Item 1. Business.
General
R&B, Inc. was incorporated in Pennsylvania in October 1978. As used herein, unless the context otherwise requires, "R&B" or the "Company" refers to R&B, Inc. and its subsidiaries.
The Company is a leading supplier of "hard-to-find" parts, fasteners and service line products primarily for the automotive aftermarket, a market segment which it helped to establish. The Company designs, packages and markets over 60,000 different automotive replacement parts, fasteners and service line products manufactured to its specifications, with approximately half consisting of "hard-to-find" parts and fasteners. "Hard-to-find" parts are those which were traditionally available to consumers only from original equipment manufacturers or junk yards and include, among other parts, window handles, headlamp aiming screws, power steering filler caps, pedal pads and carburetor pre-heater hoses. Fasteners include such items as oil drain plugs and wheel lug nuts. Approximately 89% of the Company's products are sold under its brand names and the remainder are sold for resale under customers' private labels, other brands or in bulk. The Company's products are sold primarily in the United States through automotive aftermarket retailers (such as AutoZone, Advance and The Pep Boys), national, regional and local warehouse distributors (such as Auto Value, Carquest and NAPA) and specialty markets including parts manufacturers for resale under their own private labels (such as Federal Mogul and Dana) and salvage yards. Through its Scan-Tech subsidiary, the Company is increasing its international distribution of automotive replacement parts, with sales into Europe, the Middle East and the Far East.
The Automotive Aftermarket
The automotive replacement parts market is made up of two components: parts for passenger cars and light trucks, which accounted for sales of approximately $175 billion in 2001, and parts for heavy duty trucks, which accounted for sales of approximately $64 billion in 2001. The Company currently markets products primarily for passenger cars and light trucks.
Two distinct groups of end-users buy replacement automotive parts: (i) individual consumers, who purchase parts to perform "do-it-yourself" repairs on their own vehicles; and (ii) professional installers, which include automotive repair shops and the service departments of automobile dealers. The individual consumer market is typically supplied through retailers and through the retail arms of warehouse distributors. Automotive repair shops generally purchase parts through local independent parts wholesalers and through national warehouse distributors. Automobile dealer service departments generally obtain parts through the distribution systems of automobile manufacturers and specialized national and regional warehouse distributors.
The increasing complexity of automobiles and the number of different makes and models of automobiles have resulted in a significant increase in the number of products required to service the domestic and foreign automotive fleet. Accordingly, the number of parts required to be carried by retailers and wholesale distributors has increased substantially. These pressures to include more products in inventory and the significant consolidation among distributors of automotive replacement parts have in turn resulted in larger distributors.
Retailers and others who purchase aftermarket automotive repair and replacement parts for resale are con strained in the short-term to a finite amount of space in which to display and stock products. Thus, the reputation for quality, customer service and line profitability which a supplier enjoys is a significant factor in a purchaser's decision as to which product lines to carry in the limited space available. Further, because of the efficiencies achieved through the ability to order all or part of a complete line of products from one supplier (with possible volume discounts), as opposed to satisfying the same requirements through a variety of different sources, retailers and other purchasers of automotive parts seek to purchase products from fewer but stronger suppliers.
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Products
The Company sells over 60,000 different automotive replacement parts, fasteners and service line products to meet a variety of needs, including "hard-to-find" parts sold under one of the Motormite(R) family of brands such as the HELP!(R) brand name, a comprehensive array of automotive and hardware fasteners sold under the Dorman(R) and Pik-A- Nut(R) family of brand names, service line products sold under the Champ(R) family of brand names and traditional automotive replacement parts sold under the Company's other brand names as well as under customers' private label brands. Approximately 89% of the Company's revenues are derived from products sold under its more than sixty brand names.
Motormite(R) - brand names within the Motormite(R) master brand represent the Company's "hard-to-find" parts, including, among others, the following:
* HELP!(R) - An extensive array of replacement parts, including window handles, knobs and switches, door handles, interior trim parts, headlamp aiming screws and retainer rings, radiator parts, battery hold-down bolts, valve train parts and power steering filler caps
* Conduct-Tite!(R) - Electrical connectors
* Mighty Flow!(R) - Air intake, carburetor preheater and defroster duct hoses
* Look!(R) - Sideview mirror glass
* Pedal- UP!TM - Automotive pedal pads
* Speedi-Boot!TM - Constant velocity joint boots and clamps
Dorman(R) - brand names within the Dorman(R) master brand represent the Company's automotive fasteners and traditional replacement parts, including, among others, the following:
* Oil-Tite!(R) - Oil drain plugs and gaskets
* Cable-All!TM - Accelerator, detent and transhift cables
* Gear-Up!(R) - Flywheels, ring gears and flex plates
* Quick-Boot(R) - Constant velocity joint boots and clamps
* Uni-Fit TM - Constant velocity joint boots and clamps
Champ(R) - brand names within the Champ(R) master brand represent the Company's automotive shop supplies and accessories, including, among others, the following:
* Metal Work!TM - A program of metal-working related categories, including welding supplies and accessories, cutting equipment and supplies, abrasives and related tools and brushes for hand and power applications
* SafetyXCounts!TM - Safety products relating to compliance items, gear for personal protection and first aid
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Pik-A-Nut(R) - the Pik-A-Nut (R) brand represents the Company's fasteners for automotive retail, specialty automotive and mass merchant markets
Platinum Parts TM - the Platinum Parts TM brand represents the Company's automotive replacement parts and supplies for salvage yards
Brakeware(R) and Tru-Torque(R) - these brands represent the Company's hydraulic brake parts, including wheel cylinders and related hardware
The remainder of the Company's revenues are generated by the sale of parts packaged by the Company, or others, for sale in bulk or under the private labels of parts manufacturers (such as Federal Mogul and Dana), national warehouse distributors (such as NAPA) and automobile manufacturers or their dealers. During the years ended December 2001, 2000 and 1999, no single product or related group of products accounted for more than 10% of gross sales.
Product Development
Product development is central to the Company's business. The development of a broad range of products, many of which are not conveniently or economically available elsewhere, has in part, enabled the Company to grow to its present size and is important to its future growth. In developing its products, the Company's strategy has been to design and package its parts so as to make them better and easier to install and/or use than the original parts they replace and to sell automotive parts for the broadest possible range of uses. Through careful evaluation, exacting design and precise tooling, the Company is frequently able to offer products which fit a broader range of makes and models than the original equipment parts they replace, such as an innovative neoprene replacement oil drain plug which fits not only a variety of Chevrolet models, but also Fords, Chryslers and a range of foreign makes. This assists retailers and other purchasers in maximizing the productivity of the limited space available for each class of part sold. Further, where possible, the Company improves its parts so they are better than the parts they replace. Thus, many of the Company's products are simpler to install or use, such as a replacement "split boot" for a constant velocity joint that can be installed without disassembling the joint itself and a replacement spare tire hold-down bolt that is longer and easier to thread than the original equipment bolt it replaced. In addition, the Company often packages different items in complete kits to ease installation.
Ideas for expansion of the Company's product lines arise through a variety of sources. The Company maintains an in-house product management staff that routinely generates ideas for new parts and expansion of existing lines. Fur ther, the Company maintains an "800" telephone number and an Internet site for "New Product Suggestions" and receives, either directly or through its sales force, many ideas from the Company's customers as to which types of presently unavailable parts the ultimate consumers are seeking.
Each new product idea is reviewed by the Company's product management staff, as well as by members of the production, sales, finance, marketing and administrative staffs. In determining whether to produce an individual part or a line of related parts, the Company considers the number of vehicles of a particular model to which the part may be applied, the potential for modifications which will allow the product to be used over a broad range of makes and models, the average age of the vehicles in which the part would be used and the failure rate of the part in question. This review process winnows the many new product suggestions to those most likely to enhance the Company's existing product lines or to support new product lines.
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Sales and Marketing
The Company markets its parts to three groups of purchasers who in turn supply individual consumers and professional installers:
(i) Approximately 44% of the Company's revenues are generated from sales to automotive aftermarket retailers (such as AutoZone, Advance and The Pep Boys), local independent parts wholesalers and national general merchandise chain retailers. The Company sells some of its products to virtually all major chains of automotive aftermarket retailers;
(ii) Approximately 28% of the Company's revenues are generated from sales to warehouse distributors (such as Auto Value, Carquest and NAPA), which may be local, regional or national in scope, and which may also engage in retail sales; and
(iii) The balance of the Company's revenues are generated from international sales and sales to special markets, which include, among others, mass merchants (such as Wal-Mart) salvage yards and the parts distribution systems of parts manufacturers (such as Federal Mogul and Dana).
The Company utilizes a number of different methods to sell its products. The Company's more than 40 person direct sales force solicits purchases of the Company's products directly from customers, as well as managing the activities of more than 10 independent manufacturer's representative agencies. The Company uses independent manufacturer's represen tative to help service existing retail and warehouse distribution customers, providing frequent on-site contact. The sales focus is designed to increase sales by adding new product lines and expanding product selection within existing customers and secure new customers. For certain of its major customers, and its private label purchasers, the Company relies primarily upon the direct efforts of its sales force, who, together with the marketing department and the Company's executive officers, coordinate the more complex pricing and ordering requirements of these accounts.
The Company's sales efforts are not directed merely at selling individual products, but rather more broadly towards selling groups of related products that can be displayed on attractive Company-designed display systems, thereby maximizing each customer's ability to present the Company's product line within the confines of the available area.
The Company prepares a number of catalogs, application guides and training materials designed to describe the Company's products and other applications as well as to train the customers' salesmen in the promotion and sale of the Company's products. Every two to three years the Company prepares a new master catalog which lists all of its products. The catalog is updated periodically through supplements.
The Company currently services more than 12,000 active accounts. During 2001, 2000 and 1999, one customer (AutoZone), accounted for approximately 24%, 20% and 21% of sales, respectively.
Manufacturing
Substantially all of the products sold by the Company are manufactured to its specifications by third parties. Because numerous contract manufacturers are available to manufacture its products, the Company is not dependent upon the services of any one contract manufacturer or any small group of them, so no one vendor supplies 10% or more of the Company's products. In 2001, as a percentage of the total dollar volume of purchases made by the Company, approximately 61% of the Company's products were purchased from various suppliers throughout the United States and approximately 39% of the Company's products were purchased directly from a variety of foreign countries.
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Once a new product has been developed, the Company's engineering department produces detailed engineering drawings and prototypes which are used to solicit bids for manufacture from a variety of vendors in the United States and abroad. After a vendor is selected, tooling for a production run is produced by the vendor at the Company's expense. A pilot run of the product is produced and subjected to rigorous testing by the Company's engineering department and, on occasion, by outside testing laboratories and facilities in order to evaluate the precision of manufacture and the resiliency and structural integrity of the materials used. If acceptable, the product then moves into full production.
Packaging, Inventory and Shipping
Finished products are received at one or more of the Company's facilities, depending on the type of part. Samples of each shipment are tested upon receipt. If cleared, these shipments of finished parts are logged into the Company's computerized production tracking systems and staged for packaging.
The Company employs a variety of custom-designed packaging machines for "blister packaging," in which individual parts are dropped into plastic "blister" cups to which a preprinted card backing with appropriate graphics is sealed, and for "skinning," in which parts are pre-positioned on a printed card backing, over which a malleable plastic "skin" is laid and fixed by vacuum- and heat-treatment processes. In either event, the printed card contains the Company's label (or a private label), a part number, a universal packaging bar code suitable for electronic scanning, a description of the part and appropriate installation instructions. Products are also sold in bulk to automotive parts manufacturers and packagers. Computerized tracking systems, mechanical counting devices and experienced workers combine to assure that the proper variety and number of parts meet the correct packaging and backing materials at the appropriate places and times to produce the required quantities of finished products.
Completed inventory is stocked in the warehouse portions of the Company's facilities and is organized according to historical popularity in order to aid in retrieval for shipping. The Company strives to maintain a level of inventory to adequately meet current customer order demand with additional inventory to satisfy new customer orders and special programs. In the aggregate, this has resulted in approximately a three month supply of its products, packaged and readily available for shipment, and a two to six month supply of product in finished bulk form ready for packaging.
The Company ships its products from all of its locations, either by contract carrier, common carrier or parcel service. Products are generally shipped to the customer's central warehouse for redistribution within their network. In certain circumstances, at the request of the customer, the Company ships directly to the customer's stores.
Competition
The replacement automotive parts industry is highly competitive. Various competitive factors affecting the automotive aftermarket are price, product quality, breadth of product line, range of applications and customer service. Substantially all of the Company's products are subject to competition with similar products manufactured by other manufacturers of aftermarket automotive repair and replacement parts. Some of these competitors are divisions and subsidiaries of companies much larger than the Company, and possess a longer history of operations and greater financial and other resources than the Company. Further, some of the Company's private label customers also compete with the Company.
