<PAGE>
Filed Pursuant to Rule No. 424(b)(4) under
the Securities Act of 1933, as amended.
Registration Statement No. 333-66221
Prospectus
Exchange Offers for
R.A.B. Holdings, Inc. and R.A.B. Enterprises, Inc.
$48,000,000 $120,000,000
13% senior notes due 2008 10-1/2% senior notes due 2005
(Guaranteed by The B. Manischewitz
Company, LLC and Millbrook
Distribution Services Inc.)
o The exchange offers expire at 5:00 p.m. New York City time on March 22,
1999, unless we extend this date.
o If you decide to participate in this exchange offer, the new notes you
receive will be the same as old notes, except the new notes will be
registered with the Securities and Exchange Commission and you will be able
to offer and sell them freely to any potential buyer. This is beneficial to
you since your old notes are not registered with the Commission and may not
be offered or sold without registration or an exemption from registration
under federal securities laws.
o There is no public market for the old notes or the new notes. However, the
old notes and the new notes can be traded in The Portal Market.
o You will not owe additional federal income taxes if you exchange your
notes.
--------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the new notes or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary
is a criminal offense.
This investment involves risks. We urge you to read the "Risk Factors"
section of this prospectus beginning on page 14 which describes specific
risks associated with the exchange offers.
--------------------
February 12, 1999
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Table of Contents
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Page
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Prospectus Summary.........................................................................................................3
Summary of Key Terms of the Exchange Offers...........................................................................3
Summary of Key Terms of the New Notes.................................................................................6
About Our Business....................................................................................................9
Summary Financial Data....................................................................................................11
Risk Factors..............................................................................................................14
Risks Associated with Our High Level of Debt.........................................................................14
Risks Associated with Our Business and Operations....................................................................16
Forward Looking Statements................................................................................................18
Where You Can Find More Information.......................................................................................18
The Transactions..........................................................................................................19
Capitalization............................................................................................................20
Unaudited Pro Forma Condensed Consolidated Statements of Operations.......................................................21
Selected Historical Financial Data........................................................................................28
Management's Discussion and Analysis of Financial Condition and Results of Operations.....................................31
Business..................................................................................................................41
Management................................................................................................................52
Compensation for Executive Officers.......................................................................................55
Certain Transactions......................................................................................................56
Securities Ownership of Certain Beneficial Owners.........................................................................58
The Exchange Offers.......................................................................................................60
Description of the New Notes and the Indentures...........................................................................68
Description of Credit Agreement...........................................................................................77
Book - Entry; Delivery and Form...........................................................................................78
Plan of Distribution......................................................................................................80
Federal Income Tax Consequences...........................................................................................81
Legal Matters.............................................................................................................81
Experts...................................................................................................................81
Index to Financial Statements............................................................................................F-1
</TABLE>
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Prospectus Summary
The following summary highlights the key terms of the exchange offers
and the new notes being offered to you, as well as selected business information
and financial data. It may not contain all of the information that you need to
make your decision to participate. We strongly encourage you to read the whole
prospectus.
Summary of Key Terms of the Exchange Offers
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The Exchange Offers......................... You must properly tender your notes and we must accept them for exchange.
We will exchange all notes that you tender and do not withdraw.
If you exchange your notes we will issue new notes to you on or promptly
after the expiration date.
Ability to Resell New Notes................. We believe you may offer for resale, resell and otherwise freely transfer
the new notes without registration or delivering a prospectus to a buyer
if:
o you acquire the new notes in the ordinary course of your business;
o you are not participating, do not intend to participate and have no
arrangement or understanding with any person to participate in the
distribution of new notes; and
o you are not related to us.
If this belief is inaccurate and you sell or transfer any new note
without delivering a prospectus to a buyer or without an exemption from
registration, you may be responsible for monetary or other damages under
the Securities Act. We will not pay these damages on your behalf.
Each broker-dealer that receives new notes for its own account in
exchange for notes it acquired as a result of market-making or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of the new notes. A broker-dealer may use this
prospectus for an offer to resell, resale or other retransfer of the new
notes issued to it in an exchange offer.
The exchange offers are not being made to:
o holders of notes in any jurisdiction in which the exchange offers or
their acceptance would not comply with the securities or blue sky laws of
that jurisdiction; and
o holders of notes who we control.
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No Minimum Required......................... There is no minimum amount of notes that you must tender in the exchange
offers.
Procedures for Exchanging
Your Notes................................ If you wish to exchange your notes you must transmit to The Chase Manhattan
Bank, our exchange agent, on or before the expiration date:
either
o a properly completed and executed letter of transmittal, which we have
provided to you with this prospectus, or a facsimile of the letter of
transmittal, together with your old notes and any other documentation
requested by the letter of transmittal; or
o a computer generated message transmitted by means of DTC's ATOP system.
Our exchange agent must receive this message and form a part of a
confirmation of book-entry transfer in which you acknowledge and agree to
be bound by the terms of the letter of transmittal.
By agreeing to the letter of transmittal, you will make those
representations described on page 62 under the heading "The Exchange
Offers--Procedures for Tendering Your Notes."
Guaranteed Delivery Procedures.............. If you wish to exchange your notes and time will not permit the documents
required by the letter of transmittal to reach the exchange agent before
the expiration date, or you cannot complete the procedure for book-entry
transfer on a timely basis, you must exchange your notes according to the
guaranteed delivery procedures described on page 65 under the heading "The
Exchange Offers--Guaranteed Delivery Procedures."
Special Procedures for
Beneficial Owners......................... If you are a beneficial owner whose notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and you
wish to exchange your notes, you should contact the registered holder
promptly and instruct the registered holder to exchange the notes for
you. If you wish to exchange your notes on your own behalf, you must
either make appropriate arrangements to register ownership of the notes in
your name or obtain a properly completed bond power from the registered
holder.
The transfer of registered ownership may take considerable time and you
may not be able to be complete the transfer prior to the expiration date.
Withdrawal Rights........................... Unless we extend the date, you may withdraw your tendered notes at any time
before 5:00 p.m., New York City time, on the expiration date.
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Exchange Agent.............................. The address, telephone number and facsimile number for the exchange agent
is:
The Chase Manhattan Bank
Global Trust Department
379 Thornall Street, 12th Floor
Edison, New Jersey 08837
Attn: Julie Salovitch-Miller, Vice President
Phone: 732-603-2837
Fax: 732-603-2818
</TABLE>
Please review the information on page 60 under the heading "The
Exchange Offers" for more detailed information concerning the exchange offers.
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<PAGE>
Summary of Key Terms of the New Notes
We will pay interest on the new notes in the same manner as the old
notes. You should be aware that the indenture that currently governs your notes
is the same indenture that will govern the new notes, except there will be no
restrictions on your sale of new notes.
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The Issuers............................................... R.A.B. Holdings, Inc. and
R.A.B. Enterprises, Inc.
Total Amount of New Notes Offered......................... $48,000,000 in principal amount of Holdings notes and
$120,000,000 in principal amount of Enterprises notes.
Maturity.................................................. May 1, 2008 for Holdings notes and
May 1, 2005 for Enterprises notes.
Interest Payment Dates.................................... May 1 and November 1 of each year, commencing on May 1,
1999.
Security for Holdings Notes............................... Holdings placed $17.0 million of the net proceeds from
the original sale of its notes in an escrow account for
the benefit of holders. This amount was decreased by
$3.12 million of interest paid on the Holdings notes on
November 1, 1998. Holdings will use the remainder of the
funds in the escrow account to pay interest on both the
outstanding Holdings notes and the new Holdings notes for
the next five scheduled interest payments.
Optional Redemption of Holdings Notes..................... On or after May 1, 2003, Holdings may redeem its new
notes, in whole or in part, at the redemption prices
described on page 69 under the heading "Description of
the New Notes and the Indentures" plus accrued and unpaid
interest, if any, to the date of redemption.
Optional Redemption of Enterprises Notes.................. On or after May 1, 2002, Enterprises may redeem its new
notes, in whole or in part, at the redemption prices
described on page 69 under the heading "Description of
the New Notes and the Indentures", plus accrued and unpaid
interest, if any, to the date of redemption. In addition,
at any time on or prior to May 1, 2001, Enterprises may, at
its option, redeem up to 35% of the principal amount of its
new notes with the net cash proceeds of one or more public
offerings of equity, at a redemption price equal to 110.5%
of the principal amount to be redeemed, plus accrued and
unpaid interest to the date of redemption; however,
immediately following such redemption, at least 65% of the
principal amount of its new notes must remain outstanding.
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Change of Ownership of the Issuer......................... If there is a change of ownership of the issuer of notes,
the issuer will be required to offer to purchase the
notes from you at a purchase price equal to 101% of their
principal amount, plus accrued and unpaid interest, if
any, to the date of repurchase.
Guarantees of the Enterprises Notes....................... Manischewitz and Millbrook will each guarantee payment of
the Enterprises notes. Each guarantor will guarantee the
entire principal amount of the notes. The guarantees
rank first in right of payment before all of their
junior, or lower ranked, debt. The guarantors do not
secure payment of the guarantees by any of their assets.
As a result, if any guarantor goes bankrupt, its secured
creditors will be assured of payment from its assets
before your claims are paid under the guarantee.
Ranking................................................... The new notes:
o are not secured by any assets of the issuer;
o rank first in right of payment before all other junior
debt of the issuer;
o rank equally in right of payment with all existing and
future debt of the issuer that is not secured by the
issuer's assets and provides for equal payment with the
new notes; and
o in the case of the Holdings notes, rank junior in right
of payment to all debt of Enterprises and its
subsidiaries; or
o in the case of the Enterprises notes, rank junior in
right of payment to all debt of Enterprises and the
guarantors. This includes the debt of the guarantors
that is secured by their assets under the credit
agreement to the extent of the value of the assets
securing such debt.
As of December 31, 1998, other than the outstanding
notes, the issuers had no outstanding debt. The
guarantors had approximately $23.6 million of
outstanding debt under the credit agreement, excluding
the guarantees. In addition, the guarantors had
approximately $43.1 million of additional borrowing
capacity under their credit agreement.
Key Covenants............................................. The indenture under which we will issue the new notes
contains covenants for your benefit which restrict the
ability of the issuers or the guarantors to, among
other things:
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o borrow additional money;
o pay dividends on or redeem their capital stock, or make
other restricted payments or investments;
o sell assets;
o enter into prohibited transactions with related
parties;
o merge or consolidate with any other person;
o sell all or almost all of their assets; or
o impose restrictions on the ability of a subsidiary to
make payments to the issuer and to the issuer's
subsidiaries.
Form of the New Notes..................................... One or more permanent global securities, in fully
registered form, will represent the notes. We will
deposited them with a custodian for DTC, and registered
in the name of a nominee of DTC, as depository. DTC
and its participants will maintain records in book-entry
form showing beneficial interests in the new notes, and
transfers of these interests.
Absence of a Public Market................................ We cannot assure you that a public market for the new
notes will develop in the future, or if developed, will
continue. Chase Securities, Inc. Has advised us that it
currently intends to make a market in the new notes.
However, Chase has no obligation to make a market, and it
may discontinue any market making with respect to the new
notes at any time without notice. We do not intend to
list the new notes on any securities exchange or to seek
approval for their quotation on Nasdaq or any other
automated quotation system. This could affect your
ability to sell the notes.
</TABLE>
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<PAGE>
About Our Business
Who We Are
o Holdings and Enterprises.
Holdings was organized in 1996. Enterprises was organized in 1997. Both
of these companies are holding companies, which means that they carry on no
business other than their ownership of Millbrook and Manischewitz.
o Millbrook.
Millbrook is a full service independent distributor offering over
35,000 items in its three primary product categories: specialty foods, health
and beauty care, and general merchandise. Millbrook provides distribution
services to over 13,000 retail locations in 40 states east of the Rocky
Mountains. Millbrook also carries a line of its own private label brands as well
as store brands and other special need items for specific customers. Millbrook
Retail Solutions(Service Mark) one of Millbrook's divisions, provides a variety
of merchandising services, without associated product sales, to manufacturers,
distributors and retailers across various product categories in all trade
channels.
o Manischewitz.
Manischewitz, founded in 1888, is a manufacturer of processed kosher
food products including matzos, noodles, crackers, cake mixes, cookies, soups
and processed fish products. Manischewitz markets products under the brand names
Manischewitz(Registered), Horowitz Margareten(Registered) and
Goodman's(Registered). We believe that sales of kosher for Passover products are
stable as most of the Jewish population in the U.S. attend Passover seders each
year at which matzo and other kosher for Passover products are consumed.
The organizational structure of our companies is set forth on the chart
below:
---------------
| HOLDINGS |
---------------
|
---------------
| ENTERPRISES |
---------------
/ \
/ \
/ \
/ \
--------------- ---------------
| MILLBROOK | | MANISCHEWITZ |
--------------- ---------------
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Our Customers and Suppliers
Millbrook's principal customers include supermarkets and mass
merchandisers such as Shaws, Star Market, Stop & Shop, Food Lion, Ukrop's,
Dierbergs, Albertsons, Ames and Super Kmart. Millbrook carries a line of its own
private label brands as well as store brands, and other special need items for
specific customers.
Millbrook has over 1,500 supplier relationships nationally, including
relationships with major consumer product companies such as Procter & Gamble,
Johnson & Johnson, Gillette, Rubbermaid and BestFoods.
Manischewitz principally sells its products to independent distributors
operating throughout the U.S. and Canada. The five supermarkets which represent
the largest sales of Manischewitz products are American Stores, Ralph's,
Shoprite, Pathmark and A&P. In addition, Manischewitz has developed a marketing
arrangement with Wal-Mart to carry Manischewitz's products in its supercenters
and general merchandise stores.
Our Expansion Plans
We actively evaluate acquisition candidates in the specialty food and
distribution businesses. We do not have a binding agreement with respect to any
acquisition.
--------------------------
Before you exchange your notes, you should carefully consider all of
the information in this prospectus and, in particular, should evaluate the
specific factors under "Risk Factors" beginning on page 14 for risks of this
offering. We also encourage you to read the section headings "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
page 31, "Business" on page 41, and "Management" on page 52 for a more complete
understanding of our business and operations.
Holdings and Enterprises are Delaware corporations. Their executive
offices are located at 444 Madison Avenue, Suite 601, New York, New York 10022
and their telephone number is (212) 688-4500.
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<PAGE>
Summary Financial Data
Summary Pro Forma Financial Data
R.A.B. Holdings, Inc.
and R.A.B. Enterprises, Inc.
The following table sets forth summary pro forma consolidated financial data of
Enterprises and Holdings for the fiscal year ended March 31, 1998, and for the
six month period ended September 30, 1998. The unaudited pro forma consolidated
financial data have been derived from Enterprises and Holdings consolidated
historical financial statements for the fiscal year ended March 31, 1998 and the
six month period ended September 30, 1998 and give effect to the acquisition of
Manischewitz and the issuance of the notes as of the beginning of each period
presented. The unaudited pro forma consolidated financial data are not intended
to represent and are not indicative of what Enterprises and Holdings results of
operations actually would have been nor are they intended to project Enterprises
and Holdings results of operations for any future period. For purposes of
determining the pro forma deficiency in earnings to fixed charges, "earnings"
consist of income before income taxes and fixed charges and "fixed charges"
consist of interest on all indebtedness, amortization of deferred financing
costs and that portion of rental expense that management believes to be
representative of interest.
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Fiscal Year Ended Six Months Ended
March 31, 1998 September 30, 1998
--------------------------- ---------------------------
Enterprises Holdings Enterprises Holdings
----------- -------- ----------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues................................... $525,575 $525,575 $236,622 $236,622
Operating expenses......................... 508,895 508,903 237,377 237,377
Operating income (loss).................... 16,680 16,672 (755) (755)
Other Financial Data:
Deficiency in earnings to fixed charges.... 92 5,499 8,605 11,267
</TABLE>
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Summary Historical Financial Data
R.A.B. Holdings, Inc.
and R.A.B. Enterprises, Inc.
The following table sets forth summary historical consolidated financial data of
Enterprises and Holdings for the fiscal year ended March 31, 1998, and for the
six month periods ended September 30, 1997 and 1998, and historical financial
data of the predecessor to Millbrook for each of the two years in the period
ended March 31, 1997. The historical consolidated financial data for the fiscal
year ended March 31, 1998 have been derived from Enterprises and Holdings
audited consolidated financial statements, included elsewhere herein. The
historical consolidated financial data for the six month periods ended September
30, 1997 and 1998 have been derived from Enterprises and Holdings unaudited
condensed consolidated financial statements, included elsewhere herein, which in
the opinion of management include all adjustments, consisting of normal
recurring accruals, necessary for a fair presentation of the information.
Holdings, which was formed in 1996, did not have any income or expenses prior to
the fiscal year beginning April 1, 1997. The predecessor financial data for each
of the two years in the period ended March 31, 1997 have been derived from the
predecessor's audited financial statements, included elsewhere herein. The
unaudited condensed consolidated financial statements for the six month period
ended September 30, 1998 are not necessarily indicative of the results that may
be expected for the full fiscal year.
The predecessor was acquired on March 31, 1997. Financial information with
regard to the predecessor is based on historical results and, accordingly, does
not reflect purchase accounting adjustments or interest associated with debt
incurred to finance the acquisition. The predecessor was a wholly owned
subsidiary of McKesson Corporation. As a wholly owned subsidiary of McKesson
Corporation, the predecessor was provided certain corporate and general and
administrative services, including, among other things, treasury, certain
financial reporting, data processing and legal services. Accordingly, the
operations of the predecessor include an allocation of expenses for such
services. Additionally, because McKesson Corporation managed cash and financing
requirements centrally, interest expense and borrowing requirements were based
on the then existing capital structure. The financial position and operations of
the predecessor may differ from results that may have been achieved had the
predecessor operated as an independent entity.
<TABLE>
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Predecessor Enterprises Holdings Enterprises Holdings
----------------- ----------- -------- ------------------- ----------------
Fiscal Year Ended Fiscal Year Ended Six Months Ended Six Months Ended
March 31, March 31, September 30, September 30,
----------------- ------------------------ ------------------- -----------------
1996 1997 1998 1997 1998 1997 1998
---- ---- ---- ---- ---- ---- ----
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues $563,099 $476,175 $470,201 $470,201 $222,772 $234,455 $222,772 $234,455
Operating income (loss) 13,611 7,375 7,383 7,375 2,300 (908) 2,296 (908)
Net income (loss) 6,169 1,941 1,182 1,174 (287) (5,027) (291) (7,276)
</TABLE>
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Summary Historical Financial Data
The B. Manischewitz Company, LLC
The following table sets forth summary historical financial data of Manischewitz
for each of the three years in the period ended July 31, 1997, and for the nine
month periods ended April 30, 1997 and 1998. The historical financial data
for each of the three years in the period ended July 31, 1997 have been
derived from the audited financial statements of Manischewitz, included
elsewhere herein. The historical financial data for the nine month periods ended
April 30, 1997 and 1998 have been derived from unaudited condensed financial
statements of Manischewitz, included elsewhere herein, which in the opinion of
management include all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the information. The historical
financial data for the nine month period ended April 30, 1998 are not
necessarily indicative of results that may be expected for the full fiscal year.
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Nine Months Ended
Fiscal Year Ended July 31, April 30,
----------------------------------- --------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
(Dollars in Thousands)
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Statement of Operations Data:
Total revenues(a).................. $ 49,581 $ 52,399 $ 55,787 $ 46,387 $ 44,481
Operating income................... 7,348 8,211 9,807 9,445 9,381
Net income(b)(c)................... 2,267 1,932 5,321 6,057 6,291
</TABLE>
(a) In June 1997, Manischewitz sold its Chicago distribution operation. This
operation had revenues of $4.083 million for the nine month period ended
April 30, 1997.
(b) Fiscal 1996 net income includes an extraordinary charge for the early
extinguishment of debt ($1.965 million) and a charge for the cumulative
effect of a change in accounting principle relating to post retirement
benefits ($754,000).
(c) Effective May 31, 1996, The B. Manischewitz Company was reorganized as a
limited liability company. Accordingly, deferred income tax attributes of
$2.42 million at May 31, 1996 flowed through the provision (benefit) for
income taxes. Subsequent to May 31, 1996, income taxes, if any, are the
obligation of the shareholders and partners of Manischewitz. Pro forma
income tax expense and pro forma net income (loss) as if Manischewitz had
been a taxable entity is $1.952 million and ($165,000) for the fiscal year
ended July 31, 1996; $2.415 million and $2.906 million for the fiscal year
ended July 31, 1997; $2.749 million and $3.308 million for the nine months
ended April 30, 1997, and; $2.735 million and $3.556 million for the nine
months ended April 30, 1998.
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<PAGE>
Risk Factors
A decision to invest in the new notes involves a high degree of risk.
Before making your decision to invest, you should give careful consideration to
the following factors, as well as the other information in this prospectus.
Risks Associated with Our High Level of Debt
We may not have sufficient cash flows from our business to pay the new notes
We have a significant amount of debt. As of September 30, 1998,
Holdings had total consolidated debt of $183,878,000 and Enterprises had total
consolidated debt of $135,878,000.
The following chart shows our aggregate interest payments due on the
Holdings and Enterprises notes for each of the next three fiscal years and the
amount of our deficiency in earnings to fixed charges for the six month periods
ended September 30, 1997 and 1998. Our principal payments on the Holdings notes
are not due until 2008. Our principal payments on the Enterprises notes are not
due until 2005.
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<CAPTION>
Holdings Enterprises
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<S> <C> <C>
Aggregate interest For fiscal year ending: For fiscal year ending:
payments due March 31, 1999................. $ 3,120,000 March 31, 1999................. $ 6,300,000
March 31, 2000................. $ 6,240,000 March 31, 2000................. $12,600,000
March 31, 2001................. $ 6,240,000 March 31, 2001................. $12,600,000
Deficiency in earnings For six month period ended (consolidated for For six month period ended:
to fixed charges Holdings and Enterprises):
September 30, 1997............. $ 290,000 September 30, 1997............. $ 286,000
September 30, 1998............. $10,105,000 September 30, 1998............. $ 7,813,000
</TABLE>
We are depending on earnings generated by the operations of
Manischewitz and Millbrook for cash to make our principal and interest payments
on the notes. We only receive the cash that remains after our expenses are paid.
If our business cannot generate the cash we need, we will be unable to make
payments to you. At that time, we would be in default under the notes and you
would be entitled to accelerate the payment of principal and interest on your
notes. If this occurs, it is unlikely we would be able to meet our financial
obligations to you.
The terms of our debt agreements may restrict our ability to generate enough
cash to pay the new notes
The terms of the indentures governing your notes and the credit
agreement may restrict our ability to obtain additional financing for:
o working capital;
o capital expenditures;
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<PAGE>
o acquisitions; and
o general corporate purposes.
As a result of these restrictions, we may be unable to raise additional
debt or equity financing to operate during general economic or business
downturns, to compete effectively or to take advantage of new business
opportunities. This may affect our ability to generate revenues and make
profits. Without sufficient revenues and cash, we may not be able to pay
interest and principal on the new notes.
In addition, the interest rate on the debt under the credit agreement
is based on market interest rates. If market interest rates increase, the
variable interest rates under the credit agreement will also increase.
Manischewitz and Millbrook may be unable to pay this increased interest cost or
the principal amounts owed under the credit agreement without refinancing or
restructuring the debt, selling assets or raising additional debt or equity
capital. If these alternatives are not available or are not permitted under our
existing agreements, Manischewitz and Millbrook may default on their debt under
the credit agreement. Such a default would lower the market value of the new
notes and negatively affect our ability to pay the interest and principal on the
new notes.
The cross default provisions of the credit agreement and the indentures could
cause all of our debt to come due at once
Under the terms of the indentures, if an event of default occurs under
the credit agreement and the creditors require that all amounts borrowed under
the credit agreement be immediately repaid, an event of default will result
under the indentures. If an event of default occurs under the indentures and
note holders declare the debt to be immediately repaid in full, an event of
default will result under the credit agreement. In either case, if all of our
outstanding debt under the indentures and the credit agreement comes due at the
same time, we will not be able to pay and will be forced into a bankruptcy,
liquidation, dissolution, reorganization or similar proceeding.
We may not have sufficient assets to pay the new notes
In the event of a bankruptcy, liquidation, dissolution, reorganization
or similar proceeding against Millbrook or Manischewitz, or if a default and
acceleration of payment under the credit agreement occurs and one of these
events occurs, their assets will be applied first to pay all outstanding debt
under the credit agreement before and then to pay interest and principal on the
new notes. Because of this priority of payment, there may not be sufficient
assets to pay any of the amounts due on the new notes if one of those events
occurs. In addition, since the new notes are not secured by the assets of
Millbrook and Manischewitz, the new notes will be paid only after payment of any
other debt secured by their assets.
If a change of ownership occurs, we may not have sufficient funds to pay your
notes
Upon the occurrence of specific kinds of events which cause a change of
our ownership, we will be required to offer to repurchase all of our notes. It
is possible that we will not have sufficient funds at that time to make this
repurchase of notes. In addition, the credit agreement may not allow us to make
an offer to repurchase our notes unless we first pay our debt under the credit
agreement. We may not have Sufficient funds at that time to pay our debt under
the credit agreement and our notes.
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<PAGE>
A federal or state court may void or alter our obligations under your notes or
the guarantees
A court could void our obligations under the new notes and the
guarantees, subordinate the new notes or guarantees to our other debt, or order
you to return any amounts paid to you under the new notes to us or to a fund
benefitting our creditors if the court finds that, at the time we sold the
notes, we:
o intended to defraud our creditors or did not receive fair value for
the notes and we:
o were "insolvent", which means we could not pay our debts when
they came due or the sum of our debts was greater than the
fair value of all of our assets, or we became insolvent as a
result of our obligations under the notes; or
o did not have enough capital to operate our business following
the sale of the notes; or
o intended to or believed that we overextended our debt
obligations.
The standards for insolvency vary. We cannot predict which standard a
court would apply or if a court would determine that any of Holdings,
Enterprises or the guarantors were insolvent at the time of the sale of the
notes or became insolvent as a result of the sale.
Risks Associated with Our Business and Operations
Due to the highly seasonal business of Manischewitz and strong sales during the
Passover holiday, we may not have enough cash to pay our costs and expenses at
future times
As a result of increased sales during Passover, the working capital
requirements of Manischewitz generally increases during the months of January,
February and March, peaking in March. To fund these working capital needs,
Manischewitz borrows money under its credit agreement. If Manischewitz does not
generate enough cash from sales during the Passover holiday to fund its future
operations, it must borrow more money under its credit agreement, which may not
be available, or seek other sources of equity capital or debt, which may be
expensive. Although we believe that funds available under the credit agreement
and the cash flow generated from operations will be adequate to provide for our
present needs, our capital resources may not be sufficient in the future.
Millbrook and Manischewitz compete against distributors and manufacturers across
all of their product lines and against other larger companies with greater
resources
In the distribution of health and beauty care products, supermarkets
demand delivery and inventory techniques which maximize limited shelf space and
enhance product variety while helping to keep prices low. Similarly,
supermarkets increasingly rely on distributors of general merchandise to carry
items specifically matched to customer profiles. Competitors in the industry
continue to enhance their delivery and inventory techniques and distribute more
items to supermarkets. We do not know if Millbrook will be able to improve its
delivery and inventory techniques and remain competitive. In addition, the
distribution industry has narrow gross profit and operating profit margins. This
means that any decrease in sales or increase in operating costs will negatively
impact our profits to a greater degree than in other types of business.
Outside of the kosher section, products of Manischewitz compete with
the products of a significant number of companies of varying sizes, including
divisions or subsidiaries of larger companies. Many of these competitors have
-16-
<PAGE>
multiple product lines as well as significantly greater financial and other
resources available to them. Manischewitz believes it can compete in the
specialty foods category but it does not know if it can increase its product
offering and remain profitable outside of the kosher section where it has less
experience and resources.
Millbrook is highly dependent on its systems to operate its business and a
failure to implement its new systems could hurt our operations and profitability
Millbrook has an agreement with McKesson Corporation to supply computer,
data processing and programming services systems to Millbrook which expires in
March 1999. Although Holdings entered into a multi-year agreement with an
independent service bureau to outsource some of its computer and data processing
services beginning in February 1999, we do not know if these systems will be
successfully implemented. Implementing these new systems may significantly
disrupt our business operations and may have an impact on the revenues and
profits we generate.
Millbrook is also in the process of implementing new management information
systems that affect broad aspects of its operations. These systems are expected
to be completed in three to five years with projected capital expenditures of
$6.0 to $7.0 million. We do not know if these systems will be successfully
implemented.
-17-
<PAGE>
Forward Looking Statements
In this prospectus, we make statements about our future financial
condition, results of operations and business. All of these "forward-looking"
statements are based on estimates and assumptions made from information
currently available to us. Although we believe these estimates and assumptions
are reasonable, they are uncertain. Therefore, you should not rely completely
upon these estimates and assumptions. We cannot assure you that any of these
estimates or assumptions will occur and it is likely that actual results will
differ significantly. Important factors that could cause actual results to
differ materially from such estimates or assumptions are disclosed throughout
this prospectus, including the section on "Risk Factors" beginning on page 14.
We qualify all of our subsequent written and oral forward looking statements by
these cautionary statements. We have no obligation to release the result of any
revisions to our forward looking statements to reflect future events or
circumstances.
Where You Can Find More Information
We have filed a registration statement with the Commission under the
Securities Act for the new notes. This prospectus does not include all of the
information included in the registration statement. The registration statement
includes exhibits and schedules containing documents and information about us
that you may find important You should read these exhibits and schedules for a
more complete understanding of the document or matter involved. You can read or
copy the complete registration statement and its exhibits and schedules at the
public reference section of the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's regional offices at 7 World Trade
Center, Suite 1300, New York, New York 10048, and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You may call the Commission
at 1-800-SEC-0330 for further information on its public reference rooms or visit
the Commission's web site at http://www.sec.gov which contains reports, proxy
and information statements and other information filed electronically with the
Commission.
Following the exchange offers, we will be required to file annual,
quarterly and special reports with the Commission. The indentures governing your
notes require us to prepare and deliver copies of these reports and other
information to you upon your request, at no cost to you.
-18-
<PAGE>
The Transactions
The Acquisition
On May 1, 1998, Enterprises acquired Manischewitz for a purchase price of
approximately $126.2 million. This amount included the repayment of
Manischewitz's existing debt of approximately $38.8 million, and an estimated
$1.9 million of fees and expenses.
Holdings and Enterprises used the gross proceeds of $168.0 million raised
in connection with the sale of the outstanding notes to:
(1) pay the purchase price for Manischewitz of approximately
$126.2 million;
(2) reduce outstanding borrowings by approximately $18.8 million
under the revolving credit portion of the credit agreement;
(3) fund an interest escrow account with $17.0 million to pay
interest on the notes of Holdings for the first six scheduled
interest payment dates for the benefit of the holders thereof;
and
(4) pay fees and expenses of approximately $6.0 million relating
to the sale of the outstanding notes.
Financing of the Acquisition
Holdings contributed the net proceeds of the sale of its notes ($29.4
million) to Enterprises. Enterprises used these proceeds and the net proceeds of
the sale of its notes to complete the acquisition of Manischewitz. Concurrently
with the acquisition of Manischewitz, the parties amended the credit agreement
to provide for, among other things:
(1) Manischewitz and Millbrook to be co-borrowers under the credit
agreement;
(2) a security interest in the accounts receivable, inventory and
intellectual property of Manischewitz to provide collateral
under the credit agreement; and
(3) the inclusion of some of the assets of Manischewitz in the
determination of the borrowing base under the credit
agreement.
As of December 31, 1998, Manischewitz and Millbrook had approximately $43.1
million of additional borrowing capacity under the credit agreement.
-19-
<PAGE>
Capitalization
The following table sets forth the unaudited cash and cash equivalents and
capitalization of Enterprises and Holdings as of September 30, 1998. This
information should be read in conjunction with the other financial information
included in this document.
As of
September 30, 1998
--------------------------
Enterprises Holdings
----------- --------
(Dollars in Thousands)
Cash and cash equivalents ................. $ 4,099 $ 4,099
======== ========
Long-term debt (including current portion):
Credit Agreement(a) ..................... $ 15,878 $ 15,878
Enterprises notes ....................... 120,000 120,000
Holdings notes .......................... 48,000
-------- --------
Total long-term debt .................... 135,878 183,878
Total stockholders' equity .............. 35,637 3,900
-------- --------
Total capitalization .................... $171,515 $187,778
======== ========
(a) At September 30, 1998, $15.9 million was outstanding under the credit
agreement, consisting of revolving credit borrowings of $7.1 million and an
amortizing term loan of $8.8 million, and approximately $49.5 million of
additional borrowing capacity was available under the credit agreement.
-20-
<PAGE>
Unaudited Pro Forma Condensed Consolidated Statements of Operations
The Unaudited Pro Forma Condensed Consolidated Statements of Operations for the
fiscal year ended March 31, 1998 and the six month period ended September 30,
1998 include the historical operations of Enterprises and Holdings for the
fiscal year ended March 31, 1998 and the six month period ended September 30,
1998, respectively, and give effect to the acquisition of Manischewitz and the
issuance of the outstanding notes, as if they had occurred as of the beginning
of each period presented. The pro forma adjustments give effect to the
utilization of the excess proceeds from the sale of the outstanding notes to
repay a portion of the amounts outstanding under the credit agreement.
The acquisition has been accounted for by the purchase method of accounting.
Accordingly, assets acquired and liabilities assumed have been recorded at their
estimated fair values, based on preliminary allocations of purchase price, which
are subject to further refinement and adjustment, including appraisals and other
analyses, with appropriate recognition given to the effects of current interest
rates and deferred income taxes. Management does not expect that the final
allocations of the purchase price for the acquisition will differ materially
from the preliminary allocations.
The Unaudited Pro Forma Condensed Consolidated Statements of Operations are not
intended to represent and are not indicative of the results of operations of
Enterprises and Holdings had the transactions or events assumed therein occurred
on the dates specified, nor are they necessarily indicative of the results of
operations that may be achieved in the future. Additionally, the Unaudited Pro
Forma Condensed Consolidated Statements of Operations do not reflect potential
cost savings and revenue enhancements that management believes may be realized
following the acquisition. No assurances can be given as to the amounts of cost
savings or revenue enhancements, if any, that may be realized.
The Unaudited Pro Forma Condensed Consolidated Statements of Operations are
based on available information and certain assumptions and adjustments as
described in the notes thereto, which management believes is reasonable under
the circumstances.
-21-
<PAGE>
Unaudited Pro Forma Condensed Consolidated Statements of Operations
R.A.B. Holdings, Inc.
and R.A.B. Enterprises, Inc.
