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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 25, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number 0-18914
R&B, INC.
Incorporated pursuant to the Laws
of the Commonwealth of Pennsylvania
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IRS - Employer Identification No. 23-2078856
3400 East Walnut Street, Colmar, Pennsylvania 18915
(215) 997-1800
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Securities Registered pursuant to Section 12(b) of the Act: NONE
Securities Registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 Par Value
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |_|
As of March 17, 2000 the Registrant had 8,231,034 common shares, $.01 par value,
outstanding, and the aggregate market value of voting stock held by
non-affiliates of the Registrant was $11,833,063.
DOCUMENTS INCORPORATED BY REFERENCE
PART III - Certain information from the Registrant's definitive Proxy Statement
for its Annual Meeting of Shareholders presently scheduled to be held on May 18,
2000.
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R & B, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
DECEMBER 25, 1999
Part I
Page
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
General. . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Automotive Aftermarket. . . . . . . . . . . . . . . . . 3
Products. . . . . . . . . . . . . . . . . . . . . . . .. . 4
Product Development. . . . . . . . . . . . . . . . . . . . 5
Sales and Marketing. . . . . . . . . . . . . . . . . . . . . 6
Manufacturing. . . . . . . . . . . . . . . . . . . . . . . . 6
Packaging, Inventory and Shipping. . . . . . . . . . . . . . 7
Competition. . . . . . . . . . . . . . . . . . . . . . . . . 7
Proprietary Rights. . . . . . . . . . . . . . . . . . . . . .8
Employees. . . . . . . . . . . . . . . . . . . . . . . . . . 8
Investment Considerations. . . . . . . . . . . . . . . . . . 8
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 11
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . 11
Item 4.1 Certain Executive Officers of the Registrant. . . . . . . . . . . .11
Part II
Item 5. Market for Registrant's Common Equity and
Related Shareholder Matters.. . . . . . . . . . . . . . . . . . 13
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . 13
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition.. . . . . . . . . . . . . . . . . . . . 14
Item 8. Consolidated Financial Statements and Supplementary Data. .. . . 19
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.. . . . . . . . . . . . . . . . . . . . 34
Part III
Item 10. Directors and Executive Officers of the Registrant. . . . . . .. 35
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . 35
Item 12. Security Ownership of Certain Beneficial Owners and Management... 35
Item 13. Certain Relationships and Related Transactions. . . . . . . . . . 35
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. .35
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . .38
Report of Independent Public Accountants
on Financial Statement Schedule. . . . . . . . . . . . . . 39
Financial Statement Schedule. . . . . . . . . . . . . . . . 40
Page 2 of 40
PART I
Item 1. Business.
General
R&B, Inc. was incorporated in Pennsylvania in October 1978. As used
herein, unless the context otherwise requires, "R&B" or the "Company" refers to
R&B, Inc. and its subsidiaries.
The Company is a leading supplier of "hard-to-find" parts, fasteners and
service line products primarily for the automotive aftermarket, a market segment
which it helped to establish. The Company designs, packages and markets over
60,000 different automotive replacement parts, fasteners and service line
products manufactured to its specifications, with approximately half consisting
of "hard-to-find" parts and fasteners. "Hard-to-find" parts are those which were
traditionally available to consumers only from original equipment manufacturers
or junk yards and include, among other parts, window handles, headlamp aiming
screws, power steering filler caps, pedal pads and carburetor pre-heater hoses.
Fasteners include such items as oil drain plugs and wheel lug nuts.
Approximately 85% 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, The Pep Boys and
Advance), national, regional and local warehouse distributors (such as Auto
Value, Carquest and NAPA) and specialty markets including parts manufacturers
for resale under their own private labels (such as Federal Mogul and Dana),
automotive dealers 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 $160 billion in 1999, and parts for heavy duty trucks, which
accounted for sales of approximately $57 billion in 1999. The Company currently
markets products primarily for passenger cars and light trucks.
Two distinct groups of end-users buy replacement automotive parts: (i)
individual consumers, who purchase parts to perform "do-it-yourself" repairs on
their own vehicles; and (ii) professional installers, which include automotive
repair shops and the service departments of automobile dealers. The individual
consumer market is typically supplied through retailers and through the retail
arms of warehouse distributors. Automotive repair shops generally purchase parts
through local independent parts wholesalers and through national warehouse
distributors. Automobile dealer service departments generally obtain parts
through the distribution systems of automobile manufacturers and specialized
national and regional warehouse distributors.
The increasing complexity of automobiles and the number of different
makes and models of automobiles have resulted in a significant increase in the
number of products required to service the domestic and foreign automotive
fleet. Accordingly, the number of parts required to be carried by retailers and
wholesale distributors has increased substantially. These pressures to include
more products in inventory and the significant consolidation among distributors
of automotive replacement parts have in turn resulted in larger distributors.
Retailers and others who purchase aftermarket automotive repair and
replacement parts for resale are con strained in the short-term to a finite
amount of space in which to display and stock products. Thus, the reputation for
quality, customer service and line profitability which a supplier enjoys is a
significant factor in a purchaser's decision as to which product lines to carry
in the limited space available. Further, because of the efficiencies achieved
through the ability to order all or part of a complete line of products from one
supplier (with possible volume discounts), as opposed to satisfying the same
requirements through a variety of different sources, retailers and other
purchasers of automotive parts seek to purchase products from fewer but stronger
suppliers.
Page 3 of 40
Products
The Company sells over 60,000 different automotive replacement parts,
fasteners and service line products to meet a variety of needs, including
"hard-to-find" parts sold primarily under the HELP!(R) brand name, a
comprehensive array of automotive and hardware fasteners sold under the
Dorman(R) and Pik-A-Nut(R) brand names, service line products sold under the
Champ(R) brand name and traditional automotive replacement parts sold under the
Company's other brand names as well as under customers' private label brands.
The Company markets these parts primarily through its Motormite (R) and
Dorman(R) divisions. Many of the Company's parts are sold under "dual brands" in
order to provide the Company's customers with an individualized identity or to
satisfy a particular brand preference. For example, a customer could purchase a
line of window handles under either the Motormite (R) HELP!(R) brand or the
Dorman (R) brand. Certain of the Company's brands, such as Metal Work!TM, are
offered as a single brand through both the Motormite (R) and Dorman (R)
divisions. Approximately 85% of the Company's revenues are derived from products
sold under its more than sixty brand names including, among others, the
following:
* HELP!(R) - An extensive array of replacement parts,including
window handles, knobs and switches, door handles,
control knobs, cigarette lighters, interior trim
parts, pedal pads, wheel center caps, headlamp
aiming screws and retainer rings, license plate
frames and parts, windshield washer parts, hood
latch release cables, radiator parts, battery hold-
down bolts, valve train parts, spring U-bolts,
tailgate cables and power steering filler caps
* Dorman(R) - An extensive array of replacement
parts, including many hard-to-find parts and
fasteners. The Dorman brand is designed to provide
the customer with a competitive brand alternative.
* Speedi-Boot!TM - Constant velocity joint boots and clamps
* Quick-Boot(R) - Constant velocity joint boots and clamps
* Mighty Flow!(R) - Air intake, carburetor preheater and defroster
duct hoses
* Start!TM - Alternator and starter repair components
* Look!(R) - Sideview mirror glass
* Clutch-In!TM - Clutch cables, bushings, forks and pilot tools
* Cable-All!TM - Accelerator, detent and transhift cables
* Gear-Up!(R) - Flywheels, ring gears and flex plates
* Cool-Aid!(R) - Air conditioning O-rings, gaskets, valves, tubes
and switches
* Strut-Tite!(R) - Strut mounts and related parts
* Conduct-Tite!(R) - Electrical connectors
* Oil-Tite!(R) - Oil drain plugs and gaskets
* Wheel-Tite!(R) - Wheel studs and lug nuts
Page 4 of 40
* HPX(R) - High performance fasteners
* Metal Work!TM - A program of metal-working related
categories, including welding supplies and
accessories, cutting equipment and supplies,
abrasives and related tools and brushes for hand
and power applications
* SafetyXCounts!TM - Safety products relating to compliance items,
gear for personal protection and first aid
* Pik-A-Nut(R) - An extensive array of automotive and hardware
fasteners
* Platinum Parts TM - An extensive array of automotive replacement
parts and supplies for automotive dealers and
salvage yards
* Champ(R) - Service line products including tire repair
equipment, floor mats, gauges and mops
* Brakeware(R) - Hydraulic brake parts, including wheel cylinders
and related hardware
The remainder of the Company's revenues are generated by the sale of
parts packaged by the Company, or others, for sale in bulk or under the private
labels of parts manufacturers (such as Federal Mogul and Dana), na tional
warehouse distributors (such as NAPA) and automobile manufacturers or their
dealers (such as General Motors' "AC/Delco" brand). During the years ended
December 1999, 1998 and 1997, 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 main tains an in-house engineering 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 engineering 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
Page 5 of 40
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.
Sales and Marketing
The Company markets its parts to three groups of purchasers who in turn
supply individual consumers and professional installers:
(i) Approximately 41% of the Company's revenues are generated
from sales to automotive aftermarket retailers (such as AutoZone, The
Pep Boys and Advance), 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 30% of the Company's revenues are generated
from sales to warehouse distributors (such as Auto Value, Carquest and
NAPA), which may be local, regional or national in scope, and which may
also engage in retail sales; and
(iii) The balance of the Company's revenues are generated from
international sales and sales to special markets, which include, among
others, hardware (such as Home Depot and Lowe's) salvage yards,
automobile dealers and the parts distribution systems of parts
manufacturers (such as Federal Mogul and Dana).
