10-Q 1 file001.txt FORM 10-Q 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 June 30, 2001 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 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 days. 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, 3,327,242 shares at July 15,2001 Richton International Corporation FORM 10-Q INDEX -------------------------------------------------------------------------------- PAGE PART I FINANCIAL INFORMATION Item 1. - Financial Statements: Consolidated Statements of Income for the three and six months ended June 30, 2001 and June 30, 2000 (unaudited) 3 Consolidated Balance Sheets at June 30, 2001 (unaudited) and December 31,2000 4 Consolidated Statements of Cash Flows for The six months ended June 30, 2001 and June 30, 2000 (unaudited) 5 Notes to Consolidated Financial Statements (unaudited) 6 Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II OTHER INFORMATION - Item 5. - Richton International announces merger with Deere & Co 14 Item 6. - Exhibits and Reports on Form 8-K 15 2 Part I: Financial Information Item 1: Financial Statements RICHTON INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (unaudited)

The accompanying notes are an integral part of these consolidated statements. 3 RICHTON INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS

The accompanying notes are an integral part of these consolidated balance sheets. 4 RICHTON INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying notes are an integral part of these consolidated balance sheets. 5 RICHTON INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such requirements. All adjustments, including those of a 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. 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, 2000. 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 seasonality of the Company's business. As a result of this seasonality, the highest quarterly sales, and profits historically occur in the second quarter while the lowest sales and profits occur in the fourth quarter. Correspondingly, the working capital and bank borrowing amounts are highest during the second quarter negatively impacting financial ratios and comparable analysis of quarter to quarter or six month results and lowest in the fourth quarter when the reverse is true. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual results may differ from these estimates. 1. Description of Business: Richton International Corporation ("Richton") is a diversified service company with three operating subsidiaries, Century Supply Corp. ("Century"), CBE Technologies, Inc. ("CBE") and Creative Business Concepts, Inc. ("CBC"), 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 38 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 is headquartered in Boston, Massachusetts, with offices located in New York 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. CBC is headquartered in Irvine, California and provides essentially the same services to west coast customers that CBE provides on the east coast. 6 On May 29, 2001, Richton announced it had entered into an agreement to be acquired by Deere & Company ("Deere") The acquisition is subject to Richton stockholder approval, with approval to be sought at a meeting to be held during September 2001. Under the terms of the merger agreement Deere will pay not less than $125 million for Richton's equity and will assume approximately $60 million of debt for a total consideration of approximately $185 million. Stockholders of Richton will have the option of receiving $36.13 (rounded) cash per share or a stock exchange ratio of no less than .8415 Deere share for each Richton share. The .8415 ratio is based upon a price of $42.94 per share (rounded) of Deere stock. If the average market price of Deere stock during the pricing period is more than $42.94 per share, the exchange ratio is fixed at .8415. If the average market price of Deere stock is less than $42.94, Richton stockholders electing to take stock will receive Deere stock in an amount that is necessary to equal a market value of $36.13 per Richton share. No more than 49% of the Richton shares may be exchanged for cash. For stockholders electing to receive only Deere stock, the transaction is intended to qualify as a tax-free reorganization. Richton and Deere have filed with the Securities and Exchange Commission a proxy statement/prospectus relating to this proposed acquisition. Investors should carefully read the proxy statement/prospectus including all amendments thereto, before making any voting or investment decision. 