U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to __________________
Commission File No.: 0-26276
R.H. PHILLIPS, INC.
(Exact name of small business issuer in its charter)
California 68-0313739
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
26836 County Road 12A, Esparto, California 95627
(Address of principal executive offices)
(916) 662-3215
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Number of shares outstanding of each of the issuer's classes of common equity
as of May 13, 1996: 4,632,985.
Transitional Small Business Disclosure Format: Yes No X
This document consists of 13 pages.
Item 1. FINANCIAL STATEMENTS
R.H. Phillips, Inc.
BASIS OF PRESENTATION
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. (the "Company")without audit. In the opinion of
management, the financial statements include all adjustments (which include
only normal recurring entries) necessary for a fair presentation. The
operating results for the three month periods ended March 31,1995 and 1996
are not necessarily indicative of the results which might be realized for the
full year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These statements should
be read in conjunction with the financial statements and notes included in
the Company's Report on Form 10-KSB for the fiscal year ended December 31,
1995.
Net income per share is computed using the weighted average number
shares of common outstanding and dilutive common stock equivalents.
R.H. PHILLIPS, INC., dba THE R.H. PHILLIPS VINEYARD
(A California Corporation)
BALANCE SHEET
MARCH 31, 1996 (UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ 9,219
Accounts receivable - net 2,075,903
Inventories 6,594,010
Deferred income taxes and prepaid expenses 359,446
-----------
Total current assets 9,038,578
PROPERTY, PLANT, AND EQUIPMENT - net 17,775,329
OTHER ASSETS:
Note receivable from shareholder 196,492
Deferred loan fees and other - net 661,858
-----------
Total other assets 858,350
-----------
TOTAL ASSETS $27,672,257
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 965,000
Notes payable 380,047
Accounts payable 2,154,408
Accrued liabilities 604,910
-----------
Total current liabilities 4,104,365
LONG-TERM DEBT 8,426,275
SUBORDINATED DEBT 1,500,000
DEFERRED INCOME TAXES 679,000
COMMITMENTS AND CONTINGENCIES --
REDEEMABLE PREFERRED STOCK 4,807,057
SHAREHOLDERS' EQUITY:
Common stock, no par, 12,500,000 shares authorized,
4,632,985 shares issued and outstanding 7,623,014
Retained earnings 532,546
-----------
Total shareholders' equity 8,155,560
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $27,672,257
===========
R.H. PHILLIPS, INC., dba THE R.H. PHILLIPS VINEYARD (A California
Corporation)
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
1995 1996
NET SALES $ 3,179,148 $ 3,185,822
COST OF SALES 2,053,269 1,909,074
----------- -----------
GROSS PROFIT 1,125,879 1,276,748
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 831,214 801,116
----------- -----------
OPERATING INCOME 294,665 475,632
INTEREST EXPENSE (267,488) (307,490)
OTHER INCOME (EXPENSE) - NET (11,573) 13,346
----------- -----------
INCOME BEFORE INCOME TAXES 15,604 181,488
PROVISION FOR INCOME TAXES (6,300) (66,000)
----------- -----------
NET INCOME $ 9,304 $ 115,488
=========== ===========
NET INCOME PER SHARE $ .00 $ .03
=========== ===========
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 3,645,859 4,632,985
=========== ===========
R.H. PHILLIPS, INC., dba THE R.H. PHILLIPS VINEYARD (A California
Corporation)
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
1995 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,304 $ 115,488
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 220,919 347,717
Loss on disposal of property and equipment 19,409 --
Changes in assets and liabilities:
Accounts receivable 7,258 790,785
Inventories (99,759) (239,540)
Prepaid expenses (473,370) 57,489
Other assets (8,107) (38,625)
Accounts payable and accrued liabilities (390,370) 602,592
Deferred revenue 27,500 --
----------- -----------
Net cash provided (used)
by operating activities (687,216) 1,635,906
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (810,099) (1,499,354)
----------- -----------
Net cash used in investing activities (810,099) (1,499,354)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 3,087,187 --
Issuance of redeemable preferred stock -- 4,807,057
Proceeds from long-term borrowings and
notes payable 8,670,000 901,328
Principal payments on long-term borrowings
and notes payable (8,468,337) (6,147,690)
Payment of loan origination fees (379,735) (1,500)
Loans to shareholders (4,001) (4,152)
----------- -----------
Net cash provided (used)
by financing activities 2,905,114 (444,957)
----------- -----------
INCREASE (DECREASE) IN CASH 1,407,799 (308,405)
CASH AT BEGINNING OF PERIOD 30,545 317,624
----------- -----------
CASH AT END OF PERIOD $ 1,438,344 $ 9,219
=========== ===========
OTHER CASH FLOW INFORMATION:
Interest paid (including capitalized interest of
$68,500 and $99,500) $ 383,685 $ 272,268
=========== ===========
Item 2. MANAGEMENT'S DICUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In reviewing the following management's discussion and analysis, the
reader should refer to the historical financial statements of the Company.
