- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-K
-------------------
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 25, 200431, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
-------------------For the transition period from _____________________ to ______________________
Commission file number 0-18914
R&B, INC.
Incorporated pursuant to the Laws(Exact name of the Commonwealth ofregistrant as specified in its charter)
---------------------
Pennsylvania -------------------
IRS -23-2078856
------------ ----------
(State or other jurisdiction ( I.R.S.- Employer Identification No. 23-2078856)
of Incorporation)
3400 East Walnut Street, Colmar, Pennsylvania 18915
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(215) 997-1800
--------------
(Registrant's telephone number, including area code)
-------------------
Securities Registeredregistered pursuant to Section 12(b) of the Act: NONE
Securities Registeredregistered pursuant to Section 12(g) of the Act: Common Stock, $0.01
Par Value
-------------------
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act Yes |_| No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Securities Act Yes |_| No |X|
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'sregistrant'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 a large accelerated filer, an
accelerated filer, (asor a non-accelerated filer. See definition of "accelerated
filer"and"large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one): Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer
|_|
Indicate by check mark whether the registrant is a shell company(as defined in
the Rule 12b-2 of the Exchange Act Rule 12b-2).Act.) Yes |X||_| No |_||X|
As of March 4, 20057, 2006 the Registrantregistrant had 8,959,29717,747,234 shares of common shares,stock, $.01
par value, outstanding, and the. The aggregate market value of the voting stockand non-voting
common equity held by non-affiliates of the Registrantregistrant was $128,794,048.$102,686,920.70.
DOCUMENTS INCORPORATED BY REFERENCE
PART III - Certain information fromportions of the Registrant'sregistrant's definitive Proxy Statement
forproxy statement, in connection
with its Annual Meeting of Shareholders, presently scheduled to be heldfiled with
the Securities and Exchange Commission within 120 days after December 31, 2005,
are incorporated by reference into Part III of this Annual Report on May 19,
2005.Form 10-K
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------
Page 2 of 43
R & B, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
DECEMBER 25, 200431, 2005
Part I
Page
Item 1. Business......................................................... 3
General.................................................... 3Business. . . . . . . . . . . . . . . . . . . . . . . . . . .4
General. . . . . . . . . . . . . . . . . . . . . . . 4
The Automotive Aftermarket................................. 3
Products................................................... 4Aftermarket. . . . . . . . . . . . . .4
Products. . . . . . . . . . . . . . . . . . . . . . 5
Product Development........................................ 5Development. . . . . . . . . . . . . . . . . 6
Sales and Marketing........................................ 5
Manufacturing..............................................Marketing. . . . . . . . . . . . . . . . . 6
Manufacturing. . . . . . . . . . . . . . . . . . . . 7
Packaging, Inventory and Shipping..........................Shipping. . . . . . . . . . 7
Competition................................................ 7Competition. . . . . . . . . . . . . . . . . . . . . 8
Proprietary Rights......................................... 7
Employees.................................................. 7
Risk Factors...............................................Rights. . . . . . . . . . . . . . . . . 8
Employees. . . . . . . . . . . . . . . . . . . . . . 8
Available Information......................................Information . . . . . . . . . . . . . . . 8
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 1B. Unresolved Comments . . . . . . . . . . . . . . . . . . . . 10
Item 2. Properties...................................................... 9Properties. . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 3. Legal Proceedings............................................... 10Proceedings. . . . . . . . . . . . . . . . . . . . . .11
Item 4. Submission of Matters to a Vote of Security Holders............. 10Holders. . . . .11
Item 4.1 Certain Executive Officers of the Registrant..................... 10Registrant. . . . . . . . .11
Part II
Item 5. Market for Registrant's Common Equity, and Related Shareholder Matters.............................................. 11Matters
and Issuer Purchases of Equity Securities. . . . . . . . . . . . . . . 12
Item 6. Selected Financial Data.......................................... 11Data. . . . . . . . . . . . . . . . . . . 12
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition.................... 12Condition. . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 7A Quantitative7A.Quantitative and Qualitative Disclosure about Market Risk......... 19Risk . . .19
Item 8. Consolidated Financial Statements and Supplementary Data.........Data. . . 19
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................. 35Disclosure.. . . . . . . . . . . . . . . . . . . . . . . . . 36
Item 9A9A. Controls and Procedures........................................... 35Procedures. . . . . . . . . . . . . . . . . . . 36
Part III
Item 10. Directors and Executive Officers of the Registrant.............. 37Registrant. . . . . .38
Item 11. Executive Compensation.......................................... 37Compensation. . . . . . . . . . . . . . . . . . . .38
Item 12. Security Ownership of Certain Beneficial Owners and Management...37Management and
Related Stockholder Matters. . . . . . . . . . . . . . . . . . . .. . .38
Item 13. Certain Relationships and Related Transactions.................. 38Transactions. . . . . . . .39
Item 14. Principal Accountant Fees and Services.......................... 38Services . . . . . . . . . . . 39
Part IV
Item 15. Exhibits and Financial Statement Schedules...................... 38
Signatures................................................. 41Schedules. . . . . . . . . .39
Signatures. . . . . . . . . . . . . . . . . . . . . 42
Financial Statement Schedule............................... 42Schedule. . . . . . . . . . . . 43
Page 2 of 423 0f 43
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, and 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 70,00073,000
different automotive replacement parts (including brake parts), fasteners and
service line products manufactured to its specifications, with approximately 35%33%
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 steeringsteer ing
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 Dana and Federal Mogul) and
salvage yards. Through its Scan-Tech subsidiary,and Hermoff subsidiaries, the Company is
increasing its international distribution of automotive replacement parts, with
sales into Canada, 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 $190$199 billion in 2004,2005, and parts for heavy duty trucks, which
ac
countedaccounted for sales of approximately $63$70.5 billion in 2004.2005. 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 constrainedcon 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
Page 4 of 43
lines to carry in the limited space available. Further, because of the
efficiencies achieved through the ability to order all or part of a complete
line of products from one supplier (with possible volume discounts), as opposed
to satisfying the same requirements through a variety of different sources,
retailers and other purchasers of automotive parts seek to purchase products
from fewer but stronger suppliers.
Page 3 of 42
Products
The Company sells over 70,00073,000 different automotive replacement parts,
fasteners and service line products to meet a variety of needs including
original equipment dealer "exclusive" parts soldparts. In November 2005, the Company
launched its DORMAN(R) NEW SINCE 1918(TM) marketing campaign and repositioned
its brands 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%single corporate umbrella - DORMAN(R) . All of the Company's
revenuesproducts are derived from productsnow sold under its more than seventy
brand names.
Motormite(R) - brand names within the Motormite(R) master brand represent manyone 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
*seven DORMAN(R) sub-brands as follows:
DORMAN(R) OE Solutions TMSolutions(TM) - Original equipment dealer
"exclusive" parts, such as intake manifolds,
exhaust manifolds, oil cooler lines, window
regulators, harmonic balances and radiator
fan assemblies
* Quick-Disconnect TMassemblies.
DORMAN(R) HELP!(R) - Transmission, cooling systemAn extensive array of replacement
parts, including window handles, and
fuel system
connectors
* Uni-Fit TM switches, door hardware, interior trim
parts, headlamp aiming screws and retainer
rings, radiator parts, battery hold-down
bolts and repair kits, valve train parts and
power steering filler caps
DORMAN(R)- 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!TMAuto Grade - A comprehensive line of
application specific and general automotive
hardware that is a necessary element to a
complete repair. Product categories include
body hardware, general automotive fasteners,
oil drain plugs, and wheel hardware.
DORMAN(R) Conduct-Tite!(R)- Extensive selection of electrical connectors, wire,
tools, testers, and accessories.
DORMAN(R) First Stop(TM) - Value priced technician quality brake and clutch
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
containing more than 8,500 SKU's.
DORMAN(R)Pik-A-Nut(R) - the Pik-A-Nut (R) brand represents the Company's fastenersA specialized and highly
efficient line of home hardware and home
organization products specifically designed
for automotive retail specialty automotivemerchandisers.
DORMAN(R) Scan-Tech(R) - Based in Stockholm, Sweden,
DORMAN(R) Scan-Tech(R) sells a complete line
of Volvo(R) and mass merchant markets
Platinum Parts TM - the Platinum Parts TM brand represents the Company's
automotiveSaab(R) replacement parts
and supplies for salvage yards
Page 4 of 42
Brakeware(R) and Tru-Torque(R) - these brands representthroughout the Company's hydraulic
brake parts, including wheel cylinders and related hardware
Scan-Tech TM -world, reducing the
Scan-Tech TM brand representsdependency on the Company's automotive
replacements parts sold internationally, and relate primarily to replacement
parts for Volvo and Saab cars and Scania trucksOE Dealer.
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 Dana and Federal Mogul) and national warehouse distributors (such as
Carquest and NAPA). During the years ended December 2005, 2004, 2003 and 2002,2003, no
single product or related group of products accounted for more than 10% of gross
sales.
Substantially all of the parts sold by the Company are covered by a
limited warranty, which provides that the part is free of a manufacturing
defect, under normal use and service. The duration of the limited warranty
varies by the product type, from ninety days to the life of the vehicle on which
the part is originally installed. The sole remedy is the repair or replacement
of the part that fails due to a manufacturing defect.
Page 5 of 43
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.
Sales and Marketing
The Company markets its parts to three groups of purchasers who in turn
supply individual consumers and professional installers:
(i) Approximately 46%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
Page 5 of 42
and national
general merchandise chain retailers. The Company sells some of its
products to virtually all major chains of automotive aftermarket
retailers;
(ii) Approximately 27%30% 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 (approximately
25%) 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 2530 person direct sales force solicits
purchases of the Company's products directly from customers, as well as managing
the activities
Page 6 of 1543
of 17 independent manufacturer's representative agencies. The Company uses
independent manufacturer's representative agencies 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
2005, 2004, 2003 and 2002,2003 two customers (AutoZone and Advance) each accounted for
more than 10% of net sales and in the aggregate accounted for 31%, 34%, 31% and 36%31%
of net sales, respectively.
Manufacturing
Substantially all of the products sold by the Company are manufactured
to its specifications by third parties. Because numerous contract manufacturers
are available to manufacture its products, the Company is not dependent upon the
services of any one contract manufacturer or any small group of them. No one
vendor supplies more than 10% or more of the Company's products. In 2004,2005, as a
percentage of the total dollar volume of purchases made by the Company,
approximately 40%35% 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.
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.
Page 6 of 42
Packaging, Inventory and Shipping
Finished products are received at one or more of the Company's
facilities, depending on the type of part. SamplesIt is the Company's practice to
inspect samples of each shipment are testedshipments based upon receipt.vendor performance. 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,include blister sealing, skin film sealing, clamshell sealing, bagging 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 cardboxing lines. Packaged product 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 stored and organized according to historical popularity in
orderfacilitate the most
efficient methods of retrieving product to aid in retrieval for shipping.fill customer orders. The Company
strives to maintain a
Page 7 of 43
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 resultedThe
Company maintains a "safety stock" of inventory to compensate for fluctuations
in approximately a one month supply of its products, packageddemand and readily available for shipment, and a two month supply of product in
finished bulk form ready for packaging.delivery.
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 centralmain warehouse for redistribution within their
network. In certain circumstances, at the request of the customer, the Company
ships directly to the customer's stores.stores either via smaller direct ship orders or
consolidated store orders that are cross docked.
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.
Employees
At December 25, 2004,31, 2005, the Company had 880879 employees, of whom 849858 were
employed full-time and 3121 were employed part-time. Of these employees, 584559 were
engaged in production, inventory, or quality control, 6289 were involved in
volved inengineering, product development and brand management, 7160 were employed in sales
and order entry, and the remaining 163,164, including the Company's 7 executive
officers, were devoted to administration, finance, legal, and strategic
planning.
Page 7 of 42
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 2004, 2003 and 2002, two customers
(AutoZone and Advance) each accounted for more than 10% of net sales and in the
aggregate accounted for 34%, 31% and 36% of net sales, respectively. The Company
anticipates that this concentration of sales among customers will continue in
the future. The loss of a significant customer or a substantial decrease in
sales to such a customer could have a material adverse effect on the Company's
sales and operating results. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition" and "Business-Sales and
Marketing."
Concentrations of Credit Risk. Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of cash
and cash equivalents 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 77% and 70% of total accounts receivable as of December 25, 2004
and December 27, 2003, 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.
