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 original equipment dealer "exclusive" automotive replacement 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 70,000 different automotive replacement parts, fasteners and service line products manufactured to its specifications, with approximately 35% consisting of original equipment dealer "exclusive" parts and fasteners. Original equipment dealer "exclusive" parts are those which were traditionally available to consumers only from original equipment manufacturers or salvage yards and include, among other parts, intake manifolds, exhaust manifolds, oil cooler lines, window regulators, radiator fan assemblies, power steering pulleys and harmonic balancers. Fasteners include such items as oil drain plugs and wheel lug nuts. Approximately 90% 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 O'Reilly), national, regional and local warehouse distributors (such as Carquest and NAPA) and specialty markets including parts manufacturers for resale under their own private labels (such as Federal Mogul) 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 $183 billion in 2003, and parts for heavy duty trucks, which accounted for sales of approximately $63 billion in 2003. 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 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
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same requirements through a variety of different sources, retailers and other purchasers of automotive parts seek to purchase products from fewer but stronger suppliers.
Products
The Company sells over 70,000 different automotive replacement parts, fasteners and service line products to meet a variety of needs, including original equipment dealer "exclusive" parts sold under 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 90% of the Company's revenues are derived from products sold under its more than seventy brand names.
Motormite(R) - brand names within the Motormite(R) master brand represent many of the Company's original equipment dealer "exclusive" 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
* 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, original equipment dealer "exclusive" parts and traditional replacement parts, including, among others, the following:
* Oil-Tite!(R) - Oil drain plugs and gaskets
* OE Solutions TM - Original equipment dealer "exclusive" parts, such as intake manifolds, exhaust manifolds, oil cooler lines, window regulators, harmonic balances and radiator fan assemblies
* Gear-Up!(R) - Flywheels, ring gears and flex plates
* Quick-Disconnect TM - Transmission, cooling system and fuel system connectors
* 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
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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
Scan-Tech TM - the Scan-Tech TM brand represents the Company's automotive replacements parts sold internationally, and relate primarily to replacement parts for Volvo and Saab cars and Scania trucks
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 national warehouse distributors (such as Carquest and NAPA). During the years ended December 2003, 2002 and 2001, 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 45% of the Company's revenues are generated from sales to automotive aftermarket retailers (such as AutoZone, Advance and O'Reilly), 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 25% of the Company's revenues are generated from sales to warehouse distributors (such as 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.
The Company utilizes a number of different methods to sell its products. The Company's more than 25 person direct sales force solicits purchases of the Company's products directly from customers, as well as managing the activities of 15 independent manufacturer's representative agencies. The Company uses independent manufacturer's representative 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 2,500 active accounts. During 2003 and 2002, two customers (AutoZone and Advance) each accounted for more than 10% of net sales and in the aggregate accounted for 31% and 36% of net sales, respectively. In 2001, one customer (AutoZone) accounted for approximately 24% of net sales.
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. No one vendor supplies 10% or more of the Company's products. In 2003, as a percentage of the total dollar volume of purchases made by the Company, approximately 40% of the Company's products were purchased from various suppliers throughout the United States and the balance 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 one month supply of its products, packaged and readily available for shipment, and a two 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 27, 2003, the Company had 883 employees, of whom 853 were employed full-time and 30 were employed part-time. Of these employees, 589 were engaged in production, inventory, or quality control, 60 were involved in product development and brand management, 71 were employed in sales and order entry, and the remaining 163, including the Company's 7 executive officers, were devoted to administration, finance and strategic planning.
No domestic employees are covered by any collective bargaining agreement. Approximately 30 employees at the Company's Swedish subsidiary are governed by a national union. The Company considers its relations with its employees to be generally good.
Risk Factors
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. During 2003 and 2002, two customers (AutoZone and Advance) each accounted for more than 10% of net sales and in the aggregate accounted for 31% and 36% of net sales, respectively. In 2001, one customer (AutoZone) accounted for approximately 24% of net sales. 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."
Concentrations of Credit Risk. Financial instruments that potentially subject the Company to concentrations of credit risk consists primarily of cash and cash equivalents, short-term investments, and accounts receivable. All cash equivalents and short-term investments are managed within established guidelines which limit the amount which may be invested with one issuer. A significant percentage of the Company's accounts receivable have been, and will continue to be concentrated among a relatively small number of automotive retailers and warehouse distributors in the United States. The Company's five largest customers accounted for 70% and 73% of total accounts receivable as of December 27, 2003 and December 28, 2002, respectively. Management continually monitors the credit terms and credit limits to these and other customers.
Customer Terms. The automotive aftermarket has been consolidating over the past several years. As a result, many of the Company's customers have grown larger and therefore have more leverage in negotiations with the Company. Recently, customers have pressed for extended payment terms and returns of slow moving product when negotiating with the Company. While the Company does its best to avoid such concessions, in some cases payment terms to customers have been extended and returns of product have exceeded historical levels. The product returns primarily affect the Company's profit levels while terms extensions generally reduce operating cash flow and require additional capital to finance the business. Management expects both of these trends to continue for the foreseeable future.
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Foreign Currency Fluctuations. In 2003, approximately 60% of the Company's products were purchased 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 fluctuations 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, the recent weakness in the dollar has resulted in pressure from several foreign suppliers to increase prices. To the extent that the dollar decreases in value to foreign currencies in the future or the present weakness in the dollar continues for a sustained period of time, the price of the product in dollars for new purchase orders may increase.
The Company makes significant purchases of product from Chinese vendors. The Chinese Yuan exchange rate has been fixed against the U.S. Dollar since 1998. Recently, the Chinese government has been under increasing pressure to revalue its currency, or to make its exchange rate more flexible. Most experts believe that the value of the Yuan would increase relative to the U.S. Dollar if it was revalued or allowed to float. Such a move would most likely result in an increase in the cost of products that are purchased from China.
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.
