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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, 1998 Commission File No. 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 Fifth Avenue, New York, New York 10153
(Address of principal executive offices) (Zip Code)
Issuer's telephone number.........................................(212) 751-1445
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 ___ 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. [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant.
Aggregate market value at March 1, 1999 amounted to $14,782,000
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, 2,951,000 shares at March 1, 1999
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year ended December 31, 1998
are incorporated by reference into Parts I and II.
Portions of the proxy statement for the annual shareholders meeting to be held
May 3, 1999 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").
Century is a leading full-service wholesale distributor of sprinkler
irrigation systems, outdoor lighting and decorative fountain equipment,
headquartered in Madison Heights, Michigan. Its branches serve customers in 33
States mostly in the eastern half of the country and Ontario, Canada. During
1998, Century acquired several distributors in Utah, Idaho and opened a branch
in Oregon. 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 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 15,300
customers through more than 100 branches.
Century is organized into six 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 profitably, 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 headquartered in Boston, Massachusetts with 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; and training labs at both the Boston and Portland
sites to support in-house training programs.
CBE is also an authorized service and warranty center for most of the
leading Personal Computer ("PC") manufacturers including IBM, Compaq, Hewlett
Packard, Apple, AST, and services most every other make of PC and printers. 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.
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.
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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 distributor agreements in place with Rain Bird,
Hunter, Irritrol Systems and Legacy by Hunter Golf 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.
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 and acquisitions and distributors moving
into new territories to expand market share and achieve economies 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 in 1993 to more than 94 branches and $125 million in
sales in 1998. 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, which may be
at lower prices, 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, it is management's belief that 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, 1998, the Company employed approximately 585 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.
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
$25 million, a significant increase from prior years due principally to the
added branch operations. Beginning in April borrowing requirements expand. By
July short-term borrowings will increase to approximately $40 million. During
the
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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.)
At December 31, 1998 working capital decreased approximately $.8 million
to $6.5 million from $7.3 million in the prior year. This decline was attributed
primarily to added debt associated with the acquisitions and the related
goodwill, net of amortization, of $1.4 million in 1998. In 1997 acquisitions
were nearly all funded internally and the comparable amount was $.6 million in
net goodwill charges.
Business Acquisitions
On March 29, 1995 the Company, through its wholly owned subsidiary,
Century, acquired all the operating assets and business of CBE 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 the next two years.
During 1998 Century acquired five different distributor operations in four
different markets. Northern New Jersey, Idaho, Utah and Florida for $6.4
million. The acquisitions were made for cash and were financed by its working
capital line, recording $4.2 million in tangible net assets. Century also opened
a branch in Oregon as well as fourteen new branches in existing markets. Similar
to past experience, several of these acquisitions were made primarily after the
prime selling season.
Liquidity
The Company's financial condition continues to improve. The net worth as
of December 31, 1998 has increased to $11.9 million. At December 31, 1998, the
Company's long-term debt was approximately $6.5 million, including $4.5 million
of senior secured debt owed to a Michigan bank. Of the balance of the
outstanding debt, $0.7 million is owed to Fred R. Sullivan, Chairman and Chief
Executive Officer of Richton, which is payable through April, 2000. 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 provides for a
loan covenant that precludes distribution of funds to stockholders.
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, the seasonality of its principal business, and the strong construction
economy that existed in 1998, that it can continue to do so in the future.
ITEM 2. Properties
Richton's executive offices at 767 Fifth Avenue, New York, New York are
subject to a five-year lease which expires in 2003. 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 377,000 square feet. Expiration
dates extend to July 2006. Seven 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 is
currently on an annual basis, approximates current market value. In addition,
during 1997 Century acquired a 10,000 square foot facility in Sarasota, Florida,
which it had previously leased. In 1998 Century acquired a 3000-sq. ft. facility
in Bay City, MI which it had previously leased. CBE's principal offices are
located in Boston, Massachusetts. This office is leased under an agreement,
which expires in June 2000. 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.
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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 1998.
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.
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<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.
1998 1997
--------------- -----------------
Calendar Quarter High Low High Low
----------------- ----- ----- ----- ----
First ......................... $ 6 15/16 $5 5/8 $4 3/4 $4 1/8
Second ........................ 10 1/4 6 1/2 4 9/16 3 3/4
Third ......................... 11 1/8 7 7/8 5 1/2 4 1/2
Fourth ........................ 9 1/8 7 1/2 7 3/16 5 1/16
(b) Approximate Number of Equity Stockholders:
Approximate Number
of Record Holders
Title of Class at February 28, 1999
------------- --------------------
Common Stock, $ .10 par value 524
(c) Dividends:
The Company paid no cash dividends in 1998, 1997 or 1996 as noted under
"Liquidity" the Company's financing arrangements preclude the distribution of
dividends.
