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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
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1997 Commission File No. 0-12361
Richton International Corporation
(Exact name of registrant as specified in its charter)
Delaware 05-012205
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
340 Main Street, Madison, New Jersey 07940
(Address of principal executive offices) (Zip Code)
Issuer's telephone number ..................................... (973) 966-0104
Securities registered under Name of Exchange on which Registered:
Section 12(b) of the Exchange Act:
Common Stock, par value $.10 American Stock Exchange
Securities registered under Section 12(g) of the Exchange Act:
Series A Preferred Stock, par value $1.00. Purchase Right
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 dates. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part II of this Form 10-K or any amendment to this
Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant.
Aggregate market value at March 1, 1998 amounted to $10,600,000
Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock, as of the latest practicable date.
Common Stock, par value $.10, 2,947,000 shares at March 1, 1998
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year ended December 31, 1997
are incorporated by reference into Parts I and II.
Portions of the proxy statement for the annual shareholders meeting to be held
April 29, 1998 are incorporated by reference into Part III.
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<PAGE>
PART I
Item 1. Business
Richton International Corporation (the "Company" or "Richton") is a
diversified service company with two operating subsidiaries, Century Supply
Corp. ("Century") and CBE Technologies, Inc. ("CBE").
CBE was acquired in March 1995 by issuance of $5.0 million in notes
including $3.0 million in senior debt to a Michigan bank and assumption of
certain liabilities.
Century is a leading full-service wholesale distributor of sprinkler
irrigation systems, outdoor lighting and decorative fountain equipment.
Headquarted in Madison Heights, Michigan it has branches in 18 States in the
Eastern half of the country and Ontario, Canada. Irrigation products have
historically been sold by manufacturers primarily through wholesale distributors
and Century is a leading distributor of irrigation equipment in the geographic
areas it serves. Century is currently a distributor for all of the leading
original equipment manufacturers (OEM) of turf irrigation equipment in the
United States.
Century's primary customers are irrigation and landscape contractors who
install irrigation systems for commercial, residential and golf course watering
systems. Approximately 93% of revenues are derived from irrigation products,
with the remaining 7% from lighting and fountains. Century represents more than
60 suppliers and provides a complete product line to approximately 12,000
customers through 65 branches.
Century is organized into five geographical regions, each with a regional
team that manages branches within a specific geographic area. Purchasing,
accounts receivable, accounting and cash management are centralized functions.
Close control is maintained over receivables, inventory and other key factors
through a centralized order entry management information system. All branches
are linked to the on-line system, and substantially all of Century's business is
conducted in a real time order entry environment.
Century's operations constitute a material portion of Richton's business.
Although Century has a history of operating profitability, its business is
impacted by both the economic and climatic conditions in the geographic areas
where its branches are located. Since irrigation and landscape contractors are
Century's primary customers, business is best when commercial and residential
construction is strong and general economic conditions and consumer confidence
are favorable. Weather is also a significant non-controllable element affecting
Century's business. Business is better during warm dry periods, especially in
spring and early summer months and when general construction is strong. Climatic
factors that can adversely affect Century principally relate to above-average
rainfall during the primary selling season or other unusual weather-related
conditions. Century's geographic diversity makes it much less susceptible to
weather than many of its competitors who operate in a more limited geographic
area. Century has mitigated some of the impact of both economic and climatic
conditions by pursuing an aggressive growth program. By opening or acquiring
branches (see Competition) in new areas and continuing to grow its business in
existing markets, Century has created both geographic diversity and consistent
growth. Even so, seasonality causes a significant disparity in quarterly sales
and results.
CBE Technologies, Inc. ("CBE") headquartered in Boston, Massachusetts with
satellite offices in New York, Los Angeles and Portland, Maine is a systems
integrator providing network consulting, design, and installation; network
management and related support; technical services outsourcing; comprehensive
hardware maintenance; and equipment sales.
CBE's technical certifications include: Novell Platinum reseller,
Microsoft Channel partner, Cisco Premier, Novell Authorized Training Center, as
well as a Novell Authorized Service Center.
Physical resources include a fully integrated network lab with a
functioning model of most computer operating systems; a network management lab
to support remote management; training labs at both the Boston and Portland
sites to support in-house training programs.
CBE is also a authorized service and warranty center for most of the
leading PC manufacturers including IBM, Conpaq, Hewlett Packard, Apple, AST, and
services most every other make of PC and printer. The field staff is supported
by a fully automated call control and dispatch center; a parts depot with an
extensive inventory; and a complete diagnostic/repair lab for PC's, printers and
monitors.
1
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CBE's business is impacted by technological changes both in software and
hardware. There can be no assurance that CBE can (a) continue to maintain the
highly qualified and experienced technicians and engineers, and (b) that those
technicians continue to remain technically proficient in an environment in which
technology changes occur regularly.
Suppliers
Century maintains a broad base of suppliers that enables the Company to
offer a wide range of irrigation equipment. Products are obtained from more than
60 suppliers with no one supplier comprising more than 30% of average annual
purchases. Century has master distrubutor agreements in place with Rain Bird,
Hunter, Irritrol (formerly Hardie,) and Legacy as well as with other OEM
suppliers that authorize Century as a distributor of their products for specific
geographic areas. These agreements are renewable annually, and there is no
assurance that these agreements will be renewed. Therefore, Century's business
is subject to change in these distribution agreements with manufacturers or in
manufacturers pursuing alternate channels of distribution. However, Century
maintains excellent vendor relations with these suppliers and management
believes the wholesale distribution channel will continue to be the dominant
professional channel for the irrigation industry.
CBE acquires its products from OEM suppliers as well as wholesalers and
distributors, such as Tech Data Corporation, Ingrim Micro, and Gates Arrow
Electronics which accounts for approximately 14%, 19% and 9% of CBE's purchases,
respectively.
Competition
Historically, irrigation distribution, like the wholesale distribution
industry in general, has been fragmented with many small distributorships
serving specific geographic markets. However, the more recent trend in
distribution has been one of consolidation, where larger wholesaler chains have
been created as a result of mergers, acquisitions and distributors moving into
new territories to expand market share and achieve economy of scale. Within the
irrigation industry, Century has been a leader in the trend toward
consolidation.
During the period of Richton ownership, Century has grown from 29 branches
and $43 million in sales for 1993 to the current 65 branches, and $87 million in
sales for 1997. Since Century has a sophisticated computer system supporting its
branch operations and most of its administrative functions are centralized,
Century has been able to achieve significant economies of scale as a result of
consolidation and growth.
This growth has resulted in Century facing different competitors in almost
every market it serves. Century competes with these other distributors by
providing local warehousing linked to a centralized computer system that enables
Century customers to get product when they need it, and by providing value-added
services, such as design assistance, training seminars, incentive programs and
sales leads to its customers. Century also competes against large discount
stores and plumbing supply companies that sell irrigation products, but who do
not provide the range of services that Century offers. While some of its
competitors in specific markets are larger than the corresponding Century
operations, none are larger when only the irrigation business is considered.
CBE competes in maintenance service with many companies, both larger and
smaller than CBE. Larger companies generally are OEM suppliers that also provide
network installation and maintenance services and offer a broader line of
product and service than CBE.
Employee Relations
At December 31, 1997, the Company employed approximately 425 full-time
employees. None of these employees are covered by a collective bargaining
agreement.
The Company considers its people to be one of its greatest assets and
provides training courses on sales, product features and benefits, management
skills, and communication. This has created an effective, knowledgeable and
self-motivated work force with a strong focus on customer service.
