United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10 - Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACTS OF 1934
----------
For the Quarter Ended Commission file number
September 30, 1998 0-12361
RICHTON INTERNATIONAL CORPORATION
Exact name of registrant as specified in its charter
DELAWARE 05-0122205
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
767 5th Avenue, New York, New York 10153
(Address of principal executive offices) (Zip Code)
Registrant's telephone number (212) 751-1445
Securities registered under Name of Exchange on
Section 12 (b) of the Exchange Act: which Registered:
Common Stock, par value $.10 American Stock Exchange
Securities registered under Section 12(g) of the Exchange Act:
Series A Preferred Stock, par value $100. 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 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, 2,850,000 shares at November 1, 1998
<PAGE>
Richton International Corporation
FORM 10-Q
INDEX
- --------------------------------------------------------------------------------
PAGE
PART I FINANCIAL INFORMATION
Item 1. - Financial Statements:
Consolidated Statements of Operations
for the three and nine months ended September 30, 1998
and September 30, 1997 3
Consolidated Balance Sheets at September 30,
1998 and December 31, 1997 4
Consolidated Statements of Cash Flow for
the nine months ended September 30, 1998 and
September 30, 1997 5
Notes to Consolidated Financial
Statements 6
Item 2. - Management's Discussion and
Analysis of Results of Operation and
Financial Condition 10
PART II OTHER INFORMATION - None
2
<PAGE>
RICHTON INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months ended Nine months ended
September 30 September 30
------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $48,241,000 $ 35,145,000 $115,470,000 $ 85,158,000
Cost of Sales 34,722,000 25,002,000 83,537,000 60,879,000
----------- ---------- ---------- -----------
Gross Profit 13,519,000 10,143,000 31,933,000 24,279,000
Selling, general & administrative
expenses 9,996,000 7,347,000 24,746,000 19,240,000
Interest (income) (139,000) (157,000) (454,000) (409,000)
Interest expense 755,000 567,000 1,709,000 1,434,000
----------- ---------- ---------- -----------
Income before Taxes 2,907,000 2,386,000 5,932,000 4,014,000
Provision for income taxes 1,160,000 1,016,000 2,368,000 1,645,000
----------- ---------- ---------- -----------
Net Income $ 1,747,000 $1,370,000 $3,564,000 $ 2,369,000
=========== ========== ========== ===========
Net Income Per share: $ 0.61 $ 0.46 $ 1.22 $ 0.80
=========== ========== ========== ===========
Basic earnings per common share: $ 0.53 $ 0.41 $ 1.06 $ 0.71
=========== ========== ========== ===========
Diluted earnings per common share:
Average Common and Common Equivalent
Shares outstanding
Basic- 2,854,000 2,948,000 2,922,000 2,948,000
=========== ========== ========== ===========
Diluted- 3,326,000 3,317,000 3,356,000 3,316,000
=========== ========== ========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements
3
<PAGE>
RICHTON INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30 December 31
1998 1997
------------ ------------
Assets
Current assets:
Cash and Cash Equivalents $ 545,000 $ 474,000
Notes and Accounts Receivable, net of
allowance for doubtful accounts of
$940,000 in 1998 and $690,000 in 1997 33,821,000 16,292,000
Inventories 21,810,000 16,190,000
Prepaid Expenses and Other Current Assets 894,000 602,000
Deferred Taxes 293,000 493,000
------------ ------------
Total Current Assets 57,363,000 34,051,000
Property, Plant and Equipment, 2,999,000 2,633,000
Less: Allowance for Depreciation and
Amortization (1,259,000) (1,038,000)
------------ ------------
1,740,000 1,595,000
Other Assets: Deferred taxes 597,000 716,000
Goodwill, net 4,278,000 4,011,000
Other Intangibles, net 1,761,000 1,217,000
------------ ------------
Total Assets $ 65,739,000 $ 41,590,000
============ ============
Liabilities & Stockholders' Equity
Current Liabilities:
Current Portion of Long Term Debt $ 1,750,000 $ 1,773,000
Notes Payable 30,312,000 15,135,000
Accounts Payable, Trade 9,558,000 5,204,000
Accrued Liabilities 4,705,000 2,228,000
Deferred Income 2,341,000 2,339,000
------------ ------------
Total Current Liabilities 48,666,000 26,679,000
Noncurrent Liabilities
Long Term Senior Debt 4,650,000 5,000,000
Subordinated Debt 2,356,000 2,364,000
Less: Current Portion of Long-term Debt (1,750,000) (1,773,000)
------------ ------------
5,256,000 5,591,000
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 3,116,692 shares
at September 30, 1998 and 3,086,692
shares at December 31, 1997 311,000 309,000
Additional Paid-in Capital 17,699,000 17,654,000
Retained Earnings (4,664,000) (8,228,000)
Treasury Stock (1,430,000 (415,000)
Translation adjustment (99,000) --
------------ ------------
Total Shareholders' Equity 11,817,000 9,320,000
------------ ------------
Total Liabilities and Shareholders' Equity $ 65,739,000 $ 41,590,000
============ ============
The accompanying notes to consolidated financial statements are an integral
part of these consolidated financial statements.