<TABLE>
<CAPTION>
Fiscal Year Ended March 31, 1998
(Dollars in Thousands)
Historical(a) Enterprises Holdings
---------------------------- Pro Forma Enterprises Pro Forma Holdings
Enterprises Manischewitz Adjustments Pro Forma Adjustments Pro Forma
----------- ------------ ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues......................... $470,201 $ 55,374 $ $525,575 $ $525,575
Costs and expenses:
Cost of sales................. 360,162 33,288 239 (b) 393,689 393,689
Other costs and expenses...... 102,656 11,283 1,267 (b) 115,206 8 (e) 115,214
------- ------- ------- ------- ------- --------
Total costs and expenses...... 462,818 44,571 1,506 508,895 8 508,903
Operating income................. 7,383 10,803 (1,506) 16,680 (8) 16,672
Interest expense, net............ 5,079 4,239 7,454 (c) 16,772 5,399 (f) 22,171
Income (loss) before provision
(benefit) for income taxes..... 2,304 6,564 (8,960) (92) (5,407) (5,499)
------- ------- ------- ------- ------- --------
Provision (benefit) for
income taxes..................... 1,122 (664) (d) 458 (1,892) (g) (1,434)
------- ------- ------- ------- ------- --------
Net income (loss)................ $ 1,182 $ 6,564 $ (8,296) $ (550) $ (3,515) $ (4,065)
======== ======== ======== ======== ======== ========
<CAPTION>
Six Months Ended September 30, 1998
(Dollars in Thousands)
Historical(a) Enterprises Holdings
---------------------------- Pro Forma Enterprises Pro Forma Holdings
Enterprises Manischewitz Adjustments Pro Forma Adjustments Pro Forma
----------- ------------ ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues......................... $234,455 $ 2,167 $ $236,622 $ $236,622
Costs and expenses:
Cost of sales................. 179,248 1,169 19 (b) 180,436 180,436
Other costs and expenses...... 56,115 706 120 (b) 56,941 56,941
------- ------- ------- ------- ------- --------
Total costs and expenses...... 235,363 1,875 139 237,377 237,377
Operating income (loss).......... (908) 292 (139) (755) (755)
Interest expense, net............ 6,905 323 622 (c) 7,850 2,662 (f) 10,512
------- ------- ------- ------- ------- --------
Loss before provision
(benefit) for income taxes...... (7,813) (31) (761) (8,605) (2,662) (11,267)
Provision (benefit) for
income taxes................... (2,786) 445 (d) (2,341) 1,892 (g) (449)
------- ------- ------- ------- ------- --------
Net loss......................... $(5,027) $ (31) $(1,206) $(6,264) $(4,554) $(10,818)
======= ======= ======= ======= ======= ========
</TABLE>
See Notes to Unaudited Pro Forma Condensed
Consolidated Statements of Operations.
-22-
<PAGE>
Notes to Unaudited Pro Forma Condensed
Consolidated Statements of Operations
R.A.B. Holdings, Inc.
and R.A.B. Enterprises, Inc.
R.A.B. Holdings, Inc. Pro Forma Presentation
(a) The historical amounts represent:
(1) with respect to the fiscal year ended March 31, 1998,
those of Enterprises for the fiscal year ended March 31,
1998 and Manischewitz for the twelve month period ended
March 31, 1998; and
(2) with respect to the six month period ended September 30,
1998, those of Enterprises for the six month period ended
September 30, 1998 and Manischewitz for the one month
period ended April 30, 1998.
Enterprises Pro Forma Adjustments
(b) Adjustments, which aggregate $1.506 million for the fiscal year
ended March 31, 1998 and $139,000 for the six month period ended
September 30, 1998, represent the following:
(1) the incremental increase in intangible asset amortization
as a result of the Manischewitz acquisition. The excess
of cost over the fair value of assets acquired ($97.2
million) is amortized on a straight-line basis over 40
years as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended Six Months Ended
March 31, 1998 September 30, 1998
----------------- ------------------
<S> <C> <C>
Amortization of excess of cost over fair value of assets
acquired relating to the Manischewitz acquisition $2,432 $203
Less: Historical Manischewitz intangible amortization (928) (81)
------ ----
$1,504 $122
====== ====
</TABLE>
(2) the incremental increase in depreciation of plant and
equipment, based upon the preliminary fair value of
assets acquired, determined as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended Six Months Ended
March 31, 1998 September 30, 1998
----------------- ------------------
<S> <C> <C>
Depreciation of property and equipment based upon the
preliminary fair value of assets acquired $1,195 $100
Less: Historical Manischewitz depreciation of
property and equipment (793) (66)
------ ----
$ 402 $ 34
====== ====
</TABLE>
(3) the elimination of management fees of $400,000 for the
fiscal year ended March 31, 1998 and $17,000 for the six
month period ended September 30, 1998 paid to a related
party. A management fee is no longer permitted under the
credit agreement. No additional costs will be incurred in
lieu of the management fee.
-23-
<PAGE>
Notes to Unaudited Pro Forma Condensed
Consolidated Statements of Operations
R.A.B. Holdings, Inc.
and R.A.B. Enterprises, Inc.
(c) Adjustment represents:
(1) interest expense associated with the Enterprises notes and the
related amortization of deferred financing costs;
(2) amortization of new deferred financing costs related to the
amendment of the credit agreement;
(3) the reduction in interest associated with the repayment of a
portion of the outstanding borrowings under the credit agreement;
(4) the elimination of interest on Manischewitz long-term debt repaid
at closing; and
(5) the elimination of Manischewitz historical deferred financing
costs.
This adjustment has been determined as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended Six Months Ended
March 31, 1998 September 30, 1998
----------------- ------------------
<S> <C> <C>
Interest expense relating to the sale of Enterprises notes
($120 million), at a rate of 101/2% per annum $12,600 $1,050
Amortization of deferred financing costs ($4.3 million)
relating to the sale of Enterprises notes over seven years 621 52
Amortization of deferred financing costs ($227,000) related to the
amendment of the credit agreement over forty-seven months 58 5
Less: Interest on repayment of a portion of the outstanding
borrowings under the credit agreement ($22 million) at
an effective interest rate of approximately 9.5% (2,049) (171)
Less: Historical interest on Manischewitz long-term debt
repaid at closing (3,343) (279)
Less: Historical amortization of deferred financing costs
on Manischewitz long-term debt repaid at closing (433) (35)
------- ------
Net adjustment $ 7,454 $ 622
======= ======
</TABLE>
-24-
<PAGE>
Notes to Unaudited Pro Forma Condensed
Consolidated Statements of Operations
R.A.B. Holdings, Inc.
and R.A.B. Enterprises, Inc.
(d) Adjustment represents the provision (benefit) for income taxes,
determined as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended Six Months Ended
March 31, 1998 September 30, 1998
----------------- ------------------
<S> <C> <C>
Provision (benefit) for income taxes on Manischewitz
operations, which was previously the obligation
of its members $2,596 $ (12)
(Benefit) for income taxes relating to adjustments in
notes (b) and (c) above, as applicable (3,260) (159)
Less: Valuation allowance - 616
------ ------
Provision (benefit) for income taxes $ (664) $ 445
====== ======
</TABLE>
As a result of the acquisition by Enterprises of the partnership
interests in Manischewitz, Enterprises will receive a step-up in tax
basis for Federal income tax purposes. Accordingly, the excess of cost
over the fair value of assets acquired related to the acquisition of
Manischewitz will be deductible for Federal income tax purposes. The
final amount of the step-up will be determined when the applicable
Federal income tax return is filed. In the opinion of management, the
preliminary allocation of the step-up will not differ materially from
the final allocation. For purposes of this computation, based upon
preliminary information, it has been assumed that approximately 60% of
the excess of cost over the fair value of assets acquired resulting
from the Manischewitz acquisition is attributable to the acquisition of
the partnership interests and will therefore be tax deductible.
Additionally, the income tax benefit for the six month period ended
September 30, 1998 is limited to the amount of the net deferred income
tax liability due to the establishment of a valuation allowance since
as a result of the cumulative additional interest expense, it has not
been determined that it is more likely than not that deferred tax
benefits will be realized.
-25-
<PAGE>
Notes to Unaudited Pro Forma Condensed
Consolidated Statements of Operations
R.A.B. Holdings, Inc.
and R.A.B. Enterprises, Inc.
Holdings Pro Forma Adjustments
(e) Adjustment represents the historical results of operations of Holdings.
(f) Adjustment represents interest expense associated with the Holdings
notes at a rate of 13% per annum, the related amortization of deferred
financing costs and interest income earned on the Government Securities
which comprise the interest escrow account, determined as follows (in
thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended Six Months Ended
March 31, 1998 September 30, 1998
----------------- ------------------
<S> <C> <C>
Interest expense relating to the sale of Holdings notes
($48 million), at a rate of 13% per annum $ 6,240 $ 3,120
Amortization of deferred financing costs ($1.6 million)
relating to the sale of Holdings notes over ten years 163 82
Less: Interest income earned on the Government Securities
which comprise the Interest Escrow Account (1,004) (540)
------- -------
$ 5,399 $ 2,662
======= =======
</TABLE>
(g) Adjustment represents the U.S. federal income tax benefit related to
the net interest expense in (f) above. For purposes of this
computation, it has been assumed that Holdings will not receive a state
tax benefit for this net interest expense since Holdings, which files a
separate state income tax return as compared to a consolidated Federal
income tax return, does not have income from operations which could
offset the net interest expense.
-26-
<PAGE>
Notes to Unaudited Pro Forma Condensed
Consolidated Statements of Operations
R.A.B. Holdings, Inc.
and R.A.B. Enterprises, Inc.
Additionally, the income tax benefit for the six month period ended
September 30, 1998 is limited to the amount of the net deferred income
tax liability due to the establishment of a valuation allowance since
as a result of the cumulative additional net interest expense, it has
not been determined that it is more likely than not that deferred tax
benefits will be realized. This adjustment was determined as follows
(in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended Six Months Ended
March 31, 1998 September 30, 1998
----------------- ------------------
<S> <C> <C>
Benefit for income taxes on Holdings net interest expense $(1,892) $ (932)
Less: Valuation allowance - 2,824
------- ------
Provision (benefit) for income taxes $(1,892) $1,892
======= ======
</TABLE>
The pro forma adjustments do not reflect the following:
(1) Estimated cost savings of $593,000 for the fiscal year ended
March 31, 1998 associated with the implementation of a new
comprehensive employee benefit program at Millbrook effective
January 1, 1998; and
(2) Estimated cost savings of $269,000 for the fiscal year ended
March 31, 1998 and $26,000 for the six month period ended
September 30, 1998 principally resulting from compensation and
benefits provided to former employees of Manischewitz and
one-time consulting costs.
(3) Estimated additional daily interest costs of $4,600 that may
be required to be paid as a result of the registration
statement not being declared effective on or before December
27, 1998.
-27-
<PAGE>
Selected Historical Financial Data
R.A.B. Holdings, Inc.
The following table sets forth selected historical consolidated financial data
of Holdings as of March 31, 1998 and September 30, 1998 and 1997, and for the
fiscal year ended March 31, 1998 and the six month periods ended September 30,
1997 and 1998, and historical financial data of the predecessor as of March 31,
1994, 1995, 1996 and 1997 and for each of the four years in the period ended
March 31, 1997. The historical consolidated financial data as of March 31, 1998,
and for the fiscal year ended March 31, 1998 have been derived from Holdings
audited consolidated financial statements, included elsewhere herein. The
historical consolidated financial data for the six month periods ended September
30, 1997 and 1998 have been derived from Holdings unaudited condensed
consolidated financial statements, included elsewhere herein, which in the
opinion of management include all adjustments, consisting of normal recurring
accruals, necessary for a fair presentation of the information. Holdings, which
was formed in 1996, did not have any income or expenses prior to the fiscal year
beginning April 1, 1997. The predecessor financial data for each of the two
years in the period ended March 31, 1997 have been derived from the
predecessor's audited financial statements, included elsewhere herein. The
unaudited historical condensed consolidated financial statements for the six
month period ended September 30, 1998 are not necessarily indicative of the
results that may be expected for the full fiscal year. For purposes of
determining the ratio of earnings to fixed charges and the deficiency in
earnings to fixed charges, "earnings" consist of income before income taxes and
fixed charges and "fixed charges" consist of interest on all indebtedness,
amortization of deferred financing costs and that portion of rental expense that
management believes to be representative of interest.
The predecessor was acquired on March 31, 1997. Financial information with
regard to the predecessor is based on historical results and, accordingly, does
not reflect purchase accounting adjustments or interest associated with debt
incurred to finance the acquisition. The predecessor was a wholly owned
subsidiary of McKesson Corporation. As a wholly-owned subsidiary of McKesson
Corporation, the predecessor was provided certain corporate and general and
administrative services, including, among other things, treasury, certain
financial reporting, data processing and legal services. Accordingly, the
operations of the predecessor include an allocation of expenses for such
services. Additionally, because McKesson Corporation managed cash and financing
requirements centrally, interest expense and borrowing requirements were based
on the then existing capital structure. The financial position and operations of
the predecessor may differ from results that may have been achieved had the
predecessor operated as an independent entity. The predecessor had no
indebtedness to McKesson Corporation that would have been classified as
long-term.
<TABLE>
<CAPTION>
Holdings
Predecessor ------------------------------------------
------------------------------------ Fiscal Year Ended Six Months Ended
Fiscal Year Ended March 31, March 31, September 30,
1994 1995 1996 1997 1998 1997 1998
---- ---- ---- ---- ---- ---- ----
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues................................ $728,375 $648,149 $563,099 $476,175 $ 470,201 $ 222,772 $234,455
Gross profit............................ 167,275 162,927 132,701 111,413 110,039 52,284 55,207
Operating expenses...................... 149,837 139,528 119,090 104,038 102,664 49,988 56,115
Operating income (loss)................. 17,438 23,399 13,611 7,375 7,375 2,296 (908)
Interest expense, net................... 3,434 2,806 4,708 3,843 5,079 2,586 9,197
Non-operating income, other............. 239 19 1,600 69
Provision (benefit) for income taxes.... 5,696 8,327 4,334 1,660 1,122 1 (2,829)
Net income (loss)....................... 8,547 12,285 6,169 1,941 1,174 (291) (7,276)
Other Financial Data:
Ratio of earnings to fixed charges...... 1.35x
Deficiency in earnings to fixed
charges................................. 290 10,105
Balance Sheet Data:
Working capital......................... $ 66,608 $ 41,092 $ 46,540 $ 36,535 $ 30,003 $ 39,339 $ 41,518
Property, plant and equipment, net...... 42,221 17,294 16,313 15,017 23,395 24,273 39,659
Total assets............................ 190,245 132,147 113,026 102,731 108,772 126,346 270,166
Total debt.............................. - - - - 38,110 49,159 183,878
</TABLE>
-28-
<PAGE>
Selected Historical Financial Data
R.A.B. Enterprises, Inc.
The following table sets forth selected historical consolidated financial data
of Enterprises as of March 31, 1998 and September 30, 1998 and 1997, and for the
fiscal year ended March 31, 1998 and the six month periods ended September 30,
1997 and 1998, and historical financial data of the predecessor as of March 31,
1994, 1995, 1996 and 1997 and for each of the four years in the period ended
March 31, 1997. The historical consolidated financial data as of March 31, 1998,
and for the fiscal year ended March 31, 1998 have been derived from Enterprises
audited consolidated financial statements, included elsewhere herein. The
historical consolidated financial data for the six month periods ended September
30, 1997 and 1998 have been derived from Enterprises unaudited condensed
consolidated financial statements, included elsewhere herein, which in the
opinion of management include all adjustments, consisting of normal recurring
accruals, necessary for a fair presentation of the information. The predecessor
financial data for each of the two years in the period ended March 31, 1997 have
been derived from the predecessor's audited financial statements, included
elsewhere herein. The unaudited historical condensed consolidated financial
statements for the six month period ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the full fiscal year. For
purposes of determining the ratio of earnings to fixed charges and the
deficiency in earnings to fixed charges, "earnings" consist of income before
income taxes and fixed charges and "fixed charges" consist of interest on all
indebtedness, amortization of deferred financing costs and that portion of
rental expense that management believes to be representative of interest.
The predecessor was acquired on March 31, 1997. Financial information with
regard to the predecessor is based on historical results and, accordingly, does
not reflect purchase accounting adjustments or interest associated with debt
incurred to finance the acquisition. The predecessor was a wholly owned
subsidiary of McKesson Corporation. As a wholly-owned subsidiary of McKesson
Corporation, the predecessor was provided certain corporate and general and
administrative services, including, among other things, treasury, certain
financial reporting, data processing and legal services. Accordingly, the
operations of the predecessor include an allocation of expenses for such
services. Additionally, because McKesson Corporation managed cash and financing
requirements centrally, interest expense and borrowing requirements were based
on the then existing capital structure. The financial position and operations of
the predecessor may differ from results that may have been achieved had the
predecessor operated as an independent entity. The predecessor had no
indebtedness to McKesson Corporation that would have been classified as
long-term.
<TABLE>
<CAPTION>
Enterprises
Predecessor ----------------------------------------
------------------------------------- Fiscal Year Ended Six Months Ended
Fiscal Year Ended March 31, March 31, September 30,
1994 1995 1996 1997 1998 1997 1998
---- ---- ---- ---- ---- ---- ----
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues........................ $728,375 $648,149 $563,099 $476,175 $470,201 $222,772 $234,455
Gross profit.................... 167,275 162,927 132,701 111,413 110,039 52,284 55,207
Operating expenses.............. 149,837 139,528 119,090 104,038 102,656 49,984 56,115
Operating income (loss)......... 17,438 23,399 13,611 7,375 7,383 2,300 (908)
Interest expense, net........... 3,434 2,806 4,708 3,843 5,079 2,586 6,905
Non-operating income, other..... 239 19 1,600 69
Provision (benefit) for income)
taxes........................... 5,696 8,327 4,334 1,660 1,122 1 (2,786)
Net income (loss)............... 8,547 12,285 6,169 1,941 1,182 (287) (5,027)
Other Financial Data:
Ratio of earnings to fixed
charges......................... 1.35x
Deficiency in earnings of fixed
charges......................... 286 7,813
Balance Sheet Data:
Working capital................. $ 66,608 $ 41,092 $ 46,540 $ 36,535 $ 30,108 $ 39,441 $ 38,511
Property, plant and equipment,
net........................... 42,221 17,294 16,313 15,017 23,395 24,273 39,659
Total assets.................... 190,245 132,147 113,026 102,731 108,875 126,353 251,289
Total debt...................... - - - - 38,110 49,159 135,878
</TABLE>
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<PAGE>
Selected Historical Financial Data
The B. Manischewitz Company, LLC
The following table sets forth selected historical financial data of
Manischewitz as of July 31, 1993, 1994, 1995, 1996 and 1997 and for each of the
five years in the period ended July 31, 1997, and as of April 30, 1998 and 1997
and for the nine month periods ended April 30, 1997 and 1998. The historical
financial data as of July 31, 1996 and 1997 and for each of the three years in
the period ended July 31, 1997 have been derived from Manischewitz's audited
financial statements, included elsewhere herein. The historical financial data
as of April 30, 1998 and for the nine month periods ended April 30, 1997 and
1998, have been derived from unaudited condensed financial statements of
Manischewitz, included elsewhere herein, which in the opinion of management
include all adjustments, consisting only of normal recurring accruals, necessary
for a fair presentation of the information. The historical financial data for
the nine month period ended April 30, 1998 are not necessarily indicative of
results that may be expected for the full fiscal year.
<TABLE>
<CAPTION>
Fiscal Year Ended Nine Months Ended
July 31, April 30,
--------------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total Revenues(a).................. $41,199 $45,588 $49,581 $52,399 $55,787 $46,387 $44,481
Gross Profit....................... 15,522 16,575 18,382 19,331 22,229 17,937 17,039
Operating expenses................. 11,680 11,537 11,034 11,120 12,422 8,492 7,658
Operating income................... 3,872 5,038 7,348 8,211 9,807 9,445 9,381
Interest expense, net.............. 2,080 2,328 2,946 3,705 4,486 3,388 3,090
Provision (benefit) for income
taxes(b)........................... 1,162 1,468 2,135 (145)
Net income(b)(c)................... 630 662 2,267 1,932 5,321 6,057 6,291
Balance Sheet Data:
Working capital.................... $ 3,349 $11,126 $13,717 $11,351 $12,028 $14,852 $13,299
Property, plant and equipment, net. 9,813 12,590 12,306 12,647 12,202 12,120 11,823
Total assets....................... 49,284 56,705 59,472 59,337 59,563 70,914 64,766
Total debt......................... 24,562 29,000 29,000 44,000 40,759 41,975 40,414
</TABLE>
(a) In June 1997, Manischewitz sold its Chicago distribution operation. This
operation had revenues of $4.083 million for the nine month period ended
April 30, 1997.
(b) Effective May 31, 1996, The B. Manischewitz Company was reorganized as a
limited liability company. Accordingly, deferred income tax attributes of
$2.42 million at May 31, 1996 flowed through the provision (benefit) for
income taxes. Subsequent to May 31, 1996, income taxes, if any, are the
obligation of the shareholders and partners of Manischewitz. Pro forma
income tax expense and pro forma net income (loss) as if Manischewitz had
been a taxable entity is $1.952 million and $(165,000) for the fiscal year
ended July 31, 1996; $2.415 million and $2.906 million for the fiscal year
ended July 31, 1997; $2.749 million and $3.308 million for the nine months
ended April 30, 1997, and; $2.735 million and $3.556 million for the nine
months ended April 30, 1998.
(c) Fiscal 1994 and 1996 net income includes an extraordinary charge for the
early extinguishment of debt ($482,000 and $1.965 million, respectively)
and charges for the cumulative effects of changes in accounting principles
relating to income taxes in 1994 ($98,000) and postretirement benefits in
1996 ($754,000).
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<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
R.A.B. Holdings, Inc.
Overview
Holdings was formed in 1996 to build a fully integrated specialty food
business by acquiring food manufacturers with strong brand names and integrating
their products with a strong distribution network. On March 31, 1997, Holdings
acquired Millbrook, which is one of the nation's largest value-added full
service independent distributors of specialty foods, health and beauty care
products and general merchandise. On May 1, 1998, Enterprises, a wholly-owned
subsidiary of Holdings, acquired Manischewitz. The results of operations of
Manischewitz are included in the consolidated results of operations since its
date of acquisition. Prior to its acquisition of Millbrook from McKesson
Corporation, Holdings had no operations. Enterprises, which was formed in 1998
to acquire Manischewitz, had no operations prior to that acquisition.
Predecessor Results of Operations
From 1984 to 1986, McKesson acquired three distribution companies,
including the Harrison, Arkansas based operation, Mass Merchandisers, Inc.
and the Leicester, Massachusetts based operation, Millbrook Distributors, Inc.
Mass Merchandisers and Millbrook Distributors, Inc. are predecessor operations
of Millbrook. During McKesson's period of ownership, these companies, which were
operated as autonomous subsidiaries until 1994 to 1995, comprised a small
segment of McKesson's revenues and were considered non-health care businesses.
As a wholly owned subsidiary of McKesson, Millbrook was provided certain
corporate and general and administrative services including, treasury, certain
financial reporting, data processing and legal services. Accordingly, the
historical operations of Millbrook include an allocation of expenses for such
services. Additionally, because McKesson managed cash and financing requirements
centrally, interest expense and borrowing requirements were based on the then
existing capital structure. Millbrook's financial position and results of
operations may differ from results that may have been achieved had Millbrook
operated as an independent entity. Furthermore, the historical operations of
Millbrook do not reflect purchase accounting adjustments or interest associated
with debt incurred to finance the acquisition of Millbrook by Holdings.
As a result of the circumstances described above, the results of
Millbrook's operations subsequent to its acquisition by Holdings are not
comparable to those of Millbrook prior to its acquisition.
General
Holdings' operating subsidiaries are Millbrook and Manischewitz.
Millbrook
Millbrook, is a full service independent distributor of specialty
foods, health and beauty care products and general merchandise to
supermarkets and mass merchandisers. Millbrook also carries a line of
its own private label brands as well as store brands and other special
need items for specific customers. Millbrook Retail
Solutions(Service Mark), one of Millbrook's divisions, provides a
variety of merchandising services, without associated product sales, to
manufacturers, distributors and retailers across various product
categories in all trade channels.
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<PAGE>
Manischewitz
Manischewitz is a manufacturer of processed kosher food products
including matzos, noodles, crackers, cake mixes, cookies, soups and
processed fish products. Manischewitz markets its products under the
brand names Manischewitz, Horowitz Margareten and Goodman's.
Operating costs and expenses consist of cost of sales, distribution and
warehousing and selling, general and administrative expenses. Cost of sales
includes the cost of products manufactured and purchased by Manischewitz,
including raw materials, products purchased under co-packing arrangements and
manufacturing payroll and related employee benefits costs, and the cost of
products distributed by Millbrook. Distribution and warehousing expenses include
payroll and related employee benefit costs of Millbrook's distribution operation
and transportation costs. Selling, general and administrative expenses include
payroll and related employee benefit costs of Holdings various sales
organizations and other general and administrative functions.
You should read the following discussion in conjunction with the audited
consolidated financial statements and unaudited condensed consolidated financial
statements of Holdings and Enterprises and the accompanying notes.
Six month period ended September 30, 1998 compared to the six month period ended
September 30, 1997
Revenues. Revenues for the six month period ended September 30, 1998
increased $11.7 million or 5.2% to $234.5 million as compared to $222.8 million
for the six month period ended September 30, 1997. This increase resulted from
Manischewitz sales of $11.0 and a $0.7 million (0.3%) increase in Millbrook's
sales for the six month period. Millbrook's increase resulted from growth in the
revenues from third-party merchandising services ($1.5 million), net of customer
losses, which were partially offset by the addition of new customers and growth
of existing customers in our three primary business segments ($0.8 million).
Consolidation of our customer base and heightened competitive pressures within
the health and beauty care and general merchandise segments of our business
continues to result in customer turnover. While Millbrook anticipates that this
customer turnover will continue, management does not believe it will have a
material impact on operating income. Manischewitz revenues decreased $1.8
million or 14.1% to $11.0 million since its acquisition on May 1, 1998 as
compared to $12.8 million for the comparable pre-acquisition period. This
decrease is comprised of sales of $ 0.7 million related to Manischewitz's
Chicago division which was sold in June 1997 and a slower sales rate during the
first ninety days of Enterprises' ownership caused by distributor uncertainty
resulting from the acquisition ($1.1 million). Due to Enterprises' ownership of
Millbrook, distributors were initially very cautious about continuing to place
product orders due to their concerns that we were intending to terminate their
right to distribute Manischewitz products. Following meetings with a number of
distributors, revenues for the two months ended September 30, 1998 have been in
line with the comparable pre-acquisition period.
Gross Profit. Gross profit for the six month period ended September 30,
1998 was $55.2 million, as compared to $52.3 million for the six month period
ended September 30, 1997, an increase of 5.6%. As a percentage of revenues, the
gross profit margin was 23.5% for each of the six month periods ended September
30, 1998 and 1997. The increase in gross profit dollars corresponds to the
increase in revenues and the comparable gross profit margin resulted from growth
in Millbrook's third-party service merchandising business (0.3%) and the
contribution of the gross profit margin on Manischewitz's sales since its
acquisition (0.6%), offset by Millbrook's shift in sales mix from higher margin
general merchandise to lower margin health and beauty care products (-0.9%).
Operating Expenses. Distribution and warehousing expenses for the six month
period ended September 30, 1998 were $18.5 million, as compared to $18.1 million
for the six month period ended September 30, 1997. Selling, general and
administrative expenses for the six month period ended September 30, 1998 were
$36.6 million, as compared to $31.9 million for the six month period ended
September 30, 1997. The $4.7 million increase consists of $3.0 million from
Manischewitz's operations since its acquisition and $1.7 million (5.3%) from
Millbrook's operations. The increase at Millbrook primarily relates to increased
payroll and related costs associated with the growth in the third-party service
merchandising business and increased selling expenses associated with the
acquisition of new customers, including the proposal and product conversion
process, which are expensed as incurred.
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<PAGE>
Amortization of excess of cost over fair value of net assets acquired was
$1.0 million for the six month period ended September 30, 1998 as a result of
the Manischewitz acquisition. There was no such amortization for the comparable
pre-acquisition period.
Interest Expense. Interest expense for the six month period ended September
30, 1998 was $9.2 million, consisting of $2.3 million for Holdings and $6.9
million for Enterprises, as compared to $2.6 million for Holdings and
Enterprises for the six month period ended September 30, 1997. The increased
interest expense is attributable to the $168 million of senior notes which were
sold in May 1998 to fund the acquisition of Manischewitz, resulting in higher
average debt outstanding at higher average interest rates.
Taxes. The benefit for income taxes for the six month period ended
September 30, 1998 was $2.8 million for Holdings and Enterprises. This benefit
principally relates to the results of operations. However, the Holdings' income
tax benefit for the six month period ended September 30, 1998 was limited due to
the establishment of a valuation allowance ($0.9 million), since as a result of
the cumulative additional net interest expense, management was unable to
conclude that deferred tax benefits would be realized. For the six months ended
September 30, 1997, the income tax provision was $1,000 for Holdings and
Enterprises.
Net Income (Loss). As a result of the items described above, the net loss
for the six month period ended September 30, 1998 was ($7.3) million for
Holdings and ($5.0) million for Enterprises as compared to a net loss of ($0.3)
million for Holdings and Enterprises for the six month period ended September
30, 1997.
Fiscal year ended March 31, 1998 compared to the fiscal year ended March 31,
1997 (predecessor)
Revenues. Revenues for the fiscal year ended March 31, 1998 decreased $6.0
million or $1.2% to $470.2 million, as compared to $476.2 million for the fiscal
year ended March 31, 1997. The decrease resulted from certain customer losses.
These losses were offset partially by the addition of new customers.
Gross Profit. Gross profit for the fiscal year ended March 31, 1998 was
$110.0 million, as compared to $111.4 million for the fiscal year ended March
31, 1997, a decrease of 1.2%. As a percentage of revenues, the gross profit
margin was 23.4% for the years ended March 31, 1998 and 1997. The gross profit
margin was consistent with the prior year as the decline in general merchandise
gross profit dollars was offset by increased specialty food gross profit
dollars.
Operating Expenses. Distribution and warehousing expenses for the fiscal
year ended March 31, 1998 were $37.3 million, as compared to $38.2 million for
the fiscal year ended March 31, 1997, a decrease of 2.2%. Selling expenses for
the fiscal year ended March 31, 1998 were $43.8 million, as compared to $45.3
million for the fiscal year ended March 31, 1997, a decrease of 3.3%. General
and administrative expenses for the fiscal year ended March 31, 1998 were $21.6
million. These decreases principally resulted from operating efficiencies
realized subsequent to the Millbrook acquisition.
General and administrative expenses for the fiscal year ended March 31,
1997 include the allocation of expenses from Millbrook's former parent, McKesson
Corporation. These expenses include, among other things, the cost of providing
treasury, certain financial reporting, data processing and legal services. The
cost of these services is comprised of the following:
(1) the number of hours incurred at the applicable pay rate;
(2) data processing time utilized at the applicable rate; and
(3) out-of-pocket expenses, related to the services provided.
In the opinion of management, this methodology provides a reasonable basis for
such allocation.
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<PAGE>
Interest Expense. An interest expense of $5.1 million, for the fiscal year
ended March 31, 1998, principally relates to amounts borrowed under the credit
agreement for Millbrook's operating needs and for Holdings to finance the
acquisition of Millbrook. The average interest rate on debt outstanding during
the fiscal year ended March 31, 1998 was 9.6%.
General, Administrative and Interest Expense. As a result of the
acquisition of Millbrook by Holdings, general and administrative expenses and
interest expense for the fiscal year ended March 31, 1998 are not comparable to
such expenses incurred for the fiscal year ended March 31, 1997. See
"Predecessor Results of Operations" on page 31.
Taxes. The provision for income taxes was $1.1 million for the fiscal year
ended March 31, 1998, representing an effective rate of 48.8%. The effective
income tax rate was significantly higher than the Federal statutory rate due to
state income taxes and the impact of other items, principally the disallowance
of meals and entertainment expenses in relation to pre-tax income.
Net Income. As a result of the revenues, expenses, and other items
described above, Holdings and Enterprises had net income of $1.2 million for the
fiscal year ended March 31, 1998.
Predecessor Millbrook Distribution Services Inc.
Fiscal year ended March 31, 1997 compared to the fiscal year ended March 31,
1996
Revenues. Revenues for the fiscal year ended March 31, 1997 decreased $86.9
million, or 15.4% to $476.2 million, as compared to $563.1 million for the
fiscal year ended March 31, 1996. The decrease resulted from the decline in the
customer base.
Gross Profit. Gross profit for the fiscal year ended March 31, 1997 was
$111.4 million, as compared to $132.7 million for the fiscal year ended March
31, 1996, a decrease of 16.0%. As a percentage of revenues, the gross profit
margin was 23.4% for the fiscal year ended March 31, 1997, which is comparable
to the 23.6% for the fiscal year ended March 31, 1996.
Operating Expenses. Operating expenses, consisting of distribution and
warehousing and selling, general and administrative expenses, for the fiscal
year ended March 31, 1997 decreased $15.1 million, or 12.6% to $104.0 million,
as compared to $119.1 million for the fiscal year ended March 31, 1996. As a
percentage of sales, operating expenses increased to 21.8% for the fiscal year
ended March 31, 1997, as compared to 21.1% for the fiscal year ended March 31,
1996. The decline in operating expenses is related directly to a reduction in
account management personnel and the decrease in other expenses associated with
lost sales. Further, operating expenses, as a percentage of sales, increased as
these cost reductions were not sufficient to offset lost sales.
Interest Expense. Interest expense for the fiscal year ended March 31, 1997
decreased $.9 million, or 18.4% to $3.8 million, as compared to $4.7 million for
the fiscal year ended March 31, 1996. Interest expense represented an allocation
from McKesson relating to Millbrook's operations.
Taxes. Millbrook was included in the consolidated federal income tax return
of McKesson. The provision for income taxes has been computed as if Millbrook
filed its own federal income tax return, without regard to its tax sharing
arrangement with McKesson. The provision for income taxes for the fiscal year
ended March 31, 1997 decreased $2.6 million or 61.7% to $1.7 million, as
compared to $4.3 million for the fiscal year ended March 31, 1996, principally
relating to the results of operations.
Net Income. As a result of the revenues, expenses, and other items
described above, Millbrook's net income for the fiscal year ended March 31, 1997
decreased $4.3 million or 68.5% to $1.9 million, as compared to $6.2 million for
the fiscal year ended March 31, 1996.
