<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 16, 1996
REGISTRATION NO. 333-05247
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 2 TO
FORM SB-2/A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
R.H. PHILLIPS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA 2084 68-0313739
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) NUMBER)
</TABLE>
---------------------
<TABLE>
<S> <C>
26836 COUNTY ROAD 12A JOHN E. GIGUIERE, PRESIDENT
ESPARTO, CALIFORNIA 95627 R.H. PHILLIPS, INC.
(916) 662-3215 26836 COUNTY ROAD 12A
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL ESPARTO, CALIFORNIA 95627
PLACE OF BUSINESS (916) 662-3215
AND PRINCIPAL EXECUTIVE OFFICE) (NAME, ADDRESS AND TELEPHONE NUMBER OF
AGENT FOR SERVICE OF PROCESS)
</TABLE>
---------------------
COPIES TO:
<TABLE>
<S> <C>
FREDERICK K. KOENEN, ATTORNEY AT LAW AUGUST J. MORETTI, ESQ.
555 MONTGOMERY STREET, SUITE 1405 RICHARD A. PEERS, ESQ.
SAN FRANCISCO, CA 94111 HELLER EHRMAN WHITE &
(415) 477-9415 MCAULLIFE
525 UNIVERSITY AVENUE
PALO ALTO, CA 94301-1900
(415) 324-7000
</TABLE>
---------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this registration statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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<PAGE> 2
R.H. PHILLIPS, INC.
CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF PART I ITEMS OF FORM
SB-2
<TABLE>
<CAPTION>
FORM SB-2
ITEM NO. ITEM CAPTION LOCATION IN PROSPECTUS
- --------- ------------------------------------- ------------------------------------------
<C> <S> <C>
1. Front of Registration Statement and
Outside Front Cover Page of
Prospectus......................... Outside Front Cover of Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus................ Inside Front Cover Page of Prospectus
3. Summary Information and Risk
Factors............................ Inside Front Cover of Prospectus,
Prospectus Summary, Risk Factors
4. Use of Proceeds...................... Use of Proceeds, Management's Discussion
and Analysis of Financial Condition and
Results of Operations
5. Determination of Offering Price...... Underwriting
6. Dilution............................. Not Applicable
7. Selling Security Holders............. Not Applicable
8. Plan of Distribution................. Outside Front Cover of Prospectus,
Underwriting
9. Legal Proceedings.................... Not Applicable
10. Directors, Executive Officers,
Promoters and Control Persons...... Management
11. Security Ownership of Certain
Beneficial Owners and Management... Principal Shareholders
12. Description of Securities............ Description of Capital Stock
13. Interest of Named Experts and
Counsel............................ Not Applicable
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities........................ Management
15. Organization Within Last Five
Years.............................. Certain Relationships
16. Description of Business.............. Business
17. Management's Discussion and Analysis
or Plan of Operation............... Management's Discussion and Analysis of
Financial Results and Results of
Operations
18. Description of Property.............. Business
19. Certain Relationships and Related
Transactions....................... Certain Relationships
20. Market for Common Equity and Related
Stockholder Matters................ Risk Factors, Price Range of Common Stock
and Dividend Policy, Description of
Capital Stock
21. Executive Compensation............... Management
22. Financial Statements................. Financial Statements
23. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure............... Management's Discussion and Analysis of
Financial Condition and Results of
Operations
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
JULY 16, 1996
1,300,000 SHARES
COMMON STOCK
All of the shares of Common Stock offered hereby are being sold by R.H.
Phillips, Inc. (the "Company"). The Company's Common Stock is currently traded
on the Nasdaq SmallCap Market under the trading symbol "RHPS." On June 25, 1996,
the last sale price of the Common Stock as reported on the Nasdaq SmallCap
Market was $5.50 per share. See "Price Range of Common Stock and Dividend
Policy." The Common Stock has been approved for quotation on the Nasdaq National
Market upon commencement of this offering under the symbol "RHPS."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 7 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<S> <C> <C> <C>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- ---------------------------------------------------------------------------------------------------------------------
Per Share................................. $ $ $
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Total(3).................................. $ $ $
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</TABLE>
(1) Does not include (i) a non-accountable expense allowance payable by the
Company to the Representative of the Underwriters, and (ii) the sale by the
Company to the Representative of the Underwriters of five-year warrants to
purchase up to 130,000 shares of Common Stock (149,500 shares if the
Underwriters' over-allotment option is exercised in full) at an exercise
price of $ per share (120% of the Price to Public). See
"Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $400,000
including the Underwriters' non-accountable expense allowance.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 195,000 additional shares of Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise this option in full,
the Price to Public will total $ , Underwriting Discount will total
$ and the Proceeds to Company will total $ . See
"Underwriting."
The shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by the Underwriters and
subject to their right to reject any order in whole or in part. It is expected
that the delivery of such shares will be made against payment therefor at the
offices of Van Kasper & Company, San Francisco, California on or about
July , 1996.
LOGO
JULY , 1996
<PAGE> 4
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES
EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
2
<PAGE> 5
[Drawing of "TOASTED HEAD CHARDONNAY" label and wine bottle bearing
"TOASTED HEAD" label]
Toasted Head Series
Chardonnay, Zinfandel
Super Premium Wines
Scheduled for release January 1997
Dunnigan Hills Appellation
Company Vineyards
Total acreage planted 1,293
Total acreage owned 2,696
[Photograph of Company's vineyards]
[Chart showing the following]
Total Acreage Owned
<TABLE>
<CAPTION>
Year Producing Planted Undeveloped
<S> <C> <C> <C>
93 470 186 967
94 543 171 909
95 645 201 950
96* 711 582 1403
97* 846 925 925
</TABLE>
Year End
*Estimated Company Projections
EXP Series
Syrah, Viognier
Super Premium Wines
Dunnigan Hills Appellation
[Drawing showing wine bottle bearing EXP Series Viognier label and
drawing of label]
[Photograph of wine bottles bearing R.H. Phillips, Dunnigan Hills
labels]
Dunnigan Hills Series
Chardonnay, Cabernet Sauvignon, Sauvignon Blanc, Mistura, White
Zinfandel
Popular Premium and Super Premium wines
[Photograph of new vineyards being planted]
New Vineyard Plantings
430 acres in 1996
350 acres estimated in 1997
<PAGE> 6
[Chart Showing the Following]
R.H. Phillips Sales History (Standard 9-liter cases)
(In Thousands)
<TABLE>
<CAPTION>
Year Cases Sold
- ---- ----------
<S> <C>
84 4,552
85 40,358
86 141,161
87 156,040
88 177,977
89 198,045
90 231,817
91 247,193
92 296,617
93 331,175
94 359,023
95 401,075
</TABLE>
R.H. Phillips
Estate Winery
Set in the middle of the Dunnigan Hills vineyard
75,000 total square feet
[Photograph of the Company's winery]
<PAGE> 7
PROSPECTUS SUMMARY
This following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Financial Statements and Notes
thereto, appearing elsewhere in this Prospectus. This Prospectus contains
certain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Actual results
could differ materially from those projected in the forward-looking statements
as a result of certain of the risk factors set forth elsewhere in this
Prospectus. For the purposes of this Prospectus a "case" means an industry
standard nine liter case of wine. Except as otherwise noted, all information
assumes no exercise of the Underwriters' over-allotment option. See
"Underwriting."
R.H. Phillips, Inc. (the "Company") is a producer of premium California
table wines. Founded in 1981 by John and Karl Giguiere, sales have grown from
4,500 cases in 1984 to 401,000 cases in 1995, making the Company the 22nd
largest California winery by shipments, according to the December, 1995 edition
of WINEDATA published by Gomberg, Fredrikson & Associates. The Company believes
it has been one of the fastest growing California wineries over this period. The
Company plans to increase its vineyards from the 846 acres planted at December,
1995 to approximately 1,300 acres by the end of 1996 and to over 1,700 acres by
the end of 1997. The Company significantly expanded the production capacity of
its winery in 1995 from approximately 150,000 gallons to over 1,000,000 gallons.
With the proceeds of this offering, the Company plans to further expand its
winery capacity to approximately 2,000,000 gallons by the end of 1997.
The Company produces, among other varietals and blends, Cabernet Sauvignon,
Chardonnay, Sauvignon Blanc, Syrah, Viognier and White Zinfandel, and
principally markets its wines under three distinct R.H. Phillips series, which
are positioned at price points across the super premium and popular premium
categories. The Company's wines are recognized for both their high quality and
exceptional value. For example, the Company's Barrel Cuvee Chardonnay, its
largest selling wine, which accounted for 36% of 1995 sales has for the last
five years been chosen as "one of the best Chardonnay values in the U.S." by
wine critic Robert Parker and a "Best Buy" by Wine Spectator, a wine industry
publication. The Company's Viognier, a Rhone varietal of increasing popularity,
was the only wine rated both as a "Best Wine" by varietal and a "Best Buy" among
all wines rated in the Wine and Spirits 1995 Annual Buying Guide.
The Company is able to price its wines below those of similar quality
because its production costs are considerably lower than many of its
competitors. The Company is located within the Dunnigan Hills viticultural area
where the cost of acquiring, developing and operating vineyards is far less than
those reported in the December 1994 MKF Vineyard Cost Study for nearby Napa and
Sonoma Counties. With further efficiencies derived from producing wines at its
modern facility, the Company's cost of wine production is approximately
one-third less than the average of other California wineries in the Company's
peer group as reported in the May, 1996 Wine Industry Survey of Deloitte &
Touche LLP.
The Company's objective is to become one of the largest California
producers of estate bottled premium wines. Estate bottled wines are those which
are produced entirely from grapes grown and processed on property the winemaker
owns or controls. The Company believes that estate bottled wines are generally
considered superior to those made with outside sources of grapes, wine or
processing. The Company anticipates its ongoing vineyard and winery expansion
will allow it to increase substantially both the overall sales of its wines and
the proportion of its wines which are estate bottled. In 1995, the Company
supplied approximately 60% of its grape requirements from Company-owned or
managed vineyards in the Dunnigan Hills. The Company anticipates that this
percentage will increase to approximately 80% and 90% of grape requirements by
the end of 1998 and 2000, respectively. To the Company's knowledge, no other
California winery of comparable size produces a majority of wines it sells from
vineyards it owns or leases. The Company believes that greater control over the
grape growing and winemaking process will enhance the overall quality and
consistency of its wines while reducing the costs associated with purchasing
grapes and bulk wine from outside sources, thereby increasing the Company's
competitive position in the marketplace.
The Company believes that certain industry trends benefit its current
operations and expansion strategy. Since 1980, sales of California premium
wines, the market in which the Company competes, have grown at a compounded
annual rate of approximately 15% according to the December, 1995 edition of
WINEDATA.
3
<PAGE> 8
Within this market, super premium wines (those which retail from $7.00 to $14.00
per bottle) have comprised the fastest growing segment during the last five
years according to the December, 1995 edition of WINEDATA. The Company has
positioned its EXP series and its Dunnigan Hills Barrel Cuvee Chardonnay and
Cabernet Sauvignon within the super premium category, and the Company believes
that with the planned release of a special estate bottled Chardonnay and
Zinfandel under the Toasted Head label, it will capture greater sales within the
super premium segment.
The California wine industry has recently experienced a shortage of grapes
due to a number of factors, including Phylloxera infestation, insufficient
plantings and unfavorable growing conditions in 1994 and 1995. During this
period, demand for California premium wines continued to increase and in 1995
prices of premium grapes and bulk wines increased substantially. Because of the
long planting cycle inherent in the industry, the Company believes that these
market conditions are not likely to change over the near-term. As a result of
these factors, the Company believes that wineries which are less dependent on
outside sources of supply should have a competitive advantage over those which
are more dependent on outside supplies of grapes and wine.
The Company's wines are sold throughout the United States primarily through
a broad network of approximately 90 independent wholesale wine distributors,
with sales outside of California accounting for approximately 87% of revenues in
1995. The Company's three largest distributors accounted for 13%, 12% and 11% of
the Company's sales in 1995, respectively, and no other distributor accounted
for more than 10% of sales in 1995. The Company believes that its excellent
relationships with its distributors has been a critical factor in the steady
growth of R.H. Phillips' sales and brand recognition. The Company believes that
increased sales and the introduction of additional super premium wines will
further enhance its relationship with its distributors.
The Company's Co-Founders, John and Karl Giguiere, have managed the R.H.
Phillips vineyard and winery business since its inception, during which time the
Company has grown from $143,000 in revenues in 1984 to $15.5 million in 1995.
The Company's management has significant wine and agricultural industry
experience which it has used to guide R.H. Phillips through years of consistent
growth. The Giguieres pioneered grape growing and wine producing in the Dunnigan
Hills and have employed innovative strategies in producing its wines. The
Company was one of the first to introduce night harvesting of grapes to produce
better quality wines. The Company has also developed a collapsible V-trellising
system, allowing for more vines per acre and increased yields, as well as making
harvesting easier than with conventional V-trellising systems.
As used in this Prospectus, "R.H. Phillips" applies to the vineyard and
winery business that was founded in 1981. The term "the Company" means R.H.
Phillips, Inc., a California corporation, which was incorporated in February,
1994 to own and operate the R.H. Phillips vineyard and winery business.
The Company's principal executive offices are located at 26836 County Road
12A, Esparto, California 95627. The Company's telephone number is (916)
662-3215.
------------------------
R.H. PhillipsTM, EXPTM, Night HarvestTM, MisturaTM, Toasted HeadTM and
Chateau St. NicholasTM are trademarks of the Company. Use of the name Toasted
Head and its incorporation into the Company's labels is subject to approval of
the Bureau of Alcohol, Tobacco and Firearms and certain state alcohol regulatory
agencies. This Prospectus also includes trademarks of entities other than the
Company.
4
<PAGE> 9
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered.................................... 1,300,000 shares
Common Stock Outstanding After Offering................. 5,938,435 shares(1)
Nasdaq trading symbol................................... RHPS(2)
Use of Proceeds......................................... To finance expansion of Company's
vineyards and winery. See "Use of
Proceeds."
</TABLE>
- ---------------
(1) Excludes as of June 20, 1996: (i) 1,346,788 shares issuable at $4.00 per
share upon exercise of warrants granted to John Hancock Mutual Life
Insurance Company; (ii) an estimated 300,000 shares issuable as stock
dividends through March, 2000 to holders of the Company's 12% Senior
Redeemable Preferred Stock; (iii) 98,713 shares issuable at $5.57 per share
upon exercise of warrants granted to Capitol Bay Securities; (iv) 488,113
shares issuable at a price of $3.875 per share upon the exercise of publicly
traded warrants; (v) 444,012 shares issuable upon exercise of outstanding
options under the Company's 1995 Stock Option Plan at prices ranging between
$3.75 and $4.125 per share; and (vi) an estimated maximum of 428,572 shares
issuable upon conversion of certain subordinated convertible promissory
notes with an aggregate principal amount of $1,500,000. See "Description of
Capital Stock."
(2) The Company's Common Stock has been approved for quotation on the Nasdaq
National Market upon commencement of this offering.
Except where otherwise specifically indicated in this Prospectus, the
information provided assumes no exercise of the Underwriters' over-allotment
option. See "Underwriting."
5
<PAGE> 10
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
--------------------------- ---------------
1993 1994 1995 1995 1996
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................................ $12,147 $12,896 $15,498 $3,179 $3,186
Gross profit..................................... 4,447 4,279 5,838 1,126 1,277
Income (loss) before income taxes................ 597 (637) 1,040 15 181
------- ------- ------- ------ ------
Net income (loss)................................ $ 597 $(1,001) $ 751 $ 9 $ 116
======= ======= ======= ====== ======
Net income (loss) per share...................... $ 0.17 $ 0.00 $ 0.03
======= ====== ======
PRO FORMA AMOUNTS(1):
Income (loss) before income taxes as reported.... $ 597 $ (637)
Pro forma income tax benefit (provision)......... (241) 257
------- -------
Pro forma net income (loss)...................... $ 356 $ (380)
======= =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------
ACTUAL AS ADJUSTED(2)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Current assets...................................................... $ 9,039 $ 9,039
Total assets........................................................ 27,672 33,902
Current liabilities................................................. 4,104 4,104
Long-term liabilities............................................... 10,605 10,605
Total liabilities................................................... 14,709 14,709
Redeemable Preferred Stock.......................................... 4,807 4,807
Shareholders' equity................................................ 8,156 14,386
Working capital..................................................... 4,935 4,935
</TABLE>
- ---------------
(1) During 1993, the R.H. Phillips vineyard and winery business was conducted by
R.H. Phillips Partners, a California limited partnership which was merged
into the Company in June, 1994. As a limited partnership, R.H. Phillips
Partners was not a tax paying entity for federal income tax purposes. The
pro forma amounts reflect the provision for federal income taxes at the
statutory rate and net income for R.H. Phillips Partners for 1993 and for
the first five months of 1994 as if it had been a tax-paying entity.
(2) Adjusted to reflect the sale by the Company of 1,300,000 shares of Common
Stock at an assumed public offering price per share of $5.50 and the
application of the estimated net proceeds therefrom. See "Use of Proceeds"
and "Capitalization."
6
<PAGE> 11
RISK FACTORS
An investment in the Company poses substantial risks. Prospective investors
should carefully consider the factors set forth below, in addition to the other
information contained in this Prospectus, in evaluating an investment in the
Common Stock offered hereby.
COMPETITION
The wine industry is extremely competitive based on quality, price, brand
recognition and distribution. The Company's wines in the popular premium and
super premium price categories compete with numerous other premium and super
premium wines produced in the United States, Europe, South America, Australia
and New Zealand. To a lesser extent, the Company's wines also compete with
generic wines and with other alcoholic and nonalcoholic beverages for consumer
dollars, as well as for shelf space in retail stores and for marketing attention
by the Company's independent distributors, all of which also carry other wine
and beverage brands. In addition, certain large wineries which have historically
focused principally on other segments of the wine market have entered, or can be
expected to enter, the market for premium wines, greatly increasing competition
in the market segment served by the Company. Many of the Company's competitors
have greater production, financial, marketing and distribution resources than
does the Company. Many of these competitors also have considerably greater brand
name recognition than does the Company. There is significant concentration in
the wine industry in the United States and further consolidation could increase
the market dominance of the largest wineries. See "Business -- Competition."
AGRICULTURAL HAZARDS
Growing grapes for wine production is heavily dependent upon favorable
weather conditions. Drought, frost, excessive rain or excessive heat or cold can
adversely affect the quality and quantity of grapes for wine production. There
can be no assurance that these factors will not adversely affect the Company's
grape crop in the future and force the Company to increase its outside purchases
of grapes and bulk wines, which may increase costs of production without a
corresponding increase in the Company's revenues.
The availability of water for irrigation is critical for growing grapes in
the Dunnigan Hills. The Company drip irrigates its vineyards from wells located
on its property. The wells have proven to be a reliable source of water, even
during recent droughts, and management believes that these sources of water will
remain available for the foreseeable future. However, there can be no assurance
that sufficient water will be available from the Company's wells. See
"Business -- Water Supply."
Vineyards are susceptible to a variety of diseases which can severely
reduce yields. One of the most destructive pests afflicting California vineyards
is Phylloxera, a louse which feeds on the roots of grape vines. Although
Phylloxera does not pose a health risk to humans, it can adversely affect the
quality of grapes and cause a decline in yield until the vines die. The Company
has removed 60 acres of vines showing the greatest evidence of decline from
Phylloxera. Of the approximately 1,300 acres of vineyards which the Company has
or will have planted by December 1996, 369 have rootstock susceptible to
Phylloxera. Of this acreage, the Company believes there is evidence of
Phylloxera in portions of up to 230 acres. To compensate for the decline in
production, the Company will need to replace infested vines with those on
resistant rootstock and to purchase grapes or wine from outside sources.
Depending on the extent and rate of decline, the additional costs of outside
grape and wine purchases could have a material adverse effect on the Company's
profit margins. In addition to the decline in production, the costs associated
with replanting the vines with Phylloxera-resistant rootstock could have a
significant impact upon the Company's liquidity and capital resources.
Management anticipates replanting approximately 30 acres of the affected
vineyards per year, depending on the actual decline in yields. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operation -- Liquidity and Capital Resources" and "Business -- Agricultural
Hazards."
LEVERAGE RISKS AND HIGH CAPITAL REQUIREMENTS
The planting of vineyards and the construction of wine production
facilities require substantial capital expenditures. The Company has made and
intends to continue to make such expenditures to accommodate its
7
<PAGE> 12
future growth. To finance this expansion, the Company has incurred substantial
indebtedness and will very likely continue to do so. As a consequence: (i) the
Company has and will continue to have significant interest and principal
repayment obligations requiring expenditure of substantial amounts of cash; (ii)
the Company's earnings and cash flows would be adversely affected by increases
in interest rates; (iii) there can be no assurance that the Company will be able
to obtain financing when required or that such financing will be available on
reasonable terms; and (iv) the presence of this debt will limit the Company's
ability to pay dividends on its Common Stock.