7 2. Acquisitions: During the six months ended June 30, 2001 Century acquired the operating assets, which consist primarily of working capital and fixed assets, of three distributors in Texas, Nevada and California with ten operating branches. The aggregate purchase price of these acquisitions was $5.6 million, which primarily represented $1.8 million in receivables, $2.5 million in inventory, $.3 million in fixed assets and $1.0 million in intangibles. Operating results of these entities acquired, which are included in the accompanying statement of operations from the date of acquisition, were not material to the results of operations for the six months ended June 30, 2001. 3. Statements of Cash Flows: The components of other working capital items and their effects in the Consolidated Statements of Cash Flows are as follows: (unaudited) Six Months Ended June 30, 2001 2000 ---- ---- Receivables $(16,093,000) (23,822,000) Inventories (9,832,000) (11,248,000) Prepaid Expenses (68,000) 121,000 ------------ ------------ Increase in Working Capital Items, Assets $(25,993,000) $(34,949,000) ============ ============ Accounts Payable $ 8,976,000 $ 13,726,000 Accrued Liabilities (2,166,000) 1,939,000 ------------ ------------ Increase in Working Capital Items, Liabilities $ 6,810,000 $ 15,665,000 ============ ============ 4. Debt and Financing During the six months ended June 30, 2001, the company's revolving line of credit increased by $23.3 million to $57.4 million. This higher borrowing supports the $17.1 million cash used in operations for the same six months, including $19.1 million of working capital (see Note 3), $5.6 million used to acquire additional branches (see Note 2) and $1.9 million used to make capital expenditures and reduce term and subordinated debt. During the same period last year the revolving line increased by $15.2 million to $44.2 million. This increase supported $14.0 million cash used in operations for the same six months, including $19.3 million of working capital (see Note 3), and provided $1.8 million for capital expenditures and repayment of term and subordinated debt. At June 30, 2001, the interest rate on the Company's revolving line of credit averaged 7.07%, or LIBOR plus 225 basis points and the interest rate on the Company's term loan was 6.51% or LIBOR plus 275 points. 8 5. Net Income Per Share: Net income per common share was calculated as follows: Net Income Income Shares Per Share ----------- ---------- ---------- For the six months ended June 30, 2001 -------------------------------------- (unaudited) Basic $ 800,000 3,317,000 $.24 Effect of dilutive options and warrants -- 124,000 -- Diluted $ 800,000 3,441,000 $.23 Net Income Income Shares Per Share ------------ ---------- ---------- For the three months ended June 30, 2001 ---------------------------------------- (unaudited) Basic $3,956,000 3,327,000 $1.19 Effect of dilutive options and warrants -- 117,000 -- Diluted $3,956,000 3,444,000 $1.15 Net Income Income Shares Per Share ----------- ---------- ---------- For the six months ended June 30, 2000 -------------------------------------- (unaudited) Basic $4,607,000 3,018,000 $1.53 Effect of dilutive options and warrants -- 385,000 -- Diluted $4,607,000 3,403,000 $1.35 Net Income Income Shares Per Share ------------ ---------- ---------- For the three months ended June 30, 2000 ---------------------------------------- (unaudited) Basic $5,763,000 3,010,000 $1.91 Effect of dilutive options and warrants -- 385,000 -- Diluted $5,763,000 3,395,000 $1.70 9 6. Segment Data: 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 costs 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 related to industry segments, if any, have been allocated to those segments. Amortization of goodwill is considered segment related and accordingly charged to the related industry segment. Identifiable assets by industry segment are those assets that are used in each industry segment. General corporate assets consist primarily of cash, deferred taxes, and corporate property. A summary of the Company's segment information is as follows: Wholesale Computer Distribution Services Corporate Total For the six Months ended: ------------ -------- --------- ----- June 30, 2001 Net Sales $104.6 $23.6 -0- $128.2 ====== ===== === ====== Interest Expense, net .7 .4 0 1.1 Depreciation and Amortization .9 .4 .1 1.4 Pre-Tax Income (Loss) 3.0 (1.0) (.7) 1.3 Prov (Benefit) from Income Taxes 1.1 (.4) (.2) .5 Identifiable Assets 102.4 15.4 3.3 121.1 For the Six months ended June 30, 2000 Net Sales $108.2 $28.9 -0- $137.1 ====== ===== === ====== Interest Expense, net .7 .5 .1 1.3 Depreciation and Amortization .6 .2 0 .8 Pre-Tax Income (Loss) 7.4 .8 (.6) 7.6 Prov (Benefit) from Income Taxes 2.5 .4 .1 3.0 Identifiable Assets 88.8 15.1 5.1 109.0 10 7. Recent Accounting Pronouncements: In June 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133). The Statement establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at fair value and that changes in fair value be recognized currently in