<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 5, 1996
REGISTRATION NO. 333-
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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R.H. PHILLIPS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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<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>
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<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 PLACE OF ESPARTO, CALIFORNIA 95627
BUSINESS (916) 662-3215
AND PRINCIPAL EXECUTIVE OFFICE) (NAME, ADDRESS AND TELEPHONE NUMBER OF
AGENT FOR SERVICE OF PROCESS)
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COPIES TO:
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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
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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. / /
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE REGISTRATION FEE
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Common Stock, no par value............. 1,495,000 Shares $5.125 $7,661,875 $2,642.03
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Underwriters' Warrants................. 149,500 Shares $6.15 $ 919,425 $ 317.04
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Total........................ $8,581,300 $2,959.07
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(1) Includes 195,000 shares of Common Stock issuable upon exercise of the
Underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457(c) under the Securities Act of
1933, based on the last reported sale of the Common Stock as quoted on the
Nasdaq SmallCap Market on June 3, 1996.
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
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<CAPTION>
FORM SB-2
ITEM NO. ITEM CAPTION LOCATION IN PROSPECTUS
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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, DATED , 1996
1,300,000 SHARES
[LOGO]
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." Application has
been made to have the Common Stock approved for quotation on the Nasdaq National
Market under the same symbol. On May 31, 1996, the last sale price of the Common
Stock as reported on the Nasdaq SmallCap Market was $5.375 per share. See "Price
Range of Common Stock and Dividend Policy."
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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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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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 149,500 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 SMALLCAP 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 SMALLCAP MARKET IN ACCORDANCE WITH RULE 10b-6A UNDER THE SECURITIES
EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
2
<PAGE> 5
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. 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. 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.
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
in 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 June, 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%. 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. The
3
<PAGE> 6
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.
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. Phillips(TM), EXP(TM), Night Harvest(TM), Mistura(TM), Toasted
Head(TM) and Chateau St. Nicholas(TM) 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> 7
THE OFFERING
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Common Stock Offered.................................... 1,300,000 shares
Common Stock Outstanding After Offering................. 5,938,435 shares(1)
Nasdaq SmallCap trading symbol.......................... RHPS(2)
Use of Proceeds......................................... To finance expansion of Company's
vineyards and winery. See "Use of
Proceeds."
</TABLE>
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(1) Excludes as of May 31, 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) Application has been made to have the Company's Common Stock approved for
quotation on the Nasdaq National Market under the same symbol.
Except where otherwise specifically indicated in this Prospectus, the
information provided assumes no exercise of the Underwriters' over-allotment
option. See "Underwriting."
5
<PAGE> 8
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
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1993 1994 1995 1995 1996
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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...................... $ (0.09) $ 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)
======= =======
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<CAPTION>
MARCH 31, 1996
--------------------------
ACTUAL AS ADJUSTED(2)
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BALANCE SHEET DATA:
Current assets...................................................... $ 9,039 $ 9,039
Total assets........................................................ 27,672 33,762
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 14,246
Working capital..................................................... 4,935 4,935
</TABLE>
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(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 $5.375, the last
reported sale price of the Common Stock on the Nasdaq SmallCap Market on May
31, 1996, and the application of the estimated net proceeds therefrom. See
"Use of Proceeds" and "Capitalization."
6
<PAGE> 9
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, 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 sales 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 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> 10
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
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.
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.
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 members of their immediate
family do not constitute a majority of the members of
8
<PAGE> 11
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. 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> 12
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.
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 May 31, 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> 13
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 $5.375 per share, are
estimated to be approximately $6,090,000 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 $1,228,000 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. Application
has been made to have the Common Stock approved for quotation on the Nasdaq
National Market under the same 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 May 31, 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 May 31, 1996, the last reported sale price of the Common Stock was
$5.375 per share. As of May 31, 1996, there were 304 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> 14
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 $5.375 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)... 7,623 13,713
Retained Earnings.................................... 533 533
------- -------
Total Shareholders' Equity................... 8,156 14,246
------- -------
Total Capitalization......................... $24,234 $30,324
======= =======
</TABLE>
(1) Excludes as of May 31, 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> 15
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................ $ (0.09) $ 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> 16
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> 17
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 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> 18
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 a
variety of factors, 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> 19
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.
17
<PAGE> 20
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, 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.
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
Company projects that further expansion in the years 1998 through 2000 will be
financed 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."
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:
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<PAGE> 21
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> 22
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. 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. 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 Motto, Kryla &
Fischer Report 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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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
<TABLE>
<S> <C> <C>
1980 1,141 211
81 1,291 269
82 1,371 318
83 1,368 337
84 1,462 478
85 1,483 577
86 1,626 750
87 1,739 891
88 1,935 1,094
89 2,063 1,204
90 2,314 1,392
91 2,693 1,616
92 3,037 1,883
93 3,152 2,002
94 3,433 2,224
95 3,769 2,518
</TABLE>
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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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. 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 EXP series wines are sold in 750 ml bottles, and
retail for about $12 each.
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>
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." The Company's vineyards provide
approximately 47% of its grape requirements and the Company purchased in 1995
approximately 14% of its grape requirements from vineyards owned by Charles Krug
which the Company farms and manages. As a part of its expansion program, the
Company intends to increase the percentage of its grape requirements provided by
its 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 -- Phylloxera." 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 1796 acres of land, and has a contract to
purchase an additional 900 acres adjacent to its present vineyards on which the
Company has already begun to plant vineyards. Once planted, grape vines
generally require between three to four years to
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<PAGE> 26
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.............................. 1,623 714 669
December 31, 1995.............................. 1,796 846 653
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> 27
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.
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.
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.
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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 Gomberg,
Fredrikson and Associates. 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 competiton
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 futher 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. 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 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
26
<PAGE> 29
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, 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.
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<PAGE> 30
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> 31
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
Stephen C. Kircher Director 42
</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.
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<PAGE> 32
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.
STEPHEN C. KIRCHER. Mr. Kircher was elected a director of the Company in
1995. Mr. Kircher is President of S. Kircher & Company, Inc. dba Capitol Bay
Securities ("Capital Bay"), the underwriter of the Company's initial public
offering. Prior to forming Capitol Bay in 1993, Mr. Kircher was President of
Spinner Corporation, an investment company specializing in the acquisition of
undervalued and/or troubled companies. From 1991 to 1993, Mr. Kircher was also
President of CNY International, Inc., a nationwide franchisor of retail
specialty food stores. Mr. Kircher received a B.A. in Political Science from the
University of California at San Diego.
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 Kircher, administers the Company's 1995 Stock Option Plan. The Audit
Committee, which consists of Messrs. Coit, Kircher 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, Kircher 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> 33
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> 34
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
Members of the Board of Directors are currently not 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 May 31, 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.
<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)..................
Stephen C. Kircher (9)........................ 76,869 1.6 1.3
All Executive Officers and Directors(10)...... 2,061,191 43.0 33.8
</TABLE>
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<PAGE> 35
- ---------------
(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 May 31, 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 May 31,
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) The shares attributed to Mr. Kircher consist of Common Stock he may
purchase pursuant to a stock purchase warrant. The Company issued the
warrant to Capitol Bay, of which Mr. Kircher is the President, for services
provided to the Company in connection with its initial public offering.
Capital Bay subsequently distributed a portion of the warrant to Mr.
Kircher. The warrant allows Mr. Kircher to purchase up to 76,869 shares of
Common Stock at a price of $5.57 per share. The warrant is presently
exercisable and expires on November 29, 1999.
(10) 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 May 31, 1996. See
"Description of Capital Stock."
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
33
<PAGE> 36
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, the
underwriter of the initial public offering.
Stephen Kircher is the President and majority shareholder of Capitol Bay.
Before Mr. Kircher was elected to the Board of Directors, Capitol Bay acted as
the underwriter of the Company's initial public offering, which was completed in
March, 1995. As compensation for its services in the offering, Capitol Bay
received $393,617, or 11% of the gross proceeds derived from the offering, and
warrants to purchase a maximum of 98,713 shares of the Company's Common Stock at
a price of $5.57 per share, exercisable beginning November 29, 1995 through
November 29, 1999.
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 May 31, 1996, there were 4,638,435 shares of Common Stock outstanding
held by 304 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. 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.
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<PAGE> 37
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.
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.
35
<PAGE> 38
The Hancock Warrants and the Capitol Bay 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 Bay 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.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust, New York, New York.
36
<PAGE> 39
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 all
of 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> 40
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> 41
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.
In connection with this offering, the Representative has agreed to pay a
finder's fee of $15,000 to Capitol Bay, an affiliate of Steven C. Kircher. Mr.
Kircher is a director of the Company.
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
39
<PAGE> 42
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.
40
<PAGE> 43
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> 44
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> 45
[DELOITTE & TOUCHE LETTERHEAD]
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
April 7, 1995
F-3
<PAGE> 46
R.H. PHILLIPS, INC., DBA
THE R.H. PHILLIPS VINEYARD
(A CALIFORNIA CORPORATION) (FORMERLY R.H. PHILLIPS PARTNERS)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(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, 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> 47
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)....................... $ (.09) $ .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)
(2) Net (loss) per share for 1994 is based upon the net (loss) for the seven
months ended December 31, 1994 that was attributable to the period during
which the Company operated as a C Corporation.
See accompanying notes to financial statements.
F-5
<PAGE> 48
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> 49
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> 50
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 Preferred Stock of the Company in
connection with the merger. All outstanding shares 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 the 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 45 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 accounted for 12%, 11% and 13%
of sales for the three months ended March 31, 1995 and 14%, 8% and 7% of
F-8
<PAGE> 51
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)
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 preferred stock, which was outstanding
at December 31, 1994, is 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 R.H. Phillips, Inc. 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.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
1996
DECEMBER 31, -----------
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>
F-9
<PAGE> 52
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)
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.
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.
F-10
<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)
5. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
1996
DECEMBER 31, -----------
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> 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)
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 1996
31, -----------
1995
----------- (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>
MARCH 31,
DECEMBER 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> 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)
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 5 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.
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.
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
F-13
<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)
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.
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 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.
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.
F-14
<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)
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> 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 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> 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)
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> 60
- ------------------------------------------------------
- ------------------------------------------------------
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................. 33
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> 61
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> 62
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
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> 63
<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
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 (Included on Pages II-5 and II-6)
</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.
+ To be filed by amendment.
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> 64
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 June 5, 1996.
R.H. PHILLIPS, INC.
By: /s/ JOHN E. GIGUIERE
------------------------------------
John E. Giguiere, Co-President and
Co-Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John E. Giguiere and Karl E. Giguiere, and each
of them, as his or her true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him or her in his or her name,
place and stead, in any and all capacities including his or her capacity as a
director and/or officer of R.H. Phillips, Inc., to sign any and all amendments
(including post-effective amendments and registration statement filed pursuant
to Rule 462) to this registration statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
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 June 5, 1996
GIGUIERE Officer, Chairman, Director
- --------------------------------------------- (Principal Executive Officer)
John E. Giguiere
/s/ KARL E. Co-President, Co-Chief Executive June 5, 1996
GIGUIERE Officer, Vice Chairman, Director
- --------------------------------------------- (Principal Executive Officer)
Karl E. Giguiere
/s/ ROBERT T. Vice President, Finance June 5, 1996
MOORE (Principal Financial Officer)
- ---------------------------------------------
Robert T. Moore
/s/ RICHARD ALLEN PIERCE Controller (Principal Accounting June 5, 1996
- --------------------------------------------- Officer)
Richard Allen Pierce
/s/ LANE C. Sales Administration Manager, June 5, 1996
GIGUIERE Director
- ---------------------------------------------
Lane C. Giguiere
/s/ R. KEN Director June 5, 1996
COIT
- ---------------------------------------------
R. Ken Coit
/s/ STEPHEN C. Director June 5, 1996
KIRCHER
- ---------------------------------------------
Stephen C. Kircher
</TABLE>
II-4
<PAGE> 65
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ---------- --------------------------------------------------------------------- -----------
<S> <C> <C>
1.1 Form of Underwriting Agreement
3.1* Articles of Incorporation
3.2** Bylaws
4.1** Common Stock Certificate
4.2** Form of Publicly Traded Warrant
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
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
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, Attorney at Law (contained in Exhibit
5.1)
24.1 Power of Attorney (contained on pages II-5 and II-6 of registration
statement)
</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.
+ To be filed by amendment.
<PAGE> 1
Exhibit 1.1
R. H. PHILLIPS, INC.
(a California corporation)
______________ Shares of Common Stock
UNDERWRITING AGREEMENT
_____________, 1996
VAN KASPER & COMPANY
As Representative of the several
Underwriters named in Schedule I,
11661 San Vincente Boulevard, Suite 709
Los Angeles, California 90049
Ladies and Gentlemen:
R. H. Phillips, Inc., a California corporation (the "Company"),
proposes to issue and sell to the several Underwriters named in Schedule I
hereto (the "Underwriters") 1,300,000 shares (the "Firm Shares") of the
Company's no par value Common Stock (the "Common Stock"). In addition, the
Company also proposes to grant to the Underwriters an option to purchase up to
an additional 195,000 shares of the Common Stock on the terms and for the
purposes set forth in Section 2(b) (the "Option Shares"). The Firm Shares and
any Option Shares purchased pursuant to this Agreement are referred to below as
the "Shares." Van Kasper & Company is acting as representative of the several
Underwriters and in that capacity is referred to in this Agreement as the
"Representative."
The Company hereby confirms its agreement with the several
Underwriters as set forth below.
1. Representations and Warranties of the Company. The Company
hereby represents and warrants to and agrees with each Underwriter as follows:
(a) A Registration Statement (Registration No. 333-____)
on Form SB-2 under the Securities Act of 1933, as amended (the "Securities
Act"), including such amendments to such registration statement as may have
been required to the date of this Agreement, relating to the Shares has been
prepared by the Company under and in conformity with the provisions of the
Securities Act, the rules and regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder and has been
filed with the Commission. After the execution of this Agreement, the Company
will file with the Commission either (i) if such registration statement, as it
may have been amended, has been declared by the Commission to be effective
under the Securities Act, either (A) if the Company relies on Rule 434 under
the Securities Act, a Term Sheet (defined below) relating to the Shares, that
identifies the Preliminary Prospectus (defined below) that it supplements and
contains such information as is required or permitted
<PAGE> 2
by Rules 434, 430A and 424(b) of the Rules and Regulations or (B) if the
Company does not rely on Rule 434 under the Securities Act, a prospectus in the
form most recently included in an amendment to such registration Statement (or,
if no such amendment has been filed, in such registration statement), with such
changes or insertions as are required by Rule 430A of the Rules and Regulations
or permitted by Rule 424(b) of the Rules and Regulations, and in the case of
either (i)(A) or (i)(B) of this sentence, as has been provided to and approved
by the Representative prior to the execution of this Agreement, or (ii) if such
registration statement, as it may have been amended, has not been declared by
the Commission to be effective under the Securities Act, an amendment to such
registration statement, including a form of prospectus, a copy of which
amendment has been furnished to and approved by the Representative prior to the
execution of this Agreement. As used in this Agreement, the term "Registration
Statement" means such registration statement, including all financial schedules
and exhibits thereto and including any information omitted therefrom pursuant
to Rule 430A of the Rules and Regulations and included in the Prospectus
(defined below), in the form in which it became effective, and any registration
statement filed pursuant to Rule 462(b) of the Rules and Regulations with
respect to the Common Stock (a "Rule 462(b) Registration Statement"), and, in
the event of any amendment thereto after the effective date of such
registration statement (the "Effective Date"), shall also mean (from and after
the effectiveness of such amendment) such registration statement as so amended
(including any 462(b) Registration Statement); the term "Preliminary
Prospectus" means each prospectus subject to completion filed with such
registration statement or any amendment thereto (including the prospectus
subject to completion, if any, included in the Registration Statement or any
amendment thereto at the time it was or is declared effective); the term
"Prospectus" means:
(A) if the Company relies on Rule 434 under the
Securities Act, the Term Sheet relating to the securities that is first filed
pursuant to Rule 424(b)(7) under the Securities Act, together with the
Preliminary Prospectus identified therein that such Term Sheet supplements;
(B) if the Company does not rely on Rule 434
under the Securities Act, the prospectus first filed with the Commission
pursuant to Rule 424(b) under the Securities Act; or
(C) if the Company does not rely on Rule 434
under the Securities Act and if no prospectus is required to be filed pursuant
to Rule 424(b) under the Securities Act, the prospectus included in the
Registration Statement;
provided that if any revised prospectus that is provided to the Underwriters by
the Company for "use in connection with the offering of the Shares" differs
from the prospectus on file with the Commission at the time the Registration
Statement became or becomes, as the case may be, effective, whether or not the
revised prospectus is required to be filed with the Commission pursuant to Rule
424(b)(3) of the Rules and Regulations, the term "Prospectus" shall mean such
revised prospectus from and after the time it is first provided to the
-2-
<PAGE> 3
Underwriters for such use. The term "Term Sheet" as used in this Agreement
means any term sheet that satisfies the requirements of Rule 434 under the
Securities Act. Any reference in this Agreement to the "date" of a prospectus
that includes a Term Sheet means the date of such Term Sheet.
