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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 27, 2003
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. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |_| No |X|
As of March 12, 2004 the Registrant had 8,811,190 common shares, $.01 par value,
outstanding, and the aggregate market value of voting stock held by
non-affiliates of the Registrant was $84,061,138.
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 20,
2004.
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R & B, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
DECEMBER 27, 2003
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. . . . . . . . . . . . . . . . . . . 7
Employees. . . . . . . . . . . . . . . . . . . . . . . . 8
Risk Factors. . . . . . . . . . . . . . . . . . . . . . 8
Available Information . . . . . . . . . . . . . . . . . 9
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 10
Item 4. Submission of Matters to a Vote of Security Holders. . . . . 10
Item 4.1 Certain Executive Officers of the Registrant. . . . . . . .. 10
Part II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters. .. . . .. . . . . . . . . . . . . 11
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . 12
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition. . . . . . . . . . . 13
Item 8. Consolidated Financial Statements and Supplementary Data. ... 20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.. . . . . . . . . . . 38
Item 9A Controls and Procedures. . . . . . . . . . . . . . . . . . . . 39
Part III
Item 10. Directors and Executive Officers of the Registrant. . . . . . 39
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . 40
Item 12. Security Ownership of Certain Beneficial
Owners and Management. . . . . . . . . . . . . . . . . . . 40
Item 13. Certain Relationships and Related Transactions. . . . . . . . 40
Item 14. Principal Accountant Fees and Services . . . . . . . . . . . . 41
Part IV
Item 15. Exhibits, Financial Statement Schedules and
Reports on Form 8-K. . . . . . . . . . . . . . . . . . . 41
Signatures. . . . . . . . . . . . . . . . . . . . . . . 44
Report of Independent Public Accountants on
Financial Statement Schedule. . . . . . . . . . . . . 45
Financial Statement Schedule. . . . . . . . . . . . . . . 46
Page 2 of 46
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 original equipment dealer
"exclusive" automotive replacement parts, fasteners and service line products
primarily for the automotive aftermarket, a market segment which it helped to
establish. The Company designs, packages and markets over 70,000 different
automotive replacement parts, fasteners and service line products manufactured
to its specifications, with approximately 35% consisting of original equipment
dealer "exclusive" parts and fasteners. Original equipment dealer "exclusive"
parts are those which were traditionally available to consumers only from
original equipment manufacturers or salvage yards and include, among other
parts, intake manifolds, exhaust manifolds, oil cooler lines, window regulators,
radiator fan assemblies, power steering pulleys and harmonic balancers.
Fasteners include such items as oil drain plugs and wheel lug nuts.
Approximately 90% of the Company's products are sold under its brand names and
the remainder are sold for resale under customers' private labels, other brands
or in bulk. The Company's products are sold primarily in the United States
through automotive aftermarket retailers (such as AutoZone, Advance and
O'Reilly), national, regional and local warehouse distributors (such as Carquest
and NAPA) and specialty markets including parts manufacturers for resale under
their own private labels (such as Federal Mogul) and salvage yards. Through its
Scan-Tech subsidiary, the Company is increasing its international distribution
of automotive replacement parts, with sales into Europe, the Middle East and the
Far East.
The Automotive Aftermarket
The automotive replacement parts market is made up of two components:
parts for passenger cars and light trucks, which accounted for sales of
approximately $183 billion in 2003, and parts for heavy duty trucks, which
accounted for sales of approximately $63 billion in 2003. The Company currently
markets products primarily for passenger cars and light trucks.
Two distinct groups of end-users buy replacement automotive parts: (i)
individual consumers, who purchase parts to perform "do-it-yourself" repairs on
their own vehicles; and (ii) professional installers, which include automotive
repair shops and the service departments of automobile dealers. The individual
consumer market is typically supplied through retailers and through the retail
arms of warehouse distributors. Automotive repair shops generally purchase parts
through local independent parts wholesalers and through national warehouse
distributors. Automobile dealer service departments generally obtain parts
through the distribution systems of automobile manufacturers and specialized
national and regional warehouse distributors.
The increasing complexity of automobiles and the number of different
makes and models of automobiles have resulted in a significant increase in the
number of products required to service the domestic and foreign automotive
fleet. Accordingly, the number of parts required to be carried by retailers and
wholesale distributors has increased substantially. These pressures to include
more products in inventory and the significant consolidation among distributors
of automotive replacement parts have in turn resulted in larger distributors.
Retailers and others who purchase aftermarket automotive repair and
replacement parts for resale are con strained to a finite amount of space in
which to display and stock products. Thus, the reputation for quality, customer
service and line profitability which a supplier enjoys is a significant factor
in a purchaser's decision as to which product lines to carry in the limited
space available. Further, because of the efficiencies achieved through the
ability to order all or part of a complete line of products from one supplier
(with possible volume discounts), as opposed to satisfying the
Page 3 of 46
same requirements through a variety of different sources, retailers and other
purchasers of automotive parts seek to purchase products from fewer but stronger
suppliers.
Products
The Company sells over 70,000 different automotive replacement parts,
fasteners and service line products to meet a variety of needs, including
original equipment dealer "exclusive" parts sold under the Motormite(R) family
of brands such as the HELP!(R) brand name, a comprehensive array of automotive
and hardware fasteners sold under the Dorman(R) and Pik-A-Nut(R) family of brand
names, service line products sold under the Champ(R) family of brand names and
traditional automotive replacement parts sold under the Company's other brand
names as well as under customers' private label brands. Approximately 90% of the
Company's revenues are derived from products sold under its more than seventy
brand names.
Motormite(R) - brand names within the Motormite(R) master brand represent many
of the Company's original equipment dealer "exclusive" parts, including, among
others, the following:
* HELP!(R) - An extensive array of replacement parts,
including window handles, knobs and switches, door
handles, interior trim parts, headlamp aiming
screws and retainer rings, radiator parts, battery
hold-down bolts, valve train parts and power
steering filler caps
* Conduct-Tite!(R) - Electrical connectors
* Mighty Flow!(R) - Air intake, carburetor preheater and defroster
duct hoses
* Look!(R) - Sideview mirror glass
* Speedi-Boot!TM - Constant velocity joint boots and clamps
Dorman(R) - brand names within the Dorman(R) master brand represent the
Company's automotive fasteners, original equipment dealer "exclusive" parts and
traditional replacement parts, including, among others, the following:
* Oil-Tite!(R) - Oil drain plugs and gaskets
* OE Solutions TM - Original equipment dealer "exclusive" parts,
such as intake manifolds,
exhaust manifolds, oil cooler lines, window
regulators, harmonic balances and radiator fan
assemblies
* Gear-Up!(R) - Flywheels, ring gears and flex plates
* Quick-Disconnect TM - Transmission, cooling system and fuel system
connectors
* Uni-Fit TM - Constant velocity joint boots and clamps
Champ(R) - brand names within the Champ(R) master brand represent the Company's
automotive shop supplies and accessories, including, among others, the
following:
* Metal Work!TM - A program of metal-working related
categories, including welding supplies and
accessories, cutting equipment and supplies,
abrasives and related tools and brushes for hand
and power applications
Page 4 of 46
Pik-A-Nut(R) - the Pik-A-Nut (R) brand represents the Company's fasteners for
automotive retail, specialty automotive and mass merchant markets
Platinum Parts TM - the Platinum Parts TM brand represents the Company's
automotive replacement parts and supplies for salvage yards
Brakeware(R) and Tru-Torque(R) - these brands represent the Company's hydraulic
brake parts, including wheel cylinders and related hardware
Scan-Tech TM - the Scan-Tech TM brand represents the Company's automotive
replacements parts sold internationally, and relate primarily to replacement
parts for Volvo and Saab cars and Scania trucks
The remainder of the Company's revenues are generated by the sale of
parts packaged by the Company, or others, for sale in bulk or under the private
labels of parts manufacturers (such as Federal Mogul) and national warehouse
distributors (such as Carquest and NAPA). During the years ended December 2003,
2002 and 2001, no single product or related group of products accounted for more
than 10% of gross sales.
Product Development
Product development is central to the Company's business. The
development of a broad range of products, many of which are not conveniently or
economically available elsewhere, has in part, enabled the Company to grow to
its present size and is important to its future growth. In developing its
products, the Company's strategy has been to design and package its parts so as
to make them better and easier to install and/or use than the original parts
they replace and to sell automotive parts for the broadest possible range of
uses. Through careful evaluation, exacting design and precise tooling, the
Company is frequently able to offer products which fit a broader range of makes
and models than the original equipment parts they replace, such as an innovative
neoprene replacement oil drain plug which fits not only a variety of Chevrolet
models, but also Fords, Chryslers and a range of foreign makes. This assists
retailers and other purchasers in maximizing the productivity of the limited
space available for each class of part sold. Further, where possible, the
Company improves its parts so they are better than the parts they replace. Thus,
many of the Company's products are simpler to install or use, such as a
replacement "split boot" for a constant velocity joint that can be installed
without disassembling the joint itself and a replacement spare tire hold-down
bolt that is longer and easier to thread than the original equipment bolt it
replaced. In addition, the Company often packages different items in complete
kits to ease installation.
Ideas for expansion of the Company's product lines arise through a
variety of sources. The Company maintains an in-house product management staff
that routinely generates ideas for new parts and expansion of existing lines.
Fur ther, the Company maintains an "800" telephone number and an Internet site
for "New Product Suggestions" and receives, either directly or through its sales
force, many ideas from the Company's customers as to which types of presently
unavailable parts the ultimate consumers are seeking.
Each new product idea is reviewed by the Company's product management
staff, as well as by members of the production, sales, finance, marketing and
administrative staffs. In determining whether to produce an individual part or a
line of related parts, the Company considers the number of vehicles of a
particular model to which the part may be applied, the potential for
modifications which will allow the product to be used over a broad range of
makes and models, the average age of the vehicles in which the part would be
used and the failure rate of the part in question. This review process winnows
the many new product suggestions to those most likely to enhance the Company's
existing product lines or to support new product lines.
Page 5 of 46
Sales and Marketing
The Company markets its parts to three groups of purchasers who in turn
supply individual consumers and professional installers:
(i) Approximately 45% of the Company's revenues are generated
from sales to automotive aftermarket retailers (such as AutoZone,
Advance and O'Reilly), local independent parts wholesalers and national
general merchandise chain retailers. The Company sells some of its
products to virtually all major chains of automotive aftermarket
retailers;
(ii) Approximately 25% of the Company's revenues are generated
from sales to warehouse distributors (such as Carquest and NAPA), which
may be local, regional or national in scope, and which may also engage
in retail sales; and
(iii) The balance of the Company's revenues are generated from
international sales and sales to special markets, which include, among
others, mass merchants (such as Wal-Mart), salvage yards and the parts
distribution systems of parts manufacturers.
The Company utilizes a number of different methods to sell its products.
The Company's more than 25 person direct sales force solicits purchases of the
Company's products directly from customers, as well as managing the activities
of 15 independent manufacturer's representative agencies. The Company uses
independent manufacturer's representative to help service existing retail and
warehouse distribution customers, providing frequent on-site contact. The sales
focus is designed to increase sales by adding new product lines and expanding
product selection within existing customers and secure new customers. For
certain of its major customers, and its private label purchasers, the Company
relies primarily upon the direct efforts of its sales force, who, together with
the marketing department and the Company's executive officers, coordinate the
more complex pricing and ordering requirements of these accounts.
The Company's sales efforts are not directed merely at selling
individual products, but rather more broadly towards selling groups of related
products that can be displayed on attractive Company-designed display systems,
thereby maximizing each customer's ability to present the Company's product line
within the confines of the available area.
The Company prepares a number of catalogs, application guides and
training materials designed to describe the Company's products and other
applications as well as to train the customers' salesmen in the promotion and
sale of the Company's products. Every two to three years the Company prepares a
new master catalog which lists all of its products. The catalog is updated
periodically through supplements.
The Company currently services more than 2,500 active accounts. During
2003 and 2002, two customers (AutoZone and Advance) each accounted for more than
10% of net sales and in the aggregate accounted for 31% and 36% of net sales,
respectively. In 2001, one customer (AutoZone) accounted for approximately 24%
of net sales.
Manufacturing
Substantially all of the products sold by the Company are manufactured
to its specifications by third parties. Because numerous contract manufacturers
are available to manufacture its products, the Company is not dependent upon the
services of any one contract manufacturer or any small group of them. No one
vendor supplies 10% or more of the Company's products. In 2003, as a percentage
of the total dollar volume of purchases made by the Company, approximately 40%
of the Company's products were purchased from various suppliers throughout the
United States and the balance of the Company's products were purchased directly
from a variety of foreign countries.
