10-Q 1 b326510_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 JUNE 30, 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. 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 CASH FLOWS (In thousands) --------------------------------------------------------------------------------

See notes to Condensed Consolidated Financial Statements -3- R.A.B. HOLDINGS, INC. AND SUBSIDIARIES R.A.B. ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -------------------------------------------------------------------------------- NOTE A - Basis of Presentation The condensed consolidated financial statements include the accounts of R.A.B. Holdings, Inc. ("Holdings") and its wholly-owned subsidiary, R.A.B. Enterprises, Inc. ("Enterprises") and its wholly-owned subsidiaries (collectively, the "Company"). Holdings is a holding company with no substantial assets or operations other than its investment in Enterprises. Enterprises is a holding company with no substantial assets or operations other than its investments in Millbrook Distribution Services Inc. ("Millbrook") and The B. Manischewitz Company, LLC ("Manischewitz"). Millbrook is one of the nation's largest, independent value-added distributors of specialty foods, health and beauty care products and general merchandise. Manischewitz manufactures (i) processed kosher and other ethnic foods including, among others, matzos, cake mixes, cookies, soups, noodles and processed fish products under its Manischewitz(R) brand; (ii) canned fish, vegetables and other specialty food products under its Season(R) brand; and (iii) organic baked tortilla chips, bean dips, salsas and other specialty food products under its Guiltless Gourmet(R) brand. These condensed consolidated financial statements should be read in conjunction with the Company's consolidated financial statements as of March 31, 2003 and 2002 contained in the Company's Form 10-K filed with the Securities and Exchange Commission. The information related to March 31, 2003 contained herein has been derived from the Company's audited consolidated financial statements. Certain reclassifications have been made in the prior year financial statements to conform with the current year presentation. All significant intercompany transactions and balances are eliminated in consolidation. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full fiscal year. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of recurring adjustments) necessary to present fairly the financial position of the Company as of June 30, 2003, and the results of operations and cash flows for the periods ended June 30, 2003 and 2002. NOTE B - Inventories Inventories are valued at the lower of cost or market. Cost is determined by the last-in, first-out ("LIFO") method. Inventories consisted of the following (in thousands): June 30, March 31, 2003 2003 ----------------- ----------------- Raw materials $ 1,630 $ 1,849 Finished goods 53,353 49,111 ----------------- ----------------- $ 54,983 $ 50,960 ================= ================= -4- R.A.B. HOLDINGS, INC. AND SUBSIDIARIES R.A.B. ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) -------------------------------------------------------------------------------- NOTE C - Intangibles Effective April 1, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets". Under this standard, goodwill and intangibles with indefinite useful lives, including trademarks and tradenames are no longer systematically amortized. Instead, they are reviewed for impairment and written down and charged to results of operations when their carrying amount exceeds their estimated fair values. Amortization expense for the three month period ended June 30, 2002 was approximately $43,000 representing the amortization of the remaining net book value of identified intangibles (accumulated amortization was $2,038,000 at June 30, 2002) still required to be amortized under SFAS No. 142. With the assistance of an independent professional appraisal firm, the Company performed impairment tests on the excess of cost over net assets acquired ("goodwill") and intangibles. The previous method for determining impairment prescribed by SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," utilized an undiscounted cash flow approach for the impairment assessment, while SFAS No. 142 utilizes a fair value approach. The Company has two reporting units (Millbrook and Manischewitz) with goodwill and intangibles, which also represent the Company's reporting segments. Goodwill and intangibles were reviewed for impairment at the level of each reporting unit. This review indicated that the goodwill recorded at the Company's Manischewitz subsidiary was impaired as the carrying value of the subsidiary was in excess of its estimated fair value. In determining the amount of the goodwill writedown, SFAS No. 142 requires an allocation of the estimated fair value to Manischewitz' net assets. This allocation resulted in a significant increase in the value of the subsidiary's trademarks and tradenames, which under the provisions of SFAS No. 142 may not be written up from their historical