Available Information
Our internet address is www.rbinc.com. We make available free of charge on our web site our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. In addition, we will provide, at no cost, paper or electronic copies of our reports and other filings made with the SEC. Requests should be directed to: R&B, Inc. - Office of General Counsel, 3400 East Walnut Street, Colmar, Pennsylvania 18915.
The information on the website listed above, is not and should not be considered part of this annual report on Form 10-K and is not incorporated by reference in this document. This website is, and is only intended to be, an inactive textual reference.
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Item 2.
Item 2. Properties.
Facilities
The Company currently has 10 warehouse and office facilities located throughout the United States, Sweden, China 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) Louisiana, MO Warehouse and office - 90,000 sq. ft. (owned) Baltimore, MD Warehouse and office - 83,000 sq. ft. (leased)
In the opinion of management, the Company's existing facilities are in good condition. - ----------------- (1) Leased by the Company from a 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 $3.56 per square foot ($1.2 million per year) in 2003. 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. In 2002, the lease term was extended and will expire on December 31, 2007. 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.
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. In the opinion of management, none of the actions, individually or in the aggregate, would likely have a material financial impact on the Company.
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 2003.
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 44 Senior Vice President, Chief Financial Officer
Richard N. Berman 47 President, Chief Executive Officer, Chairman of the Board of Directors, and Director
Steven L. Berman 44 Executive Vice President, Secretary-Treasurer, and Director
Edward L. Dean 47 Senior Vice President, Marketing
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Fred V. Frigo 47 Senior Vice President, Operations
Steven A. Kirchner 46 Senior Vice President, Sales
Barry D. Myers 44 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.
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.
Fred V. Frigo joined the Company in March 1997 as Director, Operations and was named Senior Vice President, Operations in September 2003. Prior to joining the Company, Mr. Frigo was the Plant Manager for Cooper Industries (Federal Mogul), where he was responsible for their Wagner Brake Plant in Boston and following that the Wagner Lighting Operations in Boyertown Pennsylvania. He is a graduate of Elmhurst College.
Steven A. Kirchner joined the Company in June 2003 as Vice President, Sales and was named Senior Vice President, Sales and Trade Marketing in December 2003. Prior to joining the Company Mr. Kirchner spent over twenty years with The Valvoline Company in various management positions, including Senior Vice President Worldwide Marketing.
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.
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 12, 2004 there were 140 holders of record of common stock, representing more than 1,500 beneficial owners. The last price for the Company's common stock on March 12, 2004, as reported by NASDAQ, was $18.799 per share. Since the Company's initial public offering, it has paid no cash dividends. The Company does not presently
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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 2003 and 2002 are as follows:
2003 2002 ----------------------- ----------------------- High Low High Low - ------------------ ---------- ------------ ---------- ------------ First Quarter $10.42 $8.84 $8.90 $6.65 Second Quarter 11.24 9.65 10.36 6.50 Third Quarter 14.00 10.55 10.00 8.10 Fourth Quarter 15.09 12.55 10.10 8.15
Item 6.
Item 6. Selected Financial Data. Selected Consolidated Financial Data
(a) Results for 2002 include a gain on sale of specialty fastener business of $2,143 ($1,329 after tax or $0.15 per share).
(b) 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.
(c) Results for 1999 include a restructuring charge of $11,400 ($7,500 after tax or $0.90 per share).
(d) The Company adopted the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," at the beginning of fiscal 2002. With the adoption of SFAS No. 142, goodwill is no longer subject to amortization. The following table presents certain financial data for fiscal 2002 and all periods prior to fiscal 2002 adjusted to exclude amortization of goodwill and the related tax effects:
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Item 7.
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition.
Executive Summary
The Company is a leading supplier of original equipment dealer "Exclusive" automotive replacement parts, fasteners and service line products to the automotive aftermarket and household hardware to the general merchandise markets. The Company's products are marketed under more than seventy proprietary brand names, through its Motormite, Dorman, Allparts, Scan-Tech, MPI and Pik-A-Nut businesses.
For the year ended December 27, 2003, sales increased 3% to $222.1 million from $215.5 million in the same period last year. The sales growth was driven primarily by new product development, which is a key to the Company's growth strategy. Gross margin improved slightly to 37.0% in 2003 from 36.7% in 2002. Operating expenses remained flat, but declined as a percentage of sales to 26.2%. The improvements in gross margin and operating expenses as a percentage of sales were driven primarily by cost saving initiatives. As a result, net income increased to $13.3 million in 2003.
New product development is a critical success factor for the Company. The Company has invested heavily in resources necessary for it to increase its new product development efforts and to strengthen its relationships with its customers. These investments are primarily in the form of increased product development and awareness programs, customer service improvements and increased customer credits and allowances. This has enabled the Company to provide an expanding array of new product offerings and grow its revenues.
The automotive aftermarket has been consolidating over the past several years. As a result, many of the Company's customers have grown larger and therefore have more leverage in negotiations with the Company. Recently, customers have pressed for extended payment terms and returns of slow moving product when negotiating with the Company. While the Company does its best to avoid such concessions, in some cases payment terms to customers have been extended and returns of product have exceeded historical levels. The product returns primarily affect the Company's profit levels while terms extensions generally reduce operating cash flow and require additional capital to finance the business. Management expects both of these trends to continue for the foreseeable future.
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. The fiscal years ended December 27, 2003, December 28, 2002 and December 29, 2001 were each fifty- two week periods.
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenues and expenses. The Company regularly evaluates its estimates and judgments, including those related to revenue recognition, bad debts, customer credits, inventories and goodwill. Estimates and judgments are based upon historical experience and on various other assumptions believed to be accurate and reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. The Company believes the following critical accounting
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policies affect its more significant estimates and judgments used in the preparation of its consolidated financial statements:
Allowance for Doubtful Accounts. The preparation of the Company's financial statements requires management to make estimates of the collectability of its accounts receivable. Management specifically analyzes accounts receivable and historical bad debts, customer creditworthiness, 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 automotive retailers and warehouse distributors in the United States. The Company's five largest customers accounted for 70% and 73% of total accounts receivable as of December 27, 2003 and December 28, 2002, respectively. 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 $1.2 million and $1.3 million as of December 27, 2003 and December 28, 2002, respectively.