The Company utilizes a number of different methods to sell its products.
The Company's approximately 25 person direct sales force solicits purchases of
the Company's products directly from customers, as well as managing the
activities of more than 10 independent manufacturer's representative agencies.
The Company uses independent manufacturer's 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 three to four years the Company prepares a
new master catalog which lists all of its products. The catalog is updated
periodically through supplements.
The Company currently services more than 12,000 active accounts. During
1999 and 1998, one customer (AutoZone), accounted for approximately 21% and 15%
of sales, respectively. During 1997 two customers (AutoZone and The Pep Boys),
each accounted for 10% or more of sales and in the aggregate accounted for 24%
of sales.
Manufacturing
Substantially all of the products sold by the Company are manufactured
to its specifications by third parties, although replacement sideview mirror
glass (sold under its Look! trademark), is manufactured by the
Page 6 of 40
Company. Because numerous contract manufacturers are available to manufacture
its products, the Company is not dependent upon the services of any one contract
manufacturer or any small group of them, so no one vendor supplies 10% or more
of the Company's products. In 1999, as a percentage of the total dollar volume
of purchases made by the Company, approximately 65% of the Company's products
were purchased from various suppliers throughout the United States and
approximately 35% of the Company's products were purchased directly from a
variety of foreign countries.
Once a new product has been developed, the Company's engineering
department produces detailed en gineering 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 en gineering 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 ac cording to historical popularity in
order to aid in retrieval for shipping. The Company strives to maintain a level
of inventory to adequately meet current customer order demand with additional
inventory to satisfy new customer orders and special programs. In the aggregate,
this has resulted in approximately a three month supply of its products,
packaged and readily available for shipment, and a three to six month supply of
product in finished bulk form ready for packaging.
The Company ships its products from all of its locations, either by
contract carrier, common carrier or parcel service. Products are generally
shipped to the customer's central warehouse for redistribution within their
network. In certain circumstances, at the request of the customer, the Company
ships directly to the customer's stores.
Competition
The replacement automotive parts industry is highly competitive. Various
competitive factors affecting the automotive aftermarket are price, product
quality, breadth of product line, range of applications and customer serv ice.
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 divi sions 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.
Page 7 of 40
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.
Employees
At December 25, 1999, the Company had 1,160 employees, of whom 1,094
were employed full-time and 66 were employed part-time. Of these employees, 805
were engaged in production, inventory, or quality control, 42 were involved in
engineering and product development, 135 were employed in sales and order entry,
and the remaining 178, including the Company's 7 executive officers, were
devoted to administration, finance and strategic planning.
No employee is covered by any collective bargaining agreement. The
Company considers its relations with its employees to be generally good.
Investment Considerations
Increasing Service Life. Advancing technology and competitive pressures
have compelled original equipment automobile and parts manufacturers to use
parts with longer service lives, which are covered by longer and more
comprehensive warranties. This may have the effect of reducing demand for the
Company's products by delaying the onset of repair conditions requiring their
use.
Competition for Shelf Space. Since the amount of space available to a
retailer and other purchasers of the Company's products is limited, the
Company's products compete with other automotive aftermarket products, some of
which are entirely dissimilar and otherwise non-competitive (such as car waxes
and engine oil), for shelf and floor space. No assurance can be given that
additional space will be available in a customers' stores to support expansion
of the number of products offered by the Company.
Concentration of Sales to Certain Customers. A significant percentage of
the Company's sales have been, and will continue to be, concentrated among a
relatively small number of customers. In 1999 and 1998 one customer (AutoZone)
accounted for approximately 21% and 15% of sales, respectively. During 1997, the
Company's two largest customers (AutoZone and The Pep Boys) accounted for
approximately 24% of the Company's 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. In 1997, Monroe Auto Equipment Co. ("Monroe") began to manufacture or
source directly a series of products previously purchased from the Company, with
a resulting reduction of sales to the Company of approximately $5.0 million
annually. See "Management's Discussion and Analysis of Results of Operations and
Financial Condition" and "Business-Sales and Marketing."
Dependence on Senior Management. The success of the Company's business
will continue to be dependent upon Richard N. Berman, Chairman of the Board,
President and Chief Executive Officer and Steven L. Berman, Executive Vice
President, Secretary-Treasurer and Director. The loss of the services of one or
both of these individuals could have a material adverse effect on the Company's
business.
Dividend Policy. The Company does not intend to pay cash dividends for
the foreseeable future. Rather, the Company intends to retain its earnings, if
any, for the operation and expansion of the Company's business.
Page 8 of 40
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 49 % 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.
Possible Environmental Liability. See "Legal Proceedings."
Page 9 of 40
Item 2. Properties.
Facilities
The Company currently has approximately 15 warehouse and office facilities
located throughout the United States and Sweden. Three of these facilities are
owned and the remainder are leased. The Company's headquarters and principal
warehouse facilities, are as follows:
Location Description
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Colmar, PA Warehouse and office - 334,000 sq. ft. (leased) (1)
Warsaw, KY Warehouse and office - 285,000 sq. ft. (owned) (2)
Carrollton, GA Warehouse and office - 100,000 sq. ft. (leased) (3)
In the opinion of management, the Company's existing facilities are in good
condition.
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(1) Leased by the Company from a partnership (the "partnership") of which
Richard N. Berman, President and Chief Executive Officer of the Company, and
Steven L. Berman, Executive Vice President of the Company, their father, Jordan
S. Berman, and their brothers, Marc H. Berman and Fred B. Berman, are partners.
Under the lease the Company paid rent of $3.24 per square foot ($1.1 million per
year) in 1999. 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 addition, the lessor has exercisized its option
effective January 1, 2000, to increase the rent to an amount determined by an
independent appraiser to be the then fair market rent. The lease also provides
that, as between the Company and the related partnership lessor, the lessor and
its partners will bear any environmental liability and all related expenses,
including legal expenses, incurred by the Company or the lessor as a result of
matters which arose other than from activities of the Company (although for any
environmental liability arising from the Company's activities, the Company will
bear all such liability and any related expenses, including legal expenses,
incurred by the Company or the lessor). The lease will expire on December 28,
2002. In the opinion of management, the terms of this lease are no less
favorable than those which could have been obtained from an unaffiliated party.
The property is being purchased by the partnerships from the Montgomery
County Industrial Development Corporation ("MCIDC") under an installment sale
agreement. MCIDC has, in turn, borrowed approximately $1,971,000 from First
Union National Bank and approximately $1,161,000 from the Pennsylvania
Industrial Development Authority ("PIDA") to fund in full its purchase and
development of the Pennsylvania property. The partnerships' payments to MCIDC
under the installment sale agreement are required to be at least equal to the
principal and interest payable by MCIDC under these two loans, and the Company's
rental payments on the Pennsylvania property are required to be at least equal
to the partnership's payments under the installment sale agreement with MCIDC.
The Company has guaranteed the obligations of the partnerships and MCIDC to
First Union and of MCIDC to PIDA. Under the provisions of the agreement pursuant
to which the partnerships acquired the property, the partnerships may be
required to indemnify the seller of that property for environmental liabilities
which existed at the time of the sale.
(2) The Kentucky facility is being purchased, pursuant to a lease purchase
agreement, from the City of Warsaw, Kentucky (the "City"). The City's
acquisition of the fee interest and building construction was financed with
$6,500,000 Floating/Fixed Rate Industrial Building Revenue Bonds, Series 1988
(SDI Operating Partners L.P. Project) (the "Bonds"). Under the lease agreement
for the Kentucky property, the Company pays interest monthly on the Bonds at a
floating rate, and makes a monthly "sinking fund" payment to cover the annual
principal payment of $300,000 or $350,000 in alternating years, with the final
payment due in July, 2009. In 1999 the Company paid $350,000 in principal and
$115,000 in interest under the Bonds.
(3) Leased by the Company from a partnership (the "partnership") of which
Richard N. Berman, President and Chief Executive Officer of the Company, and
Steven L. Berman, Executive Vice President of the Company, their father, Jordan
S. Berman, and their brothers, Marc H. Berman and Fred B. Berman, are partners.
Under the lease, the Company paid rent of $2.51 per square foot ($0.25 million
per year) in 1998. The lease will expire on January 2, 2005. In the opinion of
management, the terms of this lease are no less favorable than those which could
have been obtained from an unaffiliated party.
Page 10 of 40
Item 3. Legal Proceedings.
In addition to commitments and obligation 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.
The Company's primary operating facility in Colmar, Pennsylvania, which
is leased from the partnership, is located within an area identified by the
Environmental Protection Agency ("EPA") as a possible source or location of
volatile organic chemical contamination. In November 1990, the EPA sent a
general notice letter to certain present and former owners and operators of
properties within this area, informing them that they may be liable under the
Comprehensive Environmental Response, Compensation and Liability Act with
respect to this contamination. As a current operator of the Colmar property, the
Company received such a general notice letter. The Company may be deemed jointly
and severally liable, together with all other potentially responsible parties,
for (i) the costs of performing a study of the nature and extent of the
contamination and the possible alternatives for remediation, if any, as well as
(ii) the costs of effectuating that remediation. The Company's operations do not
generally have, and have not generally had, an adverse impact upon the
environment or produce or use the materials of environmental concern that caused
the contamination being investigated by the EPA. Based on data generated by the
EPA in 1998, the Company believes that its Colmar site has not historically been
a source of such contamination, and as such, the Company believes that any
remediation order issued by the EPA would not include the Company or the Colmar
site. In addition, the Company's lease for its Colmar facility provides that, as
between the Company and the related partnership lessor, the lessor and its
partners will bear any environmental liability and all related expenses,
including legal expenses, incurred by the Company or the lessor as a result of
the presence of hazardous substances at the facility (although for any
environmental liability arising from the Company's activities, the Company will
bear all such liability and any related expenses, including legal expenses,
incurred by the Company or the lessor).
