10-Q 1 sec10q32704.txt FORM 10-Q 3-27-04 -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- FORM 10-Q ------------------- |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 27, 2004 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------- Commission file number 0-18914 R&B, INC. Incorporated pursuant to the Laws of the Commonwealth of Pennsylvania ------------------- IRS - Employer Identification No. 23-2078856 3400 East Walnut Street, Colmar, Pennsylvania 18915 (215) 997-1800 ------------------- 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 whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes |_| No|X| As of May 7, 2004 the Registrant had 8,819,714 common shares, $.01 par value, outstanding. -------------------------------------------------------------------------------- Page 1 of 14 R & B, INC. AND SUBSIDIARIES INDEX TO QUARTERLY REPORT ON FORM 10-Q March 27, 2004 Page Part I -- FINANCIAL INFORMATION Item 1.Consolidated Financial Statements (unaudited) Statements of Operations: Thirteen Weeks Ended March 27, 2004 and March 29, 2003 .................................... 3 Balance Sheets......................................... 4 Statements of Cash Flows............................. 5 Notes to Consolidated Financial Statements........... 6 Item 2.Management's Discussion and Analysis of Results of Operations and Financial Condition.............................. 9 Item 3.Quantitative and Qualitative Disclosure about Market Risk ............................... 12 Item 4.Controls and Procedures.............................. 12 Part II -- OTHER INFORMATION Item 1.Legal Proceedings.................................... 13 Item 6.Exhibits and Reports on Form 8-K..................... 13 Signature . . . . . . . .................................... 14 Page 2 of 14 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS R&B, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
For the Thirteen Weeks Ended ------------------------------ March 27, March 29, (in thousands, except per share data) 2004 2003 -------------------------------------------------------------------------------------------- Net Sales $ 56,005 $ 50,272 Cost of goods sold 35,390 31,674 -------------------------------------------------------------------------------------------- Gross profit 20,615 18,598 Selling, general and administrative expenses 14,658 14,260 -------------------------------------------------------------------------------------------- Income from operations 5,957 4,338 Interest expense, net of interest income of $54 and $57 761 891 -------------------------------------------------------------------------------------------- Income before taxes 5,196 3,447 Provision for taxes 1,878 1,222 -------------------------------------------------------------------------------------------- Net Income $ 3,318 $ 2,225 ============================================================================================ Earnings Per Share: Basic $0.38 $0.26 Diluted 0.36 0.25 ============================================================================================ Average Shares Outstanding: Basic 8,781 8,521 Diluted 9,156 8,981
See accompanying notes to consolidated financial statements. Page 3 of 14 R&B, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 27, December 27, (in thousands, except share data) 2004 2003 --------------------------------------------------- ----------------- ----------------- Assets (unaudited) Current Assets: Cash and cash equivalents $ 10,250 $ 15,177 Short-term investments 9,460 9,905 Accounts receivable, less allowance for doubtful accounts and customer credits of $18,895 and $17,721 51,312 44,127 Inventories 50,601 51,170 Deferred income taxes 7,512 7,493 Prepaids and other current assets 1,315 1,356 --------------------------------------------------- ----------------- ----------------- Total current assets 130,450 129,228 --------------------------------------------------- ----------------- ----------------- Property, Plant and Equipment, net 18,264 17,590 Goodwill 28,982 29,125 Other Assets 610 663 --------------------------------------------------- ----------------- ----------------- Total $178,306 $176,606 =================================================== ================= ================= Liabilities and Shareholders' Equity Current Liabilities: Current portion of long-term debt $ 9,038 $ 8,571 Accounts payable 10,132 10,029 Accrued compensation 4,559 7,379 Other accrued liabilities 6,138 4,797 --------------------------------------------------- ----------------- ----------------- Total current liabilities 29,867 30,776 Long-Term Debt 34,759 35,213 Deferred Income Taxes 4,934 4,632 Commitments and Contingencies Shareholders' Equity: Common stock, par value $.01; authorized 25,000,000 shares; issued 8,811,190 and 8,762,994 shares 88 88 Additional paid-in capital 34,065 33,950 Cumulative translation adjustments 1,476 2,148 Retained earnings 73,117 69,799 Total shareholders' equity 108,746 105,985 --------------------------------------------------- ----------------- ----------------- Total $178,306 $176,606 =================================================== ================= =================
See accompanying notes to consolidated financial statements. Page 4 of 14 R&B, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
