Document/Exhibit Description Pages Size
1: 10-K Annual Report 64 334K
2: EX-10.1.6 Consent and Amendment Agreement 6 25K
3: EX-10.1.7 Amendment Agreement Dated April 24, 2000 6 23K
4: EX-10.1.8 Amendment Agreement Dated June 9, 2000 5 20K
5: EX-10.1.9 Consent and Amendment Dated Nov. 1, 2000 6 23K
6: EX-10.1.10 Consent and Amendment Dated June 29, 2001 10 37K
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to _________________________
Commission file number 333-66221
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R.A.B. HOLDINGS, INC. R.A.B. ENTERPRISES, INC.
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(Exact name of registrant as specified in its charter) (Exact name of registrant as specified in its charter)
DELAWARE DELAWARE
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(State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization)
13-3893246 13-3988873
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(I.R.S. Employer identification no.) (I.R.S. Employer identification no.)
444 Madison Avenue, New York, New York 10022
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(Address of principal executive offices) (Zip Code)
Registrants' telephone number, including area code (212) 688-4500
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ X]
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INDEX
Page
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PART I
Item 1. Business.................................................................................. 1
(a) General Development of Business................................................ 1
(b) Financial Information about Industry Segments.................................. 1
(c) Narrative Description of Business.............................................. 2
(d) Other Matters.................................................................. 8
(e) Financial Information about Foreign and Domestic Operations.................... 9
Item 2. Properties................................................................................ 9
Item 3. Legal Proceedings......................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders....................................... 10
PART II
Item 5. Market for Registrants' Common Equity and Related Stockholder Matters..................... 10
Item 6. Selected Financial Data................................................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................. 11
Item 7a. Quantitative and Qualitative Disclosures about Market Risk................................ 19
Item 8. Financial Statements and Supplementary Data............................................... 19
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................................... 19
PART III
Item 10. Directors and Executive Officers of the Registrants....................................... 20
Item 11. Executive Compensation.................................................................... 22
Item 12. Security Ownership of Certain Beneficial Owners and Management............................ 24
Item 13. Certain Relationships and Related Transactions............................................ 25
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................... 27
PART I
Item 1. Business
(a) General Development of Business
On May 6, 1996, R.A.B. Holdings, Inc., a Delaware corporation
("Holdings"), was formed 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 Distribution Services Inc., a Delaware corporation
("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 January 26, 1998, Holdings formed a wholly-owned
subsidiary, R.A.B. Enterprises, Inc., a Delaware corporation ("Enterprises"). On
May 1, 1998, Enterprises acquired The B. Manischewitz Company, LLC, a Delaware
limited liability company ("Manischewitz"). Manischewitz is among the nation's
leading manufacturers of processed kosher food products including matzos,
noodles, crackers, cake mixes, cookies, soups and processed fish products.
Concurrent with the Manischewitz acquisition, Holdings contributed its
wholly-owned subsidiary Millbrook to Enterprises. The contribution was accounted
for as an "as if" pooling of interests. Prior to the acquisitions of Millbrook
and Manischewitz, Holdings and Enterprises had no operations. Holdings and
Enterprises are referred to collectively as the "Companies".
On January 31, 2000, Millbrook acquired certain of the assets and
operations of I. Epstein & Sons, Inc. ("Epstein"). Epstein was a full service
distributor of kosher and specialty food products, including its Season(R) brand
of canned fish, vegetables and other specialty food products. Concurrent with
the acquisition, the management and ownership of the Season brand was assumed by
Manischewitz.
On April 17, 2000, Millbrook acquired substantially all of the assets
and operations of the Miller Buckeye Biscuit Company, Inc. ("Miller Buckeye")
for a purchase price of approximately $17.6 million, including transaction
costs. Miller Buckeye was a distributor of specialty foods, cookies, crackers
and snacks to grocery and other retail establishments in Ohio, Pennsylvania,
West Virginia and Western New York.
On November 1, 2000, Manischewitz acquired substantially all of the
assets and operations of Guiltless Gourmet, Inc. ("Guiltless") for a purchase
price of approximately $4.9 million, including transaction costs. Guiltless
owned the number two selling national brand and was a leader in the development
of original baked, not fried, tortilla chips. Guiltless organic baked tortilla
chips, bean dips and salsas are found in natural food supermarkets, supermarket
chains and other grocery and food outlets.
(b) Financial information about Industry Segments
Industry segment information with respect to the operations of Holdings
and Enterprises is included in the notes to the Consolidated Financial
Statements of Holdings and Enterprises for the years ended March 31, 2001, 2000
and 1999 included in Item 8 herein.
1
(c) Narrative Description of Business
Millbrook Distribution Services Inc.
The Industry. Distributors provide valuable services to both
manufacturers and retailers. Manufacturers benefit from distributors broad
geographic coverage, efficient order processing and inventory management.
Distributors provide retailers access to broad product lines, the ability to
place small quantity orders and shelf and inventory management. Large
distributors with broad geographic coverage and an extensive offering of items
generally have a competitive advantage.
Due to consolidations over the past several years, the number of
manufacturers and retailers has decreased. Additionally, retailers have
increasingly focused on reducing their supply chain costs with corresponding
improvements in their 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 food, health and beauty care and general
merchandise products. The fast growing specialty food business encompasses a
wide range of items in categories such as imported and domestic gourmet foods,
as well as natural, and ethnic foods. Specialty foods typically generate higher
margins for retailers than those realized on other mainstream grocery categories
sold in supermarkets. In addition, the demographic trends in the United States
have sparked consumer demand for more specialty food products. As a result,
supermarkets are adding more specialty food items to their product offerings,
and aggressively promoting them in an attempt to capture a higher market share.
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 products to the consumer. In
addition, retailers are beginning to segregate specialty foods 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. Retailers also integrate specialty foods into
general product categories to familiarize consumers with unique and higher
margin products with the objective of increasing awareness and generating trial
among the broader consumer market. Merchandising expertise is a key selection
criteria for determining the retailer's choice of a specialty food distributor.
The health and beauty care segment includes baby care, cosmetics,
deodorants, first-aid, hair care, over-the-counter medications, toiletries, oral
hygiene and skin care products. The general merchandise segment covers a wide
variety of non-food categories 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 customers one-stop shopping.
2
Products Distributed. Through its comprehensive product offerings,
Millbrook distributes a wide variety of products to its customers.