Page 6 of 46
Once a new product has been developed, the Company's engineering
department produces detailed engineering drawings and prototypes which are used
to solicit bids for manufacture from a variety of vendors in the United States
and abroad. After a vendor is selected, tooling for a production run is produced
by the vendor at the Company's expense. A pilot run of the product is produced
and subjected to rigorous testing by the Company's engineering department and,
on occasion, by outside testing laboratories and facilities in order to evaluate
the precision of manufacture and the resiliency and structural integrity of the
materials used. If acceptable, the product then moves into full production.
Packaging, Inventory and Shipping
Finished products are received at one or more of the Company's
facilities, depending on the type of part. Samples of each shipment are tested
upon receipt. If cleared, these shipments of finished parts are logged into the
Company's computerized production tracking systems and staged for packaging.
The Company employs a variety of custom-designed packaging machines for
"blister packaging," in which individual parts are dropped into plastic
"blister" cups to which a preprinted card backing with appropriate graphics is
sealed, and for "skinning," in which parts are pre-positioned on a printed card
backing, over which a malleable plastic "skin" is laid and fixed by vacuum- and
heat-treatment processes. In either event, the printed card contains the
Company's label (or a private label), a part number, a universal packaging bar
code suitable for electronic scanning, a description of the part and appropriate
installation instructions. Products are also sold in bulk to automotive parts
manufacturers and packagers. Computerized tracking systems, mechanical counting
devices and experienced workers combine to assure that the proper variety and
number of parts meet the correct packaging and backing materials at the
appropriate places and times to produce the required quantities of finished
products.
Completed inventory is stocked in the warehouse portions of the
Company's facilities and is organized according to historical popularity in
order to aid in retrieval for shipping. The Company strives to maintain a level
of inventory to adequately meet current customer order demand with additional
inventory to satisfy new customer orders and special programs. In the aggregate,
this has resulted in approximately a one month supply of its products, packaged
and readily available for shipment, and a two month supply of product in
finished bulk form ready for packaging.
The Company ships its products from all of its locations, either by
contract carrier, common carrier or parcel service. Products are generally
shipped to the customer's central warehouse for redistribution within their
network. In certain circumstances, at the request of the customer, the Company
ships directly to the customer's stores.
Competition
The replacement automotive parts industry is highly competitive. Various
competitive factors affecting the automotive aftermarket are price, product
quality, breadth of product line, range of applications and customer service.
Substantially all of the Company's products are subject to competition with
similar products manufactured by other manufacturers of aftermarket automotive
repair and replacement parts. Some of these competitors are divisions and
subsidiaries of companies much larger than the Company, and possess a longer
history of operations and greater financial and other resources than the
Company. Further, some of the Company's private label customers also compete
with the Company.
Proprietary Rights
While the Company takes steps to register its trademarks when possible,
it does not believe that trademark registration is generally important to its
business. Similarly, while the Company actively seeks patent protection for the
products and improvements which it develops, it does not believe that patent
protection is generally important to its business.
Page 7 of 46
Employees
At December 27, 2003, the Company had 883 employees, of whom 853 were
employed full-time and 30 were employed part-time. Of these employees, 589 were
engaged in production, inventory, or quality control, 60 were involved in
product development and brand management, 71 were employed in sales and order
entry, and the remaining 163, including the Company's 7 executive officers, were
devoted to administration, finance and strategic planning.
No domestic employees are covered by any collective bargaining
agreement. Approximately 30 employees at the Company's Swedish subsidiary are
governed by a national union. The Company considers its relations with its
employees to be generally good.
Risk Factors
Increasing Service Life. Advancing technology and competitive pressures
have compelled original equipment automobile and parts manufacturers to use
parts with longer service lives, which are covered by longer and more
comprehensive warranties. This may have the effect of reducing demand for the
Company's products by delaying the onset of repair conditions requiring their
use.
Competition for Shelf Space. Since the amount of space available to a
retailer and other purchasers of the Company's products is limited, the
Company's products compete with other automotive aftermarket products, some of
which are entirely dissimilar and otherwise non-competitive (such as car waxes
and engine oil), for shelf and floor space. No assurance can be given that
additional space will be available in a customers' stores to support expansion
of the number of products offered by the Company.
Concentration of Sales to Certain Customers. A significant percentage of
the Company's sales have been, and will continue to be, concentrated among a
relatively small number of customers. During 2003 and 2002, two customers
(AutoZone and Advance) each accounted for more than 10% of net sales and in the
aggregate accounted for 31% and 36% of net sales, respectively. In 2001, one
customer (AutoZone) accounted for approximately 24% of net sales. The Company
anticipates that this concentration of sales among customers will continue in
the future. The loss of a significant customer or a substantial decrease in
sales to such a customer could have a material adverse effect on the Company's
sales and operating results. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition" and "Business-Sales and
Marketing."
Concentrations of Credit Risk. Financial instruments that potentially
subject the Company to concentrations of credit risk consists primarily of cash
and cash equivalents, short-term investments, and accounts receivable. All cash
equivalents and short-term investments are managed within established guidelines
which limit the amount which may be invested with one issuer. A significant
percentage of the Company's accounts receivable have been, and will continue to
be concentrated among a relatively small number of automotive retailers and
warehouse distributors in the United States. The Company's five largest
customers accounted for 70% and 73% of total accounts receivable as of December
27, 2003 and December 28, 2002, respectively. Management continually monitors
the credit terms and credit limits to these and other customers.
Customer Terms. The automotive aftermarket has been consolidating over
the past several years. As a result, many of the Company's customers have grown
larger and therefore have more leverage in negotiations with the Company.
Recently, customers have pressed for extended payment terms and returns of slow
moving product when negotiating with the Company. While the Company does its
best to avoid such concessions, in some cases payment terms to customers have
been extended and returns of product have exceeded historical levels. The
product returns primarily affect the Company's profit levels while terms
extensions generally reduce operating cash flow and require additional capital
to finance the business. Management expects both of these trends to continue for
the foreseeable future.
Page 8 of 46
Foreign Currency Fluctuations. In 2003, approximately 60% of the
Company's products were purchased from a variety of foreign countries. The
products generally are purchased through purchase orders with the purchase price
specified in U.S. dollars. Accordingly, the Company does not have exposure to
fluctuations in the relationship between the dollar and various foreign
currencies between the time of execution of the purchase order and payment for
the product. However, the recent weakness in the dollar has resulted in pressure
from several foreign suppliers to increase prices. To the extent that the dollar
decreases in value to foreign currencies in the future or the present weakness
in the dollar continues for a sustained period of time, the price of the product
in dollars for new purchase orders may increase.
The Company makes significant purchases of product from Chinese vendors.
The Chinese Yuan exchange rate has been fixed against the U.S. Dollar since
1998. Recently, the Chinese government has been under increasing pressure to
revalue its currency, or to make its exchange rate more flexible. Most experts
believe that the value of the Yuan would increase relative to the U.S. Dollar if
it was revalued or allowed to float. Such a move would most likely result in an
increase in the cost of products that are purchased from China.
Dependence on Senior Management. The success of the Company's business
will continue to be dependent upon Richard N. Berman, Chairman of the Board,
President and Chief Executive Officer and Steven L. Berman, Executive Vice
President, Secretary-Treasurer and Director. The loss of the services of one or
both of these individuals could have a material adverse effect on the Company's
business.
Dividend Policy. The Company does not intend to pay cash dividends for
the foreseeable future. Rather, the Company intends to retain its earnings, if
any, for the operation and expansion of the Company's business.
Control by Officers, Directors and Family Members. Richard N. Berman and
Steven L. Berman, who are officers and directors of the Company, their father,
Jordan S. Berman, and their brothers, Marc H. Berman and Fred B. Berman,
beneficially own approximately 51% of the outstanding Common Stock and are able
to elect the Board of Directors, determine the outcome of most corporate actions
requiring shareholder approval (including certain fundamental transactions) and
control the policies of the Company.
Available Information
Our internet address is www.rbinc.com. We make available free of charge
on our web site our annual report on Form 10-K, quarterly reports on Form 10-Q
and current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the SEC. In addition, we will provide, at no cost, paper or
electronic copies of our reports and other filings made with the SEC. Requests
should be directed to: R&B, Inc. - Office of General Counsel, 3400 East Walnut
Street, Colmar, Pennsylvania 18915.
The information on the website listed above, is not and should not be
considered part of this annual report on Form 10-K and is not incorporated by
reference in this document. This website is, and is only intended to be, an
inactive textual reference.
Page 9 of 46
Item 2. Properties.
Facilities
The Company currently has 10 warehouse and office facilities located throughout
the United States, Sweden, China and Korea. Three of these facilities are owned
and the remainder are leased. The Company's headquarters and principal warehouse
facilities are as follows:
Location Description
------------------- -------------------------------------------------
Colmar, PA Warehouse and office - 334,000 sq. ft. (leased) (1)
Warsaw, KY Warehouse and office - 326,000 sq. ft. (owned)
Louisiana, MO Warehouse and office - 90,000 sq. ft. (owned)
Baltimore, MD Warehouse and office - 83,000 sq. ft. (leased)
In the opinion of management, the Company's existing facilities are in good
condition.
- -----------------
(1) Leased by the Company from a partnership of which Richard N. Berman,
President and Chief Executive Officer of the Company, and Steven L. Berman,
Executive Vice President of the Company, their father, Jordan S. Berman, and
their brothers, Marc H. Berman and Fred B. Berman, are partners. Under the lease
the Company paid rent of $3.56 per square foot ($1.2 million per year) in 2003.
The rents payable will be adjusted on January 1 of each year to reflect annual
changes in the Consumer Price Index for All Urban Consumers - U.S. City Average,
All Items. In 2002, the lease term was extended and will expire on December 31,
2007. In the opinion of management, the terms of this lease are no less
favorable than those which could have been obtained from an unaffiliated party.
Item 3. Legal Proceedings.
In addition to commitments and obligations which arise in the ordinary
course of business, the Company is subject to various claims and legal actions
from time to time involving contracts, competitive practices, trademark rights,
product liability claims and other matters arising out of the conduct of the
Company's business. In the opinion of management, none of the actions,
individually or in the aggregate, would likely have a material financial impact
on the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of the security holders of the
Company during the fourth quarter of fiscal year 2003.
Item 4.1 Certain Executive Officers of the Registrant.
The following table sets forth certain information with respect to the
executive officers of the Company:
Name Age Position with the Company
- ----------------- ---- ----------------------------------------------
Mathias J. Barton 44 Senior Vice President, Chief Financial Officer
Richard N. Berman 47 President, Chief Executive Officer, Chairman of
the Board of Directors, and Director
Steven L. Berman 44 Executive Vice President, Secretary-Treasurer,
and Director
Edward L. Dean 47 Senior Vice President, Marketing
Page 10 of 46
Fred V. Frigo 47 Senior Vice President, Operations
Steven A. Kirchner 46 Senior Vice President, Sales
Barry D. Myers 44 Senior Vice President, General Counsel and
Assistant Secretary
Mathias J. Barton joined the Company in November 1999 as Senior Vice
President, Chief Financial Officer. Prior to joining the Company Mr. Barton was
Senior Vice President and Chief Financial Officer of Central Sprinkler
Corporation, a manufacturer and distributor of automatic fire sprinklers, valves
and component parts. From May 1989 to September 1998, Mr. Barton was employed by
Rapidforms, Inc., most recently as Executive Vice President and Chief Financial
Officer. He is a graduate of Temple University.
Richard N. Berman has been President, Chief Executive Officer and a
Director of the Company since its incep tion in October 1978. He is a graduate
of the University of Pennsylvania.
Steven L. Berman has been Executive Vice-President, Secretary-Treasurer
and a Director of the Company since its inception. He attended Temple
University.
Edward L. Dean joined the Company in November 1997 as Vice President,
Marketing and was named Senior Vice President, Marketing in December 1999. Prior
to joining the Company Mr. Dean was the Vice President of Sales with Angelo
Brothers Company from May of 1989 to November of 1997. Angelo is a leading
supplier of light bulbs and lighting products to the electrical distributor and
home center markets. He is a graduate of Cincinnati Technical College.
Fred V. Frigo joined the Company in March 1997 as Director, Operations
and was named Senior Vice President, Operations in September 2003. Prior to
joining the Company, Mr. Frigo was the Plant Manager for Cooper Industries
(Federal Mogul), where he was responsible for their Wagner Brake Plant in Boston
and following that the Wagner Lighting Operations in Boyertown Pennsylvania. He
is a graduate of Elmhurst College.