For the Thirteen Weeks Ended ----------------------------------- March 27, March 29, (in thousands) 2004 2003 ---------------------------------------------------------------- --------------- ------------------- Cash Flows from Operating Activities: Net income $ 3,318 $ 2,225 Adjustments to reconcile net income to cash used in operating activities: Depreciation and amortization 1,080 1,192 Provision for doubtful accounts 143 134 Provision for deferred income tax 283 564 Provision for non-cash stock compensation - 14 Changes in assets and liabilities: Accounts receivable (7,530) 287 Inventories 242 (4,414) Prepaids and other 53 (292) Accounts payable 180 1,288 Other accrued liabilities (1,421) (2,169) ---------------------------------------------------------------- --------------- ------------------- Cash used in operating activities (3,652) (1,171) ---------------------------------------------------------------- --------------- ------------------- Cash Flows from Investing Activities: Property, plant and equipment additions (1,762) (885) Purchases of short-term investments (4,805) (3,817) Proceeds from maturities of short-term investments 5,250 7,050 ---------------------------------------------------------------- --------------- ------------------- Cash (used in) provided by investing activities (1,317) 2,348 ---------------------------------------------------------------- --------------- ------------------- Cash Flows from Financing Activities: Repayment of term loans and capitalized lease obligations - (285) Proceeds from common stock issuances 42 180 ---------------------------------------------------------------- --------------- ------------------- Cash provided by (used in) financing activities 42 (105) ---------------------------------------------------------------- --------------- ------------------- Net (Decrease) Increase in Cash and Cash Equivalents (4,927) 1,072 Cash and Cash Equivalents, Beginning of Period 15,177 5,169 ---------------------------------------------------------------- --------------- ------------------- Cash and Cash Equivalents, End of Period $ 10,250 $ 6,241 ================================================================ =============== =================== Supplemental Cash Flow Information Cash paid for interest expense $ 790 $ 919 Cash paid for income taxes $ 207 $ 329
See accompanying notes to consolidated financial statements. Page 5 of 14 R&B, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRTEEN WEEKS ENDED MARCH 27, 2004 AND MARCH 29, 2003 (UNAUDITED) 1. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. However, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the thirteen week period ended March 27, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending December 25, 2004. For further information, refer to the consolidated financial statements and footnotes thereto included in R&B, Inc.'s (the "Company") Annual Report on Form 10-K for the year ended December 27, 2003. 2. Sales of Accounts Receivable During 2003, the Company entered into a customer-sponsored program administered by an unrelated financial institution that permits the Company to sell, without recourse, certain accounts receivable at discounted rates to the financial institution. The Company does not retain any servicing requirements for these accounts receivable. Transactions under this agreement are accounted for as sales of accounts receivable following the provisions of Statement of Financial Accounting Standards (SFAS) No. 140, "Account for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a Replacement of FASB Statement 125." The Company had sold accounts receivable under this agreement of $3.4 million and $2.0 million at March 27, 2004 and December 27, 2003, respectively. 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: March 27, December 27, (in thousands) 2004 2003 ------------------- --------------- --------------- Bulk product $20,986 $22,365 Finished product 26,814 25,906 Packaging materials 2,801 2,899 ------------------- --------------- --------------- Total $50,601 $51,170 =================== =============== =============== 4. Earnings Per Share The following table sets forth the computation of basic earnings per share and diluted earnings per share for the thirteen week periods ended March 27, 2004 and March 29, 2003. Thirteen Weeks Ended --------------------------------- March 27, March 29, (in thousands, except per share data) 2004 2003 --------------------------------------------- ------------- --- ------------- - Numerator: Net income ............................. $ 3,318 $ 2,225 Denominator: Weighted average shares outstanding used in basic earnings per share calculation 8,781 8,521 Effect of dilutive stock options....... 375 460 ------------- --- ------------- - Page 6 of 14 Thirteen Weeks Ended ------------------------------- - March 27, March 29, (in thousands, except per share data 2004 2003 -------------------------------------------- -------------- --------------- Adjusted weighted average shares outstanding diluted earnings per share......... 9,156 8,981 ============= === ============= = Basic earnings per share..................... $ 0.38 $ 0.26 ============= === ============= = Diluted earnings per share................... $ 0.36 $ 0.25 ============= === ============= = 5. Stock-Based Compensation Effective May 18, 2000 the Company amended and restated its incentive Stock Option Plan (the "Plan"). Under the terms of the Plan, the Board of Directors of the Company may grant incentive stock options and non-qualified stock options or combinations thereof to purchase up to 1,172,500 shares of common stock to officers, directors and employees. Grants under the Plan must be made within 10 years of the plan amendment date and are exercisable at the discretion of the Board of Directors but in no event more than 10 years from the date of grant. At March 27, 2004, options to acquire 214,177 shares were available for grant under the Plan. The Company accounts for the 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 Statement of Financial Accounting Standards, ("SFAS") No. 123, "Accounting for Stock-Based Compensation", to stock-based employee compensation.