carrying value. Since the allocation process utilizes the increased value of the trademarks and tradenames in arriving at the remaining amount of goodwill to be compared to the historical carrying value of goodwill, the amount of the goodwill writedown is increased. As a result, the Company recorded a $24.2 million non-cash charge as a cumulative effect of a change in accounting principle for the writedown of goodwill to its estimated fair value during the three month period ended June 30, 2002. The goodwill writedown was not deductible for income taxes and, as a result, no income tax benefit was recorded in relation to the charge. The cumulative impact of adopting this change in accounting principle is reflected in the accompanying statement of operations, but does not affect the Company's operations and has no impact on its cash flows. The provisions of SFAS No. 142 require an annual assessment of goodwill and intangibles to determine any possible future impairment. The Company elected to perform this annual assessment as of March 31 of each year. As of March 31, 2003, the Company's annual assessment of each reporting unit indicated that goodwill and intangibles were not impaired. -5- R.A.B. HOLDINGS, INC. AND SUBSIDIARIES R.A.B. ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) -------------------------------------------------------------------------------- NOTE C - Intangibles (Continued) The effect of adopting the new standard on net loss for the three month periods ended June 30, 2003 and 2002 is as follows (in thousands):

NOTE D - Related Party Transactions For each of the three month periods ended June 30, 2003 and 2002, the Company paid $510,000 to P&E Properties, Inc., an affiliated entity of which the Company's Chairman and Chief Executive Officer is the sole shareholder, for management fees, services provided and expenses incurred on the Company's behalf. NOTE E - Income Taxes The provision for income taxes for the three month periods ended June 30, 2003 and 2002 consisted of the following (in thousands):

-6- R.A.B. HOLDINGS, INC. AND SUBSIDIARIES R.A.B. ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) -------------------------------------------------------------------------------- NOTE E - Income Taxes (Continued) SFAS No. 109, "Accounting for Income Taxes", requires that deferred tax assets be reduced by a valuation allowance, if based on available evidence, it is more likely than not that the deferred tax assets will not be realized. Under generally accepted accounting principles, available evidence includes the reversal of existing taxable temporary differences. As of March 31, 2003, Holdings and Enterprises had net deferred tax liabilities before the impact of SFAS No. 142 of approximately $2.9 million and $4.3 million, respectively; each including a deferred tax liability for taxable temporary differences resulting from different amortization periods for identified intangibles of approximately $10.7 million. With the adoption of SFAS No. 142 in the first quarter of fiscal 2003, the Company can no longer amortize tax deductible goodwill and indefinite-lived intangible assets for financial reporting purposes. Therefore, the deferred tax liability related to the taxable temporary differences resulting from different amortization periods for identified intangibles will not reverse unless the underlying assets are sold or an impairment is recognized for tax purposes. Without this deferred tax liability, Holdings and Enterprises would have had net deferred tax assets of approximately $7.8 million and $6.4 million, respectively, as of March 31, 2003. Historically, the Company did not need a valuation allowance (with the exception of Holdings' state tax loss carryforwards) for the portion of the tax effect of net operating losses equal to the amount of tax-deductible amortization of identified intangibles expected to occur during the carryforward period of the net operating losses based upon the timing of the reversal of other temporary differences. As a result of the adoption of SFAS No. 142, the reversal will probably not occur during the carryforward period of the net operating losses. For the three month periods ended June 30, 2003 and 2002, Holdings and Enterprises recorded non-cash deferred income tax expense of approximately $1.3 million and $1.2 million and approximately $5.5 million and $4.8 million, respectively, which would not have been required prior to SFAS No. 142. NOTE F - Comprehensive Loss For the three month periods ended June 30, 2003 and 2002, Holdings' and Enterprises' comprehensive loss was ($3,816,000) and ($3,168,000) and ($32,420,000) and ($30,814,000), respectively. -7- R.A.B. HOLDINGS, INC. AND SUBSIDIARIES R.A.B. ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) -------------------------------------------------------------------------------- NOTE G - Segment Reporting The following information is presented in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which established standards for reporting information about operating segments in the Company's interim financial statements.