2
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Working Capital
Century's business is seasonal due principally to the fact that irrigation
systems are normally installed during warm weather and a majority of Century's
branches are located in the northern half of the United States. As a result
Century's monthly and quarterly sales, operating results and working capital
requirements fluctuate significantly. Century relies on short-term borrowing to
finance its working capital needs. During the first quarter Century's working
capital requirements are at minimum, with short-term borrowings of approximately
$15 million, a significant increase from prior years due principally to the
added branch acquisitions. Beginning in April needs expand. By July short-term
borrowings have increased to approximately $22 million. During the remaining
months receivable balances are liquidated, releasing substantial amounts of cash
that may be used to reduce short-term borrowing. (See Note 7 of Notes to
Consolidated Financial Statements for a description of the Company's credit
line.)
Business Acquisitions
On March 29, 1995 the Company, through its wholly owned subsidiary,
Century, acquired all the operating assets and business of CBE Technologies,
Inc. for $5.0 million, plus assumption of certain liabilities, which was
financed by bank borrowings of $3.0 million, a $1.0 million unsecured promissory
note to the former owners and a $1.0 million note to the Chairman of Richton.
The note to the Chairman was subject to a fairness opinion of an independent
advisor chosen by Richton's Board of Directors. The note to the former owners,
which is guaranteed by both Century and Richton, is to be paid over four years.
In the fourth quarter of 1997 Century acquired six branch operations for
$3.3 million. The three businesses acquired had combined sales in 1997 of
approximately $9 million .In addition to inventory and account receivable
balances, the Company acquired nearly $1.7 million of intangibles which will be
written off over the next 5 - 15 years.
Liquidity
The Company's financial condition continues to improve. The net worth as
of December 31, 1997 has increased to $9.3 million. Tangible net worth, which at
the end of 1995 was nil has increased to nearly $4.0 million as of December 31,
1997. At December 31, 1997, the Company's long-term debt was nearly $7.4
million, including $5.0 million of senior secured debt owed to a Michigan bank.
Of the balance of the outstanding debt, $0.9 million is owed to Fred R.
Sullivan, Chairman and Chief Executive Officer of Richton, which is repayable
over the next two and half years. Notes issued to Mr. Sullivan were subject to a
fairness opinion issued by an independent advisor chosen by Richton's Board of
Directors. The bank debt carries with it a loan covenant that precludes
distribution of funds to shareholders.
The operating cash flow of the Company--before working capital
requirements--improved to $5.18 million as compared to $4.40 million last year.
These funds were used to retire nearly $1.8 million of term and subordinated
debt which came due during the year, and fund the acquisitions noted above.
At December 31, 1997 working capital increased nearly $1.7 million to $7.3
million from $5.6 million last year.
Though the Company has continued to generate sufficient cash to liquidate
its term and subordinated debt as it becomes due, and make acquisitions
necessary for it's growth, there is no assurance, given the high degree of
leverage and the seasonally of its principal business that it can continue to do
so. The Company has now exhausted it's net operating loss carry forward. The
remaining deferred tax benefit--currently at $1.2 million--is due principally to
the amortization of goodwill at a rate more quickly than can be deducted for tax
purposes.
ITEM 2. Properties
Richton's current executive offices at 340 Main St. Madison, New Jersey,
are leased on a month-to-month basis. In January, 1998 Richton signed a five
year lease for executive offices at 767 Fifth Avenue, New York, New York.
Century's principal offices are in Madison Heights, Michigan, under a lease that
expires in October 2000. In addition, Century leases warehouse and sales space
in its other branches. The aggregate of such leased space is approximately
293,000 square feet. Expiration dates extend to July 2006. Eight of these
facilities are leased from the former owner of Century under a lease agreement
which approximates current market value. These leases expire in October, 2000.
One facility is leased from a partnership which includes the President of
Century. The lease, which
3
<PAGE>
is currently on a month to month basis approximates current market value. In
addition, during 1996 Century acquired a 10,000 square foot facility in
Sarasota, Florida which it had previously leased. CBE's principal offices are
located in Boston, Mass. This office is leased under an agreement which expires
in June, 1998. CBE leases approximately 10,000 square feet of additional office
space at its other locations. Richton believes that its properties are
adequately equipped, maintained and suited to the purpose for which they are
used.
ITEM 3. Legal Proceedings
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth
quarter of fiscal 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
For the information about the executive officers of Richton required to be
included in this Part I, see "Executive Officers of Registrant in Part III
below, which is incorporated into Part I by reference.
4
<PAGE>
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) Market information:
The Company's Common Stock trades on the American Stock Exchange under the
symbol "RHT". The following table sets forth the high and low sales prices for
the Common Stock. The quotations shown are as reported by the American Stock
Exchange.
1997 1996
-------------- --------------
Calendar Quarter High Low High Low
---------------- ---- ---- ---- ----
First ........................... $4 3/4 $4 1/8 $3 7/16 $3 1/8
Second .......................... 4 9/16 3 3/4 4 7/16 3 7/16
Third ........................... 5 1/2 4 1/2 4 3/16 3 13/16
Fourth .......................... 7 3/16 5 1/16 4 7/16 4 3/8
(b) Approximate Number of Equity Stockholders:
Approximate Number
of Record Holders
Title of Class at February 28, 1998
-------------- --------------------
Common Stock, $ .10 par value 523
(c) Dividends:
No cash dividends were paid by the Company in 1997 or 1996.
ITEM 6. Selected Financial Data
SUMMARY OF OPERATIONS
(In thousands, except percentages and per share amounts)
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Sales ................................ $106,523 $87,750 $66,659 $50,306 $11,080
Gross Profit percentage .................. 28% 28% 28% 28% 27%
Operating Profit (Loss) .................. 5,505 3,832 3,466 2,702 (847)
Interest expense, net .................... $ 1,334 1,216 1,092 817 21
Income (loss) from operations ............ 2,290 1,766 1,365 1,004 (573)
Income (loss) from Discontinued
Operations ............................ -- -- -- -- (426)
Net Income ( loss) ....................... 2,290 1,766 1,365 1,004 (999)
Net Income (loss) per share .............. $ .68 $ 0.54 $ 0.43 $ 0.34 $ (0.37)
</TABLE>
FINANCIAL POSITION
(In thousands, except ratios)
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------------
1997 1996 1995(a) 1994 1993(b)
---- ---- ------- ---- -------
<S> <C> <C> <C> <C> <C>
Total Assets ............................. 41,632 32,374 26,114 15,801 15,849
Long-term Debt ........................... 5,591 6,986 7,150 3,834 6,621
Working Capital .......................... 7,330 5,610 3,029 2,341 2,537
Current ratio ............................ 1.27 to 1 1.31 to 1 1.22 to 1 1.28 to 1 1.32 to 1
</TABLE>
Notes to Selected Financial Data:
Note a--The Registrant acquired CBE effective March 29, 1995
Note b--The Registrant acquired Century effective August 31, 1993
5
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following information should be read along with the Consolidated
Financial Statements and Notes to Consolidated Financial Statements on page F-6
through F-13.
RESULTS OF OPERATIONS
1997 Compared with 1996
Sales for the year ended December 31, 1997 were $106.5 million, an
increase of $18.7 million or approximately 21% over the 1996 amount of $87.8
million. Century contributed $13 million of this increase due largely to
favorable economic and weather conditions in most of it's market areas and to
geographical expansion-principally in the East and South East sections of the
country. Presently, Century has 65 branches. CBE's sales in 1997 have increased
more than 40% over 1996 levels principally due to expansion through the
acquisition made a year ago in Maine and in Los Angeles, California.
Gross profit for the year ended December 31, 1997 was $30.2 million an
increase of $5.4 million or approximately 22% over the 1996 amount of $24.8
million. This increase is due primarily to the higher sales noted above. The
overall gross profit percentage of sales remained about 28.3%.