Thirteen Weeks Ended ------------------------------------------------ ------------------------------------ (in thousands, except per share data) March 27, March 29, 2004 2003 ------------------------------------------------ ----------------- ----------------- Net income: Net income, as reported $ 3,318 $ 2,225 Add: Stock-based employee compensation expense, net of related tax effects, included in the determination of net income, as reported - 9 Less: Stock-based employee compensation expense, net of related tax effects, determined under fair value based method for all awards (35) (11) ------------------------------------------------ ---------------- ------------------ Net income, pro forma $ 3,283 $ 2,223 ------------------------------------------------ ----------------- ----------------- Earnings per share: Basic - as reported $ 0.38 $ 0.26 Basic - pro forma $ 0.37 $ 0.26 Diluted - as reported $ 0.36 $ 0.25 Diluted - pro forma $ 0.36 $ 0.25
Page 7 of 14 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: 2004 2003 ---- ---- Expected dividend yield 0% 0% Expected stock price volatility 51% 53% Risk-free interest rate 3.7% 3.3% Expected life of option 7.5 years 7.5 years 6. Related-Party Transactions The Company has entered into a noncancelable operating lease for its primary operating facility from a partnership in which the Company's Chief Executive Officer and Executive Vice President are partners. Prior to April 2003, the Company had leased its Carrollton, Georgia facility from another partnership in which the Company's Chief Executive Officer and Executive Vice President are partners. During 2003, the Company entered into an agreement to terminate the lease for this facility. In connection with this agreement, the Company paid $200,000, which was accrued in 2002, to terminate this lease subject to the closing of the sale of the building by the partnership to an unrelated entity. 7. New Accounting Pronouncements In December 2003, the FASB issued Revised Interpretation FIN No. 46, "Consolidation of Variable Interest Entities - an interpretation of Accounting Research Bulletin No. 51." FIN No. 46 addresses the consolidation by business enterprises of variable interest entities, as defined in the interpretation. FIN No. 46 expands existing accounting guidance regarding when a company should include in its financial statements the assets, liabilities and activities of another entity. Since the Company does not have any interests in variable interest entities, the adoption of FIN No. 46 did not have any effect on the Company's consolidated financial condition or results of operations. Page 8 of 14 R&B, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Executive Summary The Company is a leading supplier of original equipment dealer "Exclusive" automotive replacement parts, fasteners and service line products to the automotive aftermarket and household hardware to the general merchandise markets. The Company's products are marketed under more than seventy proprietary brand names, through its Motormite, Dorman, Allparts, Scan-Tech, MPI and Pik-A-Nut businesses. New product development is a critical success factor for the Company. The Company has invested heavily in resources necessary for it to increase its new product development efforts and to strengthen its relationships with its customers. These investments are primarily in the form of increased product development and awareness programs, customer service improvements and increased customer credits and allowances. This has enabled the Company to provide an expanding array of new product offerings and grow its revenues. The automotive aftermarket has been consolidating over the past several years. As a result, many of the Company's customers have grown larger and therefore have more leverage in negotiations with the Company. Recently, customers have pressed for extended payment terms and returns of slow moving product when negotiating with the Company. While the Company does its best to avoid such concessions, in some cases payment terms to customers have been extended and returns of product have exceeded historical levels. The product returns primarily affect the Company's profit levels while terms extensions generally reduce operating cash flow and require additional capital to finance the business. Management expects both of these trends to continue for the foreseeable future. The Company may experience significant fluctuations from quarter to quarter in its results of operations due to the timing of orders placed by the Company's customers. Generally, the second and third quarters have the highest level of customer orders, but the introduction of new products and product lines to customers may cause significant fluctuations from quarter to quarter. The Company operates on a fifty-two, fifty-three week period ending on the last Saturday of the calendar year. Results of Operations The following table sets forth, for the periods indicated, the percentage of net sales represented by certain items in the Company's Consolidated Statements of Operations: Percentage of Net Sales --------------------------------- For the Thirteen Weeks Ended --------------------------------- March 