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U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB/A
Amendment No. 1
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ________________
Commission File No.: 0-26276
R.H. PHILLIPS, INC.
(Exact name of small business issuer in its charter)
California 68-0313739
(State or other jurisdiction of
incorporation or organization) (IRS Employer Identification No.)
26836 County Road 12A, Esparto, California 95627
(Address of principal executive offices)
(916) 662-3215
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
Number of shares outstanding of each of the issuer's classes of common
equity as of November 12, 1996: 5,920,050
Transitional Small Business Disclosure Format: Yes No X
This document consists of pages.
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Purpose of Amendment
R.H. Phillips, Inc. (the "Company") is filing the following amendment
to its Quarterly Report on Form 10-QSB for the period ended September 30,
1996 to make certain corrections to Item 2, "Mangement's Discussion and
Analysis, Results of Operations." This portion of the Quarterly Report stated
that sales expenses were $2,016,000, whereas sales expenses during this
period were actually $2,095,000. Due to this error, net income and net
working capital were overstated by a corresponding amount net of income
taxes in that portion of the report. The corrected Item 2 is set forth
below. The correct statement of sales expenses and net income was contained
in Item 1, "Financial Statements" in the Quarterly Report and, therefore,
no change to that Item is being made.
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
In reviewing the following management's discussion and analysis, the
reader should refer to the historical financial statements of the Company. The
discussion of the results and trends does not necessarily imply that these
results and trends will continue. For the purpose of the following discussion,
a "case" means a nine liter case of wine.
Seasonality
The Company has traditionally experienced substantial seasonal
fluctuations in revenues and expenditures. Sales volumes generally increase
during the Thanksgiving and Christmas holiday seasons or at times when the
Company markets its wines with special promotions or other sales incentives.
A substantial percentage of the Company's sales usually occur in the last three
months of the year.
The seasonality of the Company's sales affects its liquidity and capital
requirements. The Company generally borrows funds on a short term basis
each year beginning in late February or early March to fund crop growing
costs. Short-term borrowings increase substantially from August through
November due to additional costs from harvest, wine production and
increased bottling activity in preparation for higher sales during the holiday
season. Consequently, the Company's financial results during the first nine
months of the year are not necessarily indicative of the Company's financial
performance for the entire year.
Costs of Production
The Company, as is typical of other California wineries of its size,
depends in part on the purchase of wines and grapes from outside sources to
satisfy its production requirements. The Company estimates that the costs to
the Company of producing wines from grapes grown in the Company's
vineyards and wines processed at the Company's winery are substantially
less than the costs of producing wines made from bulk wines or grapes
purchased from others. The Company's recent expansion of its winery has
eliminated the Company's need to rely on outside sources of processing for
its wines, and the Company is in the process of expanding the size of its
vineyards in order to lessen its dependence on outside sources of bulk wine
and grapes. These factors have reduced, and are likely to continue in the near
future to reduce, the Company's costs of production, leading to higher gross
margins on sales of the Company's products.
However, the Company believes that the cost benefits derived from
the winery and vineyard expansions will be temporarily offset in the near
future by higher costs associated with a decline in yields from the 1996
harvest. The Company estimates that the decline in yields from the 1996
harvest was approximately 23% and varied depending on the varietal and
location in the vineyard. The lower yields will result in a higher cost of
sales when the current vintage is sold, beginning in October 1996. Because
many other California vineyards experienced below average yields, the Company
expects to pay higher prices for future bulk wine and grape purchases, which
will also contribute to a higher cost of sales. The Company believes that the
lower yields are temporary and were due to uncontrollable factors, primarily
weather conditions.
Results of Operations
Net sales for the nine month period ended September 30, 1996 were
approximately $11,121,000, an increase of 18% from $9,437,000 during the
corresponding period in 1995. The average selling price per case increased
from approximately $35.78 during the first nine months of 1995 to $38.93 per
case for
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the same period in 1996. The increase in the average selling price
resulted primarily from price increases on the Company's Chardonnay and
Cabernet Sauvignon classic varietals. The number of cases sold during the
first nine months of 1996 was approximately 271,100, an increase of 4% over
the 261,600 cases sold during the corresponding period in 1995.