Proprietary Rights
While the Company takes steps to register its trademarks when possible, it does not believe that trademark registration is generally important to its business. Similarly, while the Company actively seeks patent protection for the products and improvements which it develops, it does not believe that patent protection is generally important to its business.
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Employees
At December 29, 2001, the Company had 955 employees, of whom 913 were employed full-time and 42 were employed part-time. Of these employees, 677 were engaged in production, inventory, or quality control, 44 were involved in product development and brand management, 73 were employed in sales and order entry, and the remaining 161, including the Company's 7 executive officers, were devoted to administration, finance and strategic planning.
No employee is covered by any collective bargaining agreement. The Company considers its relations with its employees to be generally good.
Investment Considerations
Increasing Service Life. Advancing technology and competitive pressures have compelled original equipment automobile and parts manufacturers to use parts with longer service lives, which are covered by longer and more comprehensive warranties. This may have the effect of reducing demand for the Company's products by delaying the onset of repair conditions requiring their use.
Competition for Shelf Space. Since the amount of space available to a retailer and other purchasers of the Company's products is limited, the Company's products compete with other automotive aftermarket products, some of which are entirely dissimilar and otherwise non-competitive (such as car waxes and engine oil), for shelf and floor space. No assurance can be given that additional space will be available in a customers' stores to support expansion of the number of products offered by the Company.
Concentration of Sales to Certain Customers. A significant percentage of the Company's sales have been, and will continue to be, concentrated among a relatively small number of customers. In 2001, 2000 and 1999 one customer (AutoZone) accounted for approximately 24%, 20% and 21% of sales, respectively. The Company anticipates that this concentration of sales among customers will continue in the future. The loss of a significant customer or a substantial decrease in sales to such a customer could have a material adverse effect on the Company's sales and operating results. See "Management's Discussion and Analysis of Results of Operations and Financial Condition" and "Business-Sales and Marketing."
Dependence on Senior Management. The success of the Company's business will continue to be dependent upon Richard N. Berman, Chairman of the Board, President and Chief Executive Officer and Steven L. Berman, Executive Vice President, Secretary-Treasurer and Director. The loss of the services of one or both of these individuals could have a material adverse effect on the Company's business.
Dividend Policy. The Company does not intend to pay cash dividends for the foreseeable future. Rather, the Company intends to retain its earnings, if any, for the operation and expansion of the Company's business.
Control by Officers, Directors and Family Members. Richard N. Berman and Steven L. Berman, who are officers and directors of the Company, their father, Jordan S. Berman, and their brothers, Marc H. Berman and Fred B. Berman, beneficially own approximately 51% of the outstanding Common Stock and are able to elect the Board of Directors, determine the outcome of most corporate actions requiring shareholder approval (including certain fundamental transactions) and control the policies of the Company.
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Item 2.
Item 2. Properties.
Facilities
The Company currently has 12 warehouse and office facilities located throughout the United States, Sweden and Korea. Three of these facilities are owned and the remainder are leased. The Company's headquarters and principal warehouse facilities, are as follows:
Location Description ------------------- --------------------------------------------------- Colmar, PA Warehouse and office - 334,000 sq. ft. (leased) (1) Warsaw, KY Warehouse and office - 326,000 sq. ft. (owned) Carrollton, GA Warehouse and office - 100,000 sq. ft. (leased) (2) Baltimore, MD Warehouse and office - 83,000 sq. ft. (leased) Allentown, PA Warehouse and office - 65,000 sq. ft. (leased) Louisiana, MO Warehouse and office - 62,000 sq. ft. (owned)
In the opinion of management, the Company's existing facilities are in good condition. - ----------------- (1) Leased by the Company from a partnership (the "partnership") of which Richard N. Berman, President and Chief Executive Officer of the Company, and Steven L. Berman, Executive Vice President of the Company, their father, Jordan S. Berman, and their brothers, Marc H. Berman and Fred B. Berman, are partners. Under the lease the Company paid rent of $3.45 per square foot ($1.2 million per year) in 2001. The rents payable will be adjusted on January 1 of each year to reflect annual changes in the Consumer Price Index for All Urban Consumers - U.S. City Average, All Items. The lease also provides that, as between the Company and the related partnership lessor, the lessor and its partners will bear any environmental liability and all related expenses, including legal expenses, incurred by the Company or the lessor as a result of matters which arose other than from activities of the Company (although for any environmental liability arising from the Company's activities, the Company will bear all such liability and any related expenses, including legal expenses, incurred by the Company or the lessor). The lease will expire on December 28, 2002. The Company is currently negotiating a lease renewal with the Partnership. In the opinion of management, the terms of this lease are no less favorable than those which could have been obtained from an unaffiliated party.
The property is being purchased by the partnerships from the Montgomery County Industrial Development Corporation ("MCIDC") under an installment sale agreement. MCIDC has, in turn, borrowed approximately $1,971,000 from First Union National Bank and approximately $1,161,000 from the Pennsylvania Industrial Development Authority ("PIDA") to fund in full its purchase and development of the Pennsylvania property. The partnerships' payments to MCIDC under the installment sale agreement are required to be at least equal to the principal and interest payable by MCIDC under these two loans, and the Company's rental payments on the Pennsylvania property are required to be at least equal to the partnership's payments under the installment sale agreement with MCIDC. The Company has guaranteed the obligations of the partnerships and MCIDC to First Union and of MCIDC to PIDA.
(2) Leased by the Company from a partnership (the "partnership") of which Richard N. Berman, President and Chief Executive Officer of the Company, and Steven L. Berman, Executive Vice President of the Company, their father, Jordan S. Berman, and their brothers, Marc H. Berman and Fred B. Berman, are partners. Under the lease, the Company paid rent of $2.68 per square foot ($0.28 million per year) in 2001. The Company is currently not using this facility and is working with the partnership to either sell or sublease the facility. The lease expires on January 2, 2005. In the opinion of management, the terms of this lease are no less favorable than those which could have been obtained from an unaffiliated party.
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Item 3.
Item 3. Legal Proceedings.
In addition to commitments and obligations which arise in the ordinary course of business, the Company is subject to various claims and legal actions from time to time involving contracts, competitive practices, trademark rights, product liability claims and other matters arising out of the conduct of the Company's business.
On February 27, 1996, the Company's subsidiary, Dorman Products of America, Ltd. ("Dorman"), filed a complaint in the United States District Court for the Eastern District of Pennsylvania against SDI Operating Partners, L.P. ("SDI") for damages resulting from, inter alia, an alleged breach of various representations and warranties contained in the Asset Purchase Agreement dated as of October 5, 1994 between Dorman and SDI. On April 25, 1996, SDI filed a complaint in the Court of Common Pleas, Montgomery County, Pennsylvania against Dorman and the Company for damages of approximately $450,000 resulting from, inter alia, Dorman's alleged failure to use its "best efforts" to assist SDI in collecting certain past due accounts receivable which were not transferred to Dorman as a result of the acquisition. In addition, SDI is seeking declaratory judgment that SDI has not breached the representations and warranties of the Asset Purchase Agreement as alleged by Dorman in the federal court action. In May 1996, the issues were consolidated and will proceed in the Court of Common Pleas.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of the security holders of the Company during the fourth quarter of fiscal year 2001.
Item 4.1 Certain Executive Officers of the Registrant.
The following table sets forth certain information with respect to the executive officers of the Company:
Name Age Position with the Company
Mathias J. Barton 42 Senior Vice President, Chief Financial Officer
Richard N. Berman 45 President, Chief Executive Officer, Chairman of the Board of Directors, and Director
Steven L. Berman 42 Executive Vice President, Secretary-Treasurer, and Director
Edward L. Dean 45 Senior Vice President, Marketing
David A. Eustice 41 Senior Vice President, Chief Operating Officer
Ronald R. Montgomery 60 Senior Vice President, Sales
Barry D. Myers 42 Senior Vice President, General Counsel and Assistant Secretary
Mathias J. Barton joined the Company in November 1999 as Senior Vice President, Chief Financial Officer. Prior to joining the Company Mr. Barton was Senior Vice President and Chief Financial Officer of Central Sprinkler Corporation, a manufacturer and distributor of automatic fire sprinklers, valves and component parts. From May 1989 to September 1998, Mr. Barton was employed by Rapidforms, Inc., most recently as Executive Vice President and Chief Financial Officer. He is a graduate of Temple University.
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Richard N. Berman has been President, Chief Executive Officer and a Director of the Company since its incep tion in October 1978. He is a graduate of the University of Pennsylvania.
Steven L. Berman has been Executive Vice-President, Secretary-Treasurer and a Director of the Company since its inception. He attended Temple University.
Edward L. Dean joined the Company in November 1997 as Vice President, Marketing and was named Senior Vice President, Marketing in December 1999. Prior to joining the Company Mr. Dean was the Vice President of Sales with Angelo Brothers Company from May of 1989 to November of 1997. Angelo is a leading supplier of light bulbs and lighting products to the electrical distributor and home center markets. He is a graduate of Cincinnati Technical College.
David A. Eustice joined the Company in December 1996 as Vice President, Operations and was named Chief Operating Officer in January 1998. Prior to joining the Company Mr. Eustice was the Vice President of Operations with the Baldwin Hardware Division of Masco Corporation. Baldwin is a high end manufacturer and international distributor of architectural hardware. From August 1990 to January 1994, Mr. Eustice was a Senior Project Manager for USC Consulting, a operational improvement firm. While with USC Consulting, Mr. Eustice consulted to clients including IBM, Copper Industries, PPG Industries and Masco Corporation. Mr. Eustice received his Masters degree from the Wharton School at the University of Pennsylvania.
Ronald R. Montgomery joined the Company in June 1997 as Vice President, Sales and was named Senior Vice President, Sales in December 1999. Prior to joining the Company Mr. Montgomery was Senior Vice President, Sales for the Coleman Company, responsible for North American sales in the outdoor and camping equipment division. From December 1979 to October 1995, Mr. Montgomery held various senior sales positions with Black & Decker, Inc. He is a graduate of Miami University (Ohio).
Barry D. Myers has been an employee of the Company since March 1988, and was Vice President, General Counsel and Assistant Secretary for more than five years. In December 1999, Mr. Myers was named Senior Vice President, General Counsel and Assistant Secretary. He is a graduate of Moravian College and Syracuse University College of Law, and is a member of the Pennsylvania Bar.
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PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
The Company's shares of common stock are traded publicly in the over-the-counter market under the NASDAQ system. At March 18, 2002 there were 50 holders of record of common stock, representing more than 1,500 beneficial owners. The last price for the Company's common stock on March 18, 2002, as reported by NASDAQ, was $8.30 per share. Since the Company's initial public offering, it has paid no cash dividends. The Company does not presently contemplate paying any such dividends in the foreseeable future. The range of high and low sales prices for the Company's common stock for each quarterly period of 2001 and 2000 are as follows:
2001 2000 ----------------------- ----------------------- High Low High Low - ------------------ ---------- ------------ ---------- ------------ First Quarter $2.63 $1.66 $6.00 $2.38 Second Quarter 3.80 2.00 3.50 2.25 Third Quarter 4.50 2.69 3.13 2.50 Fourth Quarter 7.35 3.00 2.75 1.19
(a) Results for 2000 include non-recurring revenues and gain on sale of product line of $5,500 and $1,600 ($1,100 after tax or $0.13 per share), respectively.
(b) Results for 1999 include a restructuring charge of $11,400 ($7,500 after tax or $0.90 per share).
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Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition.
General
Over the periods presented, the Company has focused its efforts on providing an expanding array of new product offerings and strengthening its relationships with its customers. To that end, the Company has made significant investments to increase market penetration, primarily in the form of product development, customer service, customer credits and allowances.
The Company calculates its net sales by subtracting credits and allowances from gross sales. Credits and allowances include costs for co-operative advertising, product returns, discounts given to customers who purchase new products for inclusion in their stores, and the cost of competitors' products that are purchased from the customer in order to induce a customer to purchase new product lines from the Company. The credits and allowances are designed to increase market penetration and increase the number of product lines carried by customers by displacing competitors' products within customers' stores and promoting consolidation of customers' suppliers.
The Company may experience significant fluctuations from quarter to quarter in its results of operations due to the timing of orders placed by the Company's customers. Generally, the second and third quarters have the highest level of customer orders, but the introduction of new products and product lines to customers may cause significant fluctuations from quarter to quarter.
The Company operates on a fifty-two, fifty-three week period ending on the last Saturday of the calendar year. Results for the fiscal years ended December 29, 2001, December 30, 2000 and December 25, 1999 were fifty-two weeks, fifty-three weeks, and fifty-two weeks, respectively.
Critical Accounting Policies
The Securities and Exchange Commission ("SEC") recently issued disclosure guidance for "critical accounting policies." The SEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.