4
<PAGE>
RICHTON INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine months ended
September 30
------------------------
1998 1997
---- ----
OPERATING ACTIVITIES
Net Income $ 3,564,000 $ 2,369,000
Reconciliation of net cash provided by (used by)
operating activities:
Depreciation and amortization of assets 221,000 170,000
Amortization of Intangibles 800,000 1,180,000
Loss on Disposal of fixed Assets 425,000 --
Deferred Income 2,000 690,000
Other working capital items, assets (21,140,000) (18,014,000)
Other working capital items, liabilities 6,841,000 4,535,000
Decrease (increase) in deferred taxes 319,000 1,108,000
Decrease (increase) in other assets (161,000) 101,000
------------ ------------
Net Cash provided by (Used by) Operating
Activities (9,129,000) (7,861,000)
INVESTING ACTIVITIES
Capital expenditures (342,000) (55,000)
Cash (paid) for businesses acquired, net (3,973,000) (6,000)
Exercise of Stock Options 47,000
Repurchase of common Stock (1,015,000) --
------------ ------------
Net cash used by investing activities (5,283,000) (61,000)
FINANCING ACTIVITIES
Repayment of Subordinated Debt (433,000) (200,000)
Repayment of Long-term Debt (175,000) (1,079,000)
Reduction in Installment obligation (150,000) (150,000)
Increase in Line of Credit 15,277,000 11,537,000
------------ ------------
Net cash provided by financing activities 14,519,000 10,108,000
Effect of Exchange Rate changes on Cash balances (3,000) --
------------ ------------
Increase (Decrease) in cash and cash equivalents 71,000 2,186,000
Cash and cash equivalents, beginning of period 474,000 372,000
------------ ------------
Cash and cash equivalents, end of period $ 545,000 $ 2,558,000
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments during the period for interest $ 1,255,000 $ 1,041,000
============ ============
Cash payments during the period for income
taxes $ 1,769,000 $ 215,000
============ ============
The accompanying notes to consolidated financial statements are an integral
part of these consolidated financial statements.
5
<PAGE>
RICHTON INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements and related notes included herein
have been prepared by Richton International Corporation (the "Company") without
audit, pursuant to the requirements of Form 10-Q. All adjustments, consisting of
normal recurring nature which are, in the opinion of management, necessary to a
fair statement of the results for the interim periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such requirements. Although the
Company believes that the disclosures are adequate to make the information
presented not misleading, it is suggested that these consolidated financial
statements and related notes be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1997. The results for any interim period
should not be construed as representative for the year taken as a whole due,
among other things , to the seasonally of the Company's business.
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 19 states largely in
the Eastern half of The United Stated and in Ontario, Canada. Manufacturers
primarily through wholesale distributors have historically sold irrigation
products. Century is a major distributor in the United States for three of the
four leading original equipment manufacturers (OEM) in the irrigation systems
field. CBE Technologies, Inc. ("CBE") headquartered in Boston, Massachusetts
with satellite offices in New York, Costa Mesa and Portland, Maine is a Systems
Integrator providing, network consulting, design, and installation; networking
management and related support; technical service 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 inter-company accounts and transactions have been eliminated in
consolidation.
As of August 31, 1993 the Richton acquired 100% of the issued and
outstanding shares of Century Supply Corp. On March 30, 1995 Richton acquired
CBE.