Gross profit increased from 35% of sales for the nine month period
ending September 30, 1995 to 44% of sales for the same period in 1996. Net
sales and cost of sales during both periods included the sales of bulk wines,
and in 1996 also included the sales of grain and grapes. Excluding these
sales, the gross margins were 36% during the first nine months of 1995 and
45% during the corresponding period in 1996. The higher gross margin
during the first nine months of 1996 was primarily due to the price increases
discussed above, and to lower costs on the most recent vintages sold in 1996
as compared to the vintages sold during the first nine months of 1995. The
average cost per case sold during the first nine months of 1996 decreased by
6% from that sold in 1995, from approximately $22.80 per case to $21.34 per
case. The increase in gross margins and reduction in costs per case is
attributable primarily to the increased production the Company derived from
its vineyards and the installation in 1995 of the first phase of its expanded
winery production facilities, which eliminated the Company's use of more
expensive outside storage and processing facilities.
Although selling, general and administrative expenses remained
substantially the same for the nine month period ending September 30, 1996
as compared to the corresponding period in 1995, these expenses decreased
as a percent of sales, from 28% in 1995 to 24% in 1996. The decrease in
these expenses as a percent of sales was primarily due to increased sales
during the first nine months of 1996 as compared to 1995. Selling expenses
decreased from approximately $2,163,000 during the first nine months of
1995 to $2,095,000 during the corresponding period in 1996, primarily due to
lower sales programming expenses. General and administrative expenses
increased from $404,000 during the first nine months of 1995 to $525,000
during the corresponding period in 1996, primarily due to the write off of an
insolvent accounts receivable in 1996.
Total interest expense for the first nine months of 1996 was
$649,000, or 6% of net sales, compared to $708,000, or 8% of net sales, in
the corresponding period in 1995. The Company capitalized approximately
$434,000 of additional interest pertaining to vineyard and winery
development in the first nine months of 1996 and $205,000 of interest in the
same period in 1995. The increase in total interest cost during the first nine
months of 1996 as compared to the corresponding period in 1995 was
primarily due to increased levels of borrowing by the Company to finance
vineyard and winery expansion in 1996.
The Company had net income of $1,042,000 for the nine month
period ending September 30, 1996, compared with net income of $19,000
during the same period in 1995. This increase was primarily due to higher
sales and lower product costs, which resulted in higher profit margins for its
products, and to the other factors described above.
Liquidity and Capital Resources
The Company has financed its working capital and capital expansion
needs through internally generated funds, outside credit facilities and equity
financing. The Company has made substantial capital expenditures to expand
its vineyards and winery facilities, and intends to continue these expansions.
The purpose of the expansion is to increase the Company's production
capabilities so that the Company can lessen or eliminate its dependence on
outside grape and bulk wine purchases and processing. The Company's cash
flows from operations alone have not been sufficient to satisfy all of the
working capital and capital expenditure requirements needed to keep pace
with its growth. As a consequence, the
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Company has depended upon, and
continues to rely upon, debt and equity financing for its working capital and
expansion needs.
The Company's financial obligations consist of long-term debt, short-
term credit facilities and redeemable preferred stock. The Company obtained
in January 1995 a ten year term loan from Metropolitan Life Insurance
Company ("Metropolitan") with a principal amount of $7,500,000. In 1994,
the Company refinanced certain existing indebtedness through the issuance of
five year convertible promissory notes, with an aggregate principal amount of
$1,500,000. Amounts owing under these promissory notes are automatically
convertible into Common Stock of the Company beginning in December 1996
under certain circumstances.
The Company has a credit facility with U.S. Bank to finance working
capital requirements. The Company may borrow a maximum of $6,200,000
under the facility. The facility is comprised of an operating line of credit
and a non-revolving "crop" line of credit. The operating line of credit has a
maximum borrowing amount of $5,000,000, is secured by accounts
receivable and inventory and matures in April 1998. The annual interest rate
on the operating line is either U.S. Bank's prime rate or IBOR, at the
Company's option. The crop line of credit is in the amount of $1,200,000.
The crop line of credit bears interest at an annual rate of U.S. Bank's prime
rate plus 100 basis points, is secured by the 1996 grape crop, and matures in
November 1996. As of September 30, 1996, the total outstanding on both
lines of credit was $4,835,000, leaving an available balance of $1,365,000.
In October 1996, the Company obtained a temporary increase of
$1,000,000 on the U.S. Bank operating line of credit. The increase bears
interest at U.S. Bank's prime rate plus 100 basis points, and expires in March
1997.