The Company's significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates. However, the following policies could be deemed to be critical within the SEC definition:
Allowance for Doubtful Accounts. The preparation of the Company's financial statements requires management to make estimates of the uncollectability of its accounts receivable. Management specifically analyzes accounts receivable and historical bad debts, customer credit-worthiness, current economic trends and changes in customer payment patterns when evaluating the adequacy of the allowance for doubtful accounts. A significant percentage of the Company's accounts receivable have been, and will continue to be, concentrated among a relatively small number of customers. A bankruptcy or financial loss associated with a major customer could have a material adverse effect on the Company's sales and operating results. The Company's allowance for doubtful accounts amounted to $0.9 million as of December 29, 2001.
Allowance for Customer Credits. Management must make estimates of potential future product returns and sales allowances granted to induce customers to purchase products from the Company. Management analyzes historical returns, current economic conditions and changes in demand and acceptance of the
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Company's products when evaluating the adequacy of reserves for customer credits. Management judgements and estimates must be made and used in connection with establishing reserves for customer credits in any accounting period. Material differences in the amount and timing of customer credits for any period may result if management made different judgments or utilized different estimates for the reserves. Reserves for customer credits were $14.2 million as of December 29, 2001.
Excess and Obsolete Inventory Reserves. Management must make estimates of potential future excess and obsolete inventory costs. The Company provides reserves for discontinued and excess inventory based upon historical demand, forecasted usage, estimated customer requirements and product line updates. The Company maintains contact with its customer base in order to understand buying patters, customer preferences and the life cycle of its products. Changes in customer requirements are factored into the reserve needs as needed. During 2001, the Company revised its estimates which resulted in an increased provision for excess and obsolete inventory of $3.6 million. Reserves for excess and obsolete inventory were $9.6 million as of December 29, 2001.
Restructuring Charges
In the fourth quarter of fiscal 1999, the Company recorded a restructuring charge of $11.4 million ($7.5 million after tax or $0.90 per share) to reflect costs primarily related to inventory write downs associated with the elimination of a significant number of underperforming products, as well as the closing of a warehouse and production facility in Carrollton, Georgia, and a work force reduction of 158 people. A total of $9.8 million, representing inventory write downs, was charged to cost of sales and $1.6 million was charged to selling, general and administrative expenses. In 2001, the Company determined that it had $0.2 million in excess facility shutdown reserves which were credited to selling, general and administrative expenses.
Sale of Lift Support Assets
During the first quarter of fiscal 2000, the Company sold all of its inventory and certain other assets related to its lift support product line as a result of a strategic decision to eliminate this product line. Fiscal 2000 revenues include non-recurring net sales of $5.5 million and gross profit of $1.6 million attributable to the sale of the inventory and related assets. The gain on the sale was $1.6 million ($1.1 million after tax or $0.13 per share).
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Results of Operations
The following table sets forth, for the periods indicated, the percentage of net sales represented by cer tain items in the Company's Consolidated Statements of Operations.
2001 Compared to 2000
Net sales increased to $201.7 million in 2001 from $201.4 million in 2000, or $195.9 million without revenues from the sale of the lift support inventory described above. Net sales in 2001 increased $5.8 million, or 3.0%, after adjusting prior year amounts for the lift support sale. The sales increase is primarily the result of incremental 2001 revenues from the Company's third quarter 2000 initiative to supply Wal-Mart with its "Pik-a- Nut" brand of hardware and general use fasteners. The Company also experienced sales increases from the successful introduction of several new products lines in 2001 to existing customers. These sales increases were offset by lower 2001 sales from discontinued product lines of certain subsidiaries and a fifty-three week period in fiscal 2000.
Cost of goods sold decreased to $132.4 million in 2001 from $132.6 million in 2000. Fiscal 2000 cost of sales were $128.8 million without costs associated with the sale of the lift support inventory described above. Cost of goods sold as a percentage of sales decreased slightly to 65.6% from 65.7% before the lift support sale in 2000. The decline in cost of goods sold as a percentage of sales is the result of lower materials and operating costs achieved through several cost reduction initiatives which were offset by increased provisions for discontinued and excess inventories in the current year. The Company provides reserves for discontinued and excess inventory based upon historical demand, forecasted usage, estimated customer requirements and product line updates. During 2001, the Company revised its estimates which resulted in an increased provision of $3.6 million.
Selling, general and administrative expenses in 2001 increased to $57.0 million from $56.5 million in 2000, an increase of $0.5 million, or 0.9%. The increase in selling, general and administrative costs in 2001 was primarily the result of severance and related costs associated with the Company's consolidation of subsidiary operations as well as higher bad debt provisions due to customer financial difficulties.
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Interest expense, net decreased to $4.3 million in 2001 from $6.0 million in 2000 due to lower borrowing levels in 2001. Borrowing levels declined as a result of increased operating cash flow and lower capital spending.
The Company's effective tax rate decreased to 34.4% in 2001 from 34.8% in the prior year due to a higher mix of earnings from the Company's Swedish subsidiary which has a lower effective tax rate than the Company's other businesses.
2000 Compared to 1999
Net sales decreased to $201.4 million in 2000 from $236.7 million in 1999, a decrease of $35.3 million or 14.9%. The sales decline is the result of lower sales in substantially all of the Company's product lines due to weak automotive aftermarket conditions and the Company's strategic decision to eliminate unprofitable products in connection with the restructuring of its business in the fourth quarter of 1999. In addition, the sale of the lift support inventory mentioned previously accounted for approximately $6.0 million of the net sales reduction in 2000. This sales reduction was substantially offset by revenues from a new fiscal 2000 initiative to sell the Company's "Pik-a-Nut" brand of hardware and general use fasteners to Wal-Mart. Net income in 2000 was negatively impacted by start up losses from this and other new initiatives.
Cost of goods sold decreased to $132.6 million from $168.7 million in 1999, a decrease of $36.1 million. Restructuring charges recorded in 1999 accounted for $9.8 million of this decrease. In addition, cost of goods sold in 2000 includes $3.8 million attributable to the sale of the lift support inventory mentioned above. Cost of goods sold as a percentage of sales before 1999 restructuring charges and without the impact of the lift support sale in 2000 decreased to 65.7% from 67.1% in 1999. This decline is attributable to lower operating costs as a result of savings achieved from the restructuring initiatives implemented early in 2000.
Selling, general and administrative expenses in 2000 decreased to $56.5 million from $66.3 million in 1999, a decrease of $9.8 million, or 14.8%. Restructuring charges recorded in 1999 accounted for $1.6 million of this decrease. As a percentage of sales, selling, general and administrative expenses before restructuring charges and the lift support inventory sale were 28.9% in 2000 compared to 27.4% in 1999. This increase as a percentage of sales is primarily attributable to start up costs associated with new initiatives and the decline in sales in 2000, as the Company was not able to reduce fixed costs adequately to offset the lower sales levels experienced in 2000.
Interest expense, net decreased to $6.0 million in 2000 from $7.0 million in 1999. The decline in interest costs is the result of lower borrowing levels in 2000 due to reduced working capital requirements. Working capital levels declined in 2000 primarily as a result of lower accounts receivable and inventory levels.
The Company recorded an income tax provision at the rate of 34.8% in 2000 compared to an income tax benefit at an effective rate of 32.4% in 1999. The higher effective income tax rate in 2000 is primarily due to the lack of a state income tax benefit on the $11.4 million restructuring charge recorded in 1999.
Liquidity and Capital Resources
Historically, the Company has financed its growth through a combination of cash flow from operations and through the issuance of senior indebtedness through its bank credit facility and senior note agreements. During fiscal 2000 and 2001 the Company improved its inventory management and more aggressively managed other components of working capital. In addition, capital spending levels were reduced in 2001. These initiatives resulted in increased cash flow from operations in 2000 and 2001 which were used to reduce borrowing levels in both years. At December 29, 2001 working capital was $81.1 million, total long-term debt (including the current portion) was $65.0 million and shareholders' equity was $75.2 million. Cash and cash equivalents as of December 29, 2001 totaled $21.7 million.
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In August 1998, the Company completed a private placement of $60.0 million in Senior Notes ("Notes") due August 21, 2008 on an unsecured basis. The ten-year Notes bear a 6.81% fixed interest rate, payable quarterly, with an initial four-year interest only period. Annual repayments at the rate of $8.6 million are due beginning in August 2002.
The Company's lease for its Pennsylvania facility is recorded as a capitalized lease in the Company's financial statements. In addition, the Company has entered into three sale/leaseback transactions relating to computer hardware and software. The aggregate amount outstanding under all capital leases amounted to $2.5 million at December 29, 2001.
In March 2001, the Company amended its Revolving Credit Facility. The amended agreement provides for a $10.0 million facility for a three-year term that expires in March 2004. Borrowings under the amended facility are on an unsecured basis with interest at rates ranging from Libor plus 150 to Libor plus 275 basis points. The loan agreement also contains covenants, the most restrictive of which pertain to net worth and the ratio of debt to EBITDA. There were no borrowings under the amended credit facility in 2001.
Operating cash flow was $21.5 million in fiscal 2001. The primary sources of cash flow were net income, depreciation and amortization charges and reduced inventory levels. Inventory levels were reduced in 2001 through more disciplined inventory management. This resulted in cash generated of $5.2 million in fiscal 2001.
Additions to property, plant and equipment required $1.9 million in cash in 2001. Capital expenditures were primarily for upgrades to information systems hardware, purchases of packaging equipment designed to improve operational efficiencies and scheduled equipment replacements. Total capital spending in 2001 declined significantly from 2000 and 1999 spending levels of $6.8 and $7.9 million, respectively. Fiscal 2000 spending included one time expenditures for equipment in connection with the Company's initiative to supply Wal-Mart with its "Pik-a-Nut" brand of hardware and general use fasteners. Fiscal 1999 expenditures included spending related to a number of non-recurring information systems and customer-related projects.
Financing activities required $5.5 million in cash during 2001. During 2001 the Company amended certain agreements related to its 1998 acquisition of Scan-Tech USA/Sweden A.B. and related entities ("Scan-Tech"). As a result of this transaction, the Company purchased and canceled 250,000 shares of its common stock issued in connection with the acquisition and canceled the earn out provisions of the acquisition agreement in exchange for consideration of $3.2 million to be paid by the Company in installments through December 2005. After the initial $0.8 million payment in 2001, this transaction increased total debt at December 29, 2001 by $2.5 million. Repayments of loans and capital leases resulted in the use of $5.9 million in cash. These repayments included the payoff of an Industrial Revenue Bond with a balance of $2.9 million at December 30, 2000.
The Company believes that cash on hand, cash generated from operations together with available sources of capital are sufficient to meet ongoing cash needs for the foreseeable future.
Foreign Currency Fluctuations. In 2001, approximately 39% of the Company's products were pur chased from a variety of foreign countries. The products generally are purchased through purchase orders with the purchase price specified in U.S. dollars. Accordingly, the Company does not have exposure to fluctuation in the relationship between the dollar and various foreign currencies between the time of execution of the purchase order and payment for the product. However, to the extent that the dollar decreases in value to foreign currencies in the future, the price of the product in dollars for new purchase orders may increase. The Company attempts to lessen the impact of these currency fluctuations by resourcing its purchases to other countries.
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Impact of Inflation
The Company has not generally been adversely affected by inflation. The Company believes that price increases resulting from inflation generally could be passed on to its customers, since prices charged by the Company are not set by long-term contracts.
Cautionary Statement Regarding Forward Looking Statements
Certain statements periodically made by or on behalf of the Company and certain statements contained herein including statements in Management's Discussion and Analysis of Financial Condition and Results of Operation; certain statements contained in Business, such as statements regarding litigation; and certain other statements contained herein regarding matters that are not historical fact are forward looking statements (as such term is defined in the Securities Act of 1933), and because such statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by such forward looking statements. Factors that cause actual results to differ materially include but are not limited to those factors discussed in "Business - Investment Considerations."
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
The Company's market risk is the potential loss arising from adverse changes in interest rates. With the exception of the Company's revolving credit facility, long-term debt obligations are at fixed interest rates and denominated in U.S. dollars. The Company manages its interest rate risk by monitoring trends in interest rates as a basis for determining whether to enter into fixed rate or variable rate agreements. Under the terms of the Company's revolving credit facility, a change in either the lender's base rate or LIBOR would affect the rate at which the Company could borrow funds thereunder. The Company believes that the effect of any such change would be minimal.
The Company uses derivative financial instruments, consisting of foreign currency forward purchase and sales contracts with terms of less than one year, to hedge its exposure to changes in foreign currency exchange. Its primary exposure to changes in foreign currency rates results from changes in exchange rates on certain third-party trade receivables and payables of the Company's Swedish subsidiary. There were no forward purchase or sales contracts outstanding as of December 29, 2001.