Foreign Currency Fluctuations. In 2004, 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
Page 8 of 42
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 42% 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. The information on this website
is not and should not be considered part of this Form 10-K and is not
incorporated by reference in this Form 10-K. This website is, and is only
intended to be, for reference purposes only. 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.
Page 8 of 43
Item 1A. 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 our products is limited, our 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
that we offer.
Concentration of Sales to Certain Customers. A significant percentage
of our sales has been, and will continue to be, concentrated among a relatively
small number of customers. During 2005, 2004, and 2003, two customers (AutoZone
and Advance) each accounted for more than 10% of net sales and in the aggregate
accounted for 31%, 34%, and 31% of net sales, respectively. We anticipate that
this concentration of sales among customers will continue in the future. The
informationloss of a significant customer or a substantial decrease in sales to such a
customer could have a material adverse effect on the website listed above, is notour sales and should not be
considered partoperating
results. See "Management's Discussion and Analysis of Results of Operations and
Financial Condition" and "Business-Sales and Marketing." sections of this annual report on Form
10-K Annual Report.
Concentrations of Credit Risk. Financial instruments that potentially
subject us to concentrations of credit risk consist primarily of cash and is not incorporated by
reference in this document. This website is,cash
equivalents and is only intendedaccounts receivable. All cash equivalents are managed within
established guidelines which limit the amount which may be invested with one
issuer. A significant percentage of our 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. Our five largest
customers accounted for 77% of total accounts receivable as of December 31, 2005
and December 25, 2004. 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 our customers have grown larger and
therefore have more leverage in negotiations. Customers press for extended
payment terms and returns of slow moving product when negotiating with us. While
we do our 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 our profit levels while terms
extensions generally reduce operating cash flow and require additional capital
to finance the business. We expect both of these trends to continue for the
foreseeable future.
Foreign Currency Fluctuations. In 2005, approximately 65% of our
products were sold in a variety of foreign countries. The products generally are
purchased through purchase orders with the purchase price specified in U.S.
dollars. Accordingly, we do 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,
weakness in the dollar has resulted in some materials price increases and
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 further.
We make significant purchases of product from Chinese vendors. Prior to
2005, the Chinese Yuan exchange rate has been fixed against the U.S. Dollar
since 1998. In July 2005, the Chinese government announced an inactive textual reference.immediate 2%
revaluation of the Yuan against the U.S. Dollar and that going forward it will
allow the Yuan to fluctuate against a basket of currencies. Since that time the
Yuan has strengthened another 1% against the U.S. Dollar. Most experts believe
that the value of the Yuan will increase further relative to the U.S. Dollar
over the next few years. 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 our 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
Page 9 of 43
President, Secretary-Treasurer and Director. The loss of the services of one or
both of these individuals could have a material adverse effect on our business.
Dividend Policy. We do not intend to pay cash dividends for the
foreseeable future. Rather, we intend to retain our earnings, if any, for the
operation and expansion of our business.
Control by Officers, Directors and Family Members. As of March 7, 2006,
Richard N. Berman and Steven L. Berman, who are officers and directors of R&B,
Inc., their father, Jordan S. Berman, and their brothers, Marc H. Berman and
Fred B. Berman beneficially own approximately 41% 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.
Item 1B. Unresolved Staff Comments.
There are no unresolved comments from the Commission staff regarding
the Company's periodic or current reports under the Securities Act.
Item 2. Properties.
Facilities
The Company currently has 1013 warehouse and office facilities located throughout
the United States, Canada, Sweden, China and Korea. ThreeTwo 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 - 362,000 sq. ft. (owned)
Louisiana, MO Warehouse and office - 90,000 sq. ft. (owned)
Baltimore, MD Warehouse and office - 83,000 sq. ft. (leased)
Hagersville, ON Manufacturing, warehouse, and office 37,000 sq. ft.
(leased) (2)
Portland, TN Warehouse and office - 269,000 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 $3.63$3.75 per square foot ($1.21.3 million per year) in 2004.2005.
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,
Page 9 of 42
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.
(2) In June 2005, the Company acquired The Automotive Edge/Hermoff (Hermoff) for
approximately $1.7 million. As part of the acquisition of Hermoff, the Company
leased the existing facility from an Ontario corporation of which Arthur Bluhm,
President of Hermoff, and Robert Bluhm, Vice President of Hermoff, are
shareholders. Under the lease the Company paid rent of $58,275 Canadian in 2005.
The term of the lease is for a period of 2 years beginning June 1, 2005 and
ending May 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.
Page 10 of 43
Item 3. Legal Proceedings.
In additionThe Company is a party to commitments and obligations whichor otherwise involved in legal proceedings
that arise in the ordinary course of business, the Company is subject tosuch as 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 2004.2005.
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 4546 Senior Vice President, Chief Financial Officer
Joseph M. Beretta 5051 Senior Vice President, Product
Richard N. Berman 4849 President, Chief Executive Officer, Chairman
of the Board of Directors, and Director
Steven L. Berman 4546 Executive Vice President, Secretary-Treasurer,
and Director
Fred V. Frigo 4849 Senior Vice President, Operations
Donald J. Barry D. Myers 4543 Senior Vice President of Sales and Trade
Marketing
Thomas J. Knoblauch 50 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.
Joseph M. Beretta joined the Company in January 2004 as Senior Vice
President, Product. Prior to joining the Company, Mr. Beretta was employed by
Cardone Industries, Inc., most recently as its Chief Operating Officer. Cardone
is a remanufacturer and supplier of automotive replacement parts. He is a
graduate of Oral Roberts 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.
Page 10 of 42
Steven L. Berman has been Executive Vice-President, Secretary-Treasurer
and a Director of the Company since its inception. He attended Temple
University.
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.
Page 11 of 43
Donald J. Barry D. Myers has been an employee ofjoined 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 namedin July 2005 as Senior Vice
President General
Counselof Sales and Assistant Secretary.Trade Marketing. Prior to joining the Company he was
European Business Director for 3M Company where he was responsible for Consumer
and Office business operations. He is a graduate of Moravian CollegeUniversity of
Wisconsin-Whitewater.
Thomas J Knoblauch joined the Company in April 2005 as Vice President
and SyracuseGeneral Counsel. In May 2005, Mr. Knoblauch was appointed Assistant
Secretary. Prior to joining the Company he was Corporate Counsel at SunGard Data
Systems, Inc. and General Counsel at Rosenbluth International, Inc. He is a
graduate of Widener University, CollegeChester, PA, St. Joseph's University in
Philadelphia, PA, and the Widener University School of Law, andLaw. Mr. Knoblauch is a
member of both the Pennsylvania and New York Bar.
PART II
Item 5. Market for Registrant's Common Equity, and Related Shareholder Matters.Matters and
Issuer Purchases of Equity Securities.
The Company's shares of common stock are traded publicly in the
over-the-counter market underon the NASDAQ system. At March 4, 20057, 2006 there were 151154
holders of record of common stock, representing more than 1,5001,700 beneficial
owners. The last price for the Company's common stock on March 4, 2005,7, 2006, as
reported by NASDAQ, was $26.98$9.86 per share. Since the Company's initial public
offering, it has paid no cash dividends. The Company does not presently
contemplate paying any such dividends in the foreseeable future. The range of
high and low sales prices for the Company's common stock for each quarterly
period of 20042005 and 20032004 are as follows:
2005 (1) 2004 2003
----------------------- -----------------------(1)
---------------------------- --------------------------
High Low High Low
- ------------------ ------------------------------- ------------ ------------------------- ------------- ------------
First Quarter $18.90 $14.73 $10.42 $8.84$13.75 $12.03 $9.450 $7.37
Second Quarter 19.99 18.00 11.24 9.6514.46 10.00 10.00 9.00
Third Quarter 20.64 19.00 14.00 10.5514.50 9.04 10.32 9.50
Fourth Quarter 27.50 20.55 15.09 12.5512.62 9.35 13.75 10.28
(1) Amounts have been restated to reflect a two-for-one split of the
Company's common stock on March 28, 2005.
For the information regarding the Company's compensation plans, see
Item 12, Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
Item 6. Selected Financial Data.
Selected Consolidated Financial Data
Year Ended December
------------- -------------------------------------------------------------------------------- ----------------------------------------------------------------------------
(in thousands, except per share datadata) 2005 2004 2003 2002(a) 2001
2000 (b)
- ----------------------------- ------------- -------------------------------------------------- ----------------- ---------------- -------------- ----------------------------------- ----------------- ------------------
Statement of Operations
Data:
Net sales $278,117 $249,526 $222,083 $215,524 $201,668
$201,390
Income from operations (c)(b) 29,776 29,638 24,052 23,133 12,266
12,308
Net income (c)(b) 17,077 17,081 13,304 12,357 5,229
4,095
Earnings per share (b)
Basic (c) Basic $1.93 $1.54 1.4 0.61 0.49$0.95 $0.97 0.77 0.73 0.31
Diluted $1.86 $1.47 1.3 0.60 0.48
Page 11 of 42
(c) $0.93 $0.93 0.73 0.69 0.30
Balance Sheet Data:
Total assets 212,156 195,404 176,606 170,128 163,163
159,879
Working capital 115,812 101,585 98,452 91,340 81,068
83,262
Long-term debt 27,243 25,714 35,213 44,218 53,511
65,066
Shareholders' equity 138,542 125,227 105,985 89,572 75,162 72,384
(a) Results for 2002 include a gain on sale of specialty fastener business of
$2,143 ($1,329 after tax or $0.15$0.07 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) 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 20022005 and all periods prior to fiscal
2002periods. Fiscal
2001 has been adjusted to exclude amortization of goodwill and the related tax
effects:
Year Ended December
-------------- ----------------------------------------------------------------------------- --------------------------------------------------------------------------
2005 2004 2003 2002 2001
2000
Income from operations $29,638$29,776 $ 29,638 $ 24,052 $ 23,133 $ 13,891
$ 13,970
Net income $17,081$17,077 $ 17,081 $ 13,304 $ 12,357 $ 6,293
$ 5,185
Diluted earnings per share $ 1.860.93 $ 1.47 $ 1.380.93 $ 0.73 $ 0.6130.69 $ 0.37
(c) All prior period per share amounts have been retroactively adjusted to
reflect a two-for-one stock split of the Company's common stock effective March
28, 2005.
Page 12 of 43
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations and
Financial Condition.
Executive SummaryOperations.
Overview
The Company is a leading supplier of original equipment dealerOriginal Equipment (OE) Dealer
"Exclusive" automotive replacement parts, automotive hardware, brake products,
and household hardware to the automotive aftermarket and mass merchandise
markets. Dorman automotive parts and hardware are marketed under the OE
Solutions(TM), HELP!(R), AutoGrade(TM), First Stop(TM), Conduct-Tite(R), and
Pik-A-Nut(R) brand names. The Company designs, packages and markets over 73,000
different automotive replacement parts (including brake parts), fasteners and
service line products manufactured to its specifications. Approximately 90% of
the automotive aftermarketCompany's products are sold under its brand names and household hardware to the general merchandise
markets.remainder are sold
for resale under customers' private labels, other brands or in bulk. 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 25, 2004, net sales increased 12% to $249.5
million from $222.1 millionsold primarily in the same period last year.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 and salvage yards. Through its Scan-Tech and Hermoff
subsidiaries, the Company is increasing its international distribution of
automotive replacement parts, with sales into Canada, Europe, the Middle East
and the Far East.
The sales growth was
drivenautomotive aftermarket in which the Company competes has been
growing in size; however, the market continues to consolidate. As a result, the
Company's customers regularly seek more favorable pricing, product returns and
extended payment terms 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 and more favorable pricing primarily byaffect 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 has focused on new product development which is a key to the Company's
growth strategy. Gross margin remained essentially unchanged at 37.1% in 2004
from 37.0% in 2003. Operating expenses increased at a slower rate than sales
growth and therefore declined as a percentageway to offset
some of net sales to 25.2%. Many of the
Company's operating expenses are fixed in naturethese customer demands and therefore did not increase
in proportion to net salesas its primary vehicle for growth. As a result, net income increased 28% to
$17.1 million in 2004.
Newsuch,
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 resources 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, manyPage 13 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 12 of 4243
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 31,
2005, December 25, 2004 and December 27, 2003 are fifty-three, fifty-two, and
fifty-two weeks, respectively.
Stock Split
All prior period common stock and applicable share and per share
amounts have been retroactively adjusted to reflect a two-for-one split of the
Company's Common Stock effective March 28, 2005.