-8- R.A.B. HOLDINGS, INC. AND SUBSIDIARIES R.A.B. ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Concluded) (Unaudited) -------------------------------------------------------------------------------- NOTE H - Debt Modification Costs Effective May 1, 2002, Holdings amended the indenture underlying 92% ($23.0 million) of its 13% Notes outstanding. The amendment (i) reduced the interest rate to 6% per annum, (ii) extended their maturity date from May 1, 2008 to May 1, 2010 and (iii) increased the aggregate outstanding principal by approximately $1.5 million, representing the deferral of the May 2002 interest payment. Holders of these Notes received warrants granting them the right to purchase up to approximately 5% of the Company's common stock. The Company, at its option, may defer the payment of cash interest on the 6% Notes for ten semi-annual interest payment dates through May 1, 2007. The changes contained in the amendment constitute a material modification of the indenture requiring the historical deferred debt issuance costs to be written off. Accordingly, debt issuance costs of $0.5 million were written off and reported as a component of operating income in the accompanying statement of operations during the three month period ended June 30, 2002. The income tax benefit of $0.2 million related to the debt issuance costs was offset by a valuation allowance required by the adoption of SFAS No. 142, as described in Note E - Income Taxes. On November 1, 2002 and May 1, 2003, the Company elected to defer the cash payment of interest on its 6% Notes. NOTE I - New Accounting Pronouncements SFAS No. 145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" was issued in April 2002 and is effective for fiscal years beginning after May 15, 2002. SFAS No. 145 eliminates the requirement to classify gains and losses from the extinguishment of debt as extraordinary, requires certain lease modifications to be treated the same as a sale-leaseback transaction and makes other non-substantive technical corrections to existing pronouncements. Effective April 1, 2003, the Company adopted SFAS No. 145. As a result, the Company reclassified $500,000 of debt modification costs to operating expense in its condensed consolidated statement of operations for the three months ended June 30, 2002. SFAS No. 149 "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" was issued in April 2003 and is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after that date. SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities under SFAS No. 133. The adoption of SFAS No. 149 will not have any impact on our financial position or overall trends in results of operations. SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" was issued in May 2003 and is effective for instruments entered into or modified after May 15, 2003. SFAS No. 150 requires that certain financial instruments including mandatorily redeemable instruments and forward purchase contracts be reported as liabilities by their issuers. The adoption of SFAS No. 150 did not have any impact on our financial position or overall trends in results of operations. -9- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Revenues. Revenues for the three month period ended June 30, 2003 decreased $16.3 million or 12.4% to $114.9 million as compared to $131.2 million for the three month period ended June 30, 2002. Revenues include: (i) Millbrook's revenues of $108.7 million for the three month period ended June 30, 2003 as compared to $124.8 million for the three month period ended June 30, 2002; (ii) Manischewitz' revenues of $7.8 million for the three month period ended June 30, 2003 as compared to $7.6 million for the three month period ended June 30, 2002; and (iii) intersegment sales, which are eliminated in consolidation, of ($1.6) million for the three month period ended June 30, 2003 as compared to ($1.2) million for the three month period ended June 30, 2002. Millbrook's revenue decreased $16.1 million or 12.9% for the three month period ended June 30, 2003 as compared to the comparable period of the prior year. The decrease in revenues for the three month period is principally due to decreased sales resulting from customer bankruptcies and a decision made by a former customer in the beginning of fiscal 2002 to phase out its purchases from Millbrook as it moved to self-distribution. Customer bankruptcies include the closure of Ames Department Stores ("Ames") in August, 2002. The three month period ended June 30, 2003 represents the final negative sales comparison with respect to the former customer's self-distribution decision. Manischewitz' revenues increased $0.2 million or 3.5% for the three month period ended June 30, 2003 as compared to the comparable period of the prior year. The increase in revenues for the three month period is principally due to increased sales of Manischewitz brand products ($1.3 million) resulting from the conclusion of the Passover holiday in April 2003, new product introductions and product