John and Karl Giguiere personally guarantee the obligations of the
Company under the loan agreements with Metropolitan, U.S. Bank, and
Heller. The guarantees will be released at such time as the Company's
annual audited financial statements verify that the Company's tangible net
worth exceeds $8,500,000 and the Company's ratio of consolidated total debt
to consolidated total capitalization does not exceed 50%. All principal and
interest under each of these loans will be immediately due and payable, at the
option of the lender, if any person or group other than John or Karl Giguiere
or their immediate families constitutes a majority of the Company's Board of
Directors. The provisions in these loan agreements concerning change of
control will be eliminated if and when the Company enters into employment
agreements with John and Karl Giguiere which obligate them to remain
employed by the Company through December 31, 1999. No such
employment agreements are currently in place.
In March 1996, the Company completed a sale of 500,000 shares of
Senior Redeemable Preferred Stock (the "Senior Preferred Stock") and
warrants to purchase up to 1,346,000 shares of Common Stock. The net
proceeds the Company derived from the sale of the Senior Preferred Stock
and the warrants, after payment of offering expenses, were approximately
$4,798,000. The Senior Preferred Stock bears a 12% cumulative annual
dividend, payable semiannually. During the first four years after issuance,
50% of the dividend will be paid in cash and 50% of the dividend will be paid
in shares of Common Stock at a price equal to the lower of the market price
at the dividend payment date or $4.00 per share. The Company will be
required to redeem one-third of the Senior Preferred Stock eight years after
issuance and one-third of the Senior Preferred Stock in each of the
succeeding years at a price of $10.00 per share.
In 1995 and 1996, the Company also raised financing through the sale
of Common Stock in two public offerings. The Company completed a sale of
Common Stock and warrants to purchase Common Stock in its initial public
offering during 1995. Net proceeds from the offering, after payment of
commissions and expenses, totaled approximately $2,873,000. The Company
issued 493,563 units at a
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price of $7.25 per unit, with each unit consisting of
two shares of Common Stock and a warrant to purchase one share of
Common Stock. The warrants are currently exercisable at a price of $3.875
per share and expire on April 1, 1997. As of September 30, 1996, warrants
to purchase 16,765 shares of Common Stock had been exercised, with net
proceeds to the Company totaling approximately $65,000. If the warrants are
exercised in full, the Company estimates that it will receive net proceeds of
approximately $1,902,000.
The Company completed a second public offering of Common Stock
in July 1996. The Company issued 1,270,000 shares of Common Stock in
connection with the offering at a price of $4.375 per share, and the managing
underwriter of the offering, Van Kasper & Company, received a warrant to
purchase up to 122,000 shares of Common Stock at a price of $5.25 per
share. The net proceeds from the offering, after payment of underwriting
discounts and offering expenses, totaled approximately $4,574,000.
The Company's net working capital as of September 30, 1996 was
$5,862,000, as compared to $5,369,000 as of December 31, 1995. The
primary reason for the increase was an increase in inventories, from
$6,354,000 at December 31, 1995 to $7,250,000 at September 30, 1996.
This increase is indicative of the seasonality of the Company's business, as
inventories are typically higher immediately following harvest and prior to the
holiday sales season, during which time sales generally increase.
Net cash provided by operating activities for the nine month period
ending September 30, 1996 was $2,433,000, compared to $358,000 for the
period ending September 30, 1995. The increase in net cash provided by
operating activities is primarily due to the increased net income derived from
the higher margins, as discussed above. Net income for the first nine months
of 1996 was $1,042,000, compared to $19,000 for the same period in 1995.
The Company completed the second phase of its winery expansion in
September 1996. Over the past two years, the Company has added three
buildings used for bottling, barrel storage and chemical storage, a crush pad
and several tank pads, 86 stainless steel wine tanks, and other equipment to
its winery facility. The Company's tank storage capacity increased from
123,000 gallons to 1,445,000 gallons. The winery expansion has enabled the
Company to discontinue its former practice of having its wine fermented and
stored at outside facilities, thus reducing the cost of producing its wine. The
total cost of the two year expansion was approximately $9,327,000, of which
$4,789,000 is attributable to the second phase completed in 1996.
The Company planted 435 acres of new vineyards during 1996, and
currently intends to plant an additional 375 acres in 1997, 285 acres in 1998,
and 90-100 acres each in 1999 and 2000. The additional acres are being
planted on land the Company currently owns or may purchase in the future,
including approximately 900 acres of land which the Company purchased in
June 1996 and an additional 100 acres the Company has an option to
purchase. By the year 2000, the Company intends to have approximately
1,800 acres of vineyards under cultivation on approximately 2,700 acres of
land. However, there can be no assurance that the Company will be able to
expand the vineyards at that rate.