Item 8. Financial Statements and Supplementary Data.
The financial statement schedules of the Company that are filed with this Report on Form 10-K are listed in Item 14(a)(2), Part IV, of this Report.
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Report of Independent Public Accountants
To R&B, Inc.:
We have audited the accompanying consolidated balance sheets of R&B, Inc. (a Pennsylvania corporation) and subsidiaries as of December 29, 2001 and December 30, 2000, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three fiscal years in the period ended December 29, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of R&B, Inc. and subsidiaries as of December 29, 2001 and December 30, 2000 and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended December 29, 2001, in conformity with accounting principles generally accepted in the United States.
Arthur Andersen LLP
Philadelphia, Pennsylvania February 13, 2002
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The accompanying Notes are an integral part of these Consolidated Financial Statements.
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The accompanying Notes are an integral part of these Consolidated Financial Statements.
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The accompanying Notes are an integral part of these Consolidated Financial Statements.
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The accompanying Notes are an integral part of these Consolidated Financial Statements.
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R&B, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 29, 2001
1. Summary of Significant Accounting Policies
R&B, Inc. (the "Company") is principally engaged in the business of selling a broad range of "hard-to-find" replacement parts, fasteners and household hardware to the automotive aftermarket, home center and general merchandise markets. R&B's automotive parts and hardware are marketed under more than thirty proprietary brand names, through its Motormite/Dorman, Pik-a-Nut, Scan-Tech, MPI and Allparts businesses.
The Company operates on a fifty-two, fifty-three week period ending on the last Saturday of the calendar year. Results for the fiscal years ended December 29, 2001, December 30, 2000 and December 25, 1999 were fifty-two weeks, fifty-three weeks, and fifty-two weeks, respectively.
Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents. The Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.
Inventories. Inventories are stated at the lower of average cost or market. The Company provides reserves for discontinued and excess inventory based upon historical demand, forecasted usage, estimated customer requirements and product line updates. During 2001, the Company revised its estimates which resulted in an increased provision of $3.6 million.
Property and Depreciation. Property, plant and equipment are recorded at cost and depreciated over their estimated useful lives, which range from three to fifteen years, using the straight-line method for financial statement reporting purposes and accelerated methods for income tax purposes. Properties under capitalized leases are amortized over the related lease terms (3-15 years). The costs of maintenance and repairs are expensed as incurred. Renewals and betterments are capitalized. Gains and losses on disposals are included in operating results.
Goodwill. Goodwill is amortized over periods from 10 to 40 years. Total accumulated amortization as of December 29, 2001 and December 30, 2000 was $9.4 million and $7.8 million, respectively. Amortization expense of these assets was $1.6 million in the year ended December 29, 2001, and $1.7 million in each of the years ended December 30, 2000, and December 25, 1999.
It is the Company's policy to review goodwill and other long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such review indicates that the carrying amount is not recoverable, it is the Company's policy to reduce the carrying amount of such assets to fair value. Based upon management's current assessment, the remaining balance is fully recoverable.
Other Assets. Other assets consist of deferred credits associated with certain customer multi-year sales arrangements which are capitalized and amortized against current and future sales; costs incurred for the preparation and printing of product catalogs which are capitalized and amortized upon distribution; and deferred financing costs which are capitalized and amortized over the term of the related financing agreement.
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Foreign Currency Translation. Assets and liabilities of a foreign subsidiary are translated into U.S. dollars at the rate of exchange prevailing at the end of the year. Income statement accounts are translated at the average exchange rate prevailing during the year. Translation adjustments resulting from this process are recorded directly in shareholders' equity.
Foreign Currency Contracts. In order to minimize exposure to foreign currency fluctuations with respect to foreign currency exposures, the Company may enter into forward exchange rate contracts for the amount of the exposure. Gains and losses arising from foreign currency forward contracts are recognized in income or expense as offsets of gains and losses resulting from the underlying hedged transactions. As of December 29, 2001 and December 30, 2000, no open forward exchange contracts were outstanding.
Fair Value Disclosures. The carrying value of financial instruments such as cash, accounts receivable, accounts payable, and other current assets and liabilities approximate their fair value based on the short-term nature of these instruments. Based on borrowing rates currently available to the Company for loans with similar terms and average maturities, the fair value of long-term debt was $62.4 million and $67.5 million at December 29, 2001 and December 30, 2000, respectively.
Income Taxes. The Company follows the liability method of accounting for deferred income taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities. Deferred tax assets or liabilities at the end of each period are determined using the tax rate expected to be in effect when taxes are actually paid or recovered.
Revenue Recognition. The Company records sales when its products are shipped. The Company calculates its net sales by subtracting credits and allowances from gross sales. Credits and allowances include costs for co-operative advertising, product returns, discounts given to customers who purchase new products for inclusion in their stores, and the cost of competitors' products that are purchased from the customer in order to induce a customer to purchase new product lines from the Company. These credits and allowances are shown as a reduction of accounts receivable. Amounts billed to customers for shipping and handling are included in net sales. Costs associated with shipping and handling are included in cost of goods sold. Earnings Per Share. The following table sets forth the computation of basic earnings per share and diluted earnings per share for the three years ended December 29, 2001:
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Reclassification. Certain prior-period amounts have been reclassified to conform to the current year presentation.
2. Restructuring Charges
In the fourth quarter of fiscal 1999, the Company recorded restructuring charges of $11.4 million ($7.5 million after tax or $0.90 per share) to reflect costs primarily related to inventory write downs associated with the elimination of a significant number of underperforming products, as well as the closing of a warehouse and production facility in Carrollton, Georgia, and a workforce reduction of 158 people. A total of $9.8 million, representing inventory write downs, was charged to cost of sales and $1.6 million was charged to selling, general and administrative expenses. The following summarizes the restructuring charge and activity recorded through December 29, 2001:
In 2001, the Company determined that it had $0.2 million in excess facility shutdown reserves which were credited to selling, general and administrative expenses.
3. Inventories
Inventories include the cost of material, freight, direct labor and overhead utilized in the processing of the Company's products. Inventories were as follows:
December 29, December 30, (in thousands) 2001 2000 - ---------------------- ----------------- ------------------ Bulk product $12,327 $15,170 Finished product 29,458 31,984 Packaging materials 3,251 3,611 - ---------------------- ----------------- ------------------ Total $45,036 $50,765 ====================== ================= ==================
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4. Property, Plant and Equipment
Property, plant and equipment consists of the following:
December 29, December 30, (in thousands) 2001 2000 - ----------------------------------- ------------------- - ------------------- Property under capitalized leases $6,048 $ 6,026 Buildings 7,311 7,311 Machinery, equipment and tooling 16,154 15,200 Furniture, fixtures and leasehold improvements 3,334 3,189 Computer and other equipment 19,692 19,047 - ----------------------------------- ------------------- - ------------------- Total 52,539 50,773 Less-accumulated depreciation (33,795) (27,441) - ----------------------------------- ------------------- - ------------------- Property, plant and equipment, net $18,744 $23,332 =================================== =================== = ===================
5. Long-Term Debt
Long-term debt consists of the following:
December 29, December 30, (in thousands) 2001 2000 - --------------------------------- ------------------- ------------------- Senior notes $ 60,000 $ 60,000 Industrial revenue bonds - 2,918 Capitalized lease obligations 2,466 4,294 Obligation for stock repurchase and other (Note 6) 2,526 437 - --------------------------------- ------------------- ------------------- Total 64,992 67,649 Less: Current portion ( 11,481) (2,583) - --------------------------------- ------------------- ------------------- Total long-term debt $53,511 $65,066 ================================= =================== ===================
Senior Notes. In August 1998, the Company completed a private placement of $60 million in Senior Notes due August 21, 2008 ("Notes") on an unsecured basis. The ten-year Notes bear a 6.81% fixed interest rate, payable quarterly, with an initial four-year interest only period. Terms of the Note Purchase Agreement require, among other things, that the Company maintain certain financial covenants relating to debt to capital ratios and minimum net worth. Annual principal repayments at the rate of $8.6 million are due beginning in August 2002.
Bank Credit Facility. In March 2001, the Company amended its Revolving Credit Facility. The amended agreement provides for a $10 million facility for an additional three-year term that expires in March 2004. Borrowings under the amended facility are on an unsecured basis with interest at rates ranging from Libor plus 150 to Libor plus 275 basis points. The loan agreement also contains covenants, the most restrictive of which pertain to net worth and the ratio of debt to EBITDA. The Company believes that the amended facility together with cash generated from operations will provide sufficient funding to meet the Company's working
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capital needs for the foreseeable future.
There were no borrowings under the credit facility in 2001. The average amount outstanding under bank credit facilities was $9.0 million during 2000. The maximum amount outstanding in 2000 was $29.3 million.
Industrial Revenue Bonds. Prior to 2001, the Company had outstanding Industrial Revenue Bonds that were secured by the Company's warehouse and office facility in Warsaw, Kentucky. The Bonds had a variable rate of interest payable monthly and required annual principal payments. The bonds were repaid in full during 2001.
Capitalized Lease Obligations. The Company's capitalized lease obligation for its primary operating facility is with a partnership related to the Company by common ownership (see Note 8) and is payable monthly in installments of $47,500 including interest imputed at 13.96% through December 2002. The lease provides for contingent rental payments in amounts that, when added to the annual capitalized lease payments, do not exceed the fair market rental rate of the facility. The contingent rental payments are determined on an annual basis to approximate the change in the Consumer Price Index and are payable only to the extent that the Company has available sufficient pre-tax income in the preceding fiscal year to support the increase. The net book value of the asset under this capitalized lease was $0.2 million at December 29, 2001 and $0.5 million at December 30, 2000 (see Note 11).
The Company has entered into three sale/leaseback transactions with an equipment lease company to finance computer equipment. The leases are payable in monthly installments of $133,000 including interest computed at a weighted average rate of 9.6%. The leases expire in 2002 and 2003.
The following is a schedule of annual future minimum lease payments for the Company's primary operating facility with a partnership related to the Company by common ownership (exclusive of contingent rental payments) and other capital lease obligations as of December 29, 2001:
Aggregate annual principal payments applicable to long-term debt and capital lease obligations as of December 29, 2001 are as follows:
(in thousands) 2002 $11,481 2003 9,723 2004 9,025 2005 9,049 2006 8,571 Thereafter 17,143 - ------------------------------------------ Total $64,992 ==========================================
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6. Equity Transactions
In November 2001, the Company amended certain agreements related to its 1998 acquisition of Scan- Tech USA/Sweden A.B. and related entities ("Scan-Tech"). As a result of this transaction, the Company purchased and canceled 250,000 shares of its common stock issued in connection with the acquisition and canceled the earn out provisions of the acquisition agreement in exchange for consideration of approximately $3.2 million to be paid in installments through December 31, 2005. In 2001, the Company paid $0.8 million of this amount under the amended agreements. The obligation includes interest imputed at a 5.0% rate. The remaining amount is payable to an entity controlled by the President of Scan-Tech. The transaction resulted in additional goodwill of $0.8 million.
7. Operating Lease Commitments and Rent Expense
The Company leases certain equipment and automobiles under noncancelable operating leases. Approximate future minimum rental payments under these leases are summarized as follows:
(in thousands) 2002 $ 1,078 2003 677 2004 144 2005 6 2006 - - --------- ----------------- Total $1,905 ========= =================
Rent expense, which includes rental adjustment payments and contingent rentals paid to related parties (see Notes 5 and 8) of $0.6 million in 2001, 2000 and 1999, was $1.5 million in 2001, $1.4 million in 2000, and $1.7 million in 1999.
8. Related Party Transactions
The Company has entered into leases for two operating facilities with partnerships related to the Company by common ownership (see Notes 5 and 11). The Company has guaranteed the mortgages of the partnerships on these facilities. These guarantees at December 29, 2001 were approximately $0.8 million. Total interest expense on these capitalized leases was $0.1 million in 2001, $0.2 million in 2000, and $0.3 million in 1999.
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9. Income Taxes
The components of the income tax provision (benefit) are as follows:
The following is a reconciliation of income taxes at the statutory tax rate to the Company's effective tax rate:
2001 2000 1999 - -------------------------------------------------------------------------------- Federal taxes at statutory rate 34.0% 34.0% (34.0%) State taxes, net of Federal tax benefit 0.5% 0.8% 0.6% Contributed property and other (0.1%) - 1.0% - -------------------------------------------------------------------------------- Effective tax rate 34.4% 34.8% (32.4%) ================================================================================
Deferred income taxes result from timing differences in the recognition of revenue and expense for tax and financial statement purposes. The sources of temporary differences are as follows:
December 29, December 30, (in thousands) 2001 2000 - -------------------------------------- ---------------------- ------------------ Assets: Inventories $3,582 $ 1,756 Accounts receivable 2,394 276 Restructuring charges - 1,252 Accrued expenses 1,466 920 - -------------------------------------- ---------------------- ------------------ Gross deferred tax assets 7,442 4,204 - -------------------------------------- ---------------------- ------------------ Liabilities: Depreciation 321 225 Goodwill 2,868 2,502 Other 96 71 - -------------------------------------- ---------------------- ------------------ Gross deferred tax liabilities 3,285 2,798 - -------------------------------------- ---------------------- ------------------ Net deferred assets $4,157 $1,406 ====================================== ====================== ==================
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10. Business Segments
The Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," (SFAS No. 131) in 1998. In accordance with the provisions of SFAS No. 131, the Company has determined that its business comprises a single reportable operation segment, namely, the sale of replacement parts for the automotive aftermarket.