ITEM 6. Selected Consolidated Financial Data
The following data has been derived from the Consolidated Financial
Statements of the Company and should be read in conjunction with those
statements, and the notes related thereto, which are included in this report.
SUMMARY OF OPERATIONS
(In thousands, except percentages and per share amounts)
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net Sales .......................... $147,899 $106,523 $87,750 $66,659 $50,306
Gross Profit percentage ............ 28% 28% 28% 28% 28%
Income from Operations ............. 7,582 5,505 3,832 3,466 2,702
Interest expense, net .............. 1,604 1,334 1,216 1,092 817
Net Income ......................... 3,532 2,290 1,766 1,365 1,004
Net Income per diluted share ....... $ 1.06 $ .68 $ 0.54 $ 0.43 $ 0.34
</TABLE>
FINANCIAL POSITION
(In thousands, except ratios)
<TABLE>
<CAPTION>
December 31
----------------------------------------------------------------
1998 1997 1996 1995(a) 1994
------- ------ ------ -------- -------
<S> <C> <C> <C> <C> <C>
Total Assets ...................... 57,493 41,632 32,374 26,114 15,801
Long-term Debt .................... 4,639 5,591 6,986 7,150 3,834
Working Capital ................... 6,535 7,372 5,610 3,029 2,341
Current ratio ..................... 1.16 to 1 1.27 to 1 1.31 to 1 1.22 to 1 1.28 to 1
</TABLE>
5
<PAGE>
Notes to Selected Financial Data:
Note (a) --The Registrant acquired CBE effective March 29, 1995
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 thereto on pages F-2 through F-13.
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 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 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.
RESULTS OF OPERATIONS
1998 Compared with 1997
Sales for the year ended December 31, 1998 were $147.9 million, an
increase of $41.4 million or approximately 38.9% over the 1997 amount of $106.5
million. Century contributed $38.2 million of this increase due largely to
favorable economic and weather conditions in most of its market areas and to
geographical expansion relating to acquisitions made in the fourth quarter of
1997. Presently, Century has more than 100 branches. CBE's sales in 1998 have
increased more than 16.0% over 1997 levels principally due to market growth.
Gross profit for the year ended December 31, 1998 was $40.8 million, an
increase of $10.6 million or approximately 35.1% over the 1997 amount of $30.2
million. This increase is due primarily to the higher sales noted above. The
overall gross profit percentage of sales declined slightly to 27.6% due in part
to the overall competitive conditions in the irrigation market.
Selling, general and administrative expenses for the year ended December
31, 1998 increased $8.5 million or 34.4% of sales to $33.2 million from $24.7
million for the year ended December 31, 1997. The full year effect of the
geographical expansion resulting from acquisitions made during 1997 at Century
noted above accounted for a major portion of this increase.
Interest expense, net for the year ended December 31, 1998 increased $.3
million to $1.6 million. This increase reflects the higher borrowings under the
line of credit facility incurred in carrying the higher working capital.
The federal, state and foreign income tax provision for the year ended
December 31, 1998 was $2.4 million, an increase of approximately $.6 million
from last year. The higher taxes are due to higher income.
As a result of the foregoing, net income for the year ended December 31,
1998 was $3.53 million, or $1.06 per share-diluted. This compares with $2.29
million or $.68 per share-diluted reported for the year ended December 31, 1997.
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. In 1997, Century had 65 branches. CBE's sales in 1997 have increased
more that 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%.
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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 borrowings under the 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 to higher income.
As a result of the foregoing, 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.
Liquidity and Capital Resources
The Company's financial condition continues to improve. The net worth as
of December 31, 1998 has increased to $11.9 million. The Company's long term
debt -- including the current position -- at December 31, 1998 was $6.5 million,
a decrease of $.9 million from December 31, 1997.
The Company continues to rely on short-term borrowings to finance its
working capital. During the first quarter of each year, Century's working
capital requirements are at a low point, with short-term borrowings of $25.0
million a significant increase from prior year due principally to the increase
in the number of branches and markets served by Century. During the second
quarter working capital requirements begin to expand and by July of each year
the amount necessary to carry the working capital expands to approximately $40.0
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 profits before interest and taxes of the Company
improved to $7.5 million from $5.5 million last year. The Company was thus able
to retire nearly $.9 million of term and subordinated debt which came due during
the year and partially fund $6.4 million on acquisitions of businesses in new
markets. At December 31, 1998 working capital was $6.5 million, a decrease of
approximately $.7 million from last year. This decline was partially attributed
to the higher debt associated with the acquisitions and the related intangibles
costs which in 1998 amounted to a net increase of $1.4 million as compared to a
net increase of $.6 million in 1997 when, due to the lower level of acquisition
expenditure, funding was internally provided. It is expected that the Company
will continue to rely on short-term borrowings to fund its future growth which
will increase the Company's leverage. However, because the Company expects to
continue to reinvest its available funds, the amount of debt will grow at a
slower rate than the growth in assets.