Steven A. Kirchner joined the Company in June 2003 as Vice President,
Sales and was named Senior Vice President, Sales and Trade Marketing in December
2003. Prior to joining the Company Mr. Kirchner spent over twenty years with The
Valvoline Company in various management positions, including Senior Vice
President Worldwide Marketing.
Barry D. Myers has been an employee of the Company since March 1988, and
was Vice President, General Counsel and Assistant Secretary for more than five
years. In December 1999, Mr. Myers was named Senior Vice President, General
Counsel and Assistant Secretary. He is a graduate of Moravian College and
Syracuse University College of Law, and is a member of the Pennsylvania Bar.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
The Company's shares of common stock are traded publicly in the
over-the-counter market under the NASDAQ system. At March 12, 2004 there were
140 holders of record of common stock, representing more than 1,500 beneficial
owners. The last price for the Company's common stock on March 12, 2004, as
reported by NASDAQ, was $18.799 per share. Since the Company's initial public
offering, it has paid no cash dividends. The Company does not presently
Page 11 of 46
contemplate paying any such dividends in the foreseeable future. The range of
high and low sales prices for the Company's common stock for each quarterly
period of 2003 and 2002 are as follows:
2003 2002
----------------------- -----------------------
High Low High Low
- ------------------ ---------- ------------ ---------- ------------
First Quarter $10.42 $8.84 $8.90 $6.65
Second Quarter 11.24 9.65 10.36 6.50
Third Quarter 14.00 10.55 10.00 8.10
Fourth Quarter 15.09 12.55 10.10 8.15
Item 6. Selected Financial Data.
Selected Consolidated Financial Data
Year Ended December
-------------------------------------------------------------------------
(in thousands, except per share data2003 2002(a) 2001 2000 (b) 1999(c)
- ----------------------------- -------------- ------------ -------------- --------------- -------------
Statement of Operations Data:
Net sales $222,083 $215,524 $201,668 $201,390 $236,689
Income from operations (d) 24,052 23,133 12,266 12,308 1,633
Net income (loss) (d) 13,304 12,357 5,229 4,095 (3,602)
Earnings (loss) per share (d):
Basic $1.54 1.46 0.61 0.49 (0.43)
Diluted $1.47 1.38 0.60 0.48 (0.43)
Balance Sheet Data:
Total assets 176,606 170,128 163,163 159,879 188,004
Working capital 98,452 91,340 81,068 83,262 96,612
Long-term debt 35,213 44,218 53,511 65,066 85,283
Shareholders' equity 105,985 89,572 75,162 72,384 68,234
(a) Results for 2002 include a gain on sale of specialty fastener business of
$2,143 ($1,329 after tax or $0.15 per share).
(b) Results for 2000 include non-recurring revenues and gain on sale of product
line of $5,500 and $1,600 ($1,100 after tax or $0.13 per share), respectively.
(c) Results for 1999 include a restructuring charge of $11,400 ($7,500 after tax
or $0.90 per share).
(d) The Company adopted the provisions of SFAS No. 142, "Goodwill and Other
Intangible Assets," at the beginning of fiscal 2002. With the adoption of SFAS
No. 142, goodwill is no longer subject to amortization. The following table
presents certain financial data for fiscal 2002 and all periods prior to fiscal
2002 adjusted to exclude amortization of goodwill and the related tax effects:
Year Ended December
------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
Income from operations $ 24,052 $ 23,133 $ 13,891 $ 13,970 $ 3,320
Net income (loss) $ 13,304 $ 12,357 $ 6,293 $ 5,185 $(2,487)
Diluted earnings per $ 1.47 $ 1.38 $ 0.73 $ 0.61 $ (0.30)
share
Page 12 of 46
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition.
Executive Summary
The Company is a leading supplier of original equipment dealer
"Exclusive" automotive replacement parts, fasteners and service line products to
the automotive aftermarket and household hardware to the general merchandise
markets. The Company's products are marketed under more than seventy proprietary
brand names, through its Motormite, Dorman, Allparts, Scan-Tech, MPI and
Pik-A-Nut businesses.
For the year ended December 27, 2003, sales increased 3% to $222.1
million from $215.5 million in the same period last year. The sales growth was
driven primarily by new product development, which is a key to the Company's
growth strategy. Gross margin improved slightly to 37.0% in 2003 from 36.7% in
2002. Operating expenses remained flat, but declined as a percentage of sales to
26.2%. The improvements in gross margin and operating expenses as a percentage
of sales were driven primarily by cost saving initiatives. As a result, net
income increased to $13.3 million in 2003.
New product development is a critical success factor for the Company. The
Company has invested heavily in resources necessary for it to increase its new
product development efforts and to strengthen its relationships with its
customers. These investments are primarily in the form of increased product
development and awareness programs, customer service improvements and increased
customer credits and allowances. This has enabled the Company to provide an
expanding array of new product offerings and grow its revenues.
The automotive aftermarket has been consolidating over the past several
years. As a result, many of the Company's customers have grown larger and
therefore have more leverage in negotiations with the Company. Recently,
customers have pressed for extended payment terms and returns of slow moving
product when negotiating with the Company. While the Company does its best to
avoid such concessions, in some cases payment terms to customers have been
extended and returns of product have exceeded historical levels. The product
returns primarily affect the Company's profit levels while terms extensions
generally reduce operating cash flow and require additional capital to finance
the business. Management expects both of these trends to continue for the
foreseeable future.
The Company may experience significant fluctuations from quarter to
quarter in its results of operations due to the timing of orders placed by the
Company's customers. Generally, the second and third quarters have the highest
level of customer orders, but the introduction of new products and product lines
to customers may cause significant fluctuations from quarter to quarter.
The Company operates on a fifty-two, fifty-three week period ending on
the last Saturday of the calendar year. The fiscal years ended December 27,
2003, December 28, 2002 and December 29, 2001 were each fifty- two week periods.
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and
results of operations are based upon the consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires management to make estimates and judgments that affect the reported
amounts of assets and liabilities, the disclosure of contingent liabilities and
the reported amounts of revenues and expenses. The Company regularly evaluates
its estimates and judgments, including those related to revenue recognition, bad
debts, customer credits, inventories and goodwill. Estimates and judgments are
based upon historical experience and on various other assumptions believed to be
accurate and reasonable under the circumstances. Actual results may differ
materially from these estimates under different assumptions or conditions. The
Company believes the following critical accounting
Page 13 of 46
policies affect its more significant estimates and judgments used in the
preparation of its consolidated financial statements:
Allowance for Doubtful Accounts. The preparation of the Company's
financial statements requires management to make estimates of the collectability
of its accounts receivable. Management specifically analyzes accounts receivable
and historical bad debts, customer creditworthiness, current economic trends and
changes in customer payment patterns when evaluating the adequacy of the
allowance for doubtful accounts. A significant percentage of the Company's
accounts receivable have been, and will continue to be, concentrated among a
relatively small number of automotive retailers and warehouse distributors in
the United States. The Company's five largest customers accounted for 70% and
73% of total accounts receivable as of December 27, 2003 and December 28, 2002,
respectively. A bankruptcy or financial loss associated with a major customer
could have a material adverse effect on the Company's sales and operating
results. The Company's allowance for doubtful accounts amounted to $1.2 million
and $1.3 million as of December 27, 2003 and December 28, 2002, respectively.
Revenue Recognition and Allowance for Customer Credits. The Company
recognizes revenue for sales to its customers at the time of shipment from the
Company's warehouses. Net sales are calculated by subtracting allowances for
customer credits from gross revenues. Allowances for customer credits include
costs for product returns, discounts and promotional rebates given to customers
who purchase new products for inclusion in their stores, and the cost of
competitors' products that are purchased from the customer in order to induce a
customer to purchase new product lines from the Company. The Company provides
for customer credits and potential returns at the time of sale. Management must
make estimates of the ultimate value of customer credits that will be issued for
future product returns and sales allowances granted to induce customers to
purchase products from the Company. Management analyzes historical returns,
current economic conditions and changes in demand and acceptance of the
Company's products when evaluating the adequacy of its reserves for customer
credits. Management judgements and estimates must be made and used in connection
with establishing reserves for customer credits in any accounting period.
Material differences in the amount and timing of customer credits for any period
may result if management made different judgments or utilized different
estimates for the reserves. Reserves for customer credits were $16.5 million as
of both December 27, 2003 and December 28, 2002.
Excess and Obsolete Inventory Reserves. Management must make estimates
of potential future excess and obsolete inventory costs. The Company provides
reserves for discontinued and excess inventory based upon historical demand,
forecasted usage, estimated customer requirements and product line updates. The
Company maintains contact with its customer base in order to understand buying
patters, customer preferences and the life cycle of its products. Changes in
customer requirements are factored into the reserve needs as needed. During
2001, the Company revised its estimates which resulted in an increased provision
for excess and obsolete inventory of $3.6 million. Reserves for excess and
obsolete inventory were $8.5 million and $9.2 million as of December 27, 2003
and December 28, 2002, respectively.
Goodwill. Effective December 30, 2001, the Company adopted Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets".
SFAS No. 142 requires that goodwill and certain intangible assets resulting from
business combinations entered into prior to June 30, 2001 no longer be
amortized, but instead be reviewed for recoverability, and that annual tests for
impairment of goodwill and intangible assets that have indefinite useful lives
be performed. SFAS No. 142 also requires interim tests when an event has
occurred that more likely than not has reduced the fair value of such assets.
The Company assesses on an annual basis during the fourth quarter of the fiscal
year the fair values of the reporting unit housing the goodwill. These
assessments are based upon management estimates and assumptions about future
operating results, including revenues and earnings. Any write-offs would result
in a charge to earnings and a reduction in equity in the period taken. The
Company has completed the annual impairment review, which did not result in an
impairment charge. Goodwill was $29.1 million and $28.6 million at December 27,
2003 and December 28, 2002, respectively.
Page 14 of 46
Gain on Sale of Specialty Fastener Business and Litigation Settlement
On May 1, 2002, the Company entered into agreements to sell its
specialty fastener business and to settle litigation initiated by the Company in
1996 related to its purchase of the Dorman business. Total proceeds from the
sale and settlement, net of transaction costs and purchase price adjustments
were approximately $7.4 million. The transactions resulted in an after-tax gain
on the sale of the fastener business of $1.3 million, and a reduction in
goodwill totaling $2.2 million.
Results of Operations
The following table sets forth, for the periods indicated, the
percentage of net sales represented by cer tain items in the Company's
Consolidated Statements of Operations.
Percentage of Net Sales
--------------------------------------------------------
Year Ended
--------------------------------------------------------
December 27, December 28, December 29,
2003 2002 2001
- ----------------------------- ------------------ ---------------- -------------------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 63.0 63.3 65.6
- ----------------------------- ------------------ ---------------- -------------------
Gross profit 37.0 36.7 34.4
Selling, general and
administrative expenses 26.2 27.0 28.3
Gain on sale of specialty
fastener business - (1.0) -
- ----------------------------- ------------------ ---------------- -------------------
Income from operations 10.8 10.7 6.1
Interest expense, net 1.5 1.8 2.1
- ----------------------------- ------------------ ---------------- -------------------
Income before taxes 9.3 8.9 4.0
Provision for taxes 3.3 3.2 1.4
- ----------------------------- ------------------ ---------------- -------------------
Net income 6.0% 5.7% 2.6%
============================= ================== ================ ===================
2003 Compared to 2002
Net sales increased 3% to $222.1 million in 2003 from $215.5 million in
2002. This sales increase is all volume related as the Company had no net
selling price increases in 2003. Sales volume in 2003 increased as a result of
several successful new product introductions and shipments to new customers for
the Company's Allparts brake and Pik-A-Nut home hardware businesses. The
favorable effects of foreign currency exchange resulted in a 2% year over year
increase in sales. These sales increases were partially offset by a decline in
sales volume in the Company's Swedish subsidiary due to the weak U.S. dollar. In
addition, fourth quarter 2002 sales benefitted from over $4 million in one-time
sales related to customer inventory builds and 2002 sales included $2.1 million
in revenues from the specialty fastener business prior to its sale in May 2002.
Sales growth for fiscal 2003 after adjusting for foreign exchange, the specialty
fastener sale and the one-time sales described above was 4%.