During 2001, 2000 and 1999, one customer accounted for approximately 24%, 20% and 21% of net sales, respectively. Net sales to countries outside the US, primarily to Western Europe and Canada in 2001, 2000 and 1999 were $19.9 million, $15.1 million and $20.0 million, respectively.
11. Commitments and Contingencies
Shareholder Agreement. A shareholder agreement was entered into in September 1990 and subsequently amended in December 1992 and September 1993. Under the agreement, each of Richard Berman, Steven Berman, Jordan Berman, Marc Berman and Fred Berman has granted the others of them rights of first refusal, exercisable on a pro rata basis or in such other proportions as the exercising shareholders may agree, to purchase shares of the common stock of the Company which any of them, or upon their deaths their respective estates, proposes to sell to third parties. The Company has agreed with these shareholders that, upon their deaths, to the extent that any of their shares are not purchased by any of these surviving shareholders and may not be sold without registration under the Securities Exchange Act of 1933, as amended (the "1933 Act"), the Company will use its best efforts to cause those shares to be registered under the 1933 Act. The expenses of any such registration will be borne by the estate of the deceased shareholder.
Legal Proceedings. The Company is party to certain legal proceedings and claims arising in the normal course of business. Management believes that the disposition of these matters will not have a material adverse affect on the Company's consolidated financial position or results of operations.
12. Capital Stock
Undesignated Stock. The Company has 75,000,000 shares authorized of undesignated capital stock for future issuance. The designation, rights and preferences of such shares will be determined by the Board of Directors.
Incentive Stock Option Plan. Effective May 18, 2000 the Company amended and restated its Incentive Stock Option Plan (the "Plan"). Under the terms of the Plan, the Board of Directors of the Company may grant incentive stock options and non-qualified stock options or combinations thereof to purchase up to 1,172,500 shares of common stock to officers, directors and employees. Grants under the Plan must be made within 10 years of the plan amendment date and are exercisable at the discretion of the Board of Directors but in no event more than 10 years from the date of grant. At December 29, 2001, options to acquire 370,132 shares were available for grant under the Plan.
Transactions under the Plan for the three years ended December 29, 2001 were as follows:
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The weighted average remaining contractual life of options outstanding as of December 29, 2001 was 9.2 years.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations in accounting for this plan. The following pro forma amounts were determined as if the Company had accounted for its stock options under the methodology prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation":
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The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
2001 2000 1999 ---- ---- ---- Expected dividend yield 0% 0% 0% Expected stock price volatility 46% 42% 42% Risk-free interest rate 5.3 % 5.5% 5.5% Expected life of option 7.5 years 7.5 years 7.5 years
Employee Stock Purchase Plan. In March 1992, the Board of Directors adopted the Employee Stock Purchase Plan which was subsequently approved by the shareholders. The Plan permits the granting of options to purchase up to 300,000 shares of common stock by the employees of the Company. In any given year, employees may purchase up to 4% of their annual compensation, with the option price set at 85% of the fair market value of the stock on the date of exercise. All options granted during any year expire on the last day of the fiscal year. During 2001, optionees had exercised rights to purchase 4,106 shares at prices from $2.45 to $4.28 per share for total net proceeds of $11,000.
401(k) Retirement Plan. The Company maintains a defined contribution profit sharing and 401(k) plan covering substantially all of its employees as of December 29, 2001, Annual contributions under the plan are determined by the Board of Directors of the Company. Consolidated expense related to the plan was $957,000, $876,000, and $866,000 in fiscal 2001, 2000, and 1999, respectively.
13. Accounting Pronouncements
In June 1998 and June 2000, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." These statements establish accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS Nos. 133 and 138 also require that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The Company adopted SFAS No. 133, as amended by SFAS No. 138, on December 31, 2000, as required. The adoption of SFAS No. 133, as amended by SFAS No. 138, did not have a material impact on the consolidated statements of operations for the year ended December 29, 2001.
On June 30, 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 prohibits pooling-of-interests accounting for acquisitions initiated after June 30, 2001. SFAS No. 142 specifies that goodwill will no longer be amortized but instead will be subject to periodic impairment testing. The Company is required to adopt SFAS No. 142 effective December 30, 2001, the start of its 2002 fiscal year. As a result, the Company will cease amortizing its goodwill in fiscal 2002. During fiscal 2001, 2000 and 1999, goodwill amortization was $1.6 million, $1.7 million and $1.7 million respectively. The Company is currently evaluating the financial statement impact of the impairment provisions of SFAS No. 142.
In June, 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company is required to adopt the provisions of this pronouncement in the beginning of fiscal 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets.
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The Company is required to adopt the provisions of this pronouncement in the beginning of fiscal 2002.
The Company is currently evaluating the impact of both SFAS No. 143 and 144.
Supplementary Financial Information
Quarterly Results of Operations (Unaudited):
The following is a summary of the unaudited quarterly results of operations for the fiscal years ended December 29, 2001 and December 30, 2000:
(a) Results for the first quarter of 2000 include non-recurring revenues and gain on sale of product line of $5,500 and $1,600 ($1,100 after tax or $0.13 per share), respectively.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None
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PART III
Item 10. Directors and Executive Officers of the Registrant.
Information concerning the directors of the Company is incorporated by reference to the section entitled "Election of Directors" in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held on May 23, 2002.
Information concerning executive officers of the Company who are not also directors is presented in Item 4.1, Part I of this Report on Form 10-K.
Item 11. Executive Compensation.
Incorporated by reference to the section entitled "Executive Compensation and Transactions" in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held on May 23, 2002.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference to the section entitled "Beneficial Ownership of Common Stock" in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held on May 23, 2002.
Item 13. Certain Relationships and Related Transactions.
Incorporated by reference to the section entitled "Executive Compensation and Transactions" in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held on May 23, 2002.
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K.
(a)(1) Consolidated Financial Statements. The consolidated financial statements of the Company and related documents are listed in Item 8, Part II, of this Report on Form 10-K.
Report of Independent Public Accountants
Consolidated Statements of Operations for the years ended December 29, 2001, December 30, 2000 and December 25, 1999
Consolidated Balance Sheets as of December 29, 2001 and December 30, 2000
Consolidated Statements of Shareholders' Equity for the years ended December 29, 2001, December 30, 2000 and December 25, 1999.
Consolidated Statements of Cash Flows for the years ended December 29, 2001, December 30, 2000 and December 25, 1999.
Notes to Consolidated Financial Statements
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(a)(2) Consolidated Financial Statement Schedules. The following consolidated financial statement schedule of the Company and related documents are filed with this Report on Form 10-K:
Page
Report of Independent Public Accountants on Financial Statement Schedule. . . . . . . . . . . . . . . 40 Schedule II - Valuation and Qualifying Accounts. . . . . . . 41
(a)(3) Exhibits.
Number Title
3.1 (1) Amended and Restated Articles of Incorporation of the Company.
3.2 (1) Bylaws of the Company.
4.1 (1) Specimen Common Stock Certificate of the Company.
4.2 (1) Shareholders' Agreement, dated September 17, 1990.
4.2.1 (2) Amendment to Shareholders' Agreement, dated December 29, 1992, amending 4.2.
4.2.2 (3) Amendment to Shareholders' Agreement, dated September 14, 1993, amending 4.2.
4.2.3 (4) Amendment to Shareholders' Agreement, dated March 14, 1994, amending 4.2.
10.1 (1) Lease, dated December 1, 1990, between the Company and the Berman Real Estate Partnership, for premises located at 3400 East Walnut Street, Colmar, Pennsylvania.
10.1.1 (3) Amendment to Lease, dated September 10, 1993, between the Company and the Berman Real Estate Partnership, for premises located at 3400 East Walnut Street, Colmar, Pennsylvania, amending 10.1.
10.1.2 (5) Assignment of Lease, dated February 24, 1997, between the Company, the Berman Real Estate Partnership and BREP 1, for the premises located at 3400 East Walnut Street, Colmar, Pennsylvania, assigning 10.1.
10.2 (1) Lease, dated January 3, 1990, between the Company and the Berman Real Estate Partnership, for premises located at 390 Old Bremen Road, Carrollton, Georgia.
10.2.1 (3) Amendment to Lease, dated September 10, 1993, between the Company and the Berman Real Estate Partnership, for premises located at 390 Old Bremen Road, Carrollton, Georgia, amending 10.4.
10.2.2 (4) Amendment to Lease, dated February 17, 1994, between the Company and the Berman Real Estate Partnership, for premises located at 390 Old Bremen Road, Carrollton, Georgia, amending 10.4.
10.3 (6)+ R&B, Inc. Amended and Restated Incentive Stock Plan.
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10.4 (2)+ R&B, Inc. 401(k) Retirement Plan and Trust.
10.4.1 (7)+ Amendment No. 1 to the R&B, Inc. 401(k) Retirement Plan and Trust.
10.5 (2)+ R&B, Inc. Employee Stock Purchase Plan.
21 Subsidiaries of the Company (filed with this report)
23 Consent of Arthur Andersen LLP (filed with this report) ------------------------- + Management Contracts and Compensatory Plans, Contracts or Arrangements. (1) Incorporated by reference to the Exhibits filed with the Company's Registration Statement on Form S-1 and Amendments No. 1, No. 2, and No. 3 thereto (Registration No. 33-37264). (2) Incorporated by reference to the Exhibits files with the Company's Annual Report on Form 10-K for the fiscal year ended December 26, 1992. (3) Incorporated by reference to the Exhibits filed with the Company's Registration Statement on Form S-1 and Amendment No. 1 thereto (Registration No. 33-68740). (4) Incorporated by reference to the Exhibits filed with the Company's Annual Report on Form 10-K for the fiscal year ended December 25, 1993. (5) Incorporated by reference to the Exhibits filed with the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996. (6) Incorporated by reference to the Exhibits filed with the Company's Proxy Statement for the fiscal year ended December 27, 1997. (7) Incorporated by reference to the Exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarter ended June 25, 1994.
(b) Reports on Form 8-K.
None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
R&B, Inc.
Date: March 19 , 2002 By: \s\ Richard N. Berman ---------------------------------- Richard N. Berman, Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Capacity Date
\s\ Richard N. Berman President, Chief Executive March 19, 2002 --------------------- Officer, and Chairman of the Richard N. Berman Board of Directors (principal executive officer)
\s\ Mathias J. Barton Chief Financial Officer March 19, 2002 ---------------------- (principal financial and Mathias J. Barton accounting officer)
\s\ Steven L. Berman Executive Vice President, March 19, 2002 -------------------- Secretary-Treasurer, and Steven L. Berman Director
\s\ George L. Bernstein Director March 19, 2002 ------------------------ George L. Bernstein
\s\ John F. Creamer, Jr. Director March 19, 2002 ------------------------- John F. Creamer, Jr.
\s\ Paul R. Lederer Director March 19, 2002 ------------------- Paul R. Lederer
\s\ Edgar W. Levin Director March 19, 2002 -------------------- Edgar W. Levin
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To R&B, Inc.:
We have audited in accordance with auditing standards generally accepted in the United States, the consolidated financial statements of R&B, Inc. and subsidiaries included in this Form 10-K and have issued our report thereon dated February 13, 2002. Our audit was made for the purpose of forming an opinion on the consolidated statements taken as a whole. The schedule listed in Item 14(a)(2) is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the audit procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
Arthur Andersen LLP
Philadelphia, Pennsylvania February 13, 2002
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Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition.
General
Over the periods presented, the Company has focused its efforts on providing an expanding array of new product offerings and strengthening its relationships with its customers. To that end, the Company has made significant investments to increase market penetration, primarily in the form of product development, customer service, customer credits and allowances.
The Company calculates its net sales by subtracting credits and allowances from gross sales. Credits and allowances include costs for co-operative advertising, product returns, discounts given to customers who purchase new products for inclusion in their stores, and the cost of competitors' products that are purchased from the customer in order to induce a customer to purchase new product lines from the Company. The credits and allowances are designed to increase market penetration and increase the number of product lines carried by customers by displacing competitors' products within customers' stores and promoting consolidation of customers' suppliers.