To finance vineyard and winery expansion, the Company also issued 500,000
shares of 12% Senior Redeemable Preferred Stock (the "Senior Preferred Stock")
to John Hancock Mutual Life Insurance Company ("Hancock"). The Senior Preferred
Stock is entitled to receive an annual dividend of $1.20 per share before any
cash dividends may be paid to the holders of Common Stock. The Senior Preferred
Stock must be redeemed by the Company beginning in March, 2004. If the Company
is in arrears with respect to payment of any dividend preference or amount owing
upon redemption, no dividends or other distributions may be made with respect to
the Common Stock until this preferences and redemption payments are paid in
full. In addition, if the Company is delinquent in four consecutive semi-annual
dividend payments, the holders of the Senior Preferred Stock will have the right
to elect a majority of the Board of Directors.
The Company's continued success will depend in part upon its ability to
expand its wine storage and production facilities and to increase the size of
its vineyards. The Company's ability to achieve its expansion goals will depend
on the receipt of funds raised not only in this offering, but from the exercise
of the Company's outstanding publicly traded warrants, additional debt or equity
financings and internally generated funds. In addition, the Company's projected
costs of expansion are based on current costs and trends in the wine industry,
some of which may change in the future. If the required amount of financing is
not received or the projected costs of expansion increases, the rate at which
the Company expands its vineyards and winery may need to be reduced, which could
materially adversely affect the Company's financial results. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
DEPENDENCE ON DISTRIBUTORS AND SALES REPRESENTATIVES
The Company sells most of its products to unrelated distributors for resale
to restaurants, bars and retail outlets. The Company's arrangements with its
distributors may generally be terminated by either party with prior notice. In a
few states a distributor may be terminated by the Company only for "cause" as
defined in the statutes of those states. The Company's three largest
distributors accounted for approximately 36% of the Company's total sales in
1995. If one of these distributors performs poorly, does not pay for wine
purchased or discontinues selling the Company's products, the Company's
financial results could be materially adversely affected.
One non-employee sales representative accounted for approximately 48% of
all of the Company's wine sales in 1995. If this representative were to cease
marketing the Company's wines for any reason, the Company's financial results
could be materially adversely affected.
Wine distribution channels have changed considerably during recent years.
There has been substantial consolidation among certain distributors and
retailers. Several of the major national club stores have merged and thereby
increased their purchasing power. Distributors and retailers of the Company's
wines all offer products which compete directly with the Company's wines for
shelf space and consumer dollars. There is a risk that these distributors or
retailers may give higher priority to products of the Company's competitors.
There can be no assurance that the Company's distributors and retailers will
continue to purchase the Company's products or provide the Company's products
with sufficient promotional support. See "Business -- Distribution."
RELIANCE ON KEY PERSONNEL; NO EMPLOYMENT AGREEMENTS
The Company's success has depended, and continues to depend, upon the
efforts of John and Karl Giguiere, its founders and Co-Chief Executive Officers.
Although the Company maintains key personnel life insurance policies for John
and Karl Giguiere, the loss of either of these persons could have a material
adverse effect on the Company's financial results. The Company's agreements with
its major creditors provide that the entire balance of the Company's significant
loans will be immediately payable if John and Karl Giguiere or
8
<PAGE> 13
members of their immediate family do not constitute a majority of the members of
the Board of Directors. These provisions will be removed from the loan
agreements if John and Karl Giguiere enter into long-term employment agreements
with the Company, although the Company has not yet entered into such agreements
with them. As of June 30, 1996, the combined outstanding balance of these loans
was $13,480,146. If the loans were to be called because of a change of control
in the Board of Directors, this would have a material adverse effect on the
financial condition of the Company. See "Management."
LOW TRADING VOLUME; VOLATILITY
The Company's Common Stock currently trades on the Nasdaq SmallCap Market.
The average daily trading volume of the Common Stock has fluctuated
significantly since it began trading in 1995, but trades have averaged
approximately 950 shares per day in 1996. Shareholders wishing to sell shares of
the Common Stock may encounter difficulties in view of the low trading volume.
In addition, the market price for the Common Stock has fluctuated substantially
since trading began in April, 1995. The market price may continue to be subject
to significant fluctuations for the foreseeable future due to operating results,
the small trading volume of the Company's Common Stock and other factors.
LONG-TERM STRATEGY
The Company has adopted a long-term strategy to increase its production
capacity. The Company believes that it will not receive the full benefit from
the proposed expansion of its vineyard and facilities as described in this
Prospectus for at least five years due to the length of time required for
newly-planted grape vines to reach full production and the aging periods for
wine. As a result, the full economic impact in terms of projected cost savings
and the other beneficial effects of the expansion program which the Company
believes will occur will not be fully realized for several years.
HEALTH RISKS; SOCIAL CONCERNS
There has been substantial attention paid in recent years to the adverse
social and health effects of alcohol consumption. Although some studies have
indicated that moderate wine consumption may result in health benefits, other
reports have sharply disputed these findings. Anti-alcohol groups have advocated
more stringent labelling requirements and other governmental regulations
generally unfavorable to the wine industry. More restrictive regulations,
negative publicity regarding alcohol consumption or publication of studies which
indicate a significant health risk from moderate consumption of alcohol could
adversely affect the sale and consumption of wine and could have a material
adverse effect on the Company's financial results.
REGULATION
Federal, state and local authorities extensively regulate the production
and sale of wine. The Federal Bureau of Alcohol, Tobacco and Firearms (the
"BATF"), the California Department of Alcohol Beverage Control and other state
alcohol authorities regulate matters such as licensing, trade and pricing
practices, labelling, advertising and relations with wholesalers and
distributors. In the last several years federal and state regulators have
required warning labels to be placed on alcoholic beverages. It is uncertain
what future regulations may be promulgated by these governmental agencies and
the effect these regulations will have on the Company's business. In addition,
Congress in 1991 substantially increased the amount of the excise tax assessed
upon alcoholic beverages and it is possible that additional increases in excise
taxes could be promulgated in the future. Because excise taxes must be paid by
the Company, any increase will cause a corresponding increase in the costs to
the Company, thereby requiring the Company to raise prices or suffer reduced
profit margins.
In addition to alcohol related regulations, the Company is subject to a
broad range of other regulatory requirements. Among these are local zoning
regulations, which govern the use to which land may be placed, and regulations
governing the use, storage and disposition of pesticides, fuels and other
chemicals. These regulations all add costs to the Company's operations. It is
unknown what the impact of future regulations of this nature will be, but it is
possible these regulations could restrict the expansion of the Company's
facilities or could limit the Company's use of its properties. See
"Business -- Regulation."
9
<PAGE> 14
DEPENDENCE ON CONSUMER SPENDING
Consumer spending has a substantial impact upon the Company's business.
Factors such as economic recessions, increases in tax rates and changes in tax
laws concerning the deductibility of entertainment expenses can have a
considerable impact upon the quality and quantity of wines consumers are willing
to purchase. This, in turn, can have a considerable impact upon the Company's
sales and profit margins by forcing the Company to lower prices.
SEASONALITY
The Company's revenue and expenditure levels fluctuate substantially from
quarter to quarter due to a number of factors. Cash flow requirements generally
rise substantially during harvesting, or "crush," which takes place in August or
early September and requires significant increases in manpower. Cash flow
requirements also rise substantially prior to and during the fourth quarter as
production requirements increase. Revenues fluctuate markedly during the year
depending on promotional activities, trends in consumer purchases of wine and
other factors. The Company generally receives over one-third of all revenue
during the last three months of the year. These fluctuations in revenues and
expenditures can lead to volatile changes in earnings from one quarter to the
next. See "Management's Discussion and Analysis -- Seasonality."
ENVIRONMENTAL RISKS
The ownership of real property creates a potential for environmental
liability to the Company. Vineyards and wineries use and store pesticides,
fuels, lubricants and other chemicals. If hazardous substances are released on
or emanate from the Company's property, the Company may be held strictly liable
for the cost of remediation of the hazardous substances.
CONCENTRATION OF PRODUCTION
The Company's vineyards and winery are at a single location. This may
increase the likelihood that a single natural disaster or other calamity could
adversely affect a larger portion of the Company's grape growing and wine
production capabilities than if the Company's vineyards and winery were situated
in multiple locations. Although the Company has obtained insurance policies to
cover many possible losses of this nature, any significant loss of production
capacity would require the Company to obtain grapes and wines from outside
sources, thereby increasing the Company's cost of production and reducing the
Company's control over grape and wine production.
SHARES ELIGIBLE FOR FUTURE SALE
As of June 20, 1996, there were 4,638,435 shares of Common Stock of the
Company outstanding. Of these shares, 992,576 are freely tradeable and
approximately 3,646,000 are restricted securities as defined in Rule 144 of the
Securities and Exchange Commission (the "Commission"). Of the 3,646,000 shares
which are restricted securities, approximately 2,660,230 shares are subject to
an agreement between the holders, the Company and the Underwriters which
prohibits the sale of the shares for a period of 180 days after this offering
and the Underwriters have requested similar agreements from holders of an
additional 685,000 shares of Common Stock. Subject to these agreements with the
Underwriters, the restricted securities will be eligible for limited resale
under Rule 144 in June, 1996. In June, 1997, all restrictions on the sale of the
restricted securities (other than those held by persons considered "affiliates"
of the Company under Rule 144) imposed by Rule 144 will lapse. In addition to
these shares, the Company is obligated to issue a substantial number of
additional shares of its Common Stock upon the conversion of promissory notes,
the exercise of warrants and options and the payment of stock dividends to the
holders of the Senior Preferred Stock. See "Shares Eligible for Future Sale" and
"Description of Capital Stock."
The increase in the number of shares of Common Stock eligible for resale,
as well as the possible increase in the number of outstanding shares due to
conversion of the convertible notes, the payment of stock dividends on the
Senior Preferred Stock and exercise of warrants and options, could substantially
affect the market price for the Common Stock. If a substantial number of shares
were to be sold during a limited period of time, the market price of the Common
Stock could be adversely affected.
10
<PAGE> 15
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby, at an assumed public offering price of $5.50 per share, are
estimated to be approximately $6,230,000 after deducting the underwriting
discount and estimated offering expenses. The Company currently intends to use
all of the proceeds it receives from this offering to finance the expansion of
the Company's winery and vineyards, including the purchase of an additional 900
acres of land immediately adjacent to the Company's existing vineyards. The
Company anticipates that approximately $1,362,000 of the net proceeds will be
used to acquire the additional land, approximately $3,500,000 will be used to
plant additional vineyards and approximately $1,368,000 will be used for
expansion of the Company's winery.
Pending such uses, the Company intends to invest the net proceeds from this
offering in short-term, interest-bearing securities, including government
obligations and money market instruments.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
On March 31, 1995, the Company completed an initial public offering of
493,563 units at a price of $7.25 per unit. Each unit consisted of two shares of
Common Stock and one warrant to purchase one share of Common Stock. The units
began trading on the Nasdaq SmallCap Market in April, 1995 and the Common Stock
and warrants began trading separately on October 1, 1995. The Common Stock is
quoted on the Nasdaq SmallCap Market under the trading symbol RHPS. The Common
Stock has been approved for quotation upon commencement of this offering under
the same trading symbol.
The following table sets forth the price range of high and low last sale
prices per share for the Common Stock for the three quarters during which the
Common Stock has been traded separately.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Fourth Quarter............................................... $3.25 $3.00
YEAR ENDED DECEMBER 31, 1996
First Quarter................................................ $6.75 $3.50
Second Quarter (through June 25, 1996)....................... $6.75 $4.88
</TABLE>
The high and low bid prices for the units prior to the time that the Common
Stock was separately tradeable were as follows.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Second Quarter............................................... $7.75 $7.25
Third Quarter................................................ $7.75 $7.00
</TABLE>
On June 25, 1996, the last reported sale price of the Common Stock was
$5.50 per share. As of June 20, 1996, there were 299 holders of record of the
Common Stock.
The Company has not paid dividends on its Common Stock to date. Management
intends to reinvest earnings in the development of its business and does not
anticipate paying cash dividends on its Common Stock for the foreseeable future.
Payment of dividends on the Common Stock is subject to certain limitations under
the Company's loan agreements with Metropolitan and U.S. Bank of California
("U.S. Bank") and under the terms of the Company's Senior Preferred Stock issued
to Hancock. See "Description of Capital Stock."
11
<PAGE> 16
CAPITALIZATION
The following table sets forth as of March 31, 1996 the actual
capitalization of the Company and as adjusted to reflect the sale of 1,300,000
shares of Common Stock at an assumed public offering price of $5.50 per share
(after deducting the underwriting discount and the estimated offering expenses).
The capitalization information set forth in the table below is qualified by the
more detailed financial statements and notes thereto included elsewhere in this
Prospectus and should be read in conjunction with such financial statements and
notes.
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt........................................ $ 380 $ 380
Long-term debt (includes current maturities)........... 9,391 9,391
Convertible subordinated debt.......................... 1,500 1,500
Redeemable preferred stock............................. 4,807 4,807
Shareholders' equity:
Non-redeemable preferred stock, no par value,
4,500,000 shares authorized; none outstanding..... -- --
Common stock, no par value, 12,500,000 shares
authorized; 4,632,985 shares issued and
outstanding and 5,932,985 shares as adjusted(1)... P 7,623 13,853
Retained Earnings.................................... 533 533
------- -------
Total Shareholders' Equity................... 8,156 14,386
------- -------
Total Capitalization......................... $24,234 $30,464
======= =======
</TABLE>
(1) Excludes as of June 20, 1996: (i) 1,346,788 shares issuable at $4.00 per
share upon exercise of warrants granted to Hancock; (ii) an estimated
300,000 shares issuable as stock dividends through March, 2000 to holders of
the Senior Preferred Stock; (iii) 98,713 shares issuable at $5.57 per share
upon exercise of warrants granted to Capitol Bay Securities; (iv) 488,113
shares issuable at a price of $3.875 per share upon the exercise of publicly
traded warrants; (v) 444,012 shares issuable upon exercise of outstanding
options under the Company's 1995 Stock Option Plan at prices ranging between
$3.75 and $4.125 per share; and (vi) an estimated maximum of 428,572 shares
issuable upon conversion of certain subordinated convertible promissory
notes with a principal amount of $1,500,000. See "Description of Capital
Stock."
12
<PAGE> 17
SELECTED FINANCIAL DATA
The following historical financial data for the years ended December 31,
1993, 1994 and 1995, and the three month periods ended March 31, 1995 and 1996,
should be read in conjunction with the financial statements of the Company and
related footnotes presented elsewhere in this Prospectus. The data as of
December 31, 1995 and for the year then ended are derived from the financial
statements which were audited by KPMG Peat Marwick LLP, the Company's
independent certified public accountants. The data for the years ended December
31, 1993 and 1994 are derived from the financial statements which were audited
by Deloitte & Touche LLP, the Company's previous independent certified public
accountants. The data as of March 31, 1996 and for each of the three month
periods ended March 31, 1995 and 1996 are derived from the Company's unaudited
financial statements, which, in the opinion of management, include all
adjustments (which include only normal recurring entries) necessary for a fair
presentation of the data. The operating results for the three month period ended
March 31, 1996 are not necessarily indicative of the results which might be
expected for the full year.
STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- -----------------
1993 1994 1995 1995 1996
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales.................................. $12,147 $12,896 $15,498 $3,179 $3,186
Cost of sales.............................. 7,700 8,617 9,660 2,053 1,909
------- ------- ------- ------- -------
Gross profit............................... 4,447 4,279 5,838 1,126 1,277
Selling, general and administrative
expenses................................. 3,092 3,386 3,803 831 801
------- ------- ------- ------- -------
Operating income........................... 1,355 893 2,035 295 476
Interest expense........................... (1,037) (1,121) (1,025) (268) (308)
Other income (expense), net................ 279 (409) 30 (12) 14
------- ------- ------- ------- -------
Income (loss) before income taxes.......... 597 (637) 1,040 15 182
Provision for income taxes................. -- (364) (289) (6) (66)
------- ------- ------- ------- -------
Net income (loss).......................... $ 597 $(1,001) $ 751 $ 9 $ 116
======= ======= ======= ======= =======
Net income (loss) per share................ $ 0.17 $ 0.00 $ 0.03
======= ======= =======
PRO FORMA AMOUNTS: (1)
Income (loss) before income taxes as
reported................................. $ 597 $ (637)
Pro forma income tax (provision) benefit... (241) 257
------- -------
Pro forma net income (loss)................ $ 356 $ (380)
======= =======
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 MARCH 31, 1996
------------------ ---------------
(IN THOUSANDS)
<S> <C> <C>
Current assets............................................. $ 9,956 $ 9,039
Total assets............................................... 27,393 27,672
Current liabilities........................................ 4,587 4,104
Long-term liabilities...................................... 14,766 10,605
Total liabilities.......................................... 19,353 14,709
Redeemable preferred stock................................. -- 4,807
Shareholders' equity....................................... 8,040 8,156
Working capital............................................ 5,369 4,935
</TABLE>
(1) During 1993, the R.H. Phillips vineyard and winery business was conducted by
R.H. Phillips Partners, a California limited partnership which was merged
into the Company in June, 1994. As a limited partnership, R.H. Phillips
Partners was not a tax-paying entity for federal income tax purposes. The
pro forma amounts reflect the provision for federal income taxes at the
statutory rate and net income for R.H. Phillips Partners for 1993 and for
the first five months of 1994 as if it had been a tax-paying entity.
13
<PAGE> 18
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.
OVERVIEW
The Company was incorporated in February, 1994 to serve as the corporate
business entity into which R.H. Phillips Partners, a California limited
partnership which had conducted the R.H. Phillips business prior to that time,
was to be merged. The merger of the entities occurred in June, 1994 and, as a
result, the R.H. Phillips winery and vineyard business is now operated by the
Company.
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 large percentage
of the Company's sales usually occur in the last three months of the year,
accounting for approximately 39% of net sales in 1995 and 35% of net sales in
1994.
The seasonality of the Company's sales affects the Company's liquidity and
capital requirements. In the past, the Company has borrowed 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.
COSTS OF PRODUCTION
The company anticipates that the trends toward lower costs of production
and higher gross margins are likely to continue throughout the remainder of
1996. The Company expects to produce greater quantities of grapes in 1996 than
in 1995 as vineyards recently planted by the Company mature. The Company
believes that this will reduce the need to purchase relatively expensive bulk
wines from outside sources. The Company believes that its winery expansion will
also contribute to lower production costs by eliminating the need for outside
processing services, which add additional expenses to the production of the
Company's wines.
RESULTS OF OPERATIONS
THREE MONTH PERIODS ENDED MARCH 31, 1996 AND MARCH 31, 1995
Net Sales
Net sales for the three month period ended March 31, 1996 were $3,186,000
as compared to $3,179,000 for the corresponding period in 1995. The average
selling price per case increased to approximately $36.45 during the first three
months of 1996 as compared to $35.10 per case for the same period in 1995. The
increase in the average selling price per case resulted primarily from price
increases in certain of the Company's varietal wines. The number of cases of
wine sold during the first three months of 1996 was approximately 83,200, a
decrease of 8% from the number sold during the corresponding period in 1995. The
Company believes that the decrease in case sales was due primarily to the price
increases in February and March, 1996 and to its decision to reduce sales
program allowances. The Company believes that the reduction in sales was
temporary and does not expect the decline in case sales to continue.
Gross Profit
Gross profit increased to $1,277,000 for the three month period ended March
31, 1996 from $1,126,000 for the same period in 1995. Gross profit as a
percentage of net sales also increased to 40% during the first three months of
1996 from 35% for the corresponding period during the previous year. Net sales
and cost of
14
<PAGE> 19
sales during both periods included the sales of bulk wines. Excluding these
sales, the gross margins were 43% during the first three months of 1996 and 36%
during the corresponding period in 1995. The higher gross margin during the
first three months of 1996 was primarily due to price increases and to lower
costs of producing wines sold during the first three months in 1996 as compared
to the corresponding period in 1995. The average cost per case sold during the
first three months of 1996 decreased by 5% from those sold during the
corresponding period in 1995, from approximately $22.35 per case to $21.20 per
case.
Operating Expenses
Selling, general and administrative expenses decreased as a percentage of
net sales to 25% of net sales during the first three months of 1996 compared
with 26% of net sales during the corresponding period in 1995. Selling expenses
decreased to $571,000 during the first three months in 1996 from $703,000 during
the corresponding period in 1995. The decrease consisted primarily of a
reduction in sales programming expenses. General and administrative expenses
increased to $210,000 during the first three months of 1996 from $110,000 in the
corresponding period in 1995 because of salary expense allocation, public
company reporting costs and a write-off associated with a customer bankruptcy.
Interest Expense
Total interest expense for the first three months of 1996 was approximately
$308,000, or 10% of net sales, as compared with $268,000, or 8% of net sales, in
the corresponding period in 1995. The Company capitalized approximately $99,500
of additional interest pertaining to vineyard development in the first three
months of 1996 compared with $68,500 of interest in the first three months of
1995. The increase in total interest expense during the first three months of
1996 as compared to the same period in 1995 was primarily due to increased
levels of borrowing by the Company to finance vineyard and winery expansion in
1996.
Income Taxes
The provision for income taxes for the three months ended March 31, 1996 is
at an effective rate of approximately 36% when applied to the pretax income of
$182,000, compared with 40% applied to the pretax income of $15,000 for the
three months ended March 31, 1995. The primary reason for the difference in
effective tax rate was greater accrual for state income tax in 1995.