Cost of goods sold, as a percentage of net sales, declined to 63.0% in
2003 from 63.3% in 2002. The overall decline in cost of goods sold as a
percentage of sales was the net result of three primary factors. First,
production and materials cost reduction initiatives resulted in cost savings
that lowered cost of sales. This benefit
Page 15 of 46
was offset by provisions for customer credits that increased as a percentage of
sales in 2003 as a result of higher customer return levels in 2003 and a sales
mix shift towards more lower-gross margin product sales.
Selling, general and administrative expenses in 2003 were held to $58.2
million, which is the same level of spending as in 2002 despite additional
investments in product development resources, inflationary cost increases and 3%
sales volume growth in 2003. This was achieved through the implementation of a
number of cost saving measures which reduced overhead spending. Costs in 2002
also included $0.7 million in non- recurring net costs associated with the
closure of one of the Company's smaller distribution facilities.
Interest expense, net decreased to $3.4 million in 2003 from $3.9
million in 2002 due to lower borrowing levels in 2002. The primary reason for
the lower borrowing levels in 2003 was a reduction in the outstanding principal
of the Company's 6.81% Senior Notes. In August 2003, the Company made the second
of seven annual installment payments of $8.6 million due under the terms of its
Senior Note Agreements. This installment payment was funded with cash on hand
rather than new debt.
The Company's effective tax rate increased slightly to 35.7% in 2003
from 35.6% in 2002.
2002 Compared to 2001
Net sales increased to $215.5 million in 2002 from $201.7 million in
2001. Revenues from the specialty fastener business sold in May 2002 were $2.1
million and $5.4 million in 2002 and 2001, respectively. Net sales in 2002
increased $17.1 million, or 8.7%, after adjusting for the specialty fastener
business sale. One-time sales related to customer inventory builds accounted for
approximately 25% of the sales growth in 2002. The remainder of the sales
increase was the result of higher levels of product line updates to existing
customers, the introduction of new product lines and continued strong reorder
patterns on recently introduced new products.
Cost of goods sold, as a percentage of sales, declined to 63.3% in 2002
from 65.6% in 2001. The primary reason for this decline was an additional
provision for discontinued and excess inventories of $3.6 million in 2001, which
increased cost of goods sold by 1.8% of sales. The remaining decline in cost of
goods sold as a percentage of sales in 2002 is the result of lower materials and
operating costs achieved through several cost reduction initiatives.
Selling, general and administrative expenses in 2002 increased to $58.2
million from $57.0 million in 2001, an increase of $1.2 million, or 2.1%. The
increase in selling, general and administrative costs was primarily the result
of higher sales volumes and $0.7 million in net costs associated with the
closure of one of the Company's smaller distribution facilities.
Interest expense, net decreased to $3.9 million in 2002 from $4.3
million in 2001 due to lower borrowing levels in 2002. In August 2002, the
Company made the first of seven annual installment payments of $8.6 million due
under the terms of its Senior Note Agreements.
The Company's effective tax rate increased to 35.6% in 2003 from 34.4%
as the gain on the sale of the specialty fastener business is subject to a
higher overall effective tax rate than the Company's operating profits.
Liquidity and Capital Resources
Historically, the Company has financed its growth through a combination
of cash flow from operations and through the issuance of senior indebtedness
through its bank credit facility and senior note agreements. At December 27,
2003, working capital was $98.5 million, total long-term debt (including the
current portion) was $43.8 million and shareholders' equity was $106.0 million.
Cash and short-term investments as of December 27, 2003 totaled $25.1 million.
Page 16 of 46
Over the past two years the Company has extended payment terms to
certain customers as a result of customer requests and market demands. These
extended terms have resulted in increased accounts receivable levels and
significant uses of cash flow. The Company participates in an accounts
receivable factoring program with one customer which allows it to sell its
accounts receivable on a non-recourse basis to a financial institution to offset
the negative cash flow impact of the payment terms extensions it has made to
date. During 2003, the Company sold $2.0 million in accounts receivable pursuant
to this plan. The Company expects continued pressure to extend its payment terms
for the foreseeable future. Further extensions of customer payment terms will
result in additional uses of cash flow or increased interest costs.
In December 2003, the Company announced its intention to add 77,200
square feet in warehouse space to its central distribution center in Warsaw,
Kentucky by July, 2004. The total estimated cost of the addition and fit out of
the warehouse space is expected to be approximately $2.8 million.
Long-term debt consists primarily of $42.9 million in Senior Notes that
were originally issued in August 1998, in a private placement on an unsecured
basis ("Notes"). The Notes bear a 6.81% fixed interest rate, payable quarterly.
Annual principal payments of $8.6 million are due each August through 2008. The
Notes require, among other things, that the Company maintain certain financial
covenants relating to debt to capital ratios and minimum net worth.
In March 2004, the Company amended its Revolving Credit Facility. The
amended facility expires in June 2005. The March 2004 amendment reduced the
total credit facility from $10.0 million to $5.0 million. The size of the
facility was reduced to decrease overall borrowing costs. Borrowings under the
amended facility are on an unsecured basis with interest at LIBOR plus 150 basis
points. The loan agreement also contains covenants, the most restrictive of
which pertain to net worth and the ratio of debt to EBITDA. In addition, the
Company's Swedish subsidiary maintains a short-term $1.8 million credit
facility. As of December 27, 2003, $1.8 million in standby letters of credit
were outstanding under the Revolving Credit Facility. There were no borrowings
under either facility as of December 27, 2003.
The Company amended certain agreements related to its 1998 acquisition
of Scan-Tech USA/Sweden A.B. and related entities ("Scan-Tech") during 2001. As
a result of this transaction, the Company purchased and canceled 250,000 shares
of its common stock issued in connection with the acquisition and canceled the
earn out provisions of the acquisition agreement in exchange for consideration
of $3.2 million to be paid by the Company in installments through December 2005.
The aggregate amount outstanding under this obligation was $0.9 million at
December 27, 2003.
The Company's business activities do not include the use of
unconsolidated special purpose entities, and there are no significant business
transactions that have not been reflected in the accompanying financial
statements.
The Company has future obligations for debt repayments, future minimum
rental and similar commitments under noncancellable operating leases as well as
contingent obligations related to outstanding letter of credit. These
obligations as of December 27, 2003 are summarized in the tables below:
Payments Due by Period
------------------------------------------------------
Less than
Contractual Obligations Total 1 year 1-3 years 4-5 years After 5 years
- ---------------------------------- ------------- ----------- ----------- ----------- ----------------
Long-term borrowings $ 43,784 $ 8,571 $ 26,642 $ 8,571 $ -
Operating leases 8,896 2,430 5,286 1,047 133
Purchase obligations (1) 600 600 - - -
------------- ----------- ----------- ----------- ----------------
$ 53,280 $ 11,601 $ 31,928 $ 9,618 $ 133
============= =========== =========== =========== ================
Page 17 of 46
Amount of Commitment Expiration Per Period
------------------------------------------------------
Total
Amounts Less than
Other Commercial Commitments Committed 1 year 1-3 years 4-5 years Over 5 years
- ---------------------------------- ------------- ----------- ----------- ------------ ---------------
Letters of credit $ 1,800 $ 1,800 $ - $ - $ -
------------- ----------- ----------- ------------ ---------------
$ 1,800 $ 1,800 $ - $ - $ -
============= =========== =========== ============ ===============
(1) Represents capital commitments in connection with the Warsaw, Kentucky
facility expansion.
Operating cash flow amounted to $20.7 million in fiscal 2003,
approximately $15.7 million higher than the $5.1 million in operating cash flow
in 2002. The primary reason for the increase in cash flow in 2003 was accounts
receivable, which generated $4.8 million in cash in 2003, but used $13.3 million
in cash in 2002. As noted above, the Company has extended payment terms to
certain customers over the past two years. Most of the negative cash flow impact
of these terms changes took place in 2002. This, together with a 7% sales
increase in 2002 is the primary reason that accounts receivable required $13.3
million in cash in 2002. Accounts receivable generated $4.8 million in cash in
2003 as the impact of further payment terms extensions during the year were
offset by a change in sales mix and the receipt of $2.0 million in proceeds from
the accounts receivable factoring program discussed above.
Investing activities used $1.5 million of cash in 2003. The Company
purchases highly liquid corporate and government bonds with maturities from
three months to one year to take advantage of higher earnings rates on these
investments. These investments have been classified as short-term investments as
required by generally accepted accounting principles. As a result of this
decision, the Company reported a net source of cash of $4.1 million during the
period. Additions to property, plant and equipment required $5.6 million of cash
in 2003 compared to $3.5 million in 2002. The increase in capital additions in
2003 is primarily the result of a 30,000 square foot addition to the Company's
Allparts brake facility. Other capital expenditures in 2003 included upgrades to
information systems, purchases of equipment designed to improve operational
efficiencies and scheduled equipment replacements.
Financing activities required $9.2 million in cash in 2003. These uses
were primary related to scheduled repayments under capital lease and other debt
obligations, including the second scheduled repayment of $8.6 million on the
Company's Senior Notes made in August 2003.
The Company believes that cash and short-term investments on hand and
cash generated from operations together with its available sources of capital
are sufficient to meet its ongoing cash needs for the foreseeable future.
Outlook
The Company's strategic plan provides for a continued intense focus on
new product development and further expansion of its existing core businesses.
Management anticipates that these efforts will result in compounded annual sales
growth of between 3% and 8% over the next two year period. The Company may
experience significant fluctuations in its results of operations from quarter to
quarter due to the timing of new product introductions and orders placed by its
customers.
Foreign Currency Fluctuations
In 2003, approximately 60% of the Company's products were purchased from
a variety of foreign countries. The products generally are purchased through
purchase orders with the purchase price specified in U.S. dollars. Accordingly,
the Company does not have exposure to fluctuations in the relationship between
the
Page 18 of 46
dollar and various foreign currencies between the time of execution of the
purchase order and payment for the product. However, the recent weakness in the
dollar has resulted in pressure from several foreign suppliers to increase
prices. To the extent that the dollar decreases in value to foreign currencies
in the future or the present weakness in the dollar continues for a sustained
period of time, the price of the product in dollars for new purchase orders may
increase.
The Company makes significant purchases of product from Chinese vendors.
The Chinese Yuan exchange rate has been fixed against the U.S. Dollar since
1998. Recently, the Chinese government has been under increasing pressure to
revalue its currency, or to make its exchange rate more flexible. Most experts
believe that the value of the Yuan would increase relative to the U.S. Dollar if
it was revalued or allowed to float. Such a move would most likely result in an
increase in the cost of products that are purchased from China.
Impact of Inflation
The Company has not generally been adversely affected by inflation,
although recently raw materials pricing pressures have become more evident. The
Company believes that material cost increases could potentially be mitigated by
passing along price increases to customers or through the use of alternative
suppliers or resourcing purchases to other countries.
Recent Accounting Pronouncements
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal of Activities." The statement has been applied
prospectively to exit or disposal activities initiated after December 28, 2002.
The initial adoption of this pronouncement did not have a material effect on the
consolidated statement of operations for the year ended December 27, 2003.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS
123." This statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in APB Opinion No. 25 and related
interpretations. Accordingly, compensation expense for stock options is measured
as the excess, if any, of the estimate of the market value of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock. The Company has adopted the annual disclosure provisions of SFAS No.
148 in its financial reports.
In December 2003, the FASB issued Revised Interpretation No. 46,
"Consolidation of Variable Interest Entities - an interpretation of Account
Research Bulletin No. 51." FIN No. 46 addresses the consolidation by business
enterprises of variable interest entities, as defined in the Interpretation. FIN
No. 46 expands existing accounting guidance regarding when a company should
include in its financial statements the assets, liabilities and activities of
another entity. Since the Company does not have any variable interests in
variable interest entities, the adoption of FIN No. 46 did not have any effect
on the Company's consolidated financial condition or results of operations.
Cautionary Statement Regarding Forward Looking Statements
Certain statements periodically made by or on behalf of the Company and
certain statements contained herein including statements in Management's
Discussion and Analysis of Financial Condition and Results of Operation; certain
statements contained in Business, such as statements regarding litigation; and
certain other statements contained herein regarding matters that are not
historical fact are forward looking statements (as such term is defined in the
Securities Act of 1933), and because such statements involve risks and
uncertainties, actual
Page 19 of 46
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. Short-term fixed income
investments are subject to interest rate and credit risk. The Company believes
that the negative effect of interest rate risk would be minimal as all
investments have maturities of one year or less. The Company's investment
portfolio consists solely of investment grade corporate and government
securities to minimize credit risk.