On February 27, 1996, the Company's subsidiary, Dorman Products of
America, Ltd. ("Dorman"), filed a complaint in the United States District Court
for the Eastern District of Pennsylvania against SDI Operating Partners, L.P.
("SDI") for damages resulting from, inter alia, an alleged breach of various
representations and warranties contained in the Asset Purchase Agreement dated
as of October 5, 1994 between Dorman and SDI. On April 25, 1996, SDI filed a
complaint in the Court of Common Pleas, Montgomery County, Pennsylvania against
Dorman and the Company for damages of approximately $450,000 resulting from,
inter alia, Dorman's alleged failure to use its "best efforts" to assist SDI in
collecting certain past due accounts receivable which were not transferred to
Dorman as a result of the acquisition. In addition, SDI is seeking declaratory
judgment that SDI has not breached the representations and warranties of the
Asset Purchase Agreement as alleged by Dorman in the federal court action. In
May 1996, the issues were consolidated and will proceed in the Court of Common
Pleas.
Item 4. 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 1999.
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 40 Senior Vice President, Chief Financial Officer
Richard N. Berman 43 President, Chief Executive Officer, Chairman of
the Board of Directors, and Director
Page 11 of 40
Steven L. Berman 40 Executive Vice President, Secretary-Treasurer,
and Director
Edward L. Dean 43 Senior Vice President, Marketing
David A. Eustice 39 Senior Vice President, Chief Operating Officer
Ronald R. Montgomery 58 Senior Vice President, Sales
Barry D. Myers 40 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 inception 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 Co., a lighting products company. He is a graduate of Cincinnati
Technical College.
David A. Eustice joined the Company in December 1996 as Vice President,
Operations and was named Chief Operating Officer in January 1998. Prior to
joining the Company Mr. Eustice was the Vice President of Operations with the
Baldwin Hardware Division of Masco Corporation. Baldwin is a high end
manufacturer and international distributor of architectural hardware. From
August 1990 to January 1994, Mr. Eustice was a Senior Project Manager for USC
Consulting, a operational improvement firm. While with USC Consulting, Mr.
Eustice consulted to clients including IBM, Copper Industries, PPG Industries
and Masco Corporation. He is a graduate of The State University of New York at
Buffalo.
Ronald R. Montgomery joined the Company in June 1997 as Vice President,
Sales and was named Senior Vice President, Sales in December 1999. Prior to
joining the Company Mr. Montgomery was Senior Vice President, Sales for the
Coleman Company, responsible for North American sales in the outdoor and camping
equipment division. From December 1979 to October 1995, Mr. Montgomery held
various senior sales positions with Black & Decker, Inc. He is a graduate of
Miami University (Ohio).
Barry D. Myers has been an employee of the Company since March 1988, and
was Vice President, General Counsel and Assistant Secretary for more than five
years. In December 1999, Mr. Myers was named Senior Vice President, General
Counsel and Assistant Secretary. He is a graduate of Moravian College and
Syracuse University College of Law, and is a member of the Pennsylvania Bar.
Page 12 of 40
PART II
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 17, 2000, there were
154 holders of record of common stock, representing more than 1,500 beneficial
owners. The last price for the Company's common stock on March 17, 2000, as
reported by NASDAQ, was $2.875 per share. Since the Company's initial public
offering, it has paid no cash dividends. The Company does not presently
contemplate paying any such dividends in the foreseeable future. The range of
high and low sales prices for the Company's common stock for each quarterly
period of 1999 and 1998 are as follows:
1999 1998
----------------------- -----------------------
High Low High Low
- ------------------ ----------- ----------- ---------- ------------
First Quarter $9.00 $7.13 $11.00 $9.38
Second Quarter 8.75 6.50 13.88 10.06
Third Quarter 10.75 5.50 12.00 7.25
Fourth Quarter 6.50 4.41 9.50 6.13
Item 6. Selected Financial Data.
Selected Consolidated Financial Data
Year Ended December
-------------------------------------------------------------------------
(in thousands, except per
share data) 1999(a) 1998 1997 1996 1995
- ----------------------------- -------------- ------------ -------------- --------------- -------------
Income Statement Data:
Net sales $236,689 $178,301 $153,046 $146,952 $113,826
Income from operations 1,633 16,419 14,784 13,244 10,455
Net income (loss) (3,602) 7,556 6,714 5,662 4,433
Earnings (loss) per share:
Basic (0.43) 0.91 0.83 0.71 0.56
Diluted (0.43) 0.90 0.83 0.71 0.56
Balance Sheet Data:
Total assets 188,004 183,948 128,707 128,970 106,475
Working capital 96,612 97,620 58,609 63,368 51,559
Long-term debt 85,283 80,004 44,336 56,248 46,629
Shareholders' equity 68,234 71,614 61,162 54,169 48,221
(a) Results for 1999 include a restructuring charge of $11,400 ($7,500 after tax or $0.90 per share).
Page 13 of 40
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition.
General
Over the periods presented, the Company has focused its efforts on
providing an expanding array of new product offerings and strengthening its
relationships with its customers. To that end, the Company has made significant
investments to increase market penetration, primarily in the form of product
development, customer service, customer credits and allowances, and strategic
acquisitions.
The Company calculates its net sales by subtracting credits and
allowances from gross sales. Credits and allowances include costs for
co-operative advertising, product returns, discounts given to customers who
purchase new products for inclusion in their stores, and the cost of
competitors' products that are purchased from the customer in order to induce a
customer to purchase new product lines from the Company. The credits and
allowances are designed to increase market penetration and increase the number
of product lines carried by customers by displacing competitors' products within
customers' stores and promoting consolidation of customers' suppliers.
The Company may experience significant fluctuations from quarter to
quarter in its results of operations due to the timing of orders placed by the
Company's customers. Generally, the second and third quarters have the highest
level of customer orders, but the introduction of new products and product lines
to customers may cause significant fluctuations from quarter to quarter.
In January 1998, the Company acquired Scan-Tech USA/Sweden A.B. and
related entities ("Scan- Tech"). Headquartered in Stockholm, Sweden, Scan-Tech
is a global distributor of replacement automotive parts, primarily Volvo and
Saab.
In September 1998, the Company began its acquisition of selective assets
of the Service Line Division ("Champ") of Standard Motor Products, Inc. Champ
includes the Champ Service Line, Pik-A-Nut and Everco. The acquisition was
completed in stages with the final stage (Everco) occurring in January 1999.
In October 1998, the Company acquired the assets of Allparts, Inc.
Headquartered in Louisiana, Missouri, Allparts is a leading supplier of
automotive hydraulic brake parts to the automotive aftermarket.
The Company operates on a fifty-two, fifty-three week period ending on
the last Saturday of the calendar year.
Page 14 of 40
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 Income.
Percentage of Net Sales
---------------------------------------------------
Year Ended
---------------------------------------------------
December 25, December 26, December 27,
1999 1998 1997
- --------------------------- ------------------ ---------------- ---------------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 68.3 60.5 60.8
- --------------------------- ------------------ ---------------- ---------------
Gross profit 31.7 39.5 39.2
Selling, general and
administrative expenses 31.0 30.3 29.6
- --------------------------- ------------------ ---------------- ---------------
Income from operations 0.7 9.2 9.6
Interest expense, net 3.0 2.6 2.7
- --------------------------- ------------------ ---------------- ---------------
Income (loss) before taxes (2.3) 6.6 6.9
Provision (benefit) for taxes (0.8) 2.4 2.5
- --------------------------- ------------------ ---------------- ---------------
Net income (loss) (1.5%) 4.2% 4.4%
=========================== ================== ================ ===============
1999 Compared to 1998
Restructuring Charges - In the fourth quarter of fiscal 1999, the
Company recorded a restructuring charge of $11.4 million ($7.5 million after tax
or $0.90 per share) to reflect costs primarily related to inventory write downs
associated with the elimination of a significant number of underperforming
products, as well as the closing of a warehouse and production facility in
Carrollton, Georgia, and a work force reduction of 158 people. A total of $9.8
million, representing inventory write downs, was charged to cost of sales and
$1.6 million was charged to selling, general and administrative expenses.
Net sales increased to $236.7 million in 1999 from $178.3 million in
1998, an increase of $58.4 million, or 32.7 %. Approximately $29 million of this
increase is the result of a full year of sales in 1999 from two acquisitions
that were completed in 1998 - Allparts and Champ. The remaining increase is
primarily the result of sales volume increases in the Company's core product
lines.
Cost of goods sold increased to $161.7 million in 1999 from $107.9
million in 1998, an increase of $53.8 million. Restructuring charges accounted
for $9.8 million of this increase. Cost of goods sold as a percentage of sales
before the restructuring charges were 64.2% compared to 60.5% in 1998. This
increase is primarily attributable to lower profitability in the Company's core
business and a change in mix as the businesses acquired in 1998 have higher cost
of goods sold as a percentage of sales than the Company's core business. The
lower profitability in the core business is the result of lower selling prices
to a number of customers in 1999 as a result of consolidation in the automotive
aftermarket.
Selling, general and administrative expenses in 1999 increased to $73.4
million from $54.0 million in 1998, an increase of $19.4 million, or 36.0%.
Restructuring charges accounted for $1.6 million of this increase, and
approximately $5 million of the increase is the result of a full year of costs
in 1999 of acquisitions made in 1998. Selling, general and administrative
expenses as a percentage of sales before restructuring charges were 30.3% in
1999 and 1998.