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<PAGE>
Financial Condition, Liquidity and Capital Resources
The acquisition of Millbrook was financed by the initial capitalization of
Holdings with approximately $10.1 million, consisting of series A preferred
stock and common stock, and with $61.8 million of borrowings under the credit
agreement. The credit agreement provided for revolving credit loans, pursuant to
a borrowing base calculation, of up to $90.2 million and an amortizing term loan
of $9.8 million. The acquisition of Manischewitz was financed by the sale of
$168.0 million of the outstanding notes. The proceeds of the outstanding notes
were used to:
(1) pay the purchase price of approximately $126.2 million;
(2) reduce outstanding borrowings by approximately $18.8 million
under the revolving credit portion of Millbrook's credit
agreement;
(3) fund an initial escrow account with approximately $17.0
million to pay interest on the outstanding notes of Holdings
for the first six scheduled interest payment dates for the
benefit of the holders thereof; and
(4) pay fees and expenses of approximately $6.0 million relating
to the sale of the outstanding notes.
At September 30, 1998, there was approximately $15.9 million outstanding
under the credit agreement, consisting of $7.1 million of revolving credit loans
and an amortizing term loan of $8.8 million. Substantially all of Millbrook's
assets and the accounts receivable and inventory of Manischewitz are pledged to
provide collateral under the terms of the credit agreement. The decrease in
borrowings under the credit agreement from $61.8 million as of March 31, 1997 to
$15.9 million as of September 30, 1998, resulted from the utilization of cash
flow from operating activities ($27.1 million) and the utilization of a portion
of the proceeds of the notes ($18.8 million) to repay borrowings.
At September 30, 1998, based upon the borrowing base calculation, Millbrook
and Manischewitz had approximately $4.1 million of cash and $49.5 million of
available borrowing capacity under the credit agreement. Under the terms of the
credit agreement, Enterprises is restricted from making distributions to
Holdings to pay dividends, including dividends related to Holdings' series A
preferred stock. At September 30, 1998, cumulative unpaid dividends on Holdings'
series A preferred stock were approximately $1.5 million.
Operations for the six months ended September 30, 1998, excluding non-cash
charges for depreciation, amortization and deferred income taxes, utilized cash
of $4.7 million for Holdings and $2.6 million for Enterprises as compared to
providing cash of $1.3 million for each of Holdings and Enterprises for the six
months ended September 30, 1997. During the six months ended September 30, 1998
and 1997, other changes in assets and liabilities resulting from operating
activities provided cash of $11.4 million for Holdings and $9.2 million for
Enterprises and $11.2 million for Holdings and $11.9 million for Enterprises,
respectively, resulting in net cash provided by operating activities of $6.6
million for Holdings and Enterprises and $12.5 million for Holdings and $13.2
million for Enterprises, respectively. Investing activities, which principally
consisted of the acquisition of Manischewitz in the 1998 period and the
acquisitions of property and equipment, resulted in a use of cash of $127.9
million and $0.4 million, respectively, for the six month periods ended
September 30, 1998 and 1997. During the six month period ended September 30,
1998, financing activities, which principally consisted of the sale of $168.0
million of senior notes, offset by debt issuance costs of $6.0 million, the
funding of a $17.0 million interest escrow account and the repayment of
borrowings under the credit agreement of $22.2 million in 1998, provided cash of
$122.8 million. During the six month period ended September 30, 1997, financing
activities used cash of $12.6 million for repayment of borrowings under the
credit agreement.
Operations for the fiscal year ended March 31, 1998, excluding non-cash
charges for depreciation and amortization and deferred income taxes, provided
cash of $5.5 million. During the fiscal year ended March 31, 1998, other changes
in assets and liabilities resulting from operating activities provided cash of
$20.4 million for Holdings and $21.1 million for Enterprises, resulting in net
cash provided by operating activities of $25.9 million for Holdings and $26.6
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<PAGE>
million for Enterprises. Investing activities, which principally consisted of
acquisitions of property, plant and equipment, resulted in a use of cash of $2.2
million for the fiscal year ended March 31, 1998. During the fiscal year ended
March 31, 1998, financing activities used cash of $23.7 million, principally
consisting of the repayment of borrowings under the credit agreement.
At September 30, 1998, working capital for Holdings and Enterprises was
$41.5 million and $38.5 million, respectively.
Forward Looking Liquidity and Capital Resources
Concurrent with the acquisition of Manischewitz, the credit agreement was
amended to provide, among other things, for:
(1) Manischewitz and Millbrook to be co-borrowers under the credit
agreement;
(2) certain assets of Manischewitz were pledged to provide
collateral under the credit agreement, including accounts
receivable, inventory and intellectual property; and
(3) the inclusion of Manischewitz's accounts receivable and
inventory in determining the borrowing base.
Holdings and Enterprises anticipate that capital expenditures during its
fiscal year ending March 31, 1999 will approximate $2.5 to $3.0 million. It is
anticipated that such capital commitment amount will be financed through working
capital, operating leases and cash flow from operations.
Interest payments on the notes and under the credit agreement represent
significant obligations of Holdings, Enterprises and their subsidiaries. The
primary source of liquidity of Holdings and Enterprises will be cash flows from
operations of Millbrook and Manischewitz and borrowings under the credit
agreement. Holdings and Enterprises believe that, based on current and
anticipated financial performance, cash flows from operations, borrowings under
the credit agreement and dividends and other distributions available from their
respective subsidiaries will be adequate to meet anticipated requirements for
capital expenditures, working capital and scheduled interest payments on the
notes. Holdings and Enterprises are currently in compliance with the financial
covenants contained in the credit agreement and the indentures and expect to be
able to continue to comply. However, the capital requirements of Holdings and
Enterprises may change. Each of Holdings and Enterprises believes that it has
sufficient borrowing capacity and access to debt markets to pursue acquisition
opportunities and fund extraordinary working capital requirements, if necessary.
At September 30, 1998, Holdings and Enterprises had total outstanding
indebtedness of $183.9 million and $135.9 million, respectively. The ability of
Holdings and Enterprises to satisfy capital requirements, to borrow under the
credit agreement and to repay or refinance the notes will depend on future
financial performance of Holdings and Enterprises, which in turn will be subject
to general economic conditions and to financial, business and other factors,
including factors beyond Holdings' control.
Year 2000 Project
We utilize computer technologies throughout our business to effectively
carry out day-to-day operations. Computer technologies include both information
technology in the form of hardware and software, as well as embedded technology
in our facilities and equipment. Similar to most companies, as the year 2000
approaches we must determine if our systems are capable of properly recognizing
and processing date sensitive information. We are using a multi-phased
concurrent approach to address the year 2000 project, which include the
awareness, assessment, remediation, validation and implementation phases. We
have completed the awareness and assessment phases of the project and are
significantly involved in the remediation phase. We are actively correcting and
replacing those systems which are not year 2000 ready to ensure our ability to
continue to meet the internal needs of our organization and the needs of our
suppliers and customers. We currently intend to substantially complete the
remediation, validation and implementation phases of the year 2000 project
before June 30, 1999. This process includes the testing of critical systems to
ensure that year 2000 readiness has been accomplished. We currently believe we
will be able to modify, replace or mitigate the
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<PAGE>
affected systems in time to avoid any material detrimental impact on operations.
If we determine that we may be unable to remediate and properly test affected
systems on a timely basis, we intend to develop appropriate contingency plans
for any such mission-critical systems at the time the determination is made.
While we are unaware presently of any significant exposure and we believe that
our systems will be remediated properly on a timely basis, we cannot assure that
all year 2000 remediation processes will be completed and properly tested before
the year 2000, or that contingency plans will sufficiently mitigate the risk of
a year 2000 readiness problem. An interruption of our ability to conduct
business due to a year 2000 readiness problem could have a material adverse
effect.
We estimate that the aggregate costs of the year 2000 project will be
approximately $1.25 million, including costs already incurred of $390,000
through September 30, 1998. The anticipated impact and costs of the project, as
well as the date on which we expect to complete the project, are based on
management's best estimates using information currently available and numerous
assumptions about future events. However, there can be no guarantee that these
estimates will be achieved and actual results may differ materially from those
plans. Based upon our current estimates and information currently available, we
do not anticipate that the costs associated with this project will have a
material adverse effect on our consolidated financial position, results of
operations or cash flows in future periods.
We have contacted our significant suppliers, customers, and critical
business partners to determine the extent to which we may be vulnerable if these
third parties fail to remediate properly their own year 2000 issues. As the year
2000 approaches we have taken steps to monitor the progress made by these third
parties and intend to test critical system interfaces. We will develop
appropriate contingency plans if a significant exposure is identified relative
to dependencies on third parties systems. While we are not aware presently of
any such significant exposure, there can be no guarantee that the systems of
third parties will be converted in a timely manner. Since we rely on certain
other companies, a failure of these other companies to properly convert its
systems could have a material adverse effect on us.
Effects of Inflation and Other Matters
For the six month period ended September 30, 1998 and the fiscal year ended
March 31, 1998, Holdings and Enterprises' cost of product remained relatively
stable. To the extent possible, Holdings and Enterprises' objective is to offset
the impact of inflation through productivity enhancements, cost reductions and
price increases.
Holdings is not involved in any significant environmental matters.
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosure
about Segments of an Enterprise and Related Information" was issued in June 1997
and is effective for financial statements for periods beginning after December
15, 1997. This statement establishes standards for the manner in which operating
segments of public reporting entities are presented in interim and annual
financial statements. Holdings and Enterprises believe its current reporting
systems will enable it to comply with the requirements of SFAS No. 131.
SFAS No. 132 "Employers' Disclosures about Pensions and Other
Postretirement Benefits" was issued in February, 1998 and is effective for
periods beginning after December 15, 1997. The Company will adopt SFAS No. 132,
effective for its 1998 fiscal year-end.
These recently issued accounting pronouncements establish
standards for disclosures only and therefore will have no impact our financial
position or results of operations.
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities"
was issued in June, 1998 and is effective for fiscal years beginning after June
15, 1999. SFAS No. 133 requires the recognition of all derivatives in the
consolidated balance sheet as either assets or liabilities measured at fair
value. We will adopt SFAS No. 133, effective for our 2000 fiscal year-end. We
have not yet determined the impact SFAS No. 133 will have on our financial
position or results of operations when such statement is adopted.
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<PAGE>
The B. Manischewitz Company, LLC
Overview
In June 1997, Manischewitz sold its Chicago distribution operation. This
operation had net revenues of $6.7 million, $6.8 million, $6.8 million and $4.1
million for the fiscal years ended July 31, 1997, 1996 and 1995 and for the nine
month period ended April 30, 1997, respectively.
Effective May 31, 1996, The B. Manischewitz Company was reorganized as a
limited liability company. Accordingly, deferred income tax attributes at May
31, 1996 flowed through the provision (benefit) for income taxes. Subsequent to
May 31, 1996, income taxes, if any, are the obligation of the shareholders and
partners of Manischewitz. Therefore, period to period comparisons of the
provision for income taxes are not meaningful.
General
Manischewitz's operating costs and expenses consist of cost of sales and
selling, general and administrative expenses. Cost of sales includes the cost of
products manufactured and purchased by Manischewitz, including raw materials,
co-packing arrangements and manufacturing payroll and related employee benefit
costs. Selling, general and administrative expenses include payroll and related
employee benefit costs of the Manischewitz sales organization, and other general
and administrative functions.
Manischewitz's revenues and net income are affected by a seasonal bias
toward the first quarter of the calendar year due to increased revenues during
the Passover holiday. During the twelve month period ended September 30, 1998,
approximately 54% of Manischewitz's revenues occurred in the first quarter of
the calendar year. As a result of this seasonality, Manischewitz's working
capital requirements have historically increased throughout the year, peaking in
March and April, when Manischewitz's utilization of the revolving credit portion
of its credit agreement is at its highest level.
The following discussion should be read in conjunction with the audited
combined financial statements and the unaudited condensed combined financial
statements of Manischewitz and the accompanying notes.
Nine month period ended April 30, 1998 compared to the nine month period ended
April 30, 1997
Revenues. Total revenues for the nine month period ended April 30, 1998
decreased $1.9 million or 4.1% to $44.5 million, as compared to $46.4 million
for the nine month period ended April 30, 1997. The decrease in revenues was due
to the sale of the Chicago distribution operation in June of 1997, partially
offset by increased sales of matzo, processed fish and noodles.
Gross Profit. Gross profit for the nine month period ended April 30, 1998
was $17.0 million, as compared to $17.9 million for the nine month period ended
April 30, 1997, a decrease of 5.0%. As a percentage of total revenues, the gross
profit margin decreased to 38.3% for the nine month period ended April 30, 1998,
as compared to 38.7% for the nine month period ended April 30, 1997. These
decreases principally resulted from an unfavorable shift in revenue mix to lower
margin products, partially offset by selected price increases in matzo and
matzo-related products.
Selling, General and Administrative Expense. Selling, general and
administrative expenses decreased $0.8 million to $7.7 million for the nine
month period ended April 30, 1998, as compared to $8.5 million for the nine
month period ended April 30, 1997. As a percentage of total revenues, selling,
general and administrative expenses decreased to 17.2% for the nine month period
ended April 30, 1998, as compared to 18.3% for the nine month period ended April
30, 1997. These decreases principally resulted from the sale of the Chicago
distribution operation.
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Interest Expense. Interest expense for the nine month period ended April
30, 1998 decreased $0.3 million to $3.1 million, as compared to $3.4 million for
the nine month period ended April 30, 1997. This decrease resulted from
reductions in the average outstanding balances under the revolving credit
agreement and outstanding term loans.
Net Income. As a result of the revenues, expenses, and other items
described above, net income for the nine month period ended April 30, 1998 was
$6.3 million, as compared to $6.1 million for the nine month period ended April
30, 1997.
Fiscal year ended July 31, 1997 Compared to the fiscal year ended July 31, 1996
Revenues. Total revenues for the fiscal year ended July 31, 1997 increased
$3.4 million, or 6.5% to $55.8 million, as compared to $52.4 million for the
fiscal year ended July 31, 1996. The increase in revenues resulted from
increased sales of matzo, processed fish, noodles and crackers and $1.0 million
of net cash received from the sale of the Chicago distribution operation.
Gross Profit. Gross profit for the fiscal year ended July 31, 1997 was
$22.2 million, as compared to $19.3 million for the fiscal year ended July 31,
1996, an increase of $2.9 million. As a percentage of total revenues, the gross
profit margin increased to 40.1% for the fiscal year ended July 31, 1997, as
compared to 36.9% for the fiscal year ended July 31, 1996. This improvement was
due to selected price increases; the implementation of a consistent and more
limited Passover product return policy; and the net cash received from the sale
of the Chicago distribution operation.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.3 million to $12.4 million for the fiscal
year ended July 31, 1997, as compared to $11.1 million for the fiscal year ended
July 31, 1996. As a percentage of total revenues, selling, general and
administrative expenses increased to 22.4% for the fiscal year ended July 31,
1997, as compared to 21.2% for the fiscal year ended July 31, 1996. The fiscal
year ended July 31, 1997 includes non-recurring provisions for allowances for
doubtful accounts and inventory obsolescence in connection with the sale of the
Chicago distribution operation. Excluding these non-recurring provisions,
selling, general and administrative expenses as a percentage of sales decreased
as a result of increased sales leverage and lower marketing expenses, partially
offset by higher trade promotions.
Interest Expense. Interest expense for the fiscal year ended July 31, 1997
increased $0.8 million to $4.5 million, as compared to $3.7 million for the
fiscal year ended July 31, 1996. This increase was due to an increase in
outstanding debt which resulted from the recapitalization of Manischewitz in
July 1996.
Net Income. As a result of the items described above, income before
provision (benefit) for income taxes, extraordinary item and cumulative effect
of a change in accounting principle for the fiscal year ended July 31, 1997 was
$5.3 million, as compared to $4.5 million for the fiscal year ended July 31,
1996.
Extraordinary Loss on Early Debt Extinguishment. Net income for the fiscal
year ended July 31, 1996 includes an extraordinary item for the early
extinguishment of debt ($2.0 million) relating to the recapitalization referred
to above and the cumulative effect of a change in accounting principle relating
to post retirement benefits ($0.8 million).
Fiscal year ended July 31, 1996 Compared to the fiscal year ended July 31, 1995
Revenues. Total revenues for the fiscal year ended July 31, 1996 increased
$2.8 million or 5.7% to $52.4 million, as compared to $49.6 million for the
fiscal year ended July 31, 1995. The increase in revenues resulted from
increased sales of matzo, processed fish, noodles and crackers.
Gross Profit. Gross profit for the fiscal year ended July 31, 1996 was
$19.3 million, as compared to $18.4 million for the fiscal year ended July 31,
1995, an increase of $0.9 million. As a percentage of total revenues, the gross
profit margin remained relatively unchanged at 36.9% for the fiscal year ended
July 31, 1996, as compared to 37.1% for the fiscal year ended July 31, 1995.
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Selling, General and Administrative Expense. Selling, general and
administrative expenses increased $0.1 million to $11.1 million for the fiscal
year ended July 31, 1996, as compared to $11.0 million for the fiscal year ended
July 31, 1995. As a percentage of total revenues, selling, general and
administrative expenses decreased to 21.2% for the fiscal year ended July 31,
1996, as compared to 22.3% for the fiscal year ended July 31, 1995. This
improvement resulted from increased sales leverage.
Interest Expense. Interest expense for the fiscal year ended July 31, 1996
increased $0.8 million to $3.7 million, as compared to $2.9 million for the
fiscal year ended July 31, 1995. This increase was primarily due to higher
average outstanding borrowings.
Net Income. As a result of the items described above, income before
provision (benefit) for income taxes, extraordinary item and cumulative effect
of a change in accounting principle for the fiscal year ended July 31, 1996 was
$4.5 million, as compared to $4.4 million for the fiscal year ended July 31,
1995.
Extraordinary Loss on Early Debt Extinguishment. Net income for the fiscal
year ended July 31, 1996 includes an extraordinary item for the early
extinguishment of debt ($2.0 million) relating to the recapitalization referred
to above and the cumulative effect of a change in accounting principle relating
to post retirement benefits ($0.8 million).
Financial Condition, Liquidity and Capital Resources
Operations for the fiscal years ended July 31, 1997 and 1996 and the nine
month period ended April 30, 1998 before changes in assets and liabilities
provided cash of $8.0 million, $4.5 million and $8.1 million, respectively.
During the fiscal years ended July 31, 1997 and 1996 and the nine month period
ended April 30, 1998, other changes in assets and liabilities resulting from
operating activities, used cash of $1.5 million, $5.0 million and $5.3 million,
respectively, resulting in net cash provided by (used in) operating activities
of $6.5 million, ($0.5) million and $2.8 million, respectively.
Investing activities provided (used) cash of $0.7 million and ($1.1)
million for the fiscal years ended July 31, 1997 and 1996, respectively. The
investing activities were principally related to the net proceeds from a
distributorship agreement during the fiscal year ended July 31, 1997, the
purchase of equipment during the fiscal year ended July 31, 1996. No cash from
investing activities was generated during the nine month period ended April 30,
1998.
Financing activities used cash of $5.8 million, $2.4 million and $3.9
million for the fiscal years ended July 31, 1997 and 1996 and the nine month
period ended April 30, 1998, respectively. The financing activities were
principally related to:
(1) revolving credit and term loan borrowings and repayments; and
(2) distributions to partners.
Effects of Inflation
For the nine month period ended April 30, 1998 and the fiscal year ended
July 31, 1997, raw material costs, principally flour, were slightly lower than
the comparable periods of the prior year. During these periods, packaging
materials were relatively stable while labor costs rose slightly. To the extent
possible, Manischewitz's objective is to offset the impact of inflation through
productivity enhancements, cost reductions and price increases.
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Business
Overview
Holdings has a growing specialty food business and a strong distribution
network. We believe that Millbrook is one of the U.S.'s largest independent
distributors of specialty foods, health and beauty care products and general
merchandise. We also believe that Manischewitz is one of the U.S.'s largest
manufacturers of branded kosher food products.
The Industry
According to Progressive Grocer, a grocery industry periodical, and
Packaged Facts, a consumer products market research company, U.S. sales of
specialty foods were estimated to be $38.9 billion in 1997, resulting in a
compound annual growth rate of 7.0% from 1992 to 1997, compared with 2.7% for
the overall U.S. grocery industry during the same period. The specialty food
segment consists of ethnic, international, health conscious, diet, vegetarian,
natural and gourmet foods that are generally considered higher quality than
those foods more widely available in the mass market. Within the specialty food
segment, kosher foods are characterized by a stable and loyal customer base of
Jewish consumers. According to Integrated Marketing Communications, Inc., a
kosher food marketing consulting company, this stable base, coupled with
increasing sales of kosher foods to non-Jewish consumers, has contributed to
sales of kosher foods increasing from $2.0 billion in 1992 to $3.3 billion in
1997, representing a compound annual growth rate of 10.2%.
Business Initiatives
Although we believe that the combination of Millbrook and Manischewitz will
provide us with an opportunity to increase sales, revenues and profitability, we
have not yet achieved our goals. Although we cannot assure that any of the
following initiatives will be successful, or if successful, whether they will
contribute significantly to our revenues and profits, we currently plan to:
o Market Manischewitz Products. To take advantage of what we believe
to be the consumer's perception of the qualities associated with kosher
products, we intend to implement several initiatives to increase sales of
Manischewitz products, including:
o increase spending on advertising, marketing and promotion of
existing products and new product offerings;
o selectively use customer advertising, trade promotions and
allowances to stimulate sales; and
o use Millbrook's existing distribution network and retailer
relationships to sell certain of Manischewitz's products with
broad consumer appeal, such as cookies, crackers,
noodles and soups, in the non-kosher aisles of retailers.
o Pursue Strategic Acquisitions. We actively evaluate acquisition
candidates in the specialty food and distribution businesses. We do not
currently have a binding agreement with respect to any acquisition. We believe
that Millbrook's distribution network provides it with opportunities to
capitalize on the acquisition of additional specialty food companies.
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These initiatives will require additional costs, including marketing and
advertising costs, costs of personnel, fees and expenses related to research and
professional services necessary in connection with possible acquisitions. In
addition, the time and energy devoted to implementing any of these initiatives
by senior executives may have an adverse effect on maintaining and increasing
the profitability of our existing businesses. In light of the narrow gross
profit and operating profit margins associated with the distribution industry,
these additional costs could have a material adverse effect on our business.
Competitive Strengths
We believe that the following attributes establish us as a recognizable
name in the specialty food industry:
o Large Distributor of Specialty Foods. We believe that Millbrook is
among the largest specialty food distributors in the U.S. We believe that
Manischewitz is among the largest producers of processed kosher food products in
the U.S. We attempt to differentiate ourselves from other specialty food
distributors through our ability to:
(1) "piece pick" which means to deliver in individual
units versus full cases and which provides retailers
with a wider variety of products with improved space
utilization and reduced inventory investment;
(2) offer health and beauty care products and general
merchandise; and
(3) provide in-store merchandising services.
Additionally, through the Millbrook Retail Solutions division, we provide a
variety of other services, including schematic development, space management,
new store installations, remodeling of existing stores, order writing, stocking,
new item placement and development and management of promotions.
o Recognizable Brand Name. Founded over 100 years ago, we believe
Manischewitz is a recognizable brand name in the kosher products segment of the
U.S. specialty food industry. As a result of the family-oriented tradition of
Manischewitz, we believe that consumers associate the Manischewitz name with
high-quality ingredients and foods prepared in accordance with strict standards.
We believe the market position and brand name recognition of Manischewitz will
help our position within the specialty food industry. Management believes that
recognition of the Manischewitz brand name is approximately 100% among Jewish
households and 80% among non-Jewish households. As a result of its brand name
and loyal customer base, Manischewitz's historical financial performance has
been stable, with revenue increases in each of its last five fiscal years.
o Extensive Distribution Network. The distribution industry is
characterized by large start-up costs required to establish a distribution
network, obtain client relationships and satisfy inventory requirements. These
initial outlays, coupled with the ongoing costs of changing technology and
business trends, are significant barriers to entry for potential market
participants. The ability to compete in the industry is driven primarily by
economies of scale. Management believes that Millbrook's extensive distribution
network provides a means for the growth of its specialty food business.
o Broad Product Offering. We believe the broad product offering of
Millbrook is necessary to compete within the specialty food industry as
retailers prefer distributors with comprehensive product offerings. Manischewitz
provides a broad range of kosher branded products, which management believes
will increase sales and help Millbrook's relationship with retailers.
o Relationships with Suppliers and Retailers. We have a base of over
1,500 supplier relationships and extensive relationships with a number of
leading retailers. Millbrook's top ten customers, which collectively represented
approximately 50% of its revenues during the fiscal year ended March 31, 1998,
have been customers for
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an average of 16 years. We believe that Millbrook has a reputation for
comprehensive product selection, service and broad geographic coverage which has
enabled it to establish its long-term relationships with many of the largest
supermarket chains and mass merchandisers in the U.S.
Business of Millbrook
The Industry
Distributors provide valuable services to both manufacturers of consumer
products and retailers. Manufacturers benefit from distributors' broad retail
coverage, efficient order processing and inventory management. Distributors
provide retailers access to broad product lines, the ability to place small
quantity orders and inventory management. Large distributors with broad
geographic coverage and an extensive offering of items generally have a
competitive advantage.
Due to consolidation over the past several years, the number of
manufacturers and retailers has decreased. Additionally, retailers have
increasingly focused on reducing supply chain costs and improving margins. As a
result, we believe that manufacturers and retailers are increasingly dependent
on distributors to provide a range of in-store retailing and merchandising
functions previously performed by retail and/or manufacturer personnel.
Distributors increasingly are participating in all stages of marketing for the
products distributed, including category management, promotions, schematic
design and display of products. To efficiently provide such services,
technological innovation has become an essential element in the distribution
industry. For smaller distributors, the costs of the required investments in
technology can be prohibitive.
Millbrook is one of only a few distributors that focuses specifically on
the distribution of specialty foods, health and beauty care products and general
merchandise. According to Packaged Facts and Progressive Grocer Annual Reports,
the specialty food segment accounted for an estimated $38.9 billion, or 8.9% of
U.S. grocery sales in 1997. Specialty foods typically generate higher margins
for retailers than those realized on other products sold in supermarkets. As a
result, supermarkets are expected to continue adding new specialty food items to
their product offerings and aggressively promoting such items to capture these
higher margins.
Retailers are employing a number of marketing techniques to increase the
sales of high margin specialty food items. Stores are using kiosks and free
standing displays to attractively present the product to the consumer. In
addition, retailers are beginning to segregate specialty food into specific
categories, such as ethnic foods, cookies and sauces. By utilizing a
"store-within-a-store" approach for specialty food, the products receive prime
shelf space within the store. Merchandising expertise is a key selection
criteria for determining the retailers' choice of a specialty food distributor.
Because of its merchandising expertise and advanced technology in merchandising
services Millbrook is positioned to help its retailers capture the advantages of
this growing product category.
The health and beauty care segment includes baby care, cosmetics,
deodorants, first-aid, hair care, over-the-counter medications, toiletries and
oral hygiene and skin care products. The general merchandise segment covers a
wide variety of non-food products including housewares, pet supplies,
stationery, baby needs, photo and cleaning supplies. Competition in both the
health and beauty care and general merchandise categories has been intense due
to the growth of mass merchandisers that have captured market share by offering
larger assortments at "everyday low pricing." Despite losing market share,
supermarkets have maintained a stable base of customers and are expected to
continue to be a key outlet for health and beauty care products and general
merchandise by expanding product variety and offering consumers one-stop
shopping.
Products Distributed
Through its comprehensive product offering, Millbrook can distribute a wide
variety of products to its customers.
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o Specialty Foods. For the fiscal year ended March 31, 1998,
specialty food sales were approximately $123.2 million and represented 26.2% of
total revenues. Millbrook's specialty food segment consists of more than 8,000
items of ethnic and gourmet foods and more than 2,500 items of natural foods and
supplements. Millbrook offers ethnic foods such as kosher, Asian, Italian,
Irish, Indian, Mexican, Greek and German products, and gourmet foods such as
teas, coffees, spices, baking ingredients, condiments, candies, crackers,
cookies, jams and jellies. Millbrook's natural food products and supplements
include items such as grains, cereals, snacks, beverages, energy bars, baking
ingredients, pasta and sauces.
Millbrook views its specialty food segment as an opportunity for future
growth. Due to the higher margins associated with specialty foods, supermarkets
are expected to continue adding new specialty food items to their product
offerings. To accommodate its retail customers' desire for a broader offering of
specialty foods, Millbrook carries a wide variety of specialty food products.
Management believes that Millbrook's product breadth, together with its
merchandising expertise and advanced technology in merchandising services, will
continue to enable its retail customers to capture the advantages of this
growing product category.
o Health and Beauty Care. The health and beauty care segment has
traditionally been Millbrook's largest segment in terms of sales. For the fiscal
year ended March 31, 1998, health and beauty care sales were approximately
$240.3 million and represented 51.1% of total revenues. Millbrook currently
carries approximately 13,500 health and beauty care items, including a full line
of national brands and private labels. Millbrook's private label health and
beauty care products are offered under its ValuStar(R) brand, which represents
less than 5% of total revenues.
Health and beauty care product offerings have grown due to new product
introductions and the growth in over-the-counter medications. This creates the
need for retailers to maximize variety in minimal shelf space. In recent years
supermarkets, Millbrook's primary customer base, have lost market share in
health and beauty care products to mass merchandisers and drug stores. In
response to this industry shift, Millbrook's strategy has been to expand its
customer base to include companies such as Ames, Super Kmart and Bradlees.
However, supermarkets have begun to recapture lost market share by increasing
the shelf space allocated to health and beauty care items and expanding the
variety of those items carried. Management believes that Millbrook's
capabilities and extensive product selection make it qualified to serve both the
growing mass merchandiser demand and meet the current expanding needs of the
supermarket retailers for health and beauty care items.
o General Merchandise. Millbrook currently carries approximately
11,000 general merchandise items. For the fiscal year ended March 31, 1998,
general merchandise accounted for approximately $106.7 million and represented
22.7% of total revenues. Although the traditional supermarket cannot afford to
devote as much space to the general merchandise category as compared to the mass
merchandisers, supermarkets have the advantage of more frequent customer
traffic. This fact ensures that supermarkets will remain a key outlet for
general merchandise. In addition, targeting certain departments such as pet,
bath and stationery as destination categories adds to the importance of general
merchandise in supermarkets.
Retail Services
Millbrook traditionally has supplemented its product distribution with full
supporting services such as schematic development, space management, new store
installations, remodeling of existing stores, order writing, stocking, new item
placement and development and management of promotions.
Over time, gross profit margins for these services have eroded principally
as a result of the retail phenomenon of "everyday low pricing." As a result,
Millbrook has begun to "unbundle" each of the elements of the full-service
program and use activity-based costing to charge the customer for each
supporting service on a stand-alone basis. In addition, Millbrook has begun to
offer these services without product distribution and to other retail channels.
This
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fundamental change in the packaging of the services Millbrook offers to its
customers resulted in the formation of Millbrook Retail Solutions as a separate
group to focus solely on providing merchandising services.
By using a predominantly part-time, hourly workforce, management believes
Millbrook Retail Solutions has cost advantages over manufacturers and retailers.
Manufacturers and retailers are beginning to realize that the frequency of
in-store merchandising is growing along with the associated costs. Consequently,
outsourcing these functions to a lower cost and more efficient alternative such
as Millbrook Retail Solutions is attractive. Management believes Millbrook
Retail Solutions' experienced personnel, customer base and technology combined
with Millbrook's established infrastructure position Millbrook to compete
effectively in the growing third-party service industry. In particular,
management believes that Millbrook's advanced technology in planogramming and
its category management capabilities enable it to provide service offerings that
are not readily available from the competition.
Customers
Millbrook's top ten customers, which collectively represented approximately
50% of its revenues during the fiscal year ended March 31, 1998, have been
customers for an average of 16 years. For the fiscal year ended March 31, 1998,
supermarkets represented 89% of revenues and mass merchandisers represented 11%
of revenues. From 1995 to 1998, revenues from mass merchandisers increased from
less than 1% to approximately 11%. While Millbrook enjoys long-term
relationships with most of its customers, consistent with industry practice,
substantially all of Millbrook's customer agreements are on a month-to-month
basis. Millbrook has supply agreements with certain of its significant
customers. None of these supply agreements are for a period of greater than
three years.
Suppliers
Millbrook purchases products from the leading suppliers in each of its
business segments. For the fiscal year ended March 31, 1998, the five largest
suppliers in each of Millbrook's three principal business categories were:
(1) for specialty foods, World Finer Foods, BestFoods, T.J.
Lipton, R.C. Bigelow and Motts USA;
(2) for health and beauty care products, Procter & Gamble,
Johnson & Johnson, Gillette, Warner-Lambert and American Home
Products; and
(3) for general merchandise, Rubbermaid, Inc., Hartz Mountain
Corp., Mead, Eveready Battery Company and Eastman Kodak
Company.
The five largest suppliers for specialty foods represented 18% of total
purchases. The five largest suppliers for health and beauty care products
represented 5% of total purchases. The five largest suppliers for general
merchandise represented 6% of total purchases.
Competition
o Specialty Foods. The competition in the specialty foods segment is
fragmented among over 200 distributors, most of which are small and
geographically limited. Supermarkets are constantly demanding increased
specialty food product offerings to entice new consumers into their stores while
retaining existing clientele. This requires distributors to continually monitor
consumer and manufacturer trends with active implementation of category
management programs.
Millbrook is able to compete effectively in the specialty foods segment
based on its breadth of products and its logistics capabilities. Its "piece
pick" capability gives retailers Millbrook's product variety without the
inventory investment in slow-moving, high margin specialty food products. Unlike
most other specialty food distributors, Millbrook offers a single source of
supply for specialty foods, health and beauty care products and general
merchandise.
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This generates transportation and distribution efficiencies for
Millbrook. Millbrook's principal competitors in this segment are Haddon House,
Hagemeyer and Gourmet Awards.
o Health and Beauty Care. Supermarkets historically have placed
health and beauty care products wherever shelf space was available. As
supermarkets do not have the available shelf space to compete with the breadth
of health and beauty care items carried by mass merchandisers, they have become
reliant on delivery and inventory techniques that maximize shelf space and
product variety. Management is of the opinion that Millbrook's "piece pick"
capability and breadth of health and beauty care product assortment allows its
supermarket customers to effectively compete with mass merchandisers in this
product category. Millbrook's principal competitors in this segment are
SuperValu, Fleming and Associated Wholesale Grocers.
o General Merchandise. Supermarkets are refocusing their efforts to
carry general merchandise specifically matched to their customer profiles and
rethinking the manner in which they allocate shelf space to general merchandise.