Selling, general and administration expenses for the year ended December
31, 1997 increased $3.8 million or 18.1% to $24.7 million from $20.9 million for
the year ended December 31, 1996. The full year effect of the geographical
expansion noted above accounted for a portion of this increase.
Interest expense, net for the year ended December 31, 1997 increased $.1
million or nearly 10% to $1.3 million over the year earlier period of $1.2
million. This increase reflects the higher line of credit facility incurred in
carrying the higher working capital, partially offset by a slightly lower
borrowing rate.
The federal, state and foreign income tax provision for the year ended
December 31, 1997 was $1.9 million, a increase of approximately $1.0 million
from last year. The higher tax is principally due higher income.
Net income for the year ended December 31, 1997 was $2.29 million, or $.68
per share-diluted. This compares with $1.77 million or $.54 per share-diluted
reported for the year ended December 31, 1996. The higher net income is due
principally to higher sales.
This report contains forward-looking statements. The matters expressed in
such statements are subject to numerous uncertainties and risks including but
not limited to general economic and climatic conditions in the markets in which
Richton and its subsidiaries operates, fluctuation in demand for the products
and services offered by these subsidiaries, and current expectations of the
Company or its management. Should one or more of those uncertainties or risks
materialize, or should the underlying assumptions prove incorrect, actual
results may vary materially from those described as forward-looking statements.
The Company does not intend to update those forward-looking statements.
1996 Compared with 1995
Sales for the year ended December 31, 1996 were $87.8 million, an increase
of $21.1 million over the 1995 amount of $66.7 million. Century contributed
nearly $17 million of this increase due largely to favorable weather conditions
in most of it's market areas and to geographical expansion. A significant
portion of this expansion has occurred in the Eastern half of the Country from
North Carolina to New Jersey. As of December 31, 1996, Century had 54 branches.
CBE's sales reflects a full year for 1996. It was acquired effective March 30,
1995. CBE's sales in 1996, on a full year basis, have increased more than 20%
over 1995 levels principally due to expansion through the acquisition of two
businesses in Maine and another in Los Angeles, California.
Gross profit for the year ended December 31, 1996 was $24.8 million an
increase of $6.2 million or approximately 33% over the 1995 amount of $18.6
million. This increase is due primarily to the higher sales noted above. While
CBE continued to experience declining typewriter maintenance revenues, its
overall gross profit percentage was about the same as the prior year.
6
<PAGE>
Selling, general and administration expenses for the year ended December
31, 1996 increased $5.8 million or 38.4% to $20.9 million from $15.1 million for
the year ended December 31, 1995. The geographical expansion noted above
accounted for nearly $4.2 million of this increase. The balance of this increase
relates to CBE's costs associated with acquiring and expanding into three new
market areas during 1996 and to higher goodwill amortization charges $.56
million--principally associated with the typewriter contract maintenance
business.
Interest expense, net for the year ended December 31, 1996 increased $.1
million or 10% over the year earlier period to $1.2 million. This increase
reflects the higher term debt and higher line of credit facility incurred in
acquiring the various businesses noted above and in carrying the higher working
capital, partially offset by a slightly lower borrowing rate.
The federal, state and foreign income tax provision for the year ended
December 31, 1996 was $.85 million, a decrease of approximately $.16 million
from last year. The lower tax rate is principally due the recognition of
deferred tax benefit associated with the goodwill amortization and to lower
state taxes.
Net income for the year ended December 31, 1996 was $1.76 million, or $.54
per share. This compares with $1.36 million or $.43 per share reported for the
year ended December 31, 1995. The higher net income is due principally to higher
sales.
Financial Condition
The Company's financial condition continues to improve. The net worth as
of December 31, 1997 has increased to $9.3 million. Tangible net worth, which at
the end of 1995 was nil has increased to nearly $4.0 million as of December 31,
1997. The Company's long term debt at December 31, 1997 was $5.6 million, a
decrease of $1.4 million from December 31, 1996. The long-term debt continues to
decline even though the Company spent more than $3.3 million in acquiring new
businesses during the fourth quarter of 1997.
As was noted last year, the Company continues to rely on short-term
borrowings to finance it's working capital. During the first quarter of each
year, Century's working capital requirements are at a low point, with short-term
borrowings of $15.0 million--a significant increase from prior year due
principally to the higher level of working capital. During the second quarter
working capital requirements begin to expand and by July of each year the amount
necessary to carrying the working capital expands to approximately $22.0
million. From July through the remainder of the year, receivable balances are
liquidated, releasing substantial amounts of cash that may be used to reduce
short-term debt. The operating cash flow of the Company--before working capital
requirements--improved to $5.18 million from $4.40 million last year. The
Company was thus able to retire nearly $1.8 million of term and subordinated
debt which came due during the year. This amount is approximately the same as
last year. At December 31, 1997 working capital increased nearly $1.7 million to
$7.3 million from $5.6 million last year.
During the first quarter of 1998, the Company completed a renegotition of
it's senior debt and revolving line of credit financing. The revised agreement
(a) lowered the rate of interest charged on the line of credit to LIBOR plus 175
basis points rather than prime less an eighth, (b) reduced the number of
financial covenants required, (c) transferred the obligor from Century to
Richton, (d) increased the amount of unsecured financing to nearly $8 million
and released the pledge of common stock of Century, which had previously been
held as security for the bank loans.
Though the Company has continued to generate sufficient cash to liquidate
its term and subordinated debt as it becomes due, and make acquisitions
necessary for its growth, there is no assurance, given the high degree of
leverage, the seasonality of its principal business, and the elimination of the
net tax loss carry forward that it can continue to do so in the future.
7
<PAGE>
ITEM 8. Financial Statements
The financial statements required by this Item, are set forth below:
Page
Description Number
----------- ------
Report of Independent Public Accountants ................................. F-1
Consolidated Balance Sheets at December 31, 1997 and
December 31, 1996 ..................................................... F-2
Consolidated Statements of Income for the three years
ended December 31, 1997 ............................................... F-3
Consolidated Statements of Shareholders' Equity for the
three years ended December 31, 1997 ................................... F-4
Consolidated Statements of Cash Flows for the three years
ended December 31, 1997 ............................................... F-5
Notes to Consolidated Financial Statements ............................... F-6
Richton International Corporation
Quarterly analysis of sales, operating margin, net income and earnings per
share
<TABLE>
<CAPTION>
Pre-Tax Net Equivalent
Gross Gross Profit Income Earnings Shares
Sales Profit $ Profit % (Loss) (Loss) Per Share Outstanding
----- -------- -------- ------ ------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1st Qtr. 1997 14,081,000 3,692,000 26.22 (1,780,000) (1,071,000) (0.33) 3,279,000
1996 10,449,000 2,445,000 23.40 (1,373,000) (872,000) (0.27) 3,185,000
2nd Qtr. 1997 35,932,000 10,444,000 29.07 3,408,000 2,070,000 0.63 3,267,000
1996 27,903,000 8,773,000 31.44 2,962,000 1,860,000 0.57 3,236,000
3rd Qtr. 1997 35,145,000 10,143,000 28.86 2,386,000 1,370,000 0.41 3,321,000
1996 32,660,000 9,714,000 29.74 1,829,000 1,107,000 0.34 3,247,000
4th Qtr. 1997 21,365,000 5,910,000 27.66 157,0000 (79,000) (0.02) 3,377,000
1996 16,738,000 3,852,000 23.01 (802,000) (329,000) (0.10) 3,290,000
---------- --------- ----- -------- ------- ---- ---------
Year 1997 106,523,000 30,189,000 28.34 4,171,000 2,290,000 0.68 3,372,000
1996 87,750,000 24,784,000 28.24 2,616,000 1,766,000 0.54 3,290,000
</TABLE>
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
8
<PAGE>
PART III
ITEM 10. Executive Officers of Registrant
Identification of the executive officers:
Officer
Name Age Positions and Offices Since
---- --- --------------------- --------
Fred R. Sullivan ........ 83 Director, Chairman of the Board 1989
& Chief Executive Officer
Cornelius F. Griffin .... 58 Vice President & Chief 1985
Financial Officer
Marshall E. Bernstein ... 59 Secretary 1985
There is no family relationship among any of the executive officers and
directors of the Company. Each executive officer holds office for one year or
until a respective successor is chosen, except that each officer may be removed
from office, with or without cause, at any time by the Board of Directors.