While 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
financing leverage, the potential for continued growth in this leverage, the
seasonality of its principal business, and the strong construction economy that
it can continue to do so in the future.
Year 2000
The year 2000 issue exists because many computer systems and applications,
including those imbedded in equipment and facilities, use two digit rather than
four digit date fields to designate an applicable year. As a result, the systems
and applications may not properly recognize the year 2000 or process data which
includes it, potentially causing data miscalculations or inaccuracies or
operational malfunctions or failures.
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 being supplied is year 2000 compliant. In the case
of Century, their operating computer environment uses a proxy for a date rather
than the actual date -thus there is no double zero problem to deal with that
would be subject to misinterpretations or miscalculation. CBE has received a
"Y2K Compliance Certificate" from American Micro Innovations, Inc. the vendor of
their general ledger systems and its supporting modules. Despite the assurance,
the Company will test these systems during the 3rd quarter of 1999.
Both Century and CBE communicate with their suppliers through EDI.
Century, however, does not receive its third party data directly into its
operating systems but rather it converts such data before it is internally
processed, avoiding the opportunity for contamination of their system. CBE
recently tested their EDI transmission with several
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of their largest vendors and found the systems compliant. Century and CBE are
continuing to work with their suppliers, however should any supplier or vendor
be unable to achieve year 2000 compliance by September 30, 1999, the Company
intends to switch to other suppliers that are able to provide year 2000
compliance. The Company does not expect to incur any material additional cost to
achieve year 2000 compliance.
The Company's ability to be completely compliant is, of course, dependant
upon the ability of its vendors, suppliers, bankers and other fiduciaries to
also be compliant. In addition, the Company can not 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.
ITEM 7a. Quantitative & Qualitative Disclosures about Market Risk
The Company's market risk sensitive instruments do not subject the Company
to material market risk exposures.
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, 1998
and December 31, 1997 .............................................. F-2
Consolidated Statements of Income for the three years ended
December 31, 1998 .................................................. F-3
Consolidated Statements of Stockholders' Equity for the
three years ended December 31, 1998 ................................ F-4
Consolidated Statements of Cash Flows for the three years ended
December 31, 1998 .................................................. 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>
Gross Pre-tax Net Earning
Sales Profit $ Profit (Loss) Income (Loss) Per Share
----- --------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
1st Qtr. 1998 16,955,000 4,313,000 (1,955,000) (1,184,000) (0.35)
1997 14,081,000 3,692,000 (1,780,000) (1,071,000) (0.33)
2nd Qtr. 1998 50,274,000 14,101,000 4,979,000 3,000,000 0.89
1997 35,932,000 10,444,000 3,408,000 2,070,000 0.63
3rd Qtr. 1998 48,241,000 13,519,000 2,907,000 1,747,000 0.53
1997 35,145,000 10,143,000 2,386,000 1,370,000 0.41
4th Qtr. 1998 32,429,000 8,828,000 47,000 (31,000) (0.01)
1997 21,365,000 5,910,000 157,000 (79,000) (0.02)
---------- --------- --------- --------- ----
Year 1998 147,899,000 40,761,000 5,978,000 3,532,000 1.06
1997 106,523,000 30,189,000 4,171,000 2,290,000 0.68
</TABLE>
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
8
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PART III
ITEM 10. Directors and Executive Officers of Registrant
Identification of the executive officers:
Officer
Name Age Positions and Offices Since
----- ---- ------------------- --------
Fred R. Sullivan 84 Director, Chairman of the Board 1989
& Chief Executive Officer
Cornelius F. Griffin 59 Vice President & Chief 1985
Financial Officer
Marshall E. Bernstein 60 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 Statements 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 Agreement 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")
9
<PAGE>
Incorporated by reference to Exhibit 2.1 to Registrant's
Current report on Form 8-K for April 5, 1995
(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
Incorporated by reference to Exhibit 3.2 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1997
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)
Incorporated by reference to Exhibit 4.1 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1997
(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
Incorporated by reference to Exhibit 10.4 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1997
10.5 --Business Loan Agreement with Addendum dated March 4, 1998
with Michigan National Bank relating to the $5 million
Term Loan
Incorporated by reference to Exhibit 10.5 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1997
10.6 --Promissory Note for $30 million dated March 4, 1998. with
Michigan National Bank
Incorporated by reference to Exhibit 10.6 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1997
10.7 --Promissory Note for $5 million dated March 4, 1998 with
Michigan National Bank
Incorporated by reference to Exhibit 10.7 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1997
10
<PAGE>
10.8 --Security Agreement dated March 4, 1998. with Michigan
National Bank
Incorporated by reference to Exhibit 10.8 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1997
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 8K 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 8K for January 5, 1994
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 Revocable Trust and Ernest Hodas
Incorporated by reference to Exhibit 2.6 to Registrant's
Current report on Form 8K 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 Partnership
and Ernest Hodas (collectively referred to as
"Subordinating creditor")
Incorporated by reference to Exhibit 28.6 to Registrant's
Current report on Form 8K 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 8K 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 8K 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 Corp.