packaging innovation. The Manischewitz brand increase was substantially offset by lower sales of Guiltless Gourmet ($0.6 million) and Season ($0.5 million) brand products resulting from competitive pressures and reduced promotional selling periods. Gross Profit. Gross profit for the three month period ended June 30, 2003 was $26.8 million as compared to $28.9 million for the three month period ended June 30, 2002, a decrease of $2.1 million or 7.3%. As a percentage of revenues, the gross profit margin was 23.3% for the three month period ended June 30, 2003 as compared to 22.0% for the three month period ended June 30, 2002. The decrease in gross profit dollars and the increase in gross profit margin is primarily due to the following: (i) decreased gross profit dollars associated with Millbrook's lower revenues ($2.3 million) and increased gross profit margin (1.1%) resulting from the shift in Millbrook's customer base from non-serviced to serviced customers and a shift in product mix from lower margin health and beauty care products to higher margin specialty food products; partially offset by (ii) increased gross profit dollars associated with Manischewitz' higher revenues ($0.2 million) and increased gross profit margin (0.2%) due to improved utilization of Manischewitz' manufacturing facilities resulting in higher absorption of manufacturing overhead. -10- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Operating Expenses. Distribution and warehousing expenses for the three month period ended June 30, 2003 were $10.5 million, as compared to $11.7 million for the three month period ended June 30, 2002. As a percentage of revenues, distribution and warehousing expenses increased to 9.1% for the three month period ended June 30, 2003 as compared to 8.9% in the comparable period of the prior year. Distribution and warehousing costs for the three month period were impacted by the following: (i) lower warehousing and distribution headcount directly related to the loss of Ames during fiscal 2003 and additional headcount reductions realized from the implementation of a cost reduction program which more efficiently deployed warehouse personnel; and (ii) lower transportation costs realized from the implementation of a cost reduction program which achieved more efficient routing and enhanced utilization of Millbrook's truck fleet. Selling, general and administrative expenses for the three month period ended June 30, 2003 were $15.9 million, as compared to $16.6 million for the three month period ended June 30, 2002. As a percentage of revenues, selling, general and administrative expenses increased to 13.8% for the three month period ended June 30, 2003 as compared to 12.6% for the comparable period of the prior year. The decrease in selling, general and administrative expenses for the three month period is principally due to the following: (i) lower headcount in Millbrook's salesforce due to reductions made during the year ended March 31, 2003 directly related to customer losses; and (ii) lower headcount in Millbrook's selling, general and administrative functions realized from the implementation of a cost reduction program which streamlined Millbrook's workforce. Amortization of intangibles for the three month period ended June 30, 2002 was approximately $43,000. The Company adopted SFAS No. 142, which provides that only intangible assets with definite lives continue to be amortized. As of June 30, 2002, the Company did not have any remaining unamortized intangible assets with definite lives. Effective May 1, 2002, Holdings amended the indenture underlying 92% ($23.0 million) of its 13% Notes outstanding. The amendment (i) reduced the interest rate to 6% per annum, (ii) extended their maturity date from May 1, 2008 to May 1, 2010 and (iii) increased the aggregate outstanding principal by approximately $1.5 million, representing the deferral of the May 2002 interest payment. Holders of these Notes received warrants granting them the right to purchase up to approximately 5% of the Company's common stock. The Company, at its option, may defer the payment of cash interest on the 6% Notes for ten semi-annual interest payment dates through May 1, 2007. The changes contained in the amendment constitute a material modification of the indenture requiring the historical deferred debt issuance costs to be written off. Accordingly, debt issuance costs of $0.5 million were written off and reported as a component of operating income in the accompanying statement of operations during the three month period ended June 30, 2002. The income tax benefit of $0.2 million related to the debt issuance costs was offset by a valuation allowance required by the adoption of SFAS No. 142. Interest Expense. Interest expense for the three month period ended June 30, 2003 was $4.0 million (consisting of $0.6 million for Holdings and $3.4 million for Enterprises, respectively) as compared to $4.2 million (consisting of $0.7 million for Holdings and $3.5 million for Enterprises, respectively) for