Acquisition
In June 2005, the Company acquired The Automotive Edge/Hermoff
("Hermoff") for approximately $1.7 million. The consolidated results include
Hermoff since June 1, 2005. The Company has not presented pro forma results of
operations for the years ended December 31, 2005, December 25, 2004 and December
28, 2002 were each fifty- two week27, 2003, assuming the acquisition had occurred at the beginning of the
respective periods, as these results would not have been materially different
than actual results for the 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 U.S. generally accepted accounting
principles. 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, goodwill and income taxes. 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 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 havehas 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 77% and
70% of net
accounts receivable as of December 25, 200431, 2005 and December 27, 2003,
respectively.25, 2004. 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 $1.1 million and $1.2 million as of December 25, 200431, 2005 and December
27, 2003, respectively.25, 2004.
Revenue Recognition and Allowance for Customer Credits. Revenue is
recognized from product sales when goods are shipped, title and risk of loss
have been transferred to the customer and collection is reasonably assured. Net
sales are calculated by subtracting allowancesThe
Company records estimates for customer credits from gross
revenues. Allowances for customer credits include costs forcash discounts, product returns and warranties,
discounts and promotional rebates givenin the period of the sale ("Customer
Credits"). The provision for Customer Credits is recorded as a reduction from
gross sales and reserves for Customer Credits are shown as a reduction of
accounts receivable. Amounts billed to customers who purchase new products
for inclusionshipping and handling are
included in their stores,net sales. Costs associated with shipping and thehandling are included
in cost of competitors' products that are
purchasedgoods
Page 14 of 43
sold. Actual Customer Credits have not differed materially from the customer in order to induce a customer to purchase new
product lines from the Company. The Company providesestimated
amounts 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 anyeach period may result if
management made different judgments or utilized different estimates for the
reserves.presented. Reserves for customer credits were $19.5$21.6
million and $16.5$19.5 million as of December 25, 200431, 2005 and December 27, 2003,25, 2004,
respectively.
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 Page 13 of 42
maintains contact with its customer base in order to understand buying
patterns, customer preferences and the life cycle of its products. Changes in
customer requirements are factored into the reserve needs as needed. Reserves
for excess and obsolete inventory were $8.2$9.6 million and $8.5$8.2 million as of
December 25,
200431, 2005 and December 27, 2003,25, 2004, respectively.
Goodwill. The Company has adoptedfollows the provisions of SFAS No. 142, "Goodwill
and Other Intangible Assets". SFAS No. 142 specifies that goodwillThe Company employs a discounted cash flow
analysis and a market comparable approach in conducting its impairment tests.
Cash flows are discounted at 12% and an earnings multiple of 5.75 to 6.0 times
EBITDA is no longer amortized but instead is subject to periodic impairment testing. As a
result, the Company no longer amortizes goodwill.used when conducting these tests. The Company has completed the
impairment tests required by SFAS No. 142, which did not result in an impairment
charge. Goodwill was $29.4$29.6 million and $29.1$29.4 million at December 25, 200431, 2005 and
December 27, 2003,25, 2004, respectively.
Income Taxes. The Company follows the liability method of accounting
for deferred income taxes. Under this method, income tax expense is recognized
for the amount of taxes payable or refundable for the current year and for
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in an entity's financial statements or tax returns.
The Company must make assumptions, judgments and estimates to determine its
current provision for income taxes and also its deferred tax assets and
liabilities and any valuation allowance to be recorded against a deferred tax
asset. Management's judgments, assumptions and estimates relative to the current
provision for income tax take into account current tax laws, its interpretation
of current tax laws and possible outcomes of current and future audits conducted
by tax authorities. Changes in tax laws or management's interpretation of tax
laws and the resolution of current and future tax audits could significantly
impact the amounts provided for income taxes in the Company's consolidated
financial statements. Management's assumptions, judgments and estimates relative
to the value of a deferred tax asset take into account predictions of the amount
and category of future taxable income. Actual operating results and the
underlying amount and category of income in future years could render
management's current assumptions, judgments and estimates of recoverable net
deferred taxes inaccurate. Any of the assumptions, judgments and estimates
mentioned above could cause the Company's actual income tax obligations to
differ from its estimates.
Results of Operations
The following table sets forth, for the periods indicated, the
percentage of net sales represented by cer taincertain items in the Company's
Consolidated Statements of Operations.
Percentage of Net Sales
----------------------------------------------------------------------------------------------------------------------------
Year Ended
----------------------------------------------------------------------------------------------------------------------------
December 31, December 25, December 27,
December 28,2005 2004 2003
2002
- ----------------------------- ------------------ ---------------- ------------------------------------------------------- ---------------------- -------------------- -----------------------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 64.5 62.9 63.0
63.3
- ----------------------------- ------------------ ---------------- ------------------------------------------------------- ---------------------- -------------------- -----------------------
Gross profit 35.5 37.1 37.0 36.7
Selling, general and
administrative expenses 24.8 25.2 26.2
27.0
Gain on sale of specialty
fastener business - - (1.0)
- ----------------------------- ------------------ ---------------- ------------------------------------------------------- ---------------------- -------------------- -----------------------
Income from operations 10.7 11.9 10.8 10.7
Interest expense, net 0.9 1.2 1.5
1.8
- ----------------------------- ------------------ ---------------- ------------------------------------------------------- ---------------------- -------------------- -----------------------
Income before taxes 9.8 10.7 9.3 8.9
Provision for taxes 3.7 3.9 3.3
3.2
- ----------------------------- ------------------ ---------------- ------------------------------------------------------- ---------------------- -------------------- -----------------------
Net income 6.1% 6.8% 6.0%
5.7%
============================= ================== ================ ======================================================= ====================== ==================== =======================
Page 1415 of 4243
Fiscal Year Ended December 31, 2005 Compared to Fiscal Year Ended December 25,
2004
Net sales increased 11% to $278.1 million in 2005 from $249.5 million
in 2004. Revenues in 2005 were up primarily as a result of continued growth in
new product sales. An additional week's sales in 2005 and the June 2005
acquisition of Hermoff accounted for approximately 1% of the sales growth.
Cost of goods sold, as a percentage of net sales, increased from 62.9%
in 2004 to 64.5% in 2005. The primary reasons for the increase in cost of goods
sold as a percentage of sales were a continued mix shift toward lower margin
automotive hard parts and a $1.8 million increase in the provision for excess
and slow moving inventory reserves in 2005.
Selling, general and administrative expenses in 2005 increased 10% to
$69.1 million from $62.9 million. The expense increase was the result of
inflationary cost increases, an increase in variable operating expenses due to
sales volume growth and the Company's decision to invest more resources in new
product development which resulted in higher spending for product management,
purchasing, engineering and quality control in 2005. During 2005, the Company
also increased the use of its accounts receivable sale facilities. Financing
costs associated with the sale of accounts receivable are recorded as operating
expenses and amounted to $1.2 million and $0.3 million in 2005 and 2004,
respectively.
Interest expense, net decreased to $2.6 million in 2005 from $2.9
million in 2004 due to lower overall borrowing rates in 2005. The primary reason
for the lower borrowing rates was a reduction in the outstanding principal of
the Company's 6.81% Senior Notes, which was replaced with revolving credit
borrowings at a lower interest rate.
The Company's effective tax rate increased to 37.1% in 2005 from 36.2%
in 2004 due to the loss of certain state tax benefits in 2005 as a result of
changes in state tax legislation and lower earnings from the Company's Swedish
subsidiary where tax rates are lower than the statutory rate in the United
States.
Fiscal Year Ended December 25, 2004 Compared to Fiscal Year Ended December 27,
2003
Net sales increased 12% to $249.5 million in 2004 from $222.1 million
in 2003. This sales increase is primarily the result of 2004 new product
introductions and year over year volume growth from products introduced in the
prior year. The favorable effects of foreign currency exchange resulted in a 1%
year over year increase in sales.
Cost of goods sold, as a percentage of net sales, remained essentially
flat at 62.9% in 2004 compared to 63.0% in 2003. The favorable effect of a
change in sales mix was offset by approximately $1.3 million in incremental
expediting costs incurred to maintain satisfactory customer fill rates in the
second half of 2004 as a result of material shortages for certain items and
higher than planned demand. Overall material costs were down slightly in 2004,
although the Company experienced price increases in several product lines in the
second half of the year as a result of raw materials price increases.
Selling, general and administrative expenses in 2004 increased 8% to
$62.9 million from $58.2 million. The expense increase was at a slower rate than
sales as many of the Company's operating expenses are fixed in nature and
therefore did not increase in proportion to sales growth. The increase in
expenses was the result of inflationary cost increases, an increase in variable
operating expenses due to the sales volume growth and further investments by the
Company in its new product development capabilities.
Interest expense, net decreased to $2.9 million in 2004 from $3.4
million in 2003 due to lower borrowing levels in 2004. The primary reason for
the lower borrowing levels in 2004 was a reduction in the outstanding principal
of the Company's 6.81% Senior Notes. In August 2004, the Company made the third
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 to 36.2% in 2004 from 35.7%
in 2003 as a result of higher incremental tax rates on 2004's higher earnings
level.
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 resultPage 16 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 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.
Page 15 of 4243
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.
Liquidity and Capital Resources
Historically, the Company has financed its growth through a combination
of cash flow from operations, accounts receivable sales programs provided by
certain customers and through the issuance of senior indebtedness through its
bank credit facility and senior note agreements. At December 25,
2004,31, 2005, working
capital was $101.6$115.8 million, total long-term debt (including the current portion)portion
and revolving credit borrowings) was $34.8$35.8 million and shareholders' equity was
$125.2$138.5 million. Cash and short-term investmentscash equivalents as of December 25, 200431, 2005 totaled $7.2$2.9
million.
Over the past threeseveral 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 accounts receivable
factoringsales programs with several customers which allow it to sell its accounts
receivable on a non-recourse basis to financial institutions to offset the
negative cash flow impact of these payment terms extensions. As of December 31,
2005 and December 25, 2004, respectively, the Company had sold $23.2 million and
$18.0 million in accounts receivable under these programs and had removed them
from its balance sheet.sheets. 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 costs associated
with the sale of accounts receivable.
During 2004, the Company announced its decision to invest approximately
$5.5 million to automate its recently-expanded central distribution facility in
Warsaw, Kentucky. Most of this spending was incurred in 2004. This initiative is
expected to be completed in the second quarter of 2005. Once completed, this
project is expected to generate significant efficiency improvements and improved
customer service capabilities for the Company's Dorman business. Total capital spending in 20042005 was $12.8 million as a result of the automation of the Warsaw
facility, a 77,200 square foot expansion of the Warsaw facility early in the
year, increased tooling costs for new products and other capital projects.$7.2 million. Capital spending in
20052006 is expected to be between $8.0$7.0 and $10.0 million, which
is down from 2004's level, but up over historic levels due primarily to
increased spending on tooling for new products, which have become more complex
over the past few years.$9.0 million.
Long-term debt consists primarily of $34.3$25.7 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.
The Company maintains a $10.0$20.0 million Revolving Credit Facility which
expires in June 2005.2007. Borrowings under the amended facility are on an unsecured
basis with interest at rates ranging from LIBOR plus 65 basis points to LIBOR
plus 150 basis points.points based upon the achievement of certain benchmarks related
to the ratio of funded debt to EBITDA. The interest rate at December 31, 2005
was LIBOR plus 85 basis points (5.24%). Borrowings under the facility were $10.1
million as of December 31, 2005. The loan agreement also contains covenants, the
most restrictive of which pertain to net worth and the ratio of debt to EBITDA. The average amount outstanding under the facility in
2004 was $0.4 million. The maximum amount outstanding in 2004 was $7.0 million.
In addition, the Company's Swedish subsidiary maintains a short-term $0.7
million credit facility. There were no borrowings outstanding under these
facilities as of December 25, 2004.
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")
in exchange for consideration of approximately $3.2 million to be paid in
installments through December 31, 2005. The Company paid $0.5 million of this
amount in both 2004 and 2003. The remaining amount payable of $0.5 million is
due to an entity controlled by
Page 16 of 42
the President of Scan-Tech.