Management believes product competition in selection and promotion at the retail
level favors distributors such as Millbrook. Millbrook's buying power results in
a large assortment of general merchandise that is continually tailored to meet
its customers and the consumers' specifications. Through Millbrook's "piece
pick" capability, this assortment is available to the retailers without the
required inventory investment and space allocation. Millbrook's principal
competitors in this segment are SuperValu, Fleming and Associated Wholesale
Grocers.
o Retail Services. The retail services industry is competitive and
is predominantly comprised of a large number of small organizations that are
either retailer, channel or region specific. It is the opinion of management
that there are approximately 120 retail service companies competing with
Millbrook Retail Solutions. Management believes that its principal competitors
in the retail service segment include PIA Merchandising, PIMMS, Powerforce and
Spar. The principal competitive factors within the industry include:
(1) breadth and quality of client services;
(2) price;
(3) the ability to execute specific client priorities rapidly and
consistently over a wide geographical region; and
(4) technological compatibility.
Millbrook Retail Solutions' combination of breadth and quality of services
currently available is unique in this industry given its retail-oriented
technology base, extensive experience at the store level and Millbrook's
logistics capabilities.
Management Information Systems and Technology
Millbrook uses a sophisticated management information system which provides
its customers with efficient and cost-effective order management and value-added
marketing and merchandising services. Management believes this gives Millbrook a
competitive advantage over smaller, less technologically sophisticated
distributors. Millbrook's order management services enable it to:
(1) permit customers to utilize Millbrook's integrated inventory
management system for forecasting, distribution requirements
planning and purchasing;
(2) capture customer orders at retail locations, which are
electronically transmitted to Millbrook's operations data
center; and
(3) quickly fill orders and pick, pack and ship those orders
within 24 hours.
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Millbrook's merchandising services provide:
(1) computerized space and shelf management programs for inventory
control;
(2) customer research analysis for better purchasing decisions;
(3) a variety of reporting menus to facilitate analysis of a
particular marketing program's effectiveness; and
(4) computerized merchandising systems that are able to integrate
with customers' existing systems.
In addition, the system's "piece pick" capability gives Millbrook's customers a
large assortment of merchandise without the required inventory investment and
space allocation.
Facilities
Millbrook's corporate headquarters are located in Leicester, Massachusetts,
where management and administrative functions are performed. Millbrook currently
uses five distribution centers:
<TABLE>
<CAPTION>
Approximate Lease
Square Expiration
Property Location Own or Lease Footage Date
- -------- -------- ------------ ------- ----------
<S> <C> <C> <C> <C>
National Support Center/Distribution Center............ Harrison, AR Own 1,200,000 --
Corporate Headquarters/Distribution Center............. Leicester, MA Lease 340,000 11/3/06
Distribution Center.................................... Worcester, MA Lease 220,000 8/31/02
Distribution Center.................................... Ozark, AL Own 210,000 --
Distribution Center.................................... Greenville, NC Lease 110,000 3/31/99
In addition, Millbrook uses 139 transfer depots located in 33 states.
Millbrook owns or leases its fleet of 110 tractors, 250 trailers and
325 vans.
Employees
As of September 30, 1998, Millbrook had a total of 1,900 full-time
employees, 250 part-time employees and the ability to draw upon 1,000 part-time
service merchandisers nationwide. Millbrook believes that its relations with its
employees are generally good.
Litigation
Millbrook is subject to litigation in the ordinary course of its
business. Millbrook is not a party to any lawsuit or proceeding which, in the
opinion of management, is likely to have a material adverse effect on Millbrook.
Business of Manischewitz
The Industry
According to Progressive Grocer, the U.S. grocery industry has been
characterized by relatively stable growth based on modest price and population
increases, with total sales of approximately $436.0 billion in 1997 reflecting a
compound annual growth rate of 2.7% for the five years ended 1997. According to
Integrated Marketing
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Communications, Inc., kosher foods are one of the fastest growing categories of
the specialty food segment and are characterized by a stable base of loyal
consumers represented primarily by the Jewish population. According to
Integrated Marketing Communications, Inc. and Packaged Facts, since 1992 sales
of kosher foods have increased significantly among non-Jewish consumers due to
heightened awareness of the quality of ingredients, rabbinical supervision and
processing techniques used in manufacturing kosher foods, together with growing
interest in healthier foods.
Kosher foods are manufactured in accordance with Jewish dietary laws
which require strict adherence to quality and cleanliness standards. Achieving
such standards requires specialized knowledge and the approval of a designated
kosher certification agency. Due to the production methods used, kosher products
generally are considered to contain higher quality and healthier ingredients and
to have less preservatives. According to Integrated Marketing Communications,
Inc., approximately 40% of the overall kosher category is kosher for Passover
products, which are prepared under more stringent guidelines than other kosher
products.
According to Integrated Marketing Communications, Inc., recently
several national brand food manufacturers have modified products to be kosher
certified with the intent of broadening their appeal and increasing sales. While
such products have contributed to the growth of the number of kosher products
available, they generally are not sold as kosher or kosher for Passover.
Manischewitz believes that it is one of the leading manufacturers of kosher for
Passover products.
Products
Manischewitz's core business consists of traditional products sold
primarily to Jewish consumers. Manischewitz is a manufacturer of products
normally consumed during certain Jewish holidays, primarily Passover, which
occurs during the spring, and Rosh Hashanah, which occurs during the fall.
Manischewitz believes that, among the Jewish population, approximately 100%
recognize the Manischewitz brand name and 90% have tried one or more
Manischewitz products. Manischewitz believes that, among the non-Jewish
population, approximately 80% are familiar with the Manischewitz brand name and
over 50% have tried one or more Manischewitz products.
Manischewitz has built its brand awareness and consumer base by
offering a broader assortment of products that can be consumed throughout the
year, as well as continued to expand its product offerings to accommodate
changing tastes and the popularity of various food items. Manischewitz's new
product offerings include macaroons with "ice cream" flavors, rice pilafs,
various soup mixes and snack items. Many of the new product offerings are
intended to appeal to the mainstream population to expand the customer base for
Manischewitz's product line.
Manischewitz also licenses its name to other entities for use in the
manufacture, distribution and sale of certain kosher products including wine,
bread, seltzer water and confectionery products. In fiscal 1997, licensing
represented approximately 1% of total revenues.
o Baked Products. Baked products include daily matzo, Passover
matzo, which is produced at more exacting standards dictated by religious tenets
for Passover, and crackers. All of these products are baked at Manischewitz's
Jersey City, New Jersey facilities. Matzo products in this segment are sold
under the Manischewitz, Horowitz Margareten and Goodman's brand names. Matzo
sales generated approximately 27% of Manischewitz's total revenues in fiscal
1997. Manischewitz has a license agreement with Goodman's to use its name on
matzo products and matzo-related products through 2003. In fiscal 1997, matzo
products and matzo-related products sold under the Goodman's name represented
approximately 2% of total revenues.
o Manufactured Products. Manufactured products consist of a variety
of fish, soups, borscht and other processed foods. The principal product in this
segment is gefilte fish, a blended combination of whitefish, pike and carp
manufactured at Manischewitz's Vineland, New Jersey facility. Gefilte fish
constitutes the second largest product line for Manischewitz and accounted for
approximately 13% of its total revenues in fiscal 1997.
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<PAGE>
o Co-Packed Products. Manischewitz markets a number of co-packed
products, including cookies, confectionery products, noodles, pasta and dry
mixes under the Manischewitz, Horowitz Margareten and Goodman's brand names.
Manischewitz also markets a variety of dry soup mixes which are manufactured by
outside entities. Manischewitz expects to continue to employ co-packers as a
capital efficient means of bringing its new products to market.
Marketing and Product Development
In fiscal 1997, spending on marketing and trade promotion represented
approximately 7% of total revenues. This is an increase over previous years.
However, as a percentage of revenue, management believes that marketing and
trade promotion expenses have historically remained substantially below other
food manufacturers. Marketing has been restricted to its core market and,
accordingly, spending has been limited and is generally equal to approximately
2% of revenues. As part of its business strategy, management intends to
significantly increase spending on advertising, marketing and promotion of
Manischewitz's existing products and new product offerings.
During the last few years, the Manischewitz product line has been
expanded to strengthen and broaden its popular appeal. Packaging has been
updated to better communicate good taste and high quality and enhance visibility
on store shelves. Manischewitz has introduced no-fat and low-fat items to
reinforce the positive health aspects of its products. Where appropriate,
recipes have been improved and new flavors introduced. In addition, Manischewitz
has introduced new products targeted at both Jewish and non-Jewish consumers and
has begun to capitalize on the positive Manischewitz brand image among
consumers. In fiscal 1997, new products introduced since 1993 generated
approximately 17% of Manischewitz's total revenues.
Distribution
Manischewitz principally sells its products to independent distributors
operating throughout the U.S. and Canada. Two of its independent distributors
represented approximately 31% of total revenues in fiscal 1997. Among its
customer base, supermarkets represented approximately 90% of Manischewitz's
fiscal 1997 total revenues and other customers represented approximately 10%.
Management believes that Manischewitz's five largest supermarket customers are
American Stores, Ralph's, ShopRite, Pathmark and A&P. In addition, Manischewitz
has developed a marketing arrangement with Wal-Mart to carry Manischewitz's
products in its supercenters and general merchandise stores.
Management estimates that its products are sold in a majority of the
supermarkets throughout the U.S. Due to their importance to Jewish consumers
Manischewitz products are "must carry" items for many supermarkets in the U.S.
Management intends to seek to obtain shelf space sections from supermarkets
other than in the kosher aisle. The ability to display Manischewitz's products
in the non-kosher supermarket aisles for products such as cookies, crackers,
noodles and sauces will enhance awareness of Manischewitz products, particularly
among the non-Jewish consumer. To support these efforts, management intends to
increase promotional and advertising expenditures to enhance product presence
and increase sales.
Competition
Manischewitz competes within a small group of branded kosher
manufacturers in which it has increased its market shares over many years. In
the matzo category, all of the domestic producers have been in the industry for
over 80 years. Manischewitz's brand names, the complexities of complying with
kosher manufacturing requirements and the relatively modest size of the market
have all contributed to the stability of the competitive environment faced by
Manischewitz. Unlike most food manufacturers, Manischewitz presently does not
face competition in its core products from any private label products because of
the unique knowledge and processes involved in manufacturing kosher food. This
lack of private label competition gives Manischewitz flexibility with respect to
pricing its core products. Management's business strategy includes promoting and
marketing Manischewitz products in the non-kosher aisles of supermarkets.
However, outside the kosher aisle, Manischewitz products will compete with the
products of a
-49-
<PAGE>
significant number of companies of varying sizes, including divisions or
subsidiaries of larger companies. Many of these competitors have multiple
product lines as well as substantially greater financial and other resources
available to them.
Manischewitz's major competitor in the production and distribution of
matzo is Streit's, a family-owned regional marketer limited primarily to the New
York area.
Within the gefilte fish market, Manischewitz competes with Rokeach and
its related brands, including Mothers, Old Vienna and Mrs. Adlers.
Management believes that Manischewitz's loyal customer base and name
recognition make the brand less vulnerable to competition with respect to its
core products.
Raw Materials
Manischewitz utilizes a variety of basic raw materials in the
manufacture of its matzo and matzo-related products, principally flour.
Manischewitz also utilizes significant quantities of various fish in the
manufacture of its gefilte fish. Supplies of these ingredients are readily
available from a number of sources and are purchased based on price.
Trademarks
Manischewitz owns a number of registered trademarks in the U.S.,
Canada, Europe, Israel, South Africa and South America. The registered
trademarks in the U.S. include Manischewitz(Registered), Horowitz
Margareten(Registered),Onion Tams(Registered), Passover Pantry(Registered), Tam
Tam(Registered), Vege-Matzo(Registered), Wheat Tams(Registered), Design Star of
David(Registered) and Star of David & Lion Design(Registered). Manischewitz has
granted exclusive licenses in connection with the manufacture and sale of wine,
vinegar and certain flavored juice products, seltzer, kosher packaged rye and
pumpernickel breads and rolls and pickle products. Such licenses are limited in
scope to certain territories and entitle Manischewitz to royalties based on the
net sales or revenues of the licensed products sold. Management is not aware of
any facts that would have a material adverse impact on the continued use of any
of its trademarks and trade names.
Facilities
Manischewitz's corporate headquarters are located in Jersey City, New
Jersey, where management and administrative functions are performed.
Manischewitz occupies the following properties, all of which are used in
connection with its food business:
</TABLE>
<TABLE>
<CAPTION>
Approximate Lease
Square Expiration
Property Location Own or Lease Footage Date
- -------- -------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Bakery................................................. Jersey City, NJ Own 86,000 --
Manufacturing facility................................. Vineland, NJ Own 67,700 --
Warehouse.............................................. Jersey City, NJ Lease 43,500 8/31/00
Office................................................. Jersey City, NJ Lease 9,600 8/31/00
</TABLE>
The Jersey City, New Jersey bakery operates on a two-shift basis during
three months of the year and a three-shift basis for seven months of the year.
Each shift consists of eight hours. The plant, which has computerized production
equipment, is shut down for the month of July for maintenance and in August to
prepare the plant to meet the kosher requirements for Passover.
-50-
<PAGE>
The Vineland, New Jersey manufacturing and warehousing facility is
located on a five-acre site. It has the capacity to produce 11,000 pounds of
processed food per shift. The facility operates on a single shift basis
throughout the year, with its primary maintenance period in April.
Employees
As of September 30, 1998, Manischewitz had a total of 220 full-time
employees and 30 part-time employees. Manischewitz believes its relations with
its employees are generally good.
Litigation
Manischewitz is subject to litigation in the ordinary course of its
business. Manischewitz is not a party to any lawsuit or proceeding which, in the
opinion of management, is likely to have a material adverse effect on
Manischewitz.
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<PAGE>
Management
Directors and Executive Officers of Holdings and Enterprises
The directors and executive officers of Holdings and Enterprises, and
where indicated, the senior executive officer of each of Manischewitz and
Millbrook is as set forth in the table below:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- ---------
<S> <C> <C>
Richard A. Bernstein*............................ 52 Chairman, President, Chief Executive Officer and
Director
Lewis J. Korman*................................. 53 Vice Chairman and Director
Steven M. Grossman*.............................. 37 Executive Vice President, Chief Financial Officer,
Treasurer and Director
James A. Cohen, Esq.*............................ 53 Senior Vice President - Legal Affairs and Secretary
and Director of Enterprises
Ira A. Gomberg*.................................. 55 Senior Vice President
Hal B. Weiss*.................................... 41 Assistant Treasurer
Richard H. Hochman............................... 53 Director of Holdings
Jenny Morgenthau................................. 55 Director of Holdings
Michael A. Pietrangelo........................... 52 Director of Holdings
</TABLE>
* Titles of these individuals are the same for Holdings and Enterprises
unless otherwise specified.
<TABLE>
<S> <C> <C>
Senior executive officer of Millbrook:
Robert A. Sigel............................ 45 President and Chief Executive Officer of Millbrook
Senior executive officer of Manischewitz:
Dennis M. Newnham.......................... 58 President and Chief Executive Officer of Manischewitz
</TABLE>
Richard A. Bernstein has served as Chairman, President and Chief
Executive Officer of Holdings and Enterprises and as a director of Enterprises
since its inception in March, 1998 and of Holdings since its inception in
December, 1996. In addition to his positions with Holdings and Enterprises, Mr.
Bernstein is a member of the Board of Directors and Chairman of Millbrook. Mr.
Bernstein is Chairman and Manager of RABCO Luxury Holdings, LLC, a New York
limited liability company, a diversified holding entity for luxury products,
which has the exclusive right, through its subsidiary, Breguet, LLC to
distribute Breguet(Registered) watches and time pieces in the United States,
Canada, Mexico, Central and South America, and throughout the Caribbean. Mr.
Bernstein is also President of P&E Properties, Inc., a private commercial real
estate ownership/management company of which Mr. Bernstein is the sole
shareholder. Mr. Bernstein was the Chairman and Chief Executive Officer and a
director of Western Publishing Group, Inc. from 1984 to May 1996. Mr. Bernstein
also served as Chairman of the Board and Chief Executive Officer of RABCO Health
Services, Inc. and General Medical Corporation, a medical and surgical supply
distribution company, from April 1987 through August 1993, and Chairman and
Chief Executive Officer of Harris Wholesale Company, a pharmaceutical and health
and beauty care distribution company, from 1989 through May 1992. Mr. Bernstein
devotes substantial time to other business and charitable activities.
-52-
<PAGE>
Lewis J. Korman has been Vice Chairman of Holdings and Enterprises
since their inception and is a director of Holdings and Enterprises. Mr. Korman
is also an advisor to a company engaged in the marketing and distribution of
products designed to enhance wellness and beauty. He also serves as a consultant
to companies engaged in financial transactions in the motion picture industry.
Mr. Korman also is involved in the structuring of entrepreneurial transactions
in the entertainment industry. Prior to joining Holdings in January 1997, Mr.
Korman was President and Chief Operating Officer of Savoy Pictures
Entertainment, Inc. from its founding in 1992 until its merger with Silver King
Communications, Inc. in December 1996. Prior thereto, Mr. Korman was Senior Vice
President and Chief Operating Officer of Columbia Pictures Entertainment, Inc.
and Chairman of its Motion Picture Group until its sale to Sony Corporation at
the end of 1989.
Steven M. Grossman has been Executive Vice President, Chief Financial
Officer and Treasurer and a director of Holdings and Enterprises since their
inception. In addition to his positions with Enterprises and Holdings, Mr.
Grossman is Executive Vice President--Finance and Administration of Millbrook
and the Executive Vice President, Chief Financial Officer and Treasurer of
Manischewitz. Mr. Grossman is also Executive Vice President and Chief Financial
Officer of RABCO and Breguet and Chief Financial Officer of P&E Properties. Mr.
Grossman was Executive Vice President and Chief Financial Officer of Western
Publishing Group, Inc. from June 1994 to May 1996 and Vice President--Financial
Planning of Western Publishing Group, Inc. from July 1992 to June 1994 and of
RABCO Health Services, Inc. from July 1992 to August 1993.
James A. Cohen, Esq. has been Senior Vice President--Legal Affairs and
Secretary of Holdings and Enterprises since their inception and is a director of
Enterprises. In addition to his positions with Enterprises and Holdings, Mr.
Cohen is the Senior Vice President--General Counsel of Millbrook and
Manischewitz. Mr. Cohen is also Senior Vice President--Legal Affairs of RABCO
and Breguet and a senior executive of P&E Properties. Mr. Cohen was Senior Vice
President--Legal Affairs and Secretary of Western Publishing Group, Inc. from
1984 to May 1996 and Senior Vice President-- Legal Affairs and Secretary of
RABCO Health Services, Inc. from April 1987 through August 1993.
Ira A. Gomberg has been Senior Vice President of Enterprises and
Holdings since their inception. In addition to his position with Enterprises and
Holdings, Mr. Gomberg is a Senior Vice President of Millbrook and Manischewitz.
Mr. Gomberg is also Senior Vice President of RABCO and Breguet and a senior
executive of P&E Properties. Mr. Gomberg was Vice President of Western
Publishing Group, Inc. from 1986 to May 1996 and Executive Vice President of
RABCO Health Services, Inc. from April 1987 through August 1993.
Hal B. Weiss has been Assistant Treasurer of Enterprises and Holdings
since their inception. In addition to his position with Enterprises and
Holdings, Mr. Weiss is a Vice President and Assistant Treasurer of Millbrook and
Manischewitz. Mr. Weiss is also the Assistant Treasurer of RABCO and Breguet and
Controller of P&E Properties. Mr. Weiss served as Assistant Treasurer of Western
Publishing Group, Inc. from 1990 through May 1996 and Assistant Treasurer of
RABCO Health Services, Inc. from April 1987 through August 1993.
Richard H. Hochman is Chairman of Regent Capital Management Corp., a
private investment company, making equity and mezzanine investments in
companies, and has served in that capacity since April 1995. From 1990 through
April 1995, he was a Managing Director of the Corporate Finance Department of
PaineWebber Incorporated and served as a member of its Debt and Equity
Commitment Committees. Prior
-53-
<PAGE>
to joining PaineWebber, Mr. Hochman served as a Managing Director of Drexel
Burnham Lambert, Inc. from 1984 through 1990. Mr. Hochman also serves on the
Board of Directors of Cablevision Systems Corp. and Lite-Flite, Ltd.
Jenny Morgenthau has been Chief Executive Officer of The Fresh Air
Fund, one of New York's preeminent charitable corporations, for more than the
past five years. Prior to joining The Fresh Air Fund, Ms. Morgenthau worked for
New York City's Special Services for Children, the Department of City Planning
and the New York State Urban Development Corporation. Ms. Morgenthau serves on
the board of directors of a number of charitable and cultural organizations.
Michael Pietrangelo is a partner in the Memphis, Tennessee law firm of
Pietrangelo Cook PLC, which he joined in February 1998. Previously, Mr.
Pietrangelo was President of Johnson Products Co., a subsidiary of IVAX
Corporation that manufactured and sold cosmetic and health and beauty care
products, principally intended for the African-American consumer. Mr.
Pietrangelo also has held a number of executive positions in the consumer
products industry at Schering-Plough Corporation, including President of the
Personal Care Products Group, and has served as President and Chief Operating
Officer of Western Publishing Group, Inc. and President and Chief Executive
Officer of Cleo, Inc., a subsidiary of Gibson Greetings, Inc.
Robert A. Sigel has been President, Chief Executive Officer and
director of Millbrook since it was acquired by Holdings from McKesson in March
1997. Mr. Sigel has been associated with Millbrook's business since 1977, having
served as Vice President, Sales and Merchandising, Executive Vice President,
President and Chief Executive Officer of Millbrook Distributors, Inc. and
President and Chief Executive Officer of the service merchandising division of
McKesson, which became the current Millbrook. From 1995 through March 1997 Mr.
Sigel also served as a Corporate Vice President of McKesson and on McKesson's
Management Board.
Dennis M. Newnham has been President and Chief Executive Officer of
Manischewitz since January 1999. Mr. Newnham was the President and Chief
Executive Officer of Tsumura International, a manufacturer of personal care and
fragrance products and served in such capacities from March 1996 through
December 1998. In 1995 Mr. Newnham served as Chairman, President and Chief
Executive Officer of Adirondack Beverages, Inc., one of the largest independent
soft drink bottlers in the Northeast. From April 1983 through March 1994, Mr.
Newnham served as Chairman, President and Chief Executive Officer of Lea &
Perrins, Inc., a specialty foods company. Mr. Newnham also serves as a member of
the Board of Directors of United Water Resources and NutraMax Products, Inc.
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<PAGE>
Compensation for Executive Officers
The following table sets forth the compensation earned or paid,
including deferred compensation of the Chief Executive Officer and the most
highly compensated executive officers of Holdings, Enterprises, Manischewitz and
Millbrook for services rendered for the fiscal year indicated.
None of Holdings, Enterprises, Manischewitz or Millbrook pays a salary
to Mr. Bernstein. Enterprises reimburses P&E Properties for personal services,
including executive services rendered by certain of its executive officers. The
services provided are based upon the number of hours incurred at the applicable
pay rate for each executive officer. For the fiscal year ended March 31, 1998,
P&E Properties received a management fee of $400,000 from Millbrook and
Enterprises reimbursed P&E Properties $800,000 for personal services. Although
Mr. Bernstein does not receive any salary from P&E Properties, a portion of
these amounts may be deemed indirect compensation to Mr. Bernstein. See "Certain
Transactions -- Related Party Transactions" on page 56.
None of Holdings, Enterprises, Manischewitz or Millbrook pays a salary
to Messrs. Grossman or Cohen. Messrs. Grossman and Cohen receive a salary from
P&E Properties for executive services rendered to Holdings and Enterprises.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------ ----------------------------
Other Annual
Compensation Options/SARs
Name and Principal Position Year(1) Salary ($) Bonus($) ($) (#)
- --------------------------- ------- ---------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Holdings and Enterprises
Richard A. Bernstein..................... 1998 $ -- $ -- $ -- --
Chairman, President and Chief 1997 -- -- -- --
Executive Officer
Steven M. Grossman....................... 1998 $178,750 $ -- $ 9,200 --
Executive Vice President, 1997 -- -- -- --
Chief Financial Officer and
Treasurer
James A. Cohen........................... 1998 $120,000 $ -- $ 8,400 --
Senior Vice President - Legal 1997 -- -- -- --
Affairs and Secretary
Millbrook
Robert A. Sigel.......................... 1998 $355,623 $82,330(2) $ 8,228(3) --
Chief Executive Officer 1997 $220,000 $ 4,099 $ 9,000(3) --
and President of Millbrook 1996 $206,731 $15,169 $ 9,181(3) --
</TABLE>
(1) Holdings and Enterprises had no operations prior to April 1, 1997.
(2) During the fiscal year ended March 31, 1998, Mr. Sigel was paid a bonus of
$82,330 which was earned during the fiscal year ended March 31, 1997.
(3) Other Annual Compensation excludes any amounts paid to Mr. Sigel, in his
capacity as a Corporate Vice President of McKesson Corporation.
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<PAGE>
Certain Transactions
Voting Agreement
Mr. Bernstein is a party to a voting agreement with each of the holders
of the series A preferred stock and common stock of Holdings. Under the voting
agreement these stockholders agreed to vote all of their shares of series A
preferred stock and common stock as Mr. Bernstein directs or, if Mr. Bernstein
does not give direction, in a manner consistent with the manner in which he
votes his shares of series A preferred stock and common stock. The voting
agreement also provides that the stockholders shall execute any written consent
of holders of series A preferred stock or common stock as Mr. Bernstein directs
or, if Mr. Bernstein does not give direction, in a manner which is consistent
with his vote or written consent on the matter. The stockholders shall not
execute any other consent of holders of series A preferred stock or common
stock.
In the event that a stockholder fails to comply with the voting
provisions above, Mr. Bernstein holds a proxy to vote the stockholder's shares
or execute a written consent in any manner as he may determine in his
discretion. Under the voting agreement, Mr. Bernstein shall not be liable to any
stockholder or anyone making a claim under that stockholder as a result of any
vote or the exercise of any proxy by Mr. Bernstein. This is true even if that
vote or exercise of proxy adversely affects, or results in the decrease in the
value of, such stockholder's shares.
The voting agreement shall terminate on the earliest of:
(1) the date a stockholder, and that stockholder's heirs, personal
representatives, donees and trustees of any trusts in which
that stockholder has an interest, during the stockholder's
life or when he or she dies, ceases to own any of the shares
of Holdings;
(2) the date on which the common stock of Holdings is listed or
admitted to trade on any national securities exchange or is
quoted on the Nasdaq system or similar means; and
(3) 10 years from the date of the voting agreement.
The voting agreement is binding on the stockholder's successors, heirs, personal
representatives, donees and trustees of any trust in which the stockholder has
an interest, during the stockholder's life or when he or she dies. Mr. Bernstein
and his successor(s) including his heirs, personal representatives and the
trustees of any trust in which he has an interest, during his life or created
upon his death, shall receive the benefits of the voting agreement. Therefore,
the stockholder shall vote his or her shares and execute written consents as Mr.
Bernstein's successor(s) may designate.
Related Party Transactions
At the time of the acquisition of Millbrook by Holdings and the
acquisition of Manischewitz by Enterprises, Millbrook and Manischewitz entered
into separate arrangements with P&E Properties, Inc.,an entity of which Mr.
Bernstein is the sole shareholder. In this agreement, Millbrook agreed to pay a
quarterly management fee of $100,000 and Millbrook and Manischewitz agreed to
reimburse P&E Properties for reasonable services and out-of-pocket and other
expenses incurred on Millbrook's and Manischewitz's behalf. These services
include among other things, treasury, cash management, certain financial
reporting, legal, labor and lease negotiation and employee benefits
administration. For the six month period ended September 30, 1998, P&E
Properties was reimbursed $400,000 for reasonable services provided to
Millbrook. For the fiscal year ended March 31, 1998, P&E Properties was
reimbursed $800,000 for
-56-
<PAGE>
reasonable services provided to Millbrook. Enterprises reimburses P&E Properties
for personal services, including executive services, rendered by certain of its
executive officers. Mr. Bernstein does not receive a salary from P&E Properties.
Messrs. Grossman and Cohen receive a salary from P&E Properties for executive
services rendered to Holdings, Enterprises, Millbrook and Manischewitz. The
reasonable services provided are based upon:
(1) the number of hours incurred at the applicable pay rate; and
(2) out-of-pocket expenses, related to the services provided.
In the opinion of management, this methodology provides a reasonable basis for
such allocation. In addition, each of Holdings, Enterprises, Millbrook and
Manischewitz believe that the terms of the arrangement with P&E Properties were
no less favorable than could have been obtained from unaffiliated third parties
on an arm's length basis.
Shareholders Agreements
Each employee of Millbrook or Manischewitz who owns shares of the
common stock of Holdings is a party to a shareholders agreement with Holdings.
These agreements prohibit transfer of such shares other than to a member of the
employee shareholder's immediate family or a trustee of a trust for the benefit
of the employee shareholder or his immediate family. In the event of termination
of the employee shareholder's employment Holdings has the option or obligation
to purchase all the employee shareholder's shares at prices not greater than the
fair market value.
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<PAGE>
Securities Ownership of Certain Beneficial Owners
The following table contains, as of November 30, 1998, information
regarding the beneficial ownership of the common stock and preferred stock of
Holdings:
(1) by each person who is known by Holdings to own beneficially
more than 5% of the outstanding shares of common stock or
preferred stock of Holdings;
(2) by each of the directors and executive officers of Holdings;
and
(3) by all directors and executive officers of Holdings as a group.
Based on information furnished by those owners, we believe that the beneficial
owners of the securities listed below have investment and voting power for all
the shares of common stock and preferred stock of Holdings shown as being
beneficially owned by them. The securities are governed by the voting agreement
described under the heading "Certain Transactions--Voting Agreement." on page
56. Holdings owns 200 shares of the common stock of Enterprises, which
represents all of the issued and outstanding capital stock of Enterprises.
<TABLE>
<CAPTION>
Number of Percentage Number of Shares
Shares of of Total of Series A
Common Stock of Shares of Preferred Stock
Holdings Common of Holdings
Name of Beneficially Stock of Beneficially
Beneficial Owner Owned Holdings Owned
- ---------------- --------------- --------- ----------------
<S> <C> <C> <C>
Richard A. Bernstein......................................... 42,500 41.3% 10,000
Robert A. Sigel.............................................. 6,600 6.4 200
James A. Cohen, Esq.......................................... 3,610 3.5 120
Steven M. Grossman........................................... 3,490 3.4 80
Lewis J. Korman.............................................. 3,450 3.4 400
Ira A. Gomberg............................................... 2,850 2.8 200
Hal B. Weiss................................................. 1,460 1.4 120
Richard H. Hochman........................................... 1,200 1.2 400
Michael A. Pietrangelo....................................... 360 .3 120
Jenny Morgenthau............................................. 300 .3 100
All directors and executive officers as a group
(10 persons)................................................. 65,820 64.0% 11,740
<CAPTION>
Name of Address of
Beneficial Owner Beneficial Holder
- ---------------- -----------------
<S> <C>
Richard A. Bernstein
James A. Cohen, Esq.
Steven M. Grossman
Lewis J. Korman c/o R.A.B. Holdings, Inc.
Ira A. Gomberg 444 Madison Avenue, Suite 601
Hal B. Weiss................................................. New York, New York 10022
</TABLE>
-58-
<PAGE>
<TABLE>
<CAPTION>
Name of Address of
Beneficial Owner Beneficial Holder
- ---------------- -----------------
<S> <C>
Robert A. Sigel.............................................. c/o Millbrook Distribution Services Inc.
Route 56
88 Huntoon Memorial Highway
Leicester, Massachusetts 01524
Richard H. Hochman........................................... Regent Capital Management Corp.
505 Park Avenue, 17th Floor
New York, New York 10022
Michael A. Pietrangelo....................................... Pietrangelo Cook PLC, Suite 190
International Plaza
6410 Poplar
Memphis, Tennessee 38119
Jenny Morgenthau............................................. c/o The Fresh Air Fund
1040 Avenue of the Americas
New York, New York 10018
</TABLE>
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<PAGE>
The Exchange Offers
Purpose and Effect
On May 1, 1998, Holdings and Enterprises sold notes to Chase
Securities, Inc. In connection with the sale of notes, we entered into exchange
and registration rights agreements with Chase. These agreements require that we
register the notes with the Commission and offer to exchange the new registered
notes for your notes sold on May 1, 1998.
The registration rights agreements further provide that we shall use
our best efforts to cause the registration statement to be declared effective on
or before December 27, 1998, or we may owe liquidated damages, or a fixed sum of
money, to the current note holders. We believe we have used our best efforts to
cause the registration statement to be declared effective on or before December
27, 1998. Except as discussed below, upon the completion of the exchange offers
we will have no further obligations to register your notes.
We want to advise you that a copy of each registration rights agreement
has been filed as an exhibit to the registration statement and we strongly
encourage you to read the entire text of the applicable registration rights
agreement. We expressly qualify all of our discussions of the registration
rights agreements by the terms of the agreements themselves.
We need representations from you before you can participate in an
exchange offer
In order to participate in an exchange offer, we require that you
represent to us that:
o you are acquiring the new notes in the ordinary course of
business;
o neither you nor any such other person is engaging in or
intends to engage in a distribution of the new notes;
o neither you nor any such other person has an arrangement or
understanding with any person to participate in the
distribution of the new notes;
o neither you nor any such other person is our "affiliate," as
defined under Rule 405 of the Securities Act; and
o if you or such other person is a broker-dealer, you will
receive new notes for your own account, your new notes were
acquired as a result of market-making activities or other
trading activities, and you will be required to acknowledge
that you will deliver a prospectus in connection with any
resale of your new notes.
You may be entitled to shelf registration rights
In accordance with the registration rights agreements, we are also
required to file a "shelf" registration statement for a continuous offering in
accordance with Rule 415 of the Securities Act which means that we must file a
second registration statement to register your notes if:
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o we are not permitted to effect an exchange offer because of
any change in law or applicable interpretations of the staff
of the Commission;
o we do not consummate the exchange offer by December 27, 1998;
o you request us to do so following the exchange offer;
o any applicable law or interpretations do not permit you to
participate in an exchange offer;
o you do not receive freely transferrable notes in exchange
for your notes; or
o we so elect.
In the event that we are obligated to file a "shelf" registration statement, we
will be required to keep such shelf registration statement effective for up to
two years. Other than as described above, no holder will have the right to
participate in the shelf registration or require that we register your notes in
accordance with the Securities Act.
If you participate in an exchange offer, you should be able to freely
sell or transfer your new notes
If you make the representations that we discuss above, we believe that
you may offer, sell otherwise transfer the new notes to another party without
registration of your notes or of a prospectus.