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
favor of the CBE Liquidating Corp.
11
<PAGE>
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, 1998
(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.
12
<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 23, 1999
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 23, 1999
- ------------------------------ Chief Executive Officer
Fred R. Sullivan (Principal Executive
Officer)
/s/ CORNELIUS F. GRIFFIN Vice President and Chief March 23, 1999
- ------------------------------ Financial Officer
Cornelius F. Griffin (Principal Financial
and Accounting Officer)
/s/ NORMAN E. ALEXANDER Director March 23, 1999
- ------------------------------
Norman E. Alexander
/s/ DONALD A. MCMAHON Director March 23, 1999
- ------------------------------
Donald A. McMahon
/s/ THOMAS J. HILB Director March 23, 1999
- ------------------------------
Thomas J. Hilb
/s/ STANLEY J. LEIFER Director March 23, 1999
- ------------------------------
Stanley J. Leifer
/s/ PETER A. WHITE Director March 23, 1999
- ------------------------------
Peter A. White
13
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Richton International Corporation:
We have audited the accompanying consolidated balance sheets of Richton
International Corporation (a Delaware corporation) and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. 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, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
/s/Arthur Andersen LLP
Roseland, New Jersey
February 2, 1999
F-1
<PAGE>
RICHTON INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and Cash Equivalents ................................... $ 995,000 $ 474,000
Notes and Accounts Receivable, net of allowance for doubtful
accounts of $1,250,000 in 1998 and $690,000 in 1997 ....... 24,486,000 16,292,000
Inventories ................................................. 20,419,000 16,190,000
Prepaid Expenses and Other Current Assets ................... 736,000 602,000
Deferred Taxes .............................................. 844,000 493,000
------------ ------------
Total Current Assets ...................................... 47,480,000 34,051,000
Property, Plant and Equipment ................................... 3,566,000 2,633,000
Less: Allowance for Depreciation and Amortization ........... (1,411,000) (1,038,000)
------------ ------------
2,155,000 1,595,000
Other Assets:
Deferred taxes .............................................. 1,001,000 716,000
Goodwill .................................................... 4,515,000 4,011,000
Other Intangibles ........................................... 2,342,000 1,217,000
------------ ------------
TOTAL ASSETS .................................................... $ 57,493,000 $ 41,590,000
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Current Portion of Long-Term Debt ........................... $ 1,832,000 $ 1,773,000
Notes Payable ............................................... 25,960,000 15,135,000
Accounts Payable ............................................ 5,999,000 5,204,000
Accrued Liabilities ......................................... 4,769,000 2,228,000
Deferred Income ............................................. 2,385,000 2,339,000
------------ ------------
Total Current Liabilities ................................. 40,945,000 26,679,000
Noncurrent Liabilities
Long-Term Senior Debt ....................................... 4,475,000 5,000,000
Subordinated Debt ........................................... 1,996,000 2,364,000
Less: Current Portion of Long-Term Debt ..................... (1,832,000) (1,773,000)
------------ ------------
4,639,000 5,591,000
Stockholders' Equity
Preferred Stock,$1.00 par value; authorized
500,000 shares; none issued ............................... -- --
Common Stock,$.10 par value; authorized 6,000,000 shares;
issued 3,216,692 shares at December 31, 1998 and 3,086,692
shares at December 31, 1997 ............................... 322,000 309,000
Additional Paid-in Capital ...................................... 18,013,000 17,654,000
Accumulated Deficit ............................................. (4,696,000) (8,228,000)
Treasury Stock (267,000 and 140,000 shares at cost, respectively) (1,430,000) (415,000)
Cumulative Translation adjustment .............................. (130,000) --
Deferred Stock Compensation ..................................... (170,000) --
------------ ------------
Total Stockholders' Equity ................................ 11,909,000 9,320,000
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY ........................ $ 57,493,000 $ 41,590,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-2
<PAGE>
RICHTON INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net Sales ..................................... $ 147,899,000 $ 106,523,000 $ 87,750,000
Cost of Sales ................................. 107,138,000 76,334,000 62,966,000
------------- ------------- ------------
Gross Profit ............................ 40,761,000 30,189,000 24,784,000
Selling, general & administrative
expenses ................................... 33,179,000 24,684,000 20,952,000
------------- ------------- ------------
Income from Operations .................. 7,582,000 5,505,000 3,832,000
Interest income ............................... (659,000) (519,000) (407,000)
Interest expense ............................. 2,263,000 1,853,000 1,623,000
------------- ------------- ------------
Income before provision for income taxes 5,978,000 4,171,000 2,616,000
Provision for income taxes .................... 2,446,000 1,881,000 850,000