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 letters of credit. These
obligations as of December 25, 200431, 2005 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 $ 34,75935,814 $ 9,0458,571 $ 25,71427,243 $ - $ -
Operating leases 7,643 2,267 4,707 532 137
------------- ----------- ----------- ----------- ----------------6,460 2,662 3,620 175 3
--------------- --------------- -------------- -------------- ------------------
$ 42,402 $11,31242,274 $11,233 $ 30,42130,863 $ 532175 $ 137
============= =========== =========== =========== ================3
=============== =============== ============== ============== ==================
On January 31, 2006, the Company entered into an industrial building
lease with an unrelated party to rent 268,253 feet of additional warehouse and
production space in Portland, TN. The initial lease term is for ten years. The
Company may, at its option, terminate the lease without any further liability
after seven years by giving the landlord six months notice and paying a
termination fee. Total annual rent expense in the first year of the lease will
be $0.6 million.
Amount of Commitment Expiration Per Period
------------------------------------------------------------------------------------------------------------------------
Total
Amount
Amounts Less than
Other Commercial Commitments Committed 1 year 1-3 years 4-5 years Over 5 years
- ---------------------------------- ------------- ----------- ----------- ----------------------------------------------------- --------------- --------------- -------------- --------------- -----------------
Letters of credit $ 1,7671,618 $ 1,7671,618 $ - $ - $ -
------------- ----------- ----------- ------------ --------------- --------------- -------------- --------------- -----------------
$ 1,7671,618 $ 1,7671,618 $ - $ - $ -
============= =========== =========== ============ =============== =============== ============== =============== =================
The Company reported a net source of cash flow from its operating
activities of $3.9$3.6 million in fiscal 2004. The primary uses of cash flow were
accounts receivable and inventory, which increased $16.4 million and $9.7
million, respectively. Accounts receivable grew as a result of higher sales and
the impact of the continuing trend towards longer payment terms to certain
customers. Inventory increased as a result of the sales increase in 2004, and as
a result of management's decision to increase levels of inventory safety stock
in the third quarter of 2004.2005. Net income depreciation and a $5.4 million
increase in accounts payabledepreciation were the
primary sources of operating cash flow in fiscal 2004.2005. The payables increase was primarily theprimary uses of cash flow
were inventory and accounts receivable. Inventory utilized $12.3 million in cash
in 2005 as a result of higher levelsinventory purchased to support new product initiatives and
$2.0 million of inventory purchasesplaced on consignment to one customer in 2005.
Accounts receivable resulted in a net use of cash of $4.2 million. Higher sales
of accounts receivable under accounts receivable sales programs offset a portion
of the accounts receivable impact of sales growth and capital spending.the continued trend
towards longer payment terms to certain customers.
Investing activities used $2.9$8.9 million of cash in fiscal 2004. Additions2005 as a
result of $7.2 million in additions to property, plant and equipment required $12.8and $1.7
million ofin cash as a result ofutilized to purchase Hermoff. The Company's largest 2005 capital
project is the Company's automation and expansion of its central distribution center in
Warsaw, Kentucky,Kentucky. This project began in 2004 and was originally expected to be
completed in early 2005 at a cost of $5.0 million. Scope changes and other
factors are now expected to delay completion of the project until the second
quarter of 2006, and total costs are now expected to be approximately $6.8
million. Capital spending in 2005 also included tooling costs associated with new
products, upgrades to information systems, purchases of equipment designed to
improve operational efficiencies and scheduled equipment replacements.
The Company previously
purchased highly liquid corporate and government bonds with maturities from nine
months to one year to take advantage of higher earnings rates on these
investments. These investments had been classified as short-term investments as
required by generally accepted accounting principles. The Company reported a net
source of cash of $9.9 million during the year related to the net proceeds from
investments.
Financing activities required $9.0generated $1.1 million in cash in fiscal 2004. These
uses were primarily2005 as
proceeds of $10.1 million from the result ofCompany's amended revolving credit facility
offset cash used to make the scheduled August 2005 repayment of $8.6 million on
the Company's Senior Notes in August 2004.Notes.
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.
Page 17 of 42
Foreign Currency Fluctuations
In 2004,2005, approximately 60%65% of the Company's products were purchased fromin
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, recent weakness in the dollar has
resulted in some materials price increaseincreases and pressure from several foreign
suppliers to increase prices further. 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 further.
The Company makes significant purchases of product from Chinese
vendors. ThePrior to 2005, the Chinese Yuan exchange rate has been fixed against
the U.S. Dollar since 1998. Recently,In July 2005, the Chinese government announced an
immediate 2% revaluation of the Yuan against the U.S. Dollar and that going
forward it will allow the Yuan to fluctuate against a basket of currencies.
Since that time the Yuan has been under increasing pressure to
revalue its currency, or to make its exchange rate more flexible.strengthened another 1% against the U.S. Dollar.
Most experts believe that the value of the Yuan wouldwill increase further relative
to the U.S. Dollar if
it was revalued or allowed to float.over the next few years. Such
Page 17 of 43
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,
althoughexperienced increases in the Company did experience some material cost increasesof materials and
transportation costs as a result of raw materials shortages.shortages and commodity price
increases in 2004 and increases in the cost of crude oil in 2005. These
increases did not have a material impact on the Company. The Company believes
that further 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, however there can be no assurance that
the Company will be successful in such efforts.
Recent Accounting Pronouncements
In December 2004,May 2005, the Financial Accounting Standards Board (FASB) issued
SFAS No. 154, "Accounting Changes and Error Corrections". SFAS No. 154 is a
replacement of APB No. 20 and FASB Statement No. 3. SFAS No. 154
provides guidance on the accounting for the reporting of Financial Accounting Standards (SFAS)accounting changes
and error corrections. It establishes retrospective application as the
required method for reporting a change in accounting principle. SFAS No.
154 provides guidance for determining whether retrospective application of a
change in accounting principle is impracticable and for reporting a change
when retrospective application is impracticable. The reporting of a correction
of an error by restating previously issued financial statements is also
addressed by SFAS No. 154. SFAS No. 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after
December 15, 2005. The Company will adopt this pronouncement beginning in
fiscal year 2006.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment" (SFAS No. 123R).
This Statement is a revision of SFAS No. 123 and supersedes Accounting Principles Board (APB)APB No. 25 and its
related implementation guidance. SFAS No. 123R requires a company to measure the
grant-date fair value of equity awards given to employees in exchange for
services and recognize that cost over the period that such services are
performed. SFAS No. 123R iswill effective for the first interim or annual reporting period that begins after
June 15, 2005, the Company's third fiscal quarter.in 2006. The Company is currently
evaluating the two methods of adoption allowed by SFAS No. 123R: the
modified-prospective transition method and the modified-retrospective transition
method. While the Company has not yet determined the precise impact that this
statement will have on its financial condition and results of operations for
fiscal 2005,2006, assuming future annual stock option awards are comparable to prior
years annual awards and the Black-Scholes method is used to compute the value of
the awards, the annualized impact on diluted earnings per share is expected to
be consistent with our pro forma SFAS No. 123 disclosures.
In December 2004, the FASB issued two FASB Staff Positions (FSP)
regarding the accounting implications of the American Jobs Creation Act of 2004.
The Company is assessing the impact, if any, thatadoption of FAS No. 109-1, "Application of FASB Statement No. 109
'Accounting for Income Taxes' to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004" and FSP No. 109-2
"Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004" willdid not have any effect
on the Company's effective tax rate in 2005.
In December 2004, the FASB issued SFAS No. 151 "Inventory Costs, an
Amendment of ARB No. 43, Chapter 4". SFAS No. 151 clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling costs and wasted
material and requires that these items be recognized as current period charges.
SFAS No. 151 applies only to inventory costs incurred during periods beginning
after the effective date and also requires that the allocation of fixed
production overhead to conversion costs be based on the normal capacity Page 18 of 42
of the
production facilities. SFAS No. 151 is effective for the Company's fiscal year
beginning January 1, 2006. The Company is currently assessing the impact,
if any, ofdoes not anticipate that the adoption of
the provisions of SFAS No. 151.No.151 will have a material effect on the results of
operations in 2006.
In December 2004, the FASB issued SFAS No. 153 "Exchanges of
Non-monetary Assets, An Amendment of APB Opinion No. 29". SFAS No. 153
eliminates the exception for exchange of similar productive assets and replaces
it with a general exception for exchanges of non-monetary assets that do not
have commercial substance. SFAS No. 153 isbecame effective for non-monetary assets
and exchanges occurring in fiscal periods beginning after June 15, 2005, the
Company's third fiscal quarter. As the Company does not engage in exchanges of
non-monetary assets, the Company does not anticipate that implementation of this statement willdid not have an
impact on its financial condition or results of operations.
In December 2003, the FASB issued Revised Interpretation No. 46,
"ConsolidationPage 18 of Variable Interest Entities - an interpretation of Account
Research Bulletin No. 51." FIN No. 46R addresses the consolidation by business
enterprises of variable interest entities, as defined in the Interpretation. FIN
No. 46R 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 interests in variable
interest entities, the adoption of FIN No. 46R did not have any effect on the
Company's consolidated financial condition or results of operations.43
Cautionary Statement Regarding Forward Looking StatementsStatement.
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)1933 and the Securities Exchange Act of 1934), and because
such statements involve risks and uncertainties, actual results may differ
materially from those expressed or implied by such forward looking statements.
Factors that cause actual results to differ materially include but are not
limited to those factors discussed in "Business -"Item 1A Risk Factors."
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 and customer-sponsored programs to sell accounts receivable, 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...
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 19 of 42
Report of Independent Registered Public Accounting Firm
The Board of Directors
R&B, Inc.:
We have audited the accompanying consolidated balance sheets of R&B,
Inc. and subsidiaries as of December 25, 200431, 2005 and December 27, 200325, 2004 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended December 25, 2004.31, 2005. In
connection with our audits of the consolidated financial statements, we also
have audited the 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.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of R&B, Inc.
and subsidiaries as of December 25, 200431, 2005 and December 27, 2003,25, 2004, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 25, 2004,31, 2005, in conformity with U.S. generally accepted
accounting principles. Also in our opinion, the related 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.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of R&B,
Inc. and subsidiaries''s internal control over financial reporting as of December 25, 2004,31, 2005, based
on criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated March 7, 200513, 2006 expressed an unqualified opinion on management's
assessment of, and the effective operation of, internal control over financial
reporting.
KPMG LLP
Philadelphia, Pennsylvania
March 7, 200513, 2006
Page 2019 of 4243
R&B, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended
-------------------------------------------------------------------------------------------------------------------
December 31, December 25, December 27, December 28,
(in thousands, except per share data) 2005 2004 2003
2002
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net Sales $278,117 $249,526 $222,083 $215,524
Cost of goods sold 179,253 157,004 139,875
136,321
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Gross profit 98,864 92,522 82,208 79,203
Selling, general and administrative expenses 69,088 62,884 58,156
58,213
Gain on sale of specialty fastener business - - (2,143)
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Income from operations 29,776 29,638 24,052 23,133
Interest expense, net of interest income of $22, $103, and $198 and $4112,615 2,853 3,376
3,931
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 27,161 26,785 20,676
19,202
Income taxes 10,084 9,704 7,372
6,845
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 17,077 $ 17,081 $ 13,304
$ 12,357
==================================================================================================================================================================================================================================================
Earnings Per Share:
Basic $ 1.930.95 $ 1.540.97 $ 1.460.77
Diluted $ 1.860 93 $ 1.470.93 $ 1.38
===============================================================================================================0.73
Weighted Average Shares Outstanding:
Basic 8,845 8,647 8,48717,914 17,690 17,294
Diluted 9,184 9,050 8,948
===============================================================================================================
18,437 18,368 18,101
===================================================================================================================================
See accompanying notes to consolidated financial statements.