Specialty Foods. For the years ended March 31, 2001, 2000 and 1999,
specialty food sales were approximately $298.9 million, $192.9 million and
$141.1 million and represented 49.2%, 35.9% and 30.3% of Millbrook's total
revenues, respectively. Millbrook's specialty food category consists of
approximately 19,900 items including ethnic, gourmet, organic and natural foods
and supplements. Millbrook offers ethnic foods such as kosher, Asian, Italian,
Irish, Mexican, Greek and German products, and gourmet foods such as teas,
coffees, spices, baking ingredients, condiments, candies, crackers, cookies,
jams and jellies. Millbrook's organic and natural food products and supplements
include items such as grains, cereals, snacks, beverages, energy bars, baking
ingredients, pasta and sauces.
We continue to view the specialty food category as an opportunity for
future growth. Due to the higher margins associated with specialty foods,
supermarkets continue to add 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. We
believe that Millbrook's product breadth, together with its merchandising
expertise and advanced technology in supply chain management, will continue to
enable its retail customers to capture the advantages of this product category.
Health and Beauty Care. For the years ended March 31, 2001, 2000 and
1999, health and beauty care sales were approximately $222.8 million, $244.0
million and $234.2 million and represented 36.7%, 45.4% and 50.4% of Millbrook's
total revenues, respectively. Millbrook currently carries approximately 15,400
health and beauty care items, including a full line of national and private
label brands. Millbrook's private label health and beauty care products are
offered under its ValuStar(R) brand, which represents less than 1% of
Millbrook's 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 store chains.
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. We believe that Millbrook's capabilities and
extensive product selection make it qualified to serve both the growing mass
merchandiser demand and meet the needs of the supermarket retailers for health
and beauty care items.
General Merchandise. Millbrook currently carries approximately 11,000
general merchandise items. For the years ended March 31, 2001, 2000 and 1999,
general merchandise sales were approximately $85.4 million, $101.0 million and
$89.5 million and represented 14.1%, 18.7% and 19.3% of Millbrook's total
revenues, respectively. 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 consumer traffic ensures that supermarkets will remain a key
outlet for general merchandise. In addition, targeting certain departments such
as pet, bath, candle and stationery as destination categories adds to the
importance of general merchandise in supermarkets.
3
Retail Services. Millbrook traditionally has supplemented its product
distribution with full supporting services such as schematic development
(including planogramming), 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 developed a system 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
offers these services without product distribution to retail channels other than
supermarkets. This fundamental change in the packaging of the services Millbrook
offers to its customers resulted in the formation of Millbrook Retail
SolutionsSM 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. Consequently, outsourcing these functions to Millbrook Retail
Solutions' experienced personnel, combined with Millbrook's established customer
base and technology infrastructure, position Millbrook to compete effectively in
the third-party retail service industry. In particular, we believe 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 61%, 72% and 60% of its revenues during the years
ended March 31, 2001, 2000 and 1999, respectively, have been customers for an
average of 15 years. For the year ended March 31, 2001, supermarkets represented
approximately 81% of revenues and mass merchandisers represented approximately
19% of revenues. While Millbrook enjoys long-term relationships with most of its
customers, consistent with industry practice, substantially all of Millbrook's
customer supply agreements are on a month-to-month basis. Millbrook does have
supply agreements with certain of its significant customers. None of these
supply agreements is for a period of greater than three years.
For the years ended March 31, 2001 and 2000, combined revenues from
Millbrook's two largest customers, Ames Department Stores and Shaw's
Supermarkets represented approximately 27.9% and 31.2% of total revenues.
Suppliers. Millbrook purchases products from leading suppliers in each
of its categories. For the year ended March 31, 2001, the five largest suppliers
in each of Millbrook's three principal product categories were:
(i) for specialty foods, World Finer Foods, The B. Manischewitz Company,
LLC, Unilever (Best Foods and Lipton), R.C. Bigelow and The Hain
Celestial Group;
(ii) for health and beauty care products, Procter & Gamble, Johnson &
Johnson, Unilever HPC, Pfizer/Warner Lambert and Gillette; and
(iii) for general merchandise, Legg's Hosiery, Hartz Mountain Corp.,
Bradshaw International, Newell Rubbermaid, Inc. and Mead Products.
For the year ended March 31, 2001, the five largest suppliers
represented (i) for specialty foods, 15% of total purchases; (ii) for health and
beauty care products, 20% of total purchases; and (iii) for general merchandise,
4% of total purchases.
4
The B. Manischewitz Company, LLC
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 $494 billion
in 2000 reflecting a compound annual growth rate of 3.8% for the five years
ended 2000. According to Integrated Marketing 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
and the trend toward healthier lifestyles.
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 supervision of a
designated kosher certification agency. Due to the production methods used,
kosher products generally are considered to contain higher quality and healthier
ingredients. According to Integrated Marketing Communications, Inc.,
approximately 40% of the overall kosher category is kosher for Passover
products, which are prepared under even more stringent guidelines than other
kosher products.
Products. Manischewitz' core businesses consist of traditional products
sold primarily to Jewish consumers under the Manischewitz brand; canned fish and
condiments under the Season brand; and natural organic snack foods sold under
the Guiltless Gourmet brand. Manischewitz is a manufacturer of products
historically 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. Guiltless and Season
products are consumed all-year round.
Manischewitz has built its brand awareness and consumer base by
offering a broad assortment of products that can be consumed throughout the
year, as well as expanding its product offerings to accommodate changing tastes
and the popularity of various food items. Manischewitz' new product offerings
include Mediterranean products, full strength canned soups, preserves and snack
items. Many of the new product offerings are intended to appeal to the
mainstream population to expand the customer base for Manischewitz' product
line.
Manischewitz also licenses its name to other entities for use in the
manufacture, distribution and sale of certain kosher products including wine and
other food products. For each of the years ended March 31, 2001, licensing
revenues represented less than 2% of Manischewitz' total revenues.
Baked Products. Baked products include daily matzo, Passover matzo
(which is produced to more exacting standards dictated by religious tenets for
Passover) and crackers. The majority of these products are baked at
Manischewitz' Jersey City, New Jersey facilities. Matzo products in this
category are sold under the Manischewitz, Horowitz Margareten and Goodman's
brand names. Matzo product sales generated approximately 20.9%, 26.2% and 25.0%
of Manischewitz' total revenues in fiscal 2001, 2000 and 1999, respectively.