the three month period ended June 30, 2002. The decrease in interest expense is primarily attributable to lower interest rates on lower levels of debt outstanding under the Company's Credit Agreement and the amendment by Holdings of the indenture underlying 92% ($23.0 million) of its 13% Notes outstanding. -11- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Taxes. The provision for income taxes for the three month period ended June 30, 2003 was $0.3 million for each of Holdings and Enterprises as compared to $4.1 million for Holdings and $3.6 million for Enterprises for the three month period ended June 30, 2002. Historically, the Company did not need a valuation allowance (with the exception of Holdings' state tax loss carryforwards) for the portion of the tax effect of net operating losses equal to the amount of tax-deductible amortization of identified intangibles expected to occur during the carryforward period of the net operating losses based upon the timing of the reversal of other temporary differences. As a result of the adoption of SFAS No. 142, the reversal will probably not occur during the carryforward period of the net operating losses. For the three month period ended June 30, 2003 and 2002, Holdings and Enterprises recorded non-cash deferred income tax expense of approximately $1.3 million and $1.2 million and approximately $5.5 million and $4.8 million, respectively, which would not have been required prior to SFAS No. 142. Cumulative Effect of Change in Accounting Principle. Effective April 1, 2002, the Company adopted SFAS No. 142 "Goodwill and Other Intangible Assets". Under this standard, goodwill and intangibles with indefinite useful lives, including trademarks and tradenames are no longer systematically amortized. Instead, they are reviewed for impairment and written down and charged to results of operations when their carrying amount exceeds their estimated fair values. With the assistance of an independent professional appraisal firm, the Company performed impairment tests on the excess of cost over net assets acquired ("goodwill") and intangibles. The previous method for determining impairment prescribed by SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," utilized an undiscounted cash flow approach for the impairment assessment, while SFAS No. 142 utilizes a fair value approach. The Company has two reporting units (Millbrook and Manischewitz) with goodwill and intangibles, which also represent the Company's reporting segments. Goodwill and intangibles were reviewed for impairment at the level of each reporting unit. This review indicated that the goodwill recorded at the Company's Manischewitz subsidiary was impaired as the carrying value of the subsidiary was in excess of its estimated fair value. In determining the amount of the goodwill writedown, SFAS No. 142 requires an allocation of the estimated fair value to Manischewitz' net assets. This allocation resulted in a significant increase in the value of the subsidiary's trademarks and tradenames, which under the provisions of SFAS No. 142 may not be written up from their historical carrying value. Since the allocation process utilizes the increased value of the trademarks and tradenames in arriving at the remaining amount of goodwill to be compared to the historical carrying value of goodwill, the amount of goodwill writedown is increased. As a result, the Company recorded a $24.2 million non-cash charge as a cumulative effect of a change in accounting principle for the writedown of goodwill to its estimated fair value during the three month period ended June 30, 2002. The goodwill writedown was not deductible for income taxes and, as a result, no income tax benefit was recorded in relation to the charge. Net Income (Loss). As a result of the foregoing, the net loss for the three month period ended June 30, 2003 was $3.8 million for Holdings and $3.2 million for Enterprises as compared to $32.4 million for Holdings and $30.8 million for Enterprises for the three month period ended June 30, 2002. Impact of New Accounting Pronouncements. SFAS No. 145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" was issued in April 2002 and is effective for fiscal years beginning after May 15, 2002. SFAS No. 145 eliminates the requirement to classify gains and losses from the extinguishment of debt as extraordinary, requires certain lease modifications to be treated the same as a sale-leaseback transaction and makes other non-substantive technical corrections to existing pronouncements. Effective April 1, 2003, the Company adopted SFAS No. 145. As a result, the Company reclassified $500,000 of debt modification costs to operating expense in its condensed consolidated statement of operations for the three months ended June 30, 2002. -12- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Impact of New Accounting Pronouncements (Continued). SFAS No. 149 "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" was issued in April 2003 and is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after