The Company may experience significant fluctuations from quarter to quarter in its results of operations due to the timing of orders placed by the Company's customers. Generally, the second and third quarters have the highest level of customer orders, but the introduction of new products and product lines to customers may cause significant fluctuations from quarter to quarter.
The Company operates on a fifty-two, fifty-three week period ending on the last Saturday of the calendar year. Results for the fiscal years ended December 29, 2001, December 30, 2000 and December 25, 1999 were fifty-two weeks, fifty-three weeks, and fifty-two weeks, respectively.
Critical Accounting Policies
The Securities and Exchange Commission ("SEC") recently issued disclosure guidance for "critical accounting policies." The SEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.
The Company's significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates. However, the following policies could be deemed to be critical within the SEC definition:
Allowance for Doubtful Accounts. The preparation of the Company's financial statements requires management to make estimates of the uncollectability of its accounts receivable. Management specifically analyzes accounts receivable and historical bad debts, customer credit-worthiness, current economic trends and changes in customer payment patterns when evaluating the adequacy of the allowance for doubtful accounts. A significant percentage of the Company's accounts receivable have been, and will continue to be, concentrated among a relatively small number of customers. A bankruptcy or financial loss associated with a major customer could have a material adverse effect on the Company's sales and operating results. The Company's allowance for doubtful accounts amounted to $0.9 million as of December 29, 2001.
Allowance for Customer Credits. Management must make estimates of potential future product returns and sales allowances granted to induce customers to purchase products from the Company. Management analyzes historical returns, current economic conditions and changes in demand and acceptance of the
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Company's products when evaluating the adequacy of reserves for customer credits. Management judgements and estimates must be made and used in connection with establishing reserves for customer credits in any accounting period. Material differences in the amount and timing of customer credits for any period may result if management made different judgments or utilized different estimates for the reserves. Reserves for customer credits were $14.2 million as of December 29, 2001.
Excess and Obsolete Inventory Reserves. Management must make estimates of potential future excess and obsolete inventory costs. The Company provides reserves for discontinued and excess inventory based upon historical demand, forecasted usage, estimated customer requirements and product line updates. The Company maintains contact with its customer base in order to understand buying patters, customer preferences and the life cycle of its products. Changes in customer requirements are factored into the reserve needs as needed. During 2001, the Company revised its estimates which resulted in an increased provision for excess and obsolete inventory of $3.6 million. Reserves for excess and obsolete inventory were $9.6 million as of December 29, 2001.
Restructuring Charges
In the fourth quarter of fiscal 1999, the Company recorded a restructuring charge of $11.4 million ($7.5 million after tax or $0.90 per share) to reflect costs primarily related to inventory write downs associated with the elimination of a significant number of underperforming products, as well as the closing of a warehouse and production facility in Carrollton, Georgia, and a work force reduction of 158 people. A total of $9.8 million, representing inventory write downs, was charged to cost of sales and $1.6 million was charged to selling, general and administrative expenses. In 2001, the Company determined that it had $0.2 million in excess facility shutdown reserves which were credited to selling, general and administrative expenses.
Sale of Lift Support Assets
During the first quarter of fiscal 2000, the Company sold all of its inventory and certain other assets related to its lift support product line as a result of a strategic decision to eliminate this product line. Fiscal 2000 revenues include non-recurring net sales of $5.5 million and gross profit of $1.6 million attributable to the sale of the inventory and related assets. The gain on the sale was $1.6 million ($1.1 million after tax or $0.13 per share).
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Results of Operations
The following table sets forth, for the periods indicated, the percentage of net sales represented by cer tain items in the Company's Consolidated Statements of Operations.
2001 Compared to 2000
Net sales increased to $201.7 million in 2001 from $201.4 million in 2000, or $195.9 million without revenues from the sale of the lift support inventory described above. Net sales in 2001 increased $5.8 million, or 3.0%, after adjusting prior year amounts for the lift support sale. The sales increase is primarily the result of incremental 2001 revenues from the Company's third quarter 2000 initiative to supply Wal-Mart with its "Pik-a- Nut" brand of hardware and general use fasteners. The Company also experienced sales increases from the successful introduction of several new products lines in 2001 to existing customers. These sales increases were offset by lower 2001 sales from discontinued product lines of certain subsidiaries and a fifty-three week period in fiscal 2000.
Cost of goods sold decreased to $132.4 million in 2001 from $132.6 million in 2000. Fiscal 2000 cost of sales were $128.8 million without costs associated with the sale of the lift support inventory described above. Cost of goods sold as a percentage of sales decreased slightly to 65.6% from 65.7% before the lift support sale in 2000. The decline in cost of goods sold as a percentage of sales is the result of lower materials and operating costs achieved through several cost reduction initiatives which were offset by increased provisions for discontinued and excess inventories in the current year. The Company provides reserves for discontinued and excess inventory based upon historical demand, forecasted usage, estimated customer requirements and product line updates. During 2001, the Company revised its estimates which resulted in an increased provision of $3.6 million.
Selling, general and administrative expenses in 2001 increased to $57.0 million from $56.5 million in 2000, an increase of $0.5 million, or 0.9%. The increase in selling, general and administrative costs in 2001 was primarily the result of severance and related costs associated with the Company's consolidation of subsidiary operations as well as higher bad debt provisions due to customer financial difficulties.
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Interest expense, net decreased to $4.3 million in 2001 from $6.0 million in 2000 due to lower borrowing levels in 2001. Borrowing levels declined as a result of increased operating cash flow and lower capital spending.
The Company's effective tax rate decreased to 34.4% in 2001 from 34.8% in the prior year due to a higher mix of earnings from the Company's Swedish subsidiary which has a lower effective tax rate than the Company's other businesses.
2000 Compared to 1999
Net sales decreased to $201.4 million in 2000 from $236.7 million in 1999, a decrease of $35.3 million or 14.9%. The sales decline is the result of lower sales in substantially all of the Company's product lines due to weak automotive aftermarket conditions and the Company's strategic decision to eliminate unprofitable products in connection with the restructuring of its business in the fourth quarter of 1999. In addition, the sale of the lift support inventory mentioned previously accounted for approximately $6.0 million of the net sales reduction in 2000. This sales reduction was substantially offset by revenues from a new fiscal 2000 initiative to sell the Company's "Pik-a-Nut" brand of hardware and general use fasteners to Wal-Mart. Net income in 2000 was negatively impacted by start up losses from this and other new initiatives.
Cost of goods sold decreased to $132.6 million from $168.7 million in 1999, a decrease of $36.1 million. Restructuring charges recorded in 1999 accounted for $9.8 million of this decrease. In addition, cost of goods sold in 2000 includes $3.8 million attributable to the sale of the lift support inventory mentioned above. Cost of goods sold as a percentage of sales before 1999 restructuring charges and without the impact of the lift support sale in 2000 decreased to 65.7% from 67.1% in 1999. This decline is attributable to lower operating costs as a result of savings achieved from the restructuring initiatives implemented early in 2000.
Selling, general and administrative expenses in 2000 decreased to $56.5 million from $66.3 million in 1999, a decrease of $9.8 million, or 14.8%. Restructuring charges recorded in 1999 accounted for $1.6 million of this decrease. As a percentage of sales, selling, general and administrative expenses before restructuring charges and the lift support inventory sale were 28.9% in 2000 compared to 27.4% in 1999. This increase as a percentage of sales is primarily attributable to start up costs associated with new initiatives and the decline in sales in 2000, as the Company was not able to reduce fixed costs adequately to offset the lower sales levels experienced in 2000.
Interest expense, net decreased to $6.0 million in 2000 from $7.0 million in 1999. The decline in interest costs is the result of lower borrowing levels in 2000 due to reduced working capital requirements. Working capital levels declined in 2000 primarily as a result of lower accounts receivable and inventory levels.
The Company recorded an income tax provision at the rate of 34.8% in 2000 compared to an income tax benefit at an effective rate of 32.4% in 1999. The higher effective income tax rate in 2000 is primarily due to the lack of a state income tax benefit on the $11.4 million restructuring charge recorded in 1999.
Liquidity and Capital Resources
Historically, the Company has financed its growth through a combination of cash flow from operations and through the issuance of senior indebtedness through its bank credit facility and senior note agreements. During fiscal 2000 and 2001 the Company improved its inventory management and more aggressively managed other components of working capital. In addition, capital spending levels were reduced in 2001. These initiatives resulted in increased cash flow from operations in 2000 and 2001 which were used to reduce borrowing levels in both years. At December 29, 2001 working capital was $81.1 million, total long-term debt (including the current portion) was $65.0 million and shareholders' equity was $75.2 million. Cash and cash equivalents as of December 29, 2001 totaled $21.7 million.
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In August 1998, the Company completed a private placement of $60.0 million in Senior Notes ("Notes") due August 21, 2008 on an unsecured basis. The ten-year Notes bear a 6.81% fixed interest rate, payable quarterly, with an initial four-year interest only period. Annual repayments at the rate of $8.6 million are due beginning in August 2002.
The Company's lease for its Pennsylvania facility is recorded as a capitalized lease in the Company's financial statements. In addition, the Company has entered into three sale/leaseback transactions relating to computer hardware and software. The aggregate amount outstanding under all capital leases amounted to $2.5 million at December 29, 2001.
In March 2001, the Company amended its Revolving Credit Facility. The amended agreement provides for a $10.0 million facility for a three-year term that expires in March 2004. Borrowings under the amended facility are on an unsecured basis with interest at rates ranging from Libor plus 150 to Libor plus 275 basis points. The loan agreement also contains covenants, the most restrictive of which pertain to net worth and the ratio of debt to EBITDA. There were no borrowings under the amended credit facility in 2001.
Operating cash flow was $21.5 million in fiscal 2001. The primary sources of cash flow were net income, depreciation and amortization charges and reduced inventory levels. Inventory levels were reduced in 2001 through more disciplined inventory management. This resulted in cash generated of $5.2 million in fiscal 2001.
Additions to property, plant and equipment required $1.9 million in cash in 2001. Capital expenditures were primarily for upgrades to information systems hardware, purchases of packaging equipment designed to improve operational efficiencies and scheduled equipment replacements. Total capital spending in 2001 declined significantly from 2000 and 1999 spending levels of $6.8 and $7.9 million, respectively. Fiscal 2000 spending included one time expenditures for equipment in connection with the Company's initiative to supply Wal-Mart with its "Pik-a-Nut" brand of hardware and general use fasteners. Fiscal 1999 expenditures included spending related to a number of non-recurring information systems and customer-related projects.
Financing activities required $5.5 million in cash during 2001. During 2001 the Company amended certain agreements related to its 1998 acquisition of Scan-Tech USA/Sweden A.B. and related entities ("Scan-Tech"). As a result of this transaction, the Company purchased and canceled 250,000 shares of its common stock issued in connection with the acquisition and canceled the earn out provisions of the acquisition agreement in exchange for consideration of $3.2 million to be paid by the Company in installments through December 2005. After the initial $0.8 million payment in 2001, this transaction increased total debt at December 29, 2001 by $2.5 million. Repayments of loans and capital leases resulted in the use of $5.9 million in cash. These repayments included the payoff of an Industrial Revenue Bond with a balance of $2.9 million at December 30, 2000.
The Company believes that cash on hand, cash generated from operations together with available sources of capital are sufficient to meet ongoing cash needs for the foreseeable future.
Foreign Currency Fluctuations. In 2001, approximately 39% of the Company's products were pur chased from a variety of foreign countries. The products generally are purchased through purchase orders with the purchase price specified in U.S. dollars. Accordingly, the Company does not have exposure to fluctuation in the relationship between the dollar and various foreign currencies between the time of execution of the purchase order and payment for the product. However, to the extent that the dollar decreases in value to foreign currencies in the future, the price of the product in dollars for new purchase orders may increase. The Company attempts to lessen the impact of these currency fluctuations by resourcing its purchases to other countries.
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Impact of Inflation
The Company has not generally been adversely affected by inflation. The Company believes that price increases resulting from inflation generally could be passed on to its customers, since prices charged by the Company are not set by long-term contracts.
Cautionary Statement Regarding Forward Looking Statements
Certain statements periodically made by or on behalf of the Company and certain statements contained herein including statements in Management's Discussion and Analysis of Financial Condition and Results of Operation; certain statements contained in Business, such as statements regarding litigation; and certain other statements contained herein regarding matters that are not historical fact are forward looking statements (as such term is defined in the Securities Act of 1933), and because such statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by such forward looking statements. Factors that cause actual results to differ materially include but are not limited to those factors discussed in "Business - Investment Considerations."