Manischewitz has a license agreement with Goodman's to use its name on matzo
products and matzo-related products through 2003. In fiscal 2001, matzo products
and matzo-related products sold under the Goodman's name represented less than
1% of Manischewitz' total revenues.
5
Manufactured Products. Manufactured products consist of a variety of
soups, sauces, fish, borscht and other processed foods. Soup products constitute
the second largest manufactured product line for Manischewitz and accounted for
approximately 12.8%, 17.0% and 18.2% of its total revenues in fiscal 2001, 2000
and 1999, respectively.
Co-Packed Products. Manischewitz markets a number of co-packed
products, including cookies, confectionery products, noodles, pasta, tortilla
chips, salsa, condiments, dry soup mixes and canned fish principally under the
Manischewitz, Horowitz Margareten, Goodman's, Season and Guiltless Gourmet brand
names. Manischewitz expects to continue to employ co-packers as a capital
efficient means of bringing its new products to market. Canned fish products
generated approximately 10.4% and 4.6% of Manischewitz' total revenues in fiscal
2001 and 2000, respectively.
Marketing and Product Development. In fiscal 2001, 2000 and 1999,
spending on marketing and trade promotion represented approximately 3.1%, 1.9%
and 2.9% of total revenues, respectively. Management believes, as a percentage
of revenues, that marketing and trade promotion expenses have historically
remained substantially below other food manufacturers. Consistent with its
overall business strategy, in fiscal 2001, management significantly increased
spending on advertising, marketing and promotion of Manischewitz' existing
products and new product offerings, including package design costs.
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, enhance visibility on
store shelves and attract more contemporary Jewish and non-Jewish consumers.
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. Further,
the Guiltless Gourmet brand allows Manischewitz to capitalize on the growth of
natural and organic foods by developing new products to broaden the brand's
presence and take advantage of Manischewitz' distribution base.
Distribution. Manischewitz principally sells its products to
independent distributors operating throughout the U.S. and Canada. Two of its
independent distributors represented approximately 37.9%, 40.0% and 34.1% of
total revenues in fiscal 2001, 2000 and 1999, respectively. Among its customer
base, supermarkets represented approximately 90% of Manischewitz' fiscal 2001
total revenues and other customers represented approximately 10%. We believe
that Manischewitz' five largest supermarket customers are Kroger, Albertson's,
Publix, Shop Rite and Royal Ahold.
We estimate that Manischewitz' 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.
We continue to seek to obtain shelf space from supermarkets in sections other
than in the kosher aisle. The ability to display Manischewitz' products in the
non-kosher supermarket aisles, for products such as crackers, noodles, soups and
side dishes, will enhance awareness of Manischewitz' products, particularly
among non-Jewish consumers. We believe the Guiltless Gourmet brand will benefit
from expanded distribution in both the natural and snack food aisles in
supermarkets. To support these efforts, we will continue to increase retail and
trade promotional expenditures to enhance product presence and increase sales.
6
Raw Materials
The Companies, through its Manischewitz subsidiary, utilize a number of
raw materials in the manufacture of its matzo and matzo-related products,
principally flour. Manischewitz utilizes significant quantities of various fish
in the manufacture of its gefilte fish and the co-packing of its other canned
fish products. Manischewitz also purchases organic corn and spices for the
co-packing of its Guiltless tortilla chips. Supplies of these ingredients are
readily available from a number of sources and are purchased based on price.
Competition
Millbrook Distribution Services Inc.
Specialty Foods. The competition in the specialty foods segment is
fragmented among approximately 100 distributors, most of which are small and
geographically limited. 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 Millbrook's retailers product
variety without the inventory investment in slower-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. This generates transportation and distribution efficiencies
for Millbrook. Millbrook's principal competitors in this segment are Gourmet
Awards and Haddon House.
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 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.
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.
We believe 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' needs. Through Millbrook's "piece pick"
capability, this assortment is available to the retailers with a lower inventory
investment and space allocation. Millbrook's principal competitors in this
segment are SuperValu, Fleming and Associated Wholesale Grocers.
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. In the opinion of management, there are
numerous retail service companies competing with Millbrook Retail SolutionsSM .
The principal competitive factors within the industry include (i) breadth and
quality of client services; (ii) price; (iii) the ability to execute specific
client priorities rapidly and consistently over a wide geographical region; and
(iv) technological capability.
We believe the combination of the quality of Millbrook Retail
Solutions' client services and Millbrook's breadth of expertise, including its
retail-oriented technology, experience at store level and logistics capabilities
is unique in the industry.
7
The B. Manischewitz Company, LLC
Manischewitz competes within a small group of branded kosher
manufacturers. In the matzo category, all of the domestic producers have been in
the industry for over 80 years. Manischewitz' brand names and the complexities
of complying with kosher manufacturing requirements have all contributed to the
stability of the competitive environment faced by Manischewitz. 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 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' primary competitor in the production and distribution of
matzo is Streit's, a New York based family-owned regional marketer. Within the
gefilte fish market, Manischewitz competes primarily with Rokeach and its
related brands, including Mothers, Old Vienna and Mrs. Adlers.
Management believes that Manischewitz' loyal customer base and name
recognition make the brand less vulnerable to competition with respect to its
core products.
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(R), Horowitz Margareten(R), Onion
Tams(R), Passover Pantry(R), Tam Tam(R), Vege-Matzo(R), Wheat Tams(R), Design
Star of David(R), Star of David & Lion Design(R), Fishlets(R), Design of Star,
Lion & Scroll(R), Deborah Ross & Design(R), Bakit(R), Garlic Tam(R), Horowitz
Margareten & Design(R), Season(R), Season Kosher Select(R), Gold Boat(R),
Atlantic Gourmet(R), Moadim(R), Guiltless Gourmet(R) and Gourmet without
Guilt(R). Manischewitz has granted exclusive licenses under certain of its
trademarks to others for the manufacture and sale of wine and other food
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.
(d) Other Matters
Employees
As of March 31, 2001, we had a total of 2,200 full-time employees, 140
part-time employees and the ability to draw upon 300 service merchandisers
on-call nationwide.