Net Income
The Company had net income of $116,000 for the period ended March 31, 1996,
compared with net income of $9,000 during the same period in 1995. This increase
was primarily due to the factors described above, including lower product costs
and higher margins.
YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994
Net Sales
Net sales for the year ended December 31, 1995 were $15,498,000 as compared
with $12,896,000, which represented an increase in net sales of approximately
20%. The number of cases sold in 1995 increased to approximately 401,000, which
was approximately 11% greater than in 1994. The average selling price per case
increased to $36.28 in 1995 from $34.85 in 1994. The increase in the average
selling price per case resulted partly from a price increase in the third
quarter of 1995 on certain of the Company's wines and from management's decision
to shift the primary focus of the Company's marketing efforts to wines with
higher gross profit margins, mainly Chardonnay.
Gross Profit
Gross profit increased to $5,838,000 in 1995 from $4,279,000 in 1994. Gross
profit also increased as a percentage of net sales to 38% in 1995 from 33% of
net sales in 1994. Net sales and cost of sales for 1995 and 1994 included the
sales of bulk wines and grapes. Excluding these sales, the gross margins were
37% in 1995
15
<PAGE> 20
and 35% in 1994. The higher gross margin in 1995 was primarily due to the price
increase of certain of the Company's wines, the marketing shift to Chardonnay
and lower costs of production for Chardonnay in 1995 as compared with 1994.
Operating Expenses
Selling, general and administrative expenses increased to $3,803,000 in
1995 from $3,386,000 in 1994. As a percentage of net sales, selling, general and
administrative expenses decreased as a percentage of net sales to 25% in 1995
from 26% in 1994. Although these expenses were higher in 1995 than in 1994, the
percentage of these expenses to net sales declined due to higher revenues. The
increase in expenses was primarily due to increased sales labor expenses and
sales promotion expenses required to support the higher levels of sales in 1995
compared to 1994. Sales labor and commission expenses increased to $1,405,000 in
1995 from $1,236,000 in 1994. Promotional expenses increased to $1,300,000 in
1995 from $1,004,000 in 1994. General and administrative expenses were
substantially the same in 1995 and 1994.
Interest Expense
Total interest expense in 1995 was $1,025,000, or approximately 7% of net
sales. In addition, the Company capitalized approximately $295,000 of interest
pertaining to vineyard development and winery expansion during 1995. Total
interest expense in 1994 was approximately $1,121,000, or 9% of net sales.
Approximately $122,000 of additional interest was capitalized in 1994. The
increase in total interest, consisting of interest expense and capitalized
interest, during 1995 compared with 1994 was primarily due to increased levels
of borrowing by the Company to finance the 1995 phase of the vineyard and winery
expansions. The amount of increase was reduced somewhat by the lower interest
rates the Company obtained from refinancing of its debt during 1995.
Income Taxes
In 1995, the Company had income tax expense of $289,000 compared with
$364,000 in 1994. The 1995 income tax expense was primarily attributable to
federal and state income tax at statutory rates, which was offset primarily by
utilization of net operating loss carryforwards. The 1994 income tax expense was
primarily attributable to the required adoption by the Company of Statement of
Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes."
Net Income
The Company had net income of $751,000 in 1995, compared with a net loss of
$1,001,000 in 1994. The increase in net income in 1995 over 1994 was due to the
factors described above, including substantially increased sales and increased
profit margins.
YEARS ENDED DECEMBER 31, 1994 AND DECEMBER 31, 1993
Net Sales
Net sales in 1994 were $12,896,000 compared with $12,147,000 in 1993,
representing an increase of approximately 6% in 1994 net sales over those in
1993. The modest increase in net sales was principally attributable to price
competition which resulted from excessive industry wide inventory buildup.
Gross Profit
Gross profit was $4,279,000 in 1994 compared with $4,447,000 in 1993. This
represented a decline in gross profits as a percentage of sales to 33% of net
sales in 1994 from 37% of net sales in 1993. The reduction in gross profit was
attributable to a variety of factors, including the increasing use of discounts
to remain competitive in the marketplace, higher production costs and the
increase in the cost of bulk wines that the Company purchased from outside
suppliers in 1994.
16
<PAGE> 21
Operating Expenses
Selling, general and administrative expenses rose to $3,386,000 in 1994, an
increase from $3,092,000 in 1993, which represented approximately 26% of net
sales in each year. The increase in 1994 was due primarily to additional
expenses incurred in sales promotional activities. The single largest
promotional activity in 1994 was the Company's 8-pack program, pursuant to which
the Company sold eight 1.5 liter bottles for the price of six. Total costs for
the 8-pack program, which began in 1993, were $441,000 in 1994.
Other Income and Expense
The Company incurred $409,000 in other expenses in 1994 compared with
$279,000 in other income in 1993. The large increase in other expense for 1994
was primarily due to its write-down to estimated fair market value of certain
R.H. Phillips wines stored at another facility which did not meet the Company's
standards for inclusion in its wine program. This resulted in a $360,000 charge
to other income (expense). In addition, approximately $110,000 of capitalized
organizational costs of R.H. Phillips Partners were written off in 1994 due to
the conversion of the R.H. Phillips business from a limited partnership to a
corporation through the merger with the Company. The single largest item of
other income in 1993 was an excise tax refund. In 1993 R.H. Phillips Partners
received a refund of federal excise taxes paid for 1991 through 1993 due to the
availability of a small producer exemption. The portion of the refund
attributable to 1993 ($90,000) reduced cost of sales for that year and the
remainder of the refund ($180,000) was included in other income.
Interest Expense
Interest expense was $1,121,000 in 1994 as compared to $1,037,000 in 1993.
Interest expense as a percentage of net sales was approximately 9% during both
years. The increase in total interest expense was primarily due to increased
borrowing levels used for working capital and equipment purchases during the
latter part of 1994.
Income Taxes
Effective June 1, 1994, R.H. Phillips converted from a limited partnership
to a corporation by means of a statutory merger between the Company and R.H.
Phillips Partners. In accordance with FAS 109 the Company, as a tax-paying
entity, was required to set forth in its financial statements any temporary
differences between the financial statement basis and tax basis of its assets.
The impact of the change in entities resulted in a one time charge to income of
approximately $352,000 for the year ended December 31, 1994.
Net Income
The Company had a net loss in 1994 of $1,001,000 in contrast to net income
for R.H. Phillips Partners of $597,000 in 1993. Of the loss in 1994, $110,000
reflected the write-off of the capitalized organizational costs, $352,000
consisted of the FAS 109 adjustment and $360,000 from the write-down of wine
inventory. If these events had not occurred, the Company's net loss for the year
ended December 31, 1994 would have been $179,000. Had R.H. Phillips Partners
been a tax-paying entity for income tax purposes, net income in 1993 would have
been $356,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its working capital and capital expansion needs
through internally generated funds, outside credit facilities and equity
financings. The Company has made substantial capital expenditures to expand its
vineyards and winery facilities, and intends to continue these expenditures. The
purpose of the expansion has been and continues to be 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 capital required to fund its growth. As a consequence, the Company
has depended upon, and continues to rely upon, debt and equity financings for
its working capital and expansion needs.
The Company's financial obligations consist of long-term debt, redeemable
preferred stock and short-term credit facilities. The Company obtained in
January, 1995 a ten-year term loan from Metropolitan with a principal amount of
$7,500,000. In October, 1995, the Company entered into a loan agreement with
Heller Financial ("Heller") under which the Company may borrow a maximum of
$1,000,000. Of this amount,
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<PAGE> 22
approximately $645,000 was advanced to the Company in October, 1995, with the
balance of $355,000 to be advanced at the Company's option. The term of the loan
is five years, with principal payable in sixty equal monthly payments. The
Company also 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 in March, 1996 raised approximately
$4,807,000 after offering expense through the sale of Senior Preferred Stock and
warrants to Hancock. See "Description of Capital Stock."
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 nonrevolving
"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 crop line of credit is in the amount of $1,200,000.
The crop line of credit is secured by the 1996 grape crop and equipment, and
matures in November, 1996.
Cash provided by operating activities in 1995 was $941,000, consisting of
primarily net income of $751,000, depreciation and amortization of $1,002,000
and cash used in changes in assets and liabilities of $896,000. Net cash used in
investing activities in 1995 was $7,227,000, consisting of $2,887,000 invested
in vineyards, $2,027,000 in buildings, and $2,314,000 in equipment. Net cash
provided by financing activities in 1995 was $6,573,000. This consisted
primarily of $3,047,000 from issuance of Common Stock, $8,530,000 from ITT
Financial, $6,571,000 from U.S. Bank, $7,500,000 from Metropolitan Life and cash
used for principal payments to ITT Financial of $12,261,000, U.S. Bank of
$1,200,000, Owens Financial Group of $2,608,000, various notes and capital
leases of $2,450,000 and loan origination fees of $534,000. As a result of these
factors, cash increased by $287,000 during 1995.
The Company's net working capital as of March 31, 1996 was $4,934,000
compared with $5,369,000 as of December 31, 1995. The decrease in working
capital was primarily due to a decline in accounts receivable during the first
three months of 1996. The decline in accounts receivable during this period
reflects the seasonality of the Company's business insofar as accounts
receivable are generally higher at year end than at the end of the first three
months of the year.
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 recently completed financing with Hancock, the
proceeds from this offering and funds expected from exercise of the Common Stock
purchase warrants issued in the Company's initial public offering in 1995. The
proceeds received from Hancock after offering expenses were $4,807,000. The
proceeds from this offering are estimated to be $6,230,000 (based on an assumed
offering price of $5.50 per share) and the Company estimates it will receive
approximately $1,902,000 from exercise of the warrants (assuming full exercise
of the warrants). The Company intends to fund additional financing requirements
for the 1996 and 1997 expansion and 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.
Phylloxera infestation will potentially have a negative impact on the
Company's grape production. The Company estimates that the commercially
productive life of the infested 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 will cost approximately $45,000
per year. Both the increased depreciation charges and the cost of treatments
will be added to the cost of grapes harvested, thus increasing cost of sales. In
addition, the Company is combatting the effects of Phylloxera through the use of
innovative grafting methods whereby the existing vines are grafted onto
resistant rootstock. The Company also plans to remove and replant approximately
30 acres of Phylloxera-infested or susceptible vines per year. See
"Business -- Agricultural Hazards."
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<PAGE> 23
FACTORS AFFECTING FUTURE PERFORMANCE
The above discussion concerning future financing needs, vineyard and winery
expansion, trends in the Company's costs of production, 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 all of these statements will prove to be accurate. There are
numerous factors which could have a material impact upon whether these
projections will be realized or whether these trends will continue. Among these
factors are those set forth in "Risk Factors" beginning on page 7 as well as 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 obtain additional
debt or equity financing. The ability to obtain financing is in turn dependent
upon a variety of factors, some of which are outside of the control of the
Company. The Company is relying in part on receiving proceeds derived from the
exercise of the warrants issued in the Company's initial public offering to
assist in financing the expansion of the winery and vineyards. If some or all of
these warrants are not exercised, the Company will likely be required to seek
other sources of financing or reduce the rate at which it expands its
facilities.
Costs of Expansion. Management has based its assumptions concerning the
costs of expansion on estimates which it believes are reasonable based on
current prices and trends in the wine industry. There can be no assurance,
however, 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 obtain an even greater amount of financing or reduce the rate of
expansion of its facilities.
Market Conditions. Assumptions as to the desirability of expansion are
based to a great extent on management's belief concerning the current status of
and trends in the wine industry. Market conditions in the wine industry have
changed substantially from time to time. To the extent that market conditions
change in the future, the rate at which the Company expands its vineyard and
winery facilities may need to be adjusted significantly.
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 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 bulk
wine. In view of current prices and lack of availability of good quality bulk
wines and grapes, management believes that such an event could increase the
Company's costs of production.
Phylloxera Infestation. The discussion concerning Phylloxera infestation
and the costs associated therewith 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
Phylloxera-susceptible vines and treating them could increase, perhaps
substantially.
CHANGE OF ACCOUNTANTS
The Board of Directors of the Company approved in August, 1995 the
selection of KPMG Peat Marwick LLP ("KPMG Peat Marwick") as the Company's
independent certified public accountants for the year ended December 31, 1995.
The accounting firm of Deloitte & Touche LLP ("Deloitte & Touche") served as the
Company's independent certified public accountants for the years ended December
31, 1993 and 1994. The reports of Deloitte & Touche for those years did not
contain any adverse opinion or disclaimer of opinion and was not modified as to
any uncertainty, audit scope or accounting principles. There were no
disagreements with Deloitte & Touche on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure which,
if not resolved to Deloitte & Touche's satisfaction, would have caused it to
make reference to the subject matter of the disagreement in connection with its
reports.
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<PAGE> 24
BUSINESS
OVERVIEW
The Company is a producer of premium California table wines. Founded in
1981 by John and Karl Giguiere, sales have grown from 4,500 cases in 1984 to
401,000 cases in 1995, making the Company the 22nd largest California winery by
shipments according to the December, 1995 edition of WINEDATA. The Company
believes it has been one of the fastest growing California wineries over this
period. The Company plans to increase its vineyards from the 846 acres planted
at December, 1995 to approximately 1,300 acres by the end of 1996 and to over
1,700 acres by the end of 1997. The Company significantly expanded the
production capacity of its winery in 1995 from approximately 150,000 gallons to
over 1,000,000 gallons. With the proceeds of this offering, the Company plans to
further expand its winery capacity to approximately 2,000,000 gallons by the end
of 1997.
The Company produces, among other varietals and blends, Cabernet Sauvignon,
Chardonnay, Sauvignon Blanc, Syrah, Viognier and White Zinfandel, and
principally markets its wines under three distinct R.H. Phillips series, which
are positioned at price points across the super premium and popular premium
categories. The Company's wines are recognized for both their high quality and
exceptional value. For example, the Company's Barrel Cuvee Chardonnay, its
largest selling wine, accounted for 36% of 1995 sales and has for the last five
years been chosen as "one of the best Chardonnay values in the U.S." by wine
critic Robert Parker and a "Best Buy" by Wine Spectator, a wine industry
publication. The Company's Viognier, a Rhone varietal of increasing popularity,
was the only wine rated both as a "Best Wine" by varietal and a "Best Buy" among
all wines rated in the Wine and Spirits 1995 Annual Buying Guide.
COMPANY STRATEGY
The Company's objective is to become one of the largest California
producers of estate bottled premium wines. Estate bottled wines are those which
are produced entirely from grapes grown and processed on property the winemaker
owns or controls. The Company believes that estate bottled wines are generally
considered superior to those made with outside sources of grapes, wine or
processing. To achieve its objective, the Company has embarked upon a
significant expansion strategy. Key elements of this expansion strategy are to:
Integrate Vertically. Increased vineyard acreage and winery capacity should
enable the Company to produce substantially more wine and increase significantly
the percentage of its estate bottled wine. The Company believes this greater
control over grape growing and the winemaking process will enhance the overall
quality and consistency of its wines, while reducing the costs associated with
purchasing grapes and bulk wines from outside sources. In 1995, the Company's
grape cost per case for wine produced from purchased grapes or bulk wine was
approximately 50% greater than that for wine produced from grapes grown on the
Company's vineyards. In 1995, the Company supplied approximately 60% of its
grape requirements from Company-owned or managed vineyards in the Dunnigan
Hills, and expects this percentage to increase to approximately 80% and 90% by
the end of 1998 and 2000, respectively. Presently, to the Company's knowledge,
no other California winery of comparable size produces a majority of wines it
sells from vineyards it owns or leases.
Leverage Low Cost Advantage. Expansion of its vineyards and winery should
enable the Company to extend existing cost advantages over an increasing revenue
base. According to the 1996 Annual Wine Survey of Deloitte & Touche for the 1995
Vintage Year, the average cost per case for California wineries within the
Company's size category was $36.03. The Company's average production cost per
case for the same period was $22.80, or approximately one-third less than its
peer group. The Company's vineyards and winery are located in the Dunnigan Hills
region, where land and development costs are considerably lower than in the
nearby Napa and Sonoma Counties. The Company estimates that the cost of
acquiring undeveloped land for vineyards in the Dunnigan Hills area ranges
between $1,000 to $2,500 per acre, whereas according to the December 1994 MKF
Vineyard Cost Study, the price of undeveloped land for vineyards in Napa and
Sonoma Counties averages between $25,000 and $40,000 per acre. The Company
believes that vineyard development costs are also considerably lower on average
in the Dunnigan Hills than in Napa and Sonoma Counties.
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<PAGE> 25
Increase Brand Awareness. The Company believes that its increased ability
to deliver higher volumes of estate bottled wines should further strengthen its
existing distributor relationships and heighten the public visibility of its
wines. To further this goal, the Company intends to release more higher margin
wines positioned in the super premium segment. The Company's EXP series and its
Dunnigan Hills Barrel Cuvee Chardonnay and Cabernet Sauvignon are currently
positioned within the super premium category, and the Company has planned the
future release of a special Chardonnay and Zinfandel under the Toasted Head
label within the super premium segment. The Company believes that greater
recognition for its super premium wines will also benefit sales of its popular
premium wines.
The Company believes that certain industry trends benefit the Company's
current operations and expansion strategy. According to the 1995 edition to
WINEDATA published by Gomberg, Fredrikson & Associates, sales of premium wines
have increased substantially during the past five years and super premium wines
(those which retail from $7.00 to $14.00) have comprised the fastest growing
segment of the California premium wine market during this period. The Company
believes that its planned expansion should improve margins by reducing the use
of sourced grapes and bulk wine, as well as enhance the quality and consistency
of its wines and increase overall wine sales and the percentage of sales within
the higher margin super premium segment.
INDUSTRY
Table wines which retail for more than $3.00 per 750 ml (milliliter) bottle
are generally referred to as "premium wines." There are three segments within
the premium wine market. In this market "popular premium" wines retail between
$3.00 and $7.00, "super premium" wines retail between $7.00 and $14.00 and
"ultra premium" wines retail over $14.00.
Premium wine shipments and total revenues from premium wines have increased
steadily in the last 15 years. The December, 1995 edition of WINEDATA states
that total sales of California premium wines have increased an average of 15.2%
per year during this period. Sales of super premium wines comprised the fastest
growing segment of the premium wine market during the last five years, having
increased by an average of 11.5% per year during this period. The Company
believes that the shift in consumer preference to premium wines, and more
recently to super premium wines, is due to a number of factors, including
greater consumer education regarding higher quality wines.
The following chart shows revenues for California table wines and
California premium wines since 1980, as reported by Gomberg, Fredrikson &
Associates:
REVENUES IN MILLIONS OF DOLLARS
LOGO
Approximately 72% of all wines sold in the United States are produced in
California. As a consequence, the quality and quantity of California's grape
harvest can have a strong impact upon the amount of California wine available
and the prices charged for wine throughout the United States. The 1994 and 1995
harvests in many regions of California (although not the Dunnigan Hills) were
considerably reduced by unfavorable growing conditions during those years. This
reduced the amount of grapes available for purchase by wineries and increased
the price of bulk wines throughout the state. The shortage of bulk wines and a
recent increase in
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<PAGE> 26
demand for these wines has led to an increase in prices of bulk wines from the
Napa, Sonoma and Mendocino regions by approximately 20% to 30% from 1994 to
1995, depending on the variety, with some wines increasing in price by far more
than these amounts. This in turn contributed to an increase in the prices
generally charged for wine at the wholesale and retail levels during those
years.
Prices in the wine industry have historically varied considerably and it is
not possible to predict with certainty the prices and level of demand for wine
in the future. However, based on the steadily increase in demand for wines in
the premium and super premium categories and shortages of grapes and wine
available due to a variety of factors, the Company believes that the demand for
and price of premium and super premium wines are likely to increase in the near
future.
PRODUCTS
R.H. Phillips has developed a diverse line of popular premium and super
premium varietal table wines. The Company markets its products under primary as
well as secondary labels. Primary label products feature the "R.H. Phillips"
name and are divided into three brand groups distinguished by type of wine and
price structure. The two secondary label wines have a lower cost base and are
intended to compete aggressively with other lower-priced premium wines.
The EXP series is comprised of two Rhone varietals, Syrah and Viognier,
which are traditional to France's Southern Rhone Valley. The Company's 1992
Viognier was given a rating of 96 by Wine & Spirits, one of the highest ratings
given to a wine by the publication in 1995. The Company's Vigonier was the only
wine rated both as a "Best Wine" by varietal and a "Best Buy" among all wines
rated in the Wine and Spirits 1995 Annual Buying Guide. The EXP series wines are
sold in 750 ml bottles, and retail for about $12 each. In January 1997, the
Company anticipates releasing a special estate bottled Chardonnay to be priced
in the super premium category, the first wine in its planned Toasted Head
series. The Company also intends to introduce a similarly priced Zinfandel in
this series in late 1997.
The Company's Dunnigan Hills series, which represented 83% of 1995 sales,
consists of Barrel Cuvee Chardonnay (36% of 1995 sales) and Cabernet Sauvignon,
and the Night Harvest line of varietal blends. The Company is a recognized
quality leader for Chardonnay and Cabernet Sauvignon priced under $10 per bottle
and receives significant positive recognition from wine industry publications
such as Wine Spectator and Wine & Spirits as well as wine critics such as Robert
Parker. The lower viticultural cost associated with the Dunnigan Hills has made
it possible for R.H. Phillips to improve wine quality by applying a portion of
production savings to barrel fermentation and barrel aging. The Company believes
that these processes give the wines a quality edge within their price range. The
Chardonnay and Cabernet Sauvignon are bottled in 750 ml and 1.5 liter bottles.