The business experience of the executive officers is:
Fred R. Sullivan--Director, Chairman of the Board & Chief Executive Officer
for more than five years.
Cornelius F. Griffin--Vice President & Chief Financial Officer for more
than five years.
Marshall E. Bernstein--For more than five years a Member of the law firm of
Robinson, Brog, Leinwand, Greene, Genovese & Gluck P.C. and predecessor.
ITEM 11. Executive Compensation
The information required by Item 11 is incorporated by reference to the
Company's definitive proxy statement to be filed with the Securities and
Exchange Commission not later than April 30, 1998.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 is incorporated by reference to the
Company's definitive proxy statement to be filed with the Securities and
Exchange Commission not later than April 30, 1998.
ITEM 13. Certain Relationships and Related Transaction
The information required by Item 13 is incorporated by reference to the
Company's definitive proxy statement to be filed with the Securities and
Exchange Commission not later than April 30, 1998.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) (2) The list of financial statements and financial statement
schedules by this item are included in Item 8 on page 8.
(a) Exhibits:
(2) Exhibits
2.1 --Stock Purchase Agreeement dated as of July 31, 1993 and
amendment thereto dated August 27, 1993 and among Ernest
Hodas as trustee of the Ernest Hodas Revocable Trust, The
Hodas Family Limited Partnership, Ernest Hodas, Century
Supply Corp., Century Acquisition Corporation and Richton
International Corporation
--Incorporated by reference to Exhibit 2.1 to Registrant's
Current report on Form 8 for January 5, 1994
2.2 --Agreement for the Purchase of Assets dated March 29,1995
by and among CBE Acquisition Corp., (the "Buyer"), Century
Supply Corp., Richton International Corporation and CBE
Technologies, Inc. (the "Seller")
--Incorporated by reference to Exhibit 2.1 to Registrant's
Current report on Form 8-K for April 5, 1995
9
<PAGE>
(3) Exhibits
3.1 --Certificate of Incorporation of Richton International
Corporation
--Incorporated by reference to Exhibit 99.1 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1995
3.2 --Restated Certificate of Incorporation of Richton
International Corporation
3.3 --By laws of Richton International Corporation
--Incorporated by reference to Exhibit 99.1 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1995
(4) Exhibits
4.1 --Stock Certificate (Specimen)
(10)Exhibits --Material contracts
10.1 --1990 Long-Term Incentive Plan
--Incorporated by reference to Exhibit (b) to Registrant's
Annual Report on Form 10-K for the fiscal year ended April
30, 1990
10.2 --Amendment to the 1990 Long Term Incentive Plan providing
for additional 150,000 shares for issuance under the Plan
--Incorporated by reference to Exhibit 10(b) to
Registrant's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1994 Incorporated
10.3 --Amendment to the 1990 Long-Term Incentive Plan providing
for additional 140,000 shares for issuance under the Plan
--Incorporated by reference to Exhibit 10(b) to
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996 Incorporated
10.4 --Business Loan Agreement with Addendum dated March 4,1998
with Michigan National Bank relating to the $30 million
line of credit financing
10.5 --Business Loan Agreement with Addendum dated March 4,1998
with Michigan National Bank relating to the $5 million
Term Loan
10.6 --Promissory Note for $30 million dated March 4, 1998.with
Michigan National Bank
10.7 --Promissory Note for $5 million dated March 4, 1998 with
Michigan National Bank
10.8 --Security Agreement dated March 4, 1998. with Michigan
National Bank
10.9 --Subordination Agreement dated October 27, 1993 among
Michigan National Bank (the "bank"),Century Supply Corp.
(the "borrower") and Richton International Corporation
(the"Subordinating Creditor")
--Incorporated by reference to Exhibit 28.4 to Registrant's
Current report on Form 8 for January 5, 1994
10.10 --Subordination Agreement dated October 27, 1993 among
Michigan National Bank (the "bank"), Richton International
Corporation and Ernest Hodas, as Trustee of the Ernest
Hodas Revocable Trust (the "Trustee") and the Hodas Family
Limited Partnership") and Ernest Hodas (collectively
referred to a "Subordinating Creditor")
--Incorporated by reference to Exhibit 28.5 to Registrant's
Current report on Form 8 for January 5, 1994
10.11 --Non-Competition and Non-Disclosure Agreement dated
October 27, 1993 by and between Ernest Hodas and Century
Supply Corp.
--Incorporated by reference to Exhibit 2.3 to Registrant's
Current report on Form 8 for January 5, 1994
10.12 --Consulting Agreement dated October 27, 1993 by and between
Century Supply Corp. and Ernest Hodas
--Incorporated by reference to Exhibit 2.4 to Registrant's
Current report on Form 8 for January 5, 1994
10
<PAGE>
10.13 --Guaranty dated October 27, 1993 by Richton International
Corporation in favor of the Hodas Family Limited
Partnership and Ernest Hodas, as Trustee of the Ernest
Hodas Revo-cable Trust and Ernest Hodas
--Incorporated by reference to Exhibit 2.6 to Registrant's
Current report on Form 8 for January 5, 1994
10.14 --Subordination Agreement dated October 27, 1993 between
Michigan National Bank, Century Supply Corp. (the
"borrower"), Ernest Hodas, as Trustee of the Ernest Hodas
Revocable Trust and the Hodas Family Limited Partnerhsip
and Ernest Hodas (collectively referred to as
"Subordinating creditor")
--Incorporated by reference to Exhibit 28.6 to Registrant's
Current report on Form 8 for January 5, 1994
10.15 --Series A Warrant to Purchase 236,250 shares of Common
Stock of Richton International Corporation
--Incorporated by reference to Exhibit 28.9 to Registrant's
Current report on Form 8 for January 5, 1994
10.16 --Subordinated Note issued by Richton International Corp.
dated October 26, 1993 to Mr. Fred R. Sullivan in the
principal amount of $1,181,250.
--Incorporated by reference to Exhibit 28.10 to Registrant's
Current report on Form 8 for January 5, 1994
10.17 --Subordinated Promissory Note for $1.0 million dated
March 29, 1995 between CBE Acquisition Corp. and CBE
Liquidating Corp.
--Incorporated by reference to Exhibit 2.2 to Registrant's
Current report on Form 8K for April 5, 1995
10.18 --Subordinated Promissory Note for $1.0 million dated
March 29, 1995 between Richton International Corporation
and Fred R. Sullivan
--Incorporated by reference to Exhibit 2.3 to Registrant's
Current report on Form 8K for April 5, 1995
10.19 --Guaranty dated March 29, 1995 by Richton International
Corp. in favor of the CBE Liquidating
--Incorporated by reference to Exhibit 2.4 to Registrant's
Current report on Form 8K for April 5, 1995
10.20 --Guaranty dated March 29, 1995 by Century Supply Corp. in
in favor of the CBE Liquidating Corp.