Item 7A.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
The Company's market risk is the potential loss arising from adverse changes in interest rates. With the exception of the Company's revolving credit facility, long-term debt obligations are at fixed interest rates and denominated in U.S. dollars. The Company manages its interest rate risk by monitoring trends in interest rates as a basis for determining whether to enter into fixed rate or variable rate agreements. Under the terms of the Company's revolving credit facility, a change in either the lender's base rate or LIBOR would affect the rate at which the Company could borrow funds thereunder. The Company believes that the effect of any such change would be minimal.
The Company uses derivative financial instruments, consisting of foreign currency forward purchase and sales contracts with terms of less than one year, to hedge its exposure to changes in foreign currency exchange. Its primary exposure to changes in foreign currency rates results from changes in exchange rates on certain third-party trade receivables and payables of the Company's Swedish subsidiary. There were no forward purchase or sales contracts outstanding as of December 29, 2001.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The financial statement schedules of the Company that are filed with this Report on Form 10-K are listed in Item 14(a)(2), Part IV, of this Report.
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Report of Independent Public Accountants
To R&B, Inc.:
We have audited the accompanying consolidated balance sheets of R&B, Inc. (a Pennsylvania corporation) and subsidiaries as of December 29, 2001 and December 30, 2000, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three fiscal years in the period ended December 29, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of R&B, Inc. and subsidiaries as of December 29, 2001 and December 30, 2000 and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended December 29, 2001, in conformity with accounting principles generally accepted in the United States.
Arthur Andersen LLP
Philadelphia, Pennsylvania February 13, 2002
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The accompanying Notes are an integral part of these Consolidated Financial Statements.
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The accompanying Notes are an integral part of these Consolidated Financial Statements.
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The accompanying Notes are an integral part of these Consolidated Financial Statements.
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The accompanying Notes are an integral part of these Consolidated Financial Statements.
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R&B, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 29, 2001
1. Summary of Significant Accounting Policies
R&B, Inc. (the "Company") is principally engaged in the business of selling a broad range of "hard-to-find" replacement parts, fasteners and household hardware to the automotive aftermarket, home center and general merchandise markets. R&B's automotive parts and hardware are marketed under more than thirty proprietary brand names, through its Motormite/Dorman, Pik-a-Nut, Scan-Tech, MPI and Allparts businesses.
The Company operates on a fifty-two, fifty-three week period ending on the last Saturday of the calendar year. Results for the fiscal years ended December 29, 2001, December 30, 2000 and December 25, 1999 were fifty-two weeks, fifty-three weeks, and fifty-two weeks, respectively.
Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents. The Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.
Inventories. Inventories are stated at the lower of average cost or market. The Company provides reserves for discontinued and excess inventory based upon historical demand, forecasted usage, estimated customer requirements and product line updates. During 2001, the Company revised its estimates which resulted in an increased provision of $3.6 million.
Property and Depreciation. Property, plant and equipment are recorded at cost and depreciated over their estimated useful lives, which range from three to fifteen years, using the straight-line method for financial statement reporting purposes and accelerated methods for income tax purposes. Properties under capitalized leases are amortized over the related lease terms (3-15 years). The costs of maintenance and repairs are expensed as incurred. Renewals and betterments are capitalized. Gains and losses on disposals are included in operating results.
Goodwill. Goodwill is amortized over periods from 10 to 40 years. Total accumulated amortization as of December 29, 2001 and December 30, 2000 was $9.4 million and $7.8 million, respectively. Amortization expense of these assets was $1.6 million in the year ended December 29, 2001, and $1.7 million in each of the years ended December 30, 2000, and December 25, 1999.
It is the Company's policy to review goodwill and other long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such review indicates that the carrying amount is not recoverable, it is the Company's policy to reduce the carrying amount of such assets to fair value. Based upon management's current assessment, the remaining balance is fully recoverable.
Other Assets. Other assets consist of deferred credits associated with certain customer multi-year sales arrangements which are capitalized and amortized against current and future sales; costs incurred for the preparation and printing of product catalogs which are capitalized and amortized upon distribution; and deferred financing costs which are capitalized and amortized over the term of the related financing agreement.
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Foreign Currency Translation. Assets and liabilities of a foreign subsidiary are translated into U.S. dollars at the rate of exchange prevailing at the end of the year. Income statement accounts are translated at the average exchange rate prevailing during the year. Translation adjustments resulting from this process are recorded directly in shareholders' equity.
Foreign Currency Contracts. In order to minimize exposure to foreign currency fluctuations with respect to foreign currency exposures, the Company may enter into forward exchange rate contracts for the amount of the exposure. Gains and losses arising from foreign currency forward contracts are recognized in income or expense as offsets of gains and losses resulting from the underlying hedged transactions. As of December 29, 2001 and December 30, 2000, no open forward exchange contracts were outstanding.
Fair Value Disclosures. The carrying value of financial instruments such as cash, accounts receivable, accounts payable, and other current assets and liabilities approximate their fair value based on the short-term nature of these instruments. Based on borrowing rates currently available to the Company for loans with similar terms and average maturities, the fair value of long-term debt was $62.4 million and $67.5 million at December 29, 2001 and December 30, 2000, respectively.
Income Taxes. The Company follows the liability method of accounting for deferred income taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities. Deferred tax assets or liabilities at the end of each period are determined using the tax rate expected to be in effect when taxes are actually paid or recovered.
Revenue Recognition. The Company records sales when its products are shipped. The Company calculates its net sales by subtracting credits and allowances from gross sales. Credits and allowances include costs for co-operative advertising, product returns, discounts given to customers who purchase new products for inclusion in their stores, and the cost of competitors' products that are purchased from the customer in order to induce a customer to purchase new product lines from the Company. These credits and allowances are shown as a reduction of accounts receivable. Amounts billed to customers for shipping and handling are included in net sales. Costs associated with shipping and handling are included in cost of goods sold. Earnings Per Share. The following table sets forth the computation of basic earnings per share and diluted earnings per share for the three years ended December 29, 2001:
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Reclassification. Certain prior-period amounts have been reclassified to conform to the current year presentation.
2. Restructuring Charges
In the fourth quarter of fiscal 1999, the Company recorded restructuring charges of $11.4 million ($7.5 million after tax or $0.90 per share) to reflect costs primarily related to inventory write downs associated with the elimination of a significant number of underperforming products, as well as the closing of a warehouse and production facility in Carrollton, Georgia, and a workforce reduction of 158 people. A total of $9.8 million, representing inventory write downs, was charged to cost of sales and $1.6 million was charged to selling, general and administrative expenses. The following summarizes the restructuring charge and activity recorded through December 29, 2001:
In 2001, the Company determined that it had $0.2 million in excess facility shutdown reserves which were credited to selling, general and administrative expenses.
3. Inventories
Inventories include the cost of material, freight, direct labor and overhead utilized in the processing of the Company's products. Inventories were as follows:
December 29, December 30, (in thousands) 2001 2000 - ---------------------- ----------------- ------------------ Bulk product $12,327 $15,170 Finished product 29,458 31,984 Packaging materials 3,251 3,611 - ---------------------- ----------------- ------------------ Total $45,036 $50,765 ====================== ================= ==================
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4. Property, Plant and Equipment
Property, plant and equipment consists of the following:
December 29, December 30, (in thousands) 2001 2000 - ----------------------------------- ------------------- - ------------------- Property under capitalized leases $6,048 $ 6,026 Buildings 7,311 7,311 Machinery, equipment and tooling 16,154 15,200 Furniture, fixtures and leasehold improvements 3,334 3,189 Computer and other equipment 19,692 19,047 - ----------------------------------- ------------------- - ------------------- Total 52,539 50,773 Less-accumulated depreciation (33,795) (27,441) - ----------------------------------- ------------------- - ------------------- Property, plant and equipment, net $18,744 $23,332 =================================== =================== = ===================
5. Long-Term Debt
Long-term debt consists of the following:
December 29, December 30, (in thousands) 2001 2000 - --------------------------------- ------------------- ------------------- Senior notes $ 60,000 $ 60,000 Industrial revenue bonds - 2,918 Capitalized lease obligations 2,466 4,294 Obligation for stock repurchase and other (Note 6) 2,526 437 - --------------------------------- ------------------- ------------------- Total 64,992 67,649 Less: Current portion ( 11,481) (2,583) - --------------------------------- ------------------- ------------------- Total long-term debt $53,511 $65,066 ================================= =================== ===================
Senior Notes. In August 1998, the Company completed a private placement of $60 million in Senior Notes due August 21, 2008 ("Notes") on an unsecured basis. The ten-year Notes bear a 6.81% fixed interest rate, payable quarterly, with an initial four-year interest only period. Terms of the Note Purchase Agreement require, among other things, that the Company maintain certain financial covenants relating to debt to capital ratios and minimum net worth. Annual principal repayments at the rate of $8.6 million are due beginning in August 2002.
Bank Credit Facility. In March 2001, the Company amended its Revolving Credit Facility. The amended agreement provides for a $10 million facility for an additional three-year term that expires in March 2004. Borrowings under the amended facility are on an unsecured basis with interest at rates ranging from Libor plus 150 to Libor plus 275 basis points. The loan agreement also contains covenants, the most restrictive of which pertain to net worth and the ratio of debt to EBITDA. The Company believes that the amended facility together with cash generated from operations will provide sufficient funding to meet the Company's working
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capital needs for the foreseeable future.
There were no borrowings under the credit facility in 2001. The average amount outstanding under bank credit facilities was $9.0 million during 2000. The maximum amount outstanding in 2000 was $29.3 million.
Industrial Revenue Bonds. Prior to 2001, the Company had outstanding Industrial Revenue Bonds that were secured by the Company's warehouse and office facility in Warsaw, Kentucky. The Bonds had a variable rate of interest payable monthly and required annual principal payments. The bonds were repaid in full during 2001.
Capitalized Lease Obligations. The Company's capitalized lease obligation for its primary operating facility is with a partnership related to the Company by common ownership (see Note 8) and is payable monthly in installments of $47,500 including interest imputed at 13.96% through December 2002. The lease provides for contingent rental payments in amounts that, when added to the annual capitalized lease payments, do not exceed the fair market rental rate of the facility. The contingent rental payments are determined on an annual basis to approximate the change in the Consumer Price Index and are payable only to the extent that the Company has available sufficient pre-tax income in the preceding fiscal year to support the increase. The net book value of the asset under this capitalized lease was $0.2 million at December 29, 2001 and $0.5 million at December 30, 2000 (see Note 11).
The Company has entered into three sale/leaseback transactions with an equipment lease company to finance computer equipment. The leases are payable in monthly installments of $133,000 including interest computed at a weighted average rate of 9.6%. The leases expire in 2002 and 2003.
The following is a schedule of annual future minimum lease payments for the Company's primary operating facility with a partnership related to the Company by common ownership (exclusive of contingent rental payments) and other capital lease obligations as of December 29, 2001:
Aggregate annual principal payments applicable to long-term debt and capital lease obligations as of December 29, 2001 are as follows:
(in thousands) 2002 $11,481 2003 9,723 2004 9,025 2005 9,049 2006 8,571 Thereafter 17,143 - ------------------------------------------ Total $64,992 ==========================================
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6. Equity Transactions
In November 2001, the Company amended certain agreements related to its 1998 acquisition of Scan- Tech USA/Sweden A.B. and related entities ("Scan-Tech"). As a result of this transaction, the Company purchased and canceled 250,000 shares of its common stock issued in connection with the acquisition and canceled the earn out provisions of the acquisition agreement in exchange for consideration of approximately $3.2 million to be paid in installments through December 31, 2005. In 2001, the Company paid $0.8 million of this amount under the amended agreements. The obligation includes interest imputed at a 5.0% rate. The remaining amount is payable to an entity controlled by the President of Scan-Tech. The transaction resulted in additional goodwill of $0.8 million.
7. Operating Lease Commitments and Rent Expense
The Company leases certain equipment and automobiles under noncancelable operating leases. Approximate future minimum rental payments under these leases are summarized as follows:
(in thousands) 2002 $ 1,078 2003 677 2004 144 2005 6 2006 - - --------- ----------------- Total $1,905 ========= =================
Rent expense, which includes rental adjustment payments and contingent rentals paid to related parties (see Notes 5 and 8) of $0.6 million in 2001, 2000 and 1999, was $1.5 million in 2001, $1.4 million in 2000, and $1.7 million in 1999.
8. Related Party Transactions
The Company has entered into leases for two operating facilities with partnerships related to the Company by common ownership (see Notes 5 and 11). The Company has guaranteed the mortgages of the partnerships on these facilities. These guarantees at December 29, 2001 were approximately $0.8 million. Total interest expense on these capitalized leases was $0.1 million in 2001, $0.2 million in 2000, and $0.3 million in 1999.