(b) No order suspending the effectiveness of the
Registration Statement or preventing or suspending the issue of any Preliminary
Prospectus or the Prospectus has been issued and no proceedings for that
purpose are pending or, to the best knowledge of the Company, threatened or
contemplated by the Commission; no order suspending the sale of the Shares in
any jurisdiction has been issued and no proceedings for that purpose are
pending or, to the best knowledge of the Company, threatened or contemplated,
and any request of the Commission for additional information (to be included in
the Registration Statement, any Preliminary Prospectus or the Prospectus or
otherwise) has been complied with.
(c) When the Preliminary Prospectus was filed with the
Commission it (i) contained all statements required to be contained therein and
complied in all respects with the requirements of the Securities Act, the Rules
and Regulations, the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations of the Commission thereunder (the
"Exchange Act Rules and Regulations") and (ii) did not include any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. When the Registration Statement or any
amendment thereto was or is declared effective, it (i) contained or will
contain all statements required to be contained therein and complied or will
comply in all respects with the requirements of the Securities Act, the Rules
and Regulations, the Exchange Act and the Exchange Act Rules and Regulations
and (ii) did not or will not include any untrue statement of a material fact or
omit to state any material fact necessary to make the statements therein not
misleading. When the Prospectus or any amendment or supplement to the
Prospectus is filed with the Commission pursuant to Rule 424(b) (or, if the
Prospectus or such amendment or supplement is not required to be so filed, when
the Registration Statement or the amendment thereto containing such amendment
or supplement to the Prospectus was or is declared effective) and at all times
subsequent thereto up to and including the Closing Date (defined below) and any
date on which Option Shares are to be purchased, the Prospectus, as amended or
supplemented at any such time, (i) contained or will contain all statements
required to be contained therein and complied or will comply in all respects
with the requirements of the Securities Act, the Rules and Regulations, the
Exchange Act and the Exchange Act Rules and Regulations, and (ii) did not or
will not include any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading. The foregoing
provisions of this paragraph (c) do not apply to statements or omissions made
in any Preliminary Prospectus, the Registration Statement or any amendment
thereto or the Prospectus or any amendment or supplement thereto in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter through the Representative specifically for use therein.
-3-
<PAGE> 4
(d) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the jurisdiction
of its incorporation, has full power (corporate and other) and authority to own
or lease its properties and conduct its business as described in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) and as currently being
conducted and proposed to be conducted by it and is duly qualified as a foreign
corporation and in good standing in all jurisdictions in which the character of
the property owned or leased or the nature of the business transacted by it
makes qualification necessary (except where the failure to be so qualified
would not have a material effect on the business, properties, condition
(financial or otherwise), results of operations or prospects of the Company).
The Company is in possession of and operating in compliance with all
authorizations, licenses, certificates, consents, orders and permits from
federal, state, local, foreign and other governmental or regulatory authorities
that are material to the conduct of its business, all of which are valid and in
full force and effect. The Company does not have any subsidiaries. As used in
this Agreement, the word "subsidiary" means any corporation, partnership,
limited liability company or other entity of which the Company directly or
indirectly owns 50% or more of the equity or that the Company directly or
indirectly controls.
(e) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus), there has not
been any material loss or interference with the business of the Company from
fire, explosion, flood, earthquake or other calamity, whether or not covered by
insurance, or from any court or governmental action, order or decree, or any
changes in the capital stock or long-term debt of the Company, or any dividend
or distribution of any kind declared, paid or made on the capital stock of the
Company, or any material change, or a development known to the Company that
might cause or result in a material change, in or affecting the business,
properties, condition (financial or otherwise), results of operation or
prospects of the Company taken as a whole, whether or not arising from
transactions in the ordinary course of business, in each case other than as may
be set forth in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus), and
since such dates, except in the ordinary course of business, the Company has
not entered into any material transaction not described in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).
(f) There is no agreement, contract, license, lease or other
document required to be described in the Registration Statement or the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) or to be filed as an exhibit to the Registration
Statement which is not described or filed as required. All contracts described
in the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), if any, are in full force and effect on the date
hereof, and to the best knowledge of the Company, neither the Company nor any
other party thereto is in material breach of or default under any such
contract.
-4-
<PAGE> 5
(g) The authorized and outstanding capital stock of the
Company is set forth in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), and the description of the
Common Stock therein conforms with and accurately describes the rights set
forth in the instruments defining the same. The Shares have been duly and
validly authorized and, when issued and delivered against payment therefor as
provided herein, will be duly and validly issued, fully paid and nonassessable,
and the issuance of the Shares is not subject to any preemptive or similar
rights.
(h) All of the outstanding shares of Common Stock of the
Company have been duly authorized and validly issued and are fully paid and
nonassessable, have been issued in compliance with all applicable federal and
state securities laws and were not issued in violation of or subject to any
preemptive rights or other rights to subscribe for or purchase securities of
the Company. The description of the Company's stock option, stock bonus and
other stock plans or arrangements, and the options or other rights granted or
exercised thereunder, set forth in the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus), accurately and fairly
present the information required to be shown with respect to such plans,
arrangements, options and rights. Other than this Agreement and the options to
purchase the Common Stock described in the Prospectus, there are no options,
warrants or other rights outstanding to subscribe for or purchase any shares of
the Company's capital stock. There are no preemptive rights applicable to any
shares of capital stock of the Company.
(i) This Agreement has been duly authorized, executed and
delivered by, and constitutes the valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, except as rights
to indemnification hereunder may be limited by applicable federal or state
securities laws. The filing of the Registration Statement does not give rise
to any rights, other than those which have been waived, for or relating to the
registration of any capital stock of the Company.
(j) The Company is not, or with the giving of notice or
lapse of time or both would not be, in violation of or in default under, nor
will the execution or delivery of this Agreement or the completion of the
transactions contemplated by this Agreement result in a violation of or
constitute a breach of or a default (including without limitation with the
giving of notice, the passage of time or otherwise) under, the articles of
incorporation, bylaws or other governing documents of the Company or any
obligation, agreement, covenant or condition contained in any bond, debenture,
note or other evidence of indebtedness or in any contract, indenture, mortgage,
deed of trust, loan agreement, lease, license, joint venture or other agreement
or instrument to which the Company is a party or by which any of its properties
may be bound or affected. The Company has not incurred any liability, direct
or indirect, for any finders' or similar fees payable on behalf of the Company
or the Underwriters in connection with the transactions contemplated by this
Agreement. The performance by the Company of its obligations under this
Agreement will not violate any law, ordinance, rule or regulation, or any
order, writ, injunction, judgment or decree of any governmental agency or body
or of any court having jurisdiction over the
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<PAGE> 6
Company or any of its properties, or result in the creation or imposition of
any lien, charge, claim or encumbrance upon any property or asset of the
Company. Except for permits and similar authorizations required under the
Securities Act, the Exchange Act or under other securities or Blue Sky laws of
certain jurisdictions and for such permits and authorizations that have been
obtained, no consent, approval, authorization or order of any court,
governmental agency or body, financial institution or any other person is
required in connection with the completion of the transactions contemplated by
this Agreement.
(k) The Company owns, or has valid rights to use, all
items of real and personal property which are material to the business of the
Company and free and clear of all liens, encumbrances and claims that might
materially interfere with the business, properties, condition (financial or
otherwise), results of operations or prospects of the Company.
(l) The Company owns or possesses adequate rights to use
all material patents, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names and copyrights described or referred to
in the Registration Statement and the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus) as owned by or used by
the Company, or which are necessary for the conduct business of the Company as
described in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus); and
the Company has not received any notice of infringement of or conflict with
asserted rights of others with respect to any patents, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, tradenames or
copyrights which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, might have a material effect on the business,
properties, condition (financial or otherwise), results of operations or
prospects of the Company.
(m) There is no litigation or governmental proceeding to
which the Company is a party or to which any property of the Company is subject
which is pending or, to the best knowledge of the Company, is threatened or
contemplated against the Company that might have a material effect on the
business, properties, condition (financial or otherwise), results of operations
or prospects of the Company, that might prevent consummation of the
transactions contemplated by this Agreement or that are required to be
disclosed in the Registration Statement or Prospectus (or, if the Prospectus is
not in existence, in the most recent Preliminary Prospectus) and are not so
disclosed.
(n) The Company is not in violation of, and has not
received any notice or claim from any governmental agency or third party that
any of them is in violation of, any law, order, ordinance, rule or regulation,
or any order, writ, injunction, judgment or decree of any agency or body or of
any court, to which it or its properties (whether owned or leased) may be
subject, which violation might have a material effect on the business,
properties, condition (financial or otherwise), results of operations or
prospects of the Company.
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<PAGE> 7
(o) The Company has not taken and shall not take,
directly or indirectly, any action designed to cause or result in, or which has
constituted or which might reasonably be expected to cause or result in, under
the Exchange Act, the Exchange Act Rules and Regulations or otherwise, the
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares. No bid or purchase by the Company
and, to the best knowledge of the Company, no bid or purchase that could be
attributed to the Company (as a result of bids or purchases by an "affiliated
purchaser" within the meaning of Rule 10b-6 under the Exchange Act) for or of
the Shares, the Common Stock, any securities of the same class or series as the
Common Stock or any securities convertible into or exchangeable for or that
represent any right to acquire the Common Stock is now pending or in progress
or will have commenced at any time prior to the completion of the distribution
of the Shares.
(p) KPMG Peat Marwick LLP, whose reports appear in the
Registration Statement and the Prospectus, are, and during the periods covered
by their reports in the Registration Statement were, independent accountants as
required by the Securities Act and the Rules and Regulations. The financial
statements and schedules included in the Registration Statement, each
Preliminary Prospectus and the Prospectus present fairly (or, if the Prospectus
has not been filed with the Commission, as to the Prospectus, will present
fairly) the financial condition, results of operations, cash flow and changes
in shareholders' equity and the financial statements and schedules included in
the Registration Statement present fairly the information required to be stated
therein. Such financial statements and schedules have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis throughout the periods presented. The selected and summary
financial and statistical data included in the Registration Statement and the
Prospectus present fairly (or, if the Prospectus has not been filed with the
Commission, as to the Prospectus, will present fairly) the information shown
therein and have been compiled on a basis consistent with the audited financial
statements presented therein. No other financial statements or schedules are
required to be included in the Registration Statement.
(q) The books, records and accounts of the Company
accurately and fairly reflect, in reasonable detail, the transactions in and
dispositions of the assets of the Company. The systems of internal accounting
controls maintained by the Company are sufficient to provide reasonable
assurances that: (i) transactions are executed in accordance with management's
general or specific authorization; (ii) transactions are recorded as necessary
(x) to permit preparation of financial statements in conformity with generally
accepted accounting principles and (y) to maintain accountability for assets;
(iii) access to assets is permitted only in accordance with management's
general or specific authorization; and (iv) the recorded accountability for
assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(r) The Company will not, and the Company has delivered
to the Representative the written agreement of each of its officers and
directors and all persons who own more than 1% of the outstanding shares of
Common Stock (collectively, "Material
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<PAGE> 8
Holders") to the effect that each of the Material Holders will not, in each
case for a period of 180 days following the date of this Agreement, in each
case without the prior written consent of the Representative, offer, sell or
contract to sell, or otherwise dispose of, or announce the offer of, any Common
Stock or options or convertible securities exercisable or exchangeable for, or
convertible into, Common Stock, in each case without the prior written consent
of the Representative.
(s) No labor disturbance by the employees of the Company
exists, is imminent or, to the best knowledge of the Company, is contemplated
or threatened; and the Company is not aware of an existing, imminent or
threatened labor disturbance by the employees of any principal suppliers,
contract manufacturing organizations, manufacturers, authorized dealers or
distributors that might be expected to result in any material change in the
business, properties, condition (financial or otherwise), results of operations
or prospects of the Company. No collective bargaining agreement exists with
any of the Company's employees and, to the best knowledge of the Company, no
such agreement is imminent.
(t) The Company has filed all federal, state, local and
foreign tax returns that are required to be filed or has requested extension
thereof and has paid all taxes, including withholding taxes, penalties and
interest, assessments, fees and other charges to the extent that the same have
become due and payable. No tax assessment or deficiency has been made or
proposed against the Company or any of its subsidiaries nor has the Company
received any notice of any proposed tax assessment or deficiency.
(u) Except as set forth in the Prospectus (or if the
Prospectus is not in existence, the most recent Preliminary Prospectus) there
are no outstanding loans, advances or guaranties of indebtedness by the Company
to or for the benefit of any of (i) its "affiliates," as such term is deemed in
the Rules and Regulations, (ii) any of the officers or directors of any of its
subsidiaries or (iii) any of the members of the families of any of them.
(v) The Company has not, directly or indirectly, at any
time: (i) made any contributions to any candidate for political office in
violation of law; (ii) made any payment to any local, state, federal or foreign
governmental officer or official, or other person charged with similar public
or quasi-public duties; or (iii) violated any provision of the Foreign Corrupt
Practices Act of 1977, as amended.
(w) The Company does not have any liability, absolute or
contingent, relating to: (i) public health or safety; (ii) worker health or
safety; (iii) product defect or warranty; or (iv) except as may be disclosed in
the Registration Statement and Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) pollution, damage to or
protection of the environment, including, without limitation, relating to
damage to natural resources, emissions, discharges, releases or threatened
releases of hazardous materials into the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or subsurface
strata) or otherwise relating to the manufacture, processing, use, treatment,
storage, generation, disposal, transport or handling of any
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<PAGE> 9
hazardous materials. As used herein, "hazardous material" includes chemical
substances, wastes, pollutants, contaminants, hazardous or toxic substances,
constituents, materials or wastes, whether solid, gaseous or liquid in nature.
(x) The Company has not distributed and will not
distribute prior to the Closing Date or on or prior to any date on which the
Option Shares is to be purchased, as the case may be, any prospectus or other
offering material in connection with the offering and sale of the Shares other
than the Prospectus, the Registration Statement and any other material which
may be permitted by the Securities Act and the Rules and Regulations.