Both wines generally are sold on a retail basis in the upper premium or lower
super-premium price range at approximately $8 and $14 per bottle, respectively.
Within the Dunnigan Hills series, the Night Harvest line consists of wines
which are named for the innovative night harvesting methods employed by the
Company to retain grape freshness. These wines consist of Sauvignon Blanc,
Mistura and White Zinfandel. The method of night harvesting allows the
processing of cooler fruit, producing maximum flavor from the grapes without
extracting bitterness which emerges at higher processing temperatures. Wines in
this group are blends of various varietals, designed to gain maximum flavor from
the blending process. Night Harvest wines are bottled in 750 ml and 1.5 liter
bottles. Blends in this group, depending on bottle size, retail for about $6 to
$10 per bottle, respectively.
The Diamond G Ranch and Chateau St. Nicholas labels are two secondary label
wines which do not bear the R.H. Phillips name on the labels. These wines are
not barrel aged, allowing the wines to be produced and sold at a lower price.
Diamond G Chardonnay was introduced in 1993, and Diamond G Cabernet Sauvignon
was added in 1995. Due to its lower retail cost, Diamond G wine is able to
compete with inexpensive varietals from much larger producers such as Glen Ellen
and Sutter Home. Diamond G is produced in 750 ml and 1.5 liter bottles, and
retails for about $5 or $10 per bottle, respectively. Chateau St. Nicholas is a
seasonal label, offered both as a blended Chardonnay and as a blended White
Zinfandel, in a 750 ml bottle or a gift pack consisting of two 500 ml bottles.
Chateau St. Nicholas retails for about $6 for the 750 ml bottles, and $12 for
the gift pack.
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The Company processes some private label wine. In 1995, private label sales
represented 7% of total sales. The Company intends to reduce the sale of private
label wines to approximately 5% and to replace its existing lower margin private
label business with specialized private label programs, which carry higher
contribution margins.
The following chart sets forth the percentage of the Company's total
revenues represented by each variety of wine sold in 1995:
R.H. PHILLIPS -- SALES BY VARIETAL
PERCENTAGE OF 1995 CASE VOLUME
<TABLE>
<S> <C> <C> <C> <C>
CHARDONNAY 39.7
OTHERS 9.1
RHONE VARIETALS 10.0
CABERNET 10.9
WHITE ZINFANDEL 12.7
SAUVIGNON BLANC 17.6
</TABLE>
The Company believes that its sales of super premium wines as a percentage
of total sales are likely to increase as a result of greater emphasis on its EXP
series and the planned introduction of the Company's Toasted Head series. The
Company is reducing production of Chateau St. Nicholas to prevent competition
with R.H. Phillips branded wines during the holidays, and to focus distributor
efforts on building R.H. Phillips branded wines. Sales of Chateau St. Nicholas,
which peaked at a high of 68,000 cases in 1991, declined to approximately 32,000
cases in 1995 and will likely continue to decline as a percentage of total
sales.
SOURCES OF SUPPLY
To the Company's knowledge, no other California winery of comparable size
produces a majority of wines it sells from vineyards it owns or leases. Most
wineries rely on contracts with individual growers to provide a substantial
portion of their grapes and/or supplement supplies with purchases of grapes and
bulk wine on the so-called "spot market." In 1995, the Company's vineyards
provided approximately 47% of its grape requirements and in addition, the
Company purchased approximately 1,000 tons of grapes, or 14% of its grape
requirements, from Company farmed and managed vineyards owned by C. Mondavi &
Sons d/b/a Charles Krug. The Company has entered into an agreement with Charles
Krug to purchase 700-800 tons of grapes in 1996 and approximately 700 tons of
grapes in 1997 grown on this property. As a part of its expansion program, the
Company intends to increase the percentage of its grape requirements provided by
its own vineyards to approximately 80% in 1998 and 90% in 2000.
The Company satisfies the remainder of its production requirements from
purchases of grapes from outside growers and bulk wines on the spot market. The
supply and price of available grapes have generally been subject to considerable
fluctuations. One factor which has reduced the available supply of grapes is
Phylloxera damage, which has reduced grape harvests in Napa and Sonoma Counties.
See "Business -- Agricultural Hazards." Another factor during 1994 and 1995 was
the unusually wet and cold winter and spring, which further reduced grape
harvests in the Napa and Sonoma grape growing areas. The price which Ernest &
Julio Gallo, the largest purchaser of bulk wine and grapes, pays for these
products has a considerable impact upon the average price of bulk wines and
grapes in the industry.
The Company is engaged in a program of substantially reducing its reliance
on outside sources of grapes and bulk wines by expanding the size of its
vineyards. The Company currently owns 2,696 acres of land,
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including 900 acres which it purchased in June, 1996. Once planted, grape vines
generally require between three to four years to reach full productive capacity,
depending on the variety. The following table sets forth the number of acres of
land the Company owned, the total acreage of the Company's vineyards and the
number of acres producing grapes as of the close of the Company's last two
fiscal years as well as the number of acres the Company anticipates owning,
having planted and reaching production in the years ending December 31, 1996 and
December 31, 1997. The information set forth below for the years ending December
31, 1996 and 1997 are forward-looking statements and are not necessarily
indicative of the number of acres the Company will actually own, have planted
and have in production as of those dates.
<TABLE>
<CAPTION>
ACREAGE
-------------------------------
YEAR ENDED OWNED PLANTED PRODUCING
----------------------------------------------- ------ ------- ---------
<S> <C> <C> <C>
December 31, 1994.............................. 1,623 714 543
December 31, 1995.............................. 1,796 846 645
December 31, 1996.............................. 2,696 1,293 711
December 31, 1997.............................. 2,696 1,771 846
</TABLE>
The Company's vineyards and winery are located in the Dunnigan Hills region
of California, located approximately 30 miles east of Napa County and
approximately 45 miles north-west of Sacramento. The Company's administrative
headquarters is located at its winery.
The Company has granted to Metropolitan a deed of trust on its real
property and a security interest in certain equipment and other assets. The deed
of trust and the security interest secures the loan the Company received from
Metropolitan, the principal amount of which is $7,500,000. The Company maintains
insurance policies with respect to its principal properties which, in
management's opinion, are adequate in view of the value of the property and the
nature of the Company's business.
In addition to grapes and bulk wines, the Company purchases other supplies
from outside parties to conduct its business. Supplies include bottles, corks,
fertilizers and pesticides, labels and packaging supplies. Management believes
it has strong relationships with all of its major vendors. The Company believes
it is not dependent on any single supplier and would be able to find substitute
suppliers if necessary.
PRODUCTION
The Company's winery is located immediately adjacent to its vineyards.
Present storage capacity in the Company's warehouse is 55,000 cases of wine,
which is fully utilized.
Prior to initiating its winery expansion program in 1995, the Company's
tank capacity for fermentation was only 123,000 gallons and its barrel storage
facilities has a capacity of only 500 barrels. As a consequence, 90% of the
Company's fermentation requirements were performed at other wineries and most of
the Company's oak barrels were stored at other wineries due to lack of space at
the Company's facilities. Beginning in 1995, the Company began to implement its
program of substantially increasing the size of its winemaking facilities. The
first phase of the winery expansion was completed in September, 1995, and
included two new barrel buildings, crush and tank pads, 60 wine tanks, and other
equipment. This increased the Company's fermentation and storage tank capacity
to 1,000,000 gallons and its barrel capacity to 5,000 barrels.
The Company began the second phase of the winery expansion in April, 1996,
and plans to complete this phase prior to the end of 1997. The current plans for
this phase include the addition of a new barrel building and tank pads. The
Company currently plans to purchase additional stainless steel wine tanks,
fermentation tanks, a bottle labeler, grape press, grape crusher, must pump,
barrels, and other equipment. Following completion of the second phase, the
Company anticipates that its fermentation and storage tank capacity will
increase to approximately 1,700,000 gallons and its barrel storage capacity to
7,000 barrels. As a result of this expansion, the Company believes that it will
eliminate its need to rely on outside sources for fermentation and storage of
wine for the foreseeable future.
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<PAGE> 29
DISTRIBUTION
The Company's sales strategy has focused on developing, retaining and
expanding a large, nationwide distributor network supported by in-house sales
personnel. The Company's wines are distributed nationwide by a network of
approximately 90 independent wholesale distributors. The Company employs five
direct sales representatives and seven independent wine brokers who work with
the distributors. Each sales representative and broker has the responsibility of
managing the wholesale network established in his or her region. Each
distributor represents a large number of products, so the Company representative
or broker is an important link between the winery and the wholesaler,
facilitating communication, dealing with special promotions, and inspecting
sales performance.
There has been substantial consolidation among alcohol distributors during
the last several years. Virtually all of the Company's distributors also sell
other brands of wine and other alcoholic beverages. As a result, the Company
believes that a strong distribution network which is able and willing to sell
the Company's wines is especially important for the Company.
The three largest distributors of the Company's wines are Wine Warehouse,
Lauber Imports and M.S. Walker. In 1995, Wine Warehouse, which distributes the
Company's wines in California, accounted for approximately 13% of total sales.
Lauber Imports and M.S. Walker, both of which distribute wines in the
northeastern United States, accounted for approximately 12% and 11% of total
sales, respectively, during that year.
The Company's standard sales terms provide that payments for wines
purchased by distributors are due 30 to 60 days after shipment at prices set
forth on the Company's price lists. The Company does not have contracts with any
of its distributors which obligate them to purchase any specified amount of wine
over any defined period. It is therefore possible for a distributor, including
one of the Company's major distributors, to cease purchases of the Company's
wines at any time. See "Risk Factors -- Dependence on Distributors and Sales
Representatives."
SALES AND MARKETING
Being a low-cost producer of quality varietal wines is a key element of the
Company's business and sales strategy. The Company targets a majority of its
wines to retail at or below $8 per bottle. Many winemakers selling wine in
California of comparable quality have positioned their wines at higher price
points. The Company believes that wines at these higher price points are
typically the first to yield to competitive price pressures.
The Company's wines are sold throughout the United States and in several
foreign countries. The Northeastern United States accounted for approximately
38% of total sales, California accounted for 13% of total sales and the Northern
Midwest accounted for approximately 10% of total sales in 1995. Approximately 2%
of total revenue in 1995 was generated by sales to foreign countries, consisting
primarily of Canada, the United Kingdom and the Bahamas.
The Company has added two in-house representatives to date this year and
intends to hire additional marketing personnel, including two more in-house
representatives and a Public Relations Director.
RESEARCH AND DEVELOPMENT
The Company maintains a three-acre experimental vineyard where new grape
varieties are planted and small-scale viticultural experiments are conducted.
Variables such as the amount of vine irrigation, crop level and different
approaches to canopy management are tested on the plot. Promising grape
varieties and viticultural practices are then further tested in the main
vineyard. Research is currently being conducted in the following areas:
Reduced Irrigation. Some Rhone varietals are being grown using reduced
irrigation. Reducing the amount of water shrinks the fruit cluster and berry
size, and, through this process, the Company hopes to improve wine color, flavor
and richness.
Trellising. The Company is investigating several ways to increase the
exposure of fruit to the sun in order to improve quality, character and yield.
25
<PAGE> 30
pH Manipulation. In the warm climate of the Dunnigan Hills, high pH can
cause shifts in fruit flavor and reduce the shelf life of the finished wine.
Experiments with soil potassium levels, irrigation amounts and maturity levels
at harvest are being conducted.
Organic Viticulture. Experiments are underway to actively promote
elimination of both insecticides and herbicides from the vineyards.
Winemaking. A number of winemaking experiments are carried out each year.
Wine variables are changed and the results are evaluated through blind tastings
and statistical analyses. Yeast strains and fermentation temperatures are
examples of two winemaking variables that are tested.
The Company actively exchanges viticultural and winemaking information with
other firms in the industry and maintains a close working relationship with the
faculty of the Department of Enology and Viticulture at the University of
California at Davis. Staff members of the Company have visited a number of
wineries in Europe and Australia and personnel from French, Australian and South
African wineries and vineyards have toured the Company's facilities. These
visits have resulted in a valuable exchange of technical information.
COMPETITION
The California table wine industry in 1995 had approximately $3.8 billion
in sales according to the December, 1995 edition of WINEDATA. Of the 34 states
that produce wine, California wineries dominate the industry, producing
approximately 72% of the total wine sold in the United States. As of mid-1993,
California had about 700 wineries concentrated in the major viticultural regions
of the state. The three largest wineries are Ernest & Julio Gallo, The Wine
Group, and Canandaigua Wine Company. The shipment volume of these wineries
accounted for approximately 60% of total wine sales in California.
The wine industry is extremely competitive based on quality, price, brand
recognition and distribution. The Company's wines in the popular premium and
super premium price categories compete with numerous other premium and super
premium wines produced in the United States, Europe, South America, Australia
and New Zealand. To a lesser extent, the Company's wines also compete with
generic wines and with other alcoholic and nonalcoholic beverages for consumer
dollars, as well as for shelf space in retail stores and for marketing attention
by the Company's independent distributors, all of which also carry other wine
and beverage brands. In addition, certain large wineries which have historically
focused principally on other segments of the wine market have entered, or can be
expected to enter, the market for premium wines, greatly increasing competition
in the market segment served by the Company. Many of the Company's competitors
have greater production, financial, marketing and distribution resources than
does the Company. Many of these competitors also have considerably greater brand
name recognition than does the Company. There is significant concentration in
the wine industry in the United States and further consolidation could increase
the market dominance of the largest wineries.
TRADEMARKS
The Company applied in July, 1995 to the United States Patent and Trademark
Office (the "PTO") to register its R.H. Phillips, EXP, Night Harvest and Chateau
St. Nicholas trademarks and applied to register its Mistura trademark with the
PTO in June, 1996. As of this date the PTO has not issued registrations for
these trademarks. The Company has adopted a program to establish and protect its
rights in its trademarks and trade names, which consists in part of reviewing
potential trademarks and periodically conducting searches for potentially
infringing marks.
EMPLOYEES
The Company has approximately 85 full-time employees as of May 31, 1996. In
addition to the full-time positions, the Company employs part-time labor for
vineyard development, pruning, harvest and bottling
26
<PAGE> 31
during peak seasons. None of the Company's employees is covered by a collective
bargaining agreement and the Company is not aware of any labor disputes with its
employees.
AGRICULTURAL HAZARDS
Growing grapes for wine production is heavily dependent upon favorable
weather conditions. Drought, excessive rain or excessive heat or cold,
especially at or near the time for harvest, can adversely affect the quality and
quantity of grapes for wine production. The Company to date has not generally
suffered significant problems with its grape production due to weather
conditions. If poor weather conditions were to adversely affect production, the
Company would need to increase its outside purchases of grapes and bulk wines,
which might in turn increase costs of production.
Over the past several years, many California vineyards have been severely
damaged by Phylloxera, an aphid-sized root louse. The pest lives and propagates
in the soil and feeds on the roots of vines. Phylloxera is not harmful to
humans, but can affect grape quality and cause a progressive decline in grape
production until eventual vine death. Chemical insecticides can slow the
progress of vine deterioration, but once a vine is infested it is not possible
to eradicate Phylloxera. According to the 1994 George M. Schofield Company Grape
Intelligence report, harvests in Napa and Sonoma Counties were reduced by 14%
and 7%, respectively, in 1994. Additionally, substantial infestation is
beginning to appear in the other coastal vineyard areas of Monterey, Mendocino
and Lake counties. According to this report, production in 1996 of Napa
vineyards is expected to be reduced by up to 28% due to Phylloxera infestation
and Sonoma production is expected to be reduced by 19%.
Due to the warmer climate and careful farming practices, the infestation of
the R.H. Phillips vineyards was delayed. However, during the last year the
Company removed 60 acres of vineyards showing the greatest evidence of decline
from Phylloxera infestation. Of the approximately 1,300 acres of vineyards which
the Company has planted or will have planted by the end of 1996, approximately
369 acres have rootstock known to be susceptible to Phylloxera. The Company
believes that of these 369 acres, portions of up to 230 acres have the presence
of Phylloxera. The Company is using a variety of methods to combat Phylloxera
infestation, including chemical treatments and use of grafting techniques. The
Company is applying grafting techniques by which those vines which are less
damaged or are not yet infested are grafted onto resistant rootstock. More
damaged vines, as well as those Phylloxera-susceptible vines bearing grape
varieties which the Company plans to deemphasize, are being replaced at a rate
of approximately 30 acres per year. All replacement vines will have rootstock
which is believed in the industry to be resistant to Phylloxera.
In addition to Phylloxera, grape vines are subject to a variety of other
damaging diseases which have afflicted California vineyards. The Company is
taking steps to reduce the likelihood of infestation. These include use of
chemical treatments and organic methods, such as use of natural insect enemies
of the pests, to control them. The Company also uses a variety of different
rootstocks for its vines, which the Company believes could reduce the likelihood
that a single disease or pest could adversely affect a large portion of the
vineyards.
WATER SUPPLY
The Company drip irrigates its vineyards from wells located on its
property. These wells have proven to be a reliable source of water and the
Company believes that these sources of water will remain available for the
foreseeable future. However, there can be no assurance that sufficient water
will be available from these wells indefinitely. The Company is experimenting
with reduced irrigation farming techniques for some of its Rhone varietal grapes
which are native to areas with relatively little rainfall. If successful, this
could reduce the Company's dependence on irrigation.
REGULATION
The United States wine industry is subject to substantial federal, state
and local regulation. The Bureau of Alcohol, Tobacco and Firearms ("BATF") is
the federal agency primarily responsible for regulating the production and sale
of wine. The BATF has promulgated the numerous wine industry-related
regulations,
27
<PAGE> 32
including the licensing of wine producers, limitations on chemical additives in
wines, advertising standards, labeling requirements and numerous other aspects
of wine production and sales.
The BATF also collects federal excise taxes on wine. The amount of federal
excise tax is based on the total volume of wine shipped and the alcohol content
of that wine. The tax on wine with an alcohol content in excess of 14% is
greater than the tax assessed on wine with a lesser alcohol percentage. The
current federal excise tax on wines produced by the Company, all of which
contain less than 14% alcohol, is $1.07 per gallon for a total of $2.55 per
case. The California state excise tax is $0.20 per gallon of wine sold into
California. Some other states also collect excise taxes from out-of-state
wineries based on the volume of their in-state sales.
State governments also regulate the production and shipment of wine.
Although the laws and regulatory requirements of the states differ, most states
require that wineries be licensed by the appropriate state authorities before
they are allowed to ship wine into the state. The Company has obtained licenses
from those states in which it believes it is necessary to be licensed. Most
states also require prior state approval of wine labels and set other standards
for the manufacture and sale of wine. Wineries are subject to periodic
inspections and audits by the BATF and the state alcohol regulatory authorities.
In California, the wine regulatory agency is the Department of Alcoholic
Beverage Control.
In addition to alcohol-related governmental regulations, grape growers,
wine producers and wine shippers are subject to a broad range of other
regulatory requirements. Local zoning regulations are one example. Vineyards and
wineries are subject to regulations governing the use, storage and disposition
of pesticides, fuels and lubricants and other chemicals. The Company believes it
is in substantial compliance with all material applicable laws and regulations
relating to its business. The Company is unaware of any environmental problems
on or near the vineyard and winery which could have a materially adverse impact
on its business.
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<PAGE> 33
MANAGEMENT
The directors, executive officers and other key personnel, their positions
and ages are as follows:
<TABLE>
<CAPTION>
NAME POSITION AGE
- ------------------------------------------------------------------------ ---
<S> <C> <C>
John E. Giguiere Co-President, Co-Chief Executive Officer and
Chairman of the Board 44
Karl E. Giguiere Co-President, Co-Chief Executive Officer and
Vice-Chairman of the Board 50
Lane C. Giguiere Vice President Operations and Director 42
Robert T. Moore Vice President Finance, Chief Financial Officer
and Secretary 50
Richard A. Pierce Controller and Chief Accounting Officer 44
Barry L. Bergman Winemaker 38
Steven L. Crosta Sales Manager 46
R. Ken Coit Director 52
Victor L. Motto Director 56
</TABLE>
JOHN E. GIGUIERE. Raised on the Giguiere family farm, John Giguiere has
spent his entire professional life in agribusiness. Together with his brother
Karl, John Giguiere founded R.H. Phillips in 1981. John Giguiere is the
President of The R.H. Phillips Vineyard, Inc., the second largest shareholder of
the Company ("R.H. Phillips Vineyard") and has managed the sales and marketing
aspects of R.H. Phillips since it was founded. Mr. Giguiere attended Willamette
University and California State University at San Jose. Mr. Giguiere resides on
the R.H. Phillips property near Esparto, California.
KARL E. GIGUIERE. Karl Giguiere was also raised on the Giguiere family
farm. Karl Giguiere has managed the farming and vineyard operations of R.H.
Phillips since it was founded. Karl Giguiere is the President of RHP Vineyards,
Inc., the largest shareholder of the Company ("RHP Vineyards"). Mr. Giguiere
graduated from California State Polytechnic University with a B.A. in
Agribusiness.