------------- ------------- ------------
Net Income .............................. $ 3,532,000 $ 2,290,000 $ 1,766,000
============= ============= ============
Net Income per common share:
Basic ................................... $ 1.22 $ 0.78 $ 0.60
============= ============= ============
Diluted ................................. $ 1.06 $ 0.68 $ 0.54
============= ============= ============
Weighted Average Common and Common Equivalent
Shares outstanding
Basic ................................... 2,905,000 2,948,000 2,949,000
============= ============= ============
Diluted ................................. 3,318,000 3,372,000 3,290,000
============= ============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
RICHTON INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Cumulative Deferred Total
Common Common Paid-in Accumulated Treasury Translation Stock Stockholders'
shares stock Capital Deficit Stock Adjustment Compensation Equity
------ ----- ------- ------- ----- ---------- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1995 ... 3,088,247 $309,000 $17,661,000 $(12,284,000) $ (415,000) $ -- $ 5,271,000
Net Income ............. -- -- -- 1,766,000 -- -- 1,766,000
--------- -------- ----------- ------------ ----------- --------- --------- -----------
Balance at
December 31, 1996 ... 3,088,247 309,000 17,661,000 (10,518,000) (415,000) -- 7,037,000
Net Income ............. -- -- -- 2,290,000 -- -- 2,290,000
Purchase of 1,555
Common Shares ....... (1,555) -- (7,000) -- -- -- (7,000)
--------- -------- ----------- ------------ ----------- --------- --------- -----------
Balance at
December 31, 1997 ... 3,086,692 309,000 17,654,000 (8,228,000) (415,000) -- 9,320,000
Net Income ............. -- -- -- 3,532,000 -- -- 3,532,000
Issuance of restricted
common stock ........ 20,000 2,000 168,000 -- -- -- (170,000) 0
Purchase of 127,000
Common Shares ....... -- -- -- -- (1,015,000) -- (1,015,000)
Exercise of Stock
Options ............. 110,000 11,000 191,000 -- -- -- 202,000
Cumulative Translation
Adjustment .......... -- -- -- -- -- (130,000) (130,000)
--------- -------- ----------- ------------ ----------- --------- --------- -----------
Balance at
December 31, 1998 ... 3,216,692 $322,000 $18,013,000 $ (4,696,000) $(1,430,000) $(130,000) $(170,000) $11,909,000
========= ======== =========== ============ =========== ========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
RICHTON INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income ............................................... $ 3,532,000 $ 2,290,000 $ 1,766,000
Reconciliation of net income to net cash provided
by (used in )operating activities:
Depreciation and amortization ....................... 1,100,000 1,350,000 1,860,000
Deferred taxes ...................................... (636,000) 1,583,000 672,000
Changes in operating assets and Liabilities:
Deferred Income ..................................... 46,000 179,000 (115,000)
Other working capital items, assets ................. (8,093,000) (8,229,000) (4,839,000)
Other working capital items, liabilities ............ 2,963,000 1,002,000 625,000
Other assets ........................................ (181,000) (7,000) 142,000
------------ ----------- -----------
Net cash provided by (used in) operating activities (1,269,000) (1,832,000) 111,000
INVESTING ACTIVITIES
Capital expenditures ...................................... (445,000) (135,000) (350,000)
Cash paid for acquisitions, net of cash acquired ......... (6,421,000) (3,318,000) (2,093,000)
------------ ----------- -----------
Net cash used in investing activities ............ (6,866,000) (3,453,000) (2,443,000)
FINANCING ACTIVITIES
Proceeds from Long-Term Debt ............................. -- -- 1,400,000
Repayment of Subordinated Debt ............................ (701,000) (1,594,000) (1,235,000)
Exercise of Stock options ................................. 202,000 -- --
Repurchase of Shares ...................................... (1,015,000) (7,000) --
Proceeds from Line of Credit .............................. 10,825,000 7,188,000 2,672,000
Repayment of Long -Term Debt .............................. (525,000) (200,000) (600,000)
------------ ----------- -----------
Net cash provided by financing activities ......... 8,786,000 5,387,000 2,237,000
Effect of exchange rate on cash balances .................. (130,000) -- --
------------ ----------- -----------
Increase (Decrease) in cash and cash equivalents .......... 521,000 102,000 (95,000)
Cash and cash equivalents, beginning of period ........... 474,000 372,000 467,000
------------ ----------- -----------
Cash and cash equivalents, end of period .................. $ 995,000 $ 474,000 $ 372,000
============ =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest ................................. $ 2,161,000 $ 1,728,000 $ 1,391,000
============ =========== ===========
Cash paid for income taxes ............................. $ 1,863,000 $ 247,000 $ 430,000
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated 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 serve customers in 33
states mostly in the eastern 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") is headquartered in Boston, Massachusetts
with satellite offices located in New York, Los Angeles and Portland, Maine. CBE
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, and 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.
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 include highly liquid
investments with original maturities of three months or less.