27, March 29, 2004 2003 ---------------------------------------- ---------------- ---------------- Net Sales 100.0% 100.0% Cost of goods sold 63.2% 63.0% ---------------------------------------- ---------------- ---------------- Gross profit 36.8% 37.0% Selling, general and administrative expenses 26.2% 28.4% ---------------------------------------- ---------------- ---------------- Income from operations 10.6% 8.6% Interest expense, net 1.3% 1.7% ---------------------------------------- ---------------- ---------------- Income before taxes 9.3% 6.9% Provision for taxes 3.4% 2.5% ---------------------------------------- ---------------- ---------------- Net Income 5.9% 4.4% ======================================== ================ ================ Page 9 of 14 Thirteen Weeks Ended March 27, 2004 Compared to Thirteen Weeks Ended March 29, 2003 Net sales increased 11% to $56.0 million for the thirteen weeks ended March 27, 2004 from $50.3 million for the same period in 2003. Sales volume in 2004 increased as a result of continued sales growth from products introduced within the last twelve months, shipments to a new customer for the Company's Pik-A-Nut home hardware business and a lower sales level in the first quarter of 2003 due to inventory reduction initiatives by certain customers. The favorable effects of foreign currency exchange resulted in a 2% year over year increase in sales. Cost of goods sold, as a percentage of sales, increased slightly to 63.2% for the thirteen weeks ended March 27, 2004 from 63.0% in the same period last year. The increase in cost of goods sold is primarily the result of higher sales credits from customer returns. Selling, general and administrative expenses for the thirteen weeks ended March 27, 2004 increased $0.4 million, or 3%, to $14.7 million from $14.3 million for the same period in 2003. This increase as a percentage of sales is less than the 11% sales increase in the first quarter as the benefits of several cost savings initiatives offset the additional costs incurred as a result of inflationary cost increases and the higher sales levels. Interest expense, net, decreased to $0.8 million for the thirteen weeks ended March 27, 2004 from $0.9 million in the prior year due to lowering borrowing levels. 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. The Company's effective tax rate increased to 36.1% for the thirteen weeks ended March 27, 2004 from 35.5% for the thirteen weeks ended March 29, 2003 due to the impact of higher graduated tax rates associated with the Company's higher earnings levels. Liquidity and Capital Resources Historically, the Company has financed its growth through a combination of cash flow from operations and through the issuance of senior indebtedness through its bank credit facility and senior note agreements. At March 27, 2004, working capital was $100.6 million, total long-term debt (including the current portion) was $43.8 million and shareholders' equity was $108.7 million. Cash and short-term investments as of March 27, 2004 totaled $19.7 million. Over the past two years the Company has extended payment terms to certain customers as a result of customer requests and market demands. These extended terms have resulted in increased accounts receivable levels and significant uses of cash flow. The Company participates in a customer-sponsored program administered by an unrelated financial institution that permits the Company to sell, without recourse, certain accounts receivable at discounted rates to the financial institution to offset the negative cash flow impact of the payment terms extensions. The Company had sold accounts receivable under this agreement of $3.4 million and $2.0 million at March 27, 2004 and December 27, 2003, respectively. The Company expects continued pressure to extend its payment terms for the foreseeable future. Further extensions of customer payment terms will result in additional uses of cash flow or increased interest costs. In December 2003, the Company announced its intention to add 77,200 square feet in warehouse space to its central distribution center in Warsaw, Kentucky by July, 2004. The total estimated cost of the addition and fit out of the warehouse space is expected to be approximately $2.8 million, of which $0.3 had been spent and is included in Property, Plant and Equipment as of March 27, 2004. Long-term debt consists primarily of $42.9 million in Senior Notes that were originally issued in August 1998, in a private placement on an unsecured basis ("Notes"). The Notes bear a 6.81% fixed interest rate, payable quarterly. Annual principal payments of $8.6 million are due each August through 2008. The Notes require, among other things, that the Company maintain certain financial covenants relating to debt to capital ratios and minimum net worth. In March 2004, the Company amended its Revolving Credit Facility. The amended facility expires in June 2005. The March 2004 amendment reduced the total credit facility from $10.0 million to $5.0 million. The size of the facility was reduced to decrease overall borrowing costs. Borrowings under the amended facility are on an unsecured basis with interest at LIBOR