LANE C. GIGUIERE. Ms. Giguiere has been Sales Administration Manager of
R.H. Phillips since 1983. Ms. Giguiere attended California State University at
San Jose and California State University at Chico. Ms. Giguiere resides on the
R.H. Phillips property with John Giguiere.
ROBERT T. MOORE. Mr. Moore has served as the Chief Financial Officer of
R.H. Phillips since 1991. Prior to that time, Mr. Moore served as Treasurer and
Chief Financial Officer of Big O Tire Dealers of N.Cal/N.Nev. Mr. Moore received
a B.B.A. in Accounting and an M.B.A. in Finance from the University of Michigan.
He is a Certified Management Accountant and a Certified Financial Planner.
RICHARD A. PIERCE. Mr. Pierce is the Controller and Chief Accounting
Officer of the Company. Mr. Pierce joined R.H. Phillips in 1991 as Controller.
From 1989 through 1991 Mr. Pierce owned and operated his own computer consulting
company. Mr. Pierce received a B.S. in Accounting and Computer Science at
California State University at Chico. Mr. Pierce is a Certified Public
Accountant, Certified Management Accountant, Certified Systems Professional and
a Certified Computing Professional.
BARRY L. BERGMAN. Mr. Bergman is the Company's Winemaker. He was promoted
to that position in July, 1994 after serving as assistant winemaker since March,
1989. Mr. Bergman is responsible for all winery production activities, including
final blending decisions and bulk wine purchases. He also oversees vineyard
sampling prior to and during harvest. He is a graduate of the University of
California at Davis, where he received a B.S. in Fermentation Science.
STEVEN L. CROSTA. Mr. Crosta has served as the Company's National Sales
Manager since August, 1994. Mr. Crosta was the South Bay Regional Manager of
Wine Warehouse, a major alcohol distributor, from 1992 until he joined the
Company. Mr. Crosta was National Sales Manager of Flora Springs Wine Company of
St. Helena, California from 1991 through 1992, and from 1989 through 1991 was
Northern California Sales Manager of Flora Springs and Dreyfus Ashby & Co. Mr.
Crosta received a B.A. from the University of California at Davis.
29
<PAGE> 34
R. KEN COIT. Mr. Coit was elected a director of the Company soon after its
incorporation and served on the limited partners' Advisory Committee of R.H.
Phillips Partners from 1989 through 1994. Mr. Coit is the owner of Coit
Financial Group, a firm which specializes in real estate investments. Mr. Coit
is also a licensed broker-dealer affiliated with Sequoia Equity Securities
Corporation and American Investors Company. Mr. Coit received an M.B.A. from
Pepperdine University and a B.S. in Pharmacy from the University of Arizona.
VICTOR L. MOTTO. Mr. Motto was elected to the Board of Directors in June,
1996. Mr. Motto is a founding partner of Motto, Kryla & Fisher, an accounting
and business consulting firm devoted exclusively to the wine industry. Mr. Motto
is also partner of MKF Systems, a wine industry computer systems business. Mr.
Motto serves as a director or financial advisor to several wine industry trade
groups, teaches university courses and is a frequent lecturer on wine industry
issues. Mr. Motto is also a frequent contributor to Wine Business Update, a
quarterly newsletter published by Motto, Kryla and Fisher, as well as to various
other wine industry publications. Mr. Motto is a Certified Public Accountant.
Mr. Motto received a B.A. in Business from the University of South Florida.
Directors are elected at the annual meeting of the shareholders. Directors
serve terms of one year and until their successors have been duly elected and
qualified. Officers are appointed by, and serve at the discretion of, the Board
of Directors.
John and Karl Giguiere are brothers. John and Lane Giguiere are husband and
wife. There are no other familial relationships between members of the Board of
Directors or the executive officers of the Company.
BOARD COMMITTEES
The Board of Directors has a Stock Option Committee, an Audit Committee and
a Compensation Committee. The Stock Option Committee, which consists of Messrs.
Coit and Motto, administers the Company's 1995 Stock Option Plan. The Audit
Committee, which consists of Messrs. Coit, Motto and John Giguiere, reviews the
financial results of the Company, the scope of the annual audit and other
services of the Company's outside auditors. The Compensation Committee, which
consists of Messrs. Coit, Motto and John Giguiere, makes recommendations
concerning salaries and incentive compensation for officers and employees.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Articles of Incorporation limit the liability of directors
for monetary damages to the fullest extent allowed by California law. The
Articles of Incorporation also allow the Company to indemnify its agents to the
maximum extent permitted by law. The Company's Bylaws require that all directors
be indemnified to the maximum extent allowed by law. In cases where
indemnification is required, the Company is required to advance costs of
attorneys' fees and other expenses as well as costs of litigation and settlement
to the person indemnified.
To the extent that indemnification for liability arising under the
Securities Act may be permitted to directors or officers, the Company has been
advised that, in the opinion of the Commission, such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
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<PAGE> 35
EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following is a summary of all compensation paid for services rendered
to the Company during 1993, 1994 and 1995 by John and Karl Giguiere, the
Company's current Co-Chief Executive Officers of the Company (the "Named
Executive Officers"). No employee or officer received a salary and bonus in
excess of $100,000 in 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
-----------------------
ANNUAL COMPENSATION SECURITIES
------------------------------------------ RESTRICTED UNDERLYING
NAME AND PRINCIPAL OTHER ANNUAL STOCK OPTIONS
POSITION YEAR SALARY($) BONUS($) COMPENSATION AWARDS(#) (#)
- -------------------------------------- ---- --------- -------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
John Giguiere, Co-Chief 1995 $80,625 $ 662 $ 20,000(1) 0 54,480
Executive Officer 1994 87,394 16,258 20,000(1) 0 0
1993 75,000 1,345 20,000(1) 0 0
Karl Giguiere, Co-Chief 1995 80,625 662 0 0 81,720
Executive Officer 1994 87,394 16,258 0 0 0
1993 75,000 1,345 0 0 0
</TABLE>
- ---------------
(1) The amounts listed under "Other Compensation" consist of a $500 per month
automobile allowance for John Giguiere and the fair rental value of the farm
house located at the Company's winery where John and Lane Giguiere reside on
a rent free basis. The Company estimates that the fair rental value of the
housing is approximately $14,000 per year.
The following table contains information concerning the grant of stock
options made during 1995 to each Named Executive Officer.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING % OF TOTAL
OPTIONS OPTIONS GRANTED
GRANTED TO EMPLOYEES IN EXERCISE OR BASE
NAME (#) FISCAL YEAR PRICE ($/SH) EXPIRATION DATE
- ------------------------------------ ---------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
John Giguiere(1).................... 54,480 12.12% $4.125 07/11/05
Karl Giguiere(1).................... 81,720 18.18% $4.125 07/11/05
</TABLE>
- ---------------
(1) The stock options were granted on July 11, 1995. The options vest annually
at a rate of 25% per year, calculated beginning as of the date of grant, and
will be exercisable as to the full number of shares granted to each
recipient on July 11, 1999, provided that the recipient remains employed by
the Company during this period.
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<PAGE> 36
The following table provides information with respect to the Named
Executive Officers concerning unexercised options held as of December 31, 1995.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS
FY-END AT FY-END (1)
SHARES ------------- -------------
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED UNEXERCISABLE UNEXERCISABLE
- ------------------------------------------------- ------------ -------- ------------- -------------
<S> <C> <C> <C> <C>
John Giguiere.................................... -- -- 0/54,480 --(2)
Karl Giguiere.................................... -- -- 0/81,720 --(2)
</TABLE>
- ---------------
(1) Based upon the closing price of the Common Stock on December 31, 1995, as
reported by the Nasdaq SmallCap Market ($3.75 per share).
(2) The closing price of the Common Stock on December 31, 1995 was below the
exercise price per share.
COMPENSATION OF DIRECTORS
Mr. Motto is to receive a retainer of $5,000 for agreeing to serve on the
Board of Directors, plus a fee of $1,000 per Board Meeting he attends. He is
also to receive options to purchase a maximum of 20,000 shares of Common Stock
at a price equal to the fair market value of the Company's Common Stock, subject
to approval of a final stock option agreement by Mr. Motto and the Board of
Directors. No other members of the Board of Directors are compensated for
attending meetings of the Board of Directors or Board Committees. The Board of
Directors may institute a policy of compensating Directors for attending such
meetings in the future.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the number of
shares of Common Stock beneficially owned as of June 20, 1996 by: (i) each
person or entity known to the Company to own beneficially more than 5% of the
outstanding shares of Common Stock; (ii) each of the Company's Named Executive
Officers; (iii) each director; and (iv) all directors and executive officers of
the Company as a group. The only class of securities outstanding with a present
right to vote in elections for the Board of Directors is the Common Stock.
32
<PAGE> 37
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF OUTSTANDING SHARES
BENEFICIALLY ------------------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED BEFORE OFFERING (1) AFTER OFFERING (2)
- ---------------------------------------------- ------------ ------------------- ------------------
<S> <C> <C> <C>
John E. Giguiere 1,618,324 34.8% 27.2%
26836 County Road 12A
Esparto, CA 95627 (3)(4)....................
Karl E. Giguiere 1,600,306 34.4 26.9
26836 County Road 12A
Esparto, CA 95627 (3)(5)....................
Lane C. Giguiere 1,615,009 34.7 27.1
26836 County Road 12A
Esparto, CA 95627 (3)(6)....................
R. Ken Coit 300,322 6.5 5.1
1655 N. Main Street, Suite 270
Walnut Creek, CA 94596 (7)..................
David L. Gemmer 256,336 5.5 4.3
1655 N. Main Street, Suite 365
Walnut Creek, CA 94596 (8)..................
Victor L. Motto............................... 0 0 0
All Executive Officers and Directors(9)....... 1,984,322 41.4 32.5
========= ===== =====
</TABLE>
- ---------------
(1) This table is based upon information supplied by officers, directors and
principal shareholders and Schedules 13D and 13G filed with the Commission.
Unless otherwise indicated in the footnotes to this table and subject to
community property laws where applicable, the Company believes that each of
the shareholders named in this table has sole voting and investment power
with respect to the shares indicated as beneficially owned. Percentages are
based on 4,638,435 shares of Common Stock outstanding on June 20, 1996,
adjusted as required by the rules of the Commission.
(2) Assumes the issuance of 1,300,000 shares of Common Stock in the offering.
Applicable percentages are based on 5,938,435 shares outstanding on June
20, 1996, adjusted as required by the rules of the Commission.
(3) Includes 865,773 shares of Common Stock owned by RHP Vineyards and 714,103
shares of Common Stock owned by R.H. Phillips Vineyard. John and Karl
Giguiere own a majority of the outstanding stock of each corporation,
constitute two of the three members of the Board of Directors, and are the
Secretary and President, respectively, of each corporation. Because they
share majority ownership of the stock of those corporations and constitute
a majority of those corporation's directors, John and Karl Giguiere may be
deemed beneficial owners of the shares held by those two corporations.
(4) Also includes 16,552 shares of Common Stock held as joint tenants with Lane
Giguiere, a warrant, which is presently exercisable, to purchase 8,276
shares of Common Stock which he holds as a joint tenant with Lane Giguiere,
and 13,620 shares of Common Stock subject to that portion of a stock option
which is exercisable within 60 days of the date of this Prospectus.
(5) Also includes 20,430 shares subject to that portion of a stock option which
is exercisable within 60 days of the date of this Prospectus.
(6) Also includes 10,215 shares subject to that portion of a stock option
exercisable within 60 days of the date of this Prospectus.
(7) Mr. Coit holds 252,527 shares as a joint tenant with Donna Coit, his wife,
and 47,688 shares are held individually by Mr. Coit.
(8) Mr. Gemmer's shares are held in joint tenancy with Shirley Gemmer, his
wife.
(9) Includes shares purchasable upon exercise of stock options within 60 days
of the date of this Prospectus.
The Company granted warrants to Hancock to purchase up to 1,346,788 shares
of Common Stock. The warrant is exercisable beginning on March 27, 1997. If this
warrant were presently exercisable, the shares purchasable thereunder would
constitute 22.5% of the outstanding Common Stock as of June 20, 1996. See
"Description of Capital Stock."
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<PAGE> 38
CERTAIN RELATIONSHIPS
R.H. Phillips Partners made a cash distribution of $220,000 to The R.H.
Phillips Vineyard and RHP Vineyards in April, 1994, to enable those companies to
pay a portion of their income tax incurred as a result of taxable income
generated by R.H. Phillips Partners for the years 1990 through 1993. John and
Karl Giguiere are majority owners and executive officers of RHP Vineyards and
The R.H. Phillips Vineyard.
John and Lane Giguiere held a promissory note in the principal amount of
$57,000 payable by the Company. The note was granted to reimburse them for
expenses they incurred in repairing and renovating the farm house located on the
Company's property. The Company repaid the note on March 31, 1995.
The Company is the holder of a promissory note payable by RHP Vineyards.
The note evidences a loan to that corporation by R.H. Phillips Partners and the
assumption in 1993 of payment obligations of certain persons to R.H. Phillips
Partners. The amount payable under the note as of December 31, 1995, was
$192,340. The note bears interest at a rate of 7% per annum. The note and other
obligations are payable in full on June 30, 1996. The Company intends to extend
the note to June 30, 1999.
Mr. Coit received commission payments for his services in connection with
the issuance of the Company's convertible promissory notes in 1994 and the
Company's initial public offering in early 1995. The Company paid Sequoia Equity
Securities Corporation ("Sequoia") a commission of 8% of the face value of the
notes issued in connection with Sequoia's assistance in the issuance of
$1,500,000 in convertible promissory notes of the Company. Mr. Coit, who is a
registered representative of Sequoia, substantially assisted the Company in
connection with the exchange and received a commission from Sequoia. The total
payment to Sequoia in connection with the notes was $119,600, approximately 95%
of which was paid by Sequoia to Mr. Coit. Mr. Coit also received a commission in
connection with the Company's initial public offering for obtaining purchasers
of the units on terms similar to those granted to other participating broker-
dealers in the offering. The commission was payable by Capitol Bay Securities
("Capitol Bay"), the underwriter of the initial public offering.
The Board of Directors has adopted a policy pursuant to which all material
transactions and loans with affiliated parties will be made or entered into on
terms no less favorable than those that can be obtained from unaffiliated third
parties. All material affiliated transactions and loans, and any forgiveness
thereof, must be approved by a majority of independent outside members of the
Board of Directors who do not have an interest in the transaction.
DESCRIPTION OF CAPITAL STOCK
The Company is authorized under its Articles of Incorporation to issue
12,500,000 shares of Common Stock with no par value and 5,000,000 shares of
Preferred Stock with no par value.
COMMON STOCK
As of June 20, 1996, there were 4,638,435 shares of Common Stock
outstanding held by 299 shareholders of record. Each shareholder is entitled to
one vote per share of Common Stock and, if notice to cumulate votes has been
properly given, a shareholder may cumulate his or her votes in the election of
directors. Cumulative voting allows a shareholder to accumulate his or her votes
and give one candidate a number of votes equal to the number of directors to be
elected multiplied by the number of votes to which those shares are normally
entitled, or to distribute those votes among the candidates. All shares of
Common Stock are nonassessable.
PREFERRED STOCK
The Company has created one series of Preferred Stock, the Senior Preferred
Stock, of which it is authorized to issue, and has issued, 500,000 shares. All
outstanding shares of Senior Preferred Stock are currently owned by Hancock. The
Senior Preferred Stock is entitled to receive a dividend preference of $1.20 per
share per annum, which must be paid in full before dividend payments may be made
to the Common Stock. Dividends are payable semi-annually, on March 15 and
September 15 of each year, and are cumulative.
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<PAGE> 39
Until September 15, 2000, one half of the dividend payment is payable in cash
and the other half is payable in Common Stock, priced at the lesser of the fair
market value of the Common Stock as of the time of payment or $4.00 per share.
The Senior Preferred Stock is entitled to a $10.00 per share liquidation
preference, which must be paid upon the liquidation, dissolution or winding up
of the Company, before the Company may make any liquidating distributions to
holders of Common Stock.
The Company will be required to redeem the Senior Preferred Stock beginning
on March 15, 2004, when one-third of the outstanding Senior Preferred Stock must
be redeemed ("Mandatory Redemption"). The Company will be required to redeem an
additional one-third of the outstanding Senior Preferred Stock on March 15, 2005
and the remaining outstanding shares on March 15, 2006. The redemption price for
the Senior Preferred Stock upon Mandatory Redemption is $10.00 per share. The
Senior Preferred Stock is also redeemable at the option of the Company,
beginning in March, 2001, at $10.00 per share plus a premium equal to the
difference, as discounted to present value at the U.S. Treasury Rate (calculated
as of the date of redemption), between: (i) the dividends which would have been
payable had the shares been held through the date of Mandatory Redemption; (ii)
the amount paid on U.S. Treasury Notes with maturities equal the length of time
between the date of optional redemption and the date of Mandatory Redemption for
those shares.
Unless there is a default in dividend payments, the Senior Preferred Stock
is not entitled to vote in elections of directors or, with certain exceptions,
on any other matter required or allowed to be submitted to a vote of
shareholders. If the Company defaults on the payment of two consecutive
semi-annual dividends, the holders of the Senior Preferred Stock are entitled to
elect one member to the Board of Directors, if there is a default in paying
three consecutive dividend payments, the Senior Preferred Stock may elect two
directors, and if there is a default in the payment of four consecutive
dividends, the Senior Preferred Stock may elect a majority of the Board of
Directors. The consent of the Senior Preferred Stock, voting as a separate
class, is necessary to approve mergers, the dissolution of the Corporation,
changes in rights of the Senior Preferred Stock or the issuance of Preferred
Stock with dividend or liquidation preferences superior to those of the Senior
Preferred Stock.
The Company's Articles of Incorporation authorize the Board of Directors to
create additional series of Preferred Stock. The Board of Directors may provide
the Preferred Stock with such rights, preferences, limitations and restrictions
on any series of unissued Preferred Stock as the Board of Directors may
designate, without the prior approval of the shareholders, subject to the rights
of the holders of the Senior Preferred Stock.
WARRANTS
The Company issued 493,563 warrants to purchase Common Stock to the public
in its initial public offering (the "IPO Warrants"). Each IPO Warrant entitles
the holder thereof to purchase one share of Common Stock at a price of $3.875
per share, and unless exercised will expire on April 1, 1997. The Board of
Directors of the Company may lengthen the exercise period for the IPO Warrants
at any time in its discretion. The Company may repurchase, or "call," the IPO
Warrants upon 30 days notice at a price of $0.25 per warrant if the closing bid
price per share of Common Stock exceeds $4.50 per share for five consecutive
trading days.
The Company granted to Hancock warrants to purchase an aggregate of
1,346,788 shares of Common Stock at a price of $4.00 per share (the "Hancock
Warrants"). The Hancock Warrants are exercisable beginning on March 27, 1997 and
may be exercised at any time thereafter until March 27, 2006. The number of
shares issuable upon exercise of the Hancock Warrants, and the exercise price,
is subject to adjustment on a weighted average basis, if the Company issues
shares at a price less than $4.00 per share or at less than the fair market
value of the Common Stock at the time of issuance, whichever is greater. Fair
market value is determined to be the average of the trading price of the Common
Stock for the 20 business days prior to the issuance of the Common Stock or, in
the case of an issuance pursuant to a firm commitment underwritten public
offering, 20 business days prior to the date that the offering price is
determined. The antidilution adjustment, if any, which will result from this
offering cannot be determined until pricing of this offering, but the Company
anticipates the effect of any such adjustment will not be material.
35
<PAGE> 40
The Company granted Capitol Bay on March 31, 1995 warrants to purchase an
aggregate of 98,713 shares of Common Stock at a price of $5.57 per share (the
"Capitol Warrants"). The Capitol Warrants are currently exercisable and expire
on November 29, 1999. The Capitol Warrants were issued by the Company in
connection with Capitol Bay's services as underwriter of the Company's initial
public offering.
The Hancock Warrants and the Capitol Warrants entitle the holders thereof
to require the Company to register the shares issuable upon the exercise of
those warrants under the Securities Act of 1933, as amended (the "Securities
Act"). The holders of the Hancock Warrants and the Capitol Warrants are entitled
to notice of any proposed registrations of the Common Stock under the Securities
Act (other than registrations effected on Forms S-4 or S-8) and, with certain
limitations, are entitled to have the shares purchasable upon exercise of the
warrants registered under the Securities Act and sold in that offering. In
addition, the holders of a majority of the Hancock Warrants and the Capitol
Warrants have the right to require one time during the period that the warrants
are exercisable that the Company, at the Company's expense, use its best efforts
to register the Common Stock issuable upon exercise of those warrants under the
Securities Act.
The Company has also agreed to grant a stock purchase warrant to the
representative of the Underwriters as compensation for services rendered in
conducting this offering. See "Underwriting."
STOCK OPTIONS
The Company's 1995 Stock Option Plan allows the Company to grant options to
purchase up to 815,000 shares to its employees, directors and consultants (the
"Plan"). There are presently outstanding options to purchase 444,012 shares of
Common Stock which have been granted to certain of the Company's employees. The
Plan is administered by the Stock Option Committee. The options presently
outstanding were granted on July 11, 1995 and vest annually and ratably over
four years. Except for those options granted to John, Karl and Lane Giguiere,
the exercise price for the currently outstanding options is $3.75 per share,
which was the fair market value of the Common Stock as of the date of grant as
determined by the Stock Option Committee. The stock options granted to John,
Karl and Lane Giguiere, which total 177,060 shares, have an exercise price of
$4.125 per share. All outstanding options have terms of ten years.