Revenue Recognition and Allowance for Customer Credits. The Company recognizes revenue for sales to its customers at the time of shipment from the Company's warehouses. Net sales are calculated by subtracting allowances for customer credits from gross revenues. Allowances for customer credits include costs for product returns, discounts and promotional rebates 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 Company provides for customer credits and potential returns at the time of sale. Management must make estimates of the ultimate value of customer credits that will be issued for 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 Company's products when evaluating the adequacy of its 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 $16.5 million as of both December 27, 2003 and December 28, 2002.
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 $8.5 million and $9.2 million as of December 27, 2003 and December 28, 2002, respectively.
Goodwill. Effective December 30, 2001, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 requires that goodwill and certain intangible assets resulting from business combinations entered into prior to June 30, 2001 no longer be amortized, but instead be reviewed for recoverability, and that annual tests for impairment of goodwill and intangible assets that have indefinite useful lives be performed. SFAS No. 142 also requires interim tests when an event has occurred that more likely than not has reduced the fair value of such assets. The Company assesses on an annual basis during the fourth quarter of the fiscal year the fair values of the reporting unit housing the goodwill. These assessments are based upon management estimates and assumptions about future operating results, including revenues and earnings. Any write-offs would result in a charge to earnings and a reduction in equity in the period taken. The Company has completed the annual impairment review, which did not result in an impairment charge. Goodwill was $29.1 million and $28.6 million at December 27, 2003 and December 28, 2002, respectively.
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Gain on Sale of Specialty Fastener Business and Litigation Settlement
On May 1, 2002, the Company entered into agreements to sell its specialty fastener business and to settle litigation initiated by the Company in 1996 related to its purchase of the Dorman business. Total proceeds from the sale and settlement, net of transaction costs and purchase price adjustments were approximately $7.4 million. The transactions resulted in an after-tax gain on the sale of the fastener business of $1.3 million, and a reduction in goodwill totaling $2.2 million.
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.
2003 Compared to 2002
Net sales increased 3% to $222.1 million in 2003 from $215.5 million in 2002. This sales increase is all volume related as the Company had no net selling price increases in 2003. Sales volume in 2003 increased as a result of several successful new product introductions and shipments to new customers for the Company's Allparts brake and Pik-A-Nut home hardware businesses. The favorable effects of foreign currency exchange resulted in a 2% year over year increase in sales. These sales increases were partially offset by a decline in sales volume in the Company's Swedish subsidiary due to the weak U.S. dollar. In addition, fourth quarter 2002 sales benefitted from over $4 million in one-time sales related to customer inventory builds and 2002 sales included $2.1 million in revenues from the specialty fastener business prior to its sale in May 2002. Sales growth for fiscal 2003 after adjusting for foreign exchange, the specialty fastener sale and the one-time sales described above was 4%.
Cost of goods sold, as a percentage of net sales, declined to 63.0% in 2003 from 63.3% in 2002. The overall decline in cost of goods sold as a percentage of sales was the net result of three primary factors. First, production and materials cost reduction initiatives resulted in cost savings that lowered cost of sales. This benefit
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was offset by provisions for customer credits that increased as a percentage of sales in 2003 as a result of higher customer return levels in 2003 and a sales mix shift towards more lower-gross margin product sales.
Selling, general and administrative expenses in 2003 were held to $58.2 million, which is the same level of spending as in 2002 despite additional investments in product development resources, inflationary cost increases and 3% sales volume growth in 2003. This was achieved through the implementation of a number of cost saving measures which reduced overhead spending. Costs in 2002 also included $0.7 million in non- recurring net costs associated with the closure of one of the Company's smaller distribution facilities.
Interest expense, net decreased to $3.4 million in 2003 from $3.9 million in 2002 due to lower borrowing levels in 2002. The primary reason for the lower borrowing levels in 2003 was a reduction in the outstanding principal of the Company's 6.81% Senior Notes. In August 2003, the Company made the second of seven annual installment payments of $8.6 million due under the terms of its Senior Note Agreements. This installment payment was funded with cash on hand rather than new debt.
The Company's effective tax rate increased slightly to 35.7% in 2003 from 35.6% in 2002.
2002 Compared to 2001
Net sales increased to $215.5 million in 2002 from $201.7 million in 2001. Revenues from the specialty fastener business sold in May 2002 were $2.1 million and $5.4 million in 2002 and 2001, respectively. Net sales in 2002 increased $17.1 million, or 8.7%, after adjusting for the specialty fastener business sale. One-time sales related to customer inventory builds accounted for approximately 25% of the sales growth in 2002. The remainder of the sales increase was the result of higher levels of product line updates to existing customers, the introduction of new product lines and continued strong reorder patterns on recently introduced new products.
Cost of goods sold, as a percentage of sales, declined to 63.3% in 2002 from 65.6% in 2001. The primary reason for this decline was an additional provision for discontinued and excess inventories of $3.6 million in 2001, which increased cost of goods sold by 1.8% of sales. The remaining decline in cost of goods sold as a percentage of sales in 2002 is the result of lower materials and operating costs achieved through several cost reduction initiatives.
Selling, general and administrative expenses in 2002 increased to $58.2 million from $57.0 million in 2001, an increase of $1.2 million, or 2.1%. The increase in selling, general and administrative costs was primarily the result of higher sales volumes and $0.7 million in net costs associated with the closure of one of the Company's smaller distribution facilities.
Interest expense, net decreased to $3.9 million in 2002 from $4.3 million in 2001 due to lower borrowing levels in 2002. In August 2002, the Company made the first of seven annual installment payments of $8.6 million due under the terms of its Senior Note Agreements.