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 a government security
purchased with maturates 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 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.
6
<PAGE>
RICHTON INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Goodwill and other Intangibles - Goodwill and other intangibles are
amortized on a straight-line basis over periods of 5 - 15 years as follows:
<TABLE>
<CAPTION>
Amortization 12/31/97 9/30/98
Amortization Period Balance Additions Reductions Balance
- -------------- ------------ --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Goodwill
Computer Maintenance 15 years 2,956,000 247,000 2,709,000
Irrigation 5 - 15 years 1,055,000 613,000 99,000 1,569,000
--------- --------- ---------- ---------
4,011,000 613,000 346,000 4,278,000
========= ======= ======= =========
Other Intangibles
Irrigation 1 - 5 years 1,115,000 837,000 244,000 1,708,000
--------- --------- ---------- ---------
1,115,000 837,000 244,000 1,708,000
========= ======= ======= =========
Amortization 12/31/96 12/31/97
Amortization Period Balance Additions Reductions Balance
- -------------- ------------ --------- --------- ---------- ---------
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 Standards 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-lives 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 (UN-discounted and without interest charges)
would be less than the carrying amount of the goodwill allocated to the
typewriter maintenance business. Based on discounted estimated future cash
flows, 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 period of time, less than
one year. Income is recognized proportionally over the life of the contract.
7
<PAGE>
RICHTON INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 - The 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 Statement 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 requirement of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (AFAS 123).
3. Statement of Cash Flows:
The components of other working capital items included in the Consolidated
Statement of Cash Flows are as follows:
For Nine Months Ended
September 30
------------------------------------
1998 1997
------------ ------------
Receivables $(16,945,000) $(12,369,000)
Inventories (3,903,000) (5,417,000)
Prepaid Expenses and other (292,000) (228,000)
------------ ------------
Increase in Working Capital
Items, Assets $(21,140,000) $(18,014,000)
============ ============
Accounts Payable 4,364,000 4,184,000
Accrued Expenses 2,477,000 351,000
------------ ------------
Increase Working Capital
Items, Liabilities $ 6,841,000 $ 4,535,000
============ ============
4. Bank Borrowing:
In July, 1998, due to its increase in sales and to acquisitions of new branches,
Century requested and received authorization from its bank to increase its line
of credit to $30 million from $25 million. As has been noted before, Century's
working capital needs expand during the second and early third quarters of each
year. This year is no exception. During the remaining months of the second half
of the year historically receivable balances are reduced, releasing significant
amounts of cash that may be used to reduce short - term borrowing. The Company
has entered into negotiations with Michigan National Bank to revise the terms
and increase the borrowing limits on the lines of credit.
8
<PAGE>
RICHTON INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Earnings per Common Share and Common Share Equivalent:
Earnings per common share equivalent on the basis of 3,356,000 and
3,317,000 weighted average common and common equivalent shares outstanding in
the nine months ending September 30, 1998 and 1997, respectively.
Net Per-Share
Income Shares Amount
------ ------ ------
For the nine months ended September 30, 1998
--------------------------------------------
Net Income $3,564,000 2,922,000(1) $1.22
Options issued to Executives 181,000
Shares subject to exercise of
warrants 253,000
Income available to common
shareholders $3,564,000 3,356,000 $1.06
(1) Reduced by the acquisition of 127,000 shares of the Company's common stock
during the first nine months of 1998. The Company uses a trailing
twelve-month rolling average of shares outstanding.
For the nine months ended September 30, 1997
--------------------------------------------
Net Income $2,369,000 2,948,000 $.80
Options issued to Executives 152,000
Shares subject to exercise of
warrants 217,000
Income available to common
shareholders $2,369,000 3,317,000 $.71
9
<PAGE>
Management's Discussion and Analysis of Results of Operations and Financial
Condition - (For the nine months ended September 30, 1998).