CONVERTIBLE NOTES
The Company issued in December, 1994 convertible promissory notes with an
aggregate principal amount of $1,500,000. The convertible notes bear interest at
a rate of 6% per annum and have a term of five years. All amounts owing under
the convertible notes will be converted into Common Stock, beginning on December
9, 1996, if as of that date or during any period thereafter before maturity the
average bid price for the Common Stock as reported on Nasdaq or a national
securities exchange equals or exceeds $3.50 per share. The rate at which the
amounts owing shall be converted shall be the lesser of the bid price as of the
date of conversion or $3.875 per share.
RIGHT OF FIRST REFUSAL
The Company granted to Hancock a right of first refusal to purchase all or
a portion of the equity securities offered by the Company under certain
circumstances. If the Company receives a proposal from a third party to purchase
Common Stock or securities convertible or exchangeable for Common Stock, and the
Company intends to accept such proposal, the Company must first offer to Hancock
the right to purchase all or some of the securities offered under the same terms
and conditions as offered to the third party. If Hancock does not accept the
offer to purchase within 30 days of receiving notice, the Company may proceed to
sell the securities to the third party, provided that the sale is consummated
within 120 days after the Company gives Hancock notice of the proposed sale. The
right of first refusal does not apply to: (i) securities to be issued in
connection with a public offering registered under the Securities Act; (ii)
securities issued to employees, directors or consultants under compensation
plans; (iii) securities issued for consideration other than cash or cash
equivalents; or (iv) securities issued pursuant to a reorganization approved by
a court of competent jurisdiction.
36
<PAGE> 41
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust, New York, New York.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
5,938,435 shares of Common Stock. Of these shares, 2,292,576 shares, including
1,300,000 shares of Common Stock sold in this offering, will be free from any
restrictions on resale. All of the remaining outstanding shares of Common Stock
are "restricted securities" as defined in Rule 144 of the Commission.
The Company's directors and shareholders holding an aggregate of 3,345,859
shares of Common Stock, have entered (or will have entered as of the date of
this Prospectus) into an agreement not to sell any shares of Common Stock owned
by them without the prior written consent of Van Kasper & Company for a period
of 180 days from the closing of this offering.
In general, Rule 144 provides that a person who holds restricted stock for
at least two years, but less than three years, will be entitled to sell in any
three-month period a number of shares that does not exceed the greater of: i) 1%
of the then outstanding shares of Common Stock; or ii) the average weekly
trading volume during the four calendar weeks immediately preceding the date
upon which a notice of sale is filed with the SEC. Sales under Rule 144 are
subject to certain requirements relating to manner of sale, notice and
availability of public information about the Company. If a person who is not
deemed an "affiliate" has beneficially owned his or her shares for at least
three years, that person is entitled to sell his or her shares free of the
restrictions described above. An affiliate's shares are always subject to the
limitations described above until 90 days after that person ceases to be an
affiliate. Rule 144 defines an "affiliate" as a person who directly, or
indirectly, through the use of one or more intermediaries, controls, is
controlled by, or is under common control with, the issuer of the securities.
Rule 144A permits the immediate sale by current holders of restricted shares of
all or a portion of their shares to certain qualified institutional buyers
described in Rule 144A, subject to certain conditions.
All of the outstanding shares of Common Stock which are subject to Rule 144
were issued in connection with the merger of R.H. Phillips Partners into the
Company on June 15, 1994. Excluding the shares subject to restrictions on resale
pursuant to the agreement with the Underwriters, approximately 300,000 shares of
presently outstanding Common Stock which are restricted securities will be
eligible for limited resale under Rule 144 beginning on June 15, 1996.
37
<PAGE> 42
UNDERWRITING
The Underwriters named below acting through their representative, Van
Kasper & Company (the "Representative"), have severally agreed, subject to the
terms and conditions set forth in an Underwriting Agreement with the Company, to
purchase from the Company the number of shares of Common Stock set forth
opposite their respective names:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
------------------------------------------------------------------ ---------
<S> <C>
Van Kasper & Company..............................................
Total................................................... 1,300,000
=========
</TABLE>
The shares of Common Stock are being offered by the Underwriters named
herein, subject to receipt and acceptance by them, to their right to reject any
order in whole or in part, and to certain other conditions. The Underwriters are
committed to purchase all of the above shares of Common Stock being offered if
any are purchased.
The Representative has advised the Company that the Underwriters propose to
offer the shares of Common Stock to the public initially at the offering price
set forth on the cover page of this Prospectus and to certain dealers at that
price less a concession of not less than $ per share, and such dealers
may reallow to certain dealers a discount not in excess of $ per share.
After the initial offering, the public offering price, concessions and
reallowance to dealers may be changed by the Representative as a result of
market conditions or other factors.
Certain of the Underwriters, and certain dealers, may have engaged in
"passive market-making" activities in the Common Stock of the Company on Nasdaq
pursuant to the rules of the Commission. Because the Nasdaq market-makers for
the Common Stock include Underwriters and prospective Underwriters accounting
for more than 30% of the recent trading volume of the Common Stock, the rules
permit Underwriters and dealers, during the two business day period ending
immediately prior to the date of this Prospectus, to continue to make a market
in the Common Stock, so long as bids and transactions are at prices which do not
exceed the then highest independent bid price for the security, net purchases by
the market-makers do not exceed prescribed limits, and the market-makers comply
with the other provisions of the passive market-making rule. Passive
market-making may stabilize the market price of the Common Stock at a level
which might otherwise not prevail and, if commenced, may be discontinued at any
time.
The Company has granted an option to the Underwriters, exercisable by the
Representative within 30 days after the date of this Prospectus, to purchase up
to 195,000 additional shares of Common Stock at the initial offering price, less
underwriting discounts and commissions. The Representative may exercise the
over-allotment option solely for the purpose of covering over-allotments, if
any, incurred in the sale of the shares of Common Stock offered hereby. To the
extent that the over-allotment option is exercised, each of the Underwriters
will have a firm commitment to purchase approximately the same percentage of the
additional shares as the number of shares to be purchased and offered by that
Underwriter in the above table bears to the total.
Upon completion of this offering, the Company will sell to the
Representative a warrant to purchase up to 130,000 shares of Common Stock
(149,500 shares of Common Stock if the over-allotment option is exercised in
full) at a price per share equal to 120% of that at which the Common Stock is
being sold in this offering, subject to adjustment under certain events. The
warrant will be exercisable beginning one year after the date of this Prospectus
and will expire five years from the date thereof. The holders of shares of
Common Stock acquired upon exercise of this warrant are entitled to require that
the Company register such shares under the
38
<PAGE> 43
Securities Act at the Company's expense one time during such five year period.
In addition, the holders of shares of Common Stock issuable upon exercise of
this warrant have the right to include those shares in any future registration
statement filed by the Company, with certain exceptions.
The Company has agreed to pay the Underwriters a non-accountable expense
allowance of two percent of the total proceeds from this offering plus $7,500.
The Company has agreed to indemnify the Underwriters for certain
liabilities, including liabilities under the Securities Act.
Certain beneficial owners of the Company's stock have agreed not to,
directly or indirectly, sell, offer to sell, contract to sell or otherwise
dispose of any shares of Common Stock or securities exercisable for shares of
Common Stock for a period of 180 days after the date of this Prospectus without
the prior written consent of the Representative. See "Shares Eligible for Future
Sale."
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by Frederick K. Koenen, Attorney at Law, San
Francisco, California. Heller Ehrman White & McAuliffe, Palo Alto, California
has acted as counsel for the Underwriters in connection with this offering and
will pass upon certain legal matters for the Underwriters.
EXPERTS
The financial statements of the Company as of December 31, 1995 and for the
year ended December 31, 1995 included in this Prospectus have been audited by
KPMG Peat Marwick LLP as stated in their report thereon appearing elsewhere in
this Prospectus. The financial statements of the Company for the year ended
December 31, 1994 included in this Prospectus have been audited by Deloitte &
Touche LLP, independent public accountants as stated in their report appearing
elsewhere in this Prospectus. These financial statements are included in
reliance upon such reports given upon the authority of those firms as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files annual and quarterly reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information may be inspected and copies at the Commission's Public Reference
Section, 450 Fifth Street, N.W., Room 1024, Washington D.C. 20549, as well as at
the Commission's Regional Offices located at 7 World Trade Center, 13th Floor,
New York, New York 10048 and at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such material can be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W. 20549. The Common Stock of the Company is quoted on the
Nasdaq SmallCap Market. Reports and other information may be inspected at the
National Association of Securities Dealers, Inc. at 1735 K Street, N.W.,
Washington, D.C. 20006.
The Company has filed with the Commission a registration statement on Form
SB-2 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus omits certain information contained in the registration
statement and reference is hereby made to the registration statement and
exhibits thereto for further information with respect to the Company and the
Common Stock to which this Prospectus relates. Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of such
contract or document filed as an exhibit to the registration statement, each
statement being qualified in all respect by such reference. Copies of the
registration statement, together with the exhibits thereto, may be obtained from
the Commission without charge from the Commission's Public Reference Room, 450
Fifth Street, N.W., Washington, D.C., 20549, upon payment of the prescribed
fees.
39
<PAGE> 44
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 45
R.H. PHILLIPS, INC., DBA
THE R.H. PHILLIPS VINEYARD
(A CALIFORNIA CORPORATION) (FORMERLY R.H. PHILLIPS PARTNERS)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITORS' REPORT -- 1995................................................... F-2
INDEPENDENT AUDITORS' REPORT -- 1994................................................... F-3
FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995, AND THREE MONTHS
ENDED MARCH 31, 1995 AND 1996:
Balance Sheets....................................................................... F-4
Statements of Operations............................................................. F-5
Statements of Partners' Capital and Shareholders' Equity............................. F-6
Statements of Cash Flows............................................................. F-7
Notes to Financial Statements........................................................ F-8
</TABLE>
F-1
<PAGE> 46
INDEPENDENT AUDITORS' REPORT
The Board of Directors
R.H. Phillips, Inc.:
We have audited the accompanying balance sheet of R.H. Phillips, Inc. as of
December 31, 1995, and the related statements of operations, partners' capital
and shareholders' equity, and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1995 financial statements referred to above present
fairly, in all material respects, the financial position of R.H. Phillips, Inc.
as of December 31, 1995, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Sacramento, California
March 8, 1996,
except as to Note 14, which is as of March 27, 1996
F-2
<PAGE> 47
INDEPENDENT AUDITORS' REPORT
R.H. Phillips, Inc.:
We have audited the statements of operations, partners' capital and
shareholders' equity and of cash flows of R.H. Phillips, Inc. (the "Company")
for the year ended December 31, 1994. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of the Company's operations and its cash flows for the
year ended December 31, 1994 in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Oakland, California
April 7, 1995
F-3
<PAGE> 48
R.H. PHILLIPS, INC., DBA
THE R.H. PHILLIPS VINEYARD
(A CALIFORNIA CORPORATION) (FORMERLY R.H. PHILLIPS PARTNERS)
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, 1996
1995 -----------
------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................................................. $ 318 $ 9
Accounts receivable.............................................. 2,867 2,076
Inventories...................................................... 6,354 6,594
Deferred income taxes and prepaid expenses....................... 417 360
------- -------
Total current assets.......................................... 9,956 9,039
PROPERTY, PLANT, AND EQUIPMENT -- net.............................. 16,578 17,775
OTHER ASSETS:
Note receivable from shareholder................................. 192 196
Deferred loan fees and other, net................................ 667 662
------- -------
Total other assets............................................ 859 858
------- -------
TOTAL ASSETS....................................................... $ 27,393 $27,672
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt............................. $ 1,040 $ 965
Notes payable.................................................... 1,390 380
Accounts payable................................................. 1,728 2,154
Accrued liabilities.............................................. 429 605
------- -------
Total current liabilities..................................... 4,587 4,104
LONG-TERM DEBT..................................................... 12,587 8,426
SUBORDINATED DEBT.................................................. 1,500 1,500
DEFERRED INCOME TAXES.............................................. 679 679
COMMITMENTS AND CONTINGENCIES...................................... -- --
REDEEMABLE PREFERRED STOCK......................................... -- 4,807
SHAREHOLDERS' EQUITY:
Non-redeemable preferred stock, no par value, 4,500,000 shares
authorized, none outstanding.................................. -- --
Common stock, no par value, 12,500,000 shares authorized,
4,632,985 shares issued and outstanding....................... 7,623 7,623
Retained earnings................................................ 417 533
------- -------
Total shareholders' equity.................................... 8,040 8,156
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......................... $ 27,393 $27,672
======= =======
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 49
R.H. PHILLIPS, INC., DBA
THE R.H. PHILLIPS VINEYARD
(A CALIFORNIA CORPORATION) (FORMERLY R.H. PHILLIPS PARTNERS)
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------- -----------------
1994 1995 1995 1996
------- ------- ------ ------
<S> <C> <C> <C> <C>
(UNAUDITED)
NET SALES............................................. $12,896 $15,498 $3,179 $3,186
COST OF SALES......................................... 8,617 9,660 2,053 1,909
------- ------- ------ ------
GROSS PROFIT.......................................... 4,279 5,838 1,126 1,277
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.......... 3,386 3,803 831 801
------- ------- ------ ------
OPERATING INCOME...................................... 893 2,035 295 476
INTEREST EXPENSE...................................... (1,121) (1,025) (268) (308)
OTHER INCOME (EXPENSE) -- NET......................... (409) 30 (12) 14
------- ------- ------ ------
INCOME (LOSS) BEFORE INCOME TAXES..................... (637) 1,040 15 182
PROVISION FOR INCOME TAXES............................ (364) (289) (6) (66)
------- ------- ------ ------
NET INCOME (LOSS)..................................... $(1,001) $ 751 $ 9 $ 116
======= ======= ====== ======
NET INCOME (LOSS) PER SHARE (2)....................... $ .17 $ .00 $ .03
======= ====== ======
COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING....... 3,646 4,386 3,646 4,633
======= ======= ====== ======
PRO FORMA AMOUNTS (1):
(LOSS) BEFORE INCOME TAXES AS REPORTED................ $ (637)
PRO FORMA INCOME TAX BENEFIT.......................... 257
-------
PRO FORMA NET (LOSS).................................. $ (380)
=======
PRO FORMA NET (LOSS) PER SHARE........................ $ (.10)
=======
</TABLE>
- ---------------
(1) Pro forma net (loss) reflects adjustments for income taxes which would have
been provided if R.H. Phillips, Inc. had been organized and operated as a C
Corporation, rather than a partnership, for the entire year ending December
31, 1994. (See Note 1)
See accompanying notes to financial statements.
F-5
<PAGE> 50
R.H. PHILLIPS, INC., DBA
THE R.H. PHILLIPS VINEYARD
(A CALIFORNIA CORPORATION) (FORMERLY R.H. PHILLIPS PARTNERS)
STATEMENTS OF PARTNERS' CAPITAL AND SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THREE MONTHS ENDED MARCH 31, 1996
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
LIMITED LIMITED LIMITED
PARTNERS I/ PARTNERS I/ PARTNERS II/ GENERAL RETAINED
SERIES A SERIES A-1 SERIES A-2 PARTNERS/ EARNINGS/
PREFERRED PREFERRED PREFERRED COMMON (ACCUMULATED
STOCK STOCK STOCK STOCK DEFICIT) TOTAL
----------- ----------- ------------ ----------- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
PARTNERS' CAPITAL JANUARY 1, 1994.......... $ 1,719 $ -- $ 1,702 $ 2,215 $ -- $5,636
DISTRIBUTION TO PARTNERS................... -- -- -- (220) -- (220)
NET INCOME (LOSS) FIVE MONTHS ENDED MAY 31,
1994..................................... (401) -- 127 (393) -- (667)
------- ----- ------- ------ ----- ------
PARTNERS' CAPITAL, MAY 31, 1994............ 1,318 -- 1,829 1,602 -- 4,749
MERGER OF R.H. PHILLIPS PARTNERS AND R.H.
PHILLIPS, INC.(1)........................ (231) 231 -- -- -- --
COSTS OF PUBLIC STOCK OFFERING............. -- -- -- (173) -- (173)
NET LOSS SEVEN MONTHS ENDED DECEMBER 31,
1994..................................... -- -- -- -- (334) (334)
------- ----- ------- ------ ----- ------
SHAREHOLDERS' EQUITY DECEMBER 31, 1994..... 1,087 231 1,829 1,429 (334) 4,242
ISSUANCE OF COMMON STOCK................... -- -- -- 3,047 -- 3,047
CONVERSION OF PREFERRED STOCK TO COMMON
STOCK.................................... (1,087) (231) (1,829) 3,147 -- --
NET INCOME YEAR ENDED DECEMBER 31, 1995.... -- -- -- -- 751 751
------- ----- ------- ------ ----- ------
SHAREHOLDERS' EQUITY DECEMBER 31, 1995..... -- -- -- 7,623 417 8,040
NET INCOME THREE MONTHS ENDED MARCH 31,
1996 (Unaudited)......................... -- -- -- -- 116 116
------- ----- ------- ------ ----- ------
SHAREHOLDERS' EQUITY MARCH 31, 1996
(Unaudited).............................. $ -- $ -- $ -- $ 7,623 $ 533 $8,156
======= ===== ======= ====== ===== ======
</TABLE>
- ---------------
(1) Effective June 1, 1994, in connection with the merger of R.H. Phillips
Partners with R.H. Phillips, Inc., the general and limited partners in R.H.
Phillips Partners exchanged their partnership interests for shares of
preferred and common stock in R.H. Phillips, Inc. At the time of the merger,
R.H. Phillips, Inc. had no assets, liabilities or prior operations.
See accompanying notes to financial statements.
F-6
<PAGE> 51
R.H. PHILLIPS, INC., DBA
THE R.H. PHILLIPS VINEYARD
(A CALIFORNIA CORPORATION) (FORMERLY R.H. PHILLIPS PARTNERS)
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
-------------------- ------------------
1994 1995 1995 1996
-------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................. $ (1,001) $ 751 $ 9 $ 116
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Deferred income taxes........................... 364 62 -- --
Depreciation and amortization................... 870 1,002 221 348
Write down of wine inventories.................. 360 -- -- --
Write off of intangible assets.................. 110 -- -- --
Loss on disposal of property, plant and
equipment..................................... -- 22 19 --
Changes in assets and liabilities:
Accounts receivable........................... 58 (631) 7 791
Inventories................................... (58) (285) (100) (240)
Prepaid expenses.............................. (5) (104) (473) 57
Other assets.................................. (37) (6) (8) (39)
Accounts payable and accrued liabilities...... 718 357 (390) 602
Deferred revenue.............................. (45) (227) 28 --
-------- -------- ------- -------
Net cash provided (used) by operating
activities............................... 1,334 941 (687) 1,635
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment.......... (1,484) (7,284) (810) (1,500)
Proceeds from equipment sold....................... -- 57 -- --
-------- -------- ------- -------
Net cash used in investing activities...... (1,484) (7,227) (810) (1,500)
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution to partners........................... (220) -- -- --
Issuance of redeemable preferred stock............. -- -- -- 4,807
Issuance of (costs of issuing) common stock........ (173) 3,047 3,087 --
Proceeds from long-term debt and notes payable..... 13,813 22,601 8,670 902
Principal payments on long-term debt and notes
payable......................................... (13,154) (18,519) (8,468) (6,148)
Payment of loan origination fees................... (122) (534) (380) (1)
Payments from (loans to) shareholders.............. 21 (22) (4) (4)
-------- -------- ------- -------
Net cash provided (used) by financing
activities............................... 165 6,573 2,905 (444)
-------- -------- ------- -------
INCREASE (DECREASE) IN CASH.......................... 15 287 1,408 (309)
CASH AT BEGINNING OF PERIOD.......................... 16 31 31 318
-------- -------- ------- -------
CASH AT END OF PERIOD................................ $ 31 $ 318 $ 1,439 $ 9
======== ======== ======= =======
OTHER CASH FLOW INFORMATION:
Interest paid (including capitalized interest of
$122 and $295 in 1994 and 1995, and $69 and $100
for the three months ended March 31, 1995 and
1996,
respectively)................................... $ 1,016 $ 1,382 $ 384 $ 272
======== ======== ======= =======
NONCASH TRANSACTIONS:
Issuance of notes payable to finance inventory,
property, plant and equipment purchased......... $ 1,475 $ 1,369 $ -- $ --
======== ======== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE> 52
R.H. PHILLIPS, INC. DBA
THE R.H. PHILLIPS VINEYARD
(A CALIFORNIA CORPORATION) (FORMERLY R.H. PHILLIPS PARTNERS)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization -- Effective June 1, 1994, R.H. Phillips Partners, a
California limited partnership, merged into R.H. Phillips, Inc. (the "Company").
Pursuant to that merger, the Company acquired all of the assets and liabilities
of R.H. Phillips Partners. The general partners of R.H. Phillips Partners
received all of the Common Stock of the Company, and the limited partners of
R.H. Phillips Partners received all of the Series A, Series A-1 and Series A-2
Preferred Stock of the Company in connection with the merger. All outstanding
shares of those series of Preferred Stock were converted to Common Stock on
March 31, 1995. The total number of shares of Common Stock issued to the general
partners as of the merger and to the limited partners on conversion of Preferred
Stock was 3,645,859. On March 31, 1995, the Company issued 493,563 units in an
initial public offering, with each unit consisting of two shares of Common Stock
and one warrant to purchase one share of Common Stock.
The Company produces, markets, and sells premium quality California table
wines. The Company also farms vineyards located in the Dunnigan Hills region of
Northern California which supply a majority of its annual grape requirements.
Inventories are stated at the lower of FIFO (first-in, first-out) cost or
market. Cost includes the cost of grown and purchased grapes, and harvesting,
production, aging and bottling costs. Wine inventories are classified as current
assets in accordance with recognized trade practice although certain inventories
will be aged for periods longer than one year. Crop costs associated with
farming vineyards prior to the harvest are deferred and recognized in the year
the grapes are harvested.
Property, plant, and equipment are stated at cost and are depreciated using
primarily the straight-line method over the estimated useful lives of the
assets. Vineyards have estimated depreciable lives of 10 to 25 years, buildings
30 years, wine tanks 25 years and furniture and equipment 5 to 7 years. Major
property additions and betterments are capitalized and maintenance and repairs
are expensed as incurred. The cost of property sold or otherwise disposed of,
and the related accumulated depreciation, are removed from the accounts at the
time of sale and any resulting gain or loss is included in operations.
Costs of planting new vines and ongoing cultivation costs for vines not yet
bearing, including interest, are capitalized. Depreciation commences in the
initial year the vineyard yields a commercial crop, generally in the third year
after planting.
Other assets include organization costs, trade name and deferred loan fees.
Deferred loan fees and other costs are amortized using the straight-line method
over the term of the loan, or over lives ranging from 3 to 5 years. Accumulated
amortization was approximately $103,000 at December 31, 1995 and approximately
$148,000 at March 31, 1996.
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.
Major Customers and Sales Representatives -- The Company sells most of its
products to distributors for resale to restaurants, bars and retail outlets. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral. The Company's credit losses have been minimal and within
management's expectations.
The Company's three largest distributors accounted for 11%, 12% and 11% of
sales for the year ended December 31, 1994 and 13%, 12% and 11% of sales for the
year ended December 31, 1995. These distributors
F-8
<PAGE> 53
R.H. PHILLIPS, INC. DBA
THE R.H. PHILLIPS VINEYARD
(A CALIFORNIA CORPORATION) (FORMERLY R.H. PHILLIPS PARTNERS)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
accounted for 12%, 11% and 13% of sales for the three months ended March 31,
1995 and 14%, 8% and 7% of sales for the three months ended March 31, 1996.
Accounts receivable from these distributors at December 31, 1995 and March 31,
1996 totaled approximately $1,038,000 and $685,000, respectively.
The Company has twelve sales representatives. The Company's representative
who generated the largest sales volume accounted for $6,127,000, or 47% of total
sales in 1994, and $7,375,000, or 48% of total sales in 1995. This
representative accounted for $1,894,000 or 60% of total sales for the three
months ended March 31, 1995 and $1,646,000 or 54% of total sales for the three
months ended March 31, 1996.
Net income or loss per share -- Net income or loss per share has been
computed based on the number of common and common equivalent shares outstanding
and the net income or loss applicable to the period during which the Company
operated as a corporation. The Company's Series A, Series A-1 and Series A-2
Preferred Stock, which was outstanding at December 31, 1994, are considered to
be common equivalent shares. The Company's warrants to purchase Common Stock and
employee stock options, which were outstanding at December 31, 1995 and March
31, 1996, are anti-dilutive, and were therefore not included in the calculation
of earnings (loss) per share.
Income taxes -- The Company accounts for income taxes using the asset and
liability method, under which deferred income taxes are provided for the
temporary differences between the tax basis of assets and liabilities and their
related financial statement amounts using current income tax rates.
Interim Financial Information -- The interim financial statements as of
March 31, 1996 and for each of the three month periods ended March 31, 1995 and
1996 have been prepared by the Company without audit. In the opinion of
management, the financial statements include all adjustments (which include only
normal recurring entries) necessary for a fair presentation. The operating
results for the three month periods ended March 31, 1995 and 1996 are not
necessarily indicative of the results which might be realized for the full year.
Recent Pronouncements -- In March of 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 121,
Accounting for Impairment of Long-lived Assets and Long-lived Assets to be
Disposed of (FASB 121). The Company is required to adopt the provisions of this
statement for years beginning after December 15, 1995. This statement requires
that long-lived assets and certain identifiable intangibles to be disposed of be
reported at the lower of carrying amount or fair value, less cost to sell. The
impact of FASB 121 is not expected to have a material effect on the Company.
In October of 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation (FASB 123). The Company is required to adopt the provisions of FASB
123 for years beginning after December 15, 1995. FASB 123 encourages all
entities to adopt a fair value based method of accounting for employee stock
options or similar equity instruments. However, it also allows an entity to
continue to measure compensation cost for those plans using the intrinsic-value
method of accounting prescribed by APB opinion No. 25, Accounting for Stock
Issued to Employees (APB 25). Entities electing to remain with the accounting in
APB 25 must make pro forma disclosures of net income and earnings per share as
if the fair value based method of accounting defined in this statement had been
applied. It is currently anticipated that the Company will continue to account
for employee stock options or similar equity instruments in accordance with APB
25 and provide the disclosures required by FASB 123. The impact of FASB 123 is
not expected to have a material effect on the Company.
F-9
<PAGE> 54
R.H. PHILLIPS, INC. DBA
THE R.H. PHILLIPS VINEYARD
(A CALIFORNIA CORPORATION) (FORMERLY R.H. PHILLIPS PARTNERS)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, 1996
1995 -----------
------------ (UNAUDITED)
<S> <C> <C>
Bulk and bottled wine...................................... $5,268,000 $ 5,075,000
Bottling supplies and other................................ 611,000 657,000
Deferred crop costs........................................ 475,000 862,000
------- -------
Total................................................. $6,354,000 $ 6,594,000
======= =======
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------ MARCH 31,
1996
-----------
(UNAUDITED)
<S> <C> <C>
Land...................................................... $ 1,831,000 $ 1,871,000
Vineyard improvements..................................... 3,731,000 3,731,000
Buildings................................................. 3,538,000 3,543,000
Machinery and equipment................................... 7,084,000 7,388,000
Vehicles and office fixtures.............................. 663,000 704,000
----------- -----------
Total................................................ 16,847,000 17,237,000
Less accumulated depreciation............................. 3,868,000 4,170,000
----------- -----------
Total................................................ 12,979,000 13,067,000
Vineyard improvements under development................... 3,599,000 4,708,000
----------- -----------
Property, plant, and equipment -- net..................... $ 16,578,000 $17,775,000
=========== ===========
</TABLE>
Total depreciation expense during the years ended December 31, 1994 and
1995 was approximately $715,000 and $938,000, respectively and $202,000 and
$303,000 during the three months ended March 31, 1995 and 1996, respectively.
Property, plant and equipment under capital leases is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------ MARCH 31,
1996
-----------
(UNAUDITED)
<S> <C> <C>
Machinery and equipment.................................... $1,011,000 $ 1,011,000
Less accumulated depreciation.............................. 354,000 396,000
---------- ----------
Net........................................................ $ 657,000 $ 615,000
========== ==========
</TABLE>
Depreciation expense for machinery and equipment under capital leases was
approximately $113,000 and $172,000 for the years ended December 31, 1994 and
1995, respectively and $58,000 and $42,000 for the three months ended March 31,
1995 and 1996 respectively.
F-10
<PAGE> 55
R.H. PHILLIPS, INC. DBA
THE R.H. PHILLIPS VINEYARD
(A CALIFORNIA CORPORATION) (FORMERLY R.H. PHILLIPS PARTNERS)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
4. NOTE RECEIVABLE FROM SHAREHOLDER
The Company has a note receivable from RHP Vineyards, Inc., a major
shareholder, which bears interest at 7.00% and is unsecured. The note is due
June 30, 1996. The Company intends to extend the note to June 30, 1999.
5. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, 1996
1995 -----------
------------ (UNAUDITED)
<S> <C> <C>
Note payable to bank........................................ $ 796,000 $ --
Note payable to grower, interest at 9.75%, $77,896 payable
monthly through August 1996, unsecured.................... 594,000 380,000
---------- --------
Total............................................. $1,390,000 $ 380,000
========== ========
</TABLE>
As of December 31, 1995, the note payable to bank represents borrowings on
a $1,000,000 line of credit, which bears interest at prime plus 1.00%, of which
approximately $3,500 was available. The note was due February 1996 and was
collateralized by farm equipment and the 1995 grape crop. As of March 31, 1996,
the Company has a $1,200,000 line of credit, which bears interest at prime plus
1.00%, of which approximately $352,000 was available at March 31, 1996. The note
is due in November, 1996 and is collateralized by farm equipment and the 1996
grape crop. In addition, the Company had a $350,000 non revolving line of credit
which has an interest rate of prime plus 1.00%, of which $350,000 was available
at December 31, 1995. The line was drawn upon and repaid in full during the
three months ended March 31, 1996 and availability thereunder has expired.
F-11
<PAGE> 56
R.H. PHILLIPS, INC. DBA
THE R.H. PHILLIPS VINEYARD
(A CALIFORNIA CORPORATION) (FORMERLY R.H. PHILLIPS PARTNERS)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Note payable to insurance company, with interest on $4,600,000 of
principal at 9.05% per annum, $1,500,000 of principal at 8.10%
and $1,400,000 of principal at 8.55%. Interest payable monthly,
principal due in monthly payments beginning February 1996 through
February 2005, secured by various assets of the Company.......... $ 7,500,000 $ 7,400,000
Notes payable to bank, interest at prime or IBOR plus 200 basis
points, principal due April, 1997 collateralized by accounts
receivable and inventory(1)...................................... 4,575,000 521,000
Note payable to finance company, payable in sixty monthly
installments of $10,744 plus interest at one-month LIBOR plus
3.32%, due November 2000, secured by certain equipment........... 634,000 602,000
Note payable to individual, payable $1,322 per month including
interest at 9%, balance of $104,729 due September 2000, secured
by land.......................................................... 129,000 128,000
Notes payable to shareholders and affiliates, interest at various
rates, due June 30, 1996, unsecured.............................. 47,000 44,000
Capital lease obligations........................................ 625,000 595,000
Other............................................................ 117,000 101,000
----------- ----------
Total.................................................... 13,627,000 9,391,000
Less current maturities............................................ 1,040,000 965,000
----------- ----------
Long-term portion.................................................. $12,587,000 $ 8,426,000
=========== ==========
</TABLE>
- ---------------
(1) Maximum amount that can be borrowed on the note is $5,000,000 of which
approximately $425,000 was available at December 31, 1995, and approximately
$4,479,000 was available at March 31, 1996.
Principal payments required on long-term debt, (other than capital leases)
for each of the next five years ending December 31, and March 31, are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------ -----------
(UNAUDITED)
<S> <C> <C>
Year 1............................................................. $ 781,000 $ 828,000
Year 2............................................................. 5,352,000 1,286,000
Year 3............................................................. 747,000 746,000
Year 4............................................................. 745,000 742,000
Year 5............................................................. 827,000 794,000
Thereafter......................................................... 4,550,000 4,400,000
------------ -----------
Total......................................................... $ 13,002,000 $ 8,796,000
============ ===========
</TABLE>
F-12
<PAGE> 57
R.H. PHILLIPS, INC. DBA
THE R.H. PHILLIPS VINEYARD
(A CALIFORNIA CORPORATION) (FORMERLY R.H. PHILLIPS PARTNERS)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
The Company leases certain winery and other equipment under noncancelable
capital leases. Future minimum lease payments under these leases for each of the
next four years ending December 31, and March 31, are as follows:
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, -----------
------------ (UNAUDITED)
<S> <C> <C>
Year 1.................................................... $260,000 $ 238,000
Year 2.................................................... 201,000 201,000
Year 3.................................................... 180,000 185,000
Year 4.................................................... 142,000 144,000
------------ -----------
Total.................................................. 783,000 768,000
Less amounts representing interest........................ 158,000 173,000
------------ -----------
Net minimum lease payments................................ $625,000 $ 595,000
========== =========
</TABLE>
7. SUBORDINATED DEBT
In December 1994, the Company issued $1,500,000 of unsecured subordinated
convertible five year promissory notes in exchange for the cancellation of
indebtedness under certain promissory notes. The subordinated convertible
promissory notes bear interest at 6% per annum, payable yearly, and will be
converted into shares of the Company's Common Stock beginning two years after
issuance, if the market price of such stock as quoted on a national securities
exchange or Nasdaq equals or exceeds $3.50 per share for five consecutive days.
The number of shares of Common Stock issuable upon conversion shall equal the
amount of unpaid principal and interest divided by the lesser of the quoted
price per share or $3.875. Payment of principal on the notes is due in December
1999 if not converted to Common Stock prior to that time.
8. COMMITMENTS AND CONTINGENCIES
As of January 1995, the Company had a total of 437 acres of vineyards which
were believed by management to be susceptible to Phylloxera infestation
(Bio-type A). During 1995, the Company removed 68 acres of vineyards, 63 of
which were removed because of Phylloxera and five of which were removed for the
winery expansion, leaving a total of 369 acres which management believes may be
susceptible to Phylloxera as of December 31, 1995 and March 31, 1996.
Approximately 60 of these 369 acres were showing visual symptoms of decline.
Although this acreage will ultimately require replanting, at this time
management expects that these vineyards will remain commercially productive for
approximately eight more years. As a result, the Company reduced the depreciable
life of these vineyards to reflect the expected remaining useful life.
The Company has adopted a policy of reducing to 10 years the depreciable
life of all vineyards with non-resistant rootstock showing evidence of
Phylloxera infestation. This policy was based on estimated future production of
affected vineyards derived from historical declines and their projected cash
flows.
In October 1995, the Company entered into a contract to purchase
approximately 900 acres of land adjacent to the Company's current property for
approximately $1,362,000. Management anticipates closing the land purchase by
the end of June 1996.
F-13
<PAGE> 58
R.H. PHILLIPS, INC. DBA
THE R.H. PHILLIPS VINEYARD
(A CALIFORNIA CORPORATION) (FORMERLY R.H. PHILLIPS PARTNERS)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
The Company is party to various legal proceedings arising in the ordinary
course of business. In the opinion of management, the ultimate disposition of
these matters will not have a material adverse impact on the Company's financial
position, results of operations or liquidity.
In connection with the Company's operating plant expansion, the Company has
filed a claim against a contractor, who has in turn filed a counterclaim against
the Company. Management believes that the ultimate outcome of this matter will
not have a significant impact on the Company's financial position, results of
operations or liquidity.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments. The carrying amounts of cash, note
receivable from shareholder and notes payable approximate fair value because of
the short maturity of those instruments. The carrying value of the Company's
long-term debt is recorded at the present value of amounts due under the
applicable agreements, and therefore, approximate fair value. It is not
practicable for the Company to determine the fair value of its subordinated debt
due to the facts that the subordinated debt is non-transferable (except for
certain limited exceptions) and that no public market for the subordinated debt
exists.
10. SHAREHOLDERS' EQUITY
The Company's authorized and outstanding no par value capital stock as of
December 31, 1994 was as follows:
<TABLE>
<CAPTION>
SHARES SHARES
AUTHORIZED OUTSTANDING
---------- -----------
<S> <C> <C>
Series A Preferred................................... 1,200,000 1,183,065
Series A-1 Preferred................................. 255,000 250,953
Series A-2 Preferred................................. 650,000 631,965
Common Stock......................................... 7,500,000 1,579,876
</TABLE>
Effective March 31, 1995, the Company completed its public offering of
Common Stock. A total of 493,563 units were sold at a price of $7.25 per unit. A
unit consists of two shares of Common Stock and one warrant to purchase an
additional share of Common Stock at a price of $3.875. The warrants may be
exercised beginning on April 1, 1996 and will expire on April 1, 1997. The Board
of Directors may lengthen the exercise period for the warrants at any time at
its discretion. The Company may repurchase, or "call", the warrants upon 30 days
notice at a price of $0.25 per warrant while the warrants are exercisable if the
closing bid price per share of Common Stock exceeds $4.50 per share for five
consecutive trading days at any time after March 31, 1996. In addition, the
Company also issued warrants to purchase 98,713 shares of Common Stock at an
exercise price per share of $5.57 to the underwriter of the public offering. In
connection with the public offering, 987,126 shares of Common Stock were issued.
After payment of commissions and other expenses of the offering, the Company
received proceeds from the offering of approximately $2,873,000.
In connection with the public offering, all shares of Series A, Series A-1
and Series A-2 Preferred Stock were converted into 2,065,983 shares of Common
Stock. The total number of shares of Common Stock issued and outstanding as of
April 1, 1995, immediately after the public offering and the conversion of the
Preferred Stock, was 4,632,985 shares.
F-14
<PAGE> 59
R.H. PHILLIPS, INC. DBA
THE R.H. PHILLIPS VINEYARD
(A CALIFORNIA CORPORATION) (FORMERLY R.H. PHILLIPS PARTNERS)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
11. OTHER INCOME (EXPENSE)
Other expense for the year ended December 31, 1994 includes $360,000
representing a write down of wine inventories to lower of cost or market.
Management determined that certain bulk wines did not meet minimum quality
standards for inclusion in the Company's wine programs and a write down was
recorded based on the expected sales price of the wine in the bulk market. Other
expense in 1994 also includes approximately $110,000, representing the write-off
of intangible assets of R.H. Phillips Partners at the time of the merger with
the Company, since such assets were of no continuing value.
12. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
--------------------- ---------------------
1994 1995 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Current:
Federal............................... $ -- $219,000 $ 5,000 $ 62,000
State................................. -- 8,000 1,000 4,000
-------- -------- ------ ------
Total current provision....... -- 227,000 6,000 66,000
Deferred:
Federal............................... 282,000 (11,000) -- --
State................................. 82,000 73,000 -- --
-------- -------- ------ ------
Total deferred provision...... 364,000 62,000 -- --
-------- -------- ------ ------
$364,000 $289,000 $ 6,000 $ 66,000
======== ======== ====== ======
</TABLE>
Deferred income taxes included in the balance sheets are as follows:
<TABLE>
<S> <C> <C>
Current deferred tax assets:
Nondeductible reserves and difference between book and tax
basis of inventory........................................ $155,000
State manufacturer's investment credit....................... 98,000
Noncurrent deferred tax assets:
Difference between book and tax basis of intangible assets... 141,000
Other........................................................ 7,000
--------
Total deferred tax asset............................. 401,000
Noncurrent deferred tax liability:
Difference between book and tax basis of property, plant and
equipment................................................. 827,000
--------
Net deferred tax liability..................................... $426,000
========
</TABLE>
Management believes that it is more likely than not that all the deferred
tax assets as of December 31, 1995 and March 31, 1996 will be realized and,
therefore, no allowance for deferred tax assets has been made.
F-15
<PAGE> 60
R.H. PHILLIPS, INC. DBA
THE R.H. PHILLIPS VINEYARD
(A CALIFORNIA CORPORATION) (FORMERLY R.H. PHILLIPS PARTNERS)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
The provision for income taxes is at an effective rate different from the
statutory tax rate of 34% when applied to the pre-tax income (loss) as a result
of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS ENDED
31, MARCH 31,
---------------------- ------------------
1994 1995 1995 1996
--------- -------- ------ -------
<S> <C> <C> <C> <C>
Expected U.S. Federal income tax at 34%........... $(216,000) $354,000 $5,000 $62,000
State franchise tax............................... -- 8,000 1,000 4,000
Effect of non-taxable partnership losses prior to
merger.......................................... 227,000 -- -- --
Deferred tax liability recognized due to change in
Company's tax status............................ 352,000 -- -- --
Permanent difference in basis of assets........... -- 23,000 -- --
Net operating loss carry forward from 1994,
federal......................................... -- (99,000) -- --
Other............................................. 1,000 3,000 -- --
--------- -------- ------ -------
Total........................................... $ 364,000 $289,000 $6,000 $66,000
========= ======== ====== =======
</TABLE>
Due to the Company's change in tax status, $352,000 of deferred tax
liabilities were recognized in 1994. In 1995 the Company utilized all of the net
operating losses that were generated in 1994 resulting in a tax benefit of
approximately $117,000. The Company utilized approximately $62,000 of the state
manufacturer's investment credit in 1995. The remaining carry forward of
approximately $98,000 is due to expire in 2005.
13. STOCK OPTION PLAN
On May 17, 1995, the Board of Directors of the Company adopted the R.H.
Phillips, Inc. 1995 Stock Option Plan (the "Plan"). Under the Plan, the Company
may grant options to purchase shares of the Company's Common Stock to eligible
directors, officers, employees and consultants. The Company may issue a maximum
of 815,000 shares of Common Stock under the Plan, which amount may be changed
due to stock splits, stock dividends and other adjustments to the Company's
outstanding shares. The options consist of incentive stock options, as described
in Section 422 of the Internal Revenue Code of 1986 ("ISO's"), and options which
do not qualify for the tax treatment specified in that section of the Internal
Revenue Code ("NSO's"). The price at which the holder of an option may purchase
the stock is set forth in individual option agreements between the Company and
the holder. In any event, the price at which the stock may be purchased (the
"Exercise Price") may be no less than 100% of the fair market value of the stock
as of the date the option is granted in the case of an ISO or 85% of the fair
market value for an NSO.
On July 11, 1995, the Stock Option Committee of the Board of Directors (the
"Stock Option Committee") approved the grant of options to purchase 449,460
shares of Common Stock under the Plan. Of these options, the Company granted
ISO's to purchase an aggregate of 272,400 shares of Common Stock to various
officers and employees. The Exercise Price of these ISO's was $3.75 per share,
which the Stock Option Committee determined to be the fair market value of the
Company's Common Stock as of that date. The Company also granted NSO's to
purchase an aggregate of 177,060 shares to John, Karl, and Lane Giguiere with an
Exercise Price of $4.125 per share, which was 110% of the fair market value of
the Common Stock on that date. The options discussed above generally vest
prorateably over four years, are exercisable to the extent vested, and expire
ten years from the date of grant.
F-16
<PAGE> 61
R.H. PHILLIPS, INC. DBA
THE R.H. PHILLIPS VINEYARD
(A CALIFORNIA CORPORATION) (FORMERLY R.H. PHILLIPS PARTNERS)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
14. SUBSEQUENT EVENTS
On March 27, 1996, the Company sold to John Hancock Mutual Life Insurance
Company ("Hancock") in a private placement at a price of $5,000,000 Redeemable
Preferred Stock and warrants to purchase Common Stock of the Company. The
Company issued 500,000 shares of Redeemable Preferred Stock to Hancock and
warrants to purchase up to 1,346,788 shares of Common Stock at a price of $4.00
per share. The warrants are exercisable beginning on March 27, 1997 and will be
exercisable for ten years following the date of grant.
The Redeemable Preferred Stock bears a 12% cumulative dividend, payable
semi-annually. 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 Redeemable Preferred Stock will be redeemable by
the Company beginning approximately five years after issuance. The Company will
be required to redeem one-third of the Redeemable Preferred Stock on March 15,
2004, one-third on March 15, 2005 and the remaining shares on March 15, 2006.
The net proceeds from the offering were approximately $4,800,000 after
expenses. The Company has used the proceeds to fund a portion of the 1996 winery
and vineyard expansions and to pay down existing debt used for the 1996 vineyard
development, started in 1995.
F-17
<PAGE> 62
[Photograph of Company's wine storage tanks]
[Photograph of Company's barrel storage room]
R.H. Phillips
Barrel Capacity
5,000 French and American oak barrels
[Photograph of the Company's P-5 vineyard]
R.H. Phillips
P-5 Vineyard
Dunnigan Hills
[Map showing Sonoma, Napa and Yolo Counties, California, with Sonoma, Napa and
Dunnigan Hills viticultural areas shaded in green, and showing location of the
Company's vineyards and winery.]
R.H. Phillips
Tank Capacity
1,000,000 gallons
[Photograph of Company's wine storage tanks]
<PAGE> 63
- ------------------------------------------------------
- ------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 11
Price Range of Common Stock........... 11
Capitalization........................ 12
Selected Financial Data............... 13
Management's Discussion and
Analysis............................ 14
Business.............................. 20
Management............................ 29
Executive Compensation................ 31
Principal Shareholders................ 32
Certain Relationships................. 34
Description of Capital Stock.......... 34
Shares Eligible for Future Sale....... 37
Underwriting.......................... 38
Legal Matters......................... 39
Experts............................... 39
Additional Information................ 39
Index to Financial Statements......... F-1
</TABLE>
No dealer, salesman or other person has been authorized to give any information
or make any representation other than those contained in the prospectus, and, if
given or made, such information or representation must not be relied upon as
having been authorized by the Company or the Underwriter. This Prospectus does
not constitute an offer to sell or the solicitation of an offer to buy
securities by anyone in any jurisdiction in which such offer or solicitation is
not authorized, or in which the person making such offer or solicitation is not
qualified to do so, or to any person to whom it is unlawful to make such an
offer or solicitation. Neither the delivery of this Prospectus, nor any sale
made hereunder shall, under any circumstances, create any implication that there
has been no change in the affairs of the Company since the date hereof.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
1,300,000 SHARES
COMMON STOCK
--------------------
PROSPECTUS
--------------------
LOGO
------------------------
July , 1996
------------------------------------------------------
------------------------------------------------------
<PAGE> 64
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation of R.H. Phillips, Inc. (the "Company") limit
the liability of directors for monetary damages to the fullest extent allowed by
California law. The effect of this provision is that the Company and
shareholders through derivative suits may not recover monetary damages against a
director for breach of the fiduciary duty of care, including those resulting
from negligence, with certain exceptions. Directors may still be liable for
monetary or other damages for breach of fiduciary duty for: i) acts or omissions
involving intentional misconduct or knowing and culpable violation of law; ii)
acts or omissions that a director believes to be contrary to the best interests
of the corporation or its shareholders or involve an absence of good faith by
the director; iii) any transaction in which a director received an improper
personal benefit; iv) acts or omissions showing a reckless disregard of the
director's duty to the corporation and its shareholders; v) acts or omissions
that constitute an unexcused pattern of inattention that amounts to an
abdication of duty; vi) liabilities arising out of transactions between the
corporation and a director; or vii) making improper distributions to
shareholders or loans to directors.
The Articles of Incorporation also allow the Company to indemnify its
agents to the maximum extent permitted by law. Generally speaking, agents (such
as directors, officers and employees) must be indemnified if the agent prevails
on any claim made against him while acting as an agent. The Company's Bylaws
require that all directors be indemnified to the maximum extent allowed by the
California Corporations Code. In cases where indemnification is required, the
Company is required to advance costs of attorneys fees and other expenses as
well as costs of litigation and settlement to the person indemnified. The
Company has not entered into indemnification agreements with any of its
directors or officers at this time, but may do so in the near future. The
Company also has not purchased directors' and officers' liability insurance but
may do so in the future.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The Company's expenses in connection with the offering of the Common Stock
being registered hereby, other than underwriting discounts and commissions, are
set forth below. All of these amounts are estimates except the SEC registration
fee and NASD filing fees.
<TABLE>
<S> <C>
Registration Fee.......................................................... $ 2,960
NASD Filing Fee........................................................... 1,359
Nasdaq Listing Fee........................................................ 17,500
Blue Sky Filing Fees and Expenses......................................... 20,000
Printing and Engraving Expenses........................................... 70,000
Registrar and Transfer Agent Fees......................................... 5,000
Legal Fees and Expenses................................................... 30,000
Accounting Fees and Expenses.............................................. 50,000
Underwriters' Nonaccountable Expense Allowance............................ 161,000
Miscellaneous............................................................. 42,181
--------
Total........................................................... $400,000
========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The Company issued an aggregate of 1,579,876 shares of Common Stock,
1,183,065 shares of Series A Preferred Stock, 250,953 shares of Series A-1
Preferred Stock and 631,965 shares of Series A-2 Preferred Stock to the former
general and limited partners of R.H. Phillips Partners in June, 1994 in
connection with the statutory merger of that limited partnership into the
Company. The purpose for the merger was to convert the R.H. Phillips vineyard
and winery business from a limited partnership to a corporation. The shares were
issued
II-1
<PAGE> 65
in reliance on exemptions from registration under the Securities Act of 1933, as
amended, (the "Securities Act") as provided by Section 4(2) of the Securities
Act and Rule 506 of Regulation D promulgated thereunder. All of the outstanding
shares of Series A Preferred Stock, Series A-1 Preferred Stock and Series A-2
Preferred Stock were converted into Common Stock upon the completion of the
Company's initial public offering, which took place on March 31, 1995.
Prior to the merger, the Company issued one share of its Common Stock to
R.H. Phillips Partners. The share was cancelled as a result of the merger. The
share was issued in reliance on the exemption from registration contained in
Section 4(2) of the Securities Act.
On December 9, 1994, the Company issued in a private placement 6%
convertible promissory notes in reliance on the exemption from registration
under the Securities Act set forth in Rule 506 of Regulation D and Section 4(2)
of the Securities Act. The convertible notes were issued in exchange for the
cancellation of secured promissory notes of the Company which these investors
held. The total aggregate principal amount of the notes issued was $1,500,000.
On March 27, 1996, the Company issued in a private placement 500,000 shares
of 12% Senior Redeemable Preferred Stock and warrants to purchase an aggregate
of 1,346,788 shares of Common Stock to John Hancock Mutual Life Insurance
Company ("Hancock"). The shares and warrants were issued without registration
under the Securities Act by virtue of the exemption contained in Rule 506 of
Regulation D and Section 4(2) of the Securities Act.
ITEM 27. EXHIBITS
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------------------------------------------------------------------------------
<S> <C>
1.1+ Form of Underwriting Agreement
3.1* Articles of Incorporation
3.2** Bylaws
4.1** Form of Common Stock Certificate
4.2** Form of Publicly Traded Warrant
</TABLE>
<TABLE>
<S> <C>
5.1 Opinion of Frederick K. Koenen, Attorney at Law
10.1** Loan Agreement between the Company and Metropolitan Life Insurance Company and
related agreements, dated January 20, 1995
10.2+ Loan Agreement between the Company and U.S. Bank and related agreements, dated
May 26, 1995
10.3* Loan Agreement between the Company and Heller Financial and related documents,
dated October 20, 1995
10.4** Promissory Note, dated December 31, 1993, by RHP Vineyards, Inc., payable to R.H.
Phillips Partners
10.5** Form of Convertible Promissory Note Purchase Agreement and Form of 6% 5 Year
Convertible Promissory Note
10.6** Form of Selling Agent Agreement between the Company and Sequoia Equity Securities
Corporation
10.7+ Form of Underwriters' Warrant
10.8** Merger Agreement between R.H. Phillips Partners and R.H. Phillips, Inc., dated May
31, 1994
10.9** Sale Restriction Agreement by and between the Company, Capitol Bay Securities and
certain shareholders of the Company, dated October 5, 1994
10.11*** R.H. Phillips, Inc. 1995 Stock Option Plan and form of Incentive Stock Option
Agreement and Non-Statutory Stock Option Agreement
10.12* Securities Purchase Agreement between the Company and John Hancock Mutual Life
Insurance Company, dated March 27, 1996
10.13* Form of Common Stock Purchase Warrant issued to John Hancock Mutual Life Insurance
Company, dated March 27, 1996
</TABLE>
II-2
<PAGE> 66
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------------------------------------------------------------------------------
<S> <C>
10.14** Form of Common Stock Purchase Warrant issued to Capitol Bay Securities, dated
March 31, 1995
10.15** Underwriting Agreement between the Company and Capitol Bay Securities, dated
November 29, 1994
10.16 Grape Purchase Agreement between the Company and C. Mondavi & Sons dba Charles
Krug, dated February 14, 1995
10.17 Description of compensation arrangement between Victor L. Motto and the Company
16.1**** Letter from Deloitte & Touche LLP with respect to change of certified public
accountant
23.1 Consent of KPMG Peat Marwick LLP, Certified Public Accountants
23.2 Consent of Deloitte & Touche LLP, Certified Public Accountants
23.3 Consent of Frederick K. Koenen (Contained in Exhibit 5.1)
24.1+ Power of Attorney
</TABLE>
- ---------------
* Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1995 and incorporated by reference herein.
** Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994 and incorporated by reference herein.
*** Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for
the three month period ended September 30, 1995 and incorporated by
reference herein.
**** Filed as an exhibit to the Company's Current Report on Form 8-K, dated
August 1, 1995, and incorporated by reference herein.
+ Filed as an exhibit to the Company's Registration Statement on Form SB-2
dated June 5, 1996, and incorporated by reference.
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the small
business issuer in the successful defence of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned registrant undertakes that: (1) for purposes of determining
any liability under the Securities Act, the information omitted from the form of
prospectus filed as part of the registration statement in reliance upon Rule
430A and contained in the form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of the registration statement as of the time it was declared effective, and
(2) for the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-3
<PAGE> 67
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this amendment to the
registration statement to be signed on its behalf by the undersigned in the City
of Esparto, State of California, on July 15, 1996.
R.H. PHILLIPS, INC.
By: /s/ JOHN E. GIGUIERE
------------------------------------
John E. Giguiere, Co-President and
Co-Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacity and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- --------------------------------- --------------
<C> <S> <C>
/s/ JOHN E. Co-President, Co-Chief Executive July 15, 1996
GIGUIERE Officer, Chairman, Director
- --------------------------------------------- (Principal Executive Officer)
John E. Giguiere
/s/ * Co-President, Co-Chief Executive July 15, 1996
- --------------------------------------------- Officer, Vice Chairman, Director
Karl E. Giguiere (Principal Executive Officer)
/s/ * Vice President, Finance July 15, 1996
- --------------------------------------------- (Principal Financial Officer)
Robert T. Moore
/s/ * Controller (Principal Accounting July 15, 1996
- --------------------------------------------- Officer)
Richard Allen Pierce
/s/ * Sales Administration Manager, July 15, 1996
- --------------------------------------------- Director
Lane C. Giguiere
/s/ * Director July 15, 1996
- ---------------------------------------------
R. Ken Coit
/s/ Director
- ---------------------------------------------
Victor L. Motto
*By: JOHN E.
GIGUIERE
Attorney-in-fact
</TABLE>
II-4
<PAGE> 68
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ----------------------------------------------------------------------- -------------
<S> <C> <C>
1.1+ Form of Underwriting Agreement
3.1* Articles of Incorporation
3.2** Bylaws
4.1** Form of Common Stock Certificate
4.2** Form of Publicly Traded Warrant
</TABLE>
<TABLE>
<S> <C> <C>
5.1 Opinion of Frederick K. Koenen, Attorney at Law
10.1** Loan Agreement between the Company and Metropolitan Life Insurance
Company and related agreements, dated January 20, 1995
10.2+ Loan Agreement between the Company and U.S. Bank and related
agreements, dated April 30, 1996
10.3* Loan Agreement between the Company and Heller Financial and related
documents, dated October 20, 1995
10.4** Promissory Note, dated December 31, 1993, by RHP Vineyards, Inc.,
payable to R.H. Phillips Partners
10.5** Form of Convertible Promissory Note Purchase Agreement and Form of 6% 5
Year Convertible Promissory Note
10.6** Form of Selling Agent Agreement between the Company and Sequoia Equity
Securities Corporation
10.7+ Form of Underwriters' Warrant
10.8** Merger Agreement between R.H. Phillips Partners and R.H. Phillips,
Inc., dated May 31, 1994
10.9** Sale Restriction Agreement by and between the Company, Capitol Bay
Securities and certain shareholders of the Company, dated October 5,
1994
10.11*** R.H. Phillips, Inc. 1995 Stock Option Plan and form of Incentive Stock
Option Agreement and Non-Statutory Stock Option Agreement
10.12* Securities Purchase Agreement between the Company and John Hancock
Mutual Life Insurance Company, dated March 27, 1996
10.13* Form of Common Stock Purchase Warrant issued to John Hancock Mutual
Life Insurance Company, dated March 27, 1996
10.14** Form of Common Stock Purchase Warrant issued to Capitol Bay Securities,
dated
March 31, 1995
10.15** Underwriting Agreement between the Company and Capitol Bay Securities,
dated
November 29, 1994
10.16 Grape Purchase Agreement between the Company and C. Mondavi & Sons dba
Charles Krug, dated February 14, 1995
10.17 Description of compensation arrangement between Victor L. Motto and the
Company
16.1**** Letter from Deloitte & Touche LLP with respect to change of certified
public accountant
23.1 Consent of KPMG Peat Marwick LLP, Certified Public Accountants
23.2 Consent of Deloitte & Touche LLP, Certified Public Accountants
23.3 Consent of Frederick K. Koenen (Contained in Exhibit 5.1)
24.1+ Power of Attorney
</TABLE>
- ---------------
* Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1995 and incorporated by reference herein.
** Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994 and incorporated by reference herein.
*** Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for
the three month period ended September 30, 1995 and incorporated by
reference herein.
**** Filed as an exhibit to the Company's Current Report on Form 8-K, dated
August 1, 1995, and incorporated by reference herein.
+ Filed as an exhibit to the Company's Registration Statement on Form SB-2
dated June 5, 1996, and incorporated by reference.
<PAGE> 1
EXHIBIT 5.1
FREDERICK K. KOENEN
ATTORNEY AT LAW
<TABLE>
<S> <C>
San Francisco Office East Bay Office
- -------------------- ---------------
555 Montgomery Street, 1360 Pearl Street
Suite 1405 Alameda, California 94501
San Francisco, California 94111 (ph) (510) 769-0548
(ph) (415) 477-9415 (fax) (510) 769-0548
(fax) (415) 296-0467
</TABLE>
July 16, 1996
Board of Directors
R.H. Phillips, Inc.
26836 County Road 12A
Esparto, CA 95627
Ladies and Gentlemen:
I refer to the Registration Statement on Form SB-2, Registration Number
333-5247, filed by R.H. Phillips, Inc. (the "Company") with the Securities and
Exchange Commission under the Securities Act of 1933 (the "Act") on June 5,
1996, as subsequently amended by Amendment Number 1 to that Registration
Statement, which was filed with the Commission on July 5, 1996, and Amendment
Number 2 to that Registration Statement, which was submitted for filing with the
Commission as of the date of this letter. The Registration Statement and all
amendments thereto relate to the registration under the Act of up to 1,495,000
shares of Common Stock of the Company. For the purposes of this opinion, the
Registration Statement and all amendments to the Registration Statement are
collectively referred to as the "Registration Statement."
As counsel to the Company in connection with such registration, I have
examined the Registration Statement, examined corporate records, documents and
questions of law and have made such factual inquiries as I have considered
necessary or appropriate for the purposes of rendering this opinion. I have
assumed the genuineness of all signatures, the authenticity of all documents
submitted to me as originals, and the conformity to authentic original documents
of all documents submitted to me as copies.
Based on the foregoing, it is my opinion that: Following: a) a declaration
of the Commission that the Registration Statement is effective; b) due
qualification or registration of the Common Stock in those states in which the
aforementioned securities are to be offered and sold and where qualification or
registration is required; and c:) the sale of these securities in the manner
described in Amendment Number 2 to the Registration Statement
<PAGE> 2
Board of Directors
July 16, 1996
Page 2
(including the Company's receipt of full payment therefor), the Common Stock
will be legally issued, fully paid and non-assessable.
I consent to the filing of this opinion as an exhibit to the Registration
Statement and to the reference to the undersigned under the caption "Legal
Matters" in the prospectus contained therein. This consent is not to be
construed as an admission that I am a person whose consent is required to be
filed with the Registration Statement under the provisions of Section 7 of the
Act.
This opinion is furnished to you in connection with the filing of the
Registration Statement, and is not to be used, circulated, quoted or otherwise
relied upon for any other purpose.
Sincerely,
Frederick K. Koenen
<PAGE> 1
EXHIBIT 10.16
[CHARLES KRUG LETTERHEAD]
February 14, 1995
R.H. Phillips
26836 County Road 12A
Esparto, CA 95627
Attn: Bob Moore and Karl Giguiere
Pursuant to our conversation today, C. Mondavi & Sons agree to sell
approximately 1000 tons of Dunnigan Chardonnay in 1995, 700-800 tons in 1996
and 700+ tons in 1997. We do need 500 to 550 tons in 1995, so this should be
no problem.
Terms are eight (8) equal monthly payments beginning January 15 and ending
August 15 of each year. Price is to be the previous year's average of District
11 as published in the CDF&A final report. Interest is to begin on November 1
and is based on Bank of America's prime rate +1% as published on November 1,
each year. Buyer may prepay without penalty.
If these terms are agreeable with you, please sign and date in the appropriate
space below, and return the original to me.
C. Mondavi & Sons Acknowledge and agree to above terms:
/s/ M. C. Mondavi 3-16-95 /s/ R. Moore 3-31-95
- ----------------------------------- --------------------------------------
Seller Date Buyer Date
MCM/clp
Marc/Contrac1
<PAGE> 1
EXHIBIT 10.17
DESCRIPTION OF COMPENSATION ARRANGEMENT
BETWEEN R.H. PHILLIPS, INC. AND VICTOR L. MOTTO
In exchange for his agreement to serve on the Board of Directors of R.H.
Phillips, Inc. (the "Company"), Victor L. Motto is to receive a one-time
retainer of $5,000, plus a fee of $1,000 per Board of Directors meeting he
attends. Mr. Motto is also to receive options to purchase a maximum of 20,000
shares of Common Stock at a price equal to the fair market value of the
Company's Common Stock, subject to approval of a final stock option agreement by
Mr. Motto and the Board of Directors of the Company.
<PAGE> 1
EXHIBIT 23.1
The Board of Directors
R.H. Phillips, Inc.:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
Sacramento, California
July 15, 1996
<PAGE> 1
[DELOITTE & TOUCHE LLP LETTERHEAD]
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of R. H. Phillips,
Inc. on Form SB-2 of our report dated April 7, 1995, appearing in the
Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the headings "Selected
Financial Data" and "Experts" in such Prospectus.
Deloitte & Touche LLP
Oakland, California
July 15, 1996