(y) The Company has filed in a timely manner all reports
and other documents required to be filed with the Commission under the Exchange
Act and with the National Association of Securities Dealers, Inc. (the "NASD"),
and each such report or other document contained, at the time it was filed,
such information as was required to be included in such report or other
document and all such information was correct and complete in all material
respects; to the Company's best knowledge, except as disclosed in the
Registration Statement, no event has occurred or is likely to occur that
required or would require an amendment to any report or document referred to in
this section that has not been filed or distributed as required.
(z) The Shares have been approved for inclusion for listing on
the Nasdaq National Market, subject only to official notice of issuance.
(aa) The Company is not now, and intends to conduct its
affairs in the future in such a manner so that it will not become, an
investment company within the meaning of the Investment Company Act of 1940, as
amended.
(ab) The Company is in compliance in all material respects
with all presently applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) for which the Company would have any liability has occurred; the Company
has not incurred and does not expect to incur liability under (i) Title IV of
ERISA with respect to termination of, or withdrawal from, any "pension plan" or
(ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the
"Code"); and each "pension plan" for which the Company would have any liability
that is intended to be qualified under Section 401(a) of the Code is so
qualified in all material respects and nothing has occurred, whether by action
or by failure to act, which would cause the loss of such qualification.
(ac) There has been no storage, disposal, generation,
manufacture, refinement, transportation, handling or treatment of toxic wastes,
medical wastes, hazardous wastes or hazardous substances by the Company (or, to
the best knowledge of the Company, any of their predecessors in interest) at,
upon or from any of the property now or previously owned or leased by the
Company in violation of any applicable law, ordinance, rule, regulation,
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<PAGE> 10
order, judgment, decree or permit or which would require remedial action under
any applicable law, ordinance, rule, regulation, order, judgment, decree or
permit, except for any violation or remedial action which would not have, or
could not be reasonably likely to have, singularly or in the aggregate with all
such violations and remedial actions, a material effect on the general affairs,
management, financial position, shareholders' equity or results of operations
of the Company; there has been no material spill, discharge, leak, emission,
injection, escape, dumping or release of any kind onto such property or into
the environment surrounding such property of any toxic wastes, medical wastes,
solid wastes, hazardous wastes or hazardous substances due to or caused by the
Company or with respect to which the Company have knowledge, except for any
such spill, discharge, leak, emission, injection, escape, dumping or release
which would not have or would not be reasonably likely to have, singularly or
in the aggregate with all such spills, discharges, leaks, emissions,
injections, escapes, dumpings and releases, a material effect on the general
affairs, management, financial position, shareholders' equity or results of
operations of the Company and the terms "hazardous wastes," "toxic wastes,"
"hazardous substances" and "medical wastes" shall have the meanings specified
in any applicable local, state, federal and foreign laws or regulations with
respect to environmental protection.
(ad) The Company satisfies the requirements for filing
a registration statement on Form SB-2.
2. Purchase, Sale and Delivery of the Stock.
(a) On the basis of the representations, warranties,
covenants and agreements of the Company contained in this Agreement and subject
to the terms and conditions set forth in this Agreement, the Company agrees to
sell to the several Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Company, at a purchase price of
$______ per Share ("Purchase Price") the respective number of Firm Shares set
forth opposite the name of such Underwriter on Schedule I to this Agreement
(subject to adjustment as provided in Section 8 of this Agreement). In
addition, the Company agrees to issue to the Representative at the Closing
Date, as additional compensation for the Representative's services, a warrant
to purchase Common Stock (the "Representative Warrant") for the purchase of up
to ______ shares of Common Stock at the Purchase Price, upon the terms and
subject to adjustment and conversion as described in the form of
Representative's Warrant filed as an exhibit to the Registration Statement.
(b) On the basis of the several (and not joint)
representations, warranties, covenants and agreements of the Underwriters
contained in this Agreement and subject to the terms and conditions set forth
in this Agreement, the Company grants an option to the several Underwriters to
purchase from the Company, severally and jointly, all or any portion of the
Option Shares at the Purchase Price. This option may be exercised only to
cover over-allotments in the sale of the Firm Shares by the Underwriters and
may be exercised in whole or in part at any time (but not more than once) on or
before the 30th day after the date
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<PAGE> 11
of the Prospectus upon written, telecopied or telegraphic notice by the
Representative to the Company setting forth the aggregate principal amount of
Option Shares as to which the several Underwriters are exercising the option
and the settlement date. The Option Shares shall be purchased severally, and
not jointly, by each Underwriter, if purchased at all, in the same proportion
that the number of Firm Shares set forth opposite the name of the Underwriter
in Schedule I to this Agreement bears to the total number of Firm Shares to be
purchased by the Underwriters under Section 2(a) above, subject to such
adjustments as the Representative in its absolute discretion shall make to
eliminate any fractional Shares. Delivery of Option Shares, and payment
therefor, shall be made as provided in Section 2(c) and Section 2(d) below.
(c) Delivery of the Firm Shares and the Option Shares (if
the option granted by the Company in Section 2(b) above has been exercised not
later than 7:00 a.m., San Francisco time, on the date two business days
preceding the Closing Date), and payment therefor, shall be made at the office
of Van Kasper & Company, 600 California Street, San Francisco, California at
7:00 a.m., San Francisco time, on the third business day after the date of this
Agreement, or at such time on such other day, not later than seven full
business days after such third business day, as shall be agreed upon in writing
by the Company and the Representative, or as provided in Section 8 of this
Agreement. The date and hour of delivery and payment for the Firm Shares are
referred to in this Agreement as the "Closing Date." As used in this
Agreement, "business day" means a day on which the Nasdaq Stock Market is
operating and on which banks in New York and California are open for business
and not permitted by law or executive order to be closed. Certificates for the
Shares shall be in such denominations and registered in such names as the
Representative may request in writing at least two business days before the
Closing Date.
(d) If the option granted by the Company in Section 2(b)
above is exercised after 7:00 a.m., San Francisco time, on the date two
business days preceding the Closing Date, delivery of the Option Shares and
payment therefor shall be made at the office of Van Kasper & Company, 600
California Street, San Francisco, California at 7:00 a.m., San Francisco time,
on the date specified by the Representative (which shall be three or four or
fewer business days after the exercise of the option, but not in excess of the
period specified in the Rules and Regulations).
(e) Payment of the purchase price for the Shares by the
several Underwriters shall be made by certified or official bank check or
checks drawn in next-day funds, payable to the order of the Company. Such
payment shall be made upon delivery of Shares to the Representative for the
respective accounts of the several Underwriters. The Shares to be delivered to
the Representative shall be registered in such name or names and shall be in
such denominations as the Representative may request at least two business days
before the Closing Date, in the case of Firm Shares, and at least one business
prior to the purchase of the Option Shares, in the case of the Option Shares.
The Representative, individually and not on behalf of the Underwriters, may
(but shall not be obligated to) make payment to the Company for Shares to be
purchased by any Underwriter whose check shall
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<PAGE> 12
not have been received by the Representative on the Closing Date or any later
date on which Option Shares is purchased for the account of such Underwriter.
Any such payment shall not relieve such Underwriter from any of its obligations
hereunder.
(f) The several Underwriters propose to offer the Shares
for sale to the public as soon as the Representative deems it advisable to do
so. The Firm Shares are to be initially offered to the public at the public
offering price set forth (or to be set forth) in the Prospectus. The
Representative may from time to time thereafter change the public offering
price and other selling terms.
(g) The information set forth in the last paragraph on
the front cover page (insofar as such information relates to the Underwriters),
the legend respecting stabilization set forth on the inside front cover page
and the statements set forth under the caption "Underwriting" in the
Registration Statement, any Preliminary Prospectus and in the final form of
Prospectus filed pursuant to Rule 424(b) constitute the only information
furnished by the Underwriters to the Company for inclusion in any Preliminary
Prospectus, the Prospectus or the Registration Statement.
3. Further Agreements of the Company. The Company covenants and
agrees with the several Underwriters as follows:
(a) The Company will use its best efforts to cause the
Registration Statement, and any amendment thereof, if not effective at the time
of execution of this Agreement, to become effective as promptly as possible.
If the Registration Statement has become or becomes effective pursuant to Rule
430A, or filing of the Prospectus is otherwise required under Rule 424(b), the
Company will file the Prospectus, properly completed (and in form and substance
reasonably satisfactory to the Underwriters) pursuant to Rule 424(b) within the
time period prescribed and will provide evidence satisfactory to the
Representative of such timely filing. The Company will not file the
Prospectus, any amended Prospectus, any amendment (including post-effective
amendments) of the Registration Statement or any supplement to the Prospectus
without (i) advising the Representative of and, a reasonable time prior to the
proposed filing of such amendment or supplement, furnishing the Representative
with copies thereof and (ii) obtaining the prior consent of the Representative
to such filing. The Company will prepare and file with the Commission,
promptly upon the request of the Representative, any amendment to the
Registration Statement or supplement to the Prospectus that may be necessary or
advisable in the opinion of the Representative in connection with the
distribution of the Shares by the Underwriters and use its best efforts to
cause the same to become effective as promptly as possible.
(b) The Company will promptly advise the Representative
(i) when the Registration Statement becomes effective, (ii) when any
post-effective amendment thereof becomes effective, (iii) of any request by the
Commission for any amendment of or supplement to the Registration Statement or
the Prospectus or for any additional information, (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the
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<PAGE> 13
Registration Statement or the institution or threatening of any proceeding for
that purpose, and (v) of the receipt by the Company of any notification with
respect to the suspension of the registration, qualification or exemption from
registration or qualification of the Shares for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose. The Company will
use its best efforts to prevent the issuance of any such stop order or
suspension and, if issued, to obtain as soon as possible the withdrawal
thereof.
(c) The Company will (i) on or before the Closing Date,
deliver to the Representative and its counsel a signed copy of the Registration
Statement as originally filed and of each amendment thereto filed prior to the
time the Registration Statement becomes effective and, promptly upon the filing
thereof, a signed copy of each post-effective amendment, if any, to the
Registration Statement (together with, in each case, all exhibits thereto
unless previously furnished to the Representative) and will also deliver to the
Representative, for distribution to the several Underwriters, a sufficient
number of additional conformed copies of each of the foregoing (excluding
exhibits) so that one copy of each may be distributed to each Underwriter, (ii)
as promptly as possible deliver to the Representative and send to the several
Underwriters, at such office or offices as the Representative may designate, as
many copies of the Prospectus as the Representative may reasonably request and
(iii) thereafter from time to time during the period in which a prospectus is
required by law to be delivered by an Underwriter or a dealer, likewise to send
to the Underwriters as many additional copies of the Prospectus and as many
copies of any supplement to the Prospectus and of any amended Prospectus, filed
by the Company with the Commission, as the Representative may reasonably
request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a
prospectus is required by law to be delivered by an Underwriter or a dealer any
event shall occur as a result of which it is necessary to supplement or amend
the Prospectus in order to make the Prospectus not misleading or so that the
Prospectus will not omit to state a material fact necessary to be stated
therein, in each case at the time the Prospectus is delivered to a purchaser of
the Shares, or if it shall be necessary to amend or to supplement the
Prospectus to comply with the Securities Act or the Rules and Regulations, the
Company will forthwith prepare and file with the Commission a supplement to the
Prospectus or an amended Prospectus so that the Prospectus as so supplemented
or amended will not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein not
misleading and so that it then will otherwise comply with the Securities Act
and the Rules and Regulations. If, after the public offering of the Shares by
the Underwriters and during such period, the Underwriters propose to vary the
terms of offering thereof by reason of changes in general market conditions or
otherwise, the Representative will advise the Company in writing of the
proposed variation and if, in the opinion either of counsel for the Company or
counsel for the Underwriters, such proposed variation requires that the
Prospectus be supplemented or amended, the Company will forthwith prepare and
file with the Commission a supplement to the Prospectus setting forth such
variation. The Company authorizes the Underwriters and all dealers to whom any
of the Shares may be sold by the
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<PAGE> 14
Underwriters to use the Prospectus, as from time to time so amended or
supplemented, in connection with the sale of the Shares in accordance with the
applicable provisions of the Securities Act and the Rules and Regulations for
such period.
(e) The Company will cooperate with the Representative
and its counsel in the qualification or registration of the Shares for offer
and sale under the securities or blue sky laws of such jurisdictions as the
Representative may designate and, if applicable, in connection with exemptions
from such qualification or registration and, during the period in which a
Prospectus is required by law to be delivered by an Underwriter or a dealer, in
keeping such qualifications, registrations and exemptions in effect; provided,
however, that the Company shall not be obligated to file any general consent to
service of process or to qualify to do business as a foreign corporation in any
jurisdiction in which it is not so qualified. The Company will, from time to
time, prepare and file such statements, reports and other documents as are or
may be required to continue such qualifications, registrations and exemptions
in effect for so long a period as the Representative may reasonably request for
the distribution of the Shares.
(f) During a period of five years commencing with the
date of this Agreement, the Company will promptly furnish to the Representative
and to each Underwriter who may so request in writing copies of (i) all
periodic and special reports furnished by it to shareholders of the Company,
(ii) all information, documents and reports filed by it with the Commission,
any securities exchange on which any securities of the Company are then listed,
Nasdaq National Market or the NASD, (iii) all press releases and material news
items or articles in respect of the Company or its affairs released or prepared
by the Company (other than promotional and marketing materials disseminated
solely to customers and potential customers of the Company in the ordinary
course of business) and (iv) any additional information concerning the Company
or its business which the Representative may reasonably request.
(g) As soon as practicable, but not later than the 45th
day following the end of the fiscal quarter first ending after the first
anniversary of the Effective Date, the Company will make generally available to
its securities holders and furnish to the Representative an earnings statement
or statements in accordance with Section 11(a) of the Securities Act and Rule
158 of the Rules and Regulations.
(h) The Company will apply the net proceeds from the
offering of the Shares in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(i) The Company will comply with all provisions of all
undertakings contained in the Registration Statement.
(j) The Company will, and at all times for a period of at
least five years after the date of this Agreement, cause the Common Stock
(including the Shares) to be listed on the Nasdaq National Market, and the
Company will comply with all registration, filing,
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<PAGE> 15
reporting and other requirements of the Exchange Act and the Nasdaq National
Market which may from time to time be applicable to the Company.
(k) The Company will use its best efforts to maintain
insurance of the types and in the amounts which it deems adequate for its
business consistent with insurance coverage maintained by companies of similar
size and engaged in similar businesses, including, but not limited to, product
liability insurance and general liability insurance covering all real and
personal property owned or leased by the Company against theft, damage,
destruction, acts of vandalism and all other risks customarily insured against.
(l) The Company will issue no press release prior to the
Closing Date with respect to the offering without the Representative's prior
written consent.