Page 15 of 40
Interest expense, net increased to $7.0 million in 1999 from $4.6
million in 1998. The increase resulted from higher average debt levels in 1999
and higher interest costs on the Company's Revolving Credit Facility. Borrowing
levels increased in 1999 due to higher working capital levels primarily related
to higher inventory, and were at higher average levels for the year due to the
acquisitions made in 1998.
The Company recorded an income tax benefit at an effective rate of 32.4%
in 1999. This compares to an effective income rate of 35.9% in 1998. The lower
effective income tax rate in 1999 is primarily due to the lack of a state income
tax benefit on the $11.4 million restructuring charge recorded in 1999.
1998 Compared to 1997
Net sales increased to $178.3 million in 1998 from $153.0 million in
1997, an increase of $25.3 million or 16.5%. The acquisitions completed during
1998 - Scan-Tech, Champ and Allparts - accounted for $21.7 million of this
increase while the remaining increase of $3.6 million resulted from an increase
in core business sales.
Cost of goods sold increased to $107.9 million in 1998 from $93.0
million in 1997, an increase of 16.0%. As a percentage of net sales, cost of
goods sold decreased in 1998 to 60.5% from 60.8% in 1997. This improvement
resulted primarily from a reduction in the material cost component of cost of
goods sold.
Selling, general and administrative expenses for 1998 increased to $54.0
million from $45.2 million in 1997, an increase of 19.4%. As a percentage of net
sales, selling, general and administrative expenses increased in 1998 to 30.3%
from 29.6% in 1997. This increase resulted from inefficiencies related to three
concurrent events in 1998, namely: 1) the installation of a new company-wide
computer system; 2) the reorganization of two of the Company's three primary
facilities; and, 3) the purchase and integration of the Champ Service Line
Division. These three events occurred during the Company's third quarter leading
to a reduction in service levels to customers. Solutions implemented during the
third and fourth quarters included, among other things, increases in inventory
levels, warehouse space and warehouse personnel, all of which contributed to
increased selling, general and administrative expenses.
Interest expense, net, increased to $4.6 million in 1998 from $4.2
million in 1997. This increase resulted from higher average debt levels in 1998
relating to the funding of the acquisitions made by the Company during the year
and the expansion in working capital assets, offset partially by lower average
interest rates.
A provision for income taxes was recorded in 1998 of $4.2 million and
$3.9 million in 1997. The Company's effective tax rate decreased to 35.9% in
1998 from 36.5% in 1997. This change reflects the slightly lower foreign tax
rates and increased benefit of contributed property.
Page 16 of 40
Liquidity and Capital Resources
The Company has financed its growth through the combination of cash flow
from its operations, issuance of senior notes, borrowings under its credit
facilities and industrial revenue bonds. Working capital was $96.6 million as of
December 25, 1999 and $97.6 million as of December 26, 1998. The Company
believes that cash generated from operations and borrowings under its revolving
credit facility will be sufficient to meet the Company's working capital needs
and to fund expansion for the foreseeable future.
Net cash used in operating activities was $ 6.0 million in 1999 and
$11.1 million in 1998 compared to net cash provided from operating activities of
$16.3 million in 1997. During 1999, the net loss, offset by non- cash provisions
for depreciation, amortization and restructuring charges, and lower accounts
receivable levels provided $21.0 million in positive cash flow, however, these
increases were offset by $27.0 million in cash used as a result of increases in
inventory, other assets and reductions in accounts payable. During 1998, net
income, depreciation and amortization and an increase in accounts payable
provided the majority of the $24.0 million in positive cash flow, however, these
increases were more than offset by $35.1 million in cash used related primarily
to increases in accounts receivable and inventories. During 1997, net income,
non-cash charges, a reduction in inventories and increases in current
liabilities provided $20.5 million in cash flow which was partially offset by
cash uses of $4.2 million relating to increases in accounts receivable, prepaids
and other assets.
Net cash used in investing activities amounted to $7.9 million in 1999,
$16.8 million in 1998, and $4.5 million in 1997. In 1998, the acquisitions of
Scan-Tech, Champ and Allparts accounted for $13.4 million in cash used while
additions to property, plant and equipment required an additional $7.7 million
in cash. This was partially offset by $4.3 million in proceeds from a
sale/leaseback transaction. Additions to property, plant and equipment accounted
for all cash used in 1999 and 1997.
Net cash provided by financing activities amounted to $14.5 million in
1999 and $27.2 million in 1998, compared to cash used in financing activities of
$11.1 million in 1997. During 1999, revolving credit facility borrowings
provided $15.0 million in cash which was used to fund cash used in operating and
investing activities. During 1998, proceeds from the issuance of the senior
notes provided $60.0 million in cash which was used to partially paydown other
debt and fund acquisitions and working capital increases. During 1997 cash was
used to reduce the amounts outstanding under the Company's revolving credit
facility and for repayments of term debt and capitalized lease obligations.
The Acquisition of Scan-Tech. In January 1998, Scan-Tech was acquired
with the payment of $1 million in cash, up to350,000 shares of the Company's
common stock and assumption of certain liabilities including approximately $0.8
million in bank debt.
The Acquisition of Champ. In September 1998, the Company began its
acquisition of selective assets of Champ from Standard Motor Products, Inc. for
approximately $2.3 million representing the net asset value of inventories. The
acquisition was completed in stages with the final stage (Everco) occurring in
January 1999 and requiring a payment of approximately $0.4 million representing
the net asset value of inventories.
The Acquisition of Allparts. In October 1998, the Company acquired the
assets of Allparts from JPE, Inc., for approximately $10.1 million in cash.
Senior Notes. In August 1998, the Company completed a private placement
of $60 million in 6.81% Senior Notes ("Notes") due August 21, 2008 on an
unsecured basis. The ten-year Notes bear a 6.81 percent fixed interest rate,
payable quarterly, with an initial four-year interest only period.
Page 17 of 40
Revolving Credit Facility. In connection with the Notes, the Company
amended its $35 million revolving credit facility with First Union National Bank
and National City Bank. As amended, the commitment for the line was extended for
a five-year term on an unsecured basis with interest at Libor plus 125 basis
points. Proceeds from the Notes were used, among other things, to paydown the
term debt portions of the bank credit facilities previously advanced to the
Company by the bank syndicate. Borrowings under the revolving credit facility
amounted to $28.5 million at December 25, 1999.
In March 2000, the Company received a waiver of compliance with one
covenant of the revolving credit facility as of December 25, 1999 and the
lenders under the facility agreed to amend the borrowing agreement. The terms of
the amended agreement will include revisions to certain debt coverage covenants,
require the Company to obtain $1.0 million in new financing, and provide for
mandatory reductions in the facility to $20.0 million and $15.0 million by
December 31, 2000 and June 30, 2001, respectively. In addition, the amendment
provides for an increase in the facility's interest rate to a maximum of Libor
plus 300 basis points. Upon the occurrence of an Event of Default, as defined in
the loan agreement, the banks, at their option, may require a lien on
substantially all of the company's assets. The Company believes that the amended
facility together with cash generated from operations will provide sufficient
funding to meet the Company's working capital needs for the foreseeable future.
Industrial Revenue Bonds. Construction of the Company's Warsaw, Kentucky
facility in 1990 was funded by the Bonds. The Bonds bear interest at an annual
rate of 4% payable monthly and require annual principal payments of $300,000 or
$350,000 in alternating years with the final payment due in July, 2009.
Capitalized Leases. The Company's leases for its Pennsylvania and
Georgia facilities are recorded as capitalized leases in the Company's financial
statements. In addition, in 1998 and 1999, the Company entered into three
sale/leaseback transactions relating to computer hardware and software. The
aggregate amount outstanding under all capital leases amounted to $4.4 million
at December 25, 1999.
Foreign Currency Fluctuations. In 1999, approximately 35% 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
fluctuation in the relationship between the dollar and various foreign
currencies between the time of execution of the purchase order and payment for
the product. However, to the extent that the dollar decreases in value to
foreign currencies in the future, the price of the product in dollars for new
purchase orders may increase. The Company attempts to lessen the impact of these
currency fluctuations by resourcing its purchases to other countries.
Year 2000 Compliance
The efficient operation of the Company's business is dependent in part
on its computer software programs and operating systems ("Programs"). The
Company evaluated its Programs to identify potential Year 2000 compliance
problems. This evaluation led to the selection and implementation of a
comprehensive enterprise resource planning package and related programs ("New
System"). This New System, installed in 1998, is used in several key areas of
the company's business including inventory purchasing and management, production
planning, forecasting, pricing, sales, shipping and financial reporting and
replaces the majority of the Company's previous Programs. Those Programs not
replaced by the New System were also evaluated for Year 2000 compliance and
appropriate adjustments were made to bring them into compliance either through
modification or replacement. The most significant of these are the Company's
Human Resource, payroll and time keeping systems, which were replaced with a
combination of purchased software and third party services during the first
quarter of 1999.
The investment in capital expenditures to implement the New System was
approximately $4.3 million. The Company estimates that the expenses associated
with the replacement and upgrade to the Human Resources, payroll and time
keeping systems were approximately $0.5 million.
Page 18 of 40
The Company has experienced no problems or issues relating to the Year
2000 problem as of the date of this report. We will gain more confidence that
this issue will not impede our business once we have gone through a transaction
cycle with every customer and vendor. We anticipate that this cycle should be
complete, for the most part, by the end of our first fiscal quarter in the year
2000. We will maintain our contingency plans until we are satisfied that the
business will not be impacted by the possibility of a Year 2000 problem.