--Incorporated by reference to Exhibit 2.5 to Registrant's
Current report on Form 8K for April 5, 1995 (11) Exhibit
11.1 --Calculation of earnings per share
--Incorporated by reference to Footnote 11 to Notes to
Consolidated Financial Statements of Registrant's Annual
Report on Form 10- K for the year ended December 31, 1997
(21)Exhibits--Subsidiaries of the Registrant
(99)Exhibits--Other
99.1 --Fairness Opinion received from Quirk, Carson & Pettit
relating to the $1.0 million the promissory note agreement
between F.R. Sullivan and the Registrant
--Incorporated by reference to Exhibit 99.1 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1995
99.2 --Fairness Opinion received from Quirk, Carson & Pettit
relating to the $1.0 million the promissory note agreement
between F.R. Sullivan and the Registrant
--Incorporated by reference to Exhibit 99.1 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1995
(b) Reports on Form 8-K
None.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
RICHTON INTERNATIONAL CORPORATION
(Registrant)
By: /s/ Fred R. Sullivan
---------------------------
Fred R. Sullivan
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: March 9, 1998
By: /s/ Cornelius F. Griffin
---------------------------
Cornelius F. Griffin
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ Fred R. Sullivan Chairman of the Board and March 9, 1998
- ------------------------
Fred R. Sullivan Chief Executive Officer
(Principal Executive Officer)
/s/ Cornelius F. Griffin Vice President and Chief March 9, 1998
- ------------------------
Cornelius F. Griffin Financial Officer (Principal
Financial and Accounting Officer)
/s/ Norman E. Alexander Director March 9, 1998
- ------------------------
Norman E. Alexander
/s/ Donald A. McMahon Director March 9, 1998
- ------------------------
Donald A. McMahon
/s/ Thomas J. Hilb Director March 9, 1998
- ------------------------
Thomas J. Hilb
/s/ Stanley J. Leifer Director March 9, 1998
- ------------------------
Stanley J. Leifer
/s/ Peter A. White Director March 9, 1998
- ------------------------
Peter A. White
12
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Richton International Corporation:
We have audited the accompanying consolidated balance sheets of Richton
International Corporation (a Delaware corporation) and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 Richton
International Corporation and subsidiaries, as of December 31, 1997 and 1996 and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Detroit, Michigan
March 4, 1998
F-1
<PAGE>
RICHTON INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
----------------------------
ASSETS 1997 1996
----------- -----------
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents ................................................. $ 474,000 $ 372,000
Notes and Accounts Receivable, net of allowance for
doubtful accounts of $690,000 in 1997 and $700,000 in 1996 ......... 16,292,000 13,004,000
Inventories ............................................................... 16,190,000 9,550,000
Prepaid Expenses and Other Current Assets ................................. 602,000 467,000
Deferred Taxes ............................................................ 493,000 568,000
----------- -----------
Total Current Assets .................................................... 34,051,000 23,961,000
Property, Plant and Equipment, ................................................ 2,633,000 2,287,000
Less: Allowance for Depreciation and Amortization ......................... (1,038,000) (747,000)
----------- -----------
1,595,000 1,540,000
Other Assets: Deferred taxes .................................................. 716,000 2,224,000
Goodwill .................................................................. 4,011,000 4,050,000
Other Intangibles ......................................................... 1,217,000 599,000
----------- -----------
TOTAL ASSETS .................................................................. $41,590,000 $32,374,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Portion of Long Term Debt ......................................... $ 1,773,000 $ 1,879,000
Notes Payable ............................................................. 15,135,000 7,947,000
Accounts Payable,Trade .................................................... 5,204,000 3,978,000
Accrued Liabilities ....................................................... 2,228,000 2,387,000
Deferred Income ........................................................... 2,339,000 2,160,000
----------- -----------
Total Current Liabilities ............................................... 26,679,000 18,351,000
Noncurrent Liabilities
Long Term Senior Debt ..................................................... 5,000,000 5,200,000
Subordinated Debt ......................................................... 2,364,000 3,665,000
Less: Current Portion of Long-term Debt ................................... (1,773,000) (1,879,000)
----------- -----------
5,591,000 6,986,000
Stockholders' Equity
Preferred Shares, $1.00 par value; authorized
500,000 shares; none issued -- --
Common Shares, $.10 par value; authorized 6,000,000 shares; issued 3,086,692
shares at December 31,
1997 and 3,088,347 shares at December 31, 1996 .......................... 309,000 309,000
Additional Paid-in Capital ................................................ 17,654,000 17,661,000
Retained Earnings ......................................................... (8,228,000) (10,518,000)
Treasury Stock ............................................................ (415,000) (415,000)
----------- -----------
Total Shareholders' Equity .............................................. 9,320,000 7,037,000
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .................................... $41,590,000 $32,374,000
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements.
F-2
<PAGE>
RICHTON INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Sales ............................... $106,523,000 $87,750,000 $66,659,000
Cost of Sales ........................... 76,334,000 62,966,000 48,101,000
----------- ---------- ----------
Gross Profit ............................ 30,189,000 24,784,000 18,558,000
Selling, general &
administrative expenses ............... 24,684,000 20,952,000 15,092,000
Interest (income) ....................... (519,000) (407,000) (349,000)
Interest expense ........................ 1,853,000 1,623,000 1,441,000
----------- --------- ----------
Income before Taxes ..................... 4,171,000 2,616,000 2,374,000
Provision for income taxes .............. 1,881,000 850,000 1,009,000
----------- ---------- ----------
Net Income .............................. $ 2,290,000 $ 1,766,000 $ 1,365,000
=========== ========== ==========
Net Income Per share:
Basic earnings per common share: ........ $ 0.78 $ 0.60 $ 0.46
=========== ========== ==========
Diluted earnings per common share: ...... $ 0.68 $ 0.54 $ 0.43
=========== ========== ==========
Average Common and Common Equivalent
Shares outstanding
Basic-- ...................... 2,948,000 2,949,000 2,931,000
=========== ========== ==========
Diluted-- .................... 3,372,000 3,290,000 3,161,000
=========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements.
F-3
<PAGE>
RICHTON INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
Additional Cumulative
Common Paid-in Accumulated Treasury Translation
Shares Capital Deficit Stock Adjustment
------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ........ $303,000 $17,490,000 $(13,649,000) $(415,000) $ 3,000
Issuances of 58,877 common shares ... 6,000 171,000 -- --
Cumulative Translation Adjustment (3,000)
Net Income .......................... -- -- 1,365,000 -- --
-------- ----------- ------------ --------- -------
Balance at December 31, 1995 ........ $309,000 $17,661,000 $(12,284,000) $(415,000) $ 0
Net Income .......................... -- -- 1,766,000 -- --
-------- ----------- ------------ --------- -------
Balance at December 31, 1996 ........ $309,000 $17,661,000 $(10,518,000) $(415,000) $ 0
Net Income .......................... -- -- 2,290,000 -- --
Purchase of 1,555 Odd-Lot Shares .... -- (7,000) -- -- --
-------- ----------- ------------ --------- -------
Balance at December 31, 1997 ........ $309,000 $17,654,000 $ (8,228,000) $(415,000) $ 0
======== =========== ============ ========= =======
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements.