Millbrook has approximately 200 unionized workers. Most of the
unionized workers are located at the East Brunswick, NJ and Youngstown, OH
distribution centers which were acquired as part of the Epstein and Miller
Buckeye acquisitions. These unionized workers are represented under contracts
with Teamsters Local 802, which was ratified in December 2000 and will expire in
June 2006 and Teamsters Local 377, which was ratified in April 2000 and will
expire in July 2004.
Manischewitz has approximately 180 unionized workers at the Jersey
City, NJ and Vineland, NJ facilities. Most of the unionized workers at the
Jersey City, NJ facility are represented under a contract with Bakery,
Confectionery and Tobacco Workers International Union (AFL-CIO, Local 3), which
was ratified in October 2000 and will expire in September 2005. The unionized
workers at the Vineland, NJ facility are represented under a contract with
United Food and Commercial Workers Union (Local 56), which was ratified in May
2000 and will expire in April 2005.
8
Management believes that Manischewitz' and Millbrook's relations with
their employees and the unions representing certain groups of employees are
generally good.
(e) Financial Information about Foreign and Domestic Operations
Millbrook provides distribution services to retail locations in 42
states throughout the United States, primarily east of the Rocky Mountains.
Manischewitz' products are primarily sold through distributors throughout the
United States. Revenues generated by sales to distributors primarily in Canada,
Europe and the Middle East accounted for less than 2% of Manischewitz' revenues
in fiscal 2001.
Item 2. Properties
Facilities. Millbrook's corporate headquarters are located in
Leicester, Massachusetts, where management and administrative functions are
performed. Millbrook currently uses five distribution centers:
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Approximate Lease
Square Expiration
Property Location Own or Lease Footage Date
-------- -------- ------------ ------- ----
National Support Center/Distribution Center......... Harrison, AR Own 1,200,000 --
Corporate Headquarters/Distribution Center.......... Leicester, MA Lease 340,000 11/30/06
Distribution Center................................. Youngstown, OH Lease 262,000 03/31/07
Distribution Center................................. Worcester, MA Lease 241,300 08/31/02
Distribution Center................................. E. Brunswick, NJ Lease 177,600 07/31/08
During the year ended March 31, 2001, Millbrook closed its Ozark, AL
distribution center and it is presently being marketed for sale. In May 2001,
Millbrook closed its leased distribution center in Greenville, NC and
consolidated the customers served into its East Brunswick, NJ distribution
center. In addition, Millbrook uses 108 transfer depots located in 30 states.
Millbrook owns or leases its fleet of approximately 110 tractors, 300
trailers and 280 vans.
Manischewitz' 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:
[Enlarge/Download Table]
Approximate
Square
Property Location Own or Lease Footage
-------- -------- ------------ -------
Bakery/Warehouse/Office............................. Jersey City, NJ Own 139,100
Manufacturing facility.............................. Vineland, NJ Own 67,700
The Jersey City, New Jersey bakery operates on a two-shift basis during
four months of the year and a three-shift basis during 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 to prepare the
plant to meet the kosher requirements for Passover production.
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 fish per shift. The facility operates on a single shift basis
throughout the year, with its primary maintenance period in April.
9
Item 3. Legal Proceedings
Holdings and Enterprises are subject to litigation in the ordinary
course of business. Neither Holdings nor Enterprises is a party to any lawsuit
or proceeding which, in the opinion of management, is likely to have a material
adverse effect on their consolidated financial condition or consolidated results
of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrants' Common Equity and Related Stockholder Matters
None.
Item 6. Selected Financial Data
The selected consolidated financial data of Holdings and Enterprises
presented below as of March 31, 2001 and 2000 and for each of the years in the
four year period ended March 31, 2001 were derived from the audited consolidated
financial statements of Holdings and Enterprises (the "Consolidated Financial
Statements") set forth herein. The audited balance sheet as of March 31, 1999
was derived from the Consolidated Financial Statements of Holdings and
Enterprises which are not presented herein. The audited balance sheet data as of
March 31, 1998 and the audited statement of operations data for the year ended
March 31, 1997 was derived from the financial statements of Millbrook which are
not presented herein. In addition, the balance sheet data as of March 31, 1997
was derived from the financial statements of the predecessor, a wholly-owned
subsidiary of McKesson Corporation ("McKesson") which are not presented herein.
The data should be read in conjunction with the Consolidated Financial
Statements, related notes and other financial information included herein.
[Enlarge/Download Table]
Holdings Enterprises
------------------------------------- -------------------------------------
Predecessor
For the years ended March 31, 1997 1998 1999 2000 2001 1998 1999 2000 2001
----------------------------- ---- ---- ---- ---- ---- ---- ---- ---- ----
(Dollars in Thousands)
Statement of Operations Data:
Revenues........................... $476,175 $470,201 $508,293 $580,616 $ 652,439 $470,201 $508,293 $580,570 $652,439
Gross profit....................... 111,413 110,039 123,457 138,174 162,831 110,039 123,457 138,128 162,831
Operating expenses................. 104,038 102,664 113,533 122,209 154,073 102,656 113,533 122,188 153,996
Operating income................... 7,375 7,375 9,924 15,965 8,758 7,383 9,924 15,940 8,835
Interest expense, net.............. 3,843 5,079 20,020 18,960 20,357 5,079 14,949 15,888 17,193
Non-operating income, other........ 69
Provision (benefit) for income
taxes........................... 1,660 1,122 (3,174) (1,146) (3,411) 1,122 (1,399) 288 (2,139)
Income (loss) before
extraordinary item.............. 1,941 1,174 (6,922) (1,849) (8,188) 1,182 (3,626) (236) (6,219)
Extraordinary gain, net
of income taxes................. 12,914 3,194 4,742 3,194
Net income (loss).................. 1,941 1,174 (6,922) 11,065 (4,994) 1,182 (3,626) 4,506 (3,025)
Balance Sheet Data:
Working capital.................... $ 36,535 $ 30,798 $ 51,288 $ 54,549 $ 76,310 $ 30,796 $ 46,382 $ 55,066 $ 77,137
Property, plant and equipment,
net............................. 15,017 23,395 38,467 37,199 32,629 23,395 38,467 37,199 32,629
Total assets....................... 102,731 108,772 297,992 290,393 312,635 108,875 279,838 285,715 312,028
Total debt......................... 38,110 184,049 170,089 204,973 38,110 136,049 145,089 179,973
10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of Holdings' and Enterprises'
financial condition and results of operations should be read in conjunction with
the financial information included in their Consolidated Financial Statements.