Page 2120 of 4243
R&B, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 25,31, December 27,25,
(in thousands, except share data) 2005 2004
2003
- ------------------------------------------------------------------------ --------------- ------------------------------------------------------------------------------------------------------ ------------------ -----------------
Assets
Current Assets:
Cash and cash equivalents $ 7,1522,944 $ 15,177
Short-term investments - 9,9057,152
Accounts receivable, less allowance for doubtful accounts
and customer credits of $22,728 and $20,575 and $17,72164,778 60,962
44,127
Inventories 75,535 61,436 51,170
Deferred income taxes 9,560 8,417 7,493
Prepaids and other current assets 1,545 1,609
1,356
- ------------------------------------------------------------------------ --------------- ------------------------------------------------------------------------------------------------------ ------------------ -----------------
Total current assets 154,362 139,576
129,228
- ------------------------------------------------------------------------ --------------- ------------------------------------------------------------------------------------------------------ ------------------ -----------------
Property, Plant and Equipment, net 27,473 25,698
17,590
Goodwill 29,617 29,410 29,125
Other Assets 704 720
663
- ------------------------------------------------------------------------ --------------- ------------------------------------------------------------------------------------------------------ ------------------ -----------------
Total $ 212,156 $ 195,404
$ 176,606
======================================================================== =============== ====================================================================================================== ================== =================
Liabilities and Shareholders' Equity
Current Liabilities:
Current portion of long-term debt $ 9,0458,571 $ 8,5719,045
Accounts payable 14,739 15,599 10,029
Accrued compensation 6,727 8,028 7,379
Other accrued liabilities 8,513 5,319
4,797
- ------------------------------------------------------------------------ --------------- ------------------------------------------------------------------------------------------------------ ------------------ -----------------
Total current liabilities 38,550 37,991
30,776Other Long-Term Liabilities 626 - ------------------------------------------------------------------------ --------------- ---------------
Long-Term Debt 27,243 25,714 35,213
Deferred Income Taxes 7,195 6,472 4,632
Commitments and Contingencies (Note 10)
Shareholders' Equity:
Common stock, par value $.01; authorized 25,000,000 shares;
issued and outstanding 8,935,96417,749,583 and 8,762,99417,871,928 shares 89 88177 179
Additional paid-in capital 34,749 33,95033,138 34,659
Cumulative translation adjustments 1,270 3,509 2,148
Retained earnings 103,957 86,880 69,799
- ----------------------------------------------------------------------- --------------- ---------------
Total shareholders' equity 138,542 125,227
105,985
- ------------------------------------------------------------------------ --------------- ------------------------------------------------------------------------------------------------------ ------------------ -----------------
Total $ 212,156 $ 195,404
$ 176,606
======================================================================== =============== ===============
======================================================================================= ================== =================
See accompanying notes to consolidated financial statements.
Page 22 of 4243
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 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 32,93717,002,140 $170 $ 32,852 $ 55 56,495$56,495 $ 89,572
Common stock issued to
Employee Stock Purchase Plan 5681,136 - 5 - - 5
Compensation expense on stock option issuance - - 21 - - 21
Shares issued under Incentive Stock Plan 261,356 3 483522,712 5 481 - - 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 33,95017,525,988 175 33,863 2,148 69,799 105,985
Common stock issued to
Employee Stock Purchase Plan 5541,108 - 10 - - 10
Appreciation on shares redistributed to 401(k) plan - - 96 - - 96
Shares issued under Incentive Stock Plan 172,416 1 65344,832 4 62 - - 66
Tax benefit of stock option exercises - - 628 - - 628
Comprehensive Income:
Net income - - - - 17,081 17,081
Currency translation adjustments - - - 1,361 - 1,361
-----------------
Total comprehensive income 18,442
- ------------------------------------------------ ----------- ---------- ------------ ------------- --------- ----------------------------------------------------------------------------------------------------------------------------------------------
Balance at December 25, 2004 8,935,964 $89 $34,749 $3,509 $86,880 $125,227
================================================ =========== ==========17,871,928 179 34,659 3,509 86,880 125,227
Common stock issued to
Employee Stock Purchase Plan 709 - 7 - - 7
Appreciation on shares redistributed to 401(k) plan - - 191 - - 191
Shares issued under Incentive Stock Plan 66,955 - 105 - - 105
Tax benefit of stock option exercises - - 247 - - 247
Purchase and cancellation of common stock (190,009) (2) (2,071) - - (2,073)
Comprehensive Income:
Net income - - - - 17,077 17,077
Currency translation adjustments - - - (2,239) - (2,239)
---------
Total comprehensive income 14,838
Balance at December 31, 2005 17,749,583 $177 $33,138 $1,270 $103,957 $138,542
========================================================== ============== ============ ============= ======================= =============== ===========
See accompanying notes to consolidated financial statements.
Page 23 of 4243
R&B, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended
------------------ ------------------- ---------------------------------------- ----------------------- --------------------
December 31, December 25, December 27,
December 28,
(in thousands) 2005 2004 2003
2002
- --------------------------------------------------- ------------------ ------------------- -------------------------------------------------------------------------------- ---------------------- ----------------------- --------------------
Cash Flows from Operating Activities:
Net income $ 17,077 $ 17,081 $ 13,304 $ 12,357
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 5,774 4,545 4,640 5,560
Provision for doubtful accounts 233 110 504 737
Provision for deferred income tax (473) 916 1,285 11
Provision for non-cash stock compensation - 21 363
Gain on sale of specialty fastener business - - (1,329)21
Changes in assets and liabilities:
Accounts receivable (4,192) (16,391) 4,806
(13,339)
Inventories (12,261) (9,669) (2,766) (2,351)
Prepaids and other current assets 9 (148) 173
28
Other assets 8 66 (119)
516
Accounts payable (888) 5,380 (1,862) 3,101
2762,1012
Accrued compensation and other liabilities (1,717) 1,976 757
(593)
- --------------------------------------------------- ------------------ ------------------- -------------------------------------------------------------------------------- ---------------------- ----------------------- --------------------
Cash provided by operating activities 3,570 3,866 20,743
5,061
- --------------------------------------------------- ------------------ ------------------- -------------------------------------------------------------------------------- ---------------------- ----------------------- --------------------
Cash Flows from Investing Activities:
Property, plant and equipment additions (7,220) (12,801) (5,598) (3,543)
Purchase of short-term investments - (4,821) (11,492) (22,795)
Proceeds from maturities of short-term investments - 14,726 15,589
8,793
Proceeds from litigation settlement and saleBusiness acquisition, net of specialty fastener business, netcash acquired (1,680) - - 7,374
- --------------------------------------------------- ------------------ ------------------- ------------------
Cash used in investing activities (8,900) (2,896) (1,501)
(10,171)
- --------------------------------------------------- ------------------ ------------------- -------------------------------------------------------------------------------- ---------------------- ----------------------- --------------------
Cash Flows from Financing Activities:
Repayment of long-term debt obligations (9,071) (9,071) (9,725)
(11,483)Net proceeds from revolving credit facility 10,100 - -
Proceeds from common stock issuances 93 76 491
73
- --------------------------------------------------- ------------------ ------------------- -------------------------------------------------------------------------------- ---------------------- ----------------------- --------------------
Cash used inprovided by (used in) financing activities 1,122 (8,995) (9,234)
( 11,410)
- --------------------------------------------------- ------------------ ------------------- -------------------------------------------------------------------------------- ---------------------- ----------------------- --------------------
Net (Decrease)Increase in Cash and Cash
Equivalents (4,208) (8,025) 10,008 (16,520)
Cash and Cash Equivalents, Beginning of
Year 7,152 15,177 5,169
21,689
- --------------------------------------------------- ------------------ ------------------- -------------------------------------------------------------------------------- ---------------------- ----------------------- --------------------
Cash and Cash Equivalents, End of Year $ 2,944 $ 7,152 $ 15,177
$ 5,169
=================================================== ================== =================== ================================================================================ ====================== ======================= ====================
Supplemental Cash Flow Information
Cash paid for interest expense $ 2,569 $ 2,994 $ 3,638 $ 4,356
Cash paid for income taxes $ 9,246 $ 8,418 $ 5,572 $ 7,218
See accompanying notes to consolidated financial statements.
Page 24 of 4243
R&B, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 25, 200431, 2005
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
merchandiseAutomotive Aftermarket and Mass Merchandise
markets. R&B's productsDorman automotive parts and hardware are marketed under more than seventy
proprietarythe OE
Solutions(TM), HELP!(R), AutoGrade(TM), First Stop(TM), Conduct-Tite(R), and
Pik-A- Nut(R) brand names, through its Motormite, Dorman, Allparts, Scan-Tech, MPI
and Pik-A-Nut businesses.names.
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 31,
2005, December 25, 2004 and December 27, 2003 are fifty-three, fifty-two, and
December 28, 2002 are each fifty-two week periods.weeks, respectively.
Principles of Consolidation. The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
material intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates in the Preparation of Financial Statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents. The Company considers all highly liquid
debt instruments with original maturities of three months or less to be cash
equivalents.
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 25, 2004, the Company did not
hold any short-term investments.
Sales of Accounts Receivable. The Company has entered into several
customer sponsored programs administered by unrelated financial institutions
that permit the Company to sell, without recourse, certain accounts receivable
at discounted rates to the financial institutions. The Company does not retain
any servicing requirements for these accounts receivable. Transactions under
this factoring agreementthese agreements are accounted for as sales of accounts receivable following the
provisions of Statement of Financial Accounting Standards (SFAS) No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities - a Replacement of FASB Statement 125." At December 31, 2005 and
December 25, 2004, and December 27, 2003, $18.0$23.2 million and $2.0$18.0 million of accounts receivable were
sold and removed from the consolidated balance sheets, respectively. Selling,
general and administrative expenses include $1.2 million in 2005 and $0.3
million in 2004 in financing costs associated with these accounts receivable
sales programs.
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.
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).Estimated useful lives by major asset category areas follows:
Buildings 3 to 39 years
Machinery, equipment and tooling 3 to 10 years
Furniture, fixtures and leasehold improvements 3 to 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.
Long-lived assets, such as property, plant and equipment are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to estimated undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which
Page 25 of 4243
the carrying amount of the asset exceeds the fair value of the asset. Assets to
be disposed of would be separately presented in the balance sheet and reported
at the lower of the carrying amount or fair value less costs to sell, and are no
longer depreciated. The assets and liabilities of a disposal group classified as
held for sale would be presented separately in the appropriate asset and
liability sections of the balance sheet. The Company did not record any asset
impairment charges in fiscal 2005, 2004, or 2003.
Goodwill. The Company adoptedfollows the provisions of SFAS No. 142, "Goodwill
and Other Intangible Assets." SFAS No. 142 specifies that goodwillAssets". The Company employs a discounted cash flow
analysis and a market comparable approach in conducting its impairment tests.
Cash flows are discounted at 12% and an earnings multiple of 5.75 to 6.0 times
EBITDA is no longer
be amortized but instead is subject to periodic impairment testing. As a result,
the Company no longer amortizes goodwill.used when conducting these tests. The Company has completed the
impairment tests required by SFAS No. 142, which did not result in an impairment
charge. Changes to goodwill in 2004 and 2003 are due to currency translation.
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.
Research and Development. Research and development costs are expensed as
incurred. Research and development costs totaling $1.9 million in 2005, $1.5
million in 2004 and $1.1 million in 2003 have been recorded in selling, general
and administrative expenses.
Foreign Currency Translation. Assets and liabilities of athe Company's
foreign subsidiarysubsidiaries 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.
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 77 % and 70%77% of net accounts receivable as
of December 25, 200431, 2005 and December 27, 2003, respectively.25, 2004. 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 $36.9$36.6 million and $47.6$36.9 million at December 25, 200431, 2005 and
December 27, 2003,25, 2004, 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.
Stock Dividend. All prior period common stock and applicable share and
per share amounts have been retroactively adjusted to reflect a two-for-one
split of the Company's Common Stock effective March 28, 2005.
Revenue Recognition. Revenue is recognized from product sales when
goods are shipped, title and risk of loss have been transferred to the customer
and collection is reasonably assured. The Company calculates its net sales by
subtracting allowancesrecords estimates for customer credits from gross sales. Allowances for
customer credits include costs forcash
discounts, product returns and warranties, discounts and promotional rebates given to customers who purchase new productsin
the period of the sale ("Customer Credits"). The provision for inclusion in their
stores,Customer Credits
is recorded as a reduction from gross sales 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 allowancesreserves for customer creditsCustomer 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
Page 26 of 43
included in cost of goods sold. Actual Customer Credits have not differed
materially from estimated amounts for each period presented.