earnings, unless specific hedge accounting criteria are met. In June 1999, the FASB issued Statement No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, which delayed the required adoption of FAS 133 to fiscal 2001. In June 2000, the FASB issued Statement No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FAS 133, which was effective concurrently with FAS 133. In January 2001, the Company adopted these standards and subsequently entered into a two-year fixed interest rate swap to hedge the variable interest payments on the Company's line of credit. The notional amount of the swap is $27 million. The Company reported the $626,000 market value of unwinding this swap in other liabilities, deferred taxes and accumulated other comprehensive loss. The Company will mark the swap to fair value each reporting period. The Company did not record any effect on net income from this swap agreement as the terms of the floating rate leg of the swap match the terms of the floating rate liability during the reporting period. In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets," which establishes accounting and reporting standards governing business combinations, goodwill and intangible assets. SFAS No. 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method. SFAS No. 142 states that goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill will be subject to at least an annual assessment for impairment by applying a fair-value based test. Under the new rules, an acquired intangible asset should be separately recognized and amortized over its useful life (unless an indefinite life) if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented or exchanged regardless of the acquirer's intent to do so. The Company is required to adopt these standards on January 1, 2002, until which time the Company will continue to amortize its existing goodwill and intangible assets. The Company has not determined the impact that the adoption of these standards will have on future financial statements. 11 Item: 2 Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations- for the Six Months ended June 30, 2001 Sales and a net income for the three months ended June 30, 2001 were $ 89.9 million and $4.0 million, respectively, or $1.15 per share, diluted. For the three months ended June 30, 2000, sales and net income were $93.7 million and $5.8 million, respectively, or $1.70 per share, diluted. Sales and net income for the six months ended June 30, 2001 were $128.2 million and $.8 million, respectively, or $.23 per share, diluted. For the six months ended June 30, 2000 sales and net income were $137.1 million and $4.6 million, respectively or $1.35 per share diluted. As has been previously stated, the quarterly sales and profits are not representative of the other quarters of the year due to seasonality of the company's principal business. Century's operations are seasonal and as often stated, significantly impacted by weather conditions. During the six months ended June 2001, weather conditions have been unfavorable in many of Century's largest markets when compared to such conditions during the same period last year. In addition, the home building industry has not been as strong as was experienced during the six months ended last year. On the positive side, Century expanded through both the acquisition of 10 new branches (noted above) in Texas, Nevada, and California and the opening of 25 additional branches in new or existing markets. Century's sales in the second quarter, which had declined more than 14 % in the first quarter compared to a year earlier, were slightly ahead of the second quarter of last year. For the six months sales were down 3.3 % from the year earlier period. Traditionally, the second quarter is one of Century's best and should not be used as a measure for other quarters. The Technology Group reported a decline in revenues (down 6.6 % and 18.39%, respectively compared to the same three and six months last year) The decline in sales is predominantly attributed to the industry decline in hardware sales and to management's refocus away from product sales and toward services. Gross profit for the three and six months ended June 30, 2001 was $25.6 million or 28.5 % of sales and $ 35.0 million or 27.3% of sales, respectively. For the three and six months ended June 30, 2000 gross profit was $25.8 million or 27.5% of sales and $36.2 million or 26.4% of sales, respectively. The higher gross profit as a percentage of sales for the period ended June 30, 2001 when compared to the corresponding periods in 2000, is due principally to geographic, product and service mix and to lower product cost, resulting from buying opportunities available to Century. Selling, general and administrative expenses for the three and six months ended June 30, 2001 were $18.5 million and $32.5 million, respectively, compared to $15.6 million and $27.4 million, respectively, for the three and six months ended June 30, 2000. The higher level of expenses in the current year is due to a nearly 20% increase in the number of operating branches at Century and to 12 increased employment costs at the tech companies related to the increased focus on the service business. Interest expense, net, for the three and six months ended June 30, 2001 was $1.0 million and $1.9 million, respectively, compared to $1.1 million and $2.0 million, respectively, for the three and six months ended June 30, 2000. The lower interest cost is principally due to a lower average interest rate partially offset by higher levels of borrowing which have occurred in the later part of the second quarter of 2001 related to higher working capital requirements. The provision for Federal, State and foreign income taxes as a percentage of pre-tax income for the six-month period ended June 30, 2001 and 2000 was 39.1%. As a result of the foregoing, the net income for the three and six months ended June 30, 2001 was $4.0 million or $1.15 per share diluted and $ .8 million or $.23 per share diluted, respectively, compared to $5.8 million or $ 1.70 per share diluted and $ 4.6 million or $1.35 per share diluted, respectively, for the three months and six months ended June 30, 2000. Financial Condition: The Company's principal source of funding is through the Company's revolving line of credit. During the six months ended June 30, 2001 the Company's net cash used in operations was $17.1 million. This amount was totally financed by the Company's line of credit, which increased $ 23.3 million. This borrowing increase also funded the $5.6 million of Century's acquisition of branches and nearly $.9 million for capital expenditures. The higher receivable and inventory balances at June 30, 2001 compared to those balances at December 31, 2000 are due to the higher sales during the respective quarters immediately preceding the end of each period. Thus, the growth in these assets over the prior December 31 should be viewed in perspective to the December 31 quarters sales. In both 2001 and 2000, the respective quarters June 30 sales exceeded the December 31 quarters sales by 185% and 195%, respectively. The measures of the currency of account receivable and inventory is the days sales outstanding and inventory turnover, respectively. At June 30, 2001 both these measures compare unfavorably to the year earlier periods. The following factors contributed to this situation: (i) $1.8 million of receivables and $2.5 million of inventory acquired through acquisitions in 2001 with out any corresponding sales associated therewith. No acquisitions were recorded during the first six months of 2000. (ii) Back-ordering by a major supplier caused Century to double purchases in order to timely meet demand. (iii) A delay in the start of the selling season due to bad weather in some of Century's major markets. (iv) Overall sluggishness in the irrigation industry provided Century with buying opportunities. As noted earlier, Century's 2001 sales, while lower than 2000 on a six-month basis, is slightly ahead on a latest three month basis. The delay in the start of the selling season has also caused Century's normal pattern of collection to be delayed by roughly a month. During the first three weeks of July 2001, cash collections have exceed the same period last year by nearly 6% suggesting that the currency of the receivables will improve from their June, 2001 levels. For the six months ended June 30, 2000 the Company's net cash used in operations was $ 14.0 million. This amount was totally financed by the Company's line of credit, which increased $ 15.2 million. This borrowing increase also funded 13 $.6 million for capital expenditures and the repayment of term and subordinated debt of approximately $1.2 million. While the Company has continued to generate sufficient cash and gain sufficient credit availability to liquidate its term and subordinated debt as it becomes due, and maintain growth, there is no assurance, given the high degree of leverage, the seasonality of its principal business, that it can continue to do so in the future. Forward-looking Statements This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this report contain forward-looking statements that are based on current expectations, estimates, forecasts, management's beliefs and assumptions made by management. Words such as "expects," "anticipates," "plans," "believes," "seeks," "estimates" and variations of such words and similar expressions are intended to identify such forward looking statements. These statements are not guarantees of future performance and involve certain risks and uncertainties (collectively, "factors") that are difficult to