We base our belief upon existing interpretations by the Commission's
staff contained in several "no-action" letters to third-parties unrelated to us.
If you tender your notes in an exchange offer for the purpose of participating
in a distribution of new notes you cannot rely on this interpretation by the
Commission's staff and you must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction. Each broker-dealer that receives new notes for its own
account in exchange for its notes, whether the notes were acquired by that
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such new notes.
You may suffer adverse consequences if you fail to exchange your notes
Following the completion of the exchange offers, except as set forth
above and in the registration rights agreements we refer to, you will not have
any further registration rights and your notes will continue to be subject to
certain restrictions on transfer. Accordingly, if you do not participate in an
exchange offer, your ability to sell your notes could be adversely affected.
Terms of the Exchange Offers
We will accept any validly tendered notes which are not withdrawn prior
to 5:00 p.m., New York City time, on the expiration date. We will issue $1,000
principal amount of new notes in exchange for each $1,000 principal amount of
your notes. Holders may tender some or all of their notes in an exchange offer.
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The form and terms of the new notes will be the same as the form and
terms of your notes except that:
(1) interest on the new notes will accrue from the last interest
payment date on which interest was paid on your note, or, if
no interest was paid, from the date of the original issuance
of your note; and
(2) the new notes have been registered under the Securities Act
and will not bear a legend restricting their transfer.
This prospectus, together with the letter of transmittal you received
with this prospectus, is being sent to you and to others believed to have
beneficial interests in the notes. You do not have any appraisal or dissenters'
rights under the General Corporation Law of the State of Delaware or under the
indentures governing your notes. We intend to conduct the exchange offers in
accordance with the requirements of the Securities Exchange Act of 1934 and the
rules and regulations of the Commission.
We will have accepted your validly tendered notes when we have given
oral or written notice to the exchange agent. The exchange agent will act as
agent for the tendering holders for the purpose of receiving the new notes from
us. If the exchange agent does not accept any tendered notes for exchange
because of an invalid tender or other valid reason, the exchange agent will
return the certificates, without expense, to the tendering holder as promptly as
practicable after the expiration date.
You will not be required to pay brokerage commissions, fees, or
transfer taxes in the exchange of your notes. We will pay all charges and
expenses other than any taxes you may incur in connection with the exchange
offers.
Expiration Date; Extensions; Amendments
The exchange offer will expire at 5:00 p.m., New York City time, on
March 22, 1999, unless we extend it. In any event, we will hold each exchange
offer for at least thirty days. In order to extend an exchange offer, we will
issue a notice by press release or other public announcement prior to 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
expiration date.
We reserve the right, in our sole discretion:
o to delay accepting your notes;
o to extend either of the exchange offers;
o to terminate an exchange offer if any of the conditions
shall not have been satisfied by giving oral or written
notice of such delay, extension or termination to the
exchange agent; or
o to amend the terms of an exchange offer in any manner.
Procedures for Tendering Your Notes
Only you may tender your notes in an exchange offer. Except as stated
on page 65 under the heading "The Exchange Offers -- Book Entry Transfer," to
tender in an exchange offer, you must:
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(1) complete, sign and date the enclosed letter of transmittal,
or a copy of it;
(2) have the signature on the letter of transmittal guaranteed if
required by the letter of transmittal; and
(3) mail, fax or otherwise deliver the letter of transmittal or
copy to the exchange agent.
In addition, either:
(1) the exchange agent must receive certificates for your notes
and the letter of transmittal; or
(2) the exchange agent must receive a timely confirmation of a
book-entry transfer of your notes, if that procedure is
available, into the account of the exchange agent at the DTC
(the "Book-Entry Transfer Facility") under the procedure for
book-entry transfer described below; or
(3) you must comply with the guaranteed delivery procedures
described below.
For your notes to be tendered effectively, the exchange agent must receive a
letter of transmittal and other required documents prior to the expiration date.
If you do not withdraw your tender before the expiration date, it will
constitute an agreement between you and us in accordance with the terms and
conditions in this prospectus and in the letter of transmittal.
The method of delivery of your notes, a letter of transmittal, and all
other required documents to the exchange agent is at your election and risk.
Instead of delivery by mail, we recommend that you use an overnight or hand
delivery service. In all cases, you should allow sufficient time to assure
delivery to the exchange agent before the expiration date. Do not send a letter
of transmittal or notes directly to us. You may request your respective brokers,
dealers, commercial banks, trust companies, or nominees to make the exchange on
your behalf.
Procedure if the notes are not registered in your name
Any beneficial owner whose notes are registered in the name of a
broker, dealer, commercial bank, trust company, or other nominee and who wishes
to tender should contact the registered holder promptly and instruct the
registered holder to tender on the beneficial owner's behalf. If the beneficial
owner wishes to tender on the owner's own behalf, the owner must, prior to
completing and executing a letter of transmittal and delivering the owner's
notes, either make appropriate arrangements to register ownership of the notes
in the beneficial owner's name or obtain a properly completed bond power or
other proper endorsement from the registered holder. We strongly urge you to act
immediately since the transfer of registered ownership may take considerable
time.
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Signature requirements and signature guarantees
Unless you are a registered holder who requests that the new notes be
mailed to you and issued in your name or unless you are a member of or
participant in the Securities Transfer Agents Medallion Program, the New York
Stock Exchange Medallion Signature Program, the Stock Exchange Medallion
Program, or an "Eligible Guarantor Institution" within the meaning of Rule
17Ad-15 under the Exchange Act, each an "Eligible Institution", you must
guarantee your signature on a letter of transmittal or a notice of withdrawal by
an Eligible Guarantor Institution.
If a trustee, executor, administrator, guardian, attorney-in-fact,
officer of a corporation, or other person acting in a fiduciary or
representative capacity signs the letter of transmittal or any notes or bond
powers on your behalf, that person must indicate their capacity when signing,
and submit satisfactory evidence to us with the letter of transmittal
demonstrating their authority to act on your behalf.
Conditions to the Exchange Offers
We will decide all questions as to the validity, form, eligibility,
acceptance, and withdrawal of tendered notes, and our determination will be
final and binding on you. We reserve the absolute right to reject any and all
notes not properly tendered or accept any notes which would be unlawful in the
opinion of our counsel. We also reserve the right to waive any defects,
irregularities, or conditions of tender as to particular notes. Our
interpretation of the terms and conditions of an exchange offer, including the
instructions in a letter of transmittal, will be final and binding on all
parties. You must cure any defects or irregularities in connection with tenders
of notes as we shall determine. Although we intend to notify holders of defects
or irregularities with respect to tenders of notes, we, the exchange agent,
or any other person shall not incur any liability for failure to give such
notification. Tenders of notes will not be deemed to have been made until such
defects or irregularities have been cured or waived. Any notes received by the
exchange agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the exchange
agent to the tendering holders, unless otherwise provided in the letter of
transmittal, as soon as practicable following the expiration date.
We reserve the right to purchase or make offers for any notes that
remain outstanding after the expiration date or to terminate the exchange offer
and, to the extent permitted by law, purchase notes in the open market, in
privately negotiated transactions or otherwise. The terms of any such purchases
or offers could differ from the terms of an exchange offer.
These conditions are for our sole benefit and we may assert or waive
them at any time or for any reason. Our failure to exercise any of our rights
shall not be a waiver of our rights.
We will not accept for exchange any notes tendered, and no new notes
will be issued in exchange for any notes, if at such time any stop order is
threatened or in effect with respect to the registration statement or the
qualification of the indenture relating to the new notes under the Trust
Indenture Act of 1939. We are required to use every reasonable effort to obtain
the withdrawal of any stop order at the earliest possible time.
In all cases, issuance of new notes will be made only after timely
receipt by the exchange agent of certificates for notes or a timely Book-Entry
Confirmation of such notes into the exchange agent's account at the Book-Entry
Transfer Facility, a properly completed and duly executed letter of transmittal
or, with respect to DTC and its participants, electronic instructions of the
holder agreeing to be bound by the letter of transmittal, and all other required
documents. If we do not accept any tendered notes for a valid reason or if you
submit notes for a
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greater principal amount than you desire to exchange, we will return such
unaccepted or non-exchanged notes to you at our expense. In the case of
notes tendered by book-entry transfer into the exchange agent's account at the
Book-Entry Transfer Facility under the book-entry transfer procedures described
below, such non-exchanged notes will be credited to an account maintained with
such Book-Entry Transfer Facility. This will occur as promptly as practicable
after the expiration or termination of the exchange offers for such notes.
Book-Entry Transfer
The exchange agent will make requests to establish accounts at the
Book-Entry Transfer Facility for purposes of the exchange offers within two
business days after the date of this prospectus. Any financial institution that
is a participant in the Book-Entry Transfer Facility's systems may make
book-entry delivery of notes being tendered by causing the Book-Entry Transfer
Facility to transfer such notes into the exchange agent's account at the
Book-Entry Transfer Facility in accordance with the appropriate procedures for
transfer. However, although delivery of notes may be effected through book-entry
transfer at the Book-Entry Transfer Facility, a letter of transmittal or copy
thereof, with any required signature guarantees and any other required
documents, must, except as set forth in the following paragraph, be transmitted
to and received by the exchange agent on or prior to the expiration date or the
guaranteed delivery below must be complied with.
DTC's Automated Tender Offer Program is the only method of processing
exchange offers through DTC. To accept an exchange offer through ATOP,
participants in DTC must send electronic instructions to DTC through DTC's
communication system instead of sending a signed, hard copy letter of
transmittal. DTC is obligated to communicate those electronic instructions to
the exchange agent. To tender notes through ATOP, the electronic instructions
sent to DTC and transmitted by DTC to the exchange agent must contain the
participant's acknowledgment of its receipt of and agreement to be bound by the
letter of transmittal for such notes.
Guaranteed Delivery Procedures
If a registered holder of notes desires to tender such notes and the
notes are not immediately available, or time will not permit such holder's note
or other required documents to reach the exchange agent before the expiration
date, or the procedure for book-entry transfer cannot be completed on a timely
basis, a tender may be effected if:
o the tender is made through an Eligible Institution;
o prior to the expiration date, the exchange agent received
from such Eligible Institution a properly completed and duly
executed letter of transmittal and Notice of Guaranteed
Delivery, in the form provided by us. The Notice of
Guaranteed Delivery shall state the name and address of the
holder of such notes and the amount of notes tendered, that
the tender is being made thereby and guaranteeing that within
three New York Stock Exchange trading days after the date of
execution of the Notice of Guaranteed Delivery, the
certificates for all physically tendered notes, in proper form
for transfer, or a Book-Entry Confirmation and any other
documents required by the applicable letter of transmittal
will be deposited by the Eligible Institution with the
exchange agent; and
o the certificates for all physically tendered notes, in
proper form for transfer, or a Book-Entry Confirmation and
all other documents required by the applicable letter
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of transmittal are received by the exchange agent within
three NYSE trading days after the date of execution of the
Notice of Guaranteed Delivery.
Withdrawal Rights
You may withdraw your tender of notes at any time prior to 5:00 p.m.,
New York City time, on the expiration date.
For a withdrawal to be effective, a written or, for a DTC participant,
electronic ATOP transmission notice of withdrawal must be received by the
exchange agent at its address set forth in this prospectus prior to 5:00 p.m.,
New York City time, on the expiration date.
Any such notice of withdrawal must:
o specify the name of the person who deposited the notes to
be withdrawn;
o identify the notes to be withdrawn, including the
certificate number or numbers and principal amount of such
notes;
o be signed by the holder in the same manner as the original
signature on the letter of transmittal by which such notes
were tendered or be accompanied by documents of transfer
sufficient to have the trustee of such notes register the
transfer of such notes into the name of the person
withdrawing the tender; and
o specify the name in which any such notes are to be
registered, if different from that of the holder who
tendered such notes.
We will determine all questions as to the validity, form, and eligibility of
such notices and our determination shall be final and binding on all parties.
Any notes withdrawn will not be considered to have been validly tendered. We
will return any notes which have been tendered but not exchanged without cost to
the holder as soon as practicable after withdrawal, rejection of tender, or
termination of the exchange offer. Properly withdrawn notes may be retendered by
following one of the above procedures before the expiration date.
Exchange Agent
You should direct all executed letters of transmittal to the exchange
agent. Chase is the exchange agent for each of the exchange offers. Under an
agreement between PNC Bank, National Association and Chase Manhattan Trust
Company, PNC's corporate trust and escrow business was purchased by Chase.
Effective December 1, 1998, The Chase Manhattan Bank became the trustee under
the indentures. Questions, requests for assistance and requests for additional
copies of the prospectus or a letter of transmittal should be directed to the
exchange agent addressed as follows:
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The Chase Manhattan Bank
Global Trust Department
379 Thornall Street, 12th floor
Edison, New Jersey 08837
Attn: Julie Salovitch-Miller, Vice President
Phone: 732-603-2837
Fax: 732-603-2818
Fees and Expenses
We currently do not intend to make any payments to brokers, dealers, or
others to solicit acceptances of the exchange offers. The principal solicitation
is being made by mail. However, additional solicitations may be made in person
or by telephone by our officers and employees.
Our estimated cash expenses incurred in connection with the exchange
offers will be paid by us and are estimated to be $425,000 in the aggregate.
This amount includes fees and expenses of the trustees for the notes,
accounting, legal, printing, and related fees and expenses.
Transfer Taxes
If you tender notes for exchange you will not be obligated to pay any
transfer taxes. However, if you instruct us to register new notes in the name
of, or request that your notes not tendered or not accepted in an exchange offer
be returned to, a person other than you will be responsible for the payment of
any transfer tax owed.
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Description of the New Notes and the Indentures
The new notes will be issued under two indentures, dated as of May 1,
1998, between The Chase Manhattan Bank, the trustee and us. There is one
indenture for the new notes of Holdings and a separate indenture for the new
notes of Enterprises. The indentures are governed by the Trust Indenture Act of
1939, as amended.
The following description of the terms of the indentures is a summary
and contains the information required by the federal securities laws. However,
it does not restate either of the indentures and excludes the definitions and
complex legal terminology contained in the indentures. While we believe this
summary contains provisions of the new notes which are important to you in
making your decision to participate in the exchange offer it does not include
all of the provisions of the new notes that you may feel is important in your
decision to participate. The indentures, and not this summary, define your
rights as note holders. If you would like to read the indentures, we have filed
a copy of each indenture as an exhibit to the registration statement.
For your convenience, we have combined our description of the new notes
and the indentures of Holdings and of Enterprises into one description. Most of
the provisions in the indentures are the same for both notes. If there are
differences in the indentures, we have indicated the differences to you.
Principal, maturity and interest on the new notes
- -------------------------------------------------------------------------------
Name of issuer: Holdings Enterprises
- -------------------------------------------------------------------------------
Title of the securities: 13% senior notes 10-1/2% senior notes
due 2008 due 2005
- -------------------------------------------------------------------------------
Principal amount
being offered: $48,000,000 $120,000,000
- -------------------------------------------------------------------------------
Maturity date: May 1, 2008 May 1, 2005
- -------------------------------------------------------------------------------
Interest rate: 13% 10-1/2%
- -------------------------------------------------------------------------------
Interest payment date: May 1 and November 1 May 1 and November 1
- -------------------------------------------------------------------------------
There is an escrow fund to pay interest on the Holdings notes
We placed $17.0 million of the net proceeds from the original sale of
the notes into an escrow account only for the benefit of the holders of the
Holdings notes. This amount has decreased by the $3.12 million of interest we
paid on the Holdings notes on November 1, 1998, the date the first interest
payment was due. The funds remaining in the escrow account will be used to pay
interest on the outstanding Holdings notes for the next five scheduled interest
payments. There will be no escrow account for the Holdings notes after the last
payment is made.
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Options to purchase your notes
We have an option to purchase your notes
We have an option to redeem, or purchase, your notes before the
scheduled maturity date on the dates and at the purchase prices indicated on the
following table, plus any unpaid interest due on the date we purchase your
notes. The purchase prices are expressed as a percentage of the principal amount
due on the notes.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Name of issuer: Holdings Enterprises
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Initial optional
redemption date: May 1, 2003 May 1, 2002
- ----------------------------------------------------------------------------------------------------------------------
Optional redemption
price:
Year Percentage Year Percentage
---- ---------- ---- ----------
2003. . . . . . . . . . 106.500% 2002. . . . . . . . 105.250%
2004. . . . . . . . . . 104.333% 2003. . . . . . . . 102.625%
2005. . . . . . . . . . 102.167% 2004 and thereafter 100.000%
2006 and thereafter . . 100.000%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
We may redeem all or only some of the notes. If we want to redeem your
notes, we must give you at least 30 but no more than 60 days prior notice.
Enterprises has an additional option to purchase your notes if a
public equity offering occurs
At any time on or after May 1, 2001, Enterprises may use the proceeds
from the sale of Holdings' or Enterprises' capital stock to the public, commonly
known as a public equity offering, to purchase up to 35% of the outstanding
principal amount of the Enterprises notes. If Enterprises decides to purchase
its notes from you, the price will be 110.5% of the principal amount of the
notes, plus any unpaid interest due on the date Enterprises purchases your
notes. Enterprises can only purchase your notes under this option if at least
65% of the outstanding principal amount of its notes are outstanding after the
purchase.
A change of ownership will require that we purchase your notes
If we have a change of ownership, we will be required to offer to
purchase the notes from you at a price equal to 101% of their principal amount,
plus any unpaid interest due on the date we purchase your notes. Under the
indentures, a change of ownership means that any one of the following events has
occurred:
(1) Any sale, lease, exchange or other transfer of all or almost
all of the issuer's assets to a person other than Mr. Richard
A. Bernstein, trusts for his or his immediate family's
benefit, or his estate;
(2) The sale or dissolution of the issuer; or
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(3) A change of the voting control or a majority of the board of
directors of the issuer.
The Enterprises notes have guarantees
Millbrook and Manischewitz have guaranteed the repayment of the entire
principal amount of, and accrued interest on, the Enterprises notes. The
guarantees are not secured by any of their assets. Therefore, if a guarantor
goes bankrupt, the guarantees will be subordinated, or paid after, the payment
in full of all existing and future secured debt of that guarantor to the extent
of the value of the assets securing that debt.
Additional guarantees of Enterprises notes
If Enterprises or any subsidiary of Enterprises transfers or causes any
property to be transferred to any subsidiary that is not a guarantor, or if
Enterprises or any subsidiary of Enterprises organizes, acquires or otherwise
invests in another subsidiary, then such subsidiary will become a guarantor of
the Enterprises notes.
How your notes rank in comparison to our other debt
On page 7 under the heading "Prospectus Summary--Summary of Key Terms
of the New Notes," we include a ranking of your notes in relation to the debt
under our credit agreement and any other debt we currently have or may incur in
the future. We want to emphasize to you that, unlike our outstanding debt under
the credit agreement, the new notes are not secured by any assets of Millbrook
or Manischewitz and there are no other liens that secure your notes. This means,
for example, that if we go bankrupt and we obtain cash proceeds from a
liquidation or sale of our assets, the debt under the credit agreement will be
paid first. If there are any cash proceeds remaining and we do not have any
other secured debt at that time, your notes would be paid on the same level as
any other debt which have terms equal to the notes. We have agreed not to incur
any future debt that is junior in right of payment to any of our other debt
unless that debt is also made expressly junior to the notes, to the same extent
and in the same manner as it is junior to any of our other debt.
Key covenants
We have restrictions on issuing debt or equity in the future
In general, we are not permitted to incur any debt or issue any capital
stock. However, as long as no event of default occurs under our indenture and we
are not in default under the indenture, we may incur debt and Enterprises may
issue capital stock which may mature or be redeemed before the notes the notes
mature, if we meet our fixed charge ratio which is generally based on our net
income, income taxes and interest expense. These terms also apply to the
guarantors of the Enterprises notes.
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We cannot make payments or investments
We cannot declare or pay a dividend, make any distribution on our
capital stock, purchase our capital stock or options, rights or warrants to
acquire our capital stock, or make investments, unless they are permitted under
the indenture, if, following the payment or investment:
(1) we cannot comply with the covenant limiting our debt;
(2) we are in default under the indenture; or
(3) the amount of any proposed payment exceeds the amount
allowed under the indenture, determined in
accordance with the detailed mathematical formula
in the indenture.
There are other limited circumstances where the restricted payments
above are allowed and we refer you to the indenture for an explanation of those
circumstances. Some of these circumstances apply only to the Enterprises notes.
We cannot sell our assets
We cannot sell or lease, other than entering into operating leases in
the ordinary course of business, or otherwise transfer our assets unless we
receive fair market value for the assets. Eighty percent of the payments on
assets must be paid for in cash, securities equivalent to cash or other assets
which replace the assets sold. If we sell our assets, we must apply the net cash
proceeds from the sale to invest in replacement assets or for the payment and
reduction of our debt. If our net cash proceeds from sales of assets exceed $5.0
million, we must make you an offer to purchase your notes and other debt which
have a right of payment equal to you.
Our subsidiaries can make payments, incur loans or sell assets
We will not take any action to restrict the ability of any of our
subsidiaries to:
(1) pay dividends or make any other distributions on its capital
stock;
(2) make loans or advances to us or pay any debt owed to us or
our subsidiaries; or
(3) transfer any of its property or assets to us or our
subsidiaries.
Applicable law, other provisions in the indentures and other contracts, leases
or agreements may restrict the right of our subsidiaries to do any of the above.
We have a limitation on future liens
We will not incur any liens on our property or assets or liens on any
proceeds from the sale of our assets or property. Also, we may not assign or
convey any right to receive income or profits from our property or assets. We
are allowed to have liens securing debt that is expressly junior to the notes,
if the
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notes are secured by a senior lien on the same assets or proceeds. The
following liens are allowed under the indenture:
(1) liens existing on May 1, 1998;
(2) liens to secure debt that is permitted under the
indenture;
(3) liens to secure our notes and the guarantees of
the notes;
(4) liens for our benefit from a restricted subsidiary;
(5) new liens in a refinancing of old secured debt, if
the new liens are no less favorable to you or more
favorable to lien holders than the liens on the old
debt and if the liens relate to the old debt; and
(6) any other liens permitted under the indenture.
We have limitations on transactions with related parties
We will not, and will not enter into or permit any transactions with
parties related to us, other than:
(1) transactions or payments permitted under the
indenture;
(2) transactions on terms that are no less favorable than
the terms of a comparable transaction with a person
that is not related to us if the transaction was at
arms-length. If the dollar amounts of the transaction
reach certain levels, board approval or a fairness
opinion may be necessary;
(3) reasonable fees, compensation or amounts for
indemnification paid to our officers, directors,
employees or consultants if they are incurred in the
ordinary course;
(4) transactions exclusively between us and subsidiaries
solely owned by us, provided such transactions are
not otherwise prohibited by the indenture;
(5) any written agreement in effect on May 1, 1998, or
any transaction contemplated by that agreement,
including any amendment, if the amendments do not put
note holders in a significantly worse position;
(6) loans or advances to our employees or the employees
of our subsidiaries incurred in the ordinary course
and not to exceed $250,000 at one time;
(7) payments to P&E Properties or related parties to pay
management fees not to exceed $600,000 in any fiscal
year; and
(8) payments to reimburse P&E Properties or related
parties for reasonable services and out-of-pocket
costs and other expenses actually incurred in
connection with these services.
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Mergers, consolidation and sale of assets
We may not consolidate or merge with another company or sell all or
almost all of our assets unless we will survive as a company following any of
these actions or the surviving company will expressly assume the payment of
principal and interest on the notes and the performance of covenants of the
notes and the indentures, and following the transaction, we will be able to
incur additional debt under the indenture. Any merger, consolidation or sale of
assets must comply with any other provisions of the indenture.
Events of default
Each of the following is an event of default under the indenture:
(1) a default on the payment of interest on the notes which
continues for 30 days;
(2) a default on the payment of principal on the notes at
maturity, upon redemption or any other time principal is
required to be paid;
(3) a default in the observance or performance of any other
covenant or agreement contained in the indenture which
continues for 30 days after notice of default;
(4) a default under our debt instruments having an outstanding
principal amount of $2,000,000 or more individually or in the
aggregate that resulted in the acceleration of the payment
of such debt, or failure to pay principal when due at the
stated maturity of such debt which continues after any
applicable grace period and has not been cured or waived;
(5) one or more judgments in an aggregate amount in excess of
$2,000,000 is rendered against us or our subsidiaries and the
judgments remain undischarged, unpaid or unstayed for a period
of 60 days after becoming final and non-appealable;
(6) certain events of bankruptcy;
(7) for Holdings notes only, the escrow agreement ceases to be in
full force and effect or is declared by a court of competent
jurisdiction to be null and void, or Holdings fails to perform
its obligations under the escrow agreement for 30 days after
notice of default; or
(8) for Enterprises notes only, any of the guarantees cease to be
in full force and effect or any of the guarantees are declared
to be null and void and unenforceable or any of the guarantees
are found to be invalid or any of the guarantors deny its
liability under its guarantee other than by reason of release
of a guarantor in accordance with the terms of the indenture.
Procedures if an event of default occurs
If an event of default occurs and is continuing, the trustee or the
holders of at least 25% in principal amounts of outstanding notes may declare
the principal of and accrued interest on all notes to be due and payable by
notice in writing to the issuer and the trustee specifying the respective event
of default and that it is an "acceleration notice," and the principal and
accrued interest will become immediately due and payable. If an event of default
specified in clause (6) above occurs and is continuing, then all unpaid
principal of, and
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premiums, if any, and accrued and unpaid interest on all of
the outstanding notes of will be immediately due and payable without any
declaration or other act on the part of the trustee or any holder.
The indenture provides that, at any time after a declaration of
acceleration with respect to the notes, the holders of a majority in a principal
amount of the notes may rescind and cancel such declaration:
(1) if the rescission would not conflict with any outstanding
judgment or judicial decree;
(2) if all existing events of default have been cured or waived
except nonpayment of principal or interest that has become
due solely because of the acceleration;
(3) to the extent the payments of such interest is lawful,
interest on overdue installments of interest and overdue
principal, which has become due otherwise than by such
declaration of acceleration, has been paid;
(4) if the issuer has paid the trustee its reasonable compensation
and reimbursed the trustee for its expenses, disbursements and
advances; and
(5) in the event of the cure or waiver of an event of default of
the type described in clause (6) of the description above of
events of default, the trustee will have received an officers'
certificate and an opinion of counsel that such event of
default has been cured or waived. No such rescission will
affect any subsequent default or impair any consequent right.
The holders of a majority in a principal amount of the notes may waive
any existing default or event of default under the indenture, and its
consequences, except a default in the payment of the principal of or interest on
any notes.
How we will conduct our business
We will not engage in any businesses other than food manufacturing and
processing, food distribution and other similar or related businesses, including
the provision of merchandising services.
Reports to holders
We will deliver to the trustee copies of the quarterly and annual
reports and the information, documents and other reports we are required to file
with the Commission pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 within 15 days after filing with the Commission
If we do not have to comply with the reporting requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, we will file with the
Commission, to the extent permitted, and provide to the trustee and holders of
notes, the annual reports and such information, documents and other reports
specified in Sections 13 and 15(d) of the Securities Exchange Act of 1934. The
issuer will also comply with the other provisions of Section 314(a) of the Trust
Indenture Act of 1939.
In addition, as long as any notes remain outstanding, upon request we
will furnish to note holders, securities analysts and prospective investors the
information required under Rule 144A(d)(4) under the
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Securities Act, and, to any beneficial holder of notes, information of the type
that would be filed with the Commission if not obtainable from the Commission.
No personal liability of directors, officers, employees and stockholders
None of our directors, officers, employees or stockholders, or the same
individuals for parties related to us, will be liable for damages or responsible
for any obligations under the notes or the indenture or for any claim based on
any obligations. By accepting a note, each note holder waives and releases these
persons from all liability. The waiver of and releases from liability are part
of the consideration for our issuance of the notes.
Note holders may not enforce the indenture or the notes except as
provided in the indenture and under the Trust Indenture Act of 1939. Except as
provided in the indenture, the trustee is under no obligation to exercise any of
its rights or powers provided to it under the indenture at the request, order or
direction of any of the holders, unless such holders have offered to the trustee
reasonable indemnity. Except as provided in the indenture and under law, the
holders of a majority of a principal amount of notes may direct the time, method
and place of conducting any proceeding for any remedy available to the trustee
or exercise any power given to the trustee.
Under the indenture, we are required to provide an officers'
certificate to the trustee promptly if any officer obtains knowledge of the
occurrence of any default or event of default that has occurred under the
indenture and describe the default or event of default and the current status.
We are required to provide an officers' certificate to the trustee at least
annually.
Satisfaction and discharge
Except for surviving rights or registration of transfer or exchange of
the notes, the indenture will be discharged and will cease to be of further
effect for all outstanding notes when:
(1) all the notes have been delivered to the trustee
for cancellation;
(2) all the notes have become due and payable and the
issuer has deposited funds with the trustee to pay
and discharge the principal and interest, and any
premium, on the notes together with instructions
directing the trustee to apply such funds to pay the
notes at maturity or redemption;
(3) the issuer has paid all other sums payable by it
under the indenture; and
(4) the issuer has delivered an officers' certificate to
the trustee and an opinion of counsel stating that it
is in compliance with all conditions precedent under
the indenture relating to the satisfaction and
discharge of the indenture.
Amendment and modification of the indenture
Unless a holder of notes consents, an amendment may not:
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(1) reduce the consent of note holders required for an amendment;
(2) reduce the rate of or change the time for payment of interest,
including defaulted interest, on any notes;
(3) reduce the principal of, or change the fixed maturity of, any
notes, or change the date on which any notes may be redeemed
or repurchased or the prices for redemption or repurchase;
(4) change the form of payment on the notes;
(5) make any change in provisions of the indenture that protect
the right of each holder to receive payment of principal of
and interest on the notes on or after the due date thereof or
to bring suit to enforce such payment, or permit holders of a
majority in a principal amount of the notes to waive defaults
or events of default;
(6) amend, change or modify the obligation of the issuer to make
and consummate a change of control offer in the event of a
change of ownership of the issuer, or make and consummate a
net proceeds offer with respect to any asset sale that has
been consummated, or modify any of the provisions or
definitions relating to these obligations;
(7) subordinate the notes to any other obligation of the issuer,
and, in the case of the Enterprises notes only, subordinate
any guarantee of the guarantors; or
(8) only in the case of the Enterprises notes, release any
guarantor from any of its obligations under its guarantee or
the indenture other than in accordance with the terms of the
indenture.
Governing law
The indenture and the notes, and the guarantees will be governed by the
laws of the State of New York.
The trustee
Except during the continuance of an event of default, the trustee will
perform only such duties as are specifically set forth in the indenture. During
the existence of an event of default, the trustee will exercise such rights and
powers vested in it by the indenture, and use the same degree of care and skill
in its exercise as a prudent man would exercise or use under the circumstances
in the conduct of his own affairs.
The indenture and the provisions of the Trust Indenture Act of 1939
contain limitations on the rights of the trustee, should it become a creditor of
the issuers, to obtain payments of claims in cases or to realize on property
received in respect of any such claim as security or otherwise. The trustee will
be permitted to engage in other transactions but if the trustee acquires any
conflicting interest as described in the Trust Indenture Act of 1939, it must
eliminate such conflict within 30 days, obtain permission within 30 days from
the Commission to continue as trustee, or resign.
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Description of Credit Agreement
Millbrook and Manischewitz have entered into a credit agreement with
certain lenders under which the lenders have extended revolving credit loans of
up to $90.2 million and an amortizing term loan of $9.31 million. The following
is a summary description of the principal terms of the credit agreement
currently in effect and is qualified in all respects by reference to the
definitive credit agreement and the other loan documents. We strongly urge you
to review the complete text of the credit agreement for a complete understanding
of its terms.
At September 30, 1998, $15.9 million was outstanding under the credit
agreement, consisting of revolving credit borrowings of $7.1 million and an
amortizing term loan of $8.8 million, and approximately $49.5 million of
additional borrowing capacity was available under the credit agreement.
Security. The obligations of Millbrook and Manischewitz under the
credit agreement are secured by:
o almost all the assets of Millbrook; and
o the accounts receivable, inventory and intellectual
property of Manischewitz.
A pledge by Enterprises of all the capital stock of Millbrook secures the
obligations of Millbrook and Manischewitz under the credit agreement.
Interest; Maturity. The revolving credit loans and the term loan under
the credit agreement accrue interest at an annual rate, at the borrower's
option, equal to either:
o the adjusted London Interbank Offered Rate; or
o an alternate rate, in each case,
plus an interest margin based on Millbrook's and Manischewitz's combined
borrowing base availability. The revolving credit portion of the credit
agreement matures on March 31, 2002 and the term loan portion of the credit
agreement is due and payable on March 31, 2003.
Interest Rate Protection. Millbrook is a party to a three-year interest
rate protection agreement with Bank of Montreal that effectively cap rates on a
notional principal amount of $50 million of borrowings at 7-5/8% for London
Interbank Offered Rate loans.
Restrictive Covenants. The credit agreement contains a number of
covenants that, among other things, restrict the ability of Millbrook,
Manischewitz and their respective subsidiaries to:
o dispose of assets;
o incur additional indebtedness;
o prepay other indebtedness or amend certain other debt
instruments;
o pay dividends;
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o create liens on assets;
o enter into sale and leaseback transactions;
o make investments, loans or advances;
o make acquisitions;
o engage in mergers or consolidations;
o materially change the business conducted by Millbrook,
Manischewitz or their respective subsidiaries;
o engage in certain transactions with related parties; and
o conduct some corporate activities.
Financial Covenants. Millbrook and Manischewitz will be required to
meet certain financial covenants, including, without limitation:
o debt service coverage ratios;
o leverage ratios; and
o annual capital expenditure limitations.
Events of Default. The credit agreement contains customary events of
default, including payment defaults, breach of representations and warranties,
covenant defaults, cross-defaults and cross-acceleration to other debt,
events of bankruptcy and insolvency, ERISA, judgment defaults, actual or
asserted invalidity of any security interest and change of ownership provisions.
Book - Entry; Delivery and Form
Except as described in the next paragraph, the new notes initially will
be represented by one or more permanent global certificates in definitive, duly
registered form. The global notes will be deposited on their date of issue with,
or on behalf of, DTC and registered in the name of a nominee of DTC.
The Global Notes. We expect that under the procedures established
by DTC:
(1) upon the issuance of the global notes DTC or its custodian
will credit on its internal system the principal amount of new
notes of the individual beneficial interests represented by
such global notes to the respective accounts of persons who
have accounts with such depositary; and
(2) ownership of beneficial interest in the global notes will be
shown on, and the transfer of such ownership will be effective
only through, records maintained by DTC or its nominee
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<PAGE>
or the records of participants. Ownership of beneficial
interests in the global notes will be limited to persons who
have accounts with DTC, or participants, or persons who hold
interests through participants.