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 25, 2004:
Page 26 of 42
31, 2005:
2005 2004 2003
2002
---------- ---- ----------- ----- -------------------------- - --------------- -- --------------------
Numerator: (in thousands, except per share data)
Net income ........................................................................ $17,077 $17,081 $13,304 $12,357
Denominator:
Weighted average shares outstanding used in
basic earnings per share calculation 8,845 8,647 8,48717,914 17,690 17,294
Effect of dilutive stock options........ 339 403 461
---------- ---- ----------- ----- -----------options... ................. 523 678 807
--------------- - --------------- -- --------------------
Adjusted weighted average shares outstanding
diluted earnings per share......... 9,184 9,050 8,948
========== ==== =========== ===== ===========share........................ 18,437 18,368 18,101
=============== = =============== == ====================
Basic earnings per share...................... $1.93share.............................. $0.95 $ 1.540.97 $ 1.46
========== ==== =========== ===== ===========0.77
=============== = =============== == ====================
Diluted earnings per share.................... $1.86 $1.47share........................... $0.93 $ 1.38
========== ==== =========== ===== ===========
Options to purchase 50,750 and 5,0000.93 $ 0.73
=============== = =============== == ====================
Options to purchase 103,500 and 101,500 shares were outstanding at
December 31, 2005 and December 27, 2003, and December 28, 2002, respectively, but were not included in
the computation of diluted earnings per share, as their effect would have been
antidilutive. No outstanding options at December 25, 2004 were excluded from the
computation of diluted earnings per share.
Stock-Based Compensation. At December 25, 2004 were excluded from the
computation of diluted earnings per share.
Stock-Based Compensation. At December 31, 2005, the Company has one
stock-based employee compensation plan, which is described more fully in Note
11. 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
SFAS No. 123, "Accounting for Stock-Based Compensation", to stock-based employee
compensation.
Year Ended December
- ------------------------------------------------------ --------------------------------------------------------------------------------------------------------------- -------------------------------------------------------
(in thousands, except per share data) 2005 2004 2003
2002
- ------------------------------------------------------------------------------------------------------------------------ -------------------- ---------------- -------------- -------------
----------------
Net income:
Net income, as reported $ 17,077 $ 17,081 $ 13,304 $ 12,357
Add: Stock-based employee compensation expense
net of related tax effects, included in the determination
of net income, as reported - - 13 97
Less: Stock-based employee compensation expense,
net of related tax effects, determined under fair value
based method for all awards (281) (148) ( 81) (629)(81)
- ------------------------------------------------------------------------------------------------------------------------ -------------------- ---------------- -------------- -----------------------------
Net income, pro forma $ 16,796 $ 16,933 $ 13,236
$ 11,825
- ------------------------------------------------------------------------------------------------------------------------ -------------------- ---------------- -------------- -----------------------------
Earnings per share:
Basic - as reported $ 1.930.95 $ 1.54$ 1.460.97 $ 0.77
Basic - pro forma $ 1.910.94 $ 1.53$ 1.390.96 $ 0.77
Diluted - as reported $ 1.860.93 $ 1.47$ 1.380.93 $ 0.73
Diluted - pro forma $ 1.840.91 $ 1.46$ 1.320.92 $ 0.73
Page 27 of 43
The weighted average fair value of options granted in 2005, 2004 and 2003
was $6.54, $4.67 and 2002
was $9.33, $6.56 and
Page 27 of 42
$4.64,$3.28, respectively. The fair value of each option grant is
estimated on the date of grant using the Black- ScholesBlack-Scholes option pricing model with
the following weighted average assumptions:
2005 2004 2003 2002
---- ---- ----
Expected dividend yield 0% 0% 0%
Expected stock price volatility 46% 51% 52% 53%
Risk-free interest rate 3.9 % 3.6% 3.3% 3.3%
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. Inventories
Inventories include the cost of material, freight, direct labor and
overhead utilized in the processing of the Company's products. Inventories were
as follows:
December 25,31, December 27,25,
(in thousands) 2005 2004
2003
- --------------------------- ---------------------- ------------------ --------------------------------------------
Bulk product $30,548 $26,407 $22,365
Finished product 42,317 32,029 25,906
Packaging materials 2,670 3,000
2,899
- --------------------------- ---------------------- ------------------ --------------------------------------------
Total $75,535 $61,436
$51,170=========================== ====================== ================== ====================
4.========================
Included in Finished product as of December 31, 2005 is approximately $2.0
million in inventory held on consignment.
3. Property, Plant and Equipment
Property, plant and equipment consists of the following:
December 25,31, December 27,25,
(in thousands) 2005 2004
2003
- ------------------------------------ ------------------ ---------------------------------------------- ------------------------ --------------------------
Property under capitalized leases $ 2,4522,302 $ 2,452
Buildings 11,165 10,447 8,419
Machinery, equipment and tooling 28,279 24,693 20,296
Furniture, fixtures and
leasehold improvements 3,626 3,633 3,677
Computer and other equipment 27,195 25,168
20,468
- ------------------------------------ ----------------------------------------------- ------------------- --------------------
Total 72,567 66,393 55,312
Less-accumulated depreciation (45,094) (40,695)
(37,722)
- ------------------------------------ -------------------------------------------- ------------------- --------------------
Property, plant and equipment, net $27,473 $25,698
$17,590
============================================================= ================== =========================================
Page 28 of 4243
4. Goodwill
In June 2005, the Company acquired The Automotive Edge/Hermoff
(Hermoff) for approximately $1.7 million. The consolidated results include
Hermoff since June 1, 2005. The Company has not presented pro forma results of
operations for the years ended December 31, 2005, December 25, 2004 and December
27, 2003, assuming the acquisition had occurred at the beginning of the
respective periods, as these results would not have been materially different
than actual results for the periods. The goodwill recorded as a result of the
acquisition may be revised upon final determination of the purchase price
allocation.
Goodwill activity during the year ended December 31, 2005 is as
follows: (in thousands)
Balance, December 25, 2004 $29,410
Acquisition 734
Translation (527)
Balance, December 31, 2005 $29,617
- ----------------------------------------------- -----------------
5. Long-Term Debt
Long-term debt consists of the following:
December 25,31, December 27,25,
(in thousands) 2005 2004
2003
- --------------------------------- ------------------- ----------------------------------------------------------- ----------------- -------------
Senior notes $25,714 $34,285
$42,857Bank credit facility 10,100 -
Obligation for stock repurchase
(Note 7) - 474
927
- --------------------------------- ------------------- ----------------------------------------------------------- ----------------- -------------
Total 35,814 34,759 43,784
Less: Current portion ( 9,045) (8,571) (9,045)
- --------------------------------- ------------------- ----------------------------------------------------------- ---------------- -------------
Total long-term debt $27,243 $25,714
$35,213
================================= =================== =========================================================== ============= =================
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. TheIn May 2005, the Company has aamended its existing
Revolving Credit Facility which
provides for a $10 millionFacility. The amended facility that expires in June 2005.2007. The May
2005 amendment increased the total credit facility from $10 million to $20
million. Borrowings under the amended facility are on an unsecured basis with
interest at rates ranging from LIBOR plus 65 basis points to LIBOR plus 150
basis points.points based upon the achievement of certain benchmarks related to the
ratio of funded debt to EBITDA. The interest rate at December 31, 2005 was LIBOR
Page 29 of 43
plus 85 basis points (5.24%). The loan agreement also contains covenants, the
most restrictive of which pertain to net worth and the ratio of debt to EBITDA.
The average amount outstanding under the Revolving Credit Facility
was $422,000$5.6 million and $0.4 million during 2004.2005 and 2004, respectively. The
maximum amount outstanding in 2005 and 2004 was $13.7 million and $7.0 million. There were no borrowings
outstanding as of December 25, 2004. There were no borrowings under the
Revolving Credit Facility in 2003. The Company's Swedish subsidiary maintains a
$750,000 credit facility. As of December 25, 2004, no amounts were outstanding
under this facility, which is provided on an unsecured, short-term basis.million,
respectively.
The Company is in compliance with all financial covenants contained in
the Senior Notes and Revolving Credit Facility.
Aggregate annual principal payments applicable to long-term debt
obligations as of December 25, 200431, 2005 are as follows:
(in thousands)
20052006 $ 9,045
2006 8,571
2007 8,57118,671
2008 8,572
2009 -
Thereafter -
- ---------------------------------------------------------------------------------------------
Total $34,759$35,814
- ---------------------------------------------------------------------------------------------
6. 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:
Page 29 of 42
(in thousands)
20052006 $ 2,267
2006 2,1252,662
2007 2,0602,345
2008 522637
2009 532638
2010 175
Thereafter 1373
- -------------- ----------------------------------- ----------------------
Total $ 7,643
============== ==================6,460
================= ======================
Rent expense was $3.1 million in 2005, $2.9 million in 2004 and $2.8
million in 2003 and $2.9
million in 2002.2003.
7. 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 arewere partners. Total rental
payments each year to the partnership under the lease arrangement were $1.3
million in 2005, $1.2 million in 2004 2003 and 2002.$1.2 million in 2003.
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 arewere 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 and
$272,000 in 2003 and 2002, respectively.
In November 2001, the Company amended certain agreements related
to its 1998 acquisition of Scan- Tech USA/Sweden A.B. and related entities
("ScanTech"Scan-Tech"). As a result of this transaction, the Company
Page 30 of 43
purchased and cancelled 250,000 shares of its common stock issued in connection
with the acquisition and cancelled the earn out provisions of the agreement in
exchange for consideration of approximately $3.2 million to be paid in
installments through December 31, 2005. The Company paidsatisfied the obligation in
2005 by making the last installment payment of $0.5 million. Payments of $0.5
million of
this amount bothwere also made in 2004 and 2003. TheAll amounts due under the obligation
includes interest imputed at a
5.0% rate. The remaining amount payable of $0.5 million is duewere paid to an entity controlled by the President of Scan-Tech.
8. Income Taxes
The components of the income tax provision (benefit) are as follows:
(in thousands) 2005 2004 2003
2002
- ---------------------------------------------- --------------- ------------------ ----------------- ---------------------------
Current:
Federal $9,327 $7,621 $5,371
$ 6,048
State 893 517 292
365
Foreign 337 650 424
394
- ------------------------ ------------------ ----------------- ----------------10,557 8,788 6,087
6,807
- ------------------------ ------------------ ----------------- ------------------------------ --------------------- --------------------- -------------------
Deferred:
Federal (354) 857 1,224
36
State (34) 59 61
2
Foreign (85) - -
- - ------------------------ ------------------ ----------------- ---------------------------------------------------- --------------------- --------------------
(473) 916 1,285
38
- ------------------------ ------------------ ----------------- ---------------------------------------------------- --------------------- --------------------
Total $10,084 $9,704 $7,372
$6,845
======================== ================== ================= ================
Page 30 of 42
==================================== ===================== ====================
The following is a reconciliation of income taxes at the statutory tax rate to
the Company's effective tax rate:
2005 2004 2003 2002
- -------------------------------------------------------------------------------
Federal taxes at statutory rate 35.0% 34.0%35.0% 34.0%
State taxes, net of Federal tax benefit 2.1% 1.4% 1.1%
1.2%
Other - (0.2%) 0.6% 0.4%
- -------------------------------------------------------------------------------
Effective tax rate 37.1% 36.2% 35.7% 35.6%
===============================================================================
Deferred income taxes result from timing differences in the
recognition of revenue and expense for tax and financial statement purposes. Thepurposes.The
sources of temporary differences are as follows:
December 25,31, December 27,25,
(in thousands) 2005 2004
2003
- -------------------------------------- ----------------------------------------- -------------------- ----------------------
Assets:
Inventories $3,195$3,985 $ 3,2513,195
Accounts receivable 3,476 3,449 2,833
Accrued expenses and other 2,082 1,765
1,547
- -------------------------------------- ------------------------------------------ -------------------- ----------------------
Gross deferred tax assets 9,543 8,409
7,631
- -------------------------------------- ----------------------------------------- -------------------- ----------------------
Liabilities:
Depreciation 1,381 1,284
106
Goodwill 5,797 5,180
4,664
- -------------------------------------- ----------------- ---------------------------------------------- -------------------- ---------------------
Gross deferred tax liabilities 7,178 6,464
4,770
- -------------------------------------- ----------------- ---------------------------------------------- -------------------- ---------------------
Net deferred tax assets $2,365 $1,945
$2,861
====================================== ================= ============================================= ========================== ==========================
Page 31 of 43
Based on the Company's history of taxable income and its
projection of future earnings, the Company believes that it is more likely than
not that sufficient taxable income will be generated in the foreseeable future
to realize the net deferred tax assets.
As of December 25, 2004,31, 2005, the Company has not provided taxes on
unremitted foreign earnings from its foreign affiliate of approximately $8.7$8.1
million that are intended to be indefinitely reinvested in operations and
expansion outside the United States. The Company is exploring a one time
repatriation of earnings from certain foreign affiliates as a result of the
American Jobs Creation Act of 2004, but has not made a decision regarding such
repatriation. The deduction is subject to a number of limitations and
uncertainty remains as to how to interpret numerous provisions in the American
Jobs Creation Act of 2004. As such, the Company is not yet in a position to
decide on whether, and to what extent, it might repatriate foreign earnings.