predict and may cause actual outcomes and results to differ materially from what is expressed in these forward-looking statements. These factors include general economic conditions in the markets in which Richton and its subsidiaries operate, climatic conditions in the markets in which Century operates, fluctuation in the demand for the products and services offered by Century, CBE or CBC, distribution difficulties experienced by Century, labor relations, technological difficulties and, the ability of Richton to satisfy the conditions to closing, in connection with the proposed acquisition of the Company by Deere, including obtaining the requisite stockholder approval. The Company undertakes no obligation to update publicly any forward-looking statements. Further information concerning the Company and the business of its subsidiaries, including factors that could cause actual results to differ materially from such forward-looking statements, is included in the Company's filings with the Securities and Exchange Commission Part II. Other Information. Item: 5 MERGER EVENT Richton International Corporation, a Delaware corporation ("Richton"), Deere & Company, a Delaware corporation ("Deere"), and Green Mergersub, Inc., a wholly owned Delaware subsidiary of Deere ("Acquisition Sub") have entered into an Agreement and Plan of Merger, dated as of May 29, 2001 (the "Merger Agreement"), whereby Richton will be merged into Acquisition Sub (the "Merger") and become a wholly owned subsidiary of Deere. As a result of the Merger, stockholders of Richton will receive at their individual elections, either cash or common stock of Deere. Up to 49% of Richton common stock may be exchanged for cash at a price of $36.1299 per share. Richton stockholders who elect to receive stock will have the right to receive Deere common stock at the Exchange Ratio, as defined in the Merger Agreement. The Exchange Ratio works as follows: if the Deere common stock price (as determined by averaging the closing sale price of Deere common stock over the 10 consecutive trading days ending on the second full trading day prior to the effective date of the Merger) is equal to or more than $42.9375 per share, then the Exchange Ratio is 0.8415 shares of Deere common stock for each share of Richton common stock; if the Deere common stock price is less 14 than $42.9375 per share, then the Exchange Ratio will increase in order to maintain the aggregate consideration to be received by the holders of Richton common stock. The Merger Agreement prohibits Richton from soliciting competing acquisition proposals. Richton, however, subject to compliance with the terms of the Merger Agreement, may provide non-public information to, and engage in negotiations and discussions with, a party or parties making unsolicited, written acquisition proposals which are deemed to be superior proposals to the Merger. Furthermore, subject to compliance with the terms of the Merger Agreement, Richton could accept a superior proposal and pay Deere a termination fee of $2,000,000. Following the execution and delivery of the Merger Agreement, certain stockholders of Richton entered into a voting agreement (the "Voting Agreement") whereby such stockholders committed to vote for the adoption of the Merger. The Voting Agreement terminates in the event the Merger Agreement is terminated (including in the event Richton accepts a superior proposal in compliance with the terms of the Merger Agreement). The closing of the Merger is subject to certain conditions, including the approval of the stockholders of Richton with approval to be sought at a meeting to be held during September 2001. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 2.1 Agreement and Plan of Merger, dated as of May 29, 2001, by and among Richton International Corporation, Deere & Company and Green Mergersub, Inc. (incorporated by reference to Exhibit 2.1 to the report on Form 8-K filed with the SEC-2 on June 11, 2001). 99.1 Voting Agreement, dated as of May 30, 2001, by and among Deere & Company, Green Mergersub, Inc., Fred R. Sullivan and FRS Capital Company, LLC (incorporated by reference to Exhibit 99.1 to the Company's report on form 8-K filed with the SEC on June 11, 2001). 99.2 Press Release issued May 30, 2001, regarding the merger (incorporated by reference to Exhibit 99.2 to the Company's Report on Form 8-K filed with the SEC on June 11, 2001). (b) Reports on Form 8-K Current report on Form 8-K dated May 29, 2001 as filed with the SEC on June 11, 2001 (Item 5). 15 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RICHTON INTERNATIONAL CORPORATION (Registrant) -------------------------------------------- Cornelius F. Griffin Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) DATE: August 13, 2001 New York, New York 16

RICHTON INTERNATIONAL CORP 10-Q