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9. Income Taxes
The components of the income tax provision (benefit) are as follows:
The following is a reconciliation of income taxes at the statutory tax rate to the Company's effective tax rate:
2001 2000 1999 - -------------------------------------------------------------------------------- Federal taxes at statutory rate 34.0% 34.0% (34.0%) State taxes, net of Federal tax benefit 0.5% 0.8% 0.6% Contributed property and other (0.1%) - 1.0% - -------------------------------------------------------------------------------- Effective tax rate 34.4% 34.8% (32.4%) ================================================================================
Deferred income taxes result from timing differences in the recognition of revenue and expense for tax and financial statement purposes. The sources of temporary differences are as follows:
December 29, December 30, (in thousands) 2001 2000 - -------------------------------------- ---------------------- ------------------ Assets: Inventories $3,582 $ 1,756 Accounts receivable 2,394 276 Restructuring charges - 1,252 Accrued expenses 1,466 920 - -------------------------------------- ---------------------- ------------------ Gross deferred tax assets 7,442 4,204 - -------------------------------------- ---------------------- ------------------ Liabilities: Depreciation 321 225 Goodwill 2,868 2,502 Other 96 71 - -------------------------------------- ---------------------- ------------------ Gross deferred tax liabilities 3,285 2,798 - -------------------------------------- ---------------------- ------------------ Net deferred assets $4,157 $1,406 ====================================== ====================== ==================
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10. Business Segments
The Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," (SFAS No. 131) in 1998. In accordance with the provisions of SFAS No. 131, the Company has determined that its business comprises a single reportable operation segment, namely, the sale of replacement parts for the automotive aftermarket.
During 2001, 2000 and 1999, one customer accounted for approximately 24%, 20% and 21% of net sales, respectively. Net sales to countries outside the US, primarily to Western Europe and Canada in 2001, 2000 and 1999 were $19.9 million, $15.1 million and $20.0 million, respectively.
11. Commitments and Contingencies
Shareholder Agreement. A shareholder agreement was entered into in September 1990 and subsequently amended in December 1992 and September 1993. Under the agreement, each of Richard Berman, Steven Berman, Jordan Berman, Marc Berman and Fred Berman has granted the others of them rights of first refusal, exercisable on a pro rata basis or in such other proportions as the exercising shareholders may agree, to purchase shares of the common stock of the Company which any of them, or upon their deaths their respective estates, proposes to sell to third parties. The Company has agreed with these shareholders that, upon their deaths, to the extent that any of their shares are not purchased by any of these surviving shareholders and may not be sold without registration under the Securities Exchange Act of 1933, as amended (the "1933 Act"), the Company will use its best efforts to cause those shares to be registered under the 1933 Act. The expenses of any such registration will be borne by the estate of the deceased shareholder.
Legal Proceedings. The Company is party to certain legal proceedings and claims arising in the normal course of business. Management believes that the disposition of these matters will not have a material adverse affect on the Company's consolidated financial position or results of operations.
12. Capital Stock
Undesignated Stock. The Company has 75,000,000 shares authorized of undesignated capital stock for future issuance. The designation, rights and preferences of such shares will be determined by the Board of Directors.
Incentive Stock Option Plan. Effective May 18, 2000 the Company amended and restated its Incentive Stock Option Plan (the "Plan"). Under the terms of the Plan, the Board of Directors of the Company may grant incentive stock options and non-qualified stock options or combinations thereof to purchase up to 1,172,500 shares of common stock to officers, directors and employees. Grants under the Plan must be made within 10 years of the plan amendment date and are exercisable at the discretion of the Board of Directors but in no event more than 10 years from the date of grant. At December 29, 2001, options to acquire 370,132 shares were available for grant under the Plan.
Transactions under the Plan for the three years ended December 29, 2001 were as follows:
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The weighted average remaining contractual life of options outstanding as of December 29, 2001 was 9.2 years.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations in accounting for this plan. The following pro forma amounts were determined as if the Company had accounted for its stock options under the methodology prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation":
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The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
2001 2000 1999 ---- ---- ---- Expected dividend yield 0% 0% 0% Expected stock price volatility 46% 42% 42% Risk-free interest rate 5.3 % 5.5% 5.5% Expected life of option 7.5 years 7.5 years 7.5 years
Employee Stock Purchase Plan. In March 1992, the Board of Directors adopted the Employee Stock Purchase Plan which was subsequently approved by the shareholders. The Plan permits the granting of options to purchase up to 300,000 shares of common stock by the employees of the Company. In any given year, employees may purchase up to 4% of their annual compensation, with the option price set at 85% of the fair market value of the stock on the date of exercise. All options granted during any year expire on the last day of the fiscal year. During 2001, optionees had exercised rights to purchase 4,106 shares at prices from $2.45 to $4.28 per share for total net proceeds of $11,000.
401(k) Retirement Plan. The Company maintains a defined contribution profit sharing and 401(k) plan covering substantially all of its employees as of December 29, 2001, Annual contributions under the plan are determined by the Board of Directors of the Company. Consolidated expense related to the plan was $957,000, $876,000, and $866,000 in fiscal 2001, 2000, and 1999, respectively.
13. Accounting Pronouncements
In June 1998 and June 2000, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." These statements establish accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS Nos. 133 and 138 also require that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The Company adopted SFAS No. 133, as amended by SFAS No. 138, on December 31, 2000, as required. The adoption of SFAS No. 133, as amended by SFAS No. 138, did not have a material impact on the consolidated statements of operations for the year ended December 29, 2001.
On June 30, 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 prohibits pooling-of-interests accounting for acquisitions initiated after June 30, 2001. SFAS No. 142 specifies that goodwill will no longer be amortized but instead will be subject to periodic impairment testing. The Company is required to adopt SFAS No. 142 effective December 30, 2001, the start of its 2002 fiscal year. As a result, the Company will cease amortizing its goodwill in fiscal 2002. During fiscal 2001, 2000 and 1999, goodwill amortization was $1.6 million, $1.7 million and $1.7 million respectively. The Company is currently evaluating the financial statement impact of the impairment provisions of SFAS No. 142.
In June, 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company is required to adopt the provisions of this pronouncement in the beginning of fiscal 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets.
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The Company is required to adopt the provisions of this pronouncement in the beginning of fiscal 2002.
The Company is currently evaluating the impact of both SFAS No. 143 and 144.
Supplementary Financial Information
Quarterly Results of Operations (Unaudited):
The following is a summary of the unaudited quarterly results of operations for the fiscal years ended December 29, 2001 and December 30, 2000:
(a) Results for the first quarter of 2000 include non-recurring revenues and gain on sale of product line of $5,500 and $1,600 ($1,100 after tax or $0.13 per share), respectively.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None
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PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
Information concerning the directors of the Company is incorporated by reference to the section entitled "Election of Directors" in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held on May 23, 2002.
Information concerning executive officers of the Company who are not also directors is presented in Item 4.1, Part I of this Report on Form 10-K.
Item 11.
Item 11. Executive Compensation.
Incorporated by reference to the section entitled "Executive Compensation and Transactions" in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held on May 23, 2002.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference to the section entitled "Beneficial Ownership of Common Stock" in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held on May 23, 2002.
Item 13.
Item 13. Certain Relationships and Related Transactions.
Incorporated by reference to the section entitled "Executive Compensation and Transactions" in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held on May 23, 2002.
PART IV
Item 14.
Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K.
(a)(1) Consolidated Financial Statements. The consolidated financial statements of the Company and related documents are listed in Item 8, Part II, of this Report on Form 10-K.
Report of Independent Public Accountants
Consolidated Statements of Operations for the years ended December 29, 2001, December 30, 2000 and December 25, 1999
Consolidated Balance Sheets as of December 29, 2001 and December 30, 2000
Consolidated Statements of Shareholders' Equity for the years ended December 29, 2001, December 30, 2000 and December 25, 1999.
Consolidated Statements of Cash Flows for the years ended December 29, 2001, December 30, 2000 and December 25, 1999.
Notes to Consolidated Financial Statements
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(a)(2) Consolidated Financial Statement Schedules. The following consolidated financial statement schedule of the Company and related documents are filed with this Report on Form 10-K:
Page
Report of Independent Public Accountants on Financial Statement Schedule. . . . . . . . . . . . . . . 40 Schedule II - Valuation and Qualifying Accounts. . . . . . . 41
(a)(3) Exhibits.
Number Title
3.1 (1) Amended and Restated Articles of Incorporation of the Company.
3.2 (1) Bylaws of the Company.
4.1 (1) Specimen Common Stock Certificate of the Company.
4.2 (1) Shareholders' Agreement, dated September 17, 1990.
4.2.1 (2) Amendment to Shareholders' Agreement, dated December 29, 1992, amending 4.2.
4.2.2 (3) Amendment to Shareholders' Agreement, dated September 14, 1993, amending 4.2.
4.2.3 (4) Amendment to Shareholders' Agreement, dated March 14, 1994, amending 4.2.
10.1 (1) Lease, dated December 1, 1990, between the Company and the Berman Real Estate Partnership, for premises located at 3400 East Walnut Street, Colmar, Pennsylvania.
10.1.1 (3) Amendment to Lease, dated September 10, 1993, between the Company and the Berman Real Estate Partnership, for premises located at 3400 East Walnut Street, Colmar, Pennsylvania, amending 10.1.
10.1.2 (5) Assignment of Lease, dated February 24, 1997, between the Company, the Berman Real Estate Partnership and BREP 1, for the premises located at 3400 East Walnut Street, Colmar, Pennsylvania, assigning 10.1.
10.2 (1) Lease, dated January 3, 1990, between the Company and the Berman Real Estate Partnership, for premises located at 390 Old Bremen Road, Carrollton, Georgia.
10.2.1 (3) Amendment to Lease, dated September 10, 1993, between the Company and the Berman Real Estate Partnership, for premises located at 390 Old Bremen Road, Carrollton, Georgia, amending 10.4.
10.2.2 (4) Amendment to Lease, dated February 17, 1994, between the Company and the Berman Real Estate Partnership, for premises located at 390 Old Bremen Road, Carrollton, Georgia, amending 10.4.
10.3 (6)+ R&B, Inc. Amended and Restated Incentive Stock Plan.
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10.4 (2)+ R&B, Inc. 401(k) Retirement Plan and Trust.
10.4.1 (7)+ Amendment No. 1 to the R&B, Inc. 401(k) Retirement Plan and Trust.
10.5 (2)+ R&B, Inc. Employee Stock Purchase Plan.
21 Subsidiaries of the Company (filed with this report)
23 Consent of Arthur Andersen LLP (filed with this report) ------------------------- + Management Contracts and Compensatory Plans, Contracts or Arrangements. (1) Incorporated by reference to the Exhibits filed with the Company's Registration Statement on Form S-1 and Amendments No. 1, No. 2, and No. 3 thereto (Registration No. 33-37264). (2) Incorporated by reference to the Exhibits files with the Company's Annual Report on Form 10-K for the fiscal year ended December 26, 1992. (3) Incorporated by reference to the Exhibits filed with the Company's Registration Statement on Form S-1 and Amendment No. 1 thereto (Registration No. 33-68740). (4) Incorporated by reference to the Exhibits filed with the Company's Annual Report on Form 10-K for the fiscal year ended December 25, 1993. (5) Incorporated by reference to the Exhibits filed with the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996. (6) Incorporated by reference to the Exhibits filed with the Company's Proxy Statement for the fiscal year ended December 27, 1997. (7) Incorporated by reference to the Exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarter ended June 25, 1994.
(b) Reports on Form 8-K.
None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
R&B, Inc.
Date: March 19 , 2002 By: \s\ Richard N. Berman ---------------------------------- Richard N. Berman, Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Capacity Date
\s\ Richard N. Berman President, Chief Executive March 19, 2002 --------------------- Officer, and Chairman of the Richard N. Berman Board of Directors (principal executive officer)
\s\ Mathias J. Barton Chief Financial Officer March 19, 2002 ---------------------- (principal financial and Mathias J. Barton accounting officer)
\s\ Steven L. Berman Executive Vice President, March 19, 2002 -------------------- Secretary-Treasurer, and Steven L. Berman Director
\s\ George L. Bernstein Director March 19, 2002 ------------------------ George L. Bernstein
\s\ John F. Creamer, Jr. Director March 19, 2002 ------------------------- John F. Creamer, Jr.
\s\ Paul R. Lederer Director March 19, 2002 ------------------- Paul R. Lederer
\s\ Edgar W. Levin Director March 19, 2002 -------------------- Edgar W. Levin
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To R&B, Inc.:
We have audited in accordance with auditing standards generally accepted in the United States, the consolidated financial statements of R&B, Inc. and subsidiaries included in this Form 10-K and have issued our report thereon dated February 13, 2002. Our audit was made for the purpose of forming an opinion on the consolidated statements taken as a whole. The schedule listed in Item 14(a)(2) is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the audit procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
Arthur Andersen LLP
Philadelphia, Pennsylvania February 13, 2002
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