The Company's effective tax rate increased to 35.6% in 2003 from 34.4% as the gain on the sale of the specialty fastener business is subject to a higher overall effective tax rate than the Company's operating profits.
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. At December 27, 2003, working capital was $98.5 million, total long-term debt (including the current portion) was $43.8 million and shareholders' equity was $106.0 million. Cash and short-term investments as of December 27, 2003 totaled $25.1 million.
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Over the past two years the Company has extended payment terms to certain customers as a result of customer requests and market demands. These extended terms have resulted in increased accounts receivable levels and significant uses of cash flow. The Company participates in an accounts receivable factoring program with one customer which allows it to sell its accounts receivable on a non-recourse basis to a financial institution to offset the negative cash flow impact of the payment terms extensions it has made to date. During 2003, the Company sold $2.0 million in accounts receivable pursuant to this plan. The Company expects continued pressure to extend its payment terms for the foreseeable future. Further extensions of customer payment terms will result in additional uses of cash flow or increased interest costs.
In December 2003, the Company announced its intention to add 77,200 square feet in warehouse space to its central distribution center in Warsaw, Kentucky by July, 2004. The total estimated cost of the addition and fit out of the warehouse space is expected to be approximately $2.8 million.
Long-term debt consists primarily of $42.9 million in Senior Notes that were originally issued in August 1998, in a private placement on an unsecured basis ("Notes"). The Notes bear a 6.81% fixed interest rate, payable quarterly. Annual principal payments of $8.6 million are due each August through 2008. The Notes require, among other things, that the Company maintain certain financial covenants relating to debt to capital ratios and minimum net worth.
In March 2004, the Company amended its Revolving Credit Facility. The amended facility expires in June 2005. The March 2004 amendment reduced the total credit facility from $10.0 million to $5.0 million. The size of the facility was reduced to decrease overall borrowing costs. Borrowings under the amended facility are on an unsecured basis with interest at LIBOR plus 150 basis points. The loan agreement also contains covenants, the most restrictive of which pertain to net worth and the ratio of debt to EBITDA. In addition, the Company's Swedish subsidiary maintains a short-term $1.8 million credit facility. As of December 27, 2003, $1.8 million in standby letters of credit were outstanding under the Revolving Credit Facility. There were no borrowings under either facility as of December 27, 2003.
The Company amended certain agreements related to its 1998 acquisition of Scan-Tech USA/Sweden A.B. and related entities ("Scan-Tech") during 2001. 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. The aggregate amount outstanding under this obligation was $0.9 million at December 27, 2003.
The Company's business activities do not include the use of unconsolidated special purpose entities, and there are no significant business transactions that have not been reflected in the accompanying financial statements.
The Company has future obligations for debt repayments, future minimum rental and similar commitments under noncancellable operating leases as well as contingent obligations related to outstanding letter of credit. These obligations as of December 27, 2003 are summarized in the tables below:
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(1) Represents capital commitments in connection with the Warsaw, Kentucky facility expansion.
Operating cash flow amounted to $20.7 million in fiscal 2003, approximately $15.7 million higher than the $5.1 million in operating cash flow in 2002. The primary reason for the increase in cash flow in 2003 was accounts receivable, which generated $4.8 million in cash in 2003, but used $13.3 million in cash in 2002. As noted above, the Company has extended payment terms to certain customers over the past two years. Most of the negative cash flow impact of these terms changes took place in 2002. This, together with a 7% sales increase in 2002 is the primary reason that accounts receivable required $13.3 million in cash in 2002. Accounts receivable generated $4.8 million in cash in 2003 as the impact of further payment terms extensions during the year were offset by a change in sales mix and the receipt of $2.0 million in proceeds from the accounts receivable factoring program discussed above.
Investing activities used $1.5 million of cash in 2003. The Company purchases highly liquid corporate and government bonds with maturities from three months to one year to take advantage of higher earnings rates on these investments. These investments have been classified as short-term investments as required by generally accepted accounting principles. As a result of this decision, the Company reported a net source of cash of $4.1 million during the period. Additions to property, plant and equipment required $5.6 million of cash in 2003 compared to $3.5 million in 2002. The increase in capital additions in 2003 is primarily the result of a 30,000 square foot addition to the Company's Allparts brake facility. Other capital expenditures in 2003 included upgrades to information systems, purchases of equipment designed to improve operational efficiencies and scheduled equipment replacements.
Financing activities required $9.2 million in cash in 2003. These uses were primary related to scheduled repayments under capital lease and other debt obligations, including the second scheduled repayment of $8.6 million on the Company's Senior Notes made in August 2003.
The Company believes that cash and short-term investments on hand and cash generated from operations together with its available sources of capital are sufficient to meet its ongoing cash needs for the foreseeable future.
Outlook
The Company's strategic plan provides for a continued intense focus on new product development and further expansion of its existing core businesses. Management anticipates that these efforts will result in compounded annual sales growth of between 3% and 8% over the next two year period. The Company may experience significant fluctuations in its results of operations from quarter to quarter due to the timing of new product introductions and orders placed by its customers.
Foreign Currency Fluctuations
In 2003, approximately 60% of the Company's products were purchased 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 fluctuations in the relationship between the
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dollar and various foreign currencies between the time of execution of the purchase order and payment for the product. However, the recent weakness in the dollar has resulted in pressure from several foreign suppliers to increase prices. To the extent that the dollar decreases in value to foreign currencies in the future or the present weakness in the dollar continues for a sustained period of time, the price of the product in dollars for new purchase orders may increase.
The Company makes significant purchases of product from Chinese vendors. The Chinese Yuan exchange rate has been fixed against the U.S. Dollar since 1998. Recently, the Chinese government has been under increasing pressure to revalue its currency, or to make its exchange rate more flexible. Most experts believe that the value of the Yuan would increase relative to the U.S. Dollar if it was revalued or allowed to float. Such a move would most likely result in an increase in the cost of products that are purchased from China.