The Company may occasionally use derivative financial instruments,
consisting of foreign currency forward purchase and sales contracts with terms
of less than one year, to hedge its exposure to changes in foreign currency
exchange. Its primary exposure to changes in foreign currency rates results from
changes in exchange rates on certain third-party trade receivables and payables
of the Company's Swedish subsidiary. There were no forward purchase or sales
contracts outstanding as of December 27, 2003.
Item 8. Financial Statements and Supplementary Data.
The financial statement schedules of the Company that are filed with
this Report on Form 10-K are listed in Item 15(a)(2), Part IV, of this Report.
Page 20 of 46
Independent Auditors' Report
The Board of Directors
R&B, Inc.:
We have audited the accompanying consolidated balance sheets of R&B,
Inc. and subsidiaries as of December 27, 2003 and December 28, 2002 and the
related consolidated statements of operations, shareholders' equity and cash
flows for the fiscal years then ended. In connection with our audits of the
fiscal 2003 and 2002 consolidated financial statements, we also have audited the
fiscal 2003 and 2002 financial statement schedule. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits. The fiscal 2001consolidated financial statements of R&B, Inc. were
audited by other auditors who have ceased operations. Those auditors expressed
an unqualified opinion on those consolidated financial statements in their
report dated February 13, 2002.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the fiscal 2003 and 2002 consolidated financial
statements referred to above present fairly, in all material respects, the
financial position of R&B, Inc. and subsidiaries as of December 27, 2003 and
December 28, 2002, and the results of their operations and their cash flows for
the fiscal years then ended in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the related
fiscal 2003 and 2002 financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
As discussed above, the fiscal 2001 consolidated financial statements of
R&B, Inc. and subsidiaries were audited by other auditors who have ceased
operations. As described in Note 3, these consolidated financial statements have
been revised to include the transitional disclosures required by Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets,
which was adopted by the Company as of December 30, 2001. In our opinion, the
disclosures for fiscal 2001 are appropriate. However, we were not engaged to
audit, review, or apply any procedures to the fiscal 2001 consolidated financial
statements of R&B, Inc. and subsidiaries other than with respect to such
disclosures, and accordingly, we do not express an opinion or any other form of
assurance on the fiscal 2001 consolidated financial statements taken as a whole.
KPMG LLP
Philadelphia, Pennsylvania
February 11, 2004
Page 21 of 46
Report of Independent Public Accountants
To R&B, Inc.:
We have audited the accompanying consolidated balance sheets of R&B, Inc. (a
Pennsylvania corporation) and subsidiaries as of December 29, 2001 and December
30, 2000, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three fiscal years in the period ended
December 29, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of R&B, Inc. and
subsidiaries as of December 29, 2001 and December 30, 2000 and the consolidated
results of their operations and their cash flows for each of the three fiscal
years in the period ended December 29, 2001, in conformity with accounting
principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Philadelphia, Pennsylvania
February 13, 2002
Note: The report above is a copy of a previously issued report and it has not
been reissued by Arthur Andersen LLP (Andersen).
Page 22 of 46
R&B, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended
----------------------------------------------------
December 27, December 28, December 29,
(in thousands, except per share data) 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------
Net Sales $222,083 $215,524 $201,668
Cost of goods sold 139,875 136,321 132,353
- -------------------------------------------------------------------------------------------------------------
Gross profit 82,208 79,203 69,315
Selling, general and administrative expenses 58,156 58,213 57,049
Gain on sale of specialty fastener business - (2,143) -
- -------------------------------------------------------------------------------------------------------------
Income from operations 24,052 23,133 12,266
Interest expense, net of interest income of $198, $411,and $439 3,376 3,931 4,289
- -------------------------------------------------------------------------------------------------------------
Income before income taxes 20,676 19,202 7,977
Income taxes 7,372 6,845 2,748
- -------------------------------------------------------------------------------------------------------------
Net Income $ 13,304 $ 12,357 $ 5,229
=============================================================================================================
Earnings Per Share:
Basic $ 1.54 $ 1.46 $ 0.61
Diluted $ 1.47 $ 1.38 $ 0.60
Weighted Average Shares Outstanding:
Basic 8,647 8,487 8,529
Diluted 9,050 8,948 8,647
=============================================================================================================
See accompanying notes to consolidated financial statements.
Page 23 of 46
R&B, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 27, December 28,
(in thousands, except share data) 2003 2002
- ------------------------------------------------------------------------ --------------- ---------------
Assets
Current Assets:
Cash and cash equivalents $ 15,177 $ 5,169
Short-term investments 9,905 14,002
Accounts receivable, less allowance for doubtful accounts
and customer credits of $17,721 and $17,854 44,127 48,769
Inventories 51,170 47,217
Deferred income taxes 7,493 7,621
Prepaids and other current assets 1,356 1,425
- ------------------------------------------------------------------------ --------------- ---------------
Total current assets 129,228 124,203
- ------------------------------------------------------------------------ --------------- ---------------
Property, Plant and Equipment, net 17,590 16,591
Goodwill 29,125 28,607
Other Assets 663 727
- ------------------------------------------------------------------------ --------------- ---------------
Total $ 176,606 $ 170,128
======================================================================== =============== ===============
Liabilities and Shareholders' Equity
Current Liabilities:
Current portion of long-term debt $ 8,571 $ 9,291
Accounts payable 10,029 11,813
Accrued compensation 7,379 7,304
Other accrued liabilities 4,797 4,455
- ------------------------------------------------------------------------ --------------- ---------------
Total current liabilities 30,776 32,863
Long-Term Debt 35,213 44,218
Deferred Income Taxes 4,632 3,475
Commitments and Contingencies (Note 13)
Shareholders' Equity:
Common stock, par value $.01; authorized 25,000,000 shares;
issued and outstanding 8,762,994 and 8,501,070 shares 88 85
Additional paid-in capital 33,950 32,937
Cumulative translation adjustments 2,148 55
Retained earnings 69,799 56,495
Total shareholders' equity 105,985 89,572
- ------------------------------------------------------------------------ --------------- ---------------
Total $ 176,606 $ 170,128
======================================================================== =============== ===============
See accompanying notes to consolidated financial statements.
Page 24 of 46
R&B, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock
-------------------- Additional Cumulative
Shares Par Paid-In Translation Retained
(in thousands, except share data) Issued Value Capital Adjustments Earnings Total
- ------------------------------------------- ----------------------- ----------- ------------- ---------- ----------
Balance at December 30, 2000 8,481,517 $85 $34,229 $ (839) $38,909 $72,384
Common stock issued to
Employee Stock Purchase Plan 4,106 - 11 - - 11
Common stock issued to 401(k) Retirement Plan 230,859 3 380 - - 383
Compensation expense on stock option issuance - - 297 - - 297
Purchase and cancellation of common stock (3) (2,416) - - (2,419)
(Note 8) (250,000)
Comprehensive Income:
Net income - - - - 5,229 5,229
Currency translation adjustments - - - (723) - (723)
----------
Total comprehensive income 4,506
- ------------------------------------------- ----------- ----------- ----------- ------------- ---------- ----------
Balance at December 29, 2001 8,466,482 85 32,501 (1,562) 44,138 75,162
Common stock issued to
Employee Stock Purchase Plan 1,652 - 12 - - 12
Compensation expense on stock option issuance - - 363 - - 363
Shares issued under Incentive Stock Plan 32,936 - 61 - - 61
Comprehensive Income:
Net income - - - - 12,357 12,357
Currency translation adjustments - - - 1,617 - 1,617
----------
Total comprehensive income 13,974
- ------------------------------------------- ----------- ----------- ----------- ------------- ---------- ----------
Balance at December 28, 2002 8,501,070 85 32,937 55 56,495 89,572
Common stock issued to
Employee Stock Purchase Plan 568 - 5 - - 5
Compensation expense on stock option issuance - - 21 - - 21
Shares issued under Incentive Stock Plan 261,356 3 483 - - 486
Tax benefit of stock option exercises - - 504 - - 504
Comprehensive Income:
Net income - - - - 13,304 13,304
Currency translation adjustments - - - 2,093 - 2,093
----------
Total comprehensive income 15,397
- ------------------------------------------ ----------- ----------- ----------- ------------- ----------- ----------
Balance at December 27, 2003 8,762,994 $88 $33,950 $2,148 $69,799 $105,985
=========================================== =========== =========== =========== ============= ========== ==========
See accompanying notes to consolidated financial statements.
Page 25 of 46
R&B, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended For the Year Ended For the Year Ended
------------------ ------------------- ------------------
December 27, December 28, December 29,
(in thousands) 2003 2002 2001
- --------------------------------------------------- ------------------ ------------------- ------------------
Cash Flows from Operating Activities:
Net income $ 13,304 $ 12,357 $ 5,229
Adjustments to reconcile net income to cash
provided by operating activites:
Depreciation and amortization 4,640 5,560 8,105
Provision for doubtful accounts 504 737 1,118
Provision (benefit) for deferred income tax 1,285 11 (2,751)
Provision for non-cash stock compensation 21 363 297
Gain on sale of specialty fastener business - (1,329) -
Changes in assets and liabilities:
Accounts receivable 4,806 (13,339) (1,676)
Inventories (2,766) (2,351) 5,220
Prepaids and other current assets 173 28 1,279
Other assets (119) 516 1,231
Accounts payable (1,862) 3,101 276
Accrued compensation and other liabilities 757 (593) 3,221
- --------------------------------------------------- ------------------ ------------------- ------------------
Cash provided by operating activities 20,743 5,061 21,549
- --------------------------------------------------- ------------------ ------------------- ------------------
Cash Flows from Investing Activities:
Property, plant and equipment additions (5,598) (3,543) (1,924)
Purchase of short-term investments (11,492) (22,795) -
Proceeds from maturities of short-term investments 15,589 8,793 -
Proceeds from litigation settlement and sale of
specialty fastener business, net - 7,374 -
- --------------------------------------------------- ------------------ ------------------- ------------------
Cash used in investing activities (1,501) (10,171) (1,924)
- --------------------------------------------------- ------------------ ------------------- ------------------
Cash Flows from Financing Activities:
Repayment of long-term debt obligations (9,725) (11,483) (5,883)
Proceeds from common stock issuances 491 73 394
- --------------------------------------------------- ------------------ ------------------- ------------------
Cash used in financing activities (9,234) (11,410) (5,489)
- --------------------------------------------------- ------------------ ------------------- ------------------
Net Increase (Decrease) in Cash and Cash
Equivalents 10,008 (16,520) 14,136
Cash and Cash Equivalents, Beginning of
Year 5,169 21,689 7,553
- --------------------------------------------------- ------------------ ------------------- ------------------
Cash and Cash Equivalents, End of Year $ 15,177 $ 5,169 $ 21,689
=================================================== ================== =================== ==================
Supplemental Cash Flow Information
Cash paid for interest expense $ 3,638 $ 4,356 $ 4,788
Cash paid for income taxes $ 5,572 $ 7,218 $ 4,206
See accompanying notes to consolidated financial statements.
Page 26 of 46
R&B, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 27, 2003
1. Summary of Significant Accounting Policies
R&B, Inc. (the "Company") is a leading supplier of OE Dealer
"Exclusive" automotive replacement parts, automotive hardware and brake products
to the automotive aftermarket and household hardware products to the general
merchandise markets. R&B's products are marketed under more than seventy
proprietary brand names, through its Motormite, Dorman, Allparts, Scan-Tech, MPI
and Pik-A-Nut businesses.
The Company operates on a fifty-two, fifty-three week period ending on
the last Saturday of the calendar year. The fiscal years ended December 27,
2003, December 28, 2002 and December 29, 2001 are each fifty-two week periods.
Principles of Consolidation. The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
material intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates in the Preparation of Financial Statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents. The Company considers all highly liquid debt
instruments with original maturities of three months or less to be cash
equivalents.
Short-term Investments. Short-term investments consist primarily of
corporate and government bonds with maturities of three months to one year from
the date of purchase. Short-term investments are classified as held-to-maturity
and are recorded at amortized cost. As of December 27, 2003, the market value of
these short-term investments approximated the amortized cost.
Sales of Accounts Receivable. During 2003, the Company entered into a
factoring agreement with an unrelated financial institution that permits the
Company to sell, without recourse, certain accounts receivable at discounted
rates to the financial institution. The Company does not retain any servicing
requirements for these accounts receivable. Transactions under this factoring
agreement are accounted for as sales of accounts receivable following the
provisions of Statement of Financial Accounting Standards (SFAS) No. 140,
"Account for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities - a Replacement of FASB Statement 125." At December 27, 2003, $2.0
million of accounts receivable were sold and removed from the consolidated
balance sheet. The loss on the sale of receivables was $36,000.