Impact of Inflation
The Company has not generally been adversely affected by inflation. The
Company believes that price increases resulting from inflation generally could
be passed on to its customers, since prices charged by the Company are not set
by long-term contracts.
Cautionary Statement Regarding Forward Looking Statements
Certain statements periodically made by or on behalf of the Company and
certain statements contained herein including statements in Management's
Discussion and Analysis of Financial Condition and Results of Operation; certain
statements contained in Business, such as statements regarding litigation; and
certain other statements contained herein regarding matters that are not
historical fact are forward looking statements (as such term is defined in the
Securities Act of 1933), and because such statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward looking statements. Factors that cause actual results to
differ materially include but are not limited to those factors discussed in
"Business - Investment Considerations."
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
The Company's market risk is the potential loss arising from adverse
changes in interest rates. With the exception of the Company's revolving credit
facility, long-term debt obligations are at fixed interest rates and denominated
in U.S. dollars. The Company manages its interest rate risk by monitoring trends
in interest rates as a basis for determining whether to enter into fixed rate or
variable rate agreements. Under the terms of the Company's revolving credit
facility, a change in either the lender's base rate or LIBOR would affect the
rate at which the Company could borrow funds thereunder. The Company believes
that the effect of any such change would be minimal.
Although the Company continues to evaluate derivative financial
instruments to manage foreign currency exchange rate changes, the Company does
not currently hold derivatives for managing these risks or for trading purposes.
Item 8. Financial Statements and Supplementary Data.
The financial statement schedules of the Company that are filed with
this Report on Form 10-K are listed in Item 14(a)(2), Part IV, of this Report.
Page 19 of 40
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 25, 1999 and December
26, 1998, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
25, 1999. 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 25, 1999 and December 26, 1998 and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 25, 1999, in conformity with accounting principles
generally accepted in the United States.
Arthur Andersen LLP
Philadelphia, PA
March 22, 2000
Page 20 of 40
R&B, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended
----------------------------------------------
December 25, December 26, December 27,
(in thousands, except per share data) 1999 1998 1997
- ----------------------------------------------------------------------------------------
Net Sales $236,689 $178,301 $153,046
Cost of goods sold 161,676 107,897 93,032
- ----------------------------------------------------------------------------------------
Gross profit 75,013 70,404 60,014
Selling, general and administrative 73,380 53,985 45,230
- ----------------------------------------------------------------------------------------
Income from operations 1,633 16,419 14,784
Interest expense, net 6,961 4,629 4,205
- ----------------------------------------------------------------------------------------
Income (loss) before taxes (5,328) 11,790 10,579
Provision (benefit) for taxes (1,726) 4,234 3,865
- ----------------------------------------------------------------------------------------
Net Income (loss) $ (3,602) $ 7,556 $ 6,714
========================================================================================
Earnings (loss) Per Share:
Basic $ (0.43) $ 0.91 $ 0.83
Diluted $ (0.43) $ 0.90 $ 0.83
Average Shares Outstanding:
Basic 8,375 8,330 8,043
Diluted 8,375 8,421 8,083
========================================================================================
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
Page 21 of 40
R&B, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 25, December 26,
(in thousands, except share data) 1999 1998
- ------------------------------------------------------ ----------------- -----------------
Assets
Current Assets:
Cash and cash equivalents $ 1,467 $ 915
Accounts receivable, less allowance for doubtful
accounts and customer credits of $8,764 and $9,715 49,979 55,585
Inventories 70,272 68,401
Deferred income taxes 4,574 1,674
Prepaids and other current assets 2,543 861
- ------------------------------------------------------ ----------------- -----------------
Total current assets 128,835 127,436
- ------------------------------------------------------ ----------------- -----------------
Property, Plant and Equipment, net 22,919 20,761
Intangible Assets, net 33,212 33,640
Other Assets 3,038 2,111
- ------------------------------------------------------ ----------------- -----------------
Total $ 188,004 $ 183,948
====================================================== ================= =================
Liabilities and Shareholders' Equity
Current Liabilities:
Current portion of long-term debt $ 11,910 $ 3,089
Accounts payable 12,867 18,309
Accrued compensation 2,820 2,652
Other accrued liabilities 4,626 5,766
- ------------------------------------------------------ ----------------- -----------------
Total current liabilities 32,223 29,816
Long-Term Debt 85,283 80,004
Deferred Income Taxes 2,264 2,514
Commitments and Contingencies (Note 11)
Shareholders' Equity:
Common stock, par value $.01; authorized
25,000,000 shares; issued 8,393,796 and 8,344,082 84 83
Additional paid-in capital 33,517 33,133
Cumulative translation adjustments (181) (18)
Retained earnings 34,814 38,416
Total shareholders' equity 68,234 71,614
- ------------------------------------------------------ ----------------- -----------------
Total $ 188,004 $ 183,948
====================================================== ================= =================
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
Page 22 of 40
R&B, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock
--------------------------
Additional Cumulative
Shares Paid-In Translation Retained
(in thousands, except share data) Issued Par Value Capital Adjustment Earnings Total
- --------------------------------- ------------ ------------- ------------ ------------- ------------- -----------
Balance at December 28, 1996 8,026,254 $ 80 $ 29,943 $ - $ 24,146 $ 54,169
Common stock issued to
Employee Stock Purchase Plan 717 - 1 - - 1
Common stock issued to
401(k) Retirement Plan 39,377 1 277 - - 278
Shares issued under
Incentive Stock Plan 195 - - - - -
Net income - - - - 6,714 6,714
- -------------------------------- ------------ ------------ ------------- ------------ -------------- -----------
Balance at December 27, 1997 8,066,543 81 30,221 - 30,860 61,162
Common stock issued for
purchase of Scan-Tech
USA/Sweden AB (Note 5) 250,000 2 2,668 - - 2,670
Common stock issued to
Employee Stock Purchase Plan 5,631 - 42 - - 42
Common stock issued to
401(k) Retirement Plan 17,251 - 170 - - 170
Shares issued under
Incentive Stock Plan 4,657 - 32 - - 32
Comprehensive Income:
Net income - - - - 7,556 7,556
Currency translation adjustments - - - (18) - (18)
-----------
Total comprehensive income 7,538
- -------------------------------- ------------ ----------- ------------- ------------- ------------- -----------
Balance at December 26, 1998 8,344,082 83 33,133 (18) 38,416 71,614
Common stock issued for
purchase of Scan-Tech
USA/Sweden AB (Note 5) 3,479 - 29 - - 29
Common stock issued to
Employee Stock Purchase Plan 11,505 - 73 - - 73
Common stock issued to
401(k) Retirement Plan 34,268 1 277 - - 278
Shares issued under
Incentive Stock Plan 462 - 5 - - 5
Comprehensive Income:
Net (loss) - - - - (3,602) (3,602)
Currency translation adjustments - - - (163) - (163)
-----------
Total comprehensive (loss) (3,765)
- --------------------------------- ------------ ------------- ------------ ------------ ------------- ------------
Balance at December 25, 1999 8,393,796 $ 84 $ 33,517 $ (181) $ 34,814 $68,234
================================= ============ ============= ============ ============= ============= ===========
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
Page 23 of 40
R&B, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended
-------------------------------------------------
December 25, December 26, December 27,
(in thousands) 1999 1998 1997
- -------------------------------------------------------- ---------------- --------------- ----------------
Cash Flows from Operating Activities:
Net income (loss) $ (3,602) $ 7,556 $ 6,714
Adjustments to reconcile net income (loss) to cash provided
by (used in) operating activities:
Depreciation and amortization 7,551 6,396 4,258
Provision for doubtful accounts 1,058 649 417
Provision for deferred income tax (3,150) 256 2,474
Provision for restructuring 11,400 - -
Changes in assets and liabilities, net of acquisitions:
Accounts receivable 4,548 (13,355) (2,819)
Inventories (11,671) (20,181) 3,388
Prepaids and other current assets (1,682) 899 (855)
Other assets (2,318) (1,513) (499)
Accounts payable (5,605) 6,695 1,836
Other accrued liabilities (2,572) 1,501 1,363
- -------------------------------------------------------- ---------------- --------------- ----------------
Cash (used in) provided by operating activities (6,043) (11,097) 16,277
- -------------------------------------------------------- ---------------- --------------- ----------------
Cash Flows from Investing Activities:
Property, plant and equipment additions (7,890) (7,744) (4,511)
Proceeds from sale/leaseback transaction - 4,338 -
Business acquisitions, net of cash acquired - (13,351) -
- -------------------------------------------------------- ---------------- --------------- ----------------
Cash used in investing activities (7,890) (16,757) (4,511)
- -------------------------------------------------------- ---------------- --------------- ----------------
Cash Flows from Financing Activities:
Proceeds from senior notes - 60,000 -
Net proceeds (repayment) from revolving credit 15,000 (5,000) (5,350)
Repayment of term loans and capitalized lease obligations (900) (28,076) (6,017)
Proceeds from common stock issuances 385 244 279
- -------------------------------------------------------- ---------------- --------------- ----------------
Cash (used in) provided by financing activities 14,485 27,168 (11,088)
- -------------------------------------------------------- ---------------- --------------- ----------------
Net Increase (Decrease) in Cash and Cash Equivalents 552 (686) 678
Cash and Cash Equivalents, Beginning of Year 915 1,601 923
- -------------------------------------------------------- ---------------- --------------- ----------------
Cash and Cash Equivalents, End of Year $ 1,467 $ 915 $ 1,601
======================================================== ================ =============== ================
Supplemental Cash Flow Information
Cash paid for interest expense $ 6,692 $ 4,246 $ 3,627
Cash paid for income taxes $ 3,327 $ 499 $ 3,068
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
Page 24 of 40
R&B, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 25, 1999
1. Summary of Significant Accounting Policies
R&B, Inc. (the "Company") is principally engaged in the business of
selling a broad range of "hard-to-find" replacement auto parts, fasteners and
service line products for the automotive aftermarket to retailers, wholesalers
and others for use in the repair and maintenance of automobiles and trucks.