Impact of Inflation
The Company has not generally been adversely affected by inflation, although recently raw materials pricing pressures have become more evident. The Company believes that material cost increases could potentially be mitigated by passing along price increases to customers or through the use of alternative suppliers or resourcing purchases to other countries.
Recent Accounting Pronouncements
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal of Activities." The statement has been applied prospectively to exit or disposal activities initiated after December 28, 2002. The initial adoption of this pronouncement did not have a material effect on the consolidated statement of operations for the year ended December 27, 2003.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS 123." This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25 and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the estimate of the market value of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. The Company has adopted the annual disclosure provisions of SFAS No. 148 in its financial reports.
In December 2003, the FASB issued Revised Interpretation No. 46, "Consolidation of Variable Interest Entities - an interpretation of Account Research Bulletin No. 51." FIN No. 46 addresses the consolidation by business enterprises of variable interest entities, as defined in the Interpretation. FIN No. 46 expands existing accounting guidance regarding when a company should include in its financial statements the assets, liabilities and activities of another entity. Since the Company does not have any variable interests in variable interest entities, the adoption of FIN No. 46 did not have any effect on the Company's consolidated financial condition or results of operations.
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
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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. Short-term fixed income investments are subject to interest rate and credit risk. The Company believes that the negative effect of interest rate risk would be minimal as all investments have maturities of one year or less. The Company's investment portfolio consists solely of investment grade corporate and government securities to minimize credit risk.
The Company may occasionally use 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 27, 2003.
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 15(a)(2), Part IV, of this Report.
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Independent Auditors' Report
The Board of Directors R&B, Inc.:
We have audited the accompanying consolidated balance sheets of R&B, Inc. and subsidiaries as of December 27, 2003 and December 28, 2002 and the related consolidated statements of operations, shareholders' equity and cash flows for the fiscal years then ended. In connection with our audits of the fiscal 2003 and 2002 consolidated financial statements, we also have audited the fiscal 2003 and 2002 financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. The fiscal 2001consolidated financial statements of R&B, Inc. were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those consolidated financial statements in their report dated February 13, 2002.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 fiscal 2003 and 2002 consolidated financial statements referred to above present fairly, in all material respects, the financial position of R&B, Inc. and subsidiaries as of December 27, 2003 and December 28, 2002, and the results of their operations and their cash flows for the fiscal years then ended in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related fiscal 2003 and 2002 financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed above, the fiscal 2001 consolidated financial statements of R&B, Inc. and subsidiaries were audited by other auditors who have ceased operations. As described in Note 3, these consolidated financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, which was adopted by the Company as of December 30, 2001. In our opinion, the disclosures for fiscal 2001 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the fiscal 2001 consolidated financial statements of R&B, Inc. and subsidiaries other than with respect to such disclosures, and accordingly, we do not express an opinion or any other form of assurance on the fiscal 2001 consolidated financial statements taken as a whole.
KPMG LLP
Philadelphia, Pennsylvania February 11, 2004
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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.
/s/ Arthur Andersen LLP
Philadelphia, Pennsylvania February 13, 2002
Note: The report above is a copy of a previously issued report and it has not been reissued by Arthur Andersen LLP (Andersen).
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R&B, INC. AND SUBSIDIARIES
See accompanying notes to consolidated financial statements.
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R&B, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 27, 2003
1. Summary of Significant Accounting Policies
R&B, Inc. (the "Company") is a leading supplier of OE Dealer "Exclusive" automotive replacement parts, automotive hardware and brake products to the automotive aftermarket and household hardware products to the general merchandise markets. R&B's products are marketed under more than seventy proprietary brand names, through its Motormite, Dorman, Allparts, Scan-Tech, MPI and Pik-A-Nut businesses.
The Company operates on a fifty-two, fifty-three week period ending on the last Saturday of the calendar year. The fiscal years ended December 27, 2003, December 28, 2002 and December 29, 2001 are each fifty-two week periods.
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.
Short-term Investments. Short-term investments consist primarily of corporate and government bonds with maturities of three months to one year from the date of purchase. Short-term investments are classified as held-to-maturity and are recorded at amortized cost. As of December 27, 2003, the market value of these short-term investments approximated the amortized cost.
Sales of Accounts Receivable. During 2003, the Company entered into a factoring agreement with an unrelated financial institution that permits the Company to sell, without recourse, certain accounts receivable at discounted rates to the financial institution. The Company does not retain any servicing requirements for these accounts receivable. Transactions under this factoring agreement are accounted for as sales of accounts receivable following the provisions of Statement of Financial Accounting Standards (SFAS) No. 140, "Account for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a Replacement of FASB Statement 125." At December 27, 2003, $2.0 million of accounts receivable were sold and removed from the consolidated balance sheet. The loss on the sale of receivables was $36,000.
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 thirty-nine years, using the straight-line method for financial statement reporting purposes and accelerated methods for income tax purposes. Properties under capitalized leases were 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.
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Other Assets. Other assets consist of deposits; 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.
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 27, 2003 and December 28, 2002, no open forward exchange contracts were outstanding.
Concentrations of Credit Risk. Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, short-term investments, and accounts receivable. All cash equivalents and short-term investments are managed within established guidelines which limit the amount which may be invested with one issuer. A significant percentage of the Company's accounts receivable have been, and will continue to be, concentrated among a relatively small number of automotive retailers and warehouse distributors in the United States. The Company's five largest customers accounted for 70% and 73% of total accounts receivable as of December 27, 2003 and December 28, 2002, respectively. Management continually monitors the credit terms and credit limits to these and other customers.
Fair Value Disclosures. The carrying value of financial instruments such as cash, short-term investments, 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 total long-term debt was $47.6 million and $58.7 million at December 27, 2003 and December 28, 2002, 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 allowances for customer credits from gross sales. Allowances for customer credits include costs for product returns, discounts and promotional rebates 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 allowances for customer credits 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.