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 from McKesson. 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. Concurrent with the Manischewitz acquisition, Holdings
contributed Millbrook to Enterprises. This contribution was accounted for as an
"as if" pooling of interests. Prior to its acquisition of Millbrook, Holdings
had no operations. Enterprises, which was formed in 1998 to acquire
Manischewitz, had no operations prior to that acquisition.
On January 31, 2000, Millbrook acquired certain of the assets and
operations of Epstein. On April 17, 2000, Millbrook acquired substantially all
of the assets and operations of Miller Buckeye. On November 1, 2000,
Manischewitz acquired substantially all of the assets and operations of
Guiltless. The operating results of Epstein's distribution business and Miller
Buckeye are reflected in the operating results of Millbrook since their
respective dates of acquisition. The operating results of the Season brand
business and Guiltless are reflected in the operating results of Manischewitz
since their respective dates of acquisition.
General
Holdings' and Enterprises' operating subsidiaries are Millbrook and
Manischewitz. 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 benefit 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
Millbrook's and Manischewitz' various sales organizations and other general and
administrative functions.
Year Ended March 31, 2001 Compared to the year ended March 31, 2000
Revenues. Revenues for the year ended March 31, 2001 increased $71.8
million or 12.4% to $652.4 million as compared to $580.6 million for the year
ended March 31, 2000. Revenues include:
(i) Millbrook's revenues of $607.1 million for the year ended March
31, 2001 as compared to $537.9 million for the year ended March
31, 2000;
(ii) Manischewitz' revenues of $57.7 million for the year ended March
31, 2001 as compared to $50.3 million for the year ended March
31, 2000; and
(iii) Intersegment sales, which are eliminated in consolidation, of
$12.4 million for the year ended March 31, 2001 as compared to
$7.6 million for the year ended March 31, 2000.
11
Millbrook's revenues increased $69.2 million or 12.9% as compared to
the prior year. This increase is principally due to the following:
(i) distribution sales ($95.1 million) to new customer accounts
gained as a result of the Epstein and Miller Buckeye
acquisitions; partially offset by
(ii) decreased sales ($25.2 million) to certain customers as a result
of several factors, including customer losses during the year,
industry consolidation, significantly reduced customer
promotional activities and customer financial difficulties, the
aggregate of which exceeded the growth of sales to certain other
customers.
Manischewitz' revenues increased $7.4 million or 14.7% as compared to
the prior year. This increase is principally due to sales of Season brand
products acquired as part of the Epstein acquisition ($4.7 million) and sales
to new customer accounts gained as a result of the Guiltless acquisition in
November 2000 ($2.7 million).
Gross Profit. Gross profit for the year ended March 31, 2001 was $162.8
million as compared to $138.2 million for the year ended March 31, 2000, an
increase of $24.6 million or 17.8%. As a percentage of revenues, the gross
profit margin was 25.0% for the year ended March 31, 2001 as compared to 23.8%
for the year ended March 31, 2000.
The increase in gross profit dollars and its impact on gross profit
margin is primarily due to the following:
(i) distribution sales acquired as part of the Epstein acquisition
and additional margin dollars associated with the favorable shift
in Millbrook's product mix from lower margin health and beauty
care products to higher margin specialty food products ($6.3
million or 0.9%); and
(ii) distribution sales acquired as part of the Miller Buckeye
acquisition ($17.6 million or 0.2%).
Operating Expenses. Distribution and warehousing expenses for the year
ended March 31, 2001 were $59.8 million, as compared to $46.2 million for the
year ended March 31, 2000. As a percentage of revenues, distribution and
warehousing expenses increased to 9.2% for the year ended March 31, 2001 as
compared to 8.0% for the year ended March 31, 2000. The increase in distribution
and warehousing costs is principally due to:
(i) the addition of new distribution facilities in East Brunswick,
New Jersey and Youngstown, Ohio as a result of the Epstein and
Miller Buckeye acquisitions;
(ii) increased compensation and related employee benefit costs due to
a tightening labor market and resulting labor shortages at
Millbrook's two largest distribution center locations; and
(iii) rising energy prices increased operating costs associated with
the Companies' facilities and Millbrook's fleet.
12
Selling, general and administrative expenses for the year ended March
31, 2001 were $90.2 million, as compared to $73.0 million for the year ended
March 31, 2000. As a percentage of revenues, selling, general and administrative
expenses increased to 13.8% for the year ended March 31, 2001 as compared to
12.6% for the year ended March 31, 2000. This increase primarily consists of the
following:
(i) incremental selling, general and administrative costs associated
with the Epstein ($3.0 million) and Miller Buckeye ($8.5 million)
acquisitions;
(ii) costs associated with Millbrook's operations resulting from
general increases in a number of areas, including management
information systems and compensation and related employee
benefits ($1.5 million) and the loss on impairment of assets held
for sale ($0.4 million); and
(iii) an increase of $1.6 million associated with Manischewitz'
operations principally relating to television advertising,
promotional materials and market research associated with certain
mainstream products.
Amortization of intangibles was $4.1 million for the year ended March
31, 2001 as compared to $3.1 million for the year ended March 31, 2000. This
increase is due to amortization resulting from the Epstein, Miller Buckeye and
Guiltless acquisitions.
Interest Expense. Interest expense for the year ended March 31, 2001
was $20.4 million (consisting of $3.2 million for Holdings and $17.2 million for
Enterprises, respectively) as compared to $19.0 million (consisting of $3.1
million for Holdings and $15.9 million for Enterprises, respectively) for the
year ended March 31, 2000. The increase in interest expense is primarily
attributable to higher levels of debt outstanding under the credit agreement as
a result of its recent acquisitions, partially offset by Enterprises' repurchase
of 10.5% senior notes. The average interest rate on Holdings' and Enterprises'
debt outstanding during the year ended March 31, 2001 was 10.7% and 10.3%,
respectively.
Taxes. For the year ended March 31, 2001, the benefit for income taxes
was $3.4 million and $2.1 million for Holdings and Enterprises, respectively, as
compared to a benefit of $1.1 million for Holdings and a provision of $0.3
million for Enterprises for the year ended March 31, 2000. The change of $2.3
million and $2.4 million for Holdings and Enterprises, respectively, principally
relates to the results of operations.