The Company operates on a fifty-two, fifty-three week period ending on
the last Saturday of the calendar year.
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 generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents - The Company considers all highly liquid
debt instruments with original maturities of three months or less to be cash
equivalents.
Inventories - Inventories are stated at the lower of average cost or
market.
Property and Depreciation - Property, plant and equipment are recorded
at cost and depreciated over their estimated useful lives, which range from
three to fifteen years, using the straight-line method for financial statement
reporting purposes and accelerated methods for income tax purposes. Properties
under capitalized leases are amortized over the related lease terms (3-15
years). The costs of maintenance and repairs are expensed as incurred. Renewals
and betterments are capitalized.
Intangible Assets - Intangible assets consist primarily of goodwill
which is amortized over periods from 10 to 40 years. Total accumulated
amortization on intangible assets as of December 25, 1999 and December 26, 1998
was $6.1 million and $4.4 million, respectively. Amortization expense of these
assets was $1.7 million in 1999, $1.4 million in 1998, and $1.1 million in 1997.
It is the Company's policy to review goodwill and other long-lived
assets for possible impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If such
review indicates that the carrying amount is not recoverable, it is the
Company's policy to reduce the carrying amount of such assets to fair value.
Other Assets - Other assets consist of credits associated with certain
customer multi-year sales arrangements which are capitalized and amortized
against current and future sales; costs incurred for the preparation and
printing of product catalogs which are capitalized and amortized upon
distribution; and deferred financing costs which are capitalized and amortized
over the term of the related financing agreement.
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.
Page 25 of 40
Income Taxes - Income taxes include federal, state and foreign taxes
with deferred tax benefits and liabilities arising from temporary differences
between financial and tax reporting.
Revenue Recognition - The Company records sales when its products are
shipped. A provision is recorded for anticipated returns or allowances, based
primarily on historical experience and current estimates.
Earnings Per Share - Earnings per share is computed under Statement of
Financial Accounting Standards No. 128 , "Earnings Per Share". The Company has
included basic and diluted earnings per share on the face of the Statements of
Income for each year presented. Weighted average shares for diluted earnings per
share includes the assumption of the exercise of all potentially dilutive
securities ("in the money" stock options).
2. Restructuring Charges
In the fourth quarter of fiscal 1999, the Company recorded
restructuring charges of $11.4 million ($7.5 million after tax or $0.90 per
share) to reflect costs primarily related to inventory write downs associated
with the elimination of a significant number of underperforming products, as
well as the closing of a warehouse and production facility in Carrollton,
Georgia, and a workforce reduction of 158 people. A total of $9.8 million,
representing inventory write downs, was charged to cost of sales and $1.6
million was charged to selling, general and administrative expenses.
The following summarizes the restructuring charge and activity recorded in 1999:
Costs Balance at
(in thousands) Charge Incurred December 25, 1999
- --------------------------------------------------------------------------------
Inventory Disposals $ 9,800 $ - $ 9,800
Employee Termination Benefits 475 (124) 351
Facility Shutdown Costs 1,125 (300) 825
------------ ------------ ---------------
$11,400 $ (424) $ 10,976
============ ============ ===============
3. Inventories
Inventories include the cost of material, freight, direct labor and
overhead utilized in the processing of the Company's products. Inventories were
as follows:
December 25, December 26,
(in thousands) 1999 1998
- --------------------- ----------------- -----------------
Bulk product $20,665 $31,181
Finished product 45,136 31,445
Packaging materials 4,471 5,775
- --------------------- ----------------- -----------------
Total $70,272 $68,401
===================== ================= =================
Page 26 of 40
4. Property, Plant and Equipment
Property, plant and equipment consists of the following:
December 25, December 26,
(in thousands) 1999 1998
- ----------------------------------- ----------------- --- ----------------
Property under
capitalized leases $8,944 $ 8,768
Buildings 7,308 7,738
Machinery, equipment and
tooling 14,069 11,756
Furniture, fixtures and
leasehold improvements 2,551 2,144
Computer and other
equipment 14,230 8,682
- ----------------------------------- ----------------- --- ----------------
Total 47,102 39,088
Less-accumulated depreciation (24,183) (18,327)
- ----------------------------------- ----------------- --- ----------------
Property, plant and equipment, net $22,919 $20,761
=================================== ================= === ================
5. Acquisitions
Scan-Tech - In January 1998, the Company acquired the outstanding stock
of Scan-Tech USA/Sweden A.B. and related entities ("Scan-Tech"). Headquartered
in Stockholm, Sweden, Scan-Tech is a distributor of replacement automotive
parts, primarily Volvo and Saab, throughout Europe, the United States, Russia,
the Middle East and Far East with annual sales of approximately $10 million in
1997. The acquisition was effected through the payment of $1 million in cash,
350,000 shares of the Company's common stock and assumption of certain
liabilities including approximately $0.8 million in bank debt. Of the shares,
250,000 will vest over four years and are included in the computation of the
purchase price. The remaining 100,000 are subject to performance criteria and
are included in the computation of purchase price as the criteria are met. The
Company accounted for this acquisition using the purchase method of accounting
which resulted in the recording of goodwill of $2.7 million.
Champ - In September 1998, the Company began its acquisition of
selective assets of the Service Line Division ("Champ") of Standard Motor
Products, Inc. for approximately $2.3 million representing the net asset value
of inventories. Headquartered in Edwardsville, Kansas, the Service Line Division
included the Champ Service Line, Pik-A-Nut and Everco. The acquisition was
completed in stages with the final stage (Everco) occurring in January 1999. The
Company accounted for this acquisition using the purchase method of accounting
which resulted in the recording of goodwill of $1.3 million.
Allparts - In October 1998, the Company acquired the assets of Allparts,
Inc., from JPE, Inc., for approximately $10.1 million in cash. Headquartered in
Louisiana, Missouri, Allparts is a leading supplier of automotive hydraulic
brake parts to the automotive aftermarket. Allparts had annual sales of
approximately $18 million in 1997. The Company accounted for this acquisition
using the purchase method of accounting which resulted in the recording of
goodwill of $1.2 million.
Page 27 of 40
The unaudited pro forma consolidated results for the years ended
December 26, 1998 and December 27, 1997, as if the acquisitions of Scan-Tech,
Champ and Allparts had occurred at the beginning of 1997, are as follows:
(in thousands, except per share data) 1998 1997
------------------------------------------------------------------------
Net sales $202,071 $192,826
Net income 8,035 7,434
Diluted earnings per share $0.95 $0.90
6. Long-Term Debt
Long-term debt consists of borrowings under senior notes, bank credit
facilities, industrial revenue bonds and capitalized lease obligations as
follows:
December 25, December 26,
(in thousands) 1999 1998
- --------------------------------- ------------------- -------------------
Senior Notes $ 60,000 $ 60,000
Bank credit facility 28,500 13,500
Industrial revenue bonds 3,224 3,544
Capitalized lease obligations 4,387 5,099
Subsidiary line of credit 1,082 950
- --------------------------------- ------------------- -------------------
Total 97,193 83,093
Less: Current portion (11,910) (3,089)
- --------------------------------- ------------------- -------------------
Total long-term debt $85,283 $80,004
================================= =================== ===================
Senior Notes - In August 1998, the Company completed a private placement
of $60 million in 6.81% Senior Notes due August 21, 2008 ("Notes") on an
unsecured basis. The ten-year Notes bear a 6.81% fixed interest rate, payable
quarterly, with an initial four-year interest only period. Terms of the Note
Purchase Agreement require, among other things, that the Company maintain
certain financial covenants relating to debt to capital ratios and minimum net
worth.
Bank Credit Facility - In connection with the Notes, the Company amended
its $35 million revolving credit facility. As amended, the commitment for the
line was extended for a five-year term on an unsecured basis with interest at
Libor plus 125 basis points. Prior to amendment, the revolving credit facility
had a three year term, was secured by substantially all of the Company's assets
and was subject to a borrowing base computation with interest at Libor plus 85
basis points. The prior bank credit facility also included two term loans with
interest at Libor plus 110 and 150 basis points, respectively. Proceeds from the
Notes were used, among other things, to pay off these term loans in full.
The average amount outstanding under the bank credit facility was $27.7
million and $27.6 million during 1999 and 1998, respectively. The maximum amount
outstanding was $35.0 million in 1999 and $46.4 million in 1998.
In March 2000, the Company received a waiver of compliance with one
covenant of the revolving credit facility as of December 25, 1999 and the
lenders under the facility agreed to amend the borrowing agreement. The terms of
the amended agreement will include revisions to certain debt coverage covenants,
require the Company to obtain $1.0 million in new financing, and provide for
mandatory reductions in the facility to $20.0 million and $15.0 million by
December 31, 2000 and June 30, 2001, respectively. In addition, the amendment
provides for an increase in the facility's interest rate to a maximum of Libor
plus
Page 28 of 40
300 basis points. Upon the occurrence of an Event of Default, as defined in the
loan agreement, the banks, at their option, may require a lien on substantially
all of the company's assets. The Company believes that the amended facility
together with cash generated from operations will provide sufficient funding to
meet the Company's working capital needs for the foreseeable future.
Industrial Revenue Bonds - The Bonds bear interest at an annual rate of
4% payable monthly and require annual principal payments of $300,000 or $350,000
in alternating years with the final payment due in July, 2009. The Bonds are
secured by the Company's warehouse and office facility in Warsaw, Kentucky.