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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 27, 2003:
Options to purchase 50,750, 5,000 and 5,000 shares were outstanding at December 27, 2003, December 28, 2002, and December 29, 2001, respectively, but were not included in the computation of diluted earnings per share, as their effect would have been antidilutive.
Stock-Based Compensation. At December 27, 2003, the Company has one stock-based employee compensation plan, which is described more fully in Note 14. The Company accounts for this plan under the recognition and measurement principles of Accounting Principles Board Opinion No. 25 (APB No. 25), "Accounting for Stock Issued to Employees", and related interpretations. Under APB No. 25, compensation expense is based on the difference, if any, on the date of the grant between the fair value of our stock and the exercise price of the option. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation", to stock-based employee compensation.
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The weighted average fair value of options granted in 2003, 2002 and 2001 was $6.56, $4.64 and $1.75, respectively. 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:
2003 2002 2001 ---- ---- ---- Expected dividend yield 0% 0% 0% Expected stock price volatility 52% 53% 46% Risk-free interest rate 3.3% 3.3% 5.3% Expected life of option 7.5 years 7.5 years 7.5 years
2. Gain on Sale of Specialty Fastener Business and Litigation Settlement
On May 1, 2002, the Company entered into agreements to sell the Company's specialty fastener business and to settle litigation initiated by the Company in 1996 related to its purchase of its Dorman business. Total proceeds from the sale and settlement, net of transaction costs and purchase price adjustments were approximately $7.4 million. The transactions resulted in an after-tax gain on the sale of the fastener business of $1.3 million, and a reduction in goodwill totaling $2.2 million.
3. Goodwill
Effective December 30, 2001, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 specifies that goodwill will no longer be amortized but instead will be subject to periodic impairment testing. As a result, effective December 30, 2001, the Company no longer amortizes goodwill. The Company has completed the impairment tests required by SFAS No. 142, which did not result in an impairment charge. The elimination of goodwill amortization would have increased net income by $1.1 million for the fiscal year ended December 29, 2001, or $0.13 per diluted share.
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4. 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. In fiscal 2001, the Company determined that it had $0.2 million in excess facility shutdown reserves which were credited to selling, general and administrative expenses.
5. 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 27, December 28, (in thousands) 2003 2002 - ---------------------- ------------------ -------------------- Bulk product $22,365 $19,923 Finished product 25,906 24,462 Packaging materials 2,899 2,832 - ---------------------- ------------------ -------------------- Total $51,170 $47,217 ====================== ================== ====================
6. Property, Plant and Equipment
Property, plant and equipment consists of the following:
December 27, December 28, (in thousands) 2003 2002 - ------------------------------------ -------------------- -------------------- Property under capitalized leases $ 2,452 $ 2,452 Buildings 8,419 7,452 Machinery, equipment and tooling 20,296 17,987
Furniture, fixtures and leasehold improvements 3,677 3,512 Computer and other equipment 20,468 18,265 - ------------------------------------ -------------------- -------------------- Total 55,312 49,668 Less-accumulated depreciation (37,722) (33,077) - ------------------------------------ -------------------- -------------------- Property, plant and equipment, net $17,590 $16,591 ==================================== ==================== ====================
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7. Long-Term Debt
Long-term debt consists of the following:
December 27, December 28, (in thousands) 2003 2002 - --------------------------------- ------------------- ------------------- Senior notes $42,857 $51,428 Capitalized lease obligations - 720 Obligation for stock repurchase and other (Note 8) 927 1,361 - --------------------------------- ------------------- ------------------- Total 43,784 53,509 Less: Current portion ( 8,571) (9,291) - --------------------------------- ------------------- ------------------- Total long-term debt $35,213 $44,218 ================================= =================== ===================
Senior Notes. The Senior Notes bear a 6.81% fixed interest rate, payable quarterly. Annual principal repayments at the rate of $8.6 million are due each August through 2008. 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.
Bank Credit Facility. The Company has a Revolving Credit Facility which provides for a $10 million facility for a three-year term that expires in March 2004. Borrowings under the 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 credit facility in 2003 or 2002. In March 2004, the Company amended its Revolving Credit Facility. The amended facility expires in June 2005. The March 2004 amendment reduced the total credit facility from $10 million to $5 million. Borrowings under the amended facility are on an unsecured basis with interest at LIBOR plus 150 basis points. All other terms and conditions remain unchanged. The Company's Swedish subsidiary maintains a $1.8 million credit facility. As of December 27, 2003, no amounts were outstanding under this facility, which is provided on an unsecured, short-term basis.
The Company is in compliance with all financial covenants contained in the Senior Notes and Revolving Credit Facility.
Capitalized Lease Obligations. The Company's capitalized lease obligation for its primary operating facility was with a partnership related to the Company by common ownership (see Note10) and was payable monthly in installments of $47,500 including interest imputed at 13.96% through December 2002. In 2002, the lease was extended through December 2007 and is now accounted for as an operating lease. The net book value of the asset under this capitalized lease was $0 at December 28, 2002.
The Company entered into three sale/leaseback transactions with an equipment lease company to finance computer equipment. Two leases expired in 2002 and the third lease expired in 2003.
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Aggregate annual principal payments applicable to long-term debt obligations as of December 27, 2003 are as follows:
(in thousands) 2004 $ 8,571 2005 9,500 2006 8,571 2007 8,571 2008 8,571 Thereafter - - ------------------------------------------ Total $43,784 - ------------------------------------------
8. 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. The Company paid $0.5 million and $1.25 million of this amount under the amended agreements in 2003 and 2002, respectively. 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 during 2001.
9. Operating Lease Commitments and Rent Expense
The Company leases certain equipment, automobiles and operating facilities, including the Company's primary operating facility which is leased from a partnership related to the Company by common ownership, under noncancelable operating leases. Approximate future minimum rental payments under these leases are summarized as follows:
(in thousands) 2004 $ 2,430 2005 1,871 2006 1,719 2007 1,696 2008 517 Thereafter 663 - -------------- ------------------ Total $ 8,896 ============== ==================
Rent expense was $2.8 million in 2003, $2.9 million in 2002 and $2.7 million in 2001.