Extraordinary Item - Early Extinguishment of Debt. The extraordinary
gain on early extinguishment of debt for the year ended March 31, 2001 was $3.2
million (net of income taxes of $2.1 million). This gain resulted from
Enterprises' repurchase of approximately $18.8 million of its outstanding 10.5%
senior notes. The extraordinary gain on early extinguishment of debt for the
year ended March 31, 2000 was $12.9 million (consisting of $8.2 million, net of
income taxes of $5.4 million for Holdings and $4.7 million, net of income taxes
of $3.1 million for Enterprises). This gain resulted from Holdings' repurchase
of $23.0 million of its outstanding 13% senior notes and Enterprises' repurchase
of approximately $20.9 million of its outstanding 10.5% senior notes.
Net Income (Loss). As a result of the foregoing, the net loss for the
year ended March 31, 2001 was $5.0 million and $3.0 million for Holdings and
Enterprises, respectively, as compared to net income of $11.1 million for
Holdings and $4.5 million for Enterprises for the year ended March 31, 2000.
13
Year Ended March 31, 2000 Compared to the Year Ended March 31, 1999
Revenues. Revenues for the year ended March 31, 2000 increased $72.3
million or 14.2% to $580.6 million as compared to $508.3 million for the year
ended March 31, 1999. Revenues include:
(i) Millbrook's sales of $537.9 million for the year ended March 31,
2000 as compared to $464.8 million for the year ended March 31,
1999;
(ii) Manischewitz' sales of $50.3 million for the year ended March 31,
2000 as compared to $46.5 million for the year ended March 31,
1999; and
(iii) intersegment sales, which are eliminated in consolidation, of
$7.6 million for the year ended March 31, 2000 as compared to
$3.0 million for the year ended March 31, 1999.
Millbrook's revenues increased $73.1 million or 15.7% as compared to
the prior year. This increase is principally due to the growth of sales to
existing customers and the addition of new customers.
Manischewitz' revenues increased $3.8 million or 8.2% to $50.3 million
as compared to the eleven month period ended March 31, 1999. Had the comparable
pre-acquisition period been included in the period ended March 31, 1999,
Manischewitz' revenues would have increased $1.6 million or 3.4% for the year
ended March 31, 2000. This increase is principally due to:
(i) sales of Season brand products acquired as part of the Epstein
acquisition since January 31, 2000 ($2.9 million); partially
offset by
(ii) the negative impact on sales of customer account changes in
Manischewitz' northeast distributor network, including the
termination of its largest northeast distributor during the third
quarter of fiscal 2000 ($1.3 million).
Gross Profit. Gross profit for the year ended March 31, 2000 was $138.2
million as compared to $123.5 million for the year ended March 31, 1999, an
increase of $14.7 million or 11.9%. As a percentage of revenues, the gross
profit margin was 23.8% for the year ended March 31, 2000 as compared to 24.3%
for the year ended March 31, 1999.
The increase in gross profit dollars and its impact on gross profit
margin is primarily due to the following:
(i) additional margin dollars associated with Millbrook's increased
sales, partially offset by reduced margins within the health and
beauty care and general merchandise categories of our
distribution business due to sustained competitive pressures and
lower gross margin sales due to the growth of Millbrook's
non-serviced customer base as a percentage of its total customer
base ($12.4 million or (0.3%));
(ii) distribution sales acquired as part of the Epstein acquisition
since January 31, 2000 ($4.1 million or 0.1%);
(iii) the lost gross profit margin on Manischewitz' sales (($0.5
million) or (0.1%)). Had the comparable pre-acquisition period
been included in the period ended March 31, 1999, Manischewitz'
gross profit would have decreased $1.5 million and its gross
profit margin would have decreased approximately 3.2%. This
decline is principally due to the lower level of sales (excluding
Season products) resulting in underabsorption of manufacturing
overhead and a shift in product mix to lower margin products; and
14
(iv) the lost gross profit margin on lower third party service
merchandising sales of Millbrook as its focus shifted to the
transition and integration of new customer accounts (($1.4
million) or (0.2%)).
Operating Expenses. Distribution and warehousing expenses for the year
ended March 31, 2000 were $46.2 million, as compared to $38.8 million for the
year ended March 31, 1999. As a percentage of revenues, distribution and
warehousing expenses increased to 8.0% for the year ended March 31, 2000 as
compared to 7.6% for the year ended March 31, 1999. The increase in distribution
and warehousing costs is principally due to:
(i) the labor and transportation costs associated with the revenue
increases generated by Millbrook's existing customers and the
addition of new customers; and
(ii) the reconfiguration of certain of Millbrook's distribution
facilities to accommodate the addition of new customers.
Selling, general and administrative expenses for the year ended March
31, 2000 were $73.0 million, as compared to $72.0 million for the year ended
March 31, 1999. As a percentage of revenues, selling, general and administrative
expenses decreased to 12.6% for the year ended March 31, 2000 as compared to
14.2% for the year ended March 31, 1999. This dollar increase primarily consists
of:
(i) selling, general and administrative costs associated with the
Epstein distribution operations acquired January 31, 2000 ($2.1
million), partially offset by reduced costs of $1.7 million or
(2.6%) associated with Millbrook's operations for the year ended
March 31, 2000. This decrease primarily relates to reduced
payroll and related costs associated with the growth of
Millbrook's non-serviced customer base requiring lower overall
headcount; and
(ii) an increase of $0.6 million or 10.1% in costs associated with
Manischewitz' operations for the year ended March 31, 2000. Had
the comparable pre-acquisition period been included in the period
ended March 31, 1999, Manischewitz' selling, general and
administrative expenses would have been consistent with the prior
year.
Amortization of intangibles was $3.1 million for the year ended March
31, 2000 as compared to $2.8 million for the year ended March 31, 1999. This
increase resulted from the comparable prior period including only eleven months
of amortization as Manischewitz was acquired on May 1, 1998 and amortization
resulting from the Epstein acquisition since January 31, 2000.
Interest Expense. Interest expense for the year ended March 31, 2000
was $19.0 million (consisting of $3.1 million for Holdings and $15.9 million for
Enterprises, respectively) as compared to $20.0 million (consisting of $5.1
million for Holdings and $14.9 million for Enterprises, respectively) for the
year ended March 31, 1999. The decrease in interest expense is primarily
attributable to a lower weighted average interest rate on debt outstanding as a
result of Holdings' and Enterprises' repurchases of senior notes replacing such
debt with borrowings under the credit agreement. The average interest rate on
Holdings' and Enterprises' debt outstanding during the year ended March 31, 2000
was 11.1% and 10.7%, respectively.