Capitalized Lease Obligations - The Company's capitalized lease
obligation for its primary operating facility is with a partnership related to
the Company by common ownership ( "Partnership 1") (see Note 8) and is payable
monthly in installments of $47,500 including interest imputed at 13.96% through
December 2002. The lease provides for contingent rental payments to Partnership
1 in amounts that, when added to the annual capitalized lease payments, do not
exceed the fair market rental rate of the facility. The contingent rental
payments are determined on an annual basis to approximate the change in the
Consumer Price Index and are payable only to the extent that the Company has
available sufficient pre-tax income in the preceding fiscal year to support the
increase. The net book value of the assets under this capitalized lease was $0.6
million at December 25, 1999 and $0.8 million at December 26, 1998 (see Note
11).
In January 1990, the Company entered into a capitalized lease
arrangement for certain office and warehouse facilities in Georgia with a
partnership related to the Company by common ownership ("Partnership 2"). The
lease is payable through January 2005 at $9,600 per month including interest
imputed at 10.97%. The lease also provides for an annual adjustment in an amount
which will approximate the change in the Consumer Price Index. The net book
value of the assets under this capitalized lease was $289,000 at December 25,
1999 and $347,000 at December 26, 1998 (see Note 11).
In 1998, the Company entered into a $4.3 million sale/leaseback
transaction with an equipment lease company to finance the Company's new
computer system. The lease is payable in monthly installments of $126,500
including interest computed at 6.23% through June 2001.
The following is a schedule of approximate annual future minimum lease
payments under the capitalized leases with Partnership 1 and Partnership 2 for
the Company's facilities (exclusive of contingent rental payments) and other
capital lease obligations as of December 25, 1999:
(in thousands) Facilities Equipment Total
- ------------------------------------ ------------- ------------- -------------
2000 $ 685 $ 1,720 $ 2,405
2001 685 1,030 1,715
2002 685 44 729
2003 115 - 115
2004 115 - 115
Thereafter - - -
- ------------------------------------ ------------- ------------- -------------
Total payments 2,285 2,794 5,079
Less - amounts representing interest ( 450) (242) (692)
- ------------------------------------ ------------- ------------- -------------
Total principal payments $ 1,835 $ 2,552 $ 4,387
==================================== ============= ============= =============
Page 29 of 40
Aggregate annual principal payments applicable to long-term debt as of
December 25, 1999 are as follows:
(in thousands)
2000 $ 11,910
2001 6,786
2002 9,564
2003 24,020
2004 8,981
Thereafter 35,932
- ---------------------------
Total $ 97,193
===========================
7. Operating Lease Commitments and Rent Expense
The Company leases certain equipment and automobiles under noncancelable
operating leases. Approximate future minimum rental payments under these leases
are summarized as follows:
(in thousands)
2000 $ 713
2001 589
2002 350
2003 26
2004 12
- --------- --------------
Total $ 1,690
========= ==============
Rent expense includes rental adjustment payments and contingent rentals
paid to related parties (see Notes 6 and 8) of $0.6 million in 1999, 1998 and
1997, was $1.7 million in 1999, $1.5 million in 1998, and 1.3 million in 1997.
8. Related Party Transactions
The Company has entered into capital leases for two operating facilities
with Partnership 1 and Partnership 2 (see Notes 6 and 11). The Company has
guaranteed the mortgages of Partnership 1 and Partnership 2 on these facilities.
These guarantees at December 25, 1999 were approximately $1.6 million. Total
interest expense on these capitalized leases was $273,000 in 1999, $326,000 in
1998 and $370,000 in 1997.
Page 30 of 40
9. Income Taxes
The components of the income tax provision (benefit) are as follows:
(in thousands) 1999 1998 1997
- ------------------------------- -------------- ---------------- ----------------
Federal:
Current $1,373 $3,773 $1,341
Deferred (3,150) 243 2,384
- ------------------------------- -------------- ----------------- ---------------
Subtotal (1,777) 4,016 3,725
- ------------------------------- -------------- ----------------- ---------------
State:
Current 51 205 50
Deferred - 13 90
- ------------------------------- --------------- ---------------- ---------------
Subtotal 51 218 140
- ------------------------------- --------------- ---------------- ---------------
Total $(1,726) $4,234 $3,865
=============================== =============== ================ ===============
The following is a reconciliation of income taxes at the statutory tax rate to
the Company's effective rate:
1999 1998 1997
- ---------------------------------------------------------------------------
Federal taxes at statutory rate (34.0%) 34.2% 34.0%
State taxes, net of Federal tax benefit 0.6% 3.0% 3.0%
Contributed property and other 1.0% (1.3%) (0.5%)
- ---------------------------------------------------------------------------
Effective tax rate (32.4%) 35.9% 36.5%
===========================================================================
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 25, December 26,
(in thousands) 1999 1998
- -------------------------------------- ------------------- -------------------
Assets:
Inventories $1,371 $ 1,816
Accounts receivable (523) (1,140)
Restructuring Charges 4,177 -
Capital Leases 332 369
Accrued expenses 450 629
- -------------------------------------- ------------------- -------------------
Gross deferred assets 5,807 1,674
- -------------------------------------- ------------------- -------------------
Liabilities:
Depreciation 460 400
Goodwill 2,385 1,903
Other 652 211
- -------------------------------------- ------------------- -------------------
Gross deferred liabilities 3,497 2,514
- -------------------------------------- ------------------- -------------------
Net deferred asset (liability) $2,310 $ (840)
====================================== =================== ===================
Page 31 of 40
10. Business Segments
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information," (SFAS No.
131) in 1998. In accordance with the provisions of SFAS No.131, the Company has
determined that its business comprises a single reportable operation segment,
namely, the sale of replacement parts for the automotive aftermarket.
During 1999 and 1998, one customer accounted for approximately 21% and
15% of sales, respectively. During 1997, two customers each accounted for 10% or
more of sales and in the aggregate accounted for 24% of sales. Sales to
countries outside the US, primarily to Western Europe and Canada in 1999, 1998
and 1997 were $20.0 million, $12.6 million and $3.9 million, respectively.
11. Commitments and Contingencies
Environmental Matters - The Company's primary operating facility in
Colmar, Pennsylvania, which is leased from Partnership 1, is located within an
area identified by the Environmental Protection Agency ("EPA") as a possible
source or location of volatile organic chemical contamination. In November 1990,
the EPA sent a general notice letter to certain present and former owners and
operators of properties within this area, informing them that they may be liable
under the Comprehensive Environmental Response, Compensation and Liability Act
with respect to this contamination. As a current operator of the Colmar
property, the Company received such a general notice letter. The Company may be
deemed jointly and severally liable, together with all other potentially
responsible parties, for (i) the costs of performing a study of the nature and
extent of the contamination and the possible alternatives for remediation, if
any, as well as (ii) the costs of effectuating that remediation. The Company
revised its lease agreement for its Colmar facility effective December 1990 to
provide that, as between the Company and Partnership 1, Partnership 1 will bear
any environmental liability and all related expenses, including legal expenses,
incurred by the Company or Partnership 1 as a result of matters which arose
other than from activities of the Company. The Company believes that the
ultimate outcome of this matter will not have a material adverse impact upon the
financial position or results of operations of the Company.
Shareholder Agreement - A shareholder agreement was entered into in
September 1990 and subse quently 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.
12. Capital Stock
Undesignated Stock - The Company has 75,000,000 shares authorized of
undesignated capital stock for future issuance. The designation, rights and
preferences of such shares will be determined by the Board of Directors.
Incentive Stock Plan - In September 1990, the Board of Directors
approved an incentive stock plan to issue as options, up to 322,500 shares of
common stock, to employees, directors, consultants and advisors of the Company
or its affiliates with no one "individual" to receive more than 10% of the
total. In May 1997, the shareholders approved an increase in the number of
shares to 422,500, in May 1998, the shareholders approved an additional increase
in shares to 672,500, and in May of 1999, the shareholders approved an
additional increase in shares to 922,500. All options shall be granted within
ten years of the plan adoption date with the exercise price and period
determined by the Board of Directors on a discretionary basis, but the option
price per share shall not be less than 100% of the fair market value of a share
on the date of grant (not less than 110% if granted to an individual possessing
more than 10% of the voting rights of the Company's outstanding capital
Page 32 of 40
stock). No more than $100,000 of options may be exercised by one individual in
any calendar year. The following is a summary of transactions under the plan:
Number of Shares
---------------------------------------------------------------
Available
Option Price for Future
Per Share Outstanding Exercisable Grants
- -------------------------------- ---------------- ------------- --------------- ---------------
Balance at December 28, 1996 $5.75-$8.875 238,625 29,625 84,143
Increase in available shares - - 100,000
Became exercisable - 44,595 -
Exercised 7.75 (195) (195) -
Canceled 7.00-8.00 (31,805) - 31,805
Options granted 7.25-9.50 125,500 - (125,500)
- -------------------------------- --------------- -------------- --------------- ---------------
Balance at December 27, 1997 5.75-9.50 332,125 74,025 90,448
Increase in available shares - - 250,000
Became exercisable - 48,307 -
Exercised 5.75-8.875 (4,657) (4,657) -
Canceled 5.75-9.50 (52,093) - 52,093
Options granted 6.25-12.625 302,000 - (302,000)
- -------------------------------- ---------------- ------------- --------------- ---------------
Balance at December 26, 1998 5.75-12.625 577,375 117,675 90,541
Increase in available shares - - 250,000
Became exercisable - 85,097 -
Exercised 6.125-7.25 (462) (462) -
Canceled 6.75-11.938 (172,388) - 172,388
Options granted 1.00-9.2 512,929 - (512,929)
- -------------------------------- ---------------- ------------- --------------- ---------------
Balance at December 25, 1999 $1.00-$12.625 917,454 202,310 -
================================ ================ ============= =============== ===============
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations in
accounting for this plan. The following pro forma amounts were determined as if
the Company had accounted for its stock options using the fair value method
(Black-Scholes pricing model).