Inventories. Inventories are stated at the lower of average cost or
market. The Company provides reserves for discontinued and excess inventory
based upon historical demand, forecasted usage, estimated customer requirements
and product line updates. During 2001, the Company revised its estimates which
resulted in an increased provision of $3.6 million.
Property and Depreciation. Property, plant and equipment are recorded
at cost and depreciated over their estimated useful lives, which range from
three to thirty-nine years, using the straight-line method for financial
statement reporting purposes and accelerated methods for income tax purposes.
Properties under capitalized leases were amortized over the related lease terms
(3-15 years). The costs of maintenance and repairs are expensed as incurred.
Renewals and betterments are capitalized. Gains and losses on disposals are
included in operating results.
Page 27 of 46
Other Assets. Other assets consist of deposits; costs incurred for the
preparation and printing of product catalogs which are capitalized and amortized
upon distribution; and deferred financing costs which are capitalized and
amortized over the term of the related financing agreement.
Foreign Currency Translation. Assets and liabilities of a foreign
subsidiary are translated into U.S. dollars at the rate of exchange prevailing
at the end of the year. Income statement accounts are translated at the average
exchange rate prevailing during the year. Translation adjustments resulting from
this process are recorded directly in shareholders' equity.
Foreign Currency Contracts. In order to minimize exposure to foreign
currency fluctuations with respect to foreign currency exposures, the Company
may enter into forward exchange rate contracts for the amount of the exposure.
Gains and losses arising from foreign currency forward contracts are recognized
in income or expense as offsets of gains and losses resulting from the
underlying hedged transactions. As of December 27, 2003 and December 28, 2002,
no open forward exchange contracts were outstanding.
Concentrations of Credit Risk. Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of cash
equivalents, short-term investments, and accounts receivable. All cash
equivalents and short-term investments are managed within established guidelines
which limit the amount which may be invested with one issuer. A significant
percentage of the Company's accounts receivable have been, and will continue to
be, concentrated among a relatively small number of automotive retailers and
warehouse distributors in the United States. The Company's five largest
customers accounted for 70% and 73% of total accounts receivable as of December
27, 2003 and December 28, 2002, respectively. Management continually monitors
the credit terms and credit limits to these and other customers.
Fair Value Disclosures. The carrying value of financial instruments
such as cash, short-term investments, accounts receivable, accounts payable, and
other current assets and liabilities approximate their fair value based on the
short-term nature of these instruments. Based on borrowing rates currently
available to the Company for loans with similar terms and average maturities,
the fair value of total long-term debt was $47.6 million and $58.7 million at
December 27, 2003 and December 28, 2002, respectively.
Income Taxes. The Company follows the liability method of accounting
for deferred income taxes. Deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities. Deferred tax assets or liabilities at the end of each period
are determined using the tax rate expected to be in effect when taxes are
actually paid or recovered.
Revenue Recognition. The Company records sales when its products are
shipped. The Company calculates its net sales by subtracting allowances for
customer credits from gross sales. Allowances for customer credits include costs
for product returns, discounts and promotional rebates given to customers who
purchase new products for inclusion in their stores, and the cost of
competitors' products that are purchased from the customer in order to induce a
customer to purchase new product lines from the Company. These allowances for
customer credits are shown as a reduction of accounts receivable. Amounts billed
to customers for shipping and handling are included in net sales. Costs
associated with shipping and handling are included in cost of goods sold.
Page 28 of 46
Earnings Per Share. The following table sets forth the computation of
basic earnings per share and diluted earnings per share for the three years
ended December 27, 2003:
2003 2002 2001
---------- ---- ----------- ----- -----------
(in thousands, except per share data)
Numberator:
Net income ............................... $13,304 $12,357 $5,229
Denominator:
Weighted average shares outstanding used in
basic earnings per share calculation 8,647 8,487 8,529
Effect of dilutive stock options... ...... 403 461 118
---------- ---- ----------- ----- -----------
Adjusted weighted average shares outstanding
diluted earnings per share.......... 9,050 8,948 8,647
========== ==== =========== ===== ===========
Basic earnings per share...................... $1.54 $ 1.46 $ 0.61
========== ==== =========== ===== ===========
Diluted earnings per share.................... $1.47 $1.38 $ 0.60
========== ==== =========== ===== ===========
Options to purchase 50,750, 5,000 and 5,000 shares were outstanding at
December 27, 2003, December 28, 2002, and December 29, 2001, respectively, but
were not included in the computation of diluted earnings per share, as their
effect would have been antidilutive.
Stock-Based Compensation. At December 27, 2003, the Company has one
stock-based employee compensation plan, which is described more fully in Note
14. The Company accounts for this plan under the recognition and measurement
principles of Accounting Principles Board Opinion No. 25 (APB No. 25),
"Accounting for Stock Issued to Employees", and related interpretations. Under
APB No. 25, compensation expense is based on the difference, if any, on the date
of the grant between the fair value of our stock and the exercise price of the
option. The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions of
FASB Statement No. 123, "Accounting for Stock-Based Compensation", to
stock-based employee compensation.
Year Ended December
- ------------------------------------------------------ ---------------------------------------------
(in thousands, except per share data) 2003 2002 2001
- ------------------------------------------------------ ---------------- -------------- -------------
Net income:
Net income, as reported $ 13,304 $ 12,357 $ 5,229
Add: Stock-based employee compensation expense
net of related tax effects, included in the determination
of net income, as reported 13 97 195
Less: Stock-based employee compensation expense,
net of related tax effects, determined under fair value
based method for all awards (81) (629) (594)
- ------------------------------------------------------ ---------------- -------------- -------------
Net income, pro forma $ 13,236 $ 11,825 $ 4,830
- ------------------------------------------------------ ---------------- -------------- -------------
Earnings per share:
Basic - as reported $ 1.54 $ 1.46$ 0.61
Basic - pro forma $ 1.53 $ 1.39$ 0.57
Diluted - as reported $ 1.47 $ 1.38$ 0.60
Diluted - pro forma $ 1.46 $ 1.32$ 0.56
Page 29 of 46
The weighted average fair value of options granted in 2003, 2002 and 2001
was $6.56, $4.64 and $1.75, respectively. The fair value of each option grant
is estimated on the date of grant using the Black- Scholes option pricing model
with the following weighted average assumptions:
2003 2002 2001
---- ---- ----
Expected dividend yield 0% 0% 0%
Expected stock price volatility 52% 53% 46%
Risk-free interest rate 3.3% 3.3% 5.3%
Expected life of option 7.5 years 7.5 years 7.5 years
2. Gain on Sale of Specialty Fastener Business and Litigation Settlement
On May 1, 2002, the Company entered into agreements to sell the
Company's specialty fastener business and to settle litigation initiated by the
Company in 1996 related to its purchase of its Dorman business. Total proceeds
from the sale and settlement, net of transaction costs and purchase price
adjustments were approximately $7.4 million. The transactions resulted in an
after-tax gain on the sale of the fastener business of $1.3 million, and a
reduction in goodwill totaling $2.2 million.
3. Goodwill
Effective December 30, 2001, the Company adopted SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 142 specifies that goodwill
will no longer be amortized but instead will be subject to periodic impairment
testing. As a result, effective December 30, 2001, the Company no longer
amortizes goodwill. The Company has completed the impairment tests required by
SFAS No. 142, which did not result in an impairment charge. The elimination of
goodwill amortization would have increased net income by $1.1 million for the
fiscal year ended December 29, 2001, or $0.13 per diluted share.
Year Ended December
--------------------------------------------------
(in thousands, except per share data) 2003 2002 2001
- --------------------------------------- ----------------- --------------- ---------------
Net income:
As reported $ 13,304 $ 12,357 $ 5,229
Amortization expense - goodwill - - 1,064
----------------- --------------- ---------------
Adjusted net income $ 13,304 $ 12,357 $ 6,293
----------------- --------------- ---------------
Basic earnings per share:
As reported $ 1.54 $ 1.46 $ 0.61
Amortization exense - goodwill - - 0.13
----------------- --------------- ---------------
Adjusted earnings per share - basic $ 1.54 $ 1.46 $ 0.74
----------------- --------------- ---------------
Diluted earnings per share:
As reported $ 1.47 $ 1.38 $ 0.60
Amortization expense - goodwill - - 0.13
----------------- --------------- ---------------
Adjusted earnings per share -diluted$ 1.47 $ 1.38 $ 0.73
----------------- --------------- ---------------
Page 30 of 46
4. Restructuring Charges
In the fourth quarter of fiscal 1999, the Company recorded
restructuring charges of $11.4 million ($7.5 million after tax or $0.90 per
share) to reflect costs primarily related to inventory write downs associated
with the elimination of a significant number of underperforming products, as
well as the closing of a warehouse and production facility in Carrollton,
Georgia, and a workforce reduction of 158 people. In fiscal 2001, the Company
determined that it had $0.2 million in excess facility shutdown reserves which
were credited to selling, general and administrative expenses.
5. Inventories
Inventories include the cost of material, freight, direct labor and
overhead utilized in the processing of the Company's products. Inventories were
as follows:
December 27, December 28,
(in thousands) 2003 2002
- ---------------------- ------------------ --------------------
Bulk product $22,365 $19,923
Finished product 25,906 24,462
Packaging materials 2,899 2,832
- ---------------------- ------------------ --------------------
Total $51,170 $47,217
====================== ================== ====================
6. Property, Plant and Equipment
Property, plant and equipment consists of the following:
December 27, December 28,
(in thousands) 2003 2002
- ------------------------------------ -------------------- --------------------
Property under capitalized leases $ 2,452 $ 2,452
Buildings 8,419 7,452
Machinery, equipment and tooling 20,296 17,987
Furniture, fixtures and
leasehold improvements 3,677 3,512
Computer and other equipment 20,468 18,265
- ------------------------------------ -------------------- --------------------
Total 55,312 49,668
Less-accumulated depreciation (37,722) (33,077)
- ------------------------------------ -------------------- --------------------
Property, plant and equipment, net $17,590 $16,591
==================================== ==================== ====================
Page 31 of 46
7. Long-Term Debt
Long-term debt consists of the following:
December 27, December 28,
(in thousands) 2003 2002
- --------------------------------- ------------------- -------------------
Senior notes $42,857 $51,428
Capitalized lease obligations - 720
Obligation for stock repurchase
and other (Note 8) 927 1,361
- --------------------------------- ------------------- -------------------
Total 43,784 53,509
Less: Current portion ( 8,571) (9,291)
- --------------------------------- ------------------- -------------------
Total long-term debt $35,213 $44,218
================================= =================== ===================
Senior Notes. The Senior Notes bear a 6.81% fixed interest rate, payable
quarterly. Annual principal repayments at the rate of $8.6 million are due each
August through 2008. Terms of the Note Purchase Agreement require, among other
things, that the Company maintain certain financial covenants relating to debt
to capital ratios and minimum net worth.
Bank Credit Facility. The Company has a Revolving Credit Facility which
provides for a $10 million facility for a three-year term that expires in March
2004. Borrowings under the facility are on an unsecured basis with interest at
rates ranging from LIBOR plus 150 to LIBOR plus 275 basis points. The loan
agreement also contains covenants, the most restrictive of which pertain to net
worth and the ratio of debt to EBITDA. There were no borrowings under the credit
facility in 2003 or 2002. In March 2004, the Company amended its Revolving
Credit Facility. The amended facility expires in June 2005. The March 2004
amendment reduced the total credit facility from $10 million to $5 million.
Borrowings under the amended facility are on an unsecured basis with interest at
LIBOR plus 150 basis points. All other terms and conditions remain unchanged.
The Company's Swedish subsidiary maintains a $1.8 million credit facility. As of
December 27, 2003, no amounts were outstanding under this facility, which is
provided on an unsecured, short-term basis.
The Company is in compliance with all financial covenants contained in
the Senior Notes and Revolving Credit Facility.
Capitalized Lease Obligations. The Company's capitalized lease
obligation for its primary operating facility was with a partnership related to
the Company by common ownership (see Note10) and was payable monthly in
installments of $47,500 including interest imputed at 13.96% through December
2002. In 2002, the lease was extended through December 2007 and is now accounted
for as an operating lease. The net book value of the asset under this
capitalized lease was $0 at December 28, 2002.
The Company entered into three sale/leaseback transactions with an
equipment lease company to finance computer equipment. Two leases expired in
2002 and the third lease expired in 2003.
