restructurings of the Company's capital structure; partially offset by (iii) lower headcount in Millbrook's salesforce due to reductions made during the year ended March 31, 2003 directly related to customer losses. Amortization of intangibles for the nine month period ended December 31, 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 December 31, 2002, the Company did not have any remaining unamortized intangible assets with definite lives. On October 29, 2003, Enterprises entered into an arrangement with certain holders of its 10.5% Notes to make the November 1, 2003 interest payment through the issuance of additional Notes in lieu of cash. Holders of approximately 69% of the outstanding 10.5% Notes participated in the arrangement. As a result, Enterprises issued to holders approximately $5.8 million in principal amount of 10.5% Notes in lieu of approximately $2.9 million in cash interest. The remaining holders received their interest payment in cash. - 13 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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 Holdings' 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 nine month period ended December 31, 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. On May 1, 2003 and November 1, 2003, Holdings elected to defer the cash payment of interest on its 6% Notes. Interest Expense. Interest expense for the three and nine month periods ended December 31, 2003 was $4.5 million (consisting of $0.6 million for Holdings and $3.9 million for Enterprises, respectively) and $12.3 million (consisting of $1.7 million for Holdings and $10.6 million for Enterprises, respectively) as compared to $4.4 million (consisting of $0.6 million for Holdings and $3.8 million for Enterprises, respectively) and $12.8 million (consisting of $1.7 million for Holdings and $11.1 million for Enterprises, respectively) for the three and nine month periods ended December 31, 2002. The increase in interest expense for the three and nine months ended December 31, 2003 is primarily attributable to incremental non-cash interest expense ($0.3 million) for both Holdings and Enterprises resulting from the amortization related to the additional 10.5% Notes issued in lieu of the $2.9 million interest payment due on November 1, 2003. Excluding this non-cash interest expense, the decline in interest expense is primarily attributable to lower interest rates on lower levels of debt outstanding under the Company's Credit Agreement. Taxes. The provision for income taxes for the three and nine month periods ended December 31, 2003 was $0.3 million and $0.9 million for Holdings and $0.3 million and $0.8 million for Enterprises as compared to no provision for the three month period ended December 31, 2002 and $4.1 million for Holdings and $3.6 million for Enterprises for the nine month period ended December 31, 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 nine month periods ended December 31, 2003 and 2002, Holdings and Enterprises recorded non-cash deferred income tax expense of approximately $3.9 million and $3.2 million and approximately $8.9 million and $7.7 million, respectively, which would not have been required prior to SFAS No. 142. - 14 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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 nine month period ended December 31, 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 Loss. As a result of the foregoing, the net loss for the three and nine month periods ended December 31, 2003 was $2.7 million and $11.0 million for Holdings and $1.7 million and $8.6 million for Enterprises as compared to $2.6 million and $40.6 million for Holdings and $2.0 million and $37.8 million for Enterprises for the three and nine month periods ended December 31, 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 nine months ended December 31, 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. - 15 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Financial Condition, Liquidity and Capital Resources Operations for the nine months ended December 31, 2003, excluding non-cash charges for depreciation and amortization and deferred income taxes, utilized cash of $5.8 million for Holdings and $3.8 million for Enterprises. Operations for the nine months ended December 31, 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 $7.2 million for Holdings and $5.7 million for Enterprises. During the nine month period ended December 31, 2003, other changes in assets and liabilities resulting from operating activities utilized cash of $13.4 million for Holdings and $15.4 million for Enterprises as compared to cash utilized of $6.8 million for Holdings and $8.8 million for Enterprises for the nine month period ended December 31, 2002, resulting in net cash utilized by operating activities of $19.2 million for both Holdings and Enterprises and $14.0 million for Holdings and $14.5 million for Enterprises, respectively. Investing activities, which principally consisted of the acquisitions of plant and equipment resulted in a use of cash of $0.5 million for each of the nine month periods ended December 31, 2003 and 2002 for both Holdings and Enterprises, respectively. During the nine month period ended December 31, 2003, financing activities, which principally consisted of borrowings under the Credit Agreement, provided cash of $16.1 million for both Holdings and Enterprises. During the nine month period ended December 31, 2002, financing activities, which principally consisted of borrowings under the Credit Agreement and the payment of debt modification costs by Holdings, provided cash of $10.3 million for Holdings and $10.8 million for Enterprises. At December 31, 2003, the Company's balance sheet includes a $11.4 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 become payable unless the underlying assets are sold or a tax impairment is recorded. 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 December 31, 2003, Millbrook and Manischewitz had approximately $2.8 million of cash and approximately $1.0 million of available borrowing capacity under the Credit Agreement. Historically, the Company's usage under its revolving credit facility peaks during the three month period ended December of each year due to the seasonality of its business. 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 January 15, 2005. 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 March 31, 2004. In addition, the Company is engaged in discussions with its bondholders regarding its current capital structure. It is management's belief that these discussions may result in debt modifications and restructurings which will improve the Company's capitalization; reduce its current cash interest requirements and extend the maturity of its outstanding debt. However, there can be no assurance that debt modifications and restructurings on terms acceptable to the Company will be accomplished. - 16 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Concluded) Financial Condition, Liquidity and Capital Resources (Continued) 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. During the third quarter of fiscal 2004, Millbrook's revenues stabilized and the Company expects the current trend to continue during the fourth quarter, reflecting new customer growth and expanded distribution to existing customers, partially offset by lower sales to certain customers experiencing financial difficulties. 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. In addition, the seasonality of Manischewitz' business and the timing of Jewish holidays results in a substantial portion of Manischewitz' revenues and operating profits occurring during the fourth quarter of each fiscal year and financial information which is not comparable on a quarterly basis. Further, Manischewitz' business for the remainder of fiscal 2004 will be impacted by the unresolved Southern California grocery workers strike. Certain of Manischewitz' key retail outlets, specifically Kroger, Safeway and Albertson's have been negatively impacted by unresolved contract differences with approximately 70,000 of their employees. While Manischewitz continues to develop alternative plans and contingencies with its distributor base that services these retailers, the potential impact on operations cannot presently be determined. 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 the covenants in its Credit Agreement and its indentures. 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. 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. - 17 - 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. -------------------- Certain statements contained in this report on Form 10-Q, including but not limited to statements contained in the foregoing discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations", contain "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 November 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 November 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. - 18 - 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 Joint certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer and Chief Financial Officer. b. Form 8-K dated as of November 5, 2003. - 19 - 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. February 12, 2004 /s/ Richard A. Bernstein ------------------------ Richard A. Bernstein Chairman February 12, 2004 /s/ Steven M. Grossman ---------------------- Steven M. Grossman Chief Financial Officer R.A.B. ENTERPRISES, INC. February 12, 2004 /s/ Richard A. Bernstein ------------------------ Richard A. Bernstein Chairman February 12, 2004 /s/ Steven M. Grossman ---------------------- Steven M. Grossman Chief Financial Officer - 20 -

RAB HOLDINGS INC 10-Q