(in thousands, except per share data) 1999 1998 1997
- -------------------------------- -------------------- --------------------- ---------------------
Net income (loss):
As reported $ (3,602) $ 7,556 $ 6,714
Pro forma $ (3,951) $ 7,364 $ 6,585
Earnings per share:
As reported:
Basic ($0.43) $0.91 $0.83
Diluted ($0.43) $0.90 $0.83
Pro forma:
Basic ($0.47) $0.88 $0.82
Diluted ($0.47) $0.87 $0.82
Page 33 of 40
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 1999, optionees had exercised rights to purchase 11,505 shares at prices
from $3.93 to $8.00 per share for total net proceeds of $73,000.
401(k) Retirement Plan - The Company's 401(k) retirement plan was
amended in 1992 to permit contributions in cash or kind, including Company
qualified securities. The Company accrued for a discretionary contribution for
1999 which will be funded in early 2000 consisting of cash and approximately
73,300 shares of Company common stock at a value of approximately $340,000. The
Company made a discretionary contribution for 1998 consisting of cash and 34,268
shares of Company common stock, issued in 1999 at a value of approximately
$280,000. The Company made a discretionary contribution for 1997 consisting of
cash and 17,251 shares of stock, issued in 1998, at a value of approximately
$170,000.
Supplementary Financial Information
Quarterly Results of Operations:
The following is a summary of the unaudited quarterly results of
operations for the years ended December 25, 1999 and December 26, 1998:
(in thousands, except
per share data) First Quarter Second Quarter Third Quarter Fourth Quarter (a)
- ------------------------------ --------------- ----------------- --- ---------------- ----------------
1999
-----------------------------------------------------------------------
Net sales $55,946 $68,018 $59,495 $53,230
Income (loss) from operations 3,784 6,082 3,640 (11,873)
Net income (loss) 1,351 2,780 1,260 (8,993)
Earnings (loss) per share 0.16 0.33 0.15 (1.07)
1998
-----------------------------------------------------------------------
Net sales $39,012 $42,047 $44,509 $52,733
Income from operations 2,792 4,844 4,973 3,810
Net income 1,176 2,388 2,503 1,489
Earnings per share 0.14 0.28 0.30 0.18
(a) Results for the fourth quarter of 1999 include a restructuring charge of $11,400 ($7,500 after tax or $0.90 per share).
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
Page 34 of 40
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information concerning the directors of the Company is incorporated by
reference to the section entitled "Election of Directors" in the Company's Proxy
Statement for its Annual Meeting of Shareholders to be held on May 18, 2000.
Information concerning executive officers of the Company who are not
also directors is presented in Item 4.1, Part I of this Report on Form 10-K.
Item 11. Executive Compensation.
Incorporated by reference to the section entitled "Executive
Compensation and Transactions" in the Company's Proxy Statement for its Annual
Meeting of Shareholders to be held on May 18, 2000.
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 18, 2000.
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 18, 2000.
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules
and Reports on Form 8-K.
(a)(1) Consolidated Financial Statements. The consolidated financial
statements of the Company and related documents are listed in Item 8, Part II,
of this Report on Form 10-K.
Report of Independent Public Accountants
Consolidated Statements of Income for the years ended December 25,
1999, December 26, 1998 and December 27, 1997
Consolidated Balance Sheets as of December 25, 1999 and
December 26, 1998
Consolidated Statements of Shareholders' Equity for the years ended
December 25, 1999, December 26, 1998 and December 27, 1997.
Consolidated Statements of Cash Flows for the years ended December
25, 1999, December 26, 1998 and December 27, 1997.
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........................................................ 39
Schedule II - Valuation and Qualifying Accounts................. 40
Page 35 of 40
(a)(3) Exhibits.
Number Title
3.1 (1) Amended and Restated Articles of Incorporation of the Company.
3.2 (1) Bylaws of the Company.
4.1 (1) Specimen Common Stock Certificate of the Company.
4.2 (1) Shareholders' Agreement, dated September 17, 1990.
4.2.1 (2) Amendment to Shareholders' Agreement, dated December 29, 1992,
amending 4.2.
4.2.2 (3) Amendment to Shareholders' Agreement, dated September 14, 1993,
amending 4.2.
4.2.3 (4) Amendment to Shareholders' Agreement, dated March 14, 1994,
amending 4.2.
10.1 (1) Lease, dated December 1, 1990, between the Company and the
Berman Real Estate Partnership, for premises located at 3400 East
Walnut Street, Colmar, Pennsylvania.
10.1.1 (3) Amendment to Lease, dated September 10, 1993, between the
Company and the Berman Real Estate Partnership, for premises
located at 3400 East Walnut Street, Colmar, Pennsylvania, amending
10.3.
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 10.3.
10.2 (1) Lease, dated January 3, 1990, between the Company and the
Berman Real Estate Partnership, for premises located at 390 Old
Bremen Road, Carrollton, Georgia.
10.2.1 (3) Amendment to Lease, dated September 10, 1993, between the
Company and the Berman Real Estate Partnership, for premises
located at 390 Old Bremen Road, Carrollton, Georgia, amending
10.4.
10.2.2 (4) Amendment to Lease, dated February 17, 1994, between the
Company and the Berman Real Estate Partnership, for premises
located at 390 Old Bremen Road, Carrollton, Georgia, amending
10.4.
10.3 (6)+ R&B, Inc. Amended and Restated Incentive Stock Plan.
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)
24 Consent of Arthur Andersen LLP (filed with this report)
27 Financial Data Schedule (filed with this report)
- -------------------------
+ Management Contracts and Compensatory Plans, Contracts or Arrangements.
Page 36 of 40
(1) Incorporated by reference to the Exhibits filed with the Company's
Registration Statement on Form S-1 and Amendments No. 1, No. 2, and No.3 thereto
(Registration No. 33-37264).
(2) Incorporated by reference to the Exhibits files with the Company's Annual
Report on Form 10-K for the fiscal year ended December 26, 1992.
(3) Incorporated by reference to the Exhibits filed with the Company's
Registration Statement on Form S-1 and Amendment No. 1 thereto (Registration No.
33-68740).
(4) Incorporated by reference to the Exhibits filed with the Company's Annual
Report on Form 10-K for the fiscal year ended December 25, 1993.
(5) Incorporated by reference to the Exhibits filed with the Company's Annual
Report on Form 10-K for the fiscal year ended December 28, 1996.
(6) Incorporated by reference to the Exhibits filed with the Company's
Proxy Statement for the fiscal year ended December 27, 1997.
(7) Incorporated by reference to the Exhibits filed with the Company's Quarterly
Report on Form 10-Q for the quarter ended June 25, 1994.
(b) Reports on Form 8-K.
None
Page 37 of 40
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 24, 2000 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 24 , 2000
- ---------------------- Officer, and Chairman of the
Richard N. Berman Board of Directors
(principal executive officer)
\s\ Mathias J. Barton Chief Financial Officer March 24, 2000
- ---------------------- (principal financial and
Mathias J. Barton accounting officer)
\s\ Steven L. Berman Executive Vice President, March 24, 2000
-------------------- Secretary-Treasurer, and
Steven L. Berman Director
\s\ George L. Bernstein Director March 24, 2000
- ------------------------
George L. Bernstein
\s\ John F. Creamer, Jr. Director March 24, 2000
- -------------------------
John F. Creamer, Jr.
\s\ Paul R. Lederer Director March 24, 2000
-------------------
Paul R. Lederer
\s\ Edgar W. Levin Director March 24, 2000
- --------------------
Edgar W. Levin
Director March 24, 2000
- ---------------------
Jack A. Robinson
Page 38 of 40
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 financial statements of R&B, Inc. and subsidiaries included
in this Form 10-K and have issued our report thereon dated March 22, 2000. Our
audit was made for the purpose of forming an opinion on the 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
financial statements. This schedule has been subjected to the audit procedures
applied in the audits of the basic 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 financial statements taken as a whole.
Arthur Andersen LLP
Philadelphia, PA
March 24, 2000
Page 39 of 40
SCHEDULE II
(in thousands) For the Year Ended
- -------------------------------------- ----------------------------------------------------
December 25, December 26, December 27,
1999 1998 1997
----------------- ----------------- ----------------
Allowance for doubtful accounts:
Balance, beginning of period $ 1,439 $ 1,009 $ 962
Provision 1,058 649 417
Charge-offs (1,719) (219) (370)
- -------------------------------------- ----------------- ----------------- ----------------
Balance, end of period $ 778 $ 1,439 $ 1,009
====================================== ================= ================= ================
Allowance for customer credits:
Balance, beginning of period $ 8,276 $ 6,205 $10,343
Provision 32,928 26,039 23,268
Charge-offs (33,218) (23,968) (27,406)
- -------------------------------------- ----------------- ----------------- ----------------
Balance, end of period $ 7,986 $ 8,276 $ 6,205
====================================== ================= ================= ================
Restructuring reserves:
Balance, beginning of period $ - $ - $ -
Provision 11,400 - -
Charge-offs (424) - -
- -------------------------------------- ----------------- ----------------- ----------------
Balance, end of period $10,976 $ - $ -
====================================== ================= ================= ================
Page 40 of 40