15
Taxes. For the year ended March 31, 2000, the benefit for income taxes
was $1.1 million for Holdings and the provision was $0.3 million for
Enterprises, as compared to a benefit of $3.2 million for Holdings and $1.4
million for Enterprises for the year ended March 31, 1999. The change of $2.1
million and $1.7 million for Holdings and Enterprises, respectively, principally
relates to the results of operations and the utilization of state net operating
loss carryforwards, which were subject to a valuation allowance in fiscal 1999.
Extraordinary Item - Early Extinguishment of Debt. The extraordinary
gain on early extinguishment of debt for the year ended March 31, 2000 was $12.9
million (consisting of $8.2 million, net of income taxes of $5.4 million for
Holdings and $4.7 million, net of income taxes of $3.1 million for Enterprises).
This gain resulted from Holdings' repurchase of $23.0 million of its outstanding
13% senior notes and Enterprises' repurchase of approximately $20.9 million of
its outstanding 10.5% senior notes.
Net Income. As a result of the foregoing, the net income for the year
ended March 31, 2000 was $11.1 million and $4.5 million for Holdings and
Enterprises, respectively, as compared to net loss of $6.9 million for Holdings
and $3.6 million for Enterprises for the year ended March 31, 1999.
Financial Condition, Liquidity and Capital Resources
Operations for the year ended March 31, 2001, excluding the net gain on
early extinguishment of debt, non-cash charges for depreciation, amortization
and deferred income taxes and other non-cash charges, provided cash of $2.3
million for Holdings and $4.3 million for Enterprises as compared to providing
cash of $11.7 million for Holdings and $11.4 million for Enterprises for the
year ended March 31, 2000. During the years ended March 31, 2001 and 2000, other
changes in assets and liabilities resulting from operating activities utilized
cash of $16.4 million for Holdings and $15.1 million for Enterprises and
utilized cash of $13.0 million for Holdings and $8.2 million for Enterprises,
respectively. This activity resulted in net cash utilized by operating
activities of $14.1 million for Holdings and $10.8 million for Enterprises in
fiscal 2001 as compared to net cash utilized by operations of $1.3 million for
Holdings and net cash provided by operating activities of $3.2 million for
Enterprises, respectively, in fiscal 2000. Investing activities, which
principally consisted of the acquisitions of Miller Buckeye and Guiltless in
fiscal 2001, the acquisition of Epstein in fiscal 2000 and the acquisitions of
plant and equipment, resulted in a use of cash of $25.0 million and $18.3
million for Holdings and Enterprises for each of the years ended March 31, 2001
and 2000. During the year ended March 31, 2001, financing activities, which
principally consisted of the repurchase of approximately $18.8 million of senior
notes for $13.0 million by Enterprises, offset by $3.3 million of payments from
the interest escrow account by Holdings; and additional borrowings of $53.7
million under the credit agreement by Holdings and Enterprises, provided cash of
$44.0 million for Holdings and $40.7 million for Enterprises. During the year
ended March 31, 2000, financing activities, which principally consisted of the
repurchase of $23.0 million of senior notes for $8.8 million by Holdings and
$20.9 million of senior notes for $12.2 million by Enterprises, offset by $10.2
million of payments from the interest escrow account by Holdings; additional
borrowings of $29.9 million under the credit agreement by Holdings and
Enterprises; and $3.0 million of proceeds from the issuance of preferred stock
by Holdings, provided cash of $22.2 million for Holdings and $17.6 million for
Enterprises.
16
At March 31, 2001, outstanding borrowings under the credit agreement
were $99.6 million, consisting of $95.0 million of revolving credit loans and an
amortizing term loan of $4.6 million. Under the terms of the credit agreement,
substantially all of Millbrook's assets and the accounts receivable and
inventory of Manischewitz are pledged to provide collateral for borrowings and
Enterprises is restricted from making distributions to Holdings to pay
dividends. At March 31, 2001, Millbrook and Manischewitz had approximately $9.5
million of cash and approximately $2.2 million of available borrowing capacity
under the credit agreement. In addition, there were $4.6 million of cumulative
unpaid dividends on Holdings' series A and series B preferred stock.
Holdings and Enterprises expect capital expenditure spending for the
year ending March 31, 2002 to be approximately $3.0 million. Such expenditures
include, among other things, leasehold improvements and the acquisition of
computer equipment and software, manufacturing machinery and equipment. It is
anticipated that these capital commitments for 2002 will be financed through
working capital, operating leases and cash flow from operations.
Given the continuing industry consolidation of retailers and its impact
on certain of our customers, Holdings and Enterprises anticipates some loss of
revenues in its health and beauty care category, which tends to be more of a
commodity nature, as acquirors seek to achieve consolidation synergies by
utilizing existing infrastructure. These anticipated losses will occur at the
same time that the Companies continue to implement their strategy of expanding
the specialty food category of their business. Holdings' and Enterprises'
results of operations will be dependent upon the obtaining and timing of
increased revenues from existing and new specialty food customers in light of
anticipated losses from health and beauty care. While Holdings and Enterprises
believe the transition to a greater percentage of its composite business to the
specialty food category can be accomplished by increasing revenues from existing
customers and obtaining new customers, there can be no assurance that Holdings
and Enterprises can accomplish the goals of their strategy.
Interest payments on the senior notes and borrowings 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 the operations of Millbrook and Manischewitz and borrowings
under the credit agreement. Subject to the preceding paragraph, Holdings and
Enterprises believe that, based upon current and anticipated financial
performance, asset sales, cash flows from operations and borrowings under the
credit agreement will be adequate to meet anticipated requirements for capital
expenditures, working capital and scheduled interest payments on the senior
notes. However, the capital requirements of Holdings and Enterprises may change.
The Companies are in compliance with the covenants contained in the credit
agreement and the indentures relating to the senior notes and expect to be able
to continue to comply. Each of Holdings and Enterprises believes that they have
sufficient borrowing capacity and access to private equity and debt markets to
pursue acquisition opportunities and fund extraordinary working capital
requirements, if necessary. However, there can be no assurance that capital will
be available to them on acceptable terms. At March 31, 2001, Holdings and
Enterprises had total outstanding indebtedness of $205.0 million and $180.0
million, respectively. The ability of Holdings and Enterprises to satisfy
capital requirements, to borrow under the credit agreement and to repay or
refinance the senior 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' and Enterprises' control.