The discussion of the results and trends does not necessarily imply that
these results and trends will continue. For the purpose of the following
discussion, a "case" means a 9-liter case of wine.
Liquidity and Capital Resources
R.H. Phillips has historically financed its capital expenditures and
liquidity needs through a combination of equity infusions and short and
long-term borrowings. To date, the Company's cash flows from operations
alone have not been sufficient to satisfy all of the working capital and
capital expenditure requirements needed to keep pace with the Company's
growth.
The Company has raised substantial amounts of debt and equity financing
to reduce its dependence on higher interest debt and to finance the continued
expansion of its vineyard and winery facility. In 1994, the Company issued
convertible promissory notes in the amount of $1,500,000 to holders of
existing promissory notes of the Company. During 1995, the Company received
a loan from Metropolitan Life Insurance Company ("Metropolitan") in the
amount of $7,500,000, completed a sale of common stock from which the net
proceeds totaled approximately $2,873,000, and obtained a credit facility
from U.S. Bank of California ("U.S. Bank"). The Company completed a sale of
preferred stock to John Hancock Mutual Life Insurance Company ("Hancock") in
March 1996. The net proceeds from the preferred stock totaled approximately
$4,807,000. Descriptions of the convertible promissory notes and the
Metropolitan loan are set forth in Form 10-KSB for the fiscal year ended
December 31, 1995, Item 6, Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The Company has an agreement with U.S. Bank on a credit facility under
which the Company can borrow a maximum of $6,200,000. The credit facility is
comprised of an operating line of credit of $5,000,000 which is secured by
accounts receivable and inventory, and a non-revolving line of credit of up
to $1,200,000 which is secured by the 1996 grape crop. The operating line of
credit expires in April 1997, at which time all principal and unpaid interest
will be due and payable. However, U.S. Bank is currently in the process of
performing its annual review of this line of credit, and management believes
the maturity will be extended until April 1998. The annual interest rate on
the operating line of credit is either U.S. Bank's prime rate or IBOR plus
200 basis points, at the Company's option. The non-revolving line of credit
bears interest at an annual rate of U.S. Bank's prime rate plus 100 basis
points and matures in November 1996. The credit available on this line
increases throughout the year based on the Company's budgeted crop costs, and
was approximately $352,000 as of March 31, 1996. Interest on both lines of
credit is payable monthly. The lines of credit are used to finance the
Company's working capital needs. As of March 31, 1996, the balance on
the operating line of credit was approximately $520,000, and there was no
balance outstanding on the non-revolving line of credit. Total credit
available under both lines of credit was approximately $4,832,000.
The Company has a loan agreement with Heller Financial, Inc. ("Heller")
under which it may borrow a maximum of $1,000,000. Of the amount,
approximately $645,000 was advanced to the Company in 1995, with the balance
of $355,000 to be advanced at the Company's option. The loan is secured by
equipment. Principal is payable in sixty equal monthly payments, and
interest is payable monthly. The initial advance bears interest at a
floating monthly rate of the one month LIBOR rate plus 3.32%.
John and Karl Giguiere personally guarantee the obligations of the
Company under the loan agreements with Metropolitan, U.S. Bank, and Heller.
The guarantees will be released at such time as the Company's annual audited
financial statements verify that the Company's tangible net worth exceeds
$8,500,000 and the Company's ratio of consolidated total debt to consolidated
total capitalization does not exceed 50%. All principal and interest under
each of these loans will be immediately due and payable, at the option of the
lender, if any person or group other than John or Karl Giguiere or their
immediate families constitutes a majority of the Company's Board of
Directors. The provisions in these loan agreements concerning change of
control will be eliminated if and when the Company enters into employment
agreements with John and Karl Giguiere which obligate them to remain employed
by the Company through December 31, 1999. No such employment agreements are
currently in place.
The Company completed a sale of common stock and warrants to purchase
common stock in its initial public offering during 1995. Net proceeds from
the offering, after payment of commissions and expenses, totaled
approximately $2,873,000. The Company issued 493,563 units in connection
with the offering, with each unit consisting of two shares of common stock
and one warrant to purchase one share of common stock at a price of $3.875.
The warrants are exercisable, at the option of the holder, beginning March
31, 1996.
In March 1996, the Company completed a private placement sale to Hancock
of newly issued shares of Redeemable Senior Preferred Stock and detachable
common stock warrants at a price of $5,000,000. Net proceeds from the sale,
after payment of all commissions and expenses, totaled approximately
$4,807,000. The securities sold consisted of 500,000 shares of Redeemable
Senior Preferred Stock at $10per share and warrants to purchase up to 18% of
the number of shares of common stock outstanding on a fully diluted basis
(assuming full exercise ofthe warrants granted to Hancock) at a price of
$4.00 per share. The warrants will be exercisable for ten years following
the date of grant.
The redeemable preferred stock bears a 12% cumulative annual dividend,
payable semiannually. During the first four years after issuance, 50% of the
dividend will be paid in cash and 50% of the dividend will be paid in shares
of common stock at a price equal to the lower of the market price at the
dividend payment date or $4.00 per share. The preferred stock will be
redeemable by the Company beginning five years after issuance. The Company
will be required to redeem 1/3 of the preferred stock eight years after
issuance, 1/3 nine years after issuance, and the remainder ten tears after
issuance.
The Company's net working capital as of March 31, 1996 was $4,934,000,
compared to $3,692,000 as of March 31, 1995. The increase in working capital
was primarily due to the sale of redeemable preferred stock in March 1996,
and to the operating line of credit obtained from U.S. Bank in May 1995,
which has a maturity of greater than one year and which replaced shorter
term debt.
Net cash provided by operating activities for the three month period
ending March 31, 1996 totaled $1,636,000, compared to net cash used by
operating activities of ($687,000) for the period ending March 31, 1995. The
primary reasons for the difference in cash flows pertain to timing
differences on accounts receivable and accounts payable. Because accounts
receivable were larger as of December 31, 1995 than December 31, 1994, cash
collected during the first three months of 1996 totaled approximately
$4,069,000, compared to $2,839,000 for the same period in 1995. Accounts
payable and accrued liabilities increased by $603,000 during the first three
months of 1996, compared to a net decrease of ($390,000) in 1995 which
consumed greater amounts of cash.
The Company has historically made substantial capital expenditures to
expand its vineyards and winery facilities, and intends to continue these
expansions. The purpose of the expansion is to increase the Company's
production capabilities so that the Company can lessen or eliminate its
dependence on outside grape and bulk wine purchases and processing, thus
reducing costs of production and increasing gross profits.
The Company began the second phase of its winery expansion in April
1996. The current plans for this phase include the construction of an 18,000
square foot barrel building and tank pads. The Company currently plans to
purchase various equipment, including 26 stainless steel wine tanks with
total storage capacity of approximately 422,000 gallons, a refrigeration
system, a grape press, a grape crusher, a must pump, barrels, and other
equipment. Management expects the cost of this phase to total approximately
$4,600,000.
The Company has begun development on 400 acres of new vineyards, and
currently intends to plant an additional 375 acres in 1997, 285 acres in
1998, and 90-100 acres each in 1999 and 2000. The additional acres will be
planted both on land the Company currently owns and land the Company intends
to acquire in the future. In October 1995, the Company entered into an
agreement to purchase approximately 900 acres at a price of approximately
$1,362,000. The Company has an option agreement to purchase an additional
100 acres at a price of approximately $100,000. Both of these parcels are
located immediately adjacent to land currently owned by the Company. By the
year 2000, the Company intends to have approximately 1,700 acres of vineyard
under cultivation on approximately 2,700 acres of land. However, there can
be no assurance that the Company will be able to acquire additional land or
expand the vineyards at that rate.
The Company plans to use the proceeds from its preferred stock offering,
potential proceeds from the exercising of warrants, internally generated
funds, and other financing to fund its 1996 vineyard plantings and winery
expansion. The Company believes it will need to raise additional debt or
equity financing to fund future plantings and plant expansions. If the
Company does not obtain additional financing, the Company believes it will
need to reduce the rate at which it expands its vineyard plantings and the
winery facilities.
Phylloxera infestation will potentially have a negative impact on the
Company's grape production. Phylloxera is a root louse which feeds on the
roots of grapes, causing reduced production and eventual vine death. Of the
846 acres currently under cultivation by the Company, 369 acres have
rootstock which is susceptible to Phylloxera. Management estimates that the
commercially productive life of these vineyards is ten years from January 1,
1994, as compared with the twenty-five year life generally estimated for
vineyards, and that the reduction in the useful life of these vineyards will
result in an increase in depreciation of approximately $65,000 per year. The
Company is treating all vineyards believed to be currently at risk for
Phylloxera with Furadan, a chemical which is believed in the industry to slow
the spread of Phylloxera. The Company estimates that Furadan treatments will
cost approximately $45,000 per year. Both the increased depreciation charges
and the cost of the Furadan are added to the cost of grapes harvested, thus
increasing cost of sales. In addition, the Company is planning to combat the
effects of Phylloxera through the use of innovative grafting methods.
The Company is conducting a program of removing and replacing those
vines which have shown the largest decline in yields due to Phylloxera, and
plans to replace them with grape varieties which have greater consumer demand
and higher profit margins. Vines used to replace those infested by
Phylloxera and all other new plantings will contain rootstock which is
believed in the wine industry to be resistant to Phylloxera.
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 February or 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.
The above discussion concerning future financing needs, vineyard and
winery expansion, the impact of Phylloxera and factors affecting liquidity
are forward looking statements. Although management believes that these
statements are reasonable in view of the facts available to it, past
experience, and trends in the industry, there can be no assurance that any of
these statements will prove to be true. There are many factors which could
have a material impact upon whether these projections will be realized or
whether these trends will continue. Among these factors are the following:
Availability of Future Financing. The rate at which the Company is able
to expand its facilities is heavily dependent upon its ability to raise
additional debt or equity financing. The ability to raise financing is in
turn dependent upon a variety of factors, some of which are outside of the
control of the Company. The Company plans to use the 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. The
Company also plans to raise additional debt or equity financing to pay for
the expansion. If some or all of these warrants are not exercised, or the
Company is not able to raise additional debt or equity financing in an amount
sufficient to meet projected expansion costs, the Company will be required to
reduce, perhaps substantially, the rate at which it expands its facilities.
Costs of Expansion. Management has based its assumptions concerning the
costs of expansionon estimates which it believes are reasonable. However,
there can be no assurance that the Company's estimates as to the costs of
expansion will prove to be correct. If these costs are higher than
anticipated, the Company may be required to raise an even greater amount of
financing or reduce the rate of expansion of its facilities.
Costs of Production. Statements with respect to the general decline in
the Company's cost of production are based on management's assumptions
concerning the likely levels of sales by the Company during 1996, projected
yields from the Company's vineyards and beliefs as to the cost and
availability of bulk wine and grapes from the spot market. If, for example,
the Company's sales increase at a faster rate than anticipated or the
Company's grape production is lower than projected, the Company could be
forced to make additional purchases of grapes and wine on the spot market.
In view of current prices and lack of availability of good quality bulk wines
and grapes, management believes that such an event could increase the
Company's costs of production.
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 within the wine industry. Market conditions in the wine
industry have changed substantially from time to time. To the extent that
market conditions change substantially in the future, the rate at which
management deems it advisable to expand the Company's vineyard and winery
facilities may be adjusted.
Phylloxera Infestation. The discussion concerning Phylloxera
infestation and the costs associated with it are based on the Company's
examination of its vineyards and industry information concerning Phylloxera.
If this information changes or proves to be inaccurate, the Company's costs
in replacing vineyards and treating infested vines could increase.
Results of Operations
Net sales for the three month period ended March 31, 1996 remained
substantially the same as those for the corresponding period in 1995. The
average selling price per case increased from approximately $35.10 during the
first three months of 1995 to $36.45 per case for the same period in 1996.
The increase in the average selling price resulted primarily from price
increases on the Company's Night Harvest wines as well as on the Company's
Chardonnay and Cabernet Sauvignon classic varietals. The number of cases
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.
Management believes that the decrease in case sales is primarily due to the
price increases and to management's decision to reduce sales program
allowances.
Gross profit increased from 35% of sales for the three month period ending
March 31, 1995 to 40% of sales for the same period in 1996. Net sales and
cost of sales during both periods included the sales of bulk wines.
Excluding these sales, the gross margins were 36% during the first three
months of 1995 and 42% during the corresponding period in 1996. The higher
gross margin during the first three months of 1996 was primarily due to the
price increases discussed above, and to lower costs on the most recent
vintages sold in 1996 as compared to the vintages sold during the first three
months of 1995. The average cost per case sold during the first three months
of 1996 decreased by 5% from that sold in 1995, from approximately $22.35 per
case to $21.20 per case.
Selling, general and administrative expenses decreased as a percent of
sales for the first three months of 1996 compared to 1995, from 26% to 25%.
Selling expenses decreased from approximately $703,000 during the first three
months of 1995 to $571,000 during the corresponding period in 1996, primarily
due to lower sales programming expenses. General and administrative expenses
increased from $110,000 during the first three months of 1995 to $210,000 in
the corresponding period in 1996.
Total interest expense for the first three months of 1996 was $307,500,
or 9% of net sales, compared to $267,000, 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 and $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.
The Company had net income of $115,000 for the period ending March 31,
1996, compared with a net income of $9,304 during the same period in 1995.
This increase was primarily due to lower product costs and higher margins.
<PAGE>
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
3.1* Articles of Incorporation
3.2** Bylaws
4.1* Warrant Agency Agreement by and between the Company and
American Stock Transfer & Trust Company
4.2* Form of Common Stock Certificate
4.3* Form of Common Stock Purchase Warrant Certificate
4.4* Warrant to Purchase Common Stock issued to Capitol Bay
Securities
4.5* Form of 5 Year 6% Convertible Subordinated Note of the
Company
10.1* Loan Agreement between the Company and Metropolitan Life
Insurance and Related Agreements, dated January 20, 1995