4. Fees and Expenses.
(a) The Company agrees with each Underwriter that:
(i) The Company will pay and bear all costs and
expenses in connection with: the preparation, printing and filing of the
Registration Statement (including financial statements, schedules and
exhibits), Preliminary Prospectuses and the Prospectus, any drafts of each of
them and any amendments or supplements to any of them; the duplication or, if
applicable, printing (including all drafts thereof) of this Agreement, the
Agreement Among Underwriters, any Selected Dealer Agreements, the Preliminary
Blue Sky Survey and any Supplemental Blue Sky Survey, the Underwriters'
Questionnaire and the Power of Attorney and the duplication and printing
(including of drafts thereof) of any other underwriting documents and material
(including but not limited to marketing memoranda and other marketing material)
in connection with the offering, purchase, sale and deliver of the Shares; the
issuance and delivery of the Shares under this Agreement to the several
Underwriters, including all expenses, taxes, duties, fees and commissions on
the purchase and sale of the Shares and stock exchange brokerage and
transaction levies with respect to the purchase and, if applicable, the sale of
the Shares (x) incident to the sale and delivery of the Shares by the Company
to the Underwriters and (y) incident to the sale and delivery of the Shares by
the Underwriters to the initial purchasers thereof; the cost of printing the
certificates for the Shares; the Transfer Agents' and Registrars' fees; the
fees and disbursements of counsel for the Company; all fees and other charges
of the Company's independent public accountants and any other experts named in
the Prospectus; the cost of furnishing to the several Underwriters copies of
the Registration Statement (including appropriate exhibits), Preliminary
Prospectus and the Prospectus, the agreements and other documents and
instruments referred to above and any amendments or supplements to any of the
foregoing; the NASD filing fees; the cost of qualifying or registering the
Shares (or obtaining exemptions from qualification or registration) under the
laws of such jurisdictions as the Representative may designate (including
filing fees and fees and costs/disbursements of Underwriters' counsel in
connection with such NASD filings and state securities or Blue Sky
qualifications, registrations and exemptions and in preparing the preliminary
and any final
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<PAGE> 16
Blue Sky Memorandum); all fees and expenses in connection with listing of the
Shares on the Nasdaq National Market; all advertising and road show expenses;
and all other expenses incurred by the Company in connection with the
performance of its obligations hereunder. In addition, the Company will pay
the Representatives on the Closing Date and, if applicable, on the date on
which Option Shares is purchased a non- accountable expense allowance of two
percent (2%) of the gross proceeds (prior to deducting underwriting discounts
and commissions) of the offering of the Shares.
(ii) In addition to its obligations under Section
7(a) of this Agreement, the Company agrees that, as an interim measure during
the pendency of any claim, action, investigation, inquiry or other proceeding
arising out of or based upon any loss, claim, damage or liability described in
Section 7(a) of this Agreement, it will reimburse or advance to or for the
benefit of the Underwriters, and each of them, on a monthly basis (or more
often, if requested) for all legal and other expenses incurred in connection
with investigating or defending any such claim, action, investigation, inquiry
or other proceeding, notwithstanding the absence of a judicial determination as
to the propriety and enforceability of the Company's obligation to reimburse or
advance for the benefit of the Underwriters for such expenses or the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any portion, or all, of
any such interim reimbursement payments or advances are so held to have been
improper, the Underwriters receiving the same shall promptly return such
amounts to the Company together with interest, compounded daily, at the prime
rate (or other commercial lending rate for borrowers of the highest credit
standing) announced from time to time by Bank of America, NT&SA, San Francisco,
California (the "Prime Rate"), but not in excess of the maximum rate permitted
by applicable law. Any such interim reimbursement payments or advances that
are not made to or for the Underwriters within 30 days of a request for
reimbursement or for an advance shall bear interest at the Prime Rate,
compounded daily, but not in excess of the maximum rate permitted by applicable
law, from the date of such request until the date paid.
(b) In addition to their obligations under Section 7(b)
of this Agreement, the Underwriters severally and in proportion to their
obligation to purchase Firm Shares as set forth on Schedule I hereto, agree
that, as an interim measure during the pendency of any claim, action,
investigation, inquiry or other proceeding arising out of or based upon any
loss, claim, damage or liability described in Section 7(b) of this Agreement,
they will reimburse or advance to or for the benefit of the Company on a
monthly basis (or more often, if requested) for all legal and other expenses
incurred by the Company in connection with investigating or defending any such
claim, action, investigation, inquiry or other proceeding, notwithstanding the
absence of a judicial determination as to the propriety or enforceability of
the Underwriters' obligation to reimburse or advance for the benefit of the
Company for such expenses and the possibility that such payments or advances
might later be held to have been improper by a court of competent jurisdiction.
To the extent that any portion, or all, of any such interim reimbursement
payments or advances are so held to have been improper, the Company shall
promptly return such amounts to the Underwriters
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<PAGE> 17
together with interest, compounded daily, at the Prime Rate, but not in excess
of the maximum rate permitted by applicable law. Any such interim
reimbursement payments or advances that are not made to the Company within 30
days of a request for reimbursement or for an advance shall bear interest at
the Prime Rate, compounded daily, but not in excess of the maximum rate
permitted by applicable law, from the date of such request until the date paid.
(c) Any controversy arising out of the operation of the
interim reimbursement and advance arrangements set forth in Sections 4(a)(ii)
and 4(b) above, including the amounts of any requested reimbursement payments
or advance, the method of determining such amounts and the basis on which such
amounts shall be apportioned among the indemnifying parties, shall be settled
by arbitration conducted under the provisions of the Code of Arbitration
Procedure of the NASD. Any such arbitration must be commenced by service of a
written demand for arbitration or a written notice of intention to arbitrate,
therein electing the arbitration tribunal. If the party demanding arbitration
does not make such designation of an arbitration tribunal in such demand or
notice, then the party responding to the demand or notice is authorized to do
so. Any such arbitration will be limited to the interpretation and obligations
of the parties under the interim reimbursement and advance provisions contained
in Sections 4(a)(ii) and 4(b) above and will not resolve the ultimate propriety
or enforceability of the obligation to indemnify for or contribute to expenses
that is created by the provisions of Section 7 of this Agreement.
(d) If the sale of the Shares provided for herein is not
consummated because any condition to the obligations of the Underwriters set
forth in Section 5 of this Agreement is not satisfied, or because of any
termination pursuant to Section 9(b) of this Agreement, or because of any
refusal, inability or failure on the part of the Company to perform any
covenant or agreement set forth in this Agreement or to comply with any
provision of this Agreement other than by reason of a default by any of the
Underwriters, the Company agrees to reimburse the several Underwriters upon
demand for all out-of-pocket accountable expenses actually incurred (including
fees and disbursements of counsel) that shall have been incurred by any or all
of them in connection with investigating, preparing to market or marketing the
Shares or otherwise in connection with this Agreement.
5. Conditions of Underwriters' Obligations. The several
obligations of the Underwriters to purchase and pay for the Shares shall be
subject, in the sole discretion of the Representative, to the accuracy as of
the date of execution of this Agreement, the Closing Date and the date and time
at which the Option Shares is to be purchased, as the case may be, of the
representations and warranties of the Company set forth in this Agreement, to
the accuracy of the statements of the Company and its officers made in any
certificate delivered pursuant to this Agreement, to the performance by the
Company of all of its obligations to be performed under this Agreement at or
prior to the Closing Date or any later date on which Option Shares is to be
purchased, as the case may be, to the satisfaction of all conditions to be
satisfied or performed by the Company at or prior to that date and to the
following additional conditions:
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<PAGE> 18
(a) The Registration Statement shall have become
effective (or, if a post-effective amendment is required to be filed pursuant
to Rule 430A under the Act, such post-effective amendment shall become
effective and the Company shall have provided evidence satisfactory to the
Representative of such filing and effectiveness) not later than 5:00 p.m., New
York time, on the date of this Agreement or at such later date and time as the
Representative may approve in writing and, at the Closing Date or, with respect
to the Option Shares, the date on which such Option Shares are to be purchased,
no stop order suspending the effectiveness of the Registration Statement or any
qualification, registration or exemption from qualification or registration for
the sale of the Shares in any jurisdiction shall have been issued and no
proceedings for that purpose shall have been instituted or threatened; and any
request for additional information on the part of the Commission shall have
been complied with to the reasonable satisfaction of the Representative and its
counsel.
(b) The Representative shall have received from Heller
Ehrman White & McAuliffe, counsel for the Underwriters, an opinion, on and
dated as of the Closing Date or, if applicable, the date on which Option Shares
are to be purchased, with respect to the issuance and sale of the Shares and
such other related matters as the Representative may reasonably require, and
the Company shall have furnished such counsel with all documents which they may
request for the purpose of enabling them to pass upon such matters.
(c) The Representative shall have received on the Closing
Date or, if applicable, the later date on which Option Shares are purchased the
opinion of Frederick K. Koenen, counsel for the Company, addressed to the
Underwriters and dated the Closing Date or such later date, with reproduced
copies or signed counterparts thereof for each of the Underwriters, covering
the matters set forth in Annex A to this Agreement and in form and substance
satisfactory to the Representative.
(d) The Representative shall be satisfied that there has
not been any material change in the market for securities in general or in
political, financial or economic conditions as to render it impracticable in
the Representative's judgment to make a public offering of the Shares, or a
material adverse change in market levels for securities in general (or those of
companies in particular) or financial or economic conditions which render it
inadvisable to proceed.
(e) The Representative shall have received on the Closing
Date and on any later date on which Option Shares are purchased a certificate,
dated the Closing Date or such later date, as the case may be, and signed by
the President and the Chief Financial Officer of the Company stating that:
(i) the representations and warranties of the
Company set forth in Section 1 of this Agreement are true and correct with the
same force and effect as if expressly made at and as of the Closing Date or
such later date, and the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied at or
prior to the Closing Date or such later date;
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<PAGE> 19
(ii) no stop order suspending the effectiveness of
the Registration Statement has been issued, and no proceedings for that purpose
have been instituted or are pending or are threatened under the Securities Act;
(iii) the Shares have been approved for listing on
the Nasdaq National Market, subject only to notice of issuance, and the
outstanding shares of the Common Stock of the Company are listed on the Nasdaq
National Market; and
(iv) (A) the respective signers of such certificate
have carefully examined the Registration Statement in the form in which it
originally became effective and the Prospectus and any supplements or
amendments to any of them and, as of the Effective Date, the statements made in
the Registration Statement and the Prospectus were true and correct in all
material respects and neither the Registration Statement nor the Prospectus
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein not misleading, (B) since the Effective
Date, no event has occurred that should have been set forth in an amendment to
the Registration Statement or a supplement or amendment to the Prospectus that
has not been set forth in such an amendment or supplement, (C) since the
respective dates as of which information is given in the Registration Statement
in the form in which it originally became effective and the Prospectus, there
has not been any material change or any development involving a prospective
material change in or affecting the business, properties, condition (financial
or otherwise), results of operations or prospects of the Company and its
subsidiaries taken as a whole and, since such dates, neither the Company nor
any of its subsidiaries has entered into any material transaction not referred
to in the Registration Statement in the form in which it originally became
effective and the Prospectus contained therein, (D) there are not any pending
or known threatened legal proceedings to which the Company is a party or of
which property of the Company is the subject which are material and which are
not disclosed in the Registration Statement and the Prospectus and (E) there
are not any license agreements, contracts, leases or other documents that are
required to be filed as exhibits to the Registration Statement that have not
been filed as required.
(f) The Representative shall have received from KPMG Peat
Marwick LLP a letter or letters, addressed to the Underwriters and dated the
Closing Date and any later date on which Option Shares are purchased,
confirming that they are independent accountants with respect to the Company
within the meaning of the Securities Act and the applicable Rules and
Regulations thereunder and, based upon the procedures described in their letter
delivered to the Representative concurrently with the execution of this
Agreement (the "Original Letter"), but carried out to a date not more than five
business days prior to the Closing Date or such later date on which Option
Shares are purchased, (i) confirming, to the extent true, that the statements
and conclusions set forth in the Original Letter are accurate as of the Closing
Date or such later date,, as the case may be, and (ii) setting forth any
revisions and additions to the statements and conclusions set forth in the
Original Letter that are necessary to reflect any changes in the facts
described in the Original Letter since the date of the Original Letter or to
reflect the availability of more recent financial statements,
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<PAGE> 20
data or information. Such letters shall not disclose any change, or any
development involving a prospective change, in or affecting the business,
properties or condition (financial or otherwise), results of operations or
prospects of the Company which, in the Representative's sole judgment, makes it
impractical or inadvisable to proceed with the public offering of the Shares or
the purchase of the Option Stock as contemplated by the Prospectus. In
addition, the Representative shall have received from KPMG Peat Marwick LLP, on
or prior to the Closing Date, a letter addressed to the Company and made
available to the Representative for the use of the Underwriters stating that
their review of the Company's system of internal controls, to the extent they
deemed necessary in establishing the scope of their examination of the
Company's consolidated financial statements as of December 31, 1995, or in
delivering their Original Letter, did not disclose any weaknesses in internal
controls that they considered to be material weaknesses.
(g) Prior to the Closing Date, the Shares shall have been
approved for listing on the Nasdaq National Market, subject only to official
notice of issuance and the outstanding shares of the Common Stock of the
Company shall be listed on the Nasdaq National Market.
(h) On or prior to the Closing Date, the Representative
shall have received from all Material Holders executed agreements covering the
matters described in Section 1(r) of this Agreement.
(i) The Company shall have furnished to the
Representative such further certificates and documents as the Representative
shall request (including certificates of officers of the Company) as to the
accuracy of the representations and warranties of the Company set forth in this
Agreement, the performance by the Company of its obligations under this
Agreement and such other matters as the Representative may have then requested.
All the agreements, opinions, certificates and letters
mentioned above or elsewhere in this Agreement will be in compliance with the
provisions of this Agreement only if they are satisfactory to the
Representative and its counsel. The Company will furnish the Representative
with such number of conformed copies of such opinions, certificates, letters
and documents as the Representative shall reasonably request.
If any of the conditions specified in this Section 5 shall not
have been fulfilled in all material respects when and as provided in this
Agreement, time being of the essence, or if any of the opinions and
certificates mentioned above or elsewhere in this Agreement shall not be in all
material respects satisfactory in form and substance to the Representative and
its counsel, this Agreement and all obligations of the Underwriters hereunder
may be canceled by the Representative at or at any time prior to, the Closing
Date or, with respect to the Option Shares, prior to the date which the Option
Shares are to be purchased, as the case may be. Notice of such cancellation
shall be given to the Company in writing or by telephone, telecopy or telegraph
confirmed in writing. Any such termination shall be without liability of the
Company to the Underwriters (except as provided in Section 4 or Section 7 of
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<PAGE> 21
this Agreement) and without liability of the Underwriters to the Company
(except as provided in Section 7 of this Agreement).
6. Conditions of the Obligation of the Company. The obligations
of the Company to sell and deliver the Shares required to be delivered as and
when specified in this Agreement shall be subject to the condition that, at the
Closing Date or, with respect to the Option Shares, the date and time at which
the Option Shares are to be purchased, no stop order suspending the
effectiveness of the Registration Statement shall be in effect and no
proceedings therefor shall be pending or threatened by the Commission.
7. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless
each Underwriter and each person (including each partner or officer thereto)
who controls any Underwriter within the meaning of Section 15 of the Securities
Act from and against any and all losses, claims, damages or liabilities, joint
or several, to which such indemnified parties or any of them may become subject
under the Securities Act, the Exchange Act or other federal or state statute,
law or regulation, at common law or otherwise, specifically including but not
limited to losses, claims, damages or liabilities (or action in respect
thereof) related to negligence on the part of any Underwriter, and the Company
agrees to reimburse each such Underwriter and controlling person for any legal
or other expenses (including, except as otherwise provided below, settlement
expenses and fees and disbursements of counsel) incurred by the respective
indemnified parties in connection with defending against any such losses,
claims, damages or liabilities or in connection with any investigation or
inquiry of, or other proceeding that may be brought against, the respective
indemnified parties, in each case insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon, in
whole or in part, (i) any breach of any representation, warranty, covenant or
agreement of the Company contained in this Agreement, (ii) any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement in the form originally filed or in any amendment thereto (including
the Prospectus as part thereof) or any post-effective amendment thereto, or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading or
(iii) any untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus or the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any amendment
thereof or supplement thereto) or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading or (iv) any untrue statement or alleged untrue
statement of a material fact contained in any application or other document, or
any amendment or supplement thereto, executed by the Company or based upon
written information furnished by or on behalf of the Company filed in any
jurisdiction in order to qualify or register the Shares under the securities or
Blue Sky laws thereof or to obtain an exception from such qualification or
registration or filed with the Commission, any securities association or the
Nasdaq National Market, or the omission or alleged omission to
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<PAGE> 22
state therein a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading; provided, however, that (1) the indemnity agreements
of the Company contained in this Section 7(a) shall not apply to such losses,
claims, damages, liabilities or expenses if such statement or omission was made
in reliance upon and in conformity with information furnished in writing to the
Company by or on behalf of any Underwriter through the Representative
specifically for use in any Preliminary Prospectus or the Registration
Statement or the Prospectus or any such amendment thereof or supplement thereto
and (2) the indemnity agreement contained in this Section 7(a) with respect to
any Preliminary Prospectus shall not inure to the benefit of any Underwriter
from whom the person asserting any such losses, claims, damages, liabilities or
expenses purchased the Shares that is the subject thereof (or to the benefit of
any person controlling such Underwriter) if the Company can demonstrate that at
or prior to the written confirmation of the sale of such Shares a copy of the
Prospectus (or the Prospectus as amended or supplemented) or, for this purpose,
if applicable, a copy of the then most recent Preliminary Prospectus was not
sent or delivered to such person and the untrue statement or omission of a
material fact contained in such Preliminary Prospectus or, if applicable, prior
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented) or, if applicable, the then most recent Preliminary
Prospectus, unless the failure is the result of noncompliance by the Company
with Section 3 of this Agreement. The indemnity agreements of the Company
contained in this Section 7(a) and the representations and warranties of the
Company contained in Section 1 of this Agreement shall remain operative and in
full force and effect regardless of any investigation made by or behalf of any
indemnified party and shall survive the delivery of and payment for the Shares.
This indemnity agreement shall be in addition to any liabilities which the
Company may otherwise have.
(b) Each Underwriter, severally and not jointly, agrees
to indemnify and hold harmless the Company, each of its officers who signs the
Registration Statement, each of its directors, each other Underwriter and each
person (including each partner or officer thereof) who controls the Company or
any such other Underwriter within the meaning of Section 15 of the Securities
Act from and against any and all losses, claims, damages or liabilities, joint
or several, to which such indemnified parties or any of them may become subject
under the Securities Act, the Exchange Act, or other federal or state statute,
law or regulation or at common law or otherwise and to reimburse each of them
for any legal or other expenses (including, except as otherwise hereinafter
provided, settlement expenses and fees and disbursements of counsel) incurred
by the respective indemnified parties in connection with defending against any
such losses, claims, damages or liabilities or in connection with any
investigation or inquiry of, or other proceeding that may be brought against,
the respective indemnified parties, in each case arising out of or based upon
(i) any breach of any covenant or agreement of the indemnifying Underwriter
contained in this Agreement, (ii) any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement (including
the Prospectus as part thereof) or any post-effective amendment thereto, or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
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<PAGE> 23
circumstances under which they were made, not misleading or (iii) any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus or the Prospectus (as amended or as supplemented if the
Company shall have filed with the Commission any amendment thereof or
supplement thereto) or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, but in each case under clauses (i), (ii) and (iii) above,
as the case may be, only if such statement or omission was made in reliance
upon and in connection with information furnished in writing to the Company by
or on behalf of such indemnifying Underwriter through the Representative
specifically for use in any Preliminary Prospectus, the Registration Statement
or the Prospectus or any such amendment thereof or supplement thereto. The
Company acknowledges and agrees that the matters described in Section 2(g) of
this Agreement constitute the only information furnished in writing by or on
behalf of any of the several Underwriters for inclusion in the Registration
Statement or the Prospectus or in any Preliminary Prospectus. The several
indemnity agreement of each Underwriter contained in this Section 7(b) shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of any indemnified party and shall survive the delivery of
and payment for the Shares. This indemnity agreement shall be in addition to
any liabilities which each Underwriter may otherwise have.
(c) Each person or entity indemnified under the
provisions of Sections 7(a) and 7(b) above agrees that, upon the service of a
summons or other initial legal process upon it in any action or suit instituted
against it or upon its receipt of written notification of the commencement of
any investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
Sections, it will, if a claim in respect thereunder is to be made against the
indemnifying party or parties under this Section 7, promptly give written
notice (the "Notice") of such service or notification to the party or parties
from whom indemnification may be sought hereunder. No indemnification provided
for in Sections 7(a) or 7(b) above shall be available to any person who fails
to so give the Notice if the party to whom such Notice was not given was
unaware of the action, suit, investigation, inquiry or proceeding to which the
Notice would have related, but only to the extent such party was materially
prejudiced by the failure to receive the Notice, and the omission to so notify
such indemnifying party or parties shall not relieve such indemnifying party or
parties from any liability which it or they may have to the indemnified party
for contribution or otherwise than on account of Sections 7(a) and 7(b). Any
indemnifying party shall be entitled at its own expense to participate in the
defense of any action, suit or proceeding against, or investigation or inquiry
of, an indemnified party. Any indemnifying party shall be entitled, if it so
elects within a reasonable time after receipt of the Notice by giving written
notice (the "Notice of Defense") to the indemnified party, to assume (alone or
in conjunction with any other indemnifying party or parties) the entire defense
of such action, suit, investigation, inquiry or proceeding, in which event such
defense shall be conducted, at the expense of the indemnifying party or
parties, by counsel chosen by such indemnifying, party or parties and
reasonably satisfactory to the indemnified party or parties; provided, however,
that (i) if the indemnified party or parties reasonably
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<PAGE> 24
determine that there may be a conflict between the positions of the
indemnifying party or parties and of the indemnified party or parties in
conducting the defense of such action, suit, investigation, inquiry or
proceeding or that there may be legal defenses or rights available to such
indemnified party or parties different from or in addition to those available
to the indemnifying party or parties, then separate counsel for and selected by
the indemnified party or parties shall be entitled, at the expense of the
indemnifying parties, to conduct the defense of the indemnified parties to the
extent determined by counsel to the indemnified parties to be necessary to
protect the interests of the indemnified party or parties and (ii) in any
event, the indemnified party or parties shall be entitled to have counsel
selected by such indemnified party or parties participate in, but not conduct,
the defense. If, within a reasonable time after receipt of the Notice, an
indemnifying party gives a Notice of Defense and, unless separate counsel is to
be chosen by the indemnified party or parties as provided above, the counsel
chosen by the indemnifying party or parties is reasonably satisfactory to the
indemnified party or parties, the indemnifying party or parties will not be
liable under Sections 7(a) through 7(c) for any legal or other expenses
subsequently incurred by the indemnified party or parties in connection with
the defense of the action, suit, investigation, inquiry or proceeding, except
that (A) the indemnifying party or parties shall bear and pay the legal and
other expenses incurred in connection with the conduct of the defense as
referred to in clause (i) of the "provided, however" clause in the preceding
sentence and (B) the indemnifying party or parties shall bear and pay such
other expenses as it or they have authorized to be incurred by the indemnified
party or parties. If, within a reasonable time after receipt of the Notice, no
Notice of Defense has been given, the indemnifying party or parties shall be
responsible for any legal or other expenses incurred by the indemnified party
or parties in connection with the defense of the action, suit, investigation,
inquiry or proceeding.
(d) In order to provide for just and equitable
contribution in any action in which a claim for indemnification is made
pursuant to this Section 7 but is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the
expiration of time to appeal or the denial of the last right to appeal) that
such indemnification may not be enforced in such case notwithstanding the fact
that this Section 7 provides for indemnification in such case, each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of the losses, claims, damages, liabilities and
expenses referred to in Section 7(a) or 7(b) above (i) in such proportion as is
appropriate to reflect the relative benefits received by each indemnifying
party from the offering of the Shares or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of each indemnifying party in connection with
the statements or omissions that resulted in such losses, claims, damages or
liabilities, or actions in respect thereof, as well as any other relevant
equitable considerations. The relative benefits received by the Company and
the Underwriters shall be deemed to be in the same respective proportion as the
total proceeds from the offering of the Shares, net of the underwriting
discounts, received by the Company and the total underwriting discount retained
by the Underwriters bear to the aggregate public offering
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<PAGE> 25
price of the Shares. Relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by each indemnifying party and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission.
The parties agree that it would not be just and equitable if
contribution pursuant to this Section 7(d) were to be determined by pro rata
allocation which does not take into account the equitable considerations
referred to in the first sentence of the first paragraph of this Section 7(d)
and to the considerations referred to in the third sentence of the first
paragraph of this Section 7(d). The amount paid by an indemnified party as a
result of the losses, claims, damages or liabilities, or actions in respect
thereof, referred to in the first sentence of the first paragraph of this
Section 7(d) shall be deemed to include any legal or other expenses incurred by
such indemnified party in connection with investigating, preparing to defend or
defending against any action or claim which is the subject of this Section
7(d). Notwithstanding the provisions of this Section 7(d), no Underwriter
shall be required to contribute any amount in excess of the underwriting
discount applicable to the Shares purchased by that Underwriter. For purposes
of this Section 7(d), each person who controls an Underwriter within the
meaning of the Securities Act shall have the same rights to contribution as
such Underwriter, and each person who controls the Company within the meaning
of the Securities Act, each officer of the Company who signed the Registration
Statement and each director of the Company shall have the same rights to
contribution as the Company; provided, however, in each case that no person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. The Underwriters' obligations
to contribute in this Section 7(d) are several in proportion to their
respective underwriting obligations and not joint.
Each party or other entity entitled to contribution agrees
that upon the service of a summons or other initial legal process upon it in
any action instituted against it in respect of which contribution may be
sought, it will promptly give written notice of such service to the party or
parties from whom contribution may be sought, but the omission to so notify
such party or parties of any such service shall not relieve the party from whom
contribution may be sought from any obligation it may have hereunder or
otherwise (except as specifically provided in Section 7(c) above).
(e) The Company shall not, without the prior written
consent of each Underwriter, settle or compromise or consent to the entry of
any judgment in any pending or threatened claim, action, suit or proceeding in
respect of which indemnification or contribution may be sought hereunder
(whether or not such Underwriter or any person who controls such Underwriter
within the meaning of Section 15 of the Securities Act is a party to such
claim, action, suit or proceeding) unless such settlement, compromise or
consent includes an unconditional release of each such Underwriter and each
such controlling person from any and all liability arising out of such claim,
action, suit or proceeding.
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<PAGE> 26
(f) The parties to this Agreement hereby acknowledge that
they are sophisticated business persons who were represented by counsel during
the negotiations regarding the provisions of this Agreement, including, without
limitation, the provisions of Sections 4(a)(ii), 4(b) and 4(c) and this Section
7 of this Agreement and that they are fully informed regarding all such
provisions. They further acknowledge that the provisions of Sections 4(a)(ii),
4(b) and 4(c) and this Section 7 of this Agreement fairly allocate the risks in
light of the ability of the parties to investigate the Company and its business
in order to assure that adequate disclosure is made in the Registration
Statement and Prospectus as required by the Securities Act, the Rules and
Regulations, the Exchange Act and the Exchange Act Rules and Regulations. The
parties are advised that federal or state policy, as interpreted by the courts
in certain jurisdictions, may be contrary to certain provisions of Sections
4(a)(ii), 4(b) and 4(c) and this Section 7 of this Agreement and, to the extent
permitted by law, the parties hereto hereby expressly waive and relinquish any
right or ability to assert such public policy as a defense to a claim under
Sections 4(a)(ii), 4(b) or 4(c) or this Section 7 of this Agreement and further
agree not to attempt to assert any such defense.
8. Substitution of Underwriters. If for any reason one or more
of the Underwriters fails or refuses (otherwise than for a reason sufficient to
justify the termination of this Agreement under the provisions of Section 5 or
Section 9 of this Agreement) to purchase and pay for the number of shares of
Firm Shares agreed to be purchased by such Underwriter or Underwriters, the
Representative shall immediately give notice thereof to the Company and the
non-defaulting Underwriters shall have the right within 24 hours after the
receipt by the Representative of such notice to purchase, or procure one or
more other Underwriters to purchase, in such proportions as may be agreed upon
among the Representative and such purchasing Underwriter or Underwriters and
upon the terms set forth herein, all or any part of the Firm Shares that such
defaulting Underwriter or Underwriters agreed to purchase. If the
non-defaulting Underwriters fail to make such arrangements with respect to all
such Shares, the number of shares of Firm Shares that each non-defaulting
Underwriter is otherwise obligated to purchase under this Agreement shall be
automatically increased on a pro rata basis to absorb the remaining Shares that
the defaulting Underwriter or Underwriters agreed to purchase; provided,
however, that the non-defaulting Underwriters shall not be obligated to
purchase the Shares that the defaulting Underwriter or Underwriters agreed to
purchase if the aggregate amount of such Shares exceeds 10% of the aggregate
amount of Firm Shares that all Underwriters agreed to purchase under this
Agreement. If the total number of shares of Firm Shares that the defaulting
Underwriter or Underwriters agreed to purchase shall not be purchased or
absorbed in accordance with the two preceding sentences, the Company shall have
the right, within 24 hours next succeeding the first 24-hour period above
referred to, to make arrangements with other underwriters or purchasers
satisfactory to the Representative for purchase of such Shares on the terms set
forth in this Agreement. In any such case, either the Representative or the
Company shall have the right to postpone the Closing Date determined as
provided in Section 2(c) of this Agreement for not more than seven business
days after the date originally fixed as the Closing Date pursuant to Section
2(c) in order that any necessary changes in the Registration
-26-
<PAGE> 27
Statement, the Prospectus or any other documents or arrangements may be made.
If neither the non-defaulting Underwriters nor the Company
shall make arrangements within the time periods set forth above for the
purchase of all the Firm Shares that the defaulting Underwriter or Underwriters
agreed to purchase hereunder, this Agreement shall be terminated without
further act or deed and without any liability on the part of the Company to any
non-defaulting Underwriter (except as provided in Section 4 or Section 7 of
this Agreement) and without any liability on the part of any nondefaulting
Underwriters to the Company (except to the extent provided in Section 7 of this
Agreement). Nothing in this Section 8, and no action taken hereunder, shall
relieve any defaulting Underwriter from liability, if any, to the Company or
any nondefaulting Underwriter for damages occasioned by its default under this
Agreement. The term "Underwriter" in this Agreement shall include any persons
substituted for an Underwriter under this Section 8.
9. Effective Date of Agreement and Termination.
(a) If the Registration Statement has not been declared
effective prior to the date of this Agreement, this Agreement shall become
effective at such time, after notification of the effectiveness of the
Registration Statement has been released by the Commission, as the
Representative and the Company shall agree upon the public offering price and
other terms and the purchase price of the Shares. If the public offering price
and other terms and the purchase price of the Shares shall not have been
determined prior to 5:00 p.m., New York time, on the third full business day
after the Registration Statement has become effective, this Agreement shall
thereupon terminate without liability on the part of the Company to the
Underwriters (except as provided in Section 4 or Section 7 of this Agreement).
By giving notice before the time this Agreement becomes effective, the
Representative, as representative of the several Underwriters, may prevent this
Agreement from becoming effective without liability of any party to the other
party, except that the Company shall remain obligated to pay costs and expenses
to the extent provided in Section 4 and Section 7 of this Agreement. If the
Registration Statement has been declared effective prior to the date of this
Agreement, this Agreement shall become effective upon execution and delivery by
the Representative and the Company.