plus 150 basis points. The loan agreement also contains covenants, the most restrictive of which pertain to net worth and the ratio of debt to EBITDA. In addition, the Company's Swedish subsidiary maintains a short-term $0.7 million credit facility. There were no borrowings under either facility as of March 27, 2004. The Company amended certain agreements related to its 1998 acquisition of Scan-Tech USA/Sweden A.B. and related entities ("Scan-Tech") during 2001. As a result of this transaction, the Company purchased and canceled 250,000 Page 10 of 14 shares of its common stock issued in connection with the acquisition and canceled the earn out provisions of the acquisition agreement in exchange for consideration of $3.2 million to be paid by the Company in installments through December 2005. The aggregate amount outstanding under this obligation was $0.9 million at March 27, 2004. The Company reported a net use of cash flow from its operating activities of $3.7 million in the three months ended March 27, 2004. The primary use of cash flow was accounts receivable, which increased $7.5 million during the quarter. Accounts receivable grew as a result of higher sales and the impact of the continuing trend towards longer payment terms to certain customers. Cash flow was also used to reduce other accrued liabilities by $1.4 million as a result of the Company's funding of employee profit sharing and incentive payments earned in the prior year, but paid in the first quarter of 2004. Net income and depreciation were the primary sources of operating cash flow in the quarter. Investing activities used $1.3 million of cash in the three months ended March 27, 2004. The Company purchases highly liquid corporate and government bonds with maturities from three months to one year to take advantage of higher earnings rates on these investments. These investments have been classified as short-term investments as required by generally accepted accounting principles. As a result of this decision, the Company reported a net source of cash of $0.4 million during the period. Additions to property, plant and equipment required $1.8 million of cash in the first quarter of 2004. The capital additions are the result of the addition of 77,200 square feet in warehouse space to the Company's central distribution center in Warsaw, Kentucky as well as upgrades to information systems, purchases of equipment designed to improve operational efficiencies and scheduled equipment replacements. Financing activities generated $0.1 million in cash in the three months ended March 27, 2004 as a result of common stock issued upon the exercise of stock options. The Company believes that cash and short-term investments on hand and cash generated from operations together with its available sources of capital are sufficient to meet its ongoing cash needs for the foreseeable future. Outlook The Company's strategic plan provides for a continued intense focus on new product development and further expansion of its existing core businesses. Management anticipates that these efforts will result in compounded annual sales growth of between 3% and 8% over the next two year period. The Company may experience significant fluctuations in its results of operations from quarter to quarter due to the timing of new product introductions and orders placed by its customers. Foreign Currency Fluctuations In 2003, approximately 60% of the Company's products were purchased from a variety of foreign countries. The products generally are purchased through purchase orders with the purchase price specified in U.S. dollars. Accordingly, the Company does not have exposure to fluctuations in the relationship between the dollar and various foreign currencies between the time of execution of the purchase order and payment for the product. However, the recent weakness in the dollar has resulted in pressure from several foreign suppliers to increase prices. To the extent that the dollar decreases in value to foreign currencies in the future or the present weakness in the dollar continues for a sustained period of time, the price of the product in dollars for new purchase orders may increase. The Company makes significant purchases of product from Chinese vendors. The Chinese Yuan exchange rate has been fixed against the U.S. Dollar since 1998. Recently, the Chinese government has been under increasing pressure to revalue its currency, or to make its exchange rate more flexible. Most experts believe that the value of the Yuan would increase relative to the U.S. Dollar if it was revalued or allowed to float. Such a move would most likely result in an increase in the cost of products that are purchased from China. Impact of Inflation The Company has not generally been adversely affected by inflation, although recently raw materials pricing pressures have become more evident. The Company believes that material cost increases could potentially be mitigated by passing along price increases to customers or through the use of alternative suppliers or resourcing purchases to other countries. Page 11 of 14 Cautionary Statement Regarding Forward Looking Statements Certain statements periodically made by or on