10. Related Party Transactions
The Company has entered into a noncancelable operating lease for its primary operating facility from a partnership in which the Company's Chief Executive Officer and Executive Vice President are partners. Total rental payments each year to the partnership under the lease arrangement were $1.2 million in 2003, 2002 and 2001.
Prior to April 2003, the Company had leased its Carrollton, Georgia facility from another partnership in which the Company's Chief Executive Officer and Executive Vice President are partners. During 2003, the Company entered into an agreement to terminate the lease for this facility. In connection with this agreement, the Company paid $200,000, which was accrued in 2002, to terminate this lease subject to the closing of the sale of the building by the partnership to an unrelated entity. Total payments to the partnership under the lease arrangements, including the lease termination payment, were $269,000, $272,000 and $269,000 in 2003, 2002 and 2001, respectively.
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11. Income Taxes
The components of the income tax provision (benefit) are as follows:
(in thousands) 2003 2002 2001 - ------------------------ ------------------ ----------------- ---------------- Current: Federal $5,371 $ 6,048 $ 4,765 State 292 365 329 Foreign 424 394 405 - ------------------------ ------------------ ----------------- ---------------- 6,087 6,807 5,499 - ------------------------ ------------------ ----------------- ---------------- Deferred: Federal 1,224 36 (2,487) State 61 2 (264) Foreign - - - - ------------------------ ------------------ ----------------- ---------------- 1,285 38 (2,751) - ------------------------ ------------------ ----------------- ---------------- Total $7,372 $6,845 $2,748 ======================== ================== ================= ================
The following is a reconciliation of income taxes at the statutory tax rate to the Company's effective tax rate:
2003 2002 2001 - ------------------------------------------------------------------------------- Federal taxes at statutory rate 34.0% 34.0% 34.0% State taxes, net of Federal tax benefit 1.1% 1.2% 0.5% Contributed property and other 0.6% 0.4% (0.1%) - ------------------------------------------------------------------------------- Effective tax rate 35.7% 35.6% 34 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 27, December 28, (in thousands) 2003 2002 - --------------------------------- ---------------------- ---------------------- Assets: Inventories $3,251 $ 3,557 Accounts receivable 2,833 2,523 Accrued expenses 1,547 1,780 - --------------------------------- ---------------------- ---------------------- Gross deferred tax assets 7,631 7,860 - --------------------------------- ---------------------- ---------------------- Liabilities: Depreciation 106 274 Goodwill 4,664 3,440 - --------------------------------- ---------------------- ---------------------- Gross deferred tax liabilities 4,770 3,714 - --------------------------------- ---------------------- ---------------------- Net deferred tax assets $2,861 $4,146 ================================= ====================== ======================
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12. Business Segments
In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," the Company has determined that its business comprises a single reportable operation segment, namely, the sale of replacement parts for the automotive aftermarket.
During 2003 and 2002, two customers each accounted for more than 10% of net sales and in the aggregate accounted for 31% and 36% of net sales, respectively. During 2001, one customer accounted for approximately 24% of net sales. Net sales to countries outside the US, primarily to Western Europe and Canada in 2003, 2002 and 2001 were $20.7 million, $22.9 million and $19.9 million, respectively.
13. 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 effect on the Company's consolidated financial position or results of operations.
Facility Expansion Costs. In December 2003, the Company announced its intention to add 77,200 square feet to its central distribution center in Warsaw, Kentucky by July 2004. The total estimated cost of the addition and enhancements to the warehouse space is expected to be approximately $2.8 million. The Company has commitments totaling $600,000 under contracts for a portion of the construction costs as of December 27, 2003 that are not reflected in the consolidated financial statements.
14. 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 27, 2003, options to acquire 208,081 shares were available for grant under the Plan.
Transactions under the Plan for the three years ended December 27, 2003 were as follows:
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The following table summarizes information concerning currently outstanding and exercisable options at December 27, 2003:
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 2003, optionees had exercised rights to purchase 568 shares at prices from $7.64 to $11.64 per share for total net proceeds of $5,000.
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 27, 2003. Annual contributions under the plan are determined by the Board of Directors of the Company. Consolidated expense related to the plan was $1,121,000, $856,000, and $957,000 in fiscal 2003, 2002 and 2001, respectively.
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15. Accounting Pronouncements
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal of Activities." The statement has been applied prospectively to exit or disposal activities initiated after December 28, 2002. The initial adoption of this pronouncement did not have a material effect on the consolidated statement of operations for the year ended December 27, 2003.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS 123." This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25 and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the estimate of the market value of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. The Company has adopted the annual disclosure provisions of SFAS No. 148 in its financial reports.
In December 2003, the FASB issued Revised Interpretation No. 46, "Consolidation of Variable Interest Entities - an interpretation of Account Research Bulletin No. 51." FIN No. 46 addresses the consolidation by business enterprises of variable interest entities, as defined in the Interpretation. FIN No. 46 expands existing accounting guidance regarding when a company should include in its financial statements the assets, liabilities and activities of another entity. Since the Company does not have any variable interests in variable interest entities, the adoption of FIN No. 46 did not have any effect on the Company's consolidated financial condition or results of operations.
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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 27, 2003 and December 28, 2002:
(a) Results for the second quarter of 2002 include gain on sale of specialty fastener business of $2,143 ($1,329 after tax or $0.15 per share).
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
The Audit Committee of the Board of Directors of the Company annually considers and recommends to the Board the selection of R&B's independent public accountants. As recommended by the Company's Audit Committee, the Board of Directors on June 19, 2002 decided to no longer engage Arthur Andersen LLP ("Andersen") as the Company's independent public accountants and engaged KPMG LLP to serve as the Company's independent public accountants for the fiscal year ending December 28, 2002.