(b) This Agreement may be terminated by the
Representative in its absolute discretion by giving written notice to the
Company at any time on or prior to the Closing Date or, with respect to the
purchase of the Option Shares, on or prior to any later date on which the
Option Shares are to be purchased, as the case may be, if prior to such time
any of the following has occurred or, in the Representative's opinion, is
likely to occur: (i) after the respective dates as of which information is
given in the Registration Statement and the Prospectus, any material change or
development involving a prospective adverse change in or affecting the
business, properties, condition (financial or otherwise), results of operations
or prospects of the Company and its subsidiaries taken as a whole, which would,
in the Representative's sole judgment, make the offering or the delivery of the
Shares impracticable or inadvisable; or (ii) if trading in securities of the
Company has been suspended by the
-27-
<PAGE> 28
Commission or if trading generally on the New York Stock Exchange, American
Stock Exchange or over-the-counter market has been suspended or minimum or
maximum prices for trading have been fixed, or maximum ranges for prices for
securities have been required, by either of such exchanges, by the NASD or by
the Commission; or (iii) if there shall have been the enactment, publication,
decree or other promulgation of any federal or state statute, regulation, rule
or order of, or commencement of any proceeding or investigation by, court,
legislative body, agency or other governmental authority which in the
Representative's sole judgment materially affects or may materially affect the
business, properties, condition (financial or otherwise), results of operations
or prospects of the Company and its subsidiaries taken as a whole; (iv) if
there shall have been the declaration of a banking moratorium by federal, New
York or California authorities; (v) existing international monetary conditions
shall have undergone a material change which, in the Representative's sole
judgment, makes the offering or delivery of the Shares impracticable or
inadvisable; or (vi) if there has occurred any material change in the financial
markets in the United States or internationally or any outbreak of hostilities
or escalation of existing hostilities or other crisis, the effect of which in
the Representative's sole judgment make the offering or delivery of the Shares
impracticable or inadvisable. If this Agreement shall be terminated pursuant
to this Section 9, there shall be no liability of the Company to the
Underwriters (except pursuant to Section 4 and Section 7 of this Agreement) and
no liability of the Underwriters to the Company (except pursuant to Section 7
of this Agreement).
10. Notices. Except as otherwise provided herein, all
communications hereunder shall be in writing or by either telecopier or
telegraph and, if to the Underwriters, shall be mailed, telecopied or
telegraphed or delivered to Van Kasper & Company, 11661 San Vincente Boulevard,
Suite 709, Los Angeles, California 90049, Attention: Bruce P. Emmeluth
(telecopier: (310) 820-5032); and if to the Company, shall be mailed,
telecopied, telegraphed or delivered to it at its office at 26836 County Road
12A, Esparto, California 95627 (telecopier: (916) ________) Attention: Messrs.
John and Karl Giguiere. All notices given by telecopy or telegraph shall be
promptly confirmed by letter.
11. Persons Entitled to the Benefit of This Agreement. This
Agreement shall inure to the benefit of the Company and the several
Underwriters and, with respect to the provisions of Section 4 and Section 7 of
this Agreement, the several parties (in addition to the Company and the several
Underwriters) indemnified under the provisions of Section 4 and Section 7 and
in addition, as to paragraph 14, Van Kasper & Company, and their respect
personal representatives, successors and assigns (whether such succession or
assignment is by sale, assignment, merger, reverse merger, consolidation,
operation of law or, without limitation, otherwise). Nothing in this Agreement
is intended or shall be construed to give to any other person, firm or
corporation any legal or equitable remedy or claim under or in respect of this
Agreement or any provision contained herein. The term "successors and assigns"
as herein used shall not include any purchaser, as such, of any of the Shares
from the several Underwriters.
-28-
<PAGE> 29
12. General. Notwithstanding any provision of this Agreement to
the contrary, the reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties, covenants and
agreements in this Agreement shall remain in full force and effect regardless
of (a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof or by or on behalf of
the Company or their respective directors or officers and (c) delivery and
payment for the Shares under this Agreement; provided, however, that if this
Agreement is terminated prior to the Closing Date, the provisions of Sections
3(f), 3(g), 3(h), 3(i) and 3(j) of this Agreement shall be of no further force
or effect.
This Agreement may be executed in two or more counterparts, each of
which shall constitute an original, but all of which together shall constitute
one and the same instrument.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS, AND NOT THE LAWS PERTAINING TO CHOICE OR CONFLICT OF LAWS,
OF THE STATE OF CALIFORNIA.
13. Authority of the Representative. In connection with this
Agreement, the Representative will act for and on behalf of the several
Underwriters, and any action taken under this Agreement by the Representative,
as representative of the several Underwriters, will be binding on all of the
Underwriters.
-29-
<PAGE> 30
If the foregoing correctly sets forth your understanding,
please so indicate by signing in the space provided below for that purpose,
whereupon this letter shall constitute a binding agreement among the Company
and the several Underwriters.
Very truly yours,
R. H. PHILLIPS, INC.
By:
-----------------------------------------------
John E. Giguiere, Co-President and
Chief Executive Officer
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
VAN KASPER & COMPANY
By: __________________________________
Bruce P. Emmeluth, Managing Director
On its behalf and on behalf of each of the
several Underwriters named in Schedule I hereto
<PAGE> 31
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
Number of Firm Shares
Underwriters to be Purchased
----------------------------------------------------- ----------------------------------------------------
<S> <C>
Van Kasper & Company
---------
Total
=========
</TABLE>
<PAGE> 32
ANNEX A
Matters to be Covered in the Opinion of
Frederick K. Koenen1
(i) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of its jurisdiction of
incorporation;
(ii) The Company has the corporate power to own, lease and operate
its properties and to conduct its business as described in the Prospectus;
(iii) The Company is duly qualified to do business as a foreign
corporation and is in good standing in all jurisdictions in which the ownership
or leasing of its properties or the conduct of its business requires such
qualification, except where the failure so to qualify would not have a material
adverse effect on the business, properties, condition (financial or otherwise),
results of operations or prospects of the Company;
(iv) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus under the caption "Capitalization" as
of the dates stated therein; the issued and outstanding shares of capital stock
of the Company have been duly and validly authorized and issued, are fully paid
and nonassessable and have not been issued in violation of any preemptive right
or other rights to subscribe for or purchase securities or, except to the
extent any such violations would not be material to the Company (whether
because of the magnitude of the violation, because any claims thereof would be
barred by the statute of limitations or otherwise), in violation of any
applicable federal or state securities laws or in violation of any applicable
federal or state securities laws, provided that in rendering their opinion as
to non-violation of federal and state securities laws, such counsel may assume,
unless counsel has knowledge of facts that may render such assumption
unreasonable; that any purchasers had, to the extent relevant and represented
by such purchasers in writing, any required investment intent and the Company
directly or indirectly owns all of the issued and outstanding equity securities
of each of its subsidiaries and there are no outstanding options, warrants or
other rights to acquire any equity securities of any such subsidiary;
____________________
(1) In rendering this opinion, counsel may rely as to
questions of law not involving the laws of the United States or the
State of California on opinions of local counsel (provided that
such counsel states that they believe they and the
Underwriters are justified in relying thereon) and, as to
questions of fact, upon representations or certificates of
officers of the Company and government officials, in which case
their opinion is explicitly to state that they are so relying
thereon and that they have no knowledge of any material
misstatement or inaccuracy in such opinions, representations or
certificate. Copies of any opinion, representation or
certificate so relied upon shall be delivered to the
Representative and counsel to the Underwriters.
<PAGE> 33
(v) The Company has corporate power and authority to enter into
the Agreement and to issue, sell and deliver the Shares to the Underwriters;
(vi) The execution, delivery and performance of this Agreement and
the issuance and sale of the Shares do not (A) conflict with, violate, result
in a breach of or constitute a default (or an event that with notice or lapse
of time, or both, would constitute a default) under the Articles of
Incorporation or Bylaws of the Company or any agreement (including, without
limitation, an agreement with respect to registration rights) to which the
Company is a party or by which it or any of its properties or assets is bound
or (B) result in violation of any material federal, California law, rule or
regulation or, to the best knowledge of such counsel, any writ, judgment,
order, injunction or decree of any government, governmental body, agency or
court or any arbitration tribunal having jurisdiction over the Company or any
of its properties,
(vii) The Shares are duly authorized and, when issued and delivered
against payment in full therefor, will be validly issued, fully paid,
nonassessable, and free of preemptive rights;
(viii) The Underwriting Agreement has been duly authorized by all
necessary corporate action on the part of the Company and has been duly
executed and delivered by the Company and, assuming the due authorization,
execution and delivery of the Underwriting Agreement by the Representative, are
the valid and binding agreements of the Company, except insofar as the
indemnification and contribution provisions of the Underwriting Agreement may
be limited by public policy concerns and except as enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally or by general equitable principles;
(ix) Except for the order of the Commission making the Registration
Statement effective and similar authorizations required under the securities or
"Blue Sky" laws of certain jurisdictions (as to which such counsel need express
no opinion), no consent, approval, authorization or other order of any federal,
California governmental body or, to the knowledge of such counsel, other person
is required in connection with the authorization, issuance, sale and delivery
of the Shares and the execution, delivery and performance by the Company of the
Underwriting Agreement;
(x) The Registration Statement has become effective under the
Securities Act and, to the best knowledge of such counsel, no stop order
suspending the effectiveness of the Registration Statement has been issued and
no proceedings for that purpose have been instituted or are pending or
threatened under the Securities Act;
(xi) The Registration Statement and the Prospectus, and each
amendment or supplement thereto (other than the financial statements, financial
data and supporting schedules included therein, as to which such counsel need
express no opinion), as of the effective date of the Registration Statement,
complied as to form in all material respects with
<PAGE> 34
the requirements of the Securities Act and the applicable Rules and
Regulations;
(xii) The Company satisfies the requirements for filing a
registration statement on Form SB-2;
(xiii) The terms and provisions of the capital stock of the Company
conform in all material respects to the description thereof contained in the
Registration Statement and Prospectus, and the information in the Prospectus
under the caption "Description of Capital Stock," to the extent they constitute
matters of law or legal conclusions, has been reviewed by such counsel and is
correct and the form of certificate for the Shares complies with California
law;
(xiv) The description in the Registration Statement and the
Prospectus of the charter and Bylaws of the Company and of statutes and
contracts are accurate in all material respects and fairly present in an
material respects the information required to be presented by the Securities
Act and the Rules and Regulations;
(xv) To the best knowledge of such counsel, there are no agreements,
contracts, licenses, leases or documents of a character required to be
described or referred to in the Registration Statement or Prospectus or to be
filed as an exhibit to the Registration Statement that are not described or
referred to therein and filed as required;
(xvi) To the best knowledge of such counsel, there are no legal or
governmental proceedings pending or threatened against the Company of a
character which are required to be disclosed in the Registration Statement or
the Prospectus by the ecurities Act or the applicable Rules and Regulations,
other than those described therein;
(xvii) To the best knowledge of such counsel, the Company is not
presently in breach of, or in default under, any bond, debenture, note or other
evidence of indebtedness or any contract, indenture, mortgage, deed of trust,
loan agreement, lease, license or, without limitation, other agreement or
instrument to which the Company is a party or by which any of its properties is
bound that, individually or in the aggregate, is material to the business,
properties, condition (financial or otherwise), prospects or results of
operations or prospects of the Company; and
(xviii) To the best knowledge of such counsel, except as set forth in
the Registration Statement and Prospectus, no holders of Common Stock or other
securities of the Company have registration rights with respect to any
securities of the Company.
In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of the
Company, the independent public accountants of the Company, the Representative
and counsel to the Underwriters, at which conferences the contents of the
Registration Statement and the Prospectus and related matters were discussed
and, although they have not independently verified the accuracy,
<PAGE> 35
completeness or fairness of the statements contained in the Registration
Statement or the Prospectus, nothing has come to the attention of such counsel
that caused them to believe that, at the time the Registration Statement became
effective, the Registration Statement (except as to financial statement,
financial data and supporting schedules contained therein, as to which such
counsel need express no opinion) contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or at the Closing Date
or any later date on which the Option Shares are to be purchased, as the case
may be, the Prospectus contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading.
<PAGE> 1
Exhibit 10.7
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AS AMENDED, AND MAY NOT BE
SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT FILED UNDER SUCH ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION
UNDER SUCH ACT.
THIS WARRANT MAY NOT BE SOLD, TRANSFERRED, HYPOTHECATED OR ASSIGNED TO ANY
OTHER PERSON OR ENTITY EXCEPT OFFICERS OF THE WARRANTHOLDER.
___________, 1996
WARRANT
TO SUBSCRIBE FOR AND PURCHASE COMMON STOCK OF
R. H. PHILLIPS, INC.
VOID AFTER 5:00 P.M., SAN FRANCISCO TIME, ON ___________, ____,
OR IF NOT A BUSINESS DAY, AS DEFINED HEREIN, AT 5:00 P.M.,
SAN FRANCISCO TIME, ON THE IMMEDIATELY PRECEDING BUSINESS DAY
NO. ______
THIS CERTIFIES that for and in consideration of $___, VAN KASPER &
COMPANY ("Van Kasper"), or registered assigns, is entitled to subscribe for and
purchase from R. H. Phillips, Inc., a California corporation (hereinafter
called the "Company"), at the price of $____ per share (such price, as from
time to time to be adjusted as hereinafter provided, being hereinafter called
the "Warrant Price"), at any time and from time to time but not earlier than
the Commencement Date (as defined below) or later than the Expiration Date (as
defined below), up to ______ fully paid, nonassessable shares of no par value
Common Stock of the Company ("Common Stock"), subject, however, to the
provisions and upon the terms and conditions hereinafter set forth, including
without limitation the provisions of Section 3 hereof. "Commencement Date"
shall mean _________________, which is one year from the date hereof.
"Expiration Date" shall mean 5:00 p.m., San Francisco time, on
_________________, which is five years from the date hereof, or if not a
Business Day, as defined herein, at 5:00 p.m., San Francisco time, on the
immediately preceding business day. "Business Day" shall mean a day other than
a Saturday, Sunday or other day on which banks in the State of California are
authorized by law to remain closed.
<PAGE> 2
1. Exercise of Warrant
(a) Cash Exercise. This Warrant may be exercised, at any time and
from time to time but not earlier than the Commencement Date or later
than the Expiration Date, by the holder hereof or its permitted
assigns (hereinafter referred to as the "Warrantholder"), in whole or
in part (but not as to a fractional share of Common Stock and in no
event for less than 100 shares (unless less than an aggregate of 100
shares are then purchasable under all outstanding Warrants held by a
Warrantholder)), by the completion of the subscription form attached
hereto and by the surrender of this Warrant (properly endorsed) at the
Company's offices at 26836 County Road 12A, Esparto, California 95267
(or at such other location in the United States as it may designate by
notice in writing to the Warrantholder at the address of the
Warrantholder appearing on the books of the Company), and by payment
to the Company of the Warrant Price, in cash or by certified or
official bank check, for each share being purchased.
(b) Net Exercise. Notwithstanding anything to the contrary contained
in Subsection 1(a), the Warrantholder may elect to exercise this
Warrant and receive shares on a "net exercise" basis in an amount
equal to the value of this Warrant by delivery of the subscription
form attached hereto and surrender of this Warrant at the principal
office of the Company, in which event the Company shall issue to
Warrantholder a number of shares computed using the following formula:
X = (P)(Y)(A-B)
A
Where: X = the number of shares of Common Stock to be
issued to Warrantholder.
P = the portion of the Warrant being exercised.