F-4
<PAGE>
RICHTON INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income ......................................................... $2,290,000 $1,766,000 $1,365,000
Reconciliation of net cash provided by
(used by) operating activities:
Depreciation and amortization of assets ...................... 291,000 302,000 424,000
Amortization of Intangibles .................................. 1,059,000 1,558,000 1,000,000
Deferred Income .............................................. 179,000 (115,000) (95,000)
Other working capital items, assets .......................... (8,229,000) (4,839,000) (3,658,000)
Other working capital items, liabilities ..................... 1,002,000 625,000 131,000
Decrease (increase) in deferred taxes ........................ 1,583,000 672,000 1,275,000
Decrease (increase) in other assets .......................... (7,000) 142,000 (180,000)
--------- --------- ---------
Net cash provided by (used by) operating activities ........ (1,832,000) 111,000 262,000
INVESTING ACTIVITIES
Capital expenditures ............................................... (135,000) (350,000) (147,000)
Cash (paid) for businesses acquired, net ........................... (3,318,000) (2,093,000) (166,000)
--------- --------- ---------
Net cash used by investing activities ...................... (3,453,000) (2,443,000) (313,000)
FINANCING ACTIVITIES
Increase (Decrease) of Long-Term Debt .............................. (200,000) 1,400,000 (1,310,000)
Repayment of Subordinated Debt ..................................... (1,594,000) (1,235,000) --
Repayment of Long-term Debt ........................................ -- (600,000) --
Repurchase of Odd-Lot Shares ....................................... (7,000) -- --
Increase in Line of Credit ......................................... 7,188,000 2,672,000 1,800,000
--------- --------- ---------
Net cash provided by financing activities .................. 5,387,000 2,237,000 490,000
Effect of exchange rate on cash balances ........................... -- -- (3,000)
--------- --------- ---------
Increase (Decrease) in cash and cash equivalents ................... 102,000 (95,000) 436,000
Cash and cash equivalents, beginning of period ..................... 372,000 467,000 31,000
--------- --------- ---------
Cash and cash equivalents, end of period ........................... $ 474,000 $ 372,000 $ 467,000
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash payments during the period for interest ............... $1,728,000 $1,391,000 $1,408,000
========= ========= =========
Cash payments during the period for income taxes ........... $ 247,000 $ 430,000 $ 366,000
========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements.
F-5
<PAGE>
RICHTON INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business:
Richton International Corporation ("Richton") is a holding company with
two principal subsidiaries, Century Supply Corp. ("Century") and CBE
Technologies Inc, ("CBE"), collectively the "Company" Century is a leading
full-service wholesale distributor of sprinkler irrigation systems, outdoor
lighting and decorative fountain equipment. Branches are in 18 States in the
Eastern half of the United States and in Ontario, Canada. Irrigation products
have historically been sold by manufacturers primarily through wholesale
distributors. Century is a major distributor in the United States for all of the
leading original equipment manufacturers (OEM) in the irrigation systems field.
CBE Technologies, Inc. ("CBE") headquartered in Boston, Massachusetts with
satellite offices in New York, Los Angeles and Portland, Maine is a Systems
Integrator providing, network consulting, design, and installation; network
management and related support; technical services outsourcing; comprehensive
hardware maintenance; and equipment sales. CBE's technical certifications
include; Novell Platinum reseller, Microsoft Channel partner, Banyan
Enterprise/Network dealer, Novell authorized Training Center, as well as a
Novell Authorized Service Center.
2. Summary of Significant Accounting Policies:
Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of Richton and all wholly-owned subsidiaries.
All intercompany accounts and transactions have been eliminated in
consolidation.
As of August 31, 1993 Richton acquired 100% of the issued and outstanding
shares of Century Supply Corp. On March 30, 1995 Richton acquired CBE (See Note
3).
Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents--Cash and Cash Equivalents are defined as cash
on demand at a bank, and certificates of deposit and or government securities
purchased with maturities of less than three months.
Allowance For Doubtful Accounts--The Company provides an allowance for
doubtful accounts arising from operations of the business, which allowance is
based upon a specific review of certain outstanding amounts and historical
collection performance. In determining the amount of the allowance, the Company
is required to make certain estimates and assumptions and actual results may
differ from these estimates and assumptions.
Inventories--The Company values inventory at the lower of cost or market
using the first-in first-out ("FIFO") method of accounting.
Goodwill and other Intangibles--Goodwill is amortized on a straight-line
basis over periods of 5 - 15 years as follows:
<TABLE>
<CAPTION>
Amortization 12/31/95 12/31/96
Period Balance Additions Reductions Balance
------------ ------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
Goodwill
Typewriter Maintenance ..... 5 years 1,700,000 -- 1,310,000 390,000
Computer Maintenance ....... 15 years 3,360,000 167,000 227,000 3,300,000
Irrigation ................. 5-15 years 141,000 240,000 21,000 360,000
-------- ------- -------- --------
5,201,000 407,000 1,558,000 4,050,000
========= ======= ========= =========
</TABLE>
F-6
<PAGE>
RICHTON INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
<TABLE>
<CAPTION>
Amortization 12/31/96 12/31/97
Period Balance Additions Reductions Balance
------------ ------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
Goodwill
Typewriter Maintenance .... 5 years 390,000 -- 390,000 --
Computer Maintenance ...... 15 years 3,300,000 -- 344,000 2,956,000
Irrigation ................ 5 -15 years 360,000 733,000 38,000 1,055,000
--------- ------- -------- ---------
4,050,000 733,000 772,000 4,011,000
Other Intangibles
Irrigation ................ 1- 5 years 361,000 908,000 154,000 1,115,000
Computer Maintenance ...... 1- 5 years 133,000 -- 133,000 --
--------- ------- -------- ---------
494,000 908,000 287,000 1,115,000
========= ======= ======== =========
</TABLE>
Long-Lived Assets--During 1995, the Company adopted the provisions of
Statement of Financial Accounting Standard No. 121 "Accounting for the
Impairment of Long Lived Assets" ("SFAS 121"). SFAS 121 requires, among other
things, that an entity review its long-lived assets and certain related
intangibles for impairment whenever changes in circumstances indicate that the
carrying amount of an asset may not be fully recoverable. As a result, the
Company continually evaluates whether events and circumstances have occurred
that indicate the remaining estimated useful life of long-lived assets,
including goodwill, may not be recoverable. The acquisition of CBE (See Note 3)
resulted in goodwill of approximately $6.0 million which was based on CBE's two
major lines of business--computer maintenance and network installation services
and typewriter services. Since the acquisition of CBE, the typewriter contract
maintenance business has experienced a continual decline in revenues and it was
determined that expected future cash flows (undiscounted and without interest
charges) would be less than the carrying amount of goodwill allocated to the
typewriter maintenance business. Based on discounted estimated future cash flow,
the Company recorded a write-down of Goodwill in the amount of $1.0 million in
1995, and based on further decline of that business, an additional charge of $.8
million in the third calendar quarter of 1996, which is included in selling,
general and administrative expenses in the consolidated statement of operations
for the respective periods involved.
Deferred Income--Deferred income represents income received from customers
related to service contracts that extend for specified periods of time, less
than one year. Income is recognized proportionally over the life of the
contract.
Income Taxes--The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS No. 109). This statement requires the Company to recognize deferred
tax assets and liabilities for the expected future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
Under this method, deferred tax assets and liabilities are determined based on
the difference between the financial statement carrying amounts and the tax
basis of assets and liabilities.
Accounting for Stock Based Compensation--Company has elected to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock issued to
Employees," and related interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of grant over the amount the employee must pay
to acquire the stock in the accompanying Statements of Income. As supplemental
information, the Company has provided pro forma disclosure of the fair value at
the date of grant of stock options granted during 1997 and 1996 in Note 10, in
accordance with the requirements of Statement of Financial Accounting Standards
No.123, "Accounting for Stock-Based Compensation" (SFAS 123).