9. 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 operating segment, namely, the sale of
replacement parts for the automotive aftermarket.
During 2005, 2004 2003 and 2002,2003, two customers each accounted for more
than 10% of net sales and in the aggregate accounted for 34%31%, 31%34% and 36%31% of net
sales, respectively. Net sales to countries outside the US, primarily to Western
Europe
and Canada in 2005, 2004 and 2003 and 2002 were $22.8 million, $23.1 million $20.7 million and $22.9$20.7
million, respectively.
10. Commitments and Contingencies
Shareholder Agreement. A shareholder agreement was entered into
in September 1990 and
Page 31 of 42
amended and restated on August 1, 2004. 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.
11. Capital Stock
Stock Dividend. On February 24, 2005, the Company's Board of
Directors approved a two-for-one split of the Company's common stock, payable in
the form of a stock dividend of one share for each share held. The Board set
March 15, 2005 as the record date for the determination of the shareholders
entitled to receive the additional shares. The shares were distributed to the
shareholders of record on March 28, 2005. All earnings per share and common
stock information is presented as if the stock split occurred prior to the
earliest year included in these consolidated financial statements.
Purchase and cancellation of common stock. The Company periodically
repurchases common stock issued to the Company's deferred contribution profit
sharing and 401(k) plan. During 2005, the Company's board of directors approved
the cancellation of the 190,009 shares of common stock that have been
repurchased to date.
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.
Page 32 of 43
Control by Officers, Directors and Family Members. As of March 7, 2006,
Richard N. Berman and Steven L. Berman, who are officers and directors of the
Company, their father and their brothers beneficially own 41% of the outstanding
Common Stock of the Company and are able to elect the Board of Directors,
determine the outcome of most corporate actions requiring shareholder approval
and control the policies of the Company.
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 1,172,5002,345,000 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 25, 2004,31, 2005, options to acquire
218,041296,511 shares were available for grant under the Plan.
Transactions under the Plan for the three years ended December 25,
200431, 2005
were as follows:
Option Price Weighted
Shares per Share Average Price
- --------------------------------------- ---------------------------------------------------------------- ------------------- ------------------------------------------ -----------------------
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 1.001,580,358 $ 0.50 - 9.625 2.894.81 $1.45
Granted 148,250 10.15296,500 5.08 - 14.28 11.517.14 5.76
Exercised (284,033) 1.00(568,066) 0.50 - 9.625 2.624.81 1.31
Canceled ( 5,750) 3.00(11,500) 1.50 - 8.00 6.074.00 3.04
- --------------------------------------- ---------------------------------------------------------------- ------------------- ------------------------------------------ -----------------------
Balance at December 27, 2003 648,646 1.001,297,292 0.50 - 14.28 4.967.14 2.48
Granted 60,000 16.01120,000 8.01 - 19.45 16.469.73 8.23
Exercised (193,346) 1.00(386,692) 0.50 - 10.15 2.775.08 1.39
Canceled ( 54,000) 10.15(108,000) 5.08 5.08
- 10.16 10.16
- --------------------------------------- ---------------------------------------------------------------- ------------------- ------------------------------------------ -----------------------
Balance at December 25, 2004 461,300 $1.00922,600 0.50 - 19.45 $6.779.73 3.39
Granted 153,500 11.10 - --------------------------------------- ----------------12.48 12.03
Exercised (71,884) 0.50 - 7.14 2.14
Canceled (9,000) 0.50 - 6.36 4.41
- ------------------------------------------------ ------------------- ----------------------- -----------------------
Balance at December 31, 2005 995,216 $0.50 - 12.48 $4.80
- ------------------------------------------------ ------------------- ----------------------- -----------------------
Options exercisable at
December 25, 2004 295,367 $1.0031, 2005 579,883 $0.50 - 14.28 $3.369.73 $2.04
- --------------------------------------- ---------------------------------------------------------------- ------------------- ------------------------------------------ -----------------------
Page 3233 of 4243
The following table summarizes information concerning currently outstanding and
exercisable options at December 25, 2004:31, 2005:
Options Outstanding Options Exercisable
----------------------------------------------- ------------------------------------------------------------------------------------------- ----------------------------------------
Weighted-
Average Weighted-
Remaining Average Weighted-
Range of Numbers Contractual Exercise Number Average
Exercise Price Outstanding Life (years) Price Exercisable Exercise
Price
- ---------------------------------------- ------------------- ------------------- ---------------- ---------------- ------------- ---------------- ----------------------------------- ------------------
$1.00$0.50 - $3.00 267,550 6.1 $2.50 264,017$1.50 474,566 5.1 $1.24 471,033 $ 2.51
$5.701.24
$2.85 - $8.00 40,500 7.4 $7.82 12,700$4.00 74,200 6.4 $3.93 37,800 $ 7.73
$10.153.91
$5.08 - $14.28 93,250 8.7 $12.32 18,650 $12.32
$16.01$7.14 172,950 7.7 $6.13 67,050 $ 6.12
$8.01 - $19.45 60,000$9.73 120,000 8.2 $8.23 4,000 $ 9.36
$11.10 - $12.48 153,500 9.2 $16.46$11.55 - -
- ---------------------- ------------------- ------------------- ---------------- --- - -------------------- ------------------
995,216 $ 4.80 579,883 $ 2.04
- ---------------------- ------------------- ------------------- ---------------- --- - -------------------- ------------------
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 300,000600,000 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 2004,2005, optionees had exercised rights to purchase 554709
shares at prices from $14.03$9.42 to $22.47$11.48 per share for total net proceeds of
$10,000.$7,000.
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 25, 2004.31, 2005. Annual contributions under the plan are
determined by the Board of Directors of the Company. Consolidated expense
related to the plan was $665,000, $865,000, $1,121,000, and $856,000$1,121,000 in fiscal 2005, 2004
2003 and 2002,2003, respectively.
12. Accounting Pronouncements
In December 2004,May 2005, the Financial Accounting Standards Board (FASB)
issued SFAS No. 154, "Accounting Changes and Error Corrections:. SFAS No.
154 is a replacement of APB No. 20 and FASB Statement No. 3. SFAS No. 154
provides guidance on the accounting for and reporting of accounting changes
and error corrections. It establishes retrospective application as the
required method for reporting a change in accounting principle. SFAS No. 154
provides guidance for determining whether retrospective application of a
change in accounting principle is impracticable and for reporting a change
when retrospective application is impracticable. The reporting of a correction
of an error by restating previously issued financial statements is also
addressed by SFAS No. 154. SFAS No. 154 is effective for accounting changes
and corrections of errors made in fiscal years beginning after December 15,
2005. The Company will adopt this pronouncement beginning in fiscal year 2006.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based
Payment". This Statement is a revision of SFAS No. 123 and supersedes APB No. 25
and its related implementation guidance. SFAS No. 123R requires a company to
measure the grant-date fair value of equity awards given to employees in
exchange for services and recognize that cost over the period that such services
are performed. SFAS No. 123R iswill be effective for the
first interim or annual reporting period that begins after June 15, 2005, the
Company's third fiscal quarter.in 2006. The Company is currently
evaluating the two methods of adoption allowed by SFAS No. 123R: the
modified-prospective transition method and the modified- retrospectivemodified-retrospective transition
method. While the Company has not yet determined the precise impact that this
statement will have on its financial condition and results of operations for
fiscal 2005,2006, assuming future annual stock option awards are comparable to prior
years annual awards and the Black-Scholes method is used to compute the value of
the awards, the annualized impact on diluted earnings per share is expected to
be consistent with our pro forma SFAS No. 123 disclosures.
Page 34 of 43
In December 2004, the FASB issued two FASB Staff Positions (FSP)
regarding the accounting implications of the American Jobs Creation Act of 2004.
The Company is assessing the impact, if any, thatadoption of FAS No. 109-1, "Application of FASB Statement No. 109
'Accounting for Income Taxes' to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004" and FSP No. 109-2
"Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004" willdid not have any effect
on the Company's effective tax rate in 2005.
In December 2004, the FASB issued SFAS No. 151 "Inventory Costs,
an Amendment of ARB No. 43, Chapter 4". SFAS No. 151 clarifies the accounting
for abnormal amounts of idle facility expense, freight, handling costs and
wasted material and requires that these items be recognized as current period
charges. SFAS Page 33 of 42
No. 151 applies only to inventory costs incurred during periods
beginning after the effective date and also requires that the allocation of
fixed production overhead to conversion costs be based on the normal capacity of
the production facilities. SFAS No. 151 is effective for the Company's fiscal
year beginning January 1, 2006. The Company is currently assessing the impact, if any, ofdoes not anticipate that the
adoption of the provisions of SFAS No. 151.No.151 will have a material effect on the
results of operations in 2006.
In December 2004, the FASB issued SFAS No. 153 "Exchanges of
Non-monetary Assets, An Amendment of APB Opinion No. 29". SFAS No. 153
eliminates the exception for exchange of similar productive assets and replaces
it with a general exception for exchanges of non-monetary assets that do not
have commercial substance. SFAS No. 153 isbecame effective for non-monetary assets
and exchanges occurring in fiscal periods beginning after June 15, 2005, the
Company's third fiscal quarter. As the Company does not engage in exchanges of
non-monetary assets, the Company does not anticipate that implementation of this statement willdid not have an impact
on its financial condition or results of operations.
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. 46R addresses the consolidation by business
enterprises of variable interest entities, as defined in the Interpretation. FIN
No. 46R 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 interests in variable
interest entities, the adoption of FIN No. 46R did not have any effect on the
Company's consolidated financial condition or results of operations.
13. Subsequent Event
On February 24, 2005,January 31, 2006, the Company's Board of Directors approved a
two-for-one splitCompany entered into an industrial building
lease with an unrelated third party to rent 268,253 square feet for production
and warehousing. The initial lease term is ten years. The Company may, at its
option, terminate the lease without any further liability at the end of the Company's common stock, payable84th
month of the initial lease term by giving the landlord six months prior written
notice and by paying a termination fee. Total rent expense in the form of a stock
dividend of one share for each share held. The Board of Directors set March 15,
2005 as the record date for the determinationfirst
twelve-months of the shareholders entitled to
receive the additional shares. The Company expects the shareslease is expected to be distributed
on March 28, 2005.$0.6 million.
Page 3435 of 4243
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 25, 200431, 2005 and December 27, 2003:25, 2004:
(in thousands, except per First Second Third Fourth
share amounts) Quarter Quarter Quarter Quarter
- ----------------------------- ---------------- ----------------- --- --------------- -----------------
2004
------------------------------------------------------------------------------------------------------------ ------------------- --------------------- ---- ------------------ ---------------------
2005
---------------------------------------------------------------------------------------
Net sales $61,231 $68,611 $73,783 $74,492
Income from operations 6,070 8,018 8,009 7,679
Net income 3,454 4,628 4,613 4,382
Diluted earnings per share 0.19 0.25 0.25 0.24
---------------------------------------------------------------------------------------
2004
---------------------------------------------------------------------------------------
Net sales $56,005 $64,277 $64,135 $65,109
Income from operations 5,957 9,114 7,624 6,943
Net income 3,318 5,317 4,402 4,044
Diluted earnings per share 0.36 0.58 0.48 0.44
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 0.420.18 0.29 0.24 0.22
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
Item 9A. Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls
and Procedures
Our Management, with the participation of our chief executive officer
and chief financial officer, conducted an evaluation, as of December 25, 2004,31, 2005,
of the effectiveness of our disclosure controls and procedures, as such term is
defined in Exchange Act Rule 13a-15(e). Based on this evaluation, our chief
executive officer and our chief financial officer concluded that, as of the end
of the period covered by this annual report, our disclosure controls and
procedures were effective in reaching a reasonable level of assurance that
management is timely alerted to material information related to us during the
period when our periodic reports are being prepared.
The Company's principal executive officer and principal financial
officer note that during the Company's second fiscal quarter the Company did not
file a Form 8-K timely in connection with the Company's change in administrators
under the 401(k) plan due to human performance error, not a process deficiency .