behalf of the Company and certain statements contained herein including statements in Management's Discussion and Analysis of Financial Condition and Results of Operation, such as statements regarding litigation; and certain other statements contained herein regarding matters that are not historical fact are forward looking statements (as such term is defined in the Securities Act of 1933), and because such statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by such forward looking statements. Factors that cause actual results to differ materially include but are not limited to those factors discussed in the Company's Annual Report on Form 10-K under "Business - Risk Factors." Item 3. Quantitative and Qualitative Disclosure about Market Risk The Company's market risk is the potential loss arising from adverse changes in interest rates. With the exception of the Company's revolving credit facility, long-term debt obligations are at fixed interest rates and denominated in U.S. dollars. The Company manages its interest rate risk by monitoring trends in interest rates as a basis for determining whether to enter into fixed rate or variable rate agreements. Under the terms of the Company's revolving credit facility, a change in either the lender's base rate or LIBOR would affect the rate at which the Company could borrow funds thereunder. The Company believes that the effect of any such change would be minimal. Short-term fixed income investments are subject to interest rate and credit risk. The Company believes that the negative effect of interest rate risk would be minimal as all investments have maturities of one year or less. The Company's investment portfolio consists solely of investment grade corporate and government securities to minimize credit risk. The Company may occasionally use derivative financial instruments, consisting of foreign currency forward purchase and sales contracts with terms of less than one year, to hedge its exposure to changes in foreign currency exchange. Its primary exposure to changes in foreign currency rates results from changes in exchange rates on certain third- party trade receivables and payables of the Company's Swedish subsidiary. There were no forward purchase or sales contracts outstanding as of March 27, 2004. Item 4. Controls and Procedures Quarterly evaluation of the Company's Disclosure Controls and Internal Controls Within the 90 days prior to the date of this quarterly report, the Company evaluated the effectiveness of the design and operation of its "disclosure controls and procedures" ("Disclosure Controls"). This evaluation ("Controls Evaluation") was done under the supervision and with the participation of management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"). Limitations on the Effectiveness of Controls The Company's management, including the CEO and CFO, does not expect that its Disclosure Controls or its "internal controls and procedures for financial reporting" ("Internal Controls") will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision- making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Conclusions Based upon the Controls Evaluation, the CEO and CFO have concluded that, subject to the limitations noted above, the Disclosure Controls are effective to timely alert management to material information relating to the Company during the period when its periodic reports are being prepared. In accordance with SEC requirements, the CEO and CFO note that, since the date of the Controls Evaluation to the date of this quarterly report, there have been no significant changes in Internal Controls or in other factors that could Page 12 of 14 significantly affect Internal Controls, including any corrective actions with regard to significant deficiencies and material weaknesses. PART II: OTHER INFORMATION Item 1. Legal Proceedings In addition to commitments and obligation which arise in the ordinary course of business, the Company is subject to various claims and legal actions from time to time involving contracts, competitive practices, trademark rights, product liability claims and other matters arising out of the conduct of the Company's business. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 31.1 Certification of Chief Executive Officer as required by S ection 302 of the Sarbanes-Oxley Act of 2002). 31.2 Certification of Chief Financial Officer as required by Section 302 of the Sarbanes-Oxley Act of 2002). 32 Certification of Chief Executive and Chief Financial Officer as required by Section 906 of the Sarbanes- Oxley Act of 2002). (b) Reports on Form 8-K The Company furnished a report on Form 8-K on April 30, 2004 that included the Company's press release dated April 30, 2004 reporting first quarter results of fiscal year 2004. Page 13 of 14 SIGNATURES Pursuant to the requirements of the Securities 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 May 10, 2004 \s\ Richard Berman ---------------- ------------------------- Richard Berman President and Chief Executive Officer Date May 10, 2004 \s\ Mathias Barton ---------------- -------------------------- Mathias Barton Chief Financial Officer and Principal Accounting Officer Page 14 of 14