Page 32 of 46
Aggregate annual principal payments applicable to long-term debt
obligations as of December 27, 2003 are as follows:
(in thousands)
2004 $ 8,571
2005 9,500
2006 8,571
2007 8,571
2008 8,571
Thereafter -
- ------------------------------------------
Total $43,784
- ------------------------------------------
8. Equity Transactions
In November 2001, the Company amended certain agreements related to its
1998 acquisition of Scan- Tech USA/Sweden A.B. and related entities
("Scan-Tech"). As a result of this transaction, the Company purchased and
canceled 250,000 shares of its common stock issued in connection with the
acquisition and canceled the earn out provisions of the acquisition agreement in
exchange for consideration of approximately $3.2 million to be paid in
installments through December 31, 2005. The Company paid $0.5 million and $1.25
million of this amount under the amended agreements in 2003 and 2002,
respectively. The obligation includes interest imputed at a 5.0% rate. The
remaining amount is payable to an entity controlled by the President of
Scan-Tech. The transaction resulted in additional goodwill of $0.8 million
during 2001.
9. Operating Lease Commitments and Rent Expense
The Company leases certain equipment, automobiles and operating
facilities, including the Company's primary operating facility which is leased
from a partnership related to the Company by common ownership, under
noncancelable operating leases. Approximate future minimum rental payments under
these leases are summarized as follows:
(in thousands)
2004 $ 2,430
2005 1,871
2006 1,719
2007 1,696
2008 517
Thereafter 663
- -------------- ------------------
Total $ 8,896
============== ==================
Rent expense was $2.8 million in 2003, $2.9 million in 2002 and $2.7
million in 2001.
10. Related Party Transactions
The Company has entered into a noncancelable operating lease for its
primary operating facility from a partnership in which the Company's Chief
Executive Officer and Executive Vice President are partners. Total rental
payments each year to the partnership under the lease arrangement were $1.2
million in 2003, 2002 and 2001.
Prior to April 2003, the Company had leased its Carrollton, Georgia
facility from another partnership in which the Company's Chief Executive Officer
and Executive Vice President are partners. During 2003, the Company entered into
an agreement to terminate the lease for this facility. In connection with this
agreement, the Company paid $200,000, which was accrued in 2002, to terminate
this lease subject to the closing of the sale of the building by the partnership
to an unrelated entity. Total payments to the partnership under the lease
arrangements, including the lease termination payment, were $269,000, $272,000
and $269,000 in 2003, 2002 and 2001, respectively.
Page 33 of 46
11. Income Taxes
The components of the income tax provision (benefit) are as follows:
(in thousands) 2003 2002 2001
- ------------------------ ------------------ ----------------- ----------------
Current:
Federal $5,371 $ 6,048 $ 4,765
State 292 365 329
Foreign 424 394 405
- ------------------------ ------------------ ----------------- ----------------
6,087 6,807 5,499
- ------------------------ ------------------ ----------------- ----------------
Deferred:
Federal 1,224 36 (2,487)
State 61 2 (264)
Foreign - - -
- ------------------------ ------------------ ----------------- ----------------
1,285 38 (2,751)
- ------------------------ ------------------ ----------------- ----------------
Total $7,372 $6,845 $2,748
======================== ================== ================= ================
The following is a reconciliation of income taxes at the statutory tax rate to
the Company's effective tax rate:
2003 2002 2001
- -------------------------------------------------------------------------------
Federal taxes at statutory rate 34.0% 34.0% 34.0%
State taxes, net of Federal tax benefit 1.1% 1.2% 0.5%
Contributed property and other 0.6% 0.4% (0.1%)
- -------------------------------------------------------------------------------
Effective tax rate 35.7% 35.6% 34 4%
===============================================================================
Deferred income taxes result from timing differences in the
recognition of revenue and expense for tax and financial statement purposes. The
sources of temporary differences are as follows:
December 27, December 28,
(in thousands) 2003 2002
- --------------------------------- ---------------------- ----------------------
Assets:
Inventories $3,251 $ 3,557
Accounts receivable 2,833 2,523
Accrued expenses 1,547 1,780
- --------------------------------- ---------------------- ----------------------
Gross deferred tax assets 7,631 7,860
- --------------------------------- ---------------------- ----------------------
Liabilities:
Depreciation 106 274
Goodwill 4,664 3,440
- --------------------------------- ---------------------- ----------------------
Gross deferred tax liabilities 4,770 3,714
- --------------------------------- ---------------------- ----------------------
Net deferred tax assets $2,861 $4,146
================================= ====================== ======================
Page 34 of 46
12. Business Segments
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," the Company has determined that its
business comprises a single reportable operation segment, namely, the sale of
replacement parts for the automotive aftermarket.
During 2003 and 2002, two customers each accounted for more than 10%
of net sales and in the aggregate accounted for 31% and 36% of net sales,
respectively. During 2001, one customer accounted for approximately 24% of net
sales. Net sales to countries outside the US, primarily to Western Europe and
Canada in 2003, 2002 and 2001 were $20.7 million, $22.9 million and $19.9
million, respectively.
13. Commitments and Contingencies
Shareholder Agreement. A shareholder agreement was entered into in
September 1990 and subsequently amended in December 1992 and September 1993.
Under the agreement, each of Richard Berman, Steven Berman, Jordan Berman, Marc
Berman and Fred Berman has granted the others of them rights of first refusal,
exercisable on a pro rata basis or in such other proportions as the exercising
shareholders may agree, to purchase shares of the common stock of the Company
which any of them, or upon their deaths their respective estates, proposes to
sell to third parties. The Company has agreed with these shareholders that, upon
their deaths, to the extent that any of their shares are not purchased by any of
these surviving shareholders and may not be sold without registration under the
Securities Exchange Act of 1933, as amended (the "1933 Act"), the Company will
use its best efforts to cause those shares to be registered under the 1933 Act.
The expenses of any such registration will be borne by the estate of the
deceased shareholder.
Legal Proceedings. The Company is party to certain legal proceedings
and claims arising in the normal course of business. Management believes that
the disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
Facility Expansion Costs. In December 2003, the Company announced
its intention to add 77,200 square feet to its central distribution center in
Warsaw, Kentucky by July 2004. The total estimated cost of the addition and
enhancements to the warehouse space is expected to be approximately $2.8
million. The Company has commitments totaling $600,000 under contracts for a
portion of the construction costs as of December 27, 2003 that are not reflected
in the consolidated financial statements.
14. Capital Stock
Undesignated Stock. The Company has 75,000,000 shares authorized of
undesignated capital stock for future issuance. The designation, rights and
preferences of such shares will be determined by the Board of Directors.
Incentive Stock Option Plan. Effective May 18, 2000 the Company
amended and restated its Incentive Stock Option Plan (the "Plan"). Under the
terms of the Plan, the Board of Directors of the Company may grant incentive
stock options and non-qualified stock options or combinations thereof to
purchase up to 1,172,500 shares of common stock to officers, directors and
employees. Grants under the Plan must be made within 10 years of the plan
amendment date and are exercisable at the discretion of the Board of Directors
but in no event more than 10 years from the date of grant. At December 27, 2003,
options to acquire 208,081 shares were available for grant under the Plan.
Transactions under the Plan for the three years ended December 27,
2003 were as follows:
Page 35 of 46
Option Price Weighted
Shares per Share Average Price
- --------------------------------------- ---------------- ------------------- -------------------
Balance at December 30, 2000 849,854 $ 1.00 - $ 12.63 $ 6.17
Granted 611,000 1.875 - 5.70 3.00
Exercised - - -
Canceled (656,425) 1.00 - 12.63 7.61
- --------------------------------------- ---------------- ------------------- -------------------
Balance at December 29, 2001 804,429 1.00 - 9.625 2.59
Granted 45,000 8.00 8.00
Exercised (51,750) 1.00 - 3.00 2.71
Canceled (7,500) 3.00 3.00
- --------------------------------------- ---------------- ------------------- -------------------
Balance at December 28, 2002 790,179 1.00 - 9.625 2.89
Granted 148,250 10.15 - 14.28 11.51
Exercised (284,033) 1.00 - 9.625 2.62
Canceled ( 5,750) 3.00 - 8.00 6.07
- --------------------------------------- ---------------- ------------------- -------------------
Balance at December 27, 2003 648,646 $ 1.00 - 14.28 $ 4.96
- --------------------------------------- ---------------- ------------------- -------------------
Options exercisable at
December 27, 2003 457,196 $ 1.00 - $8.00 $ 2.64
- --------------------------------------- ---------------- ------------------- -------------------
The following table summarizes information concerning currently outstanding and
exercisable options at December 27, 2003:
Options Outstanding Options Exercisable
----------------------------------------------- ---------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Numbers Contractual Exercise Number Exercise
Exercise Price Outstanding Life (years) Price Exercisable Price
- ------------------ ---------------- ---------------- ------------- ---------------- ---------------
$1.00 - $3.00 452,896 7.2 $2.52 447,596 $ 2.53
$5.70 - $8.00 47,500 8.4 $7.75 9,600 $ 7.52
$10.15 - $14.28 148,250 9.6 $11.51 - -
Employee Stock Purchase Plan. In March 1992, the Board of Directors
adopted the Employee Stock Purchase Plan which was subsequently approved by the
shareholders. The Plan permits the granting of options to purchase up to 300,000
shares of common stock by the employees of the Company. In any given year,
employees may purchase up to 4% of their annual compensation, with the option
price set at 85% of the fair market value of the stock on the date of exercise.
All options granted during any year expire on the last day of the fiscal year.
During 2003, optionees had exercised rights to purchase 568 shares at prices
from $7.64 to $11.64 per share for total net proceeds of $5,000.
401(k) Retirement Plan. The Company maintains a defined contribution
profit sharing and 401(k) plan covering substantially all of its employees as of
December 27, 2003. Annual contributions under the plan are determined by the
Board of Directors of the Company. Consolidated expense related to the plan was
$1,121,000, $856,000, and $957,000 in fiscal 2003, 2002 and 2001, respectively.
Page 36 of 46
15. Accounting Pronouncements
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal of Activities." The statement has been applied
prospectively to exit or disposal activities initiated after December 28, 2002.
The initial adoption of this pronouncement did not have a material effect on the
consolidated statement of operations for the year ended December 27, 2003.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS
123." This statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in APB Opinion No. 25 and related
interpretations. Accordingly, compensation expense for stock options is measured
as the excess, if any, of the estimate of the market value of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock. The Company has adopted the annual disclosure provisions of SFAS No.
148 in its financial reports.
In December 2003, the FASB issued Revised Interpretation No. 46,
"Consolidation of Variable Interest Entities - an interpretation of Account
Research Bulletin No. 51." FIN No. 46 addresses the consolidation by business
enterprises of variable interest entities, as defined in the Interpretation. FIN
No. 46 expands existing accounting guidance regarding when a company should
include in its financial statements the assets, liabilities and activities of
another entity. Since the Company does not have any variable interests in
variable interest entities, the adoption of FIN No. 46 did not have any effect
on the Company's consolidated financial condition or results of operations.
Page 37 of 46
Supplementary Financial Information
Quarterly Results of Operations (Unaudited):
The following is a summary of the unaudited quarterly results of
operations for the fiscal years ended December 27, 2003 and December 28, 2002:
(in thousands, except per First Second Third Fourth
share amounts) Quarter Quarter (a) Quarter Quarter
- ----------------------------- ---------------- ----------------- --- --------------- -----------------
2003
------------------------------------------------------------------------
Net sales $50,272 $58,068 $58,183 $55,560
Income from operations 4,338 6,372 6,610 6,732
Net income 2,225 3,525 3,717 3,837
Diluted earnings per share 0.25 0.39 0.41 0.42
2002
------------------------------------------------------------------------
Net sales $51,080 $55,455 $53,889 $55,100
Income from operations 4,321 7,543 4,962 6,307
Net income 2,147 4,115 2,608 3,487
Diluted earnings per share 0.24 0.46 0.29 0.39
(a) Results for the second quarter of 2002 include gain on sale of specialty
fastener business of $2,143 ($1,329 after tax or $0.15 per share).
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
The Audit Committee of the Board of Directors of the Company
annually considers and recommends to the Board the selection of R&B's
independent public accountants. As recommended by the Company's Audit Committee,
the Board of Directors on June 19, 2002 decided to no longer engage Arthur
Andersen LLP ("Andersen") as the Company's independent public accountants and
engaged KPMG LLP to serve as the Company's independent public accountants for
the fiscal year ending December 28, 2002.