Allowance For Doubtful Accounts--The Company provides an allowance for
doubtful accounts arising from operations of the business, based upon a specific
review of certain outstanding amounts and historical experience.
Inventories--The Company values inventory, which consists entirely of
finished goods, at the lower of cost or market using the first-in first-out
("FIFO") method of accounting.
Goodwill--Goodwill shown in the consolidated balance sheets at December
31, 1998 and 1997 relates to multiple acquisitions completed during the last
four years. Goodwill is being amortized on a straight-line basis over 5 to 15
years.
Other Intangibles--Other intangibles consist principally of amounts paid
to sellers of businesses acquired subject to non-compete agreements and are
being amortized over periods of 1-5 years. Cost allocated primarily to
non-compete agreements were $2,025,000 and $1,115,000 at December 31, 1998 and
1997, respectively. Accumulated amortization was $352,000 and $287,000 at
December 31, 1998 and 1997, respectively.
Long-Lived Assets--The provisions of SFAS No. 121 "Accounting for the
Impairment of Long Lived Assets" 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. The Company continually evaluates whether events
and circumstances have occurred that indicate the remaining estimated useful
life of long-lived assets, including goodwill and other intangibles, may not be
recoverable. As a result of this review, management does not believe there is
any impairment of its long-lived assets at December 31, 1998.
F-6
<PAGE>
RICHTON INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Revenue Recognition--Revenue from sales and services are recorded at the
time the product is shipped to the customer or the service to be billed is
completed. The Company reports its sales levels on a net basis, which is
computed by deducting from gross sales the amount of actual returns received and
an amount established for anticipated returns.
Sales Returns--The Company reports its sales levels on a net sales basis,
with net sales being computed by deducting from gross sales the amount of actual
sales returns and the amount of reserves established for anticipated sales
returns.
Deferred Income--Deferred income represents cash 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
SFAS No. 109, "Accounting for Income Taxes". 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 and is recorded in the accompanying statements of income.
The Company has provided pro forma disclosure of the fair value at the date of
grant of stock options granted during 1998, 1997 and 1996 in Note 10, in
accordance with the disclosure-only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation".
Comprehensive Income--In June 1997, the Financial Accounting Standards
Board issued SFAS No. 130 "Reporting Comprehensive Income." SFAS No.130
establishes standards for reporting and display of comprehensive income and its
components in a full set of financial statements. The Company adopted SFAS No.
130 during 1998. The Company's comprehensive income consists of a cumulative
translation adjustment of $130,000. Total comprehensive income has not been
presented on the accompanying consolidated financial statements as the impact is
not material to the consolidated financial statements.
Derivative Instruments--In June 1998, the FASB issued SFAS No. 133 "
Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 is effective for all fiscal years beginning
after June 15, 1999 and will not require retroactive restatement of prior period
financial statements. The Company does not presently make material use of
derivative instruments.
Reclassification--Certain prior year balances have been reclassified to
conform with current year presentations.
3. Acquisitions:
During 1998, Century acquired five different distributor operations in
four different markets: Northern New Jersey, Idaho, Utah and Florida for an
aggregate purchase price of $6.4 million. The acquisitions were made in cash and
were financed by its working capital line. As a result of these acquisitions,
the Company recorded $4.2 million of tangible net assets. Century also opened a
branch in Oregon as well as 14 other branches in existing markets. Similar to
past experience, these acquisitions were made primarily after the prime selling
season.
F-7
<PAGE>
RICHTON INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
4. Property Plant and Equipment:
December 31
-------------------------
1998 1997
---------- ------------
Land ............................................... $ 608,000 $ 187,000
Building and Improvements .......................... 734,000 848,000
Autos and Trucks ................................... 548,000 539,000
Machinery and Equipment ............................ 1,125,000 600,000
Furniture and Fixtures ............................. 551,000 459,000
---------- ------------
$3,566,000 $ 2,633,000
Less: Accumulated Depreciation and amortization .... 1,411,000 1,038,000
---------- ------------
$2,155,000 $ 1,595,000
========== ============
All fixed assets are currently depreciated over five years except building
improvements which are amortized over the respective lease terms which are from
2 to 10 years or the life of the assets whichever is shorter.