17
Effects of Inflation and Other Matters
For the year ended March 31, 2001, 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 and Enterprises are not involved in any significant
environmental matters.
Impact of New Accounting Pronouncements - 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, 2000. SFAS No. 133 requires
the recognition of all derivatives in the consolidated balance sheet as either
assets or liabilities measured at fair value. We adopted SFAS No. 133, as
amended by SFAS No. 137 and SFAS No. 138, during the year ended March 31, 2001.
The adoption of SFAS No. 133 has not had a material impact on our financial
position or overall trends in results of operations and has not resulted in
significant changes to the financial risk management practices.
Emerging Issues Task Force ("EITF") Issue No. 00-25 was finalized and
is effective for fiscal years beginning after December 15, 2001. EITF No. 00-25
requires the reclassification of certain consideration paid to a reseller by a
vendor as a reduction of income on the vendor's income statement. The Company
will adopt EITF No. 00-25 when it becomes effective. The adoption of EITF No.
00-25 will not have a material impact on the Companies' overall trends in their
results of operations.
18
Forward-Looking Statements
The foregoing discussion in "Management's Discussion and Analysis of
Financial Condition and Result of Operations" contains "forward-looking"
statements. Additionally, written materials issued and oral statements made from
time to time by Holdings and Enterprises may contain forward-looking statements.
Forward-looking statements can be identified by the fact that they do not relate
strictly to historical or current facts and by their use of words such as
"goals", "expects", "plans", "believes", "estimates", "forecasts", "projects",
"intends" and other words of similar meaning. Execution of business and
acquisition strategies, expansion of product lines and increase of distribution
networks or product sales are areas, among others, whose future success may be
difficult to predict. They are based on management's then-current information,
assumptions, plans, expectations, estimates and projections regarding the food
and wholesale distribution industries. However, such statements are not
guarantees of future performance, and actual results and outcomes may differ
materially from what is expressed depending on a variety of factors, many of
which are outside of Holdings' and Enterprises' control.
Among the factors that could cause actual outcomes or results to differ
materially from what is expressed in these forward-looking statements are
changes in the demand for, supply of, and market prices of Holdings' and
Enterprises' products, the financial condition of customers, the action of
current and potential new competitors, changes in technology and economic
conditions.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact the
consolidated financial position, results of operations or cash flows of Holdings
and Enterprises due principally to adverse conditions in commodity market prices
and interest rate risk related to debt obligations outstanding. Holdings and
Enterprises do not use financial instruments or derivatives for any trading or
other speculative purposes.
Holdings and Enterprises secure future commitments for certain
commodities based upon historical and projected consumption such that reasonable
possible near term changes in commodity prices would not result in a material
effect on future earnings, fair values or cash flows of Holdings and
Enterprises. Holdings and Enterprises manage interest rate risk through the
strategic use of fixed and variable rate debt.
Item 8. Financial Statements and Supplementary Data
Refer to the Index to Financial Statements on page F-1 for the required
information.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
19
PART III
Item 10. Directors and Executive Officers of the Registrants
The directors and executive officers of Holdings and Enterprises, and
where indicated, the senior executive officer of each of Millbrook and
Manischewitz is as set forth in the table below:
[Enlarge/Download Table]
Name Age Position
---------------------- ---- -----------------------------------------------------------------------
Richard A. Bernstein* 55 Chairman, President, Chief Executive Officer and Director
Lewis J. Korman* 56 Vice Chairman and Director
Steven M. Grossman* 40 Executive Vice President, Chief Financial Officer, Treasurer and
Director
James A. Cohen, Esq.* 55 Senior Vice President - Legal Affairs and Secretary and Director
of Enterprises
Ira A. Gomberg* 57 Senior Vice President
Hal B. Weiss* 44 Assistant Treasurer
Richard H. Hochman 55 Director of Holdings
Jenny Morgenthau 56 Director of Holdings
Michael A. Pietrangelo 59 Director of Holdings
Senior executive officer of Millbrook:
Robert A. Sigel 47 President and Chief Executive Officer of Millbrook and Director of
Holdings
Senior executive officer of Manischewitz:
Michael P. Schall 46 President and Chief Executive Officer of Manischewitz and Director of
Holdings
* Titles of these individuals are the same for Holdings and Enterprises unless
otherwise specified.
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 May,
1996. In addition to his positions with Holdings and Enterprises, Mr. Bernstein
is a member of the Board of Directors and Chairman of Millbrook and is the
Chairman and Manager of Manischewitz. Mr. Bernstein is Chairman and Manager of
RABCO Luxury Holdings LLC, a New York limited liability company ("RABCO"), a
diversified holding entity for luxury products, which has the exclusive right,
through its subsidiaries, to distribute Breguet(R) watches and timepieces and
several other watch brands 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.
20
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 and an equity owner of a non-affiliated company engaged in
the marketing and distribution of products designed to enhance wellness and
beauty. Mr. Korman is also a member of the Board of Managers of Manischewitz and
an equity owner of a non-affiliated company which provides, through on-line and
traditional publishing channels, preparation and testing for (i) occupations
which require certification, and (ii) students and schools where standardized
examinations are administered for assessment or advancement. He also serves as a
consultant to companies involved 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 a member of the Board of Directors and Executive Vice President -
Finance and Administration of Millbrook and is a member of the Board of Managers
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 each of its subsidiaries and Chief Financial Officer of P&E
Properties, Inc. 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.
Mr. Grossman also serves on the Board of Directors of 4Kids Entertainment, Inc.,
a New York Stock Exchange company. Mr. Grossman is a certified public accountant
licensed in New York.
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 a member of the Board of Directors and the Senior Vice President -
Legal Affairs of Millbrook and Manischewitz and is a member of Manischewitz'
Board of Managers. Mr. Cohen is also Senior Vice President - Legal Affairs of
RABCO and each of its subsidiaries and a senior executive of P&E Properties,
Inc. Mr. Cohen was Senior Vice President - Legal Affairs and Secretary of
Western Publishing Group, Inc. from 1984 to May 1996 and Senior Vice Preside