Andersen's report on the company's audited financial statements for the year ended December 29, 2001 did not contain an adverse opinion or a disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope, or accounting principles.
During the year ended December 29, 2001, and the interim period between December 29, 2001 and June 19, 2002, there were no disagreements between the Company and Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to Andersen's satisfaction, would have caused it to make reference to the subject matter in connection with its report on the Company's financial statements for those years. Also, during those two years and interim period, there were no reportable events as listed in Item 304(a) (1) (v) of Regulation S-K.
The Company provided Andersen with a copy of the foregoing disclosure. Andersen's letter dated June 20, 2002, stating its agreement with such statements, was filed as Exhibit 16 to the Company's Form 8-K filed June 20, 2002, which is incorporated herein by reference.
During the year ended December 29, 2001, and the interim period between December 29, 2001 and
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June 19, 2002, the Company did not consult with KPMG regarding application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's consolidated financial statements, or any other matter or reportable event listed in Items 304 (a) (2) (i) and (ii) of Regulation S-K.
Item 9A.
Item 9A. Controls and Procedures.
Quarterly evaluation of the Company's Disclosure Controls and Internal Controls. Within the 90 days prior to the date of this Annual Report on Form 10-K, the Company evaluated the effectiveness of the design and operation of its "disclosure controls and procedures" ("Disclosure Controls"). This evaluation ("Controls Evaluation") was done under the supervision and with the participation of management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO").
Limitations on the Effectiveness of Controls. The Company's management, including the CEO and CFO, does not expect that its Disclosure Controls or its "internal controls and procedures for financial reporting" ("Internal Controls" ) will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Conclusions. Based upon the Controls Evaluation, the CEO and CFO have concluded that, subject to the limitations noted above, the Disclosure Controls are effective to timely alert management to material information relating to the Company during the period when its periodic reports are being prepared.
In accordance with SEC requirements, the CEO and CFO note that, since the date of the Controls Evaluation to the date of this Annual Report, there have been no significant changes in Internal Controls or in other factors that could significantly affect Internal Controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
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 20, 2004.
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.
The information required by Item 10 regarding audit committee financial expert disclosure is incorporated by reference from the information under the caption "Committees of the Board of Directors - Audit Committee" in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held on May 20, 2004.
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The Company has adopted a written code of ethics, "Our Values and Standards of Business Conduct," which is applicable to all Company directors, officers and employees, including the Company"s chief executive officer, chief financial officer, and principal accounting officer and controller and other executive officers identified pursuant to this Item 10 (collectively, the "Selected Officers"). In accordance with the Commission's rules and regulations a copy of the code is being filed as an exhibit to the this Form 10-K and is posted on our website. The Company intends to disclose any changes in or waivers from its code of ethics applicable to any Selected Officer or director on its website at www.rbinc.com.
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 20, 2004.
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 20, 2004.
Equity Compensation Plan Information
The following table details information regarding the Company's existing equity compensation plans as of December 27, 2003:
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 20, 2004.
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Item 14.
Item 14. Principal Accountant Fees and Services.
Incorporated by reference to the section entitled "Independent Auditors Fees" in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held on May 20, 2004.
PART IV
Item 15.
Item 15. 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.
Independent Auditors' Report
Report of Independent Public Accountants
Consolidated Statements of Operations for the years ended December 27, 2003, December 28, 2002 and December 29, 2001.
Consolidated Balance Sheets as of December 27, 2003 and December 28, 2002.
Consolidated Statements of Shareholders' Equity for the years ended December 27, 2003, December 28, 2002 and December 29, 2001.
Consolidated Statements of Cash Flows for the years ended December 27, 2003, December 28, 2002 and December 29, 2001.
Notes to Consolidated Financial Statements
(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............................................45 Schedule II - Valuation and Qualifying Accounts...............46
(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.
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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.
10.1.3(8) Amendment to Lease, dated April 1, 2002, between the Company and the BREP I, for premises located at 3400 East Walnut Street, Colmar, Pennsylvania, amending 10.1.
10.3 (6)+ R&B, Inc. Amended and Restated Incentive Stock Plan.
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 KPMG LLP (filed with this report)
31.1 Certification of Chief Executive Officer as required by Section 302 of the Sarbanes-Oxley Act of 2002 (filed with this report).
31.2 Certification of Chief Financial Officer as required by Section 302 of the Sarbanes-Oxley Act of 2002 (filed with this report).
32 Certification of Chief Executive and Chief Financial Officer as required by Section 906 of the Sarbanes-Oxley Act of 2002 (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.
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(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. (8) Incorporate by reference to the Exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarter ended June 29, 2002.
(b) Reports on Form 8-K.
The Company furnished a report on Form 8-K on February 19, 2004 that included the Company's press release dated February 13, 2004 reporting fourth quarter and full year results of fiscal year 2003.
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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 16, 2004 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 16, 2004 ---------------------- Richard N. Berman Officer, and Chairman of the Board of Directors (principal executive officer)
\s\ Mathias J. Barton Chief Financial Officer March 16, 2004 ---------------------- Mathias J. Barton (principal financial and accounting officer)
\s\ Steven L. Berman Executive Vice President, March 16, 2004 -------------------- Steven L. Berman Secretary-Treasurer, and Director
\s\ George L. Bernstein Director March 16, 2004 ------------------------ George L. Bernstein
\s\ John F. Creamer, Jr. Director March 16, 2004 ------------------------- John F. Creamer, Jr.
\s\ Paul R. Lederer Director March 16, 2004 ------------------- Paul R. Lederer
\s\ Edgar W. Levin Director March 16, 2004 -------------------- 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.
/s/Arthur Andersen LLP
Philadelphia, Pennsylvania February 13, 2002
Note: The report above is a copy of a previously issued report and it has not been reissued by Arthur Andersen LLP (Andersen).
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