that date. SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities under SFAS No. 133. The adoption of SFAS No. 149 will not have any impact on our financial position or overall trends in results of operations. SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" was issued in May 2003 and is effective for instruments entered into or modified after May 15, 2003. SFAS No. 150 requires that certain financial instruments including mandatorily redeemable instruments and forward purchase contracts be reported as liabilities by their issuers. The adoption of SFAS No. 150 did not have any impact on our financial position or overall trends in results of operations. Financial Condition, Liquidity and Capital Resources Operations for the three months ended June 30, 2003, excluding non-cash charges for depreciation and amortization and deferred income taxes, utilized cash of $2.2 million for Holdings and $1.7 million for Enterprises. Operations for the three months ended June 30, 2002, excluding non-cash charges for depreciation and amortization, modification of debt at Holdings, cumulative effect of a change in accounting principle and deferred income taxes, utilized cash of $2.0 million for Holdings and $1.4 million for Enterprises. During the three month period ended June 30, 2003, other changes in assets and liabilities resulting from operating activities provided cash of $5.9 million for Holdings and $5.4 million for Enterprises as compared to $4.1 million for Holdings and $3.1 million for Enterprises for the three month period ended June 30, 2002, resulting in net cash provided by operating activities of $3.7 million for each of Holdings and Enterprises and $2.1 million for Holdings and $1.7 million for Enterprises, respectively. Investing activities, which principally consisted of the acquisitions of plant and equipment resulted in a use of cash of $0.1 million for each of the three month periods ended June 30, 2003 and 2002 for each of Holdings and Enterprises, respectively. During the three month period ended June 30, 2003, financing activities, which principally consisted of repayments under the Credit Agreement utilized cash of $7.4 million for each of Holdings and Enterprises. During the three month period ended June 30, 2002, financing activities, which principally consisted of repayments under the Credit Agreement and the payment of debt modification costs by Holdings, utilized cash of $3.7 million for Holdings and $3.2 million for Enterprises. At June 30, 2003, the Company's balance sheet includes a $10.9 million deferred income tax liability related to the taxable temporary differences caused by different amortization periods for identified intangibles. With the adoption of SFAS No. 142, the Company's tax deductible goodwill and indefinite-lived intangible assets are no longer amortized for financial reporting purposes. Therefore, this deferred income tax liability will not reverse and become payable unless the underlying assets are sold or a tax impairment is recorded. -13- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Concluded) Financial Condition, Liquidity and Capital Resources (Continued) The primary sources of liquidity for Holdings and Enterprises are the cash flows from the operations of Millbrook and Manischewitz and borrowings under the Company's Credit Agreement. At June 30, 2003, Millbrook and Manischewitz had approximately $2.6 million of cash and approximately $13.4 million of available borrowing capacity under the Credit Agreement. The Company is currently in compliance with the covenants contained in the Credit Agreement and the indentures relating to its senior notes. The Company's Credit Agreement expires October 28, 2004. It is management's belief that it will either negotiate an extension to its current facility or enter into a new facility on terms acceptable to the Company, although there can be no assurance that such extension or new facility will be completed. Absent the completion of an extension or new facility, the Company's outstanding borrowings under its current facility would be classified as a current liability in its condensed consolidated balance sheet as of December 31, 2003. From a distribution perspective, Millbrook's business continues to be impacted by the instability of the U.S. supermarket industry, the financial condition of its customers and changes in the competitive landscape as a number of grocery and wholesale distribution companies are no longer in existence. The Company expects some further revenue decline during fiscal 2004, absent new customer growth or expanded distribution to existing customers. Millbrook continues to focus its strategy on expanding the specialty food category while taking advantage of market opportunities in its health and beauty care and general merchandise categories. Management continues to believe in its overall strategy. Further, Millbrook's management effectively implemented a number of cost reduction programs during fiscal 2003 which