F-7
<PAGE>
RICHTON INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
3. Acquisitions:
On March 29, 1995 the Company, through its wholly owned subsidiary,
Century, acquired all the operating assets and business of CBE Technologies,
Inc. for $5.0 million plus assumption of certain liabilities. The $5 million was
financed by bank borrowings of $3.0 million, a $1.0 million unsecured promissory
note to the former owners and a $1 million unsecured subordinated note to the
Chairman of Richton. The note to the Chairman was subject to a fairness opinion
of an independent advisor chosen by Richton's Board of Directors.
The following unaudited pro forma summary presents the 1995 consolidated
results of operations as if the acquisition of CBE had occurred on January 1,
1995. These pro forma results do not purport to be indicative of what would have
occurred had the acquisition been made as of that date or of the results which
may occur in the future.
Twelve Months Ended
December 31 1995
-------------------
(Unaudited)
Net Sales .......................................... $69,066,000
===========
Net Income ......................................... $ 1,377,000
===========
Net Income per Share ............................... $ .44
============
4. Property and Equipment:
December 31
--------------------------
1997 1996
-------- --------
Land ..................................... $ 80,000 $ 80,000
Property held for sale or future use ..... 107,000 108,000
Building and Improvements ................ 848,000 820,000
Autos and Trucks ......................... 539,000 445,000
Machinery and Equipment .................. 600,000 479,000
Furniture and Fixtures ................... 459,000 355,000
---------- ----------
$2,633,000 $2,287,000
Less: Accumulated Depreciation ........... 1,038,000 747,000
---------- ----------
$1,595,000 $1,540,000
========== ==========
All fixed assets are currently depreciated over five years except building
improvements which are based upon the respective lease terms which are from 2 to
10 years.
5. Income Taxes:
At December 31, 1997, and 1996 the Company has deferred tax assets of
approximately $1.1 million and $2.8 million, respectively. Significant
components of the deferred tax assets as of December 31, are as follows:
1997 1996
-------- --------
Current:
Allowance for bad debts .................. $ 234,000 $ 238,000
Accrued Pension Cost ..................... -- 97,000
Other .................................... 259,000 233,000
--------- ----------
$ 493,000 $ 568,000
========= ==========
Long Term:
Net operating loss carry forward ......... $ -- $1,383,000
Goodwill ................................. 682,000 666,000
Depreciation ............................. 34,000 --
Other .................................... -- 175,000
--------- ----------
$ 716,000 $2,224,000
========= ==========
F-8
<PAGE>
RICHTON INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
The provision for income taxes for the three years ended December 31, 1997
consists of the following:
1997 1996 1995
---- ---- ----
Federal
Current Payable (refundable) .... $ 160,000 $109,000 $ (436,000)
Deferred ........................ 1,399,000 672,000 1,275,000
State & Local ..................... 322,000 50,000 151,000
Foreign ........................... -- 19,000 19,000
---------- -------- ----------
$1,881,000 $850,000 $1,009,000
========== ======== ==========
A reconciliation of the Federal provision for income taxes at the
statutory rate to the actual provision for income taxes for the three years
ended December 31, 1997, is as follows:
1997 1996 1995
---- ---- ----
Federal ................................. 34% 34% 35%
State & Local ........................... 8 3 7
Other ................................... 3 (4) --
-- -- --
45% 33% 42%
== == ==
6. Statement of Cash Flows:
The components of other working capital items included in the Consolidated
Statement of Cash Flows are as follows:
For Twelve Months Ended
December 31
------------------------------------------
1997 1996 1995
---- ---- ----
Receivables ................... $(2,471,000) (3,232,000) $(2,388,000)
Inventories ................... (5,623,000) (1,595,000) (1,238,000)
Prepaid Expenses .............. (135,000) (12,000) (32,000)
----------- ----------- -----------
Increase in Working
Capital Items, Assets ....... $(8,229,000) $(4,839,000) $(3,658,000)
=========== =========== ===========
Accounts Payable .............. 1,226,000 775,000 (35,000)
Accrued Expenses .............. (224,000) (150,000) 166,000
----------- ----------- -----------
Increase Working Capital
Items, Liabilities .......... $ 1,002,000 $ 625,000 $ 131,000
=========== =========== ===========
7. Bank Borrowing:
During the first quarter of 1998, the Company completed a renegotition of
it's senior debt and revolving line of credit financing. The revised agreement
(a) increased the availability to $30 million and lowered the rate of interest
charged on the line of credit to LIBOR plus 175 basis points rather than prime
less an eighth, (b ) transferred the principal obligor from Century to Richton,
(c) to increase the amount of unsecured financing to nearly $8 million and (d)
released the pledge of common stock of Century, which had previously been held
as security for the bank loans. The outstanding balance on the line of credit at
December 31, 1997 and 1996 were $15.1 million and $7.9 million, respectively.
The term loan will continue to amortize at the rate of $.18 million per quarter.
In addition, certain financial covenants and distribution restrictions were also
modified or curtailed completely.
F-9
<PAGE>
RICHTON INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
8. Long-Term Debt:
The Company has the following long-term debt as of December 31, 1997:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Term note payable to a bank, secured by accounts receivable, inventory, fixtures
and equipment, interest at prime (8.5% as of December 31, 1997), payable in
quarterly installments of $175,000,final payment due April 27, 2001 ............ $5,000,000 $5,200,000
Installments payable to former owner of Century, unsecured and subordinated to
the bank debt, payable in quarterly installments of $50,000, final payment due
June 30, 2000 .................................................................. 468,000 668,000
Note payable to related party, unsecured and subordinated to bank debt, interest
at 9%, payable in semi-annual installments of $118,125 commencing April 1996,
final payment due October 31, 1999--
net of discount (A) ............................................................ 459,000 887,000
Notes payable to former owner of Century--repaid in 1997 ....................... -- 106,000
Note payable to related party, unsecured and subordinated to the term note
payable to bank, interest at 10%, payable in 10 installments of $100,000 on
October 15th and April 15th, final payment
April 2000 (B) ................................................................. 450,000 900,000
Note payable to seller of CBE Technologies, Inc. unsecured and subordinated to
the all bank debt, interest at 9% payable in 10 installments of $100,000 on
October 15th and April 15th, final
payment due April 2000. ........................................................ 428,000 700,000
Other .......................................................................... 559,000 404,000
---------- ----------
7,364,000 8,865,000
Less--Current Portion .......................................................... 1,773,000 1,879,000
---------- ----------
$5,591,000 $6,986,000
========== ==========
</TABLE>
(A): The Company issued 236,250 warrants to acquire 236,250 shares of the
common stock of Richton at $1 3/8 per share in connection with this loan. The
warrants were valued at $143,000.
(B): The Company issued 100,000 warrants to acquire 100,000 shares of
Richton's common stock at $3.0 per share--the fair market value at the time of
issuance.
The scheduled future maturities of long-term debt at December 31, 1997
after refinancing described in note 7, are as follows:
1998 ................................................ $1,773,000
1999 ................................................ 1,769,000
2000 ................................................ 920,000
2001 ................................................ 2,902,000
----------
$7,364,000
==========
9. Retirement Plans:
The Company's Richton employees were covered by a noncontributory, defined
benefit plan (the "Retirement Plan") sponsored by Richton. Effective, June 30,
1997 the Plan was effectively terminated and the amounts then
F-10
<PAGE>
RICHTON INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
owing to its active employees were paid out; an amount of approximately $.55
million. Richton during 1996 paid out its obligations to all of its former
employees and participants in the Retirement Plan.
Pension expense reflected in the consolidated statements of income for this
Plan was $37,000 in 1997 and 1996 and $155,000 in 1995.