5. Income Taxes:
At December 31, 1998 and 1997, the Company has total deferred tax assets
of approximately $1.8 million and $1.2 million, respectively. Significant
components of the deferred tax assets related to differences in tax and
financial accounting bases, are as follows:
1998 1997
--------- ---------
Current:
Allowance for bad debts ................ $ 425,000 $ 234,000
Inventory Reserves ..................... 258,000 --
Other .................................. 161,000 259,000
---------- ---------
$ 844,000 $ 493,000
========== =========
Long Term:
Amortization ........................... 921,000 682,000
Depreciation ........................... 30,000 34,000
Other .................................. 50,000 --
---------- ---------
$1,001,000 $ 716,000
========== =========
The provision for income taxes for the three years ended December 31, 1998
consists of the following:
1998 1997 1996
----- ----- -----
Federal
Current ..................... $2,668,000 $ 160,000 $109,000
Deferred .................... (636,000) 1,399,000 672,000
State & Local ................. 448,000 322,000 50,000
Other ......................... (34,000) -- 19,000
---------- ---------- --------
$2,446,000 $1,881,000 $850,000
========== ========== ========
F-8
<PAGE>
RICHTON INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
A reconciliation of the Federal provision for income taxes at the
statutory rate to the actual provision rate for income taxes for the three years
ended December 31, 1998, is as follows:
1998 1997 1996
---- ---- ----
Federal ....................... 34% 34% 34%
State & Local 7 8 3
Other ......................... -- 3 (4)
--- --- ---
41% 45% 33%
=== === ===
6. Statement of Cash Flows:
The components of other working capital items included in the Consolidated
Statements of Cash Flows are as follows:
Year Ended December 31,
---------------------------------------------
1998 1997 1996
----- ---- -----
Receivables $(6,738,000) (2,471,000) $(3,232,000)
Inventories (1,235,000) (5,623,000) (1,595,000)
Prepaid Expenses (120,000) (135,000) (12,000)
Increase in Working Capital
Items, Assets $(8,093,000) $(8,229,000) $(4,839,000)
=========== =========== ===========
Accounts Payable 795,000 1,226,000 775,000
Accrued Liabilities 2,168,000 (224,000) (150,000)
----------- ----------- ----------
Increase Working Capital
Items, Liabilities $ 2,963,000 $ 1,002,000 $ 625,000
=========== =========== ==========
7. Financing Arrangements:
The Company has a senior term note and revolving line of credit financing
agreement with Michigan National Bank. The agreement currently provides for a
$35 million revolving line of credit and a $5 million senior term debt. These
loans carry an interest rate based upon LIBOR plus 175 basis points (at December
31, 1998 the interest rate was 7.4%). The outstanding balance on the line of
credit at December 31, 1998 and 1997 was $26.0 million and $15.1 million,
respectively. The term loan is amortized at the rate of $.18 million per
quarter. The above agreement contains various covenants that among other things
require the Company to maintain certain financial ratios.
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,
1998 1997
---- ----
Term note payable to a bank, secured by
accounts receivable, inventory, furniture and
equipment, interest at Libor plus 175 points
(7.4% as of December 31, 1998), payable in
quarterly installments of $175,000, final
payment due April 27, 2001 ....................... $4,475,000 $5,000,000
Installments payable to former owner of
Century, unsecured and subordinated to bank
debt, payable in quarterly installments of
$50,000, final payment due June 30, 2000 ......... 268,000 468,000
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-- recorded net of
discount (A) ..................................... 341,000 459,000
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 due April
2000--recorded net of discount (B) ............... 362,000 450,000
Note payable to seller of CBE, 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 ................................... 254,000 428,000
Other ............................................ 771,000 559,000
---------- ----------
6,471,000 7,364,000
Less: Current Portion ............................ (1,832,000) (1,773,000)
---------- ----------
$4,639,000 $5,591,000
========== ==========
(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 which represented the fair market value at the
date of grant.
(B): The Company issued 100,000 warrants to acquire 100,000 shares of
Richton's common stock at $3.0 per share which represented the fair market value
at the time of issuance.
The scheduled future maturities of long-term debt at December 31, 1998 are
as follows:
1999 ............................................. $1,832,000
2000 ............................................. 1,262,000
2001 ............................................. 3,150,000
2002 ............................................. 227,000
----------
$6,471,000
==========
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 owing to its
active employees were paid out.
F-10
<PAGE>
RICHTON INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
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. Under 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 $361,000, $285,000, and $224,000 for the years ended December 31,
1998, 1997 and 1996, respectively. Century's discretionary contribution to the
Plan was $240,000, $190,000, and $170,000 in each of the three years ended
December 31, 1998, 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 No. 123 for options granted
subsequent to January 1995 , the Company's net income and earnings per share
would have been as follows:
1998 1997
----- -----
Net Income:
As reported ......................... $3,532,000 $2,290,000
Pro Forma ........................... 3,528,000 2,266,000
Earnings per share:
As reported--basic .................. $1.22 $.78
--diluted ................ 1.06 . 68
Pro Forma--basic ...................... $1.21 $.77
--diluted .................... 1.06 .67
The Company may grant options for up to 415,000 shares under the Plan. The
Company has granted options representing 315,000 shares through December 31,
1998. Options are granted over terms not to exceed ten years. Under the Plan,
the option exercise price equals the stock's market price on date of grant
except for options granted the Chairman of the Board. 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,
1998, 1997 and 1996 is presented in the table below:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- ---------------------
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 ..... 315,000 $ 2.59 275,000 $ 2.20 270,000 $ 2.15
Granted .............................. -- -- 40,000 5.24 5,000 5.09
Exercised ............................ 110,000 1.84 -- -- -- --
Cancelled ............................ -- -- -- -- -- --
Outstanding at end of year ........... 205,000 $ 3.03 315,000 $ 2.59 275,000 $2.20
Exercisable at end of year ........... 205,000 3.03 315,000 2.59 270,000 2.15
</TABLE>
The Company has issued warrants to purchase 336,250 shares of Common Stock
in connection with two debt agreements (see Note 8). 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
On December 1, 1998 the Company issued a restricted stock grant to the
Chairman of the Board for 20,000 shares subject to certain restrictions as
provided for in the grant. At the time of the grant the market price of the
Company's common stock was $8.50 per share. The value of these shares at the
grant date is included as a separate component of stockholders' equity and a
related compensation charge is being recorded over the vesting period.