So long as DTC, or its nominee, is the registered owner or holder of
the new notes, DTC or such nominee will be considered the sole owner or holder
of the new notes represented by such global notes for all purposes under the
indentures. No beneficial owner of an interest in the global notes will be able
to transfer that interest except in accordance with DTC's procedures.
Payments of the principal of, any premium and interest on, the
global notes will be made to DTC or its nominee as the registered owner thereof.
Enterprises, Holdings, the trustees or any paying agent will not have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the global notes
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interest.
We expect that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, and interest on the Global Notes, will credit
participants' accounts with payments in amounts proportionate to their
beneficial interests in the principal amount of the global notes as shown on the
records of DTC or its nominee. We also expect that payments by participants to
owners of beneficial interests in the global notes held through such
participants will be governed by standing instructions and customary practice,
as is now the case with securities held for the accounts of customers registered
in the names of nominees for such customers. Such payments will be the
responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary
way through DTC's same-day funds system in accordance with DTC rules and will be
settled in same-day funds. If a holder requires physical delivery of a
certificated new note for any reason, including to sell new notes to persons in
states which require physical delivery of the new notes, or to pledge such
securities, such holder must transfer its interest in a global note, in
accordance with the normal procedures of DTC.
DTC has advised us that it will take any action permitted to be taken
by a holder of new notes only at the direction of one or more participants to
whose account the DTC interests in the global notes are credited and only in
respect of such portion of the aggregate principal amount of new notes as to
which such participant or participants has or have given such direction.
DTC has advised us as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "Clearing Agency" registered pursuant to the provisions of
Section 17A of the Securities Exchange Act of 1934. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly.
Although DTC has agreed to these procedures in order to facilitate
transfers of interests in the global notes among participants of DTC, it is
under no obligation to perform such procedures, and such
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procedures may be discontinued at any time. Neither we nor the Trustee
will have any responsibility for the performance by DTC or its participants or
indirect participants of their obligations under the rules and procedures
governing their operations.
Certificated Notes. If DTC is at any time unwilling or unable to
continue as a depositary for the global notes and a successor depositary is not
appointed by us within 90 days, certificated notes will be issued in exchange
for the global notes.
Plan of Distribution
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties in similar transactions, we believe
that new notes issued in an exchange offer in exchange for old notes may be
offered for resale, resold and otherwise transferred by holders, other than any
such holder which is our "affiliate" within the meaning of Rule 405 under the
Securities Act, without compliance with the registration and prospectus delivery
provisions of the Securities Act. However, this applies only if new notes are
acquired in the ordinary course of such holders' business and such holders have
no arrangement with any person to participate in the distribution of such new
notes. We refer you to the "Morgan Stanley & Co. Inc." SEC No-Action Letter
available June 5, 1991, "Exxon Capital Holdings Corporation" SEC No-Action
Letter available May 13, 1988 and "Shearman & Sterling" SEC No-Action Letter
available July 2, 1993 for support of our belief.
Each broker-dealer that receives new notes for its own account in an
exchange offer must acknowledge that it will deliver a prospectus with any
resale of the new notes. This prospectus may be used by a broker-dealer in
connection with resales of new notes received in exchange for old notes where
such old notes were acquired as a result of market-making activities or other
trading activities. We have agreed that, for a period of 180 days after the
expiration date, we will make this prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until May 19, 1999, all dealers effecting transactions in the new
notes may be required to deliver this prospectus.
New notes received by broker-dealers for their own account in an
exchange offer may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the new notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer or the
purchasers of any such new notes. Any broker-dealer that resells new notes that
were received by it for its own account and any broker or dealer that
participates in a such new notes may be deemed to be an underwriter within the
Securities Act, and any profit on any such resale of new notes, commissions or
concessions received by any such persons may be underwriting compensation under
the Securities Act of 1933. The letter of transmittal states that by
acknowledging that it will deliver and by delivering a prospectus meeting the
requirements of the Securities Act of 1933, a broker-dealer will not be
admitting that it is an underwriter within the meaning of the Securities Act of
1933.
We have agreed to pay all expenses incident to the exchange offers,
including the expenses of one counsel for the holders of the outstanding notes,
other than commissions or concessions of any broker-dealers. We have agreed to
indemnify holders of the notes, including any broker-dealers, against some
liabilities, including some liabilities under the Securities Act.
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Federal Income Tax Consequences
The following discussion summarizes federal income tax consequences of
the exchange of the outstanding notes under existing federal income tax law.
These consequences may change in the future, and affect you adversely. This
summary does not discuss all aspects of federal income taxation which may be
relevant to a particular investor in light of his or her personal investment
circumstances or to certain types of investors subject to special treatment
under the federal income tax laws including financial institutions,
insurance companies, tax-exempt organizations, broker-dealers, and foreign
taxpayers. This summary does not discuss any aspects of other federal taxes or
state, local, or foreign tax law and assumes that investors hold and will
continue to hold their outstanding notes for investment as capital assets under
the Internal Revenue Code of 1986, as amended. Each holder is advised to consult
its tax advisors as to the specific tax consequences of exchanging their
outstanding notes, including the application and effect of federal, state, local
and foreign income and other tax laws.
An exchange of an outstanding note for a new note should not be treated
as an event in which gain or loss, if any, is realized for federal income tax
purposes, because the terms of the new notes do not differ materially in kind or
extent from the terms of the outstanding notes. As a result, the holder should
not recognize any gain or loss for federal income tax purposes if he or she
participates in an exchange offer, and the new note received in an exchange
offer should be treated as a continuation of the outstanding note surrendered in
an exchange offer. The holder should have the same basis and holding period in
its new note as it had in the outstanding note.
Legal Matters
Parker Chapin Flattau & Klimpl, LLP, New York, New York will pass upon
the legal matters on the validity of the new notes being offered hereby. Martin
Eric Weisberg, Esq., a partner of Parker Chapin Flattau & Klimpl, LLP, owns
shares of common stock and series A preferred stock of Holdings.
Experts
The consolidated financial statements of Holdings and Enterprises, each
as of March 31, 1997 and 1998 and for the fiscal year ended March 31, 1998
included in this prospectus and the related financial statement schedules
included elsewhere in the registration statement have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports appearing herein
and elsewhere in the registration statement, and are included in reliance upon
the reports of such firm given upon their authority as experts in accounting and
auditing.
The statements of operations of Millbrook included in this prospectus
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report appearing herein, and are included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
The financial statements of Manischewitz as of July 31, 1997 and 1996
and for each of the three years in the period ended July 31, 1997 included in
this prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
reports.
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<TABLE>
<CAPTION>
Index to Financial Statements
Page
----
<S> <C>
Consolidated Financial Statements of R.A.B. Holdings, Inc.
And Subsidiaries
Independent Auditors' Report.......................................................................... F-3
Consolidated Balance Sheets as of March 31, 1998 and 1997............................................. F-4
Consolidated Statement of Operations for the fiscal year ended March 31, 1998......................... F-5
Consolidated Statements of Stockholders' Equity for the period from May 6, 1996 (date of inception) to
March 31, 1997 and for the fiscal year ended March 31, 1998....................................... F-6
Consolidated Statements of Cash Flows for the period from May 6, 1996 (date of inception) to
March 31, 1997 and for the fiscal year ended March 31, 1998....................................... F-7
Notes to Consolidated Financial Statements............................................................ F-8
Unaudited Condensed Consolidated Financial Statements
of R.A.B. Holdings, Inc. And Subsidiaries
Condensed Consolidated Balance Sheets as of September 30, 1998 and March 31, 1998..................... F-17
Condensed Consolidated Statements of Operations for the six month periods ended September 30, 1998
and 1997.......................................................................................... F-18
Condensed Consolidated Statement of Stockholders' Equity for the six month period ended
September 30, 1998................................................................................ F-19
Condensed Consolidated Statements of Cash Flows for the six month periods ended September 30, 1998
and 1997.......................................................................................... F-20
Notes to Condensed Consolidated Financial Statements.................................................. F-21
Consolidated Financial Statements of R.A.B. Enterprises, Inc.
And Subsidiaries
Independent Auditors' Report.......................................................................... F-23
Consolidated Balance Sheets as of March 31, 1998 and 1997............................................. F-24
Consolidated Statement of Operations for the fiscal year ended March 31, 1998......................... F-25
Consolidated Statement of Stockholder's Equity for the fiscal year ended March 31, 1998............... F-26
Consolidated Statement of Cash Flows for the fiscal year ended March 31, 1998......................... F-27
Notes to Consolidated Financial Statements............................................................ F-28
Unaudited Condensed Consolidated Financial Statements
Of R.A.B. Enterprises, Inc. And Subsidiaries
Condensed Consolidated Balance Sheets as of September 30, 1998 and March 31, 1998..................... F-37
Condensed Consolidated Statements of Operations for the six month periods ended
September 30, 1998 and 1997....................................................................... F-38
Condensed Consolidated Statements of Stockholder's Equity for the six month period ended
September 30, 1998................................................................................ F-39
Condensed Consolidated Statements of Cash Flows for the six month periods ended
September 30, 1998 and 1997....................................................................... F-40
Notes to Condensed Consolidated Financial Statements.................................................. F-41
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
Index to Financial Statements (Continued)
Page
----
<S> <C>
Financial Statements of The B. Manischewitz Company, LLC
Report of Independent Public Accountants.............................................................. F-43
Balance Sheets as of July 31, 1997 and 1996........................................................... F-44
Statements of Operations for the years ended July 31, 1997, 1996 and 1995............................. F-45
Statements of Changes in Equity for the years ended July 31, 1997, 1996 and 1995...................... F-46
Statements of Cash Flows for the years ended July 31, 1997, 1996 and 1995............................. F-47
Notes to Financial Statements......................................................................... F-48
Unaudited Condensed Financial Statements of The B. Manischewitz Company, LLC
Condensed Balance Sheets as of April 30, 1998 and July 31, 1997....................................... F-59
Condensed Statements of Operations for the nine month periods ended
April 30, 1998 and 1997........................................................................... F-60
Condensed Statement of Changes in Members' Equity for the nine month period
ended April 30, 1998.............................................................................. F-61
Condensed Statements of Cash Flows for the nine month periods
ended April 30, 1998 and 1997..................................................................... F-62
Notes to Condensed Financial Statements............................................................... F-63
Financial Statements of Millbrook Distribution Services Inc.
Independent Auditors' Report.......................................................................... F-65
Statements of Operations for the fiscal years ended March 31, 1997 and 1996........................... F-66
Notes to Statements of Operations..................................................................... F-67
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
R.A.B. Holdings, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of R.A.B. Holdings,
Inc. and subsidiaries as of March 31, 1998 and March 31, 1997, and the related
consolidated statements of operations for the fiscal year ended March 31, 1998
and the consolidated statements of stockholders' equity and cash flows for the
period from May 6, 1996 (date of inception) to March 31, 1997 and for the fiscal
year ended March 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of R.A.B. Holdings, Inc. and
subsidiaries as of March 31, 1998 and March 31, 1997, and the results of their
operations for the fiscal year ended March 31, 1998 and their cash flows for the
period from May 6, 1996 (date of inception) to March 31, 1997 and for the fiscal
year ended March 31, 1998 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
July 10, 1998
New York, New York
F-3
<PAGE>
R.A.B. HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1998 and 1997
(In thousands except for share and per share data)
1998 1997
-------- --------
ASSETS
Current Assets:
Cash $ 2,623 $ 2,637
Accounts receivable 27,942 29,892
Inventories 41,814 52,271
Other current assets 5,707 9,480
-------- --------
Total current assets 78,086 94,280
Other assets 7,291 6,784
Property, plant and equipment, net 23,395 25,235
-------- --------
$108,772 $126,299
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 815 $ 490
Accounts payable 31,035 29,083
Other current liabilities 16,233 12,504
-------- --------
Total current liabilities 48,083 42,077
Noncurrent liabilities:
Long-term debt 37,295 61,310
Deferred compensation 7,801 7,668
Deferred income taxes 982 1,536
Other liabilities 3,434 3,704
-------- --------
Total noncurrent liabilities 49,512 74,218
Commitments and contingencies
Stockholders' equity:
Preferred stock, $500 par value, 100,000 shares
authorized, 20,000 shares of Series A issued
and outstanding 9,906 9,906
Common stock, $.01 par value, 100,000 shares
authorized, 100,000 and 99,000 shares issued 1 1
Additional paid-in capital 98 97
Retained earnings 1,174 -
-------- --------
11,179 10,004
Less cost of common stock in treasury-1,600 shares 2 -
-------- --------
Total stockholders' equity 11,177 10,004
-------- --------
$108,772 $126,299
======== ========
See notes to consolidated financial statements.
F-4
<PAGE>
R.A.B. HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
For the Fiscal Year Ended March 31, 1998
(In thousands)
Revenues $470,201
Costs and expenses:
Cost of sales 360,162
Selling 43,766
Distribution and warehousing 37,339
General and administrative 21,559
--------
Total costs and expenses 462,826
--------
Operating income 7,375
Interest expense, net 5,079
--------
Income before provision for income taxes 2,296
Provision for income taxes 1,122
--------
Net income $ 1,174
========
See notes to consolidated financial statements.
F-5
<PAGE>
R.A.B. HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands except for share data)
<TABLE>
<CAPTION>
Preferred
Stock Common Stock Additional Treasury Stock
-------------- --------------- Paid-In Retained --------------
Shares Amount Shares Amount Capital Earnings Shares Amount
------ ------ ------- ------ ---------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at May 6, 1996 - $ - - $- $ - $ - - $-
Issuance of stock 20,000 9,906 99,000 1 97
------ ------ ------- -- --- ----- ----- --
Balance at March 31, 1997 20,000 9,906 99,000 1 97 - - -
Issuance of common stock 1,000 1
Repurchase of common stock 1,600 2
Net income 1,174
------ ------ ------- -- --- ------ ----- --
Balance at March 31, 1998 20,000 $9,906 100,000 $1 $98 $1,174 1,600 $2
====== ====== ======= == === ====== ===== ==
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
R.A.B. HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Period from
Fiscal May 6, 1996
Year (date of
Ended inception)
March 31, to March 31,
1998 1997
--------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,174 $
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,471
Gain on disposition of equipment (20)
Deferred income taxes (106)
Changes in assets and liabilities:
Accounts receivable 1,950
Inventories 10,457
Other current assets 3,773
Accounts payable 1,952
Other current liabilities 3,729
Other assets and liabilities (1,477)
-------- --------
Net cash provided by operating activities 25,903
-------- --------
Cash flows from investing activities:
Purchase of Millbrook Distribution Services Inc. (69,167)
Acquisitions of equipment (2,309)
Proceeds from disposition of equipment 83
-------- --------
Net cash used in investing activities (2,226) (69,167)
-------- --------
Cash flows from financing activities:
(Repayments) borrowings under Credit Agreement (23,690) 61,800
Proceeds from issuance of preferred stock 9,906
Proceeds from issuance of common stock 1 98
Purchase of treasury stock (2)
-------- --------
Net cash (used in) provided by financing activities (23,691) 71,804
-------- --------
Net (decrease) increase in cash (14) 2,637
Cash, beginning of year 2,637 -
-------- --------
Cash, end of year $ 2,623 $ 2,637
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 4,054 $ -
Income taxes $ 1,392 $ -
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
R.A.B. HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary Of Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements
include the accounts of R.A.B. Holdings, Inc. and its wholly-owned
subsidiaries, Millbrook Distribution Services Inc. ("Millbrook") and R.A.B.
Enterprises, Inc. ("Enterprises"), Millbrook's parent (collectively, the
"Company"). Millbrook is one of the nation's largest independent value-added
distributors of health and beauty care, general merchandise and specialty and
natural food products. All significant intercompany transactions and balances
are eliminated in consolidation.
Use of Estimates - The preparation of financial statements, in
conformity with generally accepted accounting principles, requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
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 allowance for doubtful
accounts is based upon the expected collectability of its trade accounts
receivable.
Fiscal Year - The Company's fiscal year ends on March 31.
Inventories - Inventories are stated at the lower of cost or market.
Cost is determined by the last-in, first-out ("LIFO") method. At March 31,
1998, the replacement cost of inventories valued using the LIFO method
exceeded the net carrying amount of such inventories by approximately
$255,000.
Property, Plant and Equipment - Property, plant and equipment are
recorded at cost. For financial reporting purposes, depreciation is provided
on the straight-line method over the following estimated useful lives:
Buildings and improvements..................... 5-35 years
Machinery and equipment........................ 2-15 years
Rolling stock.................................. 3-8 years
F-8
<PAGE>
R.A.B. HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
1. Summary Of Significant Accounting Policies (Continued)
Expenditures which significantly increase value or extend useful lives
are capitalized, while ordinary maintenance and repairs are expensed as
incurred. The cost and related accumulated depreciation of assets replaced,
retired or disposed of are removed from the accounts and any related gains or
losses are reflected in operations.
Long-Lived Assets - The Company reviews its long-lived assets and
certain related intangibles for impairment whenever changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable.
Such changes in circumstances may include, among other factors, a significant
change in technology that may render an asset obsolete or noncompetitive or a
significant change in the extent or manner in which an asset is used. The
assessment for potential impairment is based upon the Company's ability to
recover the unamortized balance of its long-lived assets from expected future
cash flows on an undiscounted basis (without interest charges). If such
expected future cash flows are less than the carrying amount of the asset, an
impairment loss would be recorded.
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.
Income Taxes - Deferred income taxes result primarily from temporary
differences between financial and tax reporting and acquisition basis
differences.
Accounting Pronouncements - Statement of Financial Accounting Standards
("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related
Information" was issued in June 1997 and is effective for financial
statements for periods beginning after December 15, 1997. This statement
establishes standards for the manner in which operating segments of public
reporting entities are presented in interim and annual financial statements.
The Company believes its current reporting systems will enable it to comply
with the requirements of SFAS No. 131.
SFAS No. 132 "Employers' Disclosures about Pensions and Other
Postretirement Benefits" was issued in February 1998 and is effective for
periods beginning after December 15, 1997. The Company will adopt SFAS No.
132 effective for its 1998 fiscal year end.
The aforementioned recently issued accounting pronouncements establish
standards for disclosures only and therefore will have no impact on the
Company's financial position or results of operations.
F-9
<PAGE>
R.A.B. HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
1. Summary Of Significant Accounting Policies (Continued)
SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities" was issued in June 1998 and is effective for fiscal years
beginning after June 15, 1999. SFAS No. 133 requires the recognition of all
derivatives in the consolidated balance sheet as either assets or liabilities
measured at fair value. The Company will adopt SFAS No. 133 effective for its
2000 fiscal year end. The Company has not yet determined the impact SFAS No.
133 will have on its financial position or results of operations when such
statement is adopted.
2. Formation And Acquisition
On May 6, 1996, R.A.B. Holdings, Inc., a Delaware corporation, was
formed. On March 31, 1997, R.A.B. Holdings, Inc. acquired Millbrook for a
purchase price of approximately $67 million, including transaction costs,
through the sale of stock (see Note 7) and borrowings under the Company's
Credit Agreement. The acquisition was accounted for as a purchase and,
accordingly, the purchase price was allocated to the assets and liabilities
of Millbrook based upon their estimated fair values at the date of
acquisition. The fair values of assets acquired (approximately $129 million)
and liabilities assumed (approximately $53 million) were based upon third
party appraisals and other valuation analyses. The fair value of the net
assets acquired exceeded the purchase price by approximately $9 million. The
resulting negative goodwill reduced the fair value assigned to Millbrook's
property, plant and equipment.
R.A.B. Holdings, Inc. had no operations prior to April 1, 1997. During
the period from May 6, 1996 (date of inception) to March 31, 1997, the
Company sold stock ($10 million) (see Note 7) and borrowed $62 million under
its Credit Agreement (see Note 6) to acquire Millbrook ($70 million, which
was subsequently adjusted pursuant to the purchase agreement) and pay its
related acquisition and financing costs ($2 million).
3. Accounts Receivable
Accounts receivable consisted of the following:
March 31, March 31,
1998 1997
--------- ---------
(In thousands)
Accounts receivable ............. $ 30,383 $ 32,143
Allowance for doubtful accounts.. (2,441) (2,251)
-------- --------
$ 27,942 $ 29,892
======== ========
F-10
<PAGE>
R.A.B. HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. Property, Plant & Equipment
Property, plant and equipment consisted of the following:
March 31, March 31,
1998 1997
--------- ---------
(In thousands)
Land ......................................... $ 1,561 $ 1,561
Buildings and improvements ................... 9,393 9,371
Machinery and equipment ...................... 12,902 10,884
Rolling stock ................................ 3,398 3,419
Work in progress ............................. 201 -
------- -------
27,455 25,235
Less accumulated depreciation and amortization 4,060 -
------- -------
$23,395 $25,235
======= =======
5. Other Current Liabilities
Other current liabilities consisted of the following:
March 31, March 31,
1998 1997
--------- ---------
(In thousands)
Accrued compensation and fringe benefits $ 7,417 $ 4,569
Deferred income taxes .................. 795 347
Accrued liabilities .................... 8,021 7,588
------- -------
$16,233 $12,504
======= =======
6. Long-term Debt
Long-term debt consisted of the following:
Range of March 31, March 31,
Interest 1998 1997
---------- --------- ---------
(In thousands)
Revolving bank line of credit.. 7.86-9.00% $28,800 $52,000
Term loan ..................... 8.11-9.25 9,310 9,800
------- -------
38,110 61,800
Less current maturities ....... 815 490
------- -------
$37,295 $61,310
======= =======
F-11
<PAGE>
R.A.B. HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. Long-term Debt (Continued)
On March 31, 1997, Millbrook entered into an agreement, as amended, with
a group of commercial lending institutions providing for a credit facility in
the aggregate amount of $100 million consisting of revolving credit loans up
to $90.2 million and an amortizing term loan of $9.8 million (the "Credit
Agreement"). Borrowings under this long-term facility, which principally
expires March 31, 2002, are supported by specified assets in accordance with
a borrowing base formula, as defined in the Credit Agreement (see Note 12).
Substantially all of the Company's assets and Millbrook's stock are pledged
under the terms of the Credit Agreement. Additionally, the Credit Agreement
requires the maintenance of a minimum level of cash flow, as defined and
imposes restrictions on investments, capital expenditures, cash dividends,
management fees and advances to the parent and other indebtedness. At March
31, 1998, substantially all of the assets of the Company's subsidiaries are
unavailable for dividends. At March 31, 1998, Millbrook had available, under
the Credit Agreement, unused borrowing capacity of approximately $24 million,
net of outstanding letters of credit of approximately $885,000.
Borrowings under the Credit Agreement bear interest at either the London
interbank offered ("LIBO") rate plus a margin or the bank's alternate base
rate plus a margin (up to 2.50%). The margin rate, which ranged from 2.25% to
2.50% at March 31, 1998, is based upon availability pursuant to the borrowing
base calculation. At March 31, 1998, borrowings under the LIBO and alternate
base rate options were $36,310,000 and $1,800,000, respectively. In addition,
on May 1, 1997, Millbrook entered into a three-year interest rate protection
agreement that effectively caps rates on a notional principal amount up to
$50 million of borrowings at a LIBO rate of 75/8%, as required by the Credit
Agreement to manage the Company's interest rate exposure to market
fluctuations. The Company (i) does not engage in derivative activity for
trading or speculative purposes; (ii) periodically evaluates the financial
position of the counterparty; and (iii) does not expect non-performance by
the counterparty. At March 31, 1998, Millbrook's outstanding debt under the
Credit Agreement and the interest rate protection agreement approximate fair
value. The recognition of the fair value of the interest rate protection
agreement is not required since it its accounted for as a hedge.
Future maturities of the term loan at March 31, 1998 were as follows (in
thousands):
1999...... $ 815
2000...... 1,305
2001...... 1,960
2002...... 1,960
2003...... 3,270
------
$9,310
======
F-12
<PAGE>
R.A.B. HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. Stockholders' Equity
In conjunction with its acquisition of Millbrook in 1997, the Company
sold 20,000 shares of Series A Preferred Stock at $500 per share and 100,000
shares of Common Stock at $1.00 per share.
The holders of the Series A Preferred Stock are entitled to cumulative
preferential cash dividends of $50 per year (10%), per share. At March 31,
1998, the amount of accumulated unpaid dividends on the Series A Preferred
Stock was $50.00 per share. Unless all accumulated and unpaid dividends on
the Series A Preferred Stock are paid, no dividends shall be declared or paid
on the Company's Common Stock. The Preferred Stock is subject to an optional
redemption by the Company at any time, in whole or in part, at the redemption
price per share of $500 plus an amount equal to all accumulated and unpaid
dividends.
8. Commitments And Contingencies
Leases
The Company leases certain facilities, machinery and vehicles under
various non-cancelable operating lease agreements. The Company is required to
pay property taxes, insurance and normal maintenance costs for certain of its
facilities. Future minimum lease payments required under such leases in
effect at March 31, 1998 were as follows (in thousands):
1999......... $ 2,671
2000......... 2,310
2001......... 2,084
2002......... 1,977
2003......... 1,621
Thereafter... 4,216
-------
$14,879
=======
Total rent expense for all operating leases was $4.3 million for the
fiscal year ended March 31, 1998.
Contingencies
The Company is subject to pending claims and legal proceedings in the
normal course of its business. While it is not feasible to predict or
determine the outcome of these claims and proceedings, it is the opinion of
management that their outcome, to the extent not provided for through
insurance or otherwise, will not have a materially adverse effect on the
Company's financial position or results of future operations.
F-13
<PAGE>
R.A.B. HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9. Income Taxes
The provision for income taxes for the fiscal year ended March 31, 1998
consisted of the following (in thousands):
Currently payable:
Federal.......... $1,075
State............ 153
------
1,228
------
Deferred:
Federal.......... (93)
State............ (13)
------
(106)
------
$1,122
======
A reconciliation of the statutory United States Federal income tax rate
to the Company's effective income tax rate for the fiscal year ended March
31, 1998 follows:
Statutory rate............................................ 35.0%
State income taxes, net of Federal benefit................ 4.6
Other, principally meals and entertainment disallowance... 9.2
----
48.8%
====
The income tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities were as
follows:
March 31, March 31,
1998 1997
--------- ---------
(In thousands)
Deferred Tax Assets:
Accounts receivable, principally due to
allowance for doubtful accounts.................. $ 993 $ 1,086
Deferred compensation.............................. 3,279 3,005
Liability accruals................................. 3,771 4,787
Other, net......................................... 359 417
Deferred Tax Liabilities:
Inventories, principally due to acquisition basis
differences and financial statement allowances... (5,612) (6,210)
Property, plant & equipment, principally
due to basis differences......................... (4,567) (4,968)
------- -------
Net deferred tax liabilities $(1,777) $(1,883)
======= =======
F-14
<PAGE>
R.A.B. HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
10. Employee Benefit Plans
Retirement and Savings Plan
The Company has a retirement and savings plan ("401(k) Plan") covering
substantially all of its employees. The 401(k) Plan provides for matching
contributions by the Company which amounted to approximately $1.2 million
for the fiscal year ended March 31, 1998. In addition, the Company may make
annual discretionary contributions to employee accounts based, in part, on
the Company's financial performance. For the fiscal year ended March 31,
1998, the Company's discretionary contributions were approximately $1.1
million.
Deferred Compensation
In 1984, a predecessor of Millbrook implemented a deferred compensation
arrangement in the form of a non-qualified defined benefit plan and a
supplemental retirement plan which permitted former officers and certain
management employees, at the time, to defer portions of their compensation
and to earn specified maximum benefits upon retirement. The future benefit
obligations, which are fixed in accordance with the plan, have been recorded
at a discount rate of 8%. These plans do not allow new participants.
In an effort to provide for the benefits associated with these plans,
the Company purchased whole-life insurance contracts on the plan
participants (approximately $9.8 million of total value at March 31, 1998).
The cash surrender value of these policies is included in other assets. At
March 31, 1998, future payment obligations under the deferred compensation
arrangement were $395,000, $395,000, $395,000, $390,000 and $390,000 in
fiscal years ended March 31, 1999, 2000, 2001, 2002 and 2003, respectively.
11. Related Party Transactions
Concurrent with Millbrook's acquisition by R.A.B. Holdings, Inc.,
Millbrook entered into an arrangement with an entity owned by its majority
shareholder whereby the Company agreed (i) to pay a quarterly management fee
of $100,000; and (ii) to reimburse the entity for reasonable services
provided and out-of-pocket and other expenses incurred on its behalf. These
services include, among other things, treasury, cash management, certain
financial reporting, legal, labor and lease negotiation and employee
benefits administration. For the fiscal year ended March 31, 1998, Millbrook
paid management fees of $400,000 to this entity and $800,000 for reasonable
services provided to the Company pursuant to the aforementioned arrangement.
The reasonable services provided are based upon (i) the number of hours
incurred at the applicable pay rate; and (ii) out-of-pocket expenses,
related to the services provided. In the opinion of management, this
F-15
<PAGE>
R.A.B. HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Concluded)
11. Related Party Transactions (Continued)
methodology provides a reasonable basis for such allocation. In addition,
the Company believes that the terms of the arrangement with this entity were
no less favorable than could have been obtained from unaffiliated third
parties on an arm's length basis.
12. Subsequent Event (Unaudited)
Effective March 3, 1998, Enterprises, a wholly-owned subsidiary of
R.A.B. Holdings, Inc., formed on January 26, 1998, entered into a purchase
agreement with MANO Holdings I, LLC, KBMC Acquisition Company, L.P., MANO
Holdings Corporation ("MANO") and the stockholders of MANO to acquire all of
the outstanding membership interests of The B. Manischewitz Company, LLC
("Manischewitz"). As of and for the fiscal year ended July 31, 1997,
Manischewitz had total assets, revenues and operating income of
approximately $59.6 million, $54.8 million and $9.8 million, respectively.
On May 1, 1998, Enterprises acquired all of the outstanding interests of
Manischewitz for approximately $124 million less outstanding long-term debt
and certain other specified deductions, through the issuance of $120 million
Senior Notes due 2005 bearing interest at 10 1/2% ("10 1/2% Senior Notes")
and the Company's issuance of $48 million Senior Notes due 2008 bearing
interest at 13% ("13% Senior Notes") (collectively "Senior Notes"). The 13%
Senior Notes will pay interest for the first three years, semiannually from
an escrow account which was established upon their issuance ("Interest
Escrow Account"). Concurrent with the acquisition, the Company contributed
all of the capital stock of Millbrook to Enterprises.
The gross proceeds of $168 million from the issuance of the Senior
Notes were used to: (i) pay the purchase price for Manischewitz of $124
million, (ii) reduce outstanding borrowings by approximately $22 million
under the revolving credit portion of Millbrook's Credit Agreement, (iii)
fund the Interest Escrow Account with approximately $17 million and (iv) pay
fees and expenses relating to the acquisition of Manischewitz and offering
of the Senior Notes.
Also concurrent with the acquisition, the Credit Agreement was amended
to provide for, among other things, Millbrook and Manischewitz to be
co-borrowers under the Credit Agreement and certain assets of Manischewitz
to be included in determining borrowing capacity resulting in future
additional availability under the credit facility.
F-16
<PAGE>
R.A.B. HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except for share and per share data)
September 30, March 31,
1998 1998
(Unaudited)
ASSETS
Current assets:
Cash $ 4,099 $ 2,623
Accounts receivable 34,567 27,942
Inventories 55,060 41,814
Restricted investments 5,703 -
Other current assets 8,763 5,707
-------- --------
Total current assets 108,192 78,086
Noncurrent assets:
Restricted investments 11,685 -
Other assets 14,352 7,291
-------- --------
Total noncurrent assets 26,037 7,291
Property, plant and equipment, net 39,659 23,395
Excess of cost over fair value of net assets
acquired, net 96,278 -
-------- --------
Total assets $270,166 $108,772
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 1,046 $ 815
Accounts payable 38,888 31,035
Other current liabilities 26,740 16,233
-------- --------
Total current liabilities 66,674 48,083
-------- --------
Noncurrent liabilities:
Long-term debt 182,832 37,295
Deferred compensation 7,875 7,801
Other liabilities 8,885 4,416
-------- --------
Total noncurrent liabilities 199,592 49,512
Stockholders' equity:
Preferred stock, $500 par value, 100,000 shares
authorized, 20,000 shares of Series A issued
and outstanding 9,906 9,906
Common stock, $.01 par value, 100,000 shares
authorized and issued 1 1
Additional paid-in capital 98 98
Retained earnings (deficit) (6,102) 1,174
-------- --------
3,903 11,179
Less common stock in treasury - 2,600 and
1,600 shares 3 2
-------- --------
Total stockholders' equity 3,900 11,177
-------- --------
Total liabilities and stockholders' equity $270,166 $108,772
======== ========
See notes to condensed consolidated financial statements.
F-17
<PAGE>
R.A.B. HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Six Months Ended
----------------------------
September 30, September 30,
1998 1997
(Unaudited)
Revenues $234,455 $222,772
Costs and expenses:
Cost of sales 179,248 170,488
Selling 24,796 21,315
Distribution and warehousing 18,504 18,092
General and administrative 11,801 10,581
Amortization of excess of cost over fair
value of net assets acquired 1,014 -
-------- --------
Total costs and expenses 235,363 220,476
-------- --------
Operating (loss) income (908) 2,296
Interest expense, net 9,197 2,586
-------- --------
Loss before (benefit) provision for income taxes (10,105) (290)
(Benefit) provision for income taxes (2,829) 1
-------- --------
Net loss $ (7,276) $ (291)
======== ========
See notes to condensed consolidated financial statements.
F-18
<PAGE>
R.A.B. HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands except for share data)
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Retained Treasury Stock
--------------- --------------- Paid-In Earnings --------------
Shares Amount Shares Amount Capital (deficit) Shares Amount
------ ------ ------ ------ ---------- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1998 20,000 $9,906 100,000 $1 $98 $ 1,174 1,600 $2
Repurchase of common stock 1,000 1
Net loss (7,276)
------ ------ ------- -- --- ------- ----- --
Balance at September 30, 1998 20,000 $9,906 100,000 $1 $98 $(6,102) 2,600 $3
====== ====== ======= == === ======= ===== ==
</TABLE>
See notes to condensed consolidated financial statements.