Y = the number of shares of Common Stock issuable
upon exercise of this Warrant.
A = the Current Market Price (as determined
pursuant to Subsection 1(d)) of one share
of Common Stock.
B = Warrant Price.
(c) Procedure for Exercise. In the event of any exercise of the
rights represented by this Warrant, a certificate or certificates for
the total number of whole shares of Common Stock so purchased,
registered in the name of the Warrantholder, shall be delivered to the
Warrantholder within a reasonable time, not exceeding five Business
Days, after the rights represented by this Warrant shall have been so
exercised; and,
-2-
<PAGE> 3
unless this Warrant has expired, a new Warrant representing the number
of shares (except a remaining fractional share), if any, with respect
to which this Warrant shall not then have been exercised shall also be
issued to the Warrantholder within such time. With respect to any
such exercise, the Warrantholder shall for all purposes be deemed to
have become the holder of record of the number of shares of Common
Stock evidenced by such certificate or certificates from the date on
which this Warrant was surrendered and if exercise is pursuant to
Section 1(a), payment of the Warrant Price was made, irrespective of
the date of delivery of such certificate, except that, if the date of
such surrender and payment is a date on which the stock transfer books
of the Company are closed, such person shall be deemed to have been
the holder of such shares at the close of business on the next
succeeding date on which the stock transfer books are open. No
fractional shares shall be issued upon exercise of this Warrant and no
payment or adjustment shall be made upon any exercise on account of
any cash dividends on the Common Stock issued upon such exercise. If
any fractional interest in a share of Common Stock would, except for
the provisions of this Section 1, be delivered upon any such exercise,
the Company, in lieu of delivering the fractional share thereof, shall
pay to the Warrantholder an amount in cash equal to the current market
price of such fractional interest, as determined below.
(d) Current Market Price. For any computation hereunder, the current
market price per share of Common Stock on any date shall be deemed to
be the average of the daily market price per share for the 30
consecutive Trading Days commencing 45 Trading Days before the date in
question. "Market Price" is defined as the closing sale price (or, if
no closing sale price is reported, the closing bid price) of the
Common Stock in the over-the-counter market, and reported by the
National Association of Securities Dealers Automated Quotation System
("Nasdaq"), or, if the Common Stock is not quoted on Nasdaq, as
reported by the National Quotation Bureau Incorporated. In the event
that the Common Stock is hereafter listed for trading on one or more
United States national or regional securities exchanges, market price
shall be the closing price on the exchange or system designated by the
Board of Directors of the Company as the principal United States
market in which the Common Stock is traded. If market price cannot be
established as described above, market price shall be the fair market
value of the Common Stock as determined in good faith by the Board of
Directors. The term "Trading Day" shall mean a day on which Nasdaq or
the principal national securities exchange on which the Common Stock
is listed or admitted to trading is open for the transaction of
business.
2. Adjustment of Number of Shares
Upon each adjustment of the Warrant Price for any stock dividend or
distribution or any subdivision or combination of the outstanding shares of the
Common Stock as provided in Section 3, the Warrantholder shall thereafter be
entitled to purchase, at the Warrant Price resulting from such adjustment, the
number of shares (calculated to the nearest tenth of a share) obtained by
multiplying the Warrant Price in effect immediately prior to such
-3-
<PAGE> 4
adjustment by the number of shares purchasable pursuant hereto immediately
prior to such adjustment and dividing the product thereof by the Warrant Price
resulting from such adjustment.
3. Adjustment of Warrant Price
The Warrant Price and the number and kind of shares issuable hereunder
shall be subject to adjustment from time to time upon the happening of certain
events as provided in this Section 3.
(a) Adjustments
(1) if at any time prior to the exercise of this Warrant
in full, the Company shall (A) declare a dividend or make a
distribution on the Common Stock payable in shares of its
capital stock (whether shares of Common Stock or of capital
stock of any other class); (B) subdivide, reclassify or
recapitalize its outstanding Common Stock into a greater
number of shares; (C) combine, reclassify or recapitalize its
outstanding Common Stock into a smaller number of shares, or
(D) issue any shares of its capital stock by reclassification
of its Common Stock (excluding any such reclassification in
connection with a consolidation or a merger), the Warrant
Price in effect at the time of the record date of such
dividend, distribution, subdivision, combination,
reclassification or recapitalization shall be adjusted so that
the Warrantholder shall be entitled to receive the aggregate
number and kind of shares which, if this Warrant had been
exercised in full immediately prior to such event, it would
have owned upon such exercise and been entitled to receive by
virtue of such dividend, distribution, subdivision,
combination, reclassification or recapitalization. Any
adjustment required by this Section 3 (a) shall be made
successively immediately after the record date, in the case of
a dividend or distribution, or the effective date, in the case
of a subdivision, combination, reclassification or
recapitalization, to allow the purchase of such aggregate
number and kind of shares.
(2) If at any time prior to the exercise of this Warrant
in full, the Company shall make a distribution to all holders
of the Common Stock of stock of a subsidiary or securities
convertible into or exercisable for such stock, then in lieu
of an adjustment in the Warrant Price or the number of shares
of Common Stock purchasable upon the exercise of this Warrant,
each Warrantholder, upon the exercise hereof at any time after
such distribution, shall be entitled to receive from the
Company, such subsidiary or both, as the Company shall
determine, the stock or other securities to which such
Warrantholder would have been entitled if such Warrantholder
had exercised this Warrant immediately prior thereto, all
subject to further adjustment as provided in this Section 3,
and the Company shall reserve, for the life of the Warrant
such
-4-
<PAGE> 5
securities of such subsidiary or other corporation; provided,
however, that no adjustment in respect of dividends or interest
on such stock or other securities shall be made during the term
of this Warrant or upon its exercise.
(3) If at any time prior to the expiration of this
Warrant in full, the Company shall issue rights or Warrants to
all holders of Common Stock as such entitling them (for a
period expiring within sixty days after the record date of the
determination of shareholders entitled to receive the same),
to subscribe for or purchase Common Stock at a price per share
less than the current market price per share (as defined
below) on such record date, then, in each such case the number
of shares subject to this Warrant thereafter purchasable upon
the exercise of this Warrant shall be determined by
multiplying the number of shares of Common Stock theretofore
purchasable upon exercise of each Warrant by a fraction, of
which the numerator shall be the number of shares of Common
Stock outstanding on the date of issuance of such rights or
Warrants, plus the number of additional shares of Common Stock
offered for subscription or purchase, and of which the
denominator shall be the number of shares of Common Stock
outstanding on the date of issuance of such rights or Warrants
plus the number of shares that the aggregate offering price of
the total number of shares of Common Stock so offered would
purchase at such current market price. For purposes of this
Section 3(a)(3), the issuance of rights or Warrants to
subscribe for or purchase securities convertible into Common
Stock shall be deemed to be the issuance of rights or Warrants
to purchase the Common Stock into which such securities are
convertible at an aggregate offering price equal to the
aggregate offering price of such securities plus the minimum
aggregate amount (if any) payable upon conversion of such
securities into Common Stock.
(4) If at any time prior to the exercise of this Warrant
in full the Company shall distribute to all holders of its
Common Stock evidence of indebtedness of the Company or assets
of the Company (excluding cash dividends or distributions out
of earned surplus) or rights or Warrants to subscribe for
securities of the Company (excluding those referred to in
Sections 3(a)(2) or (3) above), then in each case the Warrant
Price shall be adjusted to a price determined by multiplying
the Warrant Price in effect immediately prior to such
distribution by a fraction, of which the numerator shall be
the then current market price per share of Common Stock (as
defined below) on the record date for determination of
shareholders entitled to receive such distribution, less the
then fair value (as determined by the Board of Directors of
the Company, whose determination shall be conclusive) of the
portion of the assets or evidence of indebtedness so
distributed or of such subscription rights or Warrants which
are applicable to one share of Common Stock, and of which the
denominator shall be the market price per share of Common
Stock; provided, however, that if the then current market
price per share of Common
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<PAGE> 6
Stock on the record date for determination of shareholders
entitled to receive such distribution is less than the then
fair value of the portion of the assets or evidence of
indebtedness so distributed or of such subscription rights or
Warrants which are applicable to one share of Common Stock, the
foregoing adjustment of the Warrant Price shall not be made and
in lieu thereof the number of shares purchasable upon exercise
of each Warrant immediately prior to such distribution shall be
adjusted so that the holder of such Warrant shall be entitled
to receive upon exercise of such Warrant the kind and number of
assets, evidence of indebtedness, subscription rights and
Warrants (or, in the event of the redemption of such evidence
of indebtedness, subscription rights or Warrants, any cash paid
in respect of such redemption) that such Warrantholder would
have owned or have been entitled to receive after the happening
in such distribution had such Warrant been exercised
immediately prior to the record date of such distribution.
(5) For purposes of any computation under this Section
3(a), the current market price per share of Common Stock on
any date shall be deemed calculated as provided in Section
1(d).
(6) No adjustment in the Warrant Price shall be required
unless such adjustment would require an increase or decrease
of at least five cents ($.05) in such price; provided,
however, that any adjustments which by reason of this Section
3(a)(6) are not required to be made shall be carried forward
and taken into account in any subsequent adjustment. All
calculations under this Section 3(a) shall be made to the
nearest cent or to the nearest one hundredth of a share, as
the case may be. Notwithstanding anything in this Section
3(a) to the contrary, the Warrant Price shall not be reduced
to less than the then existing par value of the Common Stock
as a result of any adjustment made hereunder.
(7) In the event that at any time, as the result of any
adjustment made pursuant to this Section 3(a), the
Warrantholder thereafter shall become entitled to receive any
securities other than Common Stock, thereafter the number of
such other securities so receivable, upon exercise of any
Warrant shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock contained in
Section 3(a).
(8) Notwithstanding the foregoing, no adjustments shall
be made pursuant to Sections 3(a)(2), (3) or (4) hereof unless
the Company directly or indirectly shall make substantially
similar adjustments to any stock options granted pursuant to
any stock option plan or otherwise grant benefits in lieu of
such adjustments to the holder of such stock option.
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<PAGE> 7
(b) No Adjustment for Dividends. Except as provided in Section
3(a) of this Agreement, no adjustment in respect of any cash dividends
shall be made during the term of this Warrant or upon the exercise of
this Warrant.
(c) Preservation of Purchase Rights in Certain Transactions. In
case of any reclassification, capital reorganization or other change
of outstanding shares of Common Stock (other than a subdivision or
combination of the outstanding Common Stock and other than a change in
the par value of the Common Stock) or in case of any consolidation or
merger of the Company with or into another corporation (other than a
merger with a subsidiary in which the Company is the continuing
corporation and that does not result in any reclassification, capital
reorganization or other change of outstanding shares of Common Stock
of the class issuable upon exercise of this Warrant) or in the case of
any sale, lease, transfer or conveyance to another corporation of the
property and assets of the Company as an entirety or substantially as
an entirety, this Warrant shall become exercisable on the record date
for such event if this Warrant was not previously exercisable. If
this Warrant is not exercised on or prior to the consummation of any
such event, then this Warrant shall terminate, if notice of such event
was properly given pursuant to Section 8 of this Agreement.
(d) Form of Warrant After Adjustments. The form of this Warrant
need not be changed because of any adjustments in the Warrant Price of
the number or kind of the shares purchasable pursuant to this Warrant,
and Warrants theretofore or thereafter issued may continue to express
the same price and number and kind of shares as are stated in this
Warrant, as initially issued; provided, however, that the Company may,
at any time in its sole discretion (which shall be conclusive), make
any change in the form of Warrant certificate that it may deem
appropriate and that does not affect the substance thereof. Any
Warrant certificate thereafter issued, whether upon registration of
transfer of, or in exchange or substitution for, an outstanding
Warrant certificate may be in the form so changed.
(e) Treatment of Warrantholder. Prior to due presentment for
registration of transfer of this Warrant, the Company may deem and
treat the Warrantholder as the absolute owner of this Warrant
(notwithstanding any notation of ownership or other writing hereon)
for all purposes and shall not be affected by any notice to the
contrary.
(f) Notice of Adjustment. Upon any Adjustment of the Warrant
Price, then and in each such case the Company shall give written
notice thereof, by first-class mail, postage prepaid, addressed to
each Warrantholder at the address of such Holder as shown on the books
of the Company, which notice shall state the Warrant Price resulting
from such adjustment, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
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<PAGE> 8
(g) Stock to Be Reserved. The Company will at all times reserve
and keep available out of its authorized Common Stock, solely for the
purpose of issuance upon the exercise of this Warrant as herein
provided, such number of shares of Common Stock as shall then be
issuable upon the exercise of this Warrant. The Company covenants
that all shares of Common Stock which shall be so issued upon full
payment of the Warrant Price therefor or as otherwise set forth
herein, shall be duly and validly issued and fully paid and
nonassessable and free from all taxes, liens and charges with respect
to the issue thereof, and, without limiting the generality of the
foregoing, the Company covenants that it will from time to time take
all such action as may be required to ensure that the par value per
share, if any, of the Common Stock is at all times equal to or less
than the effective Warrant Price. The Company will take all such
action as may be necessary to ensure that all such shares of Common
Stock may be so issued without violation of any applicable law or
regulation, or of any requirement of any national securities exchange
or automated quotation system upon which the Common Stock of the
Company may be listed. The Company will not take any action which
results in any adjustment of the Warrant Price if the total number of
shares of Common Stock issued and issuable after such action upon
exercise of this Warrant would exceed the total number of shares of
Common Stock then authorized by the Company's Articles of
Incorporation. The Company has not granted and will not grant any
right of first refusal with respect to shares issuable upon exercise
of this Warrant, and there are no preemptive rights associated with
such shares.
(h) Issue Tax. The issuance of certificates for shares of Common
Stock upon exercise of any Warrant shall be made without a charge to
the Warrantholder for any issuance tax in respect thereof, provided
that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and
delivery of any certificate in a name other than that of the
Warrantholder.
(i) Closing of Books. The Company will at no time close its
transfer books against the transfer of the shares of Common Stock
issued or issuable upon the exercise of this Warrant in any manner
which interferes with the timely exercise of this Warrant.
(j) Definition of Common Stock. The shares purchasable pursuant
to this Warrant shall include only securities designated as Common
Stock of the Company. As used herein the term "Common Stock" shall
mean and include the no par value Common Stock of the Company as
authorized on the date hereof, or shares of any class or classes
resulting from any recapitalization or reclassification thereof which
are not limited to any fixed sum or percentage and are not subject to
redemption by the Company and in case at any time there shall be more
than one such resulting class, the shares of each class then so
issuable shall be substantially in the proportion which the total
number of shares of such class resulting from all such
reclassification bears to the total number of shares of all such
classes resulting from all such reclassification.
-8-
<PAGE> 9
4. Registration Rights
(a) Demand Registration. At any time and from time to time but
not earlier than the Commencement Date or later than the Expiration
Date, the Warrantholder shall have the right to make written request
of the Company to register under the rules and regulations (the
"Regulations") of the Securities and Exchange Commission (the "SEC")
such number of underlying shares of Common Stock which may be
purchased by the Warrantholder pursuant to the terms and conditions of
this Warrant (the "Registrable Stock"). The underlying shares of
Registrable Stock specified in such request or a request pursuant to
Section 4(c) hereof is refined to herein as the "Subject Stock."
Promptly upon receipt of such request the Company shall file with the
SEC a registration statement on the applicable form for the
registration of the Subject Stock ("registration statement") and use
its best efforts to cause such registration statement to become
effective (including, without limitation, filing post-effective
amendments, appropriate qualifications under applicable blue sky or
other state securities laws, and appropriate compliance with the
Regulations) as soon as practicable to permit or facilitate the sale
and distribution of the Subject Stock. The Company is obligated to
effect only one (1) such registration pursuant to this Section 4(a).