11. Net Income Per Share:
Net income per common share was calculated on the basis of 3,318,000,
3,372,000, and 3,290,000 weighted average common and common equivalent shares
outstanding in the years ending December 31, 1998, 1997, and 1996, respectively.
<TABLE>
<CAPTION>
Net Income
Income Shares Per share
------ ------ ---------
For the year ended December 31, 1996
------------------------------------
<S> <C> <C> <C>
Basic ......................................... $1,766,000 2,949,000 $ .60
Effect of dilutive options and warrants ....... -- 341,000 --
Diluted ....................................... $1,766,000 3,290,000 $ .54
For the year ended December 31, 1997
------------------------------------
Basic ......................................... $2,290,000 2,948,000 $ .78
Effect of dilutive options and warrants ....... -- 424,000 --
Diluted ....................................... $2,290,000 3,372,000 $ .68
For the year ended December 31, 1998
------------------------------------
Basic ......................................... $3,532,000 2,905,000 $1.22
Effect of dilutive options and warrants ....... -- 413,000 --
Diluted ....................................... $3,532,000 3,318,000 $1.06
</TABLE>
Basic net income per common share was computed by dividing net income by
the weighted average number of shares of common stock outstanding during the
year. Diluted net income per common share included the effect of options and
warrants computed under the treasury stock method.
12. 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, 1998, are as follows:
1999 ............................................ $2,900,000
2000 ............................................ 2,030,000
2001 ............................................ 1,280,000
2002 ............................................ 643,000
2003 ............................................ 247,000
Thereafter ...................................... 135,000
----------
$7,235,000
==========
Rent expense under the Company's various operating leases was $2,431,000,
$1,795,000 and $1,478,000 for the years ended December 31, 1998, 1997, and 1996,
respectively.
F-12
<PAGE>
RICHTON INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
13. Segment Data:
The Company adopted SFAS No. 131 Disclosures about Segments of an
Enterprise and Related Information during the fourth quarter of 1998. SFAS No.
131 established standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports issued to stockholders. It also
established standards for related disclosure about products and services and
geographic areas. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly be the chief operating decision maker, or decision making group in
deciding how to allocate resources and in assessing performance.
The Company operates in two industry segments, wholesale distribution, and
computer and networking services. See Note 1 for description 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 ........................ $125.0 $22.9 $-- $147.9
====== ===== ==== ======
Pre-Tax Income ............... 7.0 (.1) (.9) 6.0
====== ===== ==== ======
Identifiable Assets .......... $ 43.6 $ 9.2 $ 4.7 $ 57.5
====== ===== ==== ======
14. Subsequent Event:
On February 25, 1999, the Company acquired 100% of the common stock of
Creative Business Concepts (CBC) of Costa Mesa, California, a leading computer
networking integrator, for cash. CBC will be consolidated with the Costa Mesa
office of Richton's CBE subsidiary. The acquisition will be accounted for as a
purchase. The unaudited balance sheet of CBC as of December 31, 1998 reflected
$3.6 million in total assets and $3.1 million in total liabilities. The company
expects to recognize approximately $1.8 million in additional goodwill on this
acquisition.
F-13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 995
<SECURITIES> 0
<RECEIVABLES> 25,736
<ALLOWANCES> 1,250
<INVENTORY> 20,419
<CURRENT-ASSETS> 47,480
<PP&E> 3,566
<DEPRECIATION> 1,411
<TOTAL-ASSETS> 57,493
<CURRENT-LIABILITIES> 40,945
<BONDS> 4,639
0
0
<COMMON> 322
<OTHER-SE> 11,587
<TOTAL-LIABILITY-AND-EQUITY> 57,493
<SALES> 147,899
<TOTAL-REVENUES> 147,899
<CGS> 107,138
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 33,179
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,604
<INCOME-PRETAX> 5,978
<INCOME-TAX> 2,446
<INCOME-CONTINUING> 3,532
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,532
<EPS-PRIMARY> 1.22
<EPS-DILUTED> 1.06
</TABLE>