F-19
<PAGE>
R.A.B. HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
-----------------------------
September 30, September 30,
1998 1997
(Unaudited)
Cash flows from operating activities:
Net loss $ (7,276) $ (291)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 3,290 1,566
Amortization of excess of cost over fair
value of net assets acquired 1,014 -
Deferred income taxes (1,777) -
Changes in assets and liabilities:
Accounts receivable 9,961 (730)
Inventorie (6,749) (4,418)
Accounts payab 5,353 11,602
Other assets and liabilitie 2,804 4,763
--------- --------
Net cash provided by operating activities 6,620 12,492
--------- --------
Cash flows from investing activities:
Purchase of The B. Manischewitz Company, LLC,
net of cash acquired (126,155) -
Acquisitions of plant and equipment (1,790) (415)
--------- --------
Net cash used in investing activities (127,945) (415)
--------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 168,000 -
Payment of debt issuance costs (5,975) -
Funding of Interest Escrow Account (16,991) -
Repayments under Credit Agreement (22,232) (12,641)
Purchase of treasury stock (1) (2)
--------- --------
Net cash provided by (used in)
financing activities 122,801 (12,643)
--------- --------
Net increase (decrease) in cash 1,476 (566)
Cash, beginning of period 2,623 2,637
--------- --------
Cash, end of period $ 4,099 $ 2,071
========= ========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 844 $ 1,315
Income taxes $ 749 $ 700
See notes to condensed consolidated financial statements.
F-20
<PAGE>
R.A.B. HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - Basis of Presentation
The consolidated financial statements include the accounts of R.A.B. Holdings,
Inc. and its wholly-owned subsidiary, R.A.B. Enterprises, Inc. and its
wholly-owned subsidiaries ("Enterprises") (collectively, the "Company"). The
Company is a holding company with no substantial assets or operations other than
its investment in Enterprises.
These financial statements should be read in conjunction with the Company's
summary of significant accounting policies included in its consolidated
financial statements as of March 31, 1998 and 1997, included elsewhere herein.
Effective March 3, 1998, Enterprises entered into a purchase agreement with MANO
Holdings I, LLC, KBMC Acquisition Company, L.P., MANO Holdings Corporation
("MANO") and the stockholders of MANO to acquire all of the outstanding
membership interests of The B. Manischewitz Company, LLC ("Manischewitz"). On
May 1, 1998, Enterprises acquired all of the outstanding interests of
Manischewitz for approximately $126.2 million through the issuance of $120
million Senior Notes due 2005 bearing interest at 10 1/2% ("10 1/2% Senior
Notes") and the Company's issuance of $48 million Senior Notes due 2008 bearing
interest at 13% ("13% Senior Notes"). The 10 1/2% Senior Notes are fully and
unconditionally guaranteed on a joint and several basis by Millbrook
Distribution Services Inc. and Manischewitz. The 13% Senior Notes will pay
interest for the first three years, semi-annually from a $17 million interest
escrow account which was established upon their issuance. The interest escrow
account consists of treasury securities which have been accounted for as held to
maturity and are classified on the condensed consolidated balance sheets as
Restricted investments. These restricted investments, which mature November 1
and May 1 during each of the first three years the 13% Senior Notes are
outstanding, may only be used to pay the semi-annual interest due.
The acquisition of Manischewitz was accounted for as a purchase and,
accordingly, the purchase price was allocated to the assets and liabilities of
Manischewitz based upon their estimated fair values at the date of acquisition,
based on preliminary allocations of purchase price which are subject to further
refinement and adjustment, including appraisals and other valuation analyses. In
the opinion of management, the preliminary allocations are not expected to
materially differ from the final allocations. The final allocations will include
costs relating to identified intangible assets, principally, trade names and
trademarks which will be amortized over a forty-year period. The excess of cost
over the fair value of net assets acquired represents goodwill which is being
amortized on a straight-line basis over its estimated useful life of forty
years. The statements of operations include the operating results of
Manischewitz since its date of acquisition. The pro forma combined historical
results, as if the Manischewitz business had been acquired at the beginning of
each of the periods presented are as follows:
Six Months Ended
September 30, September 30,
1998 1997
------------- -------------
Revenues $236,622 $238,986
Net Loss $(10,818) $ (6,589)
F-21
<PAGE>
R.A.B. HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
(Unaudited)
NOTE A - Basis of Presentation (continued)
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 as of September 30, 1998, and the results of operations and
cash flows for the periods ended September 30, 1998 and 1997.
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 at September 30, 1998 consisted
of the following (in thousands):
Raw materials $ 1,860
Finished goods 53,200
-------
$55,060
=======
NOTE C - Related Party Transactions
For the six month periods ended September 30, 1998 and 1997, the Company paid
$600,000 in each period to an affiliated entity for management fees, reasonable
services provided and expenses incurred on its behalf.
NOTE D - Comprehensive Income
Effective April 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income", which establishes
requirements for the reporting of comprehensive income (loss) and its
components. The Company does not have any other comprehensive income (loss), as
defined by SFAS No. 130; accordingly, there is no difference between the
Company's net income (loss) and comprehensive income (loss).
F-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
R.A.B. Enterprises, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of R.A.B.
Enterprises, Inc. (a wholly-owned subsidiary of R.A.B. Holdings, Inc.) and
subsidiary as of March 31, 1998 and March 31, 1997, and the related consolidated
statements of operations and stockholder's equity for the fiscal year ended
March 31, 1998 and the consolidated statements of cash flows for the period from
May 6, 1996 (date of inception) to March 31, 1997 and for the fiscal year ended
March 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of R.A.B. Enterprises, Inc. and
subsidiary as of March 31, 1998 and March 31, 1997, and the results of their
operations for the fiscal year ended March 31, 1998 and their cash flows for the
period from May 6, 1996 (date of inception) to March 31, 1997 and for the fiscal
year ended March 31, 1998 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
July 10, 1998
New York, New York
F-23
<PAGE>
R.A.B. ENTERPRISES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31, 1998 and 1997
(In thousands except for share and per share data)
<TABLE>
<CAPTION>
1998 1997
---------------- -----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 2,623 $ 1,903
Accounts receivable 27,942 29,892
Inventories 41,814 52,271
Other current assets 5,810 9,248
---------------- -----------------
Total current assets 78,189 93,314
Other assets 7,291 6,784
Property, plant and equipment, net 23,395 25,235
---------------- -----------------
$ 108,875 $ 125,333
================ =================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 815 $ 490
Accounts payable 31,035 29,083
Other current liabilities 16,231 11,442
---------------- -----------------
Total current liabilities 48,081 41,015
Noncurrent liabilities:
Long-term debt 37,295 61,310
Deferred compensation 7,801 7,668
Deferred income taxes 982 1,536
Other liabilities 3,434 3,704
---------------- -----------------
Total noncurrent liabilities 49,512 74,218
Commitments and contingencies
Stockholder's equity:
Common stock, $.01 par value, 200 shares,
authorized and issued - -
Additional paid-in capital 10,100 10,100
Retained earnings 1,182 -
---------------- -----------------
Total stockholder's equity 11,282 10,100
---------------- -----------------
$ 108,875 $ 125,333
================ =================
</TABLE>
See notes to consolidated financial statements.
F-24
<PAGE>
R.A.B. ENTERPRISES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
For the Fiscal Year Ended March 31, 1998
(In thousands)
Revenues $ 470,201
Costs and expenses:
Cost of sales 360,162
Selling 43,766
Distribution and warehousing 37,339
General and administrative 21,551
------------
Total costs and expenses 462,818
------------
Operating income 7,383
Interest expense, net 5,079
------------
Income before provision for income taxes 2,304
Provision for income taxes 1,122
------------
Net income $ 1,182
============
See notes to consolidated financial statements.
F-25
<PAGE>
R.A.B. ENTERPRISES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(In thousands except for share data)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings
------ ------ ------- --------
<S> <C> <C> <C> <C>
Balance at April 1, 1997 200 $ - $ 10,100 $ -
Net income 1,182
----------- --------- ---------- --------
Balance at March 31, 1998 200 $ - $ 10,100 $1,182
=========== ========= ========== ========
</TABLE>
See notes to consolidated financial statements.
F-26
<PAGE>
R.A.B. ENTERPRISES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Period from
Fiscal Year May 6, 1996
Ended (date of inception)
March 31, to March 31,
1998 1997
---------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,182 $
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,471
Gain on disposition of equipment (20)
Deferred income taxes (106)
Changes in assets and liabilities:
Accounts receivable 1,950
Inventories 10,457
Other current assets 3,438
Accounts payable 1,952
Other current liabilities 4,789
Other assets and liabilities (1,477)
---------- ----------
Net cash provided by operating activities 26,636
---------- ----------
Cash flows from investing activities:
Purchase of Millbrook Distribution Services Inc. (69,167)
Acquisitions of equipment (2,309)
Proceeds from disposition of equipment 83
---------- ----------
Net cash used in investing activities (2,226) (69,167)
---------- ----------
Cash flows from financing activities:
(Repayments) borrowings under Credit Agreement (23,690) 61,800
Equity investment from parent 10,100
Other (830)
---------- ----------
Net cash (used in) provided by financing activities (23,690) 71,070
---------- ----------
Net increase in cash 720 1,903
Cash, beginning of year 1,903 --
---------- ----------
Cash, end of year $ 2,623 $ 1,903
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 4,054 $ --
Income taxes $ 1,392 $ --
</TABLE>
See notes to consolidated financial statements.
F-27
<PAGE>
R.A.B. ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary Of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation - R.A.B.
Enterprises, Inc. (the "Company") is a wholly-owned subsidiary of
R.A.B. Holdings, Inc. ("Holdings"). On January 26, 1998, Holdings
formed the Company and on May 1, 1998 contributed to the Company its
wholly-owned subsidiary Millbrook Distribution Services Inc.
("Millbrook"), which contribution has been accounted for as an "as if"
pooling of interests. Millbrook is one of the nation's largest
independent value-added distributors of health and beauty care, general
merchandise and specialty and natural food products. All significant
intercompany transactions and balances are eliminated in consolidation.
Use of Estimates - The preparation of financial statements, in
conformity with generally accepted accounting principles, requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
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
allowance for doubtful accounts is based upon the expected
collectability of its trade accounts receivable.
Fiscal Year - The Company's fiscal year ends on March 31.
Inventories - Inventories are stated at the lower of cost or
market. Cost is determined by the last-in, first-out ("LIFO") method.
At March 31, 1998, the replacement cost of inventories valued using the
LIFO method exceeded the net carrying amount of such inventories by
approximately $255,000.
Property, Plant and Equipment - Property, plant and equipment
are recorded at cost. For financial reporting purposes, depreciation is
provided on the straight-line method over the following estimated
useful lives:
Buildings and improvements..................... 5-35 years
Machinery and equipment........................ 2-15 years
Rolling stock.................................. 3- 8 years
F-28
<PAGE>
R.A.B. ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
1. Summary Of Significant Accounting Policies (Continued)
Expenditures which significantly increase value or extend
useful lives are capitalized, while ordinary maintenance and repairs
are expensed as incurred. The cost and related accumulated depreciation
of assets replaced, retired or disposed of are removed from the
accounts and any related gains or losses are reflected in operations.
Long-Lived Assets - The Company reviews its long-lived assets
and certain related intangibles for impairment whenever changes in
circumstances indicate that the carrying amount of an asset may not be
fully recoverable. Such changes in circumstances may include, among
other factors, a significant change in technology that may render an
asset obsolete or noncompetitive or a significant change in the extent
or manner in which an asset is used. The assessment for potential
impairment is based upon the Company's ability to recover the
unamortized balance of its long-lived assets from expected future cash
flows on an undiscounted basis (without interest charges). If such
expected future cash flows are less than the carrying amount of the
asset, an impairment loss would be recorded.
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 on historical experience and
known events.
Income Taxes - The Company is included in the consolidated
Federal income tax return of Holdings and its annual Federal income tax
liability is determined as if the Company had filed a separate
consolidated Federal income tax return. Deferred income taxes result
primarily from temporary differences between financial and tax
reporting and acquisition basis differences.
Accounting Pronouncements - Statement of Financial Accounting
Standards ("SFAS") No. 131, "Disclosures about Segments of an
Enterprise and Related Information" was issued in June 1997 and is
effective for financial statements for periods beginning after December
15, 1997. This statement establishes standards for the manner in which
operating segments of public reporting entities are presented in
interim and annual financial statements. The Company believes its
current reporting systems will enable it to comply with the
requirements of SFAS No. 131.
SFAS No. 132 "Employers' Disclosures about Pensions and Other
Postretirement Benefits" was issued in February 1998 and is effective
for periods beginning after December 15, 1997. The Company will adopt
SFAS No. 132 effective for its 1998 fiscal year end.
F-29
<PAGE>
R.A.B. ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
1. Summary Of Significant Accounting Policies (Continued)
The aforementioned recently issued accounting pronouncements
establish standards for disclosures only and therefore will have no
impact on the Company's financial position or results of operations.
SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" was issued in June 1998 and is effective for fiscal
years beginning after June 15, 1999. SFAS No. 133 requires the
recognition of all derivatives in the consolidated balance sheet as
either assets or liabilities measured at fair value. The Company will
adopt SFAS No. 133 effective for its 2000 fiscal year end. The Company
has not yet determined the impact SFAS No. 133 will have on its
financial position or results of operations when such statement is
adopted.
2. Formation And Acquisition
On March 31, 1997, Holdings acquired Millbrook for a purchase
price of approximately $67 million, including transaction costs,
through the sale of stock and borrowings under Millbrook's Credit
Agreement. The acquisition was accounted for as a purchase and,
accordingly, the purchase price was allocated to the assets and
liabilities of Millbrook based upon their estimated fair values at the
date of acquisition. The fair values of assets acquired (approximately
$129 million) and liabilities assumed (approximately $53 million) were
based upon third party appraisals and other valuation analyses. The
fair value of the net assets acquired exceeded the purchase price by
approximately $9 million. The resulting negative goodwill reduced the
fair value assigned to Millbrook's property, plant and equipment.
3. Accounts Receivable
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
------------- -------------
(In thousands)
<S> <C> <C>
Accounts receivable........................................... $ 30,383 $ 32,143
Allowance for doubtful accounts............................... (2,441) (2,251)
------------- -------------
$ 27,942 $ 29,892
============= =============
</TABLE>
F-30
<PAGE>
R.A.B. ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. Property, Plant & Equipment
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
------------- -------------
(In thousands)
<S> <C> <C>
Land.......................................................... $ 1,561 $ 1,561
Buildings and improvements.................................... 9,393 9,371
Machinery and equipment....................................... 12,902 10,884
Rolling stock................................................. 3,398 3,419
Work in progress.............................................. 201 -
------------- -------------
27,455 25,235
Less accumulated depreciation and amortization................ 4,060 -
------------- -------------
$ 23,395 $ 25,235
============= =============
</TABLE>
5. Other Current Liabilities
Other current liabilities consisted of the following:
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
------------- -------------
(In thousands)
<S> <C> <C>
Accrued compensation and fringe benefits...................... $ 7,417 $ 4,569
Deferred income taxes......................................... 795 347
Accrued liabilities........................................... 8,019 6,526
------------- -------------
$ 16,231 $ 11,442
============= =============
</TABLE>
6. Long-term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
Range of March 31, March 31,
Interest 1998 1997
------------- ------------- ---------------
(In thousands)
<S> <C> <C> <C>
Revolving bank line of credit............... 7.86-9.00% $ 28,800 $ 52,000
Term loan................................... 8.11-9.25 9,310 9,800
------------- ---------------
38,110 61,800
Less current maturities..................... 815 490
------------- ---------------
$ 37,295 $ 61,310
============= ===============
</TABLE>
F-31
<PAGE>
R.A.B. ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. Long-term Debt (Continued)
On March 31, 1997, Millbrook entered into an agreement, as
amended, with a group of commercial lending institutions providing for
a credit facility in the aggregate amount of $100 million consisting of
revolving credit loans up to $90.2 million and an amortizing term loan
of $9.8 million (the "Credit Agreement"). Borrowings under this
long-term facility, which principally expires March 31, 2002, are
supported by specified assets in accordance with a borrowing base
formula, as defined in the Credit Agreement (see Note 11).
Substantially all of the Company's assets and Millbrook's stock are
pledged under the terms of the Credit Agreement. Additionally, the
Credit Agreement requires the maintenance of a minimum level of cash
flow, as defined and imposes restrictions on investments, capital
expenditures, cash dividends, management fees and advances to the
parent and other indebtedness. At March 31, 1998, substantially all of
the assets of the Company's subsidiary are unavailable for dividends.
At March 31, 1998, Millbrook had available, under the Credit Agreement,
unused borrowing capacity of approximately $24 million, net of
outstanding letters of credit of approximately $885,000.
Borrowings under the Credit Agreement bear interest at either
the London interbank offered ("LIBO") rate plus a margin or the bank's
alternate base rate plus a margin (up to 2.50%). The margin rate, which
ranged from 2.25% to 2.50% at March 31, 1998, is based upon
availability pursuant to the borrowing base calculation. At March 31,
1998, borrowings under the LIBO and alternate base rate options were
$36,310,000 and $1,800,000, respectively. In addition, on May 1, 1997,
Millbrook entered into a three-year interest rate protection agreement
that effectively caps rates on a notional principal amount up to $50
million of borrowings at a LIBO rate of 7 5/8% as required by the
Credit Agreement to manage the Company's interest rate exposure to
market fluctuations. The Company (i) does not engage in derivative
activity for trading or speculative purposes; (ii) periodically
evaluates the financial position of the counterparty; and (iii) does
not expect non-performance by the counterparty. At March 31, 1998,
Millbrook's outstanding debt under the Credit Agreement and the
interest rate protection agreement approximate fair value. The
recognition of the fair value of the interest rate protection
agreement is not required since it is accounted for as a hedge.
Future maturities of the term loan at March 31, 1998 were as
follows (in thousands):
1999..................................... $ 815
2000..................................... 1,305
2001..................................... 1,960
2002..................................... 1,960
2003..................................... 3,270
---------------
$ 9,310
===============
F-32
<PAGE>
R.A.B. ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. Commitments And Contingencies
Leases
The Company leases certain facilities, machinery and vehicles
under various non-cancelable operating lease agreements. The Company is
required to pay property taxes, insurance and normal maintenance costs
for certain of its facilities. Future minimum lease payments required
under such leases in effect at March 31, 1998 were as follows (in
thousands):
1999.................................... $ 2,671
2000.................................... 2,310
2001.................................... 2,084
2002.................................... 1,977
2003.................................... 1,621
Thereafter.............................. 4,216
--------------
$ 14,879
==============
Total rent expense for all operating leases was $4.3 million
for the fiscal year ended March 31, 1998.
Contingencies
The Company is subject to pending claims and legal proceedings
in the normal course of its business. While it is not feasible to
predict or determine the outcome of these claims and proceedings, it is
the opinion of management that their outcome, to the extent not
provided for through insurance or otherwise, will not have a materially
adverse effect on the Company's financial position or results of future
operations.
8. Income Taxes
The provision for income taxes for the fiscal year ended March
31, 1998 consisted of the following (in thousands):
Currently payable:
Federal.............................. $ 1,075
State................................ 153
--------------
1,228
--------------
Deferred:
Federal.............................. (93)
State................................ (13)
--------------
(106)
--------------
$ 1,122
==============
F-33
<PAGE>
R.A.B. ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
8. Income Taxes (Continued)
A reconciliation of the statutory United States Federal income
tax rate to the Company's effective income tax rate for the fiscal year
ended March 31, 1998 follows:
Statutory rate.............................................. 35.0%
State income taxes, net of Federal benefit.................. 4.6
Other, principally meals and entertainment disallowance..... 9.1
----
48.7%
====
The income tax effects of temporary differences that give rise
to significant portions of the deferred tax assets and liabilities were
as follows:
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
------------- -----------
(In thousands)
<S> <C> <C>
Deferred Tax Assets:
Accounts receivable, principally due to
allowance for doubtful accounts................................... $ 993 $ 1,086
Deferred compensation............................................... 3,279 3,005
Liability accruals.................................................. 3,771 4,787
Other, net.......................................................... 359 417
Deferred Tax Liabilities:
Inventories, principally due to acquisition basis
differences and financial statement allowances.................... (5,612) (6,210)
Property, plant and equipment, principally
due to basis differences.......................................... (4,567) (4,968)
------------- -------------
Net deferred tax liabilities ........................................ $ (1,777) $ (1,883)
============= =============
</TABLE>
9. Employee Benefit Plans
Retirement and Savings Plan
The Company has a retirement and savings plan ("401(k) Plan")
covering substantially all of its employees. The 401(k) Plan provides
for matching contributions by the Company which amounted to
approximately $1.2 million for the fiscal year ended March 31, 1998. In
addition, the Company may make annual discretionary contributions to
employee accounts based, in part, on the Company's financial
performance. For the fiscal year ended March 31, 1998, the Company's
discretionary contributions were approximately $1.1 million.
F-34
<PAGE>
R.A.B. ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9. Employee Benefit Plans (Continued)
Deferred Compensation
In 1984, a predecessor of Millbrook implemented a deferred
compensation arrangement in the form of a non-qualified defined benefit
plan and a supplemental retirement plan which permitted former officers
and certain management employees, at the time, to defer portions of
their compensation and to earn specified maximum benefits upon
retirement. The future benefit obligations, which are fixed in
accordance with the plan, have been recorded at a discount rate of 8%.
These plans do not allow new participants.
In an effort to provide for the benefits associated with these
plans, the Company purchased whole-life insurance contracts on the plan
participants (approximately $9.8 million of total value at March 31,
1998). The cash surrender value of these policies is included in other
assets. At March 31, 1998, future payment obligations under the
deferred compensation arrangement were $395,000, $395,000, $395,000,
$390,000 and $390,000 in fiscal years ended March 31, 1999, 2000, 2001,
2002 and 2003, respectively.
10. Related Party Transactions
Concurrent with Millbrook's acquisition by Holdings, Millbrook
entered into an arrangement with an entity owned by its majority
shareholder whereby the Company agreed (i) to pay a quarterly
management fee of $100,000; and (ii) to reimburse the entity for
reasonable services provided and out-of-pocket and other expenses
incurred on its behalf. These services include, among other things,
treasury, cash management, certain financial reporting, legal, labor
and lease negotiation and employee benefits administration. For the
fiscal year ended March 31, 1998, Millbrook paid management fees of
$400,000 to this entity and $800,000 for reasonable services provided
to the Company pursuant to the aforementioned arrangement. The
reasonable services provided are based upon (i) the number of hours
incurred at the applicable pay rate; and (ii) out-of-pocket expenses,
related to the services provided. In the opinion of management, this
methodology provides a reasonable basis for such allocation. In
addition, the Company believes that the terms of the arrangement with
this entity were no less favorable than could have been obtained from
unaffiliated third parties on an arm's length basis.
11. Subsequent Event (Unaudited)
Effective March 3, 1998, the Company entered into a purchase
agreement with MANO Holdings I, LLC, KBMC Acquisition Company, L.P.,
MANO Holdings Corporation ("MANO") and the stockholders of MANO to
acquire all of the outstanding membership interests of The B.
Manischewitz Company, LLC ("Manischewitz"). As of and for the fiscal
year ended July 31, 1997, Manischewitz had total assets, revenues and
operating income of approximately $59.6 million, $54.8 million and $9.8
million,
F-35
<PAGE>
R.A.B. ENTERPRISES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Concluded)
11. Subsequent Event (Unaudited) (Continued)
respectively. On May 1, 1998, the Company acquired all of the
outstanding interests of Manischewitz for approximately $124 million
less outstanding long-term debt and certain other specified deductions
through the issuance of $120 million Senior Notes due 2005 bearing
interest at 101/2% ("101/2% Senior Notes"). The 10 1/2% Senior Notes
are jointly and severally guaranteed on an unsecured basis by
Millbrook and Manischewitz.
Additionally, on May 1, 1998 Holdings issued $48 million
Senior Notes due 2008 bearing interest at 13% ("13% Senior Notes")
(collectively, "Senior Notes") and contributed the net proceeds, after
expenses and amounts deposited in an interest escrow account, to the
Company.
The gross proceeds of $168 million from the issuance of the
Senior Notes were used to: (i) pay the purchase price for Manischewitz
of $124 million, (ii) reduce outstanding borrowings by approximately
$22 million under the revolving credit portion of Millbrook's Credit
Agreement, (iii) fund the interest escrow account with approximately
$17 million, and (iv) pay fees and expenses relating to the acquisition
of Manischewitz and offering of the Senior Notes.
Also concurrent with the acquisition, the Credit Agreement was
amended to provide for, among other things, Millbrook and Manischewitz
to be co-borrowers under the Credit Agreement and certain assets of
Manischewitz to be included in determining the borrowing base resulting
in future additional availability under the credit facility.
F-36
<PAGE>
R.A.B. ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except for share and per share data)
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash $ 4,099 $ 2,623
Accounts receivable 34,567 27,942
Inventories 55,060 41,814
Other current assets 8,845 5,810
----------------- -----------------
Total current assets 102,571 78,189
Other assets 12,781 7,291
Property, plant and equipment, net 39,659 23,395
Excess of cost over fair value of net assets acquired, net 96,278 -
----------------- -----------------
Total assets $ 251,289 $ 108,875
================= =================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 1,046 $ 815
Accounts payable 38,888 31,035
Other current liabilities 24,126 16,231
----------------- -----------------
Total current liabilities 64,060 48,081
----------------- -----------------
Noncurrent liabilities:
Long-term debt 134,832 37,295
Deferred compensation 7,875 7,801
Other liabilities 8,885 4,416
----------------- -----------------
Total noncurrent liabilities 151,592 49,512
Stockholder's equity:
Common stock, $1.00 par value, 200 shares
authorized and issued - -
Additional paid-in capital 39,482 10,100
Retained earnings (deficit) (3,845) 1,182
----------------- -----------------
Total stockholder's equity 35,637 11,282
----------------- -----------------
Total liabilities and stockholder's equity $ 251,289 $ 108,875
================= =================
</TABLE>
See notes to condensed consolidated financial statements.
F-37
<PAGE>
R.A.B. ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
--------------------------------------
September 30, September 30,
1998 1997
(Unaudited)
<S> <C> <C>
Revenues $ 234,455 $ 222,772
Costs and expenses:
Cost of sales 179,248 170,488
Selling 24,796 21,315
Distribution and warehousing 18,504 18,092
General and administrative 11,801 10,577
Amortization of excess of cost over fair value
of net assets acquired 1,014 -
-------------- --------------
Total costs and expenses 235,363 220,472
-------------- -----------------
Operating (loss) income (908) 2,300
Interest expense, net 6,905 2,586
-------------- -----------------
Loss before (benefit) provision for income taxes (7,813) (286)
(Benefit) provision for income taxes (2,786) 1
-------------- -----------------
Net loss $ (5,027) $ (287)
============== =================
</TABLE>
See notes to condensed consolidated financial statements.
F-38
<PAGE>
R.A.B. ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(In thousands except for share data)
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional Retained
------------ Paid-In Earnings
Shares Amount Capital (deficit)
------ ------ ------- ---------
<S> <C> <C> <C> <C>
Balance at April 1, 1998 200 $ - $ 10,100 $ 1,182
Additional equity investment from parent 29,382
Net loss (5,027)
------ ----- --------- --------
Balance at September 30, 1998 200 $ - $ 39,482 $ (3,845)
====== ===== ========= ========
</TABLE>
See note to condensed consolidated financial statements.
F-39
<PAGE>
R.A.B. ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
-------------------------------------
September 30, September 30,
1998 1997
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,027) $ (287)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 3,165 1,566
Amortization of excess of cost over fair value
of net assets acquired 1,014 -
Deferred income taxes (1,734) -
Changes in assets and liabilities:
Accounts receivable 9,961 (730)
Inventories (6,749) (4,418)
Accounts payable 5,353 11,602
Other assets and liabilities 636 5,491
----------------- -----------------
Net cash provided by operating activities 6,619 13,224
----------------- -----------------
Cash flows from investing activities:
Purchase of The B. Manischewitz Company, LLC,
net of cash acquired (126,155) -
Acquisitions of plant and equipment (1,790) (415)
----------------- -----------------
Net cash used in investing activities (127,945) (415)
----------------- -----------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 120,000 -
Payment of debt issuance costs (4,348) -
Repayments under Credit Agreement (22,232) (12,641)
Additional equity investment from Parent 29,382 -
----------------- -----------------
Net cash provided by (used in) financing activities 122,802 (12,641)
----------------- -----------------
Net increase in cash 1,476 168
Cash, beginning of period 2,623 1,903
----------------- -----------------
Cash, end of period $ 4,099 $ 2,071
================= =================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 844 $ 1,315
Income taxes $ 747 $ 700
</TABLE>
See notes to condensed consolidated financial statements.
F-40
<PAGE>
R.A.B. ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE A - Basis of Presentation
R.A.B. Enterprises, Inc. (the "Company") is a wholly-owned subsidiary of
R.A.B. Holdings, Inc. ("Holdings"). On January 26, 1998, Holdings formed the
Company and on May 1, 1998 contributed to the Company its wholly-owned
subsidiary Millbrook Distribution Services Inc. ("Millbrook"), which
contribution has been accounted for as an "as if" pooling of interests.
These financial statements should be read in conjunction with the Company's
summary of significant accounting policies included in its consolidated
financial statements as of March 31, 1998 and 1997, included elsewhere herein.
Effective March 3, 1998, the Company entered into a purchase agreement with
Mano Holdings I, LLC, KBMC Acquisition Company, L.P., MANO Holdings
Corporation ("MANO") and the stockholders of MANO to acquire all of the
outstanding membership interests of The B. Manischewitz Company, LLC
("Manischewitz"). On May 1, 1998, the Company acquired all of the outstanding
interests of Manischewitz for approximately $126.2 million through the
issuance of $120 million Senior Notes due 2005 bearing interest at 10 1/2%
("10 1/2% Senior Notes"). The 10 1/2% Senior Notes are fully and
unconditionally guaranteed on a joint and several basis by Millbrook and
Manischewitz. Concurrently, on May 1, 1998, Holdings issued $48 million Senior
Notes due 2008 bearing interest at 13%, funded a $17 million interest escrow
account and contributed the remaining net proceeds to the Company.
The Company is a holding company with no substantial assets or operations
other than its investments in Millbrook and Manischewitz. Accordingly,
separate financial statements of Millbrook and Manischewitz, which are the
Company's only subsidiaries, are not presented since management has determined
that such information is not material to investors.
The acquisition of Manischewitz was accounted for as a purchase and,
accordingly, the purchase price was allocated to the assets and liabilities of
Manischewitz based upon their estimated fair values at the date of
acquisition, based on preliminary allocations of purchase price which are
subject to further refinement and adjustment including appraisals and other
valuation analyses. In the opinion of management, the preliminary allocations
are not expected to materially differ from the final allocations. The final
allocations will include costs relating to identified intangible assets,
principally trade names and trademarks which will be amortized over a
forty-year period. The excess of cost over the fair value of net assets
acquired represents goodwill which is being amortized on a straight-line basis
over its estimated useful life of forty years. The statements of operations
include the operating results of Manischewitz since its date of acquisition.
The pro forma combined historical results, as if the Manischewitz business had
been acquired at the beginning of each of the periods presented are as
follows:
Six Months Ended
September 30, September 30,
1998 1997
------------- -------------
Revenues $ 236,622 $ 238,986
Net loss $ (6,264) $ (4,036)
F-41
<PAGE>
R.A.B. ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
(Unaudited)
- -------------------------------------------------------------------------------
NOTE A - Basis of Presentation (continued)
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 as of September 30, 1998, and the results of
operations and cash flows for the periods ended September 30, 1998 and 1997.
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 at September 30, 1998
consisted of the following (in thousands):
Raw materials $ 1,860
Finished goods 53,200
-------------
$ 55,060
=============
NOTE C - Related Party Transactions
For the six month periods ended September 30, 1998 and 1997, the Company paid
$600,000 in each period to an affiliated entity for management fees,
reasonable services provided and expenses incurred on its behalf.
NOTE D - Comprehensive Income
Effective April 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income", which
establishes requirements for the reporting of comprehensive income (loss) and
its components. The Company does not have any other comprehensive income
(loss), as defined by SFAS No. 130; accordingly, there is no difference
between the Company's net income (loss) and comprehensive income (loss).
F-42
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Managers and the Unitholders of
The B. Manischewitz Company, LLC:
We have audited the accompanying balance sheets of The B. Manischewitz
Company, LLC (a Delaware limited liability corporation) as of July 31, 1997
and 1996, and the related statements of operations, changes in equity and cash
flows for each of the three years in the period ended July 31, 1997. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The B. Manischewitz Company,
LLC as of July 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended July 31, 1997, in
conformity with generally accepted accounting principles.