RESULTS OF OPERATIONS
Sales for the nine months ended September 30, 1998 were $115.5 million compared
to $85.2 million for the nine months ended September 30, 1997. An increase of
approximately 36%.The higher sales is principally attributed to a brisk economy,
favorable weather conditions in the areas the company serves and additional
market reach. Locations, which have recently been opened, are in Idaho, Utah and
Oregon. New areas continue to be tapped so that there are now nearly ninety
branches
Gross profit for the nine months ended September 30, 1998 was $31.9 million
compared to $24.3 million for the same nine-month period in 1997. The 1998
increase over the 1997 amount is due to the higher sales in 1998. The gross
profit percentage of sales for the latest nine-month period was 27.7% compared
to 28.5% for the same nine months last year. The declines in gross profit
percentage is principally due to the mix of products sold and lower margins on
the computer maintenance contracts.
Selling, general and administrative expenses for the nine months ended September
30, 1998 increased 28.6% to $24.7 million compared to $19.2 million for the same
nine month period in 1997. The higher level of expense is principally due to the
increased number of operating branches at Century. As of September 30, 1998
Century has nearly 90 branches compared to 57 at September 30, 1997 including
approximately 10 additional branches acquired during the past three months.
The federal, state and foreign income tax provision for the nine months ended
September 30, 1998 were $2.4 million or 40% of pre-tax profits. In 1997 the
comparable amount was $1.6 million.
Net income for the nine months ended September 30, 1998 was $3.6 million or
$1.06 per share - diluted, compared to $2.4 million or $.71 per share - diluted.
The higher net income is due to the higher sales as noted above. As previously
reported a large share of Richton's business is seasonal and one quarter's
results cannot be used as a measure for the other quarters.
FINANCIAL CONDITION
The company's working capital improved during the past nine months to $8.7
million from $7.4 million at December 31, 1997. The Company's free cash flow for
the nine months ended September 30, 1998 was $5.2 million compared to $5.6
million for the same nine-month period in 1997. The 1997 amount included $1.1
million from use of net operating tax loss carryforward that are no longer
available in 1998. During the nine month period ended September 30, 1998 the
Company acquired several irrigation businesses for $3.9 million, acquired
127,000 shares of it's common stock for $1.0 million and repaid senior and
subordinate debt of $.8 million.
The Company continues to generate sufficient cash flow to liquidate its senior
and subordinated debt as it becomes due, and to make acquisitions. However,
there is no assurance given the seasonality of its principal business that it
can continue to do so in the future.
10
<PAGE>
Year 2000
The Company is currently working to resolve the potential impact of the year
2000 on the processing of date-sensitive information by its computerized
information systems. The year 2000 problem is the result of computer programs
being written using two digits (rather than four) to define an applicable year.
Certain programs may recognize a date using "00" as the year 1900 rather than
the year 2000, which could result in miscalculations or systems failure.
Each of the Company's operating subsidiaries uses systems software acquired from
an established software vendor. In each case the vendor has indicated that the
software is compliant. In addition the company will take a inventory of all
off-line software programs and either modify or discard those not in compliance.
During the first half of 1999, Century will up grade its existing software
system using the same vendor. During this upgrade Century will test the systems
to insure that it is 2000 compliant. CBE's systems were recently upgraded and
the vendor supplying the programs has given the Company written assurances that
the software is compliant.
Century and CBE are working with its vendors, suppliers and customers to
determine if their systems will be Year 2000 compliant as well. In the event
that suppliers or vendors are unable to convert or replace systems
appropriately, the Company intends to switch to suppliers that are able to
provide year 2000 transaction processing.
The Company's ability however to be completely year 2000 compliant is of course
dependant upon the ability of its vendors, suppliers, banks and other
fiduciaries to also be compliant. In addition, we cannot guarantee that third
parties upon whom the Company depend for essential services (such as electric
utilities, and telephone and other interchange carriers) will convert their
critical systems and processes in a timely manner. Failure or delay by any of
these parties could disrupt the Company's businesses. The Company has
established a supplier compliance program to minimize such risks.
FORWARD-LOOKING STATEMENTS
The Company is making this statement in order to satisfy the "safe harbor"
provisions contained in the Private Securities Litigation Reform Act of 1995.
This Quarterly Report contains forward-looking statements relating to the
business of the Company. 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
operate, 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 risk 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.
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.
RICHTON INTERNATIONAL CORPORATION
(Registrant)
/s/ Cornelius F. Griffin
----------------------------
Cornelius F. Griffin
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: November 13, 1998
Madison, New Jersey
11
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