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.
On January 31, 2000, Millbrook acquired certain of the assets and
operation of I. Epstein & Sons, Inc. ("Epstein") for a purchase price of
approximately $15.4 million, including transaction costs. 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.
(b) Financial Information about Industry Segments
Industry segment information with respect to the operations of Holdings
and Enterprises is included in Note 14 to the Consolidated Financial Statements
of Holdings and Enterprises for the years ended March 31, 2000, 1999 and 1998
included in Item 8 herein.
(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 and therefore
improving 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.
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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. Specialty foods typically generate higher margins for retailers
than those realized on other products sold in supermarkets. As a result,
supermarkets are 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 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. 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 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 customers one-stop shopping.
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, 2000, 1999 and 1998,
specialty food sales were approximately $192.9 million, $141.1 million and
$123.2 million and represented 35.9%, 30.3% and 26.2% of Millbrook's total
revenues, respectively. Millbrook's specialty food segment consists of
approximately 11,500 items including ethnic, gourmet, 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 natural food products and supplements include
items such as grains, cereals, snacks, beverages, energy bars, baking
ingredients, pasta and sauces.
Millbrook continues to view its specialty food segment 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. The health and beauty care segment has
traditionally been Millbrook's largest segment in terms of sales. For the years
ended March 31, 2000, 1999 and 1998, health and beauty care sales were
approximately $244.0 million, $234.2 million and $240.3 million and represented
45.4%, 50.4% and 51.1% 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.
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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. In
response to this industry shift, Millbrook's strategy has been to expand its
customer base to include companies such as Ames 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. 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 10,300
general merchandise items. For the years ended March 31, 2000, 1999 and 1998,
general merchandise accounted for approximately $101.0 million, $89.5 million
and $106.7 million and represented 18.8%, 19.3% and 22.7% 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.
Retail Services. Millbrook traditionally has supplemented its product
distribution with full supporting services such as schematic development
(including plannogramming), 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 other retail channels. This
fundamental change in the packaging of the services Millbrook offers to its
customers resulted in the formation of Millbrook Retail Solutions(SM) 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.
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Customers. Millbrook's top ten customers, which collectively represented
approximately 72%, 60% and 50% of its revenues during the years ended March 31,
2000, 1999 and 1998, respectively, have been customers for an average of 16
years. For the year ended March 31, 2000, supermarkets represented approximately
78% of revenues and mass merchandisers represented approximately 22% 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, 2000 and 1999, revenues from the Companies'
two largest customers, Shaw's Supermarket/Star Markets and Ames Department
Stores represented approximately 28.9% and 24.4% of total revenues,
respectively.
Suppliers. Millbrook purchases products from leading suppliers in each of
its categories. For the year ended March 31, 2000, the five largest suppliers in
each of Millbrook's three principal product categories were:
(1) for specialty foods, World Finer Foods, BestFoods, T.J. Lipton, R.C.
Bigelow and Hershey Foods;
(2) for health and beauty care products, Procter & Gamble, Johnson &
Johnson, Unilever HPC, Warner-Wellcome and Gillette; and
(3) for general merchandise, Hartz Mountain Corp., Newell Rubbermaid,
Ecko Housewares, Duracell (a division of Gillette), and General
Electric Company.
For the year ended March 31, 2000, the five largest suppliers represented
(i) for specialty foods, 7% of total purchases; (ii) for health and beauty care
products, 20% of total purchases; and (iii) for general merchandise, 3% of total
purchases.
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 $473 billion in 1999
reflecting a compound annual growth rate of 3.5% for the five years ended 1999.
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.
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Products. Manischewitz' 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
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
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' 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 the year ended March 31, 2000, licensing 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 sales generated approximately 26.2% and 25.0% of
Manischewitz' total revenues in fiscal 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 2000, matzo products and
matzo-related products sold under the Goodman's name represented less than 2% of
Manischewitz' total revenues.
Manufactured Products. Manufactured products consist of a variety of
soups, fish, borscht and other processed foods. Gefilte fish, sardines and other
canned fish products constitute the second largest product line for Manischewitz
and accounted for approximately 18.9% and 13.5% of its total revenues in fiscal
2000 and 1999, respectively.
Co-Packed Products. Manischewitz markets a number of co-packed products,
including cookies, confectionery products, noodles, pasta, condiments and dry
soup mixes principally under the Manischewitz, Horowitz Margareten, Goodman's
and Season brand names. 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 2000 and 1999, spending on
marketing and trade promotion represented approximately 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. As part of its business strategy, management has
committed to significantly increase spending on advertising, marketing and
promotion of Manischewitz' existing products and new product offerings.
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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.
Distribution. Manischewitz principally sells its products to independent
distributors operating throughout the U.S. and Canada. Two of its independent
distributors represented approximately 40.0% and 34.1% of total revenues in
fiscal 2000 and 1999, respectively. Among its customer base, supermarkets
represented approximately 90% of Manischewitz' fiscal 2000 total revenues and
other customers represented approximately 10%. We believe that Manischewitz'
five largest supermarket customers are Kroger, Albertson's, Safeway, Shop Rite
and Royal Ahold. In addition, Manischewitz continues to expand its marketing
arrangement with Wal-Mart to carry Manischewitz' products in its supercenters
and general merchandise stores.
We estimate 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. 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 and side dishes, will
enhance awareness of Manischewitz' products, particularly among non-Jewish
consumers. To support these efforts, we intend to increase promotional and
advertising expenditures to enhance product presence and increase sales.
Raw Materials
Manischewitz utilizes a number of 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
and the co-packing of its other canned fish products. 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 over 200 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 Haddon
House and Gourmet Awards.
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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
approximately 120 retail service companies competing with Millbrook Retail
Solutions(SM). We believe that its principal competitors in this segment include
PIMMS, Powerforce and SPAR. The principal competitive factors within the
industry include:
(a) breadth and quality of client services;
(b) price;
(c) the ability to execute specific client priorities rapidly and
consistently over a wide geographical region; and
(d) technological capability.
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.
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, 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. 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.
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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 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) and Moadim(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, 2000, we had a total of 2,500 full-time employees, 160
part-time employees and the ability to draw upon 450 part-time service
merchandisers nationwide.
Manischewitz has approximately 170 unionized workers. Most of the
unionized workers at Manischewitz are represented under a contract with Bakery,
Confectionery and Tobacco Workers International Union (AFL-CIO, Local 3), which
was ratified in October 1997 and which will expire in September 2000. Millbrook
has approximately 35 unionized workers. The unionized workers at Millbrook are
represented under a contract with Truck Drivers Union, Local No. 170, which was
ratified in March 1999 and which will expire in March 2003.
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 40 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 5% of Manischewitz' revenues
in fiscal 2000.
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