As discussed in Note 8 to the financial statements, effective August 1, 1995,
the Company changed its method of accounting for postretirement benefits other
than pensions.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
September 24, 1997
F-43
<PAGE>
THE B. MANISCHEWITZ COMPANY, LLC
BALANCE SHEETS
JULY 31, 1997 AND 1996
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1997 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $3,115 $1,811
Accounts receivable, net of allowance for doubtful accounts of $700
and $250, respectively 6,381 5,085
Inventories 9,217 10,018
Prepaid expenses and other current assets 898 706
------------ ------------
Total current assets 19,611 17,620
PROPERTY, PLANT AND EQUIPMENT, net 12,202 12,647
INTANGIBLE ASSETS, net 27,611 28,926
OTHER ASSETS 139 144
------------ ------------
Total assets $59,563 $59,337
============ ============
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $3,157 $2,700
Accounts payable 2,424 1,930
Accrued liabilities 2,002 1,639
------------ ------------
Total current liabilities 7,583 6,269
LONG-TERM DEBT 37,602 41,300
LONG-TERM LIABILITIES 4,434 4,318
------------ ------------
Total liabilities 49,619 51,887
------------ ------------
COMMITMENTS AND CONTINGENCIES
EQUITY 9,944 7,450
------------ ------------
Total liabilities and equity $59,563 $59,337
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-44
<PAGE>
THE B. MANISCHEWITZ COMPANY, LLC
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JULY 31, 1997, 1996 AND 1995
(dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
NET REVENUES $55,383 $52,003 $49,194
ROYALTIES 404 396 387
------------ ------------ ------------
Total revenues 55,787 52,399 49,581
COST OF SALES 33,558 33,068 31,199
------------ ------------ ------------
Gross profit 22,229 19,331 18,382
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES,
including amortization of intangible assets of $1,434, $1,112 and
$1,175, respectively 12,422 11,120 11,034
------------ ------------ ------------
Operating income 9,807 8,211 7,348
INTEREST EXPENSE (4,486) (3,705) (2,946)
------------ ------------ ------------
Income before income taxes (benefit),
extraordinary item and cumulative effect of
change in accounting principle 5,321 4,506 4,402
PROVISION (BENEFIT) FOR INCOME TAXES - (145) 2,135
------------ ------------ ------------
Income before extraordinary item and
cumulative effect of change in accounting
principle 5,321 4,651 2,267
EXTRAORDINARY ITEM, net of related income tax benefit of $1,310
- (1,965) -
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, net of related income tax benefit of $502 - (754) -
------------ ------------ ------------
Net income $ 5,321 $ 1,932 $ 2,267
============ ============ ============
PRO FORMA INFORMATION:
Income tax provision $ 2,415 $ 1,952
============ ============
Net income (loss) $ 2,906 ($165)
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-45
<PAGE>
THE B. MANISCHEWITZ COMPANY, LLC
STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED JULY 31, 1997, 1996 AND 1995
(dollars in thousands, except share/unit data)
<TABLE>
<CAPTION>
Shares/
Units Amount
------------- -------------
<S> <C> <C>
BALANCE AT AUGUST 1, 1994 100 $16,881
Net income - 2,267
------------- -------------
BALANCE AT JULY 31, 1995 100 19,148
Net income - 1,932
Distribution to shareholders - (28,630)
Conversion from C corporation (shares)
to limited liability corporation (units) 9,900 -
Capital contribution - 15,000
------------- -------------
BALANCE AT JULY 31, 1996 10,000 7,450
Net income - 5,321
Repurchase of units - (82)
Distributions to
members - (2,510)
Adjustment of unfunded
pension liability - (235)
------------- -------------
BALANCE AT JULY 31, 1997 10,000 $ 9,944
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-46
<PAGE>
THE B. MANISCHEWITZ COMPANY, LLC
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 1997, 1996 AND 1995
(dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ------------ ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $5,321 $1,932 $2,267
Adjustments to reconcile net income to net cash provided
by (used in) operating activities-
Extraordinary item - 1,965 -
Cumulative effect of change in accounting principle - 754 -
Depreciation and amortization 2,664 2,236 2,097
Benefit for deferred income taxes - (2,420) (63)
Changes in assets and liabilities-
Accounts receivable (1,746) (1,374) 522
Inventories 251 (859) (1,439)
Prepaid expenses and other (187) (192) (269)
Intangible assets (800) (1,231) (1,541)
Accounts payable and accrued liabilities 857 (1,541) 717
Long-term liabilities 116 264 (154)
----------- ------------ ----------
Net cash provided by (used in) operating activities 6,476 (466) 2,137
----------- ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (339) (1,064) (516)
Net proceeds from Distributorship Agreement 1,000 - -
----------- ------------ ----------
Net cash provided by (used in) investing activities 661 (1,064) (516)
----------- ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Prepayment penalty on termination of debt $ - ($1,300) $ -
Deferred financing costs - (2,509) -
Distributions to members/shareholders (2,510) (28,630) -
Capital contribution and (repurchase) of units (82) 15,000 -
Proceeds from revolver borrowings 10,700 - -
Repayments of revolver borrowings (10,700) - -
Repayment of company notes - (29,000) -
Term loan (repayments) borrowings (3,241) 44,000 -
----------- ------------ ----------
Net cash used in financing activities (5,833) (2,439) -
----------- ------------ ----------
Increase (decrease) in cash and cash equivalents 1,304 (3,969) 1,621
CASH AND CASH EQUIVALENTS, beginning of year 1,811 5,780 4,159
----------- ------------ ----------
CASH AND CASH EQUIVALENTS, end of year $3,115 $1,811 $5,780
=========== ============ ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $4,131 $2,997 $2,624
Taxes $ - $1,534 $2,338
</TABLE>
The accompanying notes are an integral part of these statements.
F-47
<PAGE>
THE B. MANISCHEWITZ COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
(dollars in thousands, except share/unit amounts)
(1) FORMATION AND BUSINESS OPERATIONS:
Formation-
Effective May 31, 1996, The B. Manischewitz Company, LLC (the
"Company") was reorganized and recapitalized. As a result, the
Company (i) commenced operations as a limited liability company, the
effect of which is that income taxes, if any, are the obligation of
its shareholders and partners; (ii) entered into a new credit
agreement with financial institutions (see Note 7) and repaid its
existing outstanding debt; (iii) received a capital contribution of
$15,000; and (iv) made a distribution to shareholders of $28,630.
These transactions did not result in a change of control;
accordingly, for financial reporting purposes, the assets and
liabilities of the Company have been reflected on a historical cost
basis. The Company is 99% owned by MANO Holdings I, LLC and 1% owned
by MANO Holdings II, LLC (which is 100% owned by MANO Holdings I,
LLC). MANO Holdings I, LLC is 62% owned by KBMC Acquisition Company,
L.P. (KBMC) and 38% owned by MANO Holdings Corporation (MANO).
Prior to its commencement of operations as a limited liability
company, the Company, which was organized as a C corporation, was
wholly-owned by MANO. The financial statements included herein
reflect the operations of the Company as a C corporation through May
31, 1996 and a limited liability company subsequent to that date.
Business Operations-
The Company manufactures and distributes ethnic and other foods
including, among others, matzos, cakes, cookies, soups, noodles and
processed fish products. The Company also licenses its name to third
parties for which it receives royalties.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES:
Principles of Consolidation-
The accompanying financial statements include the accounts of The B.
Manischewitz Company and its subsidiaries through May 31, 1996. All
significant intercompany accounts and transactions have been
eliminated in consolidation through that date. As of May 31, 1996,
the subsidiaries of The B. Manischewitz Company were effectively
merged into the Company.
F-48
<PAGE>
THE B. MANISCHEWITZ COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS (continued)
(dollars in thousands, except share/unit amounts)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued):
Concentrations of Credit Risk-
Financial instruments, which potentially subject the Company to
significant concentrations of credit risk, consist principally of
cash and cash equivalents and trade accounts receivable.
The Company's products are sold to approximately 50 independent
distributors, two of which represented approximately 31% and 25% of
total revenues for the years ended July 31, 1997 and 1996,
respectively, and one of which represented approximately 12% of total
revenues for the year ended July 31, 1995.
Inventories-
Substantially all inventories are accounted for using the lower of
the last-in, first-out (LIFO) cost method or market.
Property, Plant and Equipment-
Property, plant and equipment is stated at cost and is depreciated
using the straight-line method for financial reporting purposes and
both straight-line and accelerated methods for income tax purposes.
The estimated useful lives used in computing depreciation and
amortization for financial reporting purposes are: buildings 20
years, machinery and equipment 10 years, furniture and fixtures 10
years.
Long-Lived Assets-
The Company reviews its long-lived assets and certain related
intangibles for impairment whenever changes in circumstances indicate
that the carrying amount of an asset may not be fully recoverable.
The assessment for potential impairment is based upon the Companys
ability to recover the unamortized balance of its long-lived assets
from expected future cash flows on an undiscounted basis.
Intangible Assets-
Intangible assets are being amortized over the following periods:
package design costs 4 years and other intangibles 40 years. Deferred
financing costs are amortized using the interest method over the life
of the applicable loans.
F-49
<PAGE>
THE B. MANISCHEWITZ COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS (continued)
(dollars in thousands, except share/unit amounts)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (continued):
Revenue Recognition-
Revenue is recognized when products are shipped to customers.
Provisions for returns and allowances and bad debts are based upon
historical experience and known events.
Royalty Income-
The Company enters into licensing agreements under which it receives
royalty payments. Royalty payments due under licensing agreements are
recognized as income either based upon shipment reports from
manufacturers, where available, or estimated shipments by such
manufacturers.
Income Taxes-
As the Company was organized as a C corporation until May 31, 1996,
income taxes were provided for these periods based upon the taxes
currently payable by the Company. On May 31, 1996, the Company was
reorganized as a limited liability company. As a result of this
reorganization, future tax effects attributable to net income as well
as temporary differences between the bases of assets and liabilities
for financial reporting purposes and income tax purposes will be
included in the income tax returns of the Company's owners.
Accordingly, no deferred income tax assets or liabilities are
reflected on the July 31, 1996 and 1997 balance sheets of the
Company. Deferred income tax assets or liabilities recognized through
May 31, 1996 of $2,420, have been reversed through the income tax
benefit as of May 31, 1996. The accompanying statements of operations
include the pro forma presentation of income taxes and net income
assuming the Company was still organized as a C corporation for all
periods presented.
Cash Equivalents-
The Company considers all highly liquid debt instruments purchased
with original maturities of three months or less to be cash
equivalents.
Use of Estimates-
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses during the reporting period and
disclosure of contingent assets and liabilities at the date of the
financial statements. Actual results could differ from those
estimates.
F-50
<PAGE>
THE B. MANISCHEWITZ COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS (continued)
(dollars in thousands, except share/unit amounts)
(3) INVENTORIES:
Inventories consists of the following at July 31-
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Raw materials $2,126 $2,042
Finished goods 7,091 7,976
----------- -----------
$9,217 $10,018
=========== ===========
</TABLE>
Had the first-in, first-out (FIFO) method been used, inventories
would have been approximately $260 greater than that reported under
the LIFO method at July 31, 1997. At July 31, 1996, inventories
valued by the FIFO cost method approximated inventories valued by the
LIFO method.
(4) PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at July 31-
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Land $897 $897
Buildings 4,549 4,444
Machinery and equipment 5,541 4,645
Furniture and fixtures 769 732
Assets under capital lease 6,077 6,077
Construction in progress 121 807
------------ ------------
17,954 17,602
Less- Accumulated depreciation and amortization 5,752 4,955
------------ ------------
$12,202 $12,647
============ ============
</TABLE>
Certain property and equipment of the Company is leased through the
Bay Street Urban Renewal Development Corporation, an affiliate of the
Company. The lease expires on August 31, 2000, and requires the
Company to pay real estate taxes, maintenance, insurance and
incidental costs as its only obligation under this lease. The Company
has the option to purchase the property at any time during the lease
term for a nominal value.
F-51
<PAGE>
THE B. MANISCHEWITZ COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS (continued)
(dollars in thousands, except share/unit amounts)
(5) INTANGIBLE ASSETS:
Intangible assets consist of the following at July 31-
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Goodwill, net of accumulated amortization of $2,582 and $2,197,
respectively $13,492 $13,877
License and trademarks, net of accumulated amortization of
$2,041 and $1,736, respectively 10,159 10,464
Deferred financing costs, net of accumulated amortization of
$516 and $70, respectively (see Note 7) 1,993 2,439
Package design costs, net of accumulated amortization of $1,697
and $953, respectively 1,579 1,725
------------ ------------
$27,223 $28,505
============ ============
</TABLE>
In addition, intangible assets on the accompanying balance sheets
include an intangible pension asset of $388 and $421 in 1997 and
1996, respectively (see Note 8).
(6) INCOME TAXES:
Income taxes, applicable to income before extraordinary item, are
comprised of the following at July 31, 1996 and 1995-
<TABLE>
<CAPTION>
1996 1995
----------- ------------
<S> <C> <C>
Current-
Federal $1,481 $1,675
State and local taxes 794 523
----------- ------------
2,275 2,198
----------- ------------
Deferred-
Federal (1,936) (50)
State and local taxes (484) (13)
----------- ------------
(2,420) (63)
----------- ------------
Provision (benefit) for income taxes ($145) $2,135
=========== ============
</TABLE>
F-52
<PAGE>
THE B. MANISCHEWITZ COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS (continued)
(dollars in thousands, except share/unit amounts)
(6) INCOME TAXES (continued):
The provision (benefit) for income taxes differs from the amount
computed by applying the statutory Federal income tax rate to the
income before provision (benefit) for income taxes for the following
reasons for fiscal 1996 and 1995-
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Statutory tax provision $2,048 $1,497
Increase (decrease) in taxes resulting from-
State income taxes, net of Federal income tax benefit 204 337
Amortization of intangible assets 211 299
Reversal of deferred income taxes as a result of a
change in the tax status of the Company (2,420) -
Other (188) 2
---------- ----------
Provision (benefit) for income taxes ($145) $2,135
========== ==========
</TABLE>
(7) LONG-TERM DEBT:
On May 31, 1996, the Company (along with MANO, MANO Holdings I, LLC
and MANO Holdings II, LLC) entered into a credit agreement with
several financial institutions (the Credit Agreement). The Credit
Agreement provides for the following: (1) $14,000 term loan A, due
May 31, 2002, bearing interest at the Base Rate (defined as the
higher of the Federal Funds Rate plus 1/2r prime), plus 1 1/2 LIBOR
plus 2.5%; (2) $19,000 term loan B, due May 31, 2004 bearing interest
at the Base Rate plus 2.0% or LIBOR plus 3.0%; (3) $11,000 term loan
C, due May 31, 2002, bearing interest at the Base Rate plus 1 1/2% or
LIBOR plus 2.5%; and (4) $15,000 revolving loan commitment based on
eligible accounts receivable and inventory, as defined, including up
to $3,000 of letters of credit due May 21, 2002, bearing interest at
the Base Rate plus 1 1/2or LIBOR plus 2.5%. As of July 31, 1997,
$5,000 is available for borrowing under this facility based upon this
formula. Additionally, there is a commitment fee of 1/2% on certain
unused balances of the revolving loan commitment, as defined. At July
31, 1997 and 1996, there were no outstanding balances under the
revolving loan commitment.
The Credit Agreement contains restrictions, all of which the Company
was in compliance with at July 31, 1997 relating to, among others,
material adverse changes in operations or affairs, capital
expenditures, the payment of dividends and the maintenance of various
financial requirements, including, among others, interest coverage
ratio, fixed charge coverage ratio, leverage ratio and minimum
EBITDA, each as defined in the Credit Agreement.
F-53
<PAGE>
THE B. MANISCHEWITZ COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS (continued)
(dollars in thousands, except share/unit amounts)
(7) LONG-TERM DEBT (continued):
Pursuant to entering into the Credit Agreement, the Company incurred
deferred financing costs of approximately $2,500 which are included
in intangible assets in the accompanying balance sheet. Additionally,
approximately $1,109 of deferred financing costs were written-off in
fiscal 1996 pursuant to the Agreement refinancing. Furthermore, the
Company incurred a prepayment penalty upon terminating the Agreement
of approximately $2,166. These amounts, net of related income tax
benefits of $1,310, are reflected as an extraordinary item in the
statements of operations.
The Credit Agreement is secured by substantially all of the Company
assets and guaranteed by both MANO and KBMC.
Aggregate amounts of long-term debt maturing each of the five years
subsequent to July 31, 1997, and thereafter are as follows-
1998 $3,157
1999 3,650
2000 4,637
2001 5,623
2002 6,116
Thereafter 17,576
-------------
$40,759
=============
(8) EMPLOYEE BENEFITS:
Pension Plan-
The Company maintains a defined benefit pension plan (the Plan)
administered by a trust, which covers substantially all employees who
meet certain eligibility requirements, and provides for pension,
death and disability benefits. Contributions are made by the Company
and contributing employees. The Companys funding policy is to
contribute amounts to the Plan sufficient to meet the minimum funding
requirements set forth by the Employee Retirement Income Security Act
of 1974. In fiscal 1997, 1996 and 1995, the Company funded additional
amounts to the Plan. Accordingly, contributions for the year ended
July 31, 1997, 1996 and 1995 amounted to $605, $541 and $300,
respectively. Benefits for salaried employees are based on the
highest five consecutive years of compensation during the last
fifteen years of employment proceeding retirement. Benefits for
hourly employees are based on various monthly amounts for each year
of credited service.
F-54
<PAGE>
THE B. MANISCHEWITZ COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS (continued)
(dollars in thousands, except share/unit amounts)
(8) EMPLOYEE BENEFITS (continued):
Net periodic pension expense for the years ended July 31, 1997, 1996
and 1995, and assumptions used were as follows-
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Service cost, benefits earned during the year $213 $237 $214
Interest cost on projected benefit obligations 889 893 877
Actual return on assets (1,159) (502) (1,151)
Net amortization and deferral 379 (250) 419
----------- ----------- -----------
Net periodic pension cost $322 $378 $359
=========== =========== ===========
Assumed discount rate 7.50% 8.25% 8.25%
Assumed rate of compensation increases 4.00 5.00 5.00
Expected long-term rate of return on assets 9.25 9.25 9.25
</TABLE>
Presented below is a reconciliation of the funded status of the Plan
to amounts recorded on the balance sheets at July 31-
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Actuarial present value of benefit obligations-
Accumulated benefit obligation, including vested benefits
of $11,332 and $10,672 in 1997 and 1996, respectively $11,660 $10,932
============= =============
Projected benefit obligation for services rendered to date ($12,264) ($11,553)
Plan assets at fair value 9,969 9,160
------------- -------------
Projected benefit obligation in excess of plan assets (2,295) (2,393)
Unrecognized net loss 839 622
Prior service cost not yet recognized in net periodic pension cost 388 421
Adjustment required to recognize minimum liability (623) (421)
------------- -------------
Net pension liability ($1,691) ($1,771)
============= =============
</TABLE>
At July 31, 1997 and 1996, the Company recorded an additional
liability of $623 and $421, respectively, representing the minimum
liability of the unfunded accumulated benefit obligation with an
offsetting intangible asset at July 31, 1997 and 1996 of $388 and
$421, respectively, and a reduction in equity at July 31, 1997 of
$235.
Substantially all of the Plan assets are invested in unallocated
insurance contracts, U. S. Government obligations, mutual funds and
marketable debt securities.
F-55
<PAGE>
THE B. MANISCHEWITZ COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS (continued)
(dollars in thousands, except share/unit amounts)
(8) EMPLOYEE BENEFITS (continued):
Postretirement Benefits
Other Than Pensions-
The Company provides certain postretirement benefits covering
non-union salaried employees hired prior to February 1, 1991. These
benefits include health care and life insurance for eligible
retirees. The Company's obligation is funded on a pay as you go
basis.
Effective August 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 106, "Employer's Accounting for
Postretirement Benefits Other Than Pensions." The cumulative effect
as of August 1, 1995 of adopting SFAS No. 106 was a one-time charge
of $754, after the related income tax benefit of $502.
The following table reconciles the Plan's funded status to the
accrued postretirement health care cost liability as of July 31-
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Accumulated postretirement benefit obligation-
Retiree and beneficiaries $622 $397
Eligible actives 192 445
Ineligible actives 835 479
----------- -----------
Total 1,649 1,321
Unrecognized net loss 228 -
Plan assets at fair value - -
----------- -----------
Net postretirement benefit liability $1,421 $1,321
=========== ===========
</TABLE>
Net periodic postretirement benefit cost for the years 1997 and 1996
included the following components-
<TABLE>
<CAPTION>
1997 1996
-------- ---------
<S> <C> <C>
Service cost $71 $35
Interest cost 113 98
-------- ---------
Net postretirement benefit cost $184 $133
======== =========
</TABLE>
F-56
<PAGE>
THE B. MANISCHEWITZ COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS (continued)
(dollars in thousands, except share/unit amounts)
(8) EMPLOYEE BENEFITS (continued):
For purposes of calculating the accumulated postretirement benefit
obligation, the following assumptions were made. The retiree medical
trend rates range from a maximum of 8.5% decreasing gradually to 5%
by the year 2010. The weighted average discount rate used in
determining the accumulated postretirement benefit obligation was
7.5%.
The health care cost trend rate assumption has an effect on the
amounts reported. To illustrate, increasing the assumed health care
cost trend rates by one percentage point in each year would increase
the accumulated postretirement benefit obligation as of July 31, 1997
and 1996 by $219 and $170, respectively, and the aggregate of the
service and interest cost components of the net periodic
postretirement benefit cost for the years 1997 and 1996 by $27 and
$20, respectively.
(9) COMMITMENTS AND CONTINGENCIES:
Operating Leases-
The Company has noncancellable operating leases expiring from
February 1998 through September 2002. Rental expense for the years
ended July 31, 1997, 1996 and 1995, was approximately $195, $363 and
$595, respectively. The future minimum annual rental commitment under
all operating leases is not material.
Purchase Commitments-
The Company enters into purchase contracts with certain vendors. At
July 31, 1996 and 1997, purchase commitments related to these
contracts were approximately $2,100 and $850, respectively.
(10) ACCRUED LIABILITIES:
Included in accrued liabilities at July 31, 1997 and 1996 is
approximately $448 and $355, respectively, principally related to a
severance agreement covering a former owner of the Company.
F-57
<PAGE>
THE B. MANISCHEWITZ COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS (concluded)
(dollars in thousands, except share/unit amounts)
(11) SALE OF DIVISION/DISTRIBUTORSHIP AGREEMENT:
In May 1997, in conjunction with the sale of its Chicago distribution
operation, the Company entered into a Distributorship Agreement whereby
it received cash, net of expenses, of $1,000 in exchange for providing
exclusive territory rights to a third-party distributor. The Company
has reflected the net cash received as net revenues, since it has no
further performance obligations under the terms of the distributorship
agreement and the amount paid is not refundable. In connection with
this transaction, the Company provided additional allowances for
accounts receivable and inventory. Accordingly, no gain or loss was
recorded. Concurrently, the Company and the distributor entered into an
Inventory Purchase Agreement which provides for the purchase of goods
by the distributor at "replacement cost," as defined, and a royalty
arrangement, as defined. The Chicago distribution operation had net
revenues of approximately $6,700, $6,800 and $6,800 for the years ended
July 31, 1997, 1996 and 1995, respectively.
(12) SIGNIFICANT CUSTOMERS:
The Company's products are sold to approximately 50 independent
distributors. Two distributors represented approximately 31% and 25%
of net revenues, respectively for the years ended July 31, 1997 and
1996, and one distributor represented approximately 12% of net
revenues for the year ended July 31, 1995.
(13) RELATED PARTY TRANSACTION:
The Company paid a management fee of approximately $410, $104 and $0
in 1997, 1996 and 1995, respectively, to a related party.
F-58
<PAGE>
THE B. MANISCHEWITZ COMPANY, LLC
CONDENSED BALANCE SHEETS
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
April 30, July 31,
1998 1997
------------- ----------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,995 $ 3,115
Accounts receivable, net of allowance for doubtful accounts
of $324 and $700, respectively 17,361 6,381
Inventories 6,593 9,217
Prepaid expenses and other current assets 261 898
------------- -----------
Total current assets 26,210 19,611
PROPERTY, PLANT AND EQUIPMENT, net 11,823 12,202
INTANGIBLE ASSETS, net 26,594 27,611
OTHER ASSETS 139 139
------------- -----------
Total assets $ 64,766 $ 59,563
============= ===========
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,382 $ 3,157
Revolving line of credit 2,250 -
Accounts payable 2,500 2,424
Accrued liabilities 4,779 2,002
------------- -----------
Total current liabilities 12,911 7,583
LONG-TERM DEBT 34,782 37,602
LONG-TERM LIABILITIES 4,380 4,434
------------- -----------
Total liabilities 52,073 49,619
COMMITMENTS AND CONTINGENCIES
MEMBERS' EQUITY 12,693 9,944
------------- -----------
Total liabilities and equity $ 64,766 $ 59,563
============= ===========
</TABLE>
The accompanying notes are an integral part of these condensed statements.
F-59
<PAGE>
THE B. MANISCHEWITZ COMPANY, LLC
CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTH PERIODS ENDED APRIL 30, 1998 AND 1997
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
NET REVENUES $ 43,816 $ 46,068
ROYALTIES 665 319
------------ ------------
Total revenues 44,481 46,387
COST OF SALES 27,442 28,450
------------ ------------
Gross profit 17,039 17,937
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES,
including amortization of intangible assets
of $1,094 in 1998 and $1,087 in 1997, respectively 7,658 8,492
------------ ------------
Operating income 9,381 9,445
INTEREST EXPENSE (3,090) (3,388)
------------ ------------
Net income $ 6,291 $ 6,057
============ ============
PRO FORMA INFORMATION:
Income tax provision $ 2,735 $ 2,749
============ ============
Net income $ 3,556 $ 3,308
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed statements.
F-60
<PAGE>
THE B. MANISCHEWITZ COMPANY, LLC
CONDENSED STATEMENT OF CHANGES IN MEMBERS' EQUITY
FOR THE NINE MONTH PERIOD ENDED APRIL 30, 1998
(dollars in thousands, except unit data)
(unaudited)
Units Amount
--------- ----------
BALANCE AT AUGUST 1, 1997 10,000 $ 9,944
Net income - 6,291
Distributions to members - (3,542)
--------- ----------
BALANCE AT APRIL 30, 1998 10,000 $ 12,693
========= ==========
The accompanying notes are an integral part of these condensed statements.
F-61
<PAGE>
THE B. MANISCHEWITZ COMPANY, LLC
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED APRIL 30, 1998 AND 1997
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,291 $6,057
Adjustments to reconcile net income to net cash used
in operating activities-
Depreciation and amortization 1,941 1,999
Gain on sale of equipment (150) -
Changes in assets and liabilities-
Accounts receivable (10,980) (14,964)
Inventories 2,624 332
Prepaid expenses and other current assets 637 267
Intangible assets (396) (551)
Accounts payable and accrued liabilities 2,853 1,240
Long-term liabilities (54) 755
----------- -----------
Net cash provided by (used in) operating activities 2,766 (4,865)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (297) (189)
Proceeds on sale of equipment 298 -
----------- -----------
Net cash provided by (used in) investing activities 1 (189)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to members/shareholders (3,542) (2,268)
Proceeds from revolving line of credit 2,250 9,800
Term loan repayments (2,595) (2,025)
----------- -----------
Net cash (used in) provided by financing activities (3,887) 5,507
----------- -----------
(Decrease) increase in cash and cash equivalents (1,120) 453
CASH AND CASH EQUIVALENTS, beginning of period 3,115 1,811
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,995 $ 2,264
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest $ 3,161 $ 3,156
</TABLE>
The accompanying notes are an integral part of these condensed statements.
F-62
<PAGE>
THE B. MANISCHEWITZ COMPANY, LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS
(dollars in thousands)
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles.
In June 1997, The B. Manischewitz Company, LLC ("the Company") sold
its Chicago distribution operation. The statement of operations for the nine
months ended April 30, 1997 includes revenues of $4.1 million and operating
income of $300,000 from this operation.
For a summary of the Company's accounting principles and other
footnote information, reference is made to the Company's July 31, 1997
financial statements. All adjustments, consisting of a normal and recurring
nature, necessary for the fair presentation of the results of operations for
the interim periods covered by this report have been included. The results of
operations for the nine month period ended April 30, 1998 is not necessarily
indicative of the operating results for the full year.
2. Inventories
Inventories consisted of the following at April 30, 1998-
Raw materials $ 2,175
Finished goods 4,418
-----------
$ 6,593
===========
Substantially all inventories are accounted for using the lower of
the last-in, first-out ("LIFO") cost method or market. Had the first-in,
first-out (FIFO) method been used, inventories would have been approximately
$241 greater than that reported under the LIFO method at April 30, 1998.
3. Income Taxes
The Company is organized as a limited liability company. Accordingly,
no provision has been made for Federal or state income tax purposes on the
accompanying condensed financial statements. The accompanying condensed
statements of operations include the pro forma presentation of income taxes
and net income assuming the Company was still organized as a C corporation for
all periods presented.
4. Related Party Transactions
The Company paid a management fee of $344 and $360 through the nine
months ended April 30, 1998 and 1997, respectively, to a related party.
F-63
<PAGE>
THE B. MANISCHEWITZ COMPANY, LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS
(CONCLUDED)
5. Subsequent Event
Effective March 3, 1998, R.A.B. Enterprises, Inc., a wholly-owned
subsidiary of R.A.B. Holdings, Inc., entered into a purchase agreement to
acquire all of the outstanding membership interests of the Company. On May 1,
1998, R.A.B. Enterprises, Inc. acquired all of the outstanding interests of
the Company for approximately $124.7 million less outstanding long-term debt
and certain other specified deductions.
F-64
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
R.A.B. Holdings, Inc.
New York, New York
We have audited the accompanying statements of operations of Millbrook
Distribution Services Inc., (a then wholly-owned subsidiary of McKesson
Corporation), for the fiscal years ended March 31, 1997 and 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such statements of operations present fairly, in all material
respects, the results of operations of Millbrook Distribution Services Inc. for
the fiscal years ended March 31, 1997 and 1996 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
April 30, 1998
New York, New York
F-65
<PAGE>
MILLBROOK DISTRIBUTION SERVICES INC.
STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1997 AND 1996
(In thousands)
<TABLE>
<CAPTION>
1997 1996
--------- ----------
<S> <C> <C>
Revenues $ 476,175 $ 563,099
Costs and expenses
Cost of sales 364,762 430,398
Selling 45,280 54,961
Distribution and warehousing 38,170 42,281
General and administrative 20,588 21,848
--------- ---------
Total costs and expenses 468,800 549,488
--------- ---------
Operating income 7,375 13,611
Interest expense, net 3,843 4,708
Non-operating income, other (69) (1,600)
--------- ---------
Income before provision for income taxes 3,601 10,503
Provision for income taxes 1,660 4,334
--------- ---------
Net income $ 1,941 $ 6,169
========= =========
</TABLE>
See notes to statements of operations.
F-66
<PAGE>
MILLBROOK DISTRIBUTION SERVICES INC.
NOTES TO STATEMENTS OF OPERATIONS
1. Summary Of Significant Accounting Policies
Basis of Presentation - On March 31, 1997, R.A.B. Holdings,
Inc. acquired Millbrook Distribution Services Inc. (the "Company") from
McKesson Corporation (the "Former Parent"). The statements of
operations of the Company are based on historical results and,
accordingly, do not reflect purchase accounting adjustments or interest
associated with debt incurred to finance the acquisition. Additionally,
the Company's Former Parent managed cash and financing requirements
centrally; as such the interest expense and related intercompany
borrowings were based on the then existing capital structure.
Additionally, the Former Parent provided certain corporate and general
and administrative services, including, among other things, treasury,
certain financial reporting, data processing and legal services.
Accordingly, the operations of the Company include an allocation of
expenses for such services. The allocation of expenses is comprised of
(i) the number of hours incurred at the applicable pay rate; (ii) data
processing time utilized at the applicable rate; and (iii)
out-of-pocket expenses, related to the services provided. In the
opinion of management, this methodology provides a reasonable basis for
such allocation. The results of operations of the Company may differ
from results that may have been achieved had the Company operated as an
independent entity.
Use of Estimates - The preparation of financial statements, in
conformity with generally accepted accounting principles, requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Fiscal Year - The Company's fiscal year ends on March 31.
Inventories - Inventories are stated at the lower of cost or
market. Cost is determined by the last-in, first-out ("LIFO") method.
At March 31, 1997 and 1996, the replacement cost of inventories valued
using the LIFO method exceeded the net carrying amount of such
inventories by approximately $8.0 million and $8.5 million,
respectively.
Property, Plant and Equipment - Property, plant and equipment
are recorded at cost. For financial reporting purposes, depreciation is
provided on the straight-line method over the following estimated
useful lives:
Buildings and improvements..................... 7-35 years
Machinery and equipment........................ 2-15 years
Rolling stock.................................. 3- 8 years
F-67
<PAGE>
MILLBROOK DISTRIBUTION SERVICES INC.
NOTES TO STATEMENTS OF OPERATIONS (CONTINUED)
1. Summary Of Significant Accounting Policies (Continued)
Expenditures which significantly increase value or extend
useful lives are capitalized, while ordinary maintenance and repairs
are expensed as incurred. The cost and related accumulated depreciation
of assets replaced, retired or disposed of are removed from the
accounts and any related gains or losses are reflected in operations.
Total depreciation expense was $ 3.0 million and $ 3.1 million for the
fiscal years ended March 31, 1997 and 1996, respectively.
Long-Lived Assets - The Company reviews its long-lived assets
and certain related intangibles for impairment whenever changes in
circumstances indicate that the carrying amount of an asset may not be
fully recoverable. Such changes in circumstances may include, among
other factors, a significant change in technology that may render an
asset obsolete or noncompetitive or a significant change in the extent
or manner in which an asset is used. The assessment for potential
impairment is based upon the Company's ability to recover the
unamortized balance of its long-lived assets from expected future cash
flows on an undiscounted basis (without interest charges). If such
expected future cash flows are less than the carrying amount of the
asset, an impairment loss would be recorded.
Revenue Recognition - Revenue is recognized when products are
shipped or services are provided to customers. Provisions are recorded
for returns and allowances and bad debts.
Income Taxes - The results of operations of the Company were
included in the consolidated Federal income tax return of its Former
Parent. The provision for income taxes was determined as though the
Company filed a separate Federal income tax return without regard to
any tax attributes of other taxable years.
Business - The Company is one of the nation's largest
independent value-added distributors of health and beauty care, general
merchandise and specialty and natural food products.
2. Leases
The Company leases certain facilities, machinery and vehicles
under various non-cancelable operating lease agreements. The Company is
required to pay property taxes, insurance and normal maintenance costs
for certain of its facilities. Total rent expense for all operating
leases was $5.3 million and $6.4 million for the fiscal years ended
March 31, 1997 and 1996, respectively.
3. Non-Operating Income, Other
During the fiscal year ended March 31, 1997, the Company sold
a distribution center facility in Lincoln, Nebraska resulting in a gain
of approximately $1.5 million.
F-68
<PAGE>
MILLBROOK DISTRIBUTION SERVICES INC.
NOTES TO STATEMENTS OF OPERATIONS (CONCLUDED)
4. Income Taxes
The provision for income taxes for the fiscal years ended
March 31, 1997 and 1996 is based on income recognized for financial
statement purposes. A reconciliation of the statutory United States
Federal income tax rate to the Company's effective income tax rate for
the fiscal years ended March 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Statutory rate............................................... 35.0% 35.0%
State income taxes, net of Federal benefit................... 4.6 4.6
Other, principally meals and entertainment disallowance...... 6.5 1.7
------ ------
46.1% 41.3%
</TABLE>
5. Employee Benefit Plans
Retirement and Savings Plan - The Company's Former Parent had
a retirement and savings plan ("401(k) Plan") covering substantially
all of its employees. The 401(k) Plan provided for matching
contributions by the Company which amounted to approximately $1.4
million for each of the fiscal years ended March 31, 1997 and 1996.
Deferred Compensation - In 1984, a predecessor of Millbrook
implemented a deferred compensation plan in the form of a non-qualified
defined benefit plan and a supplemental retirement plan which permitted
former officers and certain management employees, at the time, to defer
portions of their compensation and to earn specified maximum benefits
upon retirement. These plans do not allow new participants.
6. Related Party Transactions
As described in Note 1, the Company's Former Parent provided
certain corporate and general and administrative services to the
Company which totaled approximately $2.5 million and $2.3 million for
the fiscal years ended March 31, 1997 and 1996, respectively.
F-69
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
===============================================================================
We have not authorized any dealer, salesperson or other person to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information. This prospectus does not offer to sell
or to buy any of the securities in any jurisdiction where it is unlawful. The
information in this prospectus is current as of February 12, 1999.
---------------------
Prospectus
---------------------
Until May 19, 1999, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
February 12, 1999
===============================================================================
Exchange
Offers
R.A.B. Holdings, Inc.
$48,000,000
13% senior notes due 2008
R.A.B. Enterprises, Inc.
$120,000,000
10-1/2% senior notes due 2005
===============================================================================