Andersen's report on the company's audited financial statements for
the year ended December 29, 2001 did not contain an adverse opinion or a
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope, or accounting principles.
During the year ended December 29, 2001, and the interim period
between December 29, 2001 and June 19, 2002, there were no disagreements between
the Company and Andersen on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure which, if not
resolved to Andersen's satisfaction, would have caused it to make reference to
the subject matter in connection with its report on the Company's financial
statements for those years. Also, during those two years and interim period,
there were no reportable events as listed in Item 304(a) (1) (v) of Regulation
S-K.
The Company provided Andersen with a copy of the foregoing
disclosure. Andersen's letter dated June 20, 2002, stating its agreement with
such statements, was filed as Exhibit 16 to the Company's Form 8-K filed June
20, 2002, which is incorporated herein by reference.
During the year ended December 29, 2001, and the interim period
between December 29, 2001 and
Page 38 of 46
June 19, 2002, the Company did not consult with KPMG regarding application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on the Company's
consolidated financial statements, or any other matter or reportable event
listed in Items 304 (a) (2) (i) and (ii) of Regulation S-K.
Item 9A. Controls and Procedures.
Quarterly evaluation of the Company's Disclosure Controls and Internal
Controls. Within the 90 days prior to the date of this Annual Report on Form
10-K, the Company evaluated the effectiveness of the design and operation of its
"disclosure controls and procedures" ("Disclosure Controls"). This evaluation
("Controls Evaluation") was done under the supervision and with the
participation of management, including the Chief Executive Officer ("CEO") and
Chief Financial Officer ("CFO").
Limitations on the Effectiveness of Controls. The Company's management,
including the CEO and CFO, does not expect that its Disclosure Controls or its
"internal controls and procedures for financial reporting" ("Internal Controls"
) will prevent all error and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
Conclusions. Based upon the Controls Evaluation, the CEO and CFO have concluded
that, subject to the limitations noted above, the Disclosure Controls are
effective to timely alert management to material information relating to the
Company during the period when its periodic reports are being prepared.
In accordance with SEC requirements, the CEO and CFO note that,
since the date of the Controls Evaluation to the date of this Annual Report,
there have been no significant changes in Internal Controls or in other factors
that could significantly affect Internal Controls, including any corrective
actions with regard to significant deficiencies and material weaknesses.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information concerning the directors of the Company is incorporated
by reference to the section entitled "Election of Directors" in the Company's
Proxy Statement for its Annual Meeting of Shareholders to be held on May 20,
2004.
Information concerning executive officers of the Company who are not
also directors is presented in Item 4.1, Part I of this Report on Form 10-K.
The information required by Item 10 regarding audit committee
financial expert disclosure is incorporated by reference from the information
under the caption "Committees of the Board of Directors - Audit Committee" in
the Company's Proxy Statement for its Annual Meeting of Shareholders to be held
on May 20, 2004.
Page 39 of 46
The Company has adopted a written code of ethics, "Our Values and
Standards of Business Conduct," which is applicable to all Company directors,
officers and employees, including the Company"s chief executive officer, chief
financial officer, and principal accounting officer and controller and other
executive officers identified pursuant to this Item 10 (collectively, the
"Selected Officers"). In accordance with the Commission's rules and regulations
a copy of the code is being filed as an exhibit to the this Form 10-K and is
posted on our website. The Company intends to disclose any changes in or waivers
from its code of ethics applicable to any Selected Officer or director on its
website at www.rbinc.com.
Item 11. Executive Compensation.
Incorporated by reference to the section entitled "Executive
Compensation and Transactions" in the Company's Proxy Statement for its Annual
Meeting of Shareholders to be held on May 20, 2004.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference to the section entitled "Beneficial
Ownership of Common Stock" in the Company's Proxy Statement for its Annual
Meeting of Shareholders to be held on May 20, 2004.
Equity Compensation Plan Information
The following table details information regarding the Company's existing
equity compensation plans as of December 27, 2003:
(c)
Number of securities
(a) remaining available for
Number of securities (b) future issuance under
to be issued upon Weighted-average equity compensation
exercise of outstanding exercise price of plans (excluding
Plan Category options, warrants and outstanding options, securities reflected in
rights warrants and rights column (a))
- ------------------------------ ---------------------- --------------------- ------------------------
Equity compensation plans
approved by security holders 648,646 $4.96 208,081
Equity compensation plans not
approved by security holders - - -
----------------------- -------------------- ------------------------
Total 648,646 $4.96 208,081
======================= ==================== ========================
Item 13. Certain Relationships and Related Transactions.
Incorporated by reference to the section entitled "Executive
Compensation and Transactions" in the Company's Proxy Statement for its Annual
Meeting of Shareholders to be held on May 20, 2004.
Page 40 of 46
Item 14. Principal Accountant Fees and Services.
Incorporated by reference to the section entitled "Independent Auditors
Fees" in the Company's Proxy Statement for its Annual Meeting of Shareholders to
be held on May 20, 2004.
PART IV
Item 15. Exhibits, Consolidated Financial Statement Schedules and
Reports on Form 8-K.
(a)(1) Consolidated Financial Statements. The consolidated financial
statements of the Company and related documents are listed in Item 8, Part II,
of this Report on Form 10-K.
Independent Auditors' Report
Report of Independent Public Accountants
Consolidated Statements of Operations for the years ended December 27,
2003, December 28, 2002 and December 29, 2001.
Consolidated Balance Sheets as of December 27, 2003 and
December 28, 2002.
Consolidated Statements of Shareholders' Equity for the years ended
December 27, 2003, December 28, 2002 and December 29, 2001.
Consolidated Statements of Cash Flows for the years ended December 27,
2003, December 28, 2002 and December 29, 2001.
Notes to Consolidated Financial Statements
(a)(2) Consolidated Financial Statement Schedules. The following
consolidated financial statement schedule of the Company and related
documents are filed with this Report on Form 10-K:
Page
Report of Independent Public Accountants on Financial
Statement Schedule............................................45
Schedule II - Valuation and Qualifying Accounts...............46
(a)(3) Exhibits.
Number Title
3.1 (1) Amended and Restated Articles of Incorporation of the Company.
3.2 (1) Bylaws of the Company.
4.1 (1) Specimen Common Stock Certificate of the Company.
4.2(1) Shareholders' Agreement, dated September 17, 1990.
4.2.1 (2) Amendment to Shareholders' Agreement, dated December 29, 1992,
amending 4.2.
4.2.2 (3) Amendment to Shareholders' Agreement, dated September 14, 1993,
amending 4.2.
Page 41 of 46
4.2.3 (4) Amendment to Shareholders' Agreement, dated March 14, 1994,
amending 4.2.
10.1 (1) Lease, dated December 1, 1990, between the Company and the
Berman Real Estate Partnership, for premises located at 3400 East
Walnut Street, Colmar, Pennsylvania.
10.1.1(3) Amendment to Lease, dated September 10, 1993, between the
Company and the Berman Real Estate Partnership, for premises
located at 3400 East Walnut Street, Colmar, Pennsylvania, amending
10.1.
10.1.2(5) Assignment of Lease, dated February 24, 1997, between the
Company, the Berman Real Estate Partnership and BREP 1, for the
premises located at 3400 East Walnut Street, Colmar, Pennsylvania,
assigning 10.1.
10.1.3(8) Amendment to Lease, dated April 1, 2002, between the Company
and the BREP I, for premises located at 3400 East Walnut Street,
Colmar, Pennsylvania, amending 10.1.
10.3 (6)+ R&B, Inc. Amended and Restated Incentive Stock Plan.
10.4 (2)+ R&B, Inc. 401(k) Retirement Plan and Trust.
10.4.1 (7)+ Amendment No. 1 to the R&B, Inc. 401(k) Retirement Plan and Trust.
10.5 (2)+ R&B, Inc. Employee Stock Purchase Plan.
21 Subsidiaries of the Company (filed with this report)
23 Consent of KPMG LLP (filed with this report)
31.1 Certification of Chief Executive Officer as required by Section
302 of the Sarbanes-Oxley Act of 2002 (filed with this report).
31.2 Certification of Chief Financial Officer as required by Section
302 of the Sarbanes-Oxley Act of 2002 (filed with this report).
32 Certification of Chief Executive and Chief Financial Officer as
required by Section 906 of the Sarbanes-Oxley Act of 2002
(filed with this report).
-------------------------
+ Management Contracts and Compensatory Plans, Contracts or Arrangements.
(1) Incorporated by reference to the Exhibits filed with the Company's
Registration Statement on Form S-1 and Amendments No. 1, No. 2, and No. 3
thereto (Registration No. 33-37264).
(2) Incorporated by reference to the Exhibits files with the Company's Annual
Report on Form 10-K for the fiscal year ended December 26, 1992.
(3) Incorporated by reference to the Exhibits filed with the Company's
Registration Statement on Form S-1 and Amendment No. 1 thereto (Registration No.
33-68740).
(4) Incorporated by reference to the Exhibits filed with the Company's Annual
Report on Form 10-K for the fiscal year ended December 25, 1993.
(5) Incorporated by reference to the Exhibits filed with the Company's Annual
Report on Form 10-K for the fiscal year ended December 28, 1996.
(6) Incorporated by reference to the Exhibits filed with the Company's Proxy
Statement for the fiscal year ended December 27, 1997.
Page 42 of 46
(7) Incorporated by reference to the Exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarter ended June 25, 1994.
(8) Incorporate by reference to the Exhibits filed with the Company's Quarterly
Report on Form 10-Q for the quarter ended June 29, 2002.
(b) Reports on Form 8-K.
The Company furnished a report on Form 8-K on February 19, 2004
that included the Company's press release dated February 13, 2004 reporting
fourth quarter and full year results of fiscal year 2003.
Page 43 of 46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
R&B, Inc.
Date: March 16, 2004 By: \s\ Richard N. Berman
---------------------------------------------------
Richard N. Berman, Chairman, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Capacity Date
\s\ Richard N. Berman President, Chief Executive March 16, 2004
----------------------
Richard N. Berman Officer, and Chairman of the
Board of Directors
(principal executive officer)
\s\ Mathias J. Barton Chief Financial Officer March 16, 2004
----------------------
Mathias J. Barton (principal financial and
accounting officer)
\s\ Steven L. Berman Executive Vice President, March 16, 2004
--------------------
Steven L. Berman Secretary-Treasurer, and
Director
\s\ George L. Bernstein Director March 16, 2004
------------------------
George L. Bernstein
\s\ John F. Creamer, Jr. Director March 16, 2004
-------------------------
John F. Creamer, Jr.
\s\ Paul R. Lederer Director March 16, 2004
-------------------
Paul R. Lederer
\s\ Edgar W. Levin Director March 16, 2004
--------------------
Edgar W. Levin
Page 44 of 46
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To R&B, Inc.:
We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of R&B, Inc. and
subsidiaries included in this Form 10-K and have issued our report thereon dated
February 13, 2002. Our audit was made for the purpose of forming an opinion on
the consolidated statements taken as a whole. The schedule listed in Item
14(a)(2) is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic consolidated financial statements. This schedule has been
subjected to the audit procedures applied in the audits of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
/s/Arthur Andersen LLP
Philadelphia, Pennsylvania
February 13, 2002
Note: The report above is a copy of a previously issued report and it has not
been reissued by Arthur Andersen LLP (Andersen).
Page 45 of 46
SCHEDULE II: Valuation and Qualifying Accounts
(in thousands) For the Year Ended
- -------------------------------------- ----------------------------------------------------
December 27, December 28, December 29,
2003 2002 2001
----------------- ----------------- ----------------
Allowance for doubtful accounts:
Balance, beginning of period $ 1,337 $ 901 $836
Provision 504 737 1,118
Charge-offs (650) ( 301) (1,053)
- -------------------------------------- ----------------- ----------------- ----------------
Balance, end of period $ 1,191 $ 1,337 $ 901
====================================== ================= ================= ================
Allowance for customer credits:
Balance, beginning of period $ 16,517 $ 14,209 $ 9,498
Provision 37,136 35,769 29,742
Charge-offs (37,123) (33,461) (25,031)
- -------------------------------------- ----------------- ----------------- ----------------
Balance, end of period $ 16,530 $16,517 $ 14,209
====================================== ================= ================= ================
Restructuring reserves:
Balance, beginning of period $ - $ - $ 3,380
Provision - - -
Charge-offs - - (3,155)
Reversal of excess charge - - (225)
- -------------------------------------- ----------------- ----------------- ----------------
Balance, end of period $ - $ - $ -
====================================== ================= ================= ================
Page 46 of 46