have reduced its operating costs in order to address and react to the demands of its changing markets. From a branded food products perspective, Manischewitz' operations (principally consisting of its Manischewitz, Season and Guiltless Gourmet brands) are impacted by the amount of retail space devoted to its products and the consumer acceptance of those products. Although there can be no assurance, Holdings and Enterprises believe that its operating cash flows and borrowings under its Credit Agreement will be sufficient to meet its obligations and remain in compliance with its covenants. The ability of Holdings and Enterprises to meet those obligations and maintain compliance will depend on a number of factors, including those discussed above, general economic conditions and other factors beyond Holdings' and Enterprises' control. -14- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Reference is made to Item 7a of the Company's Form 10-K for the year ended March 31, 2003 filed with the Securities and Exchange Commission. ------------ The foregoing discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Additionally, written materials issued and oral statements made from time to time by Holdings and Enterprises may contain forward-looking statements. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and by their use of words such as "goals", "expects", "plans", "believes", "estimates", "forecasts", "projects", "intends" and other words of similar meaning. Execution of business and acquisition strategies, expansion of product lines and increase of distribution networks or product sales are areas, among others, whose future success may be difficult to predict. They are based on management's then-current information, assumptions, plans, expectations, estimates and projections regarding the food and wholesale distribution industries. However, such statements are not guarantees of future performance, and actual results and outcomes may differ materially from what is expressed depending on a variety of factors, many of which are outside of Holdings' and Enterprises' control. Given these uncertainties, current and prospective investors are cautioned not to place undue reliance on such forward-looking statements. We undertake no obligation to update or revise any forward-looking statements or to publicly announce the result of any revisions to any of the forward-looking statements herein to reflect future events or developments. Among the factors that could cause actual outcomes or results to differ materially from what is expressed in these forward-looking statements are changes in the demand for, supply of, and market prices of Holdings' and Enterprises' products, the financial condition of customers, the action of current and potential new competitors, the continuing instability of the U.S. supermarket industry, changes in technology and economic conditions. ITEM 4. CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures that are designed to ensure (i) that information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's ("SEC") rules and regulations, and (ii) that this information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In June 2003, under the supervision and review of the Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the Company's disclosure controls and procedures was conducted. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that disclosure controls and procedures are effective in alerting them in a timely manner to material information regarding the Company (including its consolidated subsidiaries) that is required to be included in the Company's periodic reports to the SEC. In addition, there have been no significant changes in the Company's internal controls or in other factors that could significantly affect those controls since the June 2003 evaluation. However, there can be no assurance that the system of disclosure controls and procedures will always achieve its stated goals under all future conditions, no matter how remote. -15- PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K: a. Index to Exhibits Exhibit No. Description of Document ----------- ----------------------- 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer. 31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer. 32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer. 32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer. b. No reports were filed on Form 8-K during the quarter for which this report is filed. -16- SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. R.A.B. HOLDINGS, INC. August 14, 2003 /s/ Richard A. Bernstein ------------------------ Richard A. Bernstein Chairman August 14, 2003 /s/ Steven M. Grossman ---------------------- Steven M. Grossman Chief Financial Officer R.A.B. ENTERPRISES, INC. August 14, 2003 /s/ Richard A. Bernstein ------------------------ Richard A. Bernstein Chairman August 14, 2003 /s/ Steven M. Grossman ---------------------- Steven M. Grossman Chief Financial Officer -17-

RAB HOLDINGS INC 10-Q