The Company estimates that the total costs of the current phase of the
vineyard and winery expansion will be approximately $14,500,000 from 1996
through 1997. The Company plans to fund this phase of the expansion
primarily with the proceeds from the March 1996 sales of the Senior
Preferred Stock, the proceeds from its secondary public offering and funds
expected from the exercise of the Common Stock warrants the Company
issued in its initial public offering in 1995. The Company intends to satisfy
additional financing requirements for the current phase of its expansion and
for further expansion in the years 1998 through 2000 through internally
generated funds and borrowings on working capital lines of credit, although
additional long-term debt or equity financing may be necessary.
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Phylloxera infestation may have a negative impact on the Company's
future grape production. Phylloxera is a root louse which feeds on the roots
of grapes, causing reduced production and eventual vine death. Of the 1,201
acres currently under cultivation by the Company, 289 acres have rootstock
which is susceptible to Phylloxera. Management estimates that the
commercially productive life of these vineyards is ten years from January 1,
1994, as compared with the twenty-five year life generally estimated for
vineyards, and that the reduction in the useful life of these vineyards will
result in an increase in depreciation of approximately $65,000 per year. The
Company is chemically treating all vineyards believed to be currently at risk
for Phylloxera and estimates that these treatments cost approximately
$45,000 per year. Both the increased depreciation charges and the cost of
treatment are added to the cost of grapes harvested, thus increasing cost of
sales. The Company plans to remove and replace all Phylloxera-infested or
susceptible vines with rootstock believed to be resistant to Phylloxera, either
by removing and replanting the vines, or through the use of grafting methods
whereby existing vines are grafted onto resistant rootstock. The Company
removed 68 acres of vineyard in 1995, and 80 acres were removed in 1996.
Thirty-three acres have been replanted. The Company plans to continue the
removal and replanting of these vines at a rate of approximately 30 acres per
year.
The above discussion concerning future financing needs, vineyard and
winery expansion, the impact of Phylloxera and factors affecting liquidity are
forward looking statements. Although management believes that these
statements are reasonable in view of the facts available to it, past
experience, and trends in the industry, there can be no assurance that any of
these statements will prove to be true. There are many factors which could
have a material impact upon whether these projections will be realized or
whether these trends will continue. Among these factors are the following:
Availability of Future Financing. The rate at which the Company is
able to expand its facilities is heavily dependent upon its ability to raise
additional debt or equity financing. The ability to raise financing is in turn
dependent upon a variety of factors, some of which are outside of the control
of the Company. These factors include, but are not limited to, interest rates,
the availability of sources of financing and the exercise of warrants issued in
the Company's initial public offering. If all of the warrants are not
exercised, interest rates increase or other financing becomes unavailable or
more costly to obtain, the Company may need to reduce its rate of expansion.
Costs of Expansion. Management has based its assumptions
concerning the costs of expansion on estimates which it believes are
reasonable. However, there can be no assurance that the Company's
estimates as to the costs of expansion will prove to be correct. If these
costs are higher than anticipated, the Company may be required to raise an
even greater amount of financing or reduce the rate of expansion of its
facilities.
Costs of Production. Statements with respect to the general decline
in the Company's cost of production are based on management's assumptions
concerning the likely levels of future sales by the Company, projected yields
from the Company's vineyards and beliefs as to the cost and availability of
bulk wine and grapes from the spot market. If, for example, the Company's
sales increase at a faster rate than anticipated or the Company's grape
production is lower than projected, the Company could be forced to make
additional purchases of grapes and wine on the spot market. In view of
current prices and lack of availability of good quality bulk wines and grapes,
management believes that such events could increase the Company's costs of
production.
Market Conditions. Assumptions as to the desirability of expansion
are based to a great extent on the Company's belief concerning the current
status of and trends within the wine industry. Market conditions in the wine
industry have changed substantially from time to time. To the extent that
market
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conditions change substantially in the future, the rate at which the
Company deems it advisable to expand its vineyard and winery facilities may
be adjusted.
Phylloxera Infestation. The discussion concerning Phylloxera
infestation and the costs associated with it are based on the Company's
examination of its vineyards and industry information concerning Phylloxera.
If this information changes or proves to be inaccurate, the Company's costs in
replacing vineyards and treating infested vines could increase.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to the signed on its behalf by the undersigned,
thereunto duly authorized.
R.H. PHILLIPS, INC.
(Registrant)
Date: November 14, 1996 /s/ John E. Giguiere
John E. Giguiere, Co-President
Co-Chief Executive Officer
Date: November 14, 1996 /s/ Robert T. Moore
Robert T. Moore, Chief Financial Officer
Principal Financial Officer