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f). Our management, with the participation of our chief
executive officer and chief financial officer, conducted an evaluation, as of
December 25, 2004,31, 2005, of the effectiveness of our internal control over financial
reporting based on the framework in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Page 36 of 43
Based on this evaluation under the framework in Internal Control - Integrated
Framework, our management concluded that, as of December 25, 2004,31, 2005, our internal
control over financial reporting was effective to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles.
Page 35 of 42
Our management's assessment of the effectiveness of our internal
control over financial reporting as of December 25, 200431, 2005 has been audited by
KPMG LLP, an independent registered public accounting firm, as stated in their
report which is included herein.
Changes in Internal Control Over Financial Reporting
Our management, with the participation of our chief executive officer
and chief financial officer, also conducted an evaluation of our internal
control over financial reporting, to determine whether any changes occurred
during the quarter ended December 25, 200431, 2005 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting. Based on that evaluation, there was no such change during the quarter
ended December 25, 2004.31, 2005.
Report of Independent Registered Public Accounting Firm
The Board of Directors
R&B, Inc.:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting that R&B, Inc.
and subsidiaries maintained effective internal control over financial reporting as of December
25, 2004,31, 2005, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). R&B, Inc.'s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention of timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Page 37 of 43
In our opinion, management's assessment that R&B, Inc. and subsidiaries
maintained effective internal control over financial reporting as of December
25, 2004,31, 2005, is fairly stated, in all material respects, based on
Page 36 of 42
criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our
opinion, R&B, Inc. and subsidiaries maintained, in all material respects, effective internal
control over financial reporting as of December 25, 2004,31, 2005 based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of R&B, Inc. and subsidiaries as of December 25, 200431, 2005 and December 27,
2003,25,
2004, and the related consolidated statements of operations, stockholders'shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 25, 2004,31, 2005, and the related financial statement schedule, and our report
dated March 7, 200513, 2006 expressed an unqualified opinion on those consolidated
financial statements and the related financial statement schedule.
KPMG LLP
Philadelphia, PA
March 7, 200513, 2006
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information concerning the directors of the CompanyThe required information is incorporated by reference to the section entitled "Election of Directors" infrom the
Company's Proxy
Statementdefinitive proxy statement for its 2006 Annual Meeting of Shareholders
to be held on May 19,filed with the SEC within 120 days of the Company's fiscal year ended
December 31, 2005.
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 19, 2005.
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'sSEC's rules and regulations a copy
of the code is posted on our website.website www.rbinc.com. 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.
IncorporatedThe required information is incorporated by reference to the section entitled "Executive
Compensation and Transactions" infrom the
Company's Proxy Statementdefinitive proxy statement for its 2006 Annual Meeting of Shareholders
to be held on May 19,filed with the SEC within 120 days of the Company's fiscal year ended
December 31, 2005.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
IncorporatedManagement and
Related Stockholder Matters.
The required information is incorporated by reference to the section entitled "Beneficial Ownership
of Common Stock" infrom
the Company's Proxy Statementdefinitive proxy statement for its 2006 Annual Meeting of
Shareholders to be held on May 19,filed with the SEC within 120 days of the Company's fiscal
year ended December 31, 2005.
Page 3738 of 4243
Equity Compensation Plan Information
The following table details information regarding the Company's
existing equity compensation plans as of December 25, 2004:31, 2005:
(c)
Number of securities
(a) remaining available for
Number of securities (b) future issuancefutureissuance under
to be issued upon Weighted-average equity compensation
exercise of outstanding exercise price of plans (excluding
Plan Category outstanding options, warrants and outstanding options, securities reflected in
warrants and
rights warrants and rights column (a))
- ---------------------------- ----------------------- -------------------- ------------------------------------------------------------
Equity compensation plans
approved by security holders 461,300 $6.77 218,041995,216 $4.80 296,511
Equity compensation plans not
approved by security holders - - -
----------------------- -------------------- --------------------------------------------------- ------------------------- -----------------------------
Total 461,300 $6.77 218,041
======================= ==================== ========================995,216 $4.80 296,511
=========================== ========================= =============================
Item 13. Certain Relationships and Related Transactions.
IncorporatedThe required information is incorporated by reference to the section entitled "Executive
Compensation and Transactions" infrom the Company's
Proxy Statementdefinitive proxy statement for its 2006 Annual Meeting of Shareholders to be
held on May 19,filed with the SEC within 120 days of the Company's fiscal year ended December
31, 2005.
Item 14. Principal Accountant Fees and Services.
IncorporatedThe required information is incorporated by reference to the section entitled "Independent Auditors
Fees" infrom the Company's
Proxy Statementdefinitive proxy statement for its 2006 Annual Meeting of Shareholders to be
held on May 19,filed with the SEC within 120 days of the Company's fiscal year ended December
31, 2005.
PART IV
Item 15. Exhibits, and Consolidated Financial Statement and Schedules.
(a)(1) Consolidated Financial Statements. The consolidated
financial statements of the Company and related documents are listedprovided in Item
8, Part II, of this Report on Form 10-K.
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations for the years ended December
31, 2005, December 25, 2004, and December 27, 2003 and December 28, 2002.2003.
Consolidated Balance Sheets as of December 31, 2005 and December
25, 2004.
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 2005, December 25, 2004, and December 27, 2003.
Consolidated Statements of Shareholders' Equity for the years ended
December 25, 2004, December 27, 2003 and December 28, 2002.
Page 38 of 42
Consolidated Statements of Cash Flows for the years ended
December 31, 2005, December 25, 2004, and December 27, 2003 and December 28, 2002.2003.
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 39 of 43
Page
Schedule II - Valuation and Qualifying Accounts..................42Accounts................... 43..........
(a)(3) Exhibits that are filed as a part of this Form 10-K and
required by Item 601 of Regulation S-K and Item 15(c) of this Form 10-K are
listed below:
Item 601
Exhibit
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 Amended and Restated Shareholders' Agreement dated August 1,
2004
(filed with this report).2004.
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,I, 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.
10.1.4 (9) Amendment to Revolving Credit Facility, dated May 23, 2005,
between the Company and Wachovia Bank, N.A.
Page 40 of 43
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 Independent Registered Public Accounting Firm
(filed with this report)
Page 39 of 42
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.
(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.
(9) Incorporated by reference to the Exhibit filed with the Company's Current
Report on Form 8-K dated May 24, 2005.
Page 4041 of 4243
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 8, 200515, 2006 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 8, 2005
- ---------------------- Officer, and Chairman of the
Richard N. Berman Board of Directors
(principal executive officer)
\s\ Mathias J. Barton Chief Financial Officer March 8, 2005
- ----------------------
Mathias J. Barton (principal financial and
accounting officer)
\s\ Steven L. Berman Executive Vice President, March 8, 2005
-------------------- Secretary-Treasurer, and
Steven L. Berman Director
\s\ George L. Bernstein Director March 8, 2005
- ------------------------
George L. Bernstein
\s\ John F. Creamer, Jr. Director March 8, 2005
- -------------------------
John F. Creamer, Jr.
\s\ Paul R. Lederer Director March 8, 2005
-------------------
Paul R. Lederer
\s\ Edgar W. Levin Director March 8, 2005
Signature Capacity Date
\s\ Richard N. Berman President, Chief Executive March 15, 2006
- ----------------------
Richard N. Berman Officer, and Chairman of the
Board of Directors
(principal executive officer)
\s\ Mathias J. Barton Chief Financial Officer March 15, 2006
- ----------------------
Mathias J. Barton (principal financial and
accounting officer)
\s\ Steven L. Berman Executive Vice President, March 15, 2006
--------------------
Steven L. Berman Secretary-Treasurer, and
Director
\s\ George L. Bernstein Director March 15, 2006
- ------------------------
George L. Bernstein
\s\ John F. Creamer, Jr. Director March 15, 2006
- -------------------------
John F. Creamer, Jr.
s\ Paul R. Lederer Director March 15, 2006
-------------------
Paul R. Lederer
\s\ Edgar W. Levin Director March 15, 2006
- --------------------
Edgar W. Levin
Page 4142 of 4243
SCHEDULE II: Valuation and Qualifying Accounts
(in thousands) For the Year Ended
- -------------------------------------- --------------------------------------------------------------------------------------------------- ---------------------------------------------------------------
December 31, December 25, December 27,
December 28,2005 2004 2003
2002
----------------- ----------------- ------------------------------------ -------------------- --------------------
Allowance for doubtful accounts:
Allowance for doubtful accounts:
Balance, beginning of period $ 1,191 $ 1,337 $ 901
Provision 110 504 737
Charge-offs (195) ( 650) (301)
- -------------------------------------- ----------------- ----------------- ----------------
Balance, end of period $ 1,106 $ 1,191 $ 1,337
====================================== ================= ================= ================Provision 233 110 504
Charge-offs (225) ( 195) (650)
- ----------------------------------------------- -------------------- -------------------- --------------------
Balance, end of period $ 1,114 $ 1,106 $ 1,191
=============================================== ==================== ==================== ====================
Allowance for customer credits:
Balance, beginning of period $ 19,469 $ 16,530 $ 16,517
$ 14,209
Provision 42,633 40,375 37,136
35,769
Charge-offs (40,488) (37,436) (37,123)
(33,461)
- -------------------------------------- ----------------- ----------------- --------------------------------------------------------------- -------------------- -------------------- --------------------
Balance, end of period $ 19,469 $16,53021,614 $19,469 $ 16,517
====================================== ================= ================= ================16,530
=============================================== ==================== ==================== ====================
Allowance for excess and obsolete inventory:
Balance, beginning of period $8,210 $8,473 $ 9,215
Provision 3,828 1,993 1,821
Charge-offs (2,410) (2,256) (2,563)
- ----------------------------------------------- -------------------- -------------------- --------------------
Balance, end of period $ 9,628 $8,210 $8,473
- ---------------------------
=============================================== ==================== ==================== ====================
Page 4243 of 42
43
Exhibit 21
Subsidiaries of R&B, Inc.
Significant Subsidiaries Jurisdiction
- ------------------------ ------------
RB Distribution, Inc. Pennsylvania
RB Management, Inc. Pennsylvania
Dorman Products of America, Ltd.(1) Kentucky
Motor Power Industries, Inc. Delaware
Scan-Tech USA/Sweden, A.B. Sweden
Allparts, Inc. Delaware
1664403 Ontario Inc.(Hermoff) Ontario, Canada
(1) Dorman Products of America, Ltd was merged with and into RB Distribution,
Inc. effective as of December 31, 2005.
Exhibit Page 1
Exhibit 23
Consent of Independent Registered Public Accounting Firm
The Board of Directors
R&B, Inc.:
We consent to the incorporation by reference in the registration statements (No.
33-52946 and 33-56492) on Form S-8 of R&B, Inc. of our reports dated March 13,
2006, with respect to the consolidated balance sheets of R&B, Inc. as of
December 31, 2005 and December 25, 2004, and the related consolidated statements
of operations, sharekholders' equity and cash flows for each of the years in the
three-year period ended December 31, 2005, and the related financial statement
schedule, management's assessment of the effectiveness of internal control over
financial reporting as of December 31, 2005 and the effectiveness of internal
control over financial reporting as of December 31, 2005, which reports appear
in the December 31, 2005 annual report on Form 10-K of R&B, Inc.
KPMG LLP
Philadelphia, Pennsylvania
Date: March 13, 2006
Exhibit Page 2
Exhibit 31.1
CERTIFICATION
I, Richard Berman certify that:
1. I have reviewed this Form 10-K of R&B, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e)and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15 (f)) and 15(d)-15(f) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting,;
and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: March 15, 2006
\s\ Richard Berman
Richard Berman
President and Chief Executive Officer
Exhibit Page 3
Exhibit 31.2
CERTIFICATION
I, Mathias Barton certify that:
1. I have reviewed this Form 10-K of R&B, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e)and 15d-15(e)) and internal control over financial
reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have,
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: March 15, 2006
\s\ Mathias Barton
Mathias Barton
Chief Financial Officer
Exhibit Page 4
Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
This Certification is intended to accompany the Annual Report of R&B, Inc.
(the "Company") on Form 10-K for the period ended December 31, 2005 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
and is given solely for the purpose of satisfying the requirements of 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. To the best of their knowledge, the undersigned, in their respective
capacities as set forth below, hereby certify that:
1. The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Richard N. Berman Chief Executive Officer Date: March 15, 2006
- ------------------------
/s/ Mathias J. Barton Chief Financial Officer Date: March 15, 2006
- ------------------------
Exhibit Page 5