Notwithstanding the provisions of this Section 4(a), if the
Company shall furnish to the Warrantholder a certificate signed by the
Chief Executive Officer of the Company stating that in the good faith
judgment of the Board of Directors of the Company it would be
seriously detrimental to the Company and its shareholders for such a
registration statement to be filed and it is therefore essential to
defer a filing of such registration statement, the Company shall have
the right to defer such filing for a period of not more than one
hundred twenty (120) days after receipt of the request from the
Warrantholder to effect such a registration; provided, however, that
the Company may not utilize this right more than once in any twenty
four month period; and provided, further, that the Warrantholder may,
at any time in writing, withdraw such request for such registration
and therefore preserve the right provided in this Section 4 (a) for
the Warrantholder to request such registration.
(b) Preparation of Documents. Prior to filing a registration
statement or any amendments or supplements thereto with the SEC
required hereby, the Company will furnish to the counsel selected by
the Warrantholder copies of all documents proposed to be filed, which
documents will be subject to the timely review of such counsel. In
connection therewith, the Company shall prepare and file a
registration statement to effect such registration. The Warrantholder
agrees to provide all such information and materials and take all such
action as may be reasonably required in order to permit the Company to
comply with all applicable requirements of the SEC and to obtain any
desired acceleration of the effective date of such registration
statement.
-9-
<PAGE> 10
(c) Piggyback Registration. If (but without any obligation to do
so) the Company proposes to register with the SEC any of the Common
Stock under the Regulations of the SEC (other than pursuant to a
request under Section 4(a) and other than securities to be issued
pursuant to a stock option or other employee benefit or similar plan,
or in connection with a merger, acquisition, or a Rule 145
transaction), the Company shall as promptly as practicable, but at
least 30 days prior to the filing of the applicable registration
statement, give written notice to the Warrantholder of its intention
to effect such registration. If, within 20 days after receipt of such
notice and after the Commencement Date but before the Expiration Date,
the Warrantholder submits a written request to the Company specifying
the amount of Registrable Stock that the Warrantholder proposes to
sell, the Company shall include the shares specified in such request
in such registration statement (and any related qualification under
blue sky laws or other compliance) and the Company shall keep each
such registration statement in effect and maintain compliance with
each federal and state law and regulation as set forth in Section
4(d).
Prior to filing a registration statement pursuant to the
Regulations under which the shares of Common Stock issuable upon
exercise of this Warrant may be included, the Company shall give
reasonable notice to the holder(s) of this Warrant or such shares of
Common Stock and shall allow such shares of Common Stock to be
included in such registration statement subject to the following terms
and conditions; (i) such shares need not be included in any
underwritten offering if and to the extent that the managing
underwriter determines in its best judgment that their inclusion would
impair the success of the offering provided that (A) if other selling
shareholders without contractual registration rights have requested
registration of securities in the proposed offering, the Company will
reduce or eliminate such securities held by selling shareholders
without registration rights before any reduction or elimination of
Registrable Stock, and (B) any such reduction or elimination (after
taking into account the effect of clause (A)) shall be pro rata to all
other selling shareholders with contractual registration rights; (ii)
the Company shall bear all costs of registration and sale of the
shares other than underwriting discounts or commissions and the fees
and expense (if any) of legal counsel to the holders; and (iii) the
Company shall have no obligation pursuant to this Section if at the
time the registration statement is proposed to be filed the holders
may freely sell the shares of Common Stock issuable upon exercise of
this Warrant pursuant to the Regulations of the SEC.
(d) Covenants of the Company. In connection with any offering of
Subject Stock registered pursuant to this Warrant, the Company shall
(a) furnish to the Warrantholder such number of copies of any
registration statement (including any preliminary prospectus) as it
may reasonably request in order to effect the offering and sale of the
Subject Stock to be offered and sold, but only while the Company shall
be required under the provisions hereof to cause the registration
statement to remain current; (b) take such action as shall be
desirable or necessary to qualify the
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<PAGE> 11
Subject Stock covered by such registration statement under such blue
sky or other state securities laws for offer and sale as the
Warrantholder shall request, and (c) keep the Warrantholder advised in
writing as to the initiation of each registration and as to the
completion thereof. Upon any registration becoming effective pursuant
to this Section 4, the Company shall use its best efforts to: (i) keep
such registration statement current for a period of 120 days; (ii)
prepare and file with the SEC such amendments and supplements to such
registration statement as may be necessary to comply with the
provisions of the Regulations of the SEC with respect to the
disposition of all securities covered by such registration statement;
(iii) cause all such Subject Stock registered pursuant to such
registration statement to be listed on each securities exchange or
automated quotation system on which the Common Stock is then listed;
(iv) provide a transfer agent and registrar for all Subject Stock
registered pursuant to such registration statement and CUSIP number
for all such Subject Stock in each case not later than the effective
date of such registration; and (v) otherwise use its best efforts to
comply with all applicable rules and regulations of the SEC.
(e) Sales by the Company. In connection with any offering of
Subject Stock pursuant to Section 4(a), the Company agrees not to
effect any public sale or distribution of Common stock for the
seven-day period preceding, and the 90-day period following the
effective date of any such registration.
(f) Expenses. With respect to the registration of Subject Stock
pursuant to Section 4(a), together with any inclusion of the Subject
Stock in a so-called piggyback registration pursuant to Section 4(b),
the Company will pay all expenses incident to its performance of or
compliance with this Section 4 including, without limitation, all
registration and filing fees, fees and expenses of compliance with
securities or blue sky laws, printing expenses, messenger, telephone
and delivery expenses, and fees and disbursements of its counsel and
independent certified public accountants. The Warrantholder will be
responsible for any stock transfer taxes, broker's fees or other
direct marketing expenses, all internal management, personnel and
administrative costs of the Warrantholder and the fees and expenses of
its attorneys, if any, incurred by it in connection with effecting any
such transactions.
(g) Indemnification. The Company will indemnify, to the maximum
extent permitted by law, the Warrantholder, its officers and directors
and each person who controls the Warrantholder (within the meaning of
the Regulations of the SEC) against all losses, claims, damages,
liabilities and expenses (or actions, proceedings or settlements in
respect thereof) caused by, arising out of or based on any untrue or
alleged untrue statement of a material fact contained in any
registration statement (or any amendment or supplement thereto) of the
Company relating to the sale of Subject Stock registered pursuant to
this Section 4, or any exhibits or materials incorporated by reference
therein, filed with the SEC, or any omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except
insofar as the same are caused by or
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<PAGE> 12
contained in any information furnished in writing to the Company by the
Warrantholder expressly for use therein.
The Warrantholder will indemnify, to the maximum extent permitted by
law, the Company, its officers and directors and each person who
controls the Company (within the meaning of the Regulations of the
SEC) against all losses, claims, damages, liabilities and expenses (or
actions, proceedings or settlements in respect thereof) caused by,
arising out of or based on any untrue or alleged untrue statement of a
material fact contained in any registration statement (or any
amendment or supplement thereto) of the Company relating to the sale
of Subject Stock registered pursuant to this Section 4, or any
exhibits or materials incorporated by reference therein, filed with
the SEC, or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, but only insofar as the same are
caused by or contained in any information furnished in writing to the
Company by the Warrantholder expressly for use therein.
Any person entitled to indemnification under this Section 4(g) will
(i) give prompt written notice to the indemnifying party of any claim
with respect to which it seeks indemnification and (ii) unless in such
indemnified party's reasonable judgment a conflict of interest between
such indemnified and indemnifying parties may exist with respect to
such claim, permit such indemnifying party to assume the defense of
such claim with counsel reasonably satisfactory to the indemnified
party. If such defense is assumed, the indemnifying party will not be
subject to any liability for any settlement made by the indemnified
party without its consent (but such consent will not be unreasonably
withheld). An indemnifying party who is not entitled to, or elects not
to, assume the defense of a claim will not be obligated to pay the
fees and expenses of more than one counsel for all parties indemnified
by such indemnifying party with respect to such claim, unless in the
reasonable judgment of any indemnified party a conflict of interest
may exist between such indemnified party and any other of such
indemnified parties with respect to such claim in which case, the
indemnifying party shall be obligated to pay the fees and expenses of
up to two counsel for all parties indemnified by such indemnifying
party with respect to such claim.
The indemnifications set forth in this Section 4(g) shall survive the
termination or expiration of this Warrant.
5. Notices of Record Dates
In the event of:
(a) any taking by the Company of a record of the holders of any class
of securities for the purpose of determining the holders thereof who
are entitled to receive any dividend or other distribution (other than
cash dividends out of earned surplus), or
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<PAGE> 13
any right to subscribe for, purchase or otherwise acquire any shares
of stock of any class or any other securities or property, or to
receive any right to sell shares of stock of any class or any other
right, or
(b) any capital reorganization of the Company, any reclassification
or recapitalization of the capital stock of the Company or any
transfer of all or substantially all the assets of the Company to or
consolidation or merger of the Company with or into any other
corporation or entity, or
(c) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company,
then and in each such event the Company will give notice to the Warrantholder
specifying (1) the date on which any such record is to be taken for the purpose
of such dividend, distribution or right and stating the amount and character of
such dividend, distribution or right, and (2) the date on which any such
reorganization, reclassification, recapitalization, transfer, consolidation,
merger, dissolution, liquidation or winding-up is to take place, and the time,
if any is to be fixed, as of which the holders of record of Common Stock will
be entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding-up. Such notice shall be given at least 20 days and not more than 90
days prior to the date therein specified, and such notice shall state that the
action in question or the record date is subject to the effectiveness of a
registration statement under the Securities Act of 1933, as amended, or to a
favorable vote of shareholders, if either is required. Failure to mail or
receive such notice or any defect therein shall not affect the validity of any
action with respect thereto.
6. No Shareholders Rights or Liabilities
This Warrant shall not entitle the Warrantholder to any voting rights
or other rights as a shareholder of the Company. No provision hereof, in the
absence of affirmative action by the Warrantholder to purchase shares of Common
Stock, and no mere enumeration herein of the rights or privileges of the
Warrantholder shall give rise to any liability of such Warrantholder for the
Warrant Price or as a shareholder of the Company, whether such liability is
asserted by the Company or by creditors of the Company.
7. Lost, Stolen, Mutilated or Destroyed Warrant
In case the certificate or certificates evidencing the Warrant shall
be mutilated, lost, stolen or destroyed, the Company shall, at the request of
the Warrantholder, issue and deliver in exchange and substitution for and upon
cancellation of the mutilated certificate or certificates, or in lieu of and
substitution for the certificate or certificates lost, stolen or destroyed, a
new Warrant certificate or certificates of like tenor and representing an
equivalent right or interest, but only upon receipt of evidence satisfactory to
the Company of
-13-
<PAGE> 14
such loss, theft or destruction of such Warrant and a bond of indemnity, if
requested, also satisfactory in form and amount at the applicant's cost.
Applicants for such substitute Warrant certificate or certificates shall also
comply with such other reasonable regulations and pay such other reasonable
charges as the Company may prescribe.
8. Notices
All notices, requests and other communications required or permitted
to be given or delivered hereunder shall be in writing, and shall be delivered
or shall be sent by certified or registered mail or overnight courier, postage
prepaid and addressed, or by facsimile, and if to the Warrantholder to such
Warrantholder at such address or facsimile number as shall have been furnished
to the Company by notice from such Warrantholder and if to the Company, at
26836 County Road 12A, Esparto, California 95267; Attention: President,
facsimile number (916) 662- 2880, or at such other address or facsimile number
as shall have been furnished to the Warrantholder by notice from the Company.
9. Restrictions on Transfer
This Warrant may not be sold, transferred, hypothecated or assigned to
any other person or entity except officers of the Warrantholder and in
accordance with all applicable laws. This Warrant shall bear a legend setting
forth the foregoing restriction.
10. Amendments and Waivers
This Warrant and any term hereof may be changed, waived, discharged or
terminated only by an instrument in writing signed by the party against which
enforcement of such change, waiver, discharge or termination is sought.
11. Severability
If one or more provisions of this Warrant are held to be unenforceable
under applicable law, such provisions shall be excluded from this Warrant, and
the balance of this Warrant shall be interpreted as if such provision were so
excluded and shall be enforceable in accordance with its terms.
12. Governing Law
This Warrant shall be governed by and construed under the laws of the
State of California without regard to conflict of law principles.
13. Headings
The headings in this Warrant are for purposes of reference only and
shall not limit or otherwise affect any of the terms hereof.
-14-
<PAGE> 15
14. Counterparts
This Warrant may be executed in any number of counterparts, each of
which shall be deemed an original but all of which together shall constitute
one and the same instrument.
-15-
<PAGE> 16
IN WITNESS WHEREOF, the Company and Van Kasper have executed this
Warrant on and as of the day and year first above written.
R. H. Phillips, Inc.
a California corporation
------------------------------------
John E. Giguiere
Co-Chief Executive Officer
Van Kasper & Company
-------------------------------------
Bruce P. Emmeluth
Managing Director, Corporate Finance
<PAGE> 17
SUBSCRIPTION FORM
(To be executed upon exercise of this Warrant)
___________________ :
The undersigned hereby irrevocably elects to exercise the right of
purchaser represented by the within Warrant for, and to purchase thereunder,
___________ shares of Common Stock, as provided for therein, and either tenders
herewith payment of the purchase price in full in the form of cash or a
certified or official bank check in the amount of $__________ or, if the
undersigned elects pursuant to Section 1(b) of the within Warrant to convert
such Warrant into Common Stock net issuance, the undersigned exercises the
within Warrant by exchange under the terms of Section 1(b).
Please issue a certificate or certificates for such Common Stock in
the name of and pay any cash for any fractional share to:
Name:
---------------------------------------------------------
Address:
------------------------------------------------------
Social
Security No:
--------------------------------------------------
Signature:
----------------------------------------------------
Note: The above signature must correspond exactly with the name on the first
page of this Warrant or with the name of the assignee appearing in the
assignment form below.
If said number of shares shall not be all the shares purchasable under
the within Warrant, a new Warrant is to be issued in the name of said
undersigned for the balance remaining of the shares purchasable thereunder
rounded up to the next higher number of shares.
Signature Guaranteed:
____________________________________
(Signature must be guaranteed by a bank or trust company having an
office or correspondence in the United States or by a member firm of a
registered securities exchange or the National Association of Security Dealers,
Inc.)
<PAGE> 18
ASSIGNMENT
(To be executed only upon assignment of Warrant)
For value received, ___________________________ hereby sells, assigns,
and transfers unto ______________________ the within Warrant Certificate,
together with all right, title and interest therein, and does hereby
irrevocably constitute, and appoint ___________________________ attorney, to
transfer said Warrant on the books of the within-named Company with respect to
the number of Warrants set forth below, with full power of substitution in the
premises:
Name(s) of
Assignee(s)/Address No. of Warrants
------------------- ---------------
And if said number of Warrants shall not be all the Warrants represented by the
Warrant, a new Warrant is to be issued in the name of said undersigned for the
balance remaining of the Warrants registered by said Warrant.
Dated: Signature:
------------------------------------------
Note: The above signature must correspond exactly
with the name on the face of this Warrant
Signature Guaranteed:
----------------------------------------
(Signature must be guaranteed by a bank or trust company having an
office or correspondence in the United States or by a member firm of a
registered securities exchange or the National Association of Security Dealers,
Inc.)
<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
June 4, 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
June 4, 1996