Century and CBE have Tax Deferred Savings Plans under Section 401 (k) (the
"Plans") of the Internal Revenue Code. The Plans allows employees to defer up to
15% of eligible compensation on a pre-tax basis through contributions to the
Plans. In line with the provisions of the Plans, Century has elected to
contribute, for every dollar the employee contributes, 50 % of the employee's
amount, up to 4 % of eligible compensation. Century may also make discretionary
contributions. The charge to income for employer contributions to the Century
Plan was approximately $285,000,$224,000, and $182,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. Century's discretionary
contribution to the Plan were $190,000, $170,000, and $125,000 in each of the
three years ended in December 31, 1997, respectively. CBE has elected to not
contribute to its Plan.
10. Stock Options:
The Company has as part of its 1990 Long-Term Compensation Plan, a Stock
Option Plan ("the Plan"). Richton accounts for this plan under APB Opinion No.
25, under which no compensation cost has been recognized. Had compensation cost
for this plan been determined consistent with SFAS 123 the Company's net income
and earnings per share would have been approximately the same.
1997 1996
----- ------
Net Income:
As reported .............................. $2,290,000 $1,766,000
Pro Forma ................................ 2,266,000 1,766,000
EPS:
As reported .............................. $ .68 $ .54
Pro Forma-diluted ........................ .67 .54
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
The Company may grant options for up to 415,000 shares under the Plan. The
Company has granted options on 315,000 shares through December 31, 1997. Under
the Plan, the option exercise price equals the stock's market price on date of
grant except for options granted to Mr. Sullivan. The exercise price for Mr.
Sullivan's options are at 110% of the current market price at date of grant.
A summary of the status of the Company stock option plan at December 31,
1997, 1996 and 1995 is presented in the table below:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- ------------------- --------------------
Wtd Avg Wtd Avg Wtd Avg
Shares ex price Shares ex price Shares ex price
------- --------- ------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of Year ...... 275,000 $ 2.20 270,000 $ 2.15 210,000 $ 1.98
Granted ............................... 40,000 5.24 5,000 5.09 60,000 2.72
Exercised ............................. -- -- -- -- -- --
Forfeited ............................. -- -- -- -- -- --
Expired ............................... -- -- -- -- -- --
------- -------- ------- ------- ------- -------
Outstanding at End of Year ............ 315,000 $ 2.59 275,000 $ 2.20 270,000 $ 2.15
Exercisable at End of Year ............ 315,000 2.59 270,000 2.15 260,000 2.10
</TABLE>
The Company has issued warrants to purchase 336,250 shares of Common Stock
in connection with several debt agreements (see Note 5). These warrants are
currently exercisable and will expire in seven years from date of issue.
F-11
<PAGE>
RICHTON INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
11. Earnings per Common Share and Common Share Equivalent:
Earnings per common share equivalent were calculated on the basis of
3,372,000, 3,290,000, and 3,161,000 weighted average common and common
equivalent shares outstanding in the years ending December 31, 1997, 1996, and
1995, respectively.
<TABLE>
<CAPTION>
Per-Share
Income Shares Amount
------- ------- ---------
For the year ended December 31, 1995
---------------------------------
<S> <C> <C> <C>
Net Income ............................................... $1,365,000 2,931,000 $.46
Options issued to Executives ............................. 86,000
Shares subject to exercise of warrants ................... 146,000
Income available to common shareholders .................. $1,365,000 3,163,000 $.43
<CAPTION>
For the year ended December 31, 1996
---------------------------------
<S> <C> <C> <C>
Net Income ............................................... $1,766,000 2,949,000 $.60
Options issued to Executives ............................. 139,000
Shares subject to exercise of warrants ................... 202,000
Income available to common shareholders .................. $1,766,000 3,290,000 $.54
<CAPTION>
For the year ended December 31, 1997
---------------------------------
<S> <C> <C> <C>
Net Income ............................................... $2,290,000 2,948,000 $.78
Options issued to Executives ............................. 180,000
Shares subject to exercise of warrants ................... 244,000
Income available to common shareholders .................. $2,290,000 3,372,000 $.68
</TABLE>
Basic earnings per common share were computed by dividing net income by
the weighted average number of shares of common stock outstanding during the
year. Diluted earnings per common share for the years 1997, 1996 and 1995 were
determined on the assumptions that the warrants were converted upon issuance on
the respective dates of issuance.
12. Stockholders' Equity:
In 1995 the Company issued 58,877 shares of the Common Stock to its
Chairman in lieu of compensation and interest owed to him of $177,000 . The
number of shares issued was determined based on the quoted market price of the
shares at the time of issuances.
13. Long-term Leases and other Commitments:
The Company leases its corporate offices, distribution facilities and data
processing equipment under agreements which expire at varying dates through
2007. Minimum annual rental commitments at December 31, 1997, are as follows:
1998 ................................................... $1,700,000
1999 ................................................... 1,442,000
2000 ................................................... 1,123,000
2001 ................................................... 510,000
2002 ................................................... 357,000
Thereafter .............................................
---------
$5,132,000
=========
Rent expense under the Company's various operating leases was $1,795,000,
$1,478,000, and $1,374,000 for the years ended December 31, 1997, 1996, and
1995, respectively.
F-12
<PAGE>
RICHTON INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
14. Segment Data:
The Company operates in two industry segments, wholesale distribution, and
computer services. See Notes 1 and 3 for description of businesses and details
of the acquisitions of businesses. There are no inter-segment sales and all
sales occur in North America. Income (loss) from operations by industry segment
consists of net sales less related cost and expenses. In computing income (loss)
from operations by segment, cost of borrowed funds for working capital have been
included. Corporate includes the general and corporate expenses and interest,
incurred to acquire the two businesses. Corporate operating expenses, directly
traceable to industry segments, if any, have been allocated to those segments.
Amortization of goodwill and related impairment charges are considered segment
related and accordingly charged to the related industry segment. Identifiable
assets by industry segment are those assets that are used in the business's
operation in each industry segment and do not include general corporate assets.
General corporate assets consist primarily of cash, deferred taxes, and
corporate property.
Corporate
Wholesale Computer Charges/
Distribution Services Interest Total
------------ ---------- ---------- ------
(in millions)
---------------------------------------------------------
Sales ............... $86.9 $19.6 $ -- $106.5
========= ========= ========= ===========
Pre-Tax Income ...... 6.0 (.3) (1.5) 4.2
========= ========= ========= ===========
Identifiable Assets . $33.2 $ 6.2 $ 2.2 $ 41.6
========= ========= ========= ===========
15. Shareholder Rights Plan:
On January 26, 1998, the Shareholder Rights Plan expired pursuant to it's
provisions., No rights were ever issued under this Plan.
F-13
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000083877
<NAME> Richton International Corporation
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 474
<SECURITIES> 0
<RECEIVABLES> 16,982
<ALLOWANCES> 690
<INVENTORY> 16,190
<CURRENT-ASSETS> 34,051
<PP&E> 2,633
<DEPRECIATION> 1,038
<TOTAL-ASSETS> 41,590
<CURRENT-LIABILITIES> 26,679
<BONDS> 0
0
0
<COMMON> 309
<OTHER-SE> 9,011
<TOTAL-LIABILITY-AND-EQUITY> 41,590
<SALES> 106,523
<TOTAL-REVENUES> 106,523
<CGS> 76,334
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 24,684
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,334
<INCOME-PRETAX> 4,171
<INCOME-TAX> 1,881
<INCOME-CONTINUING> 2,290
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,290
<EPS-PRIMARY> 0.68
<EPS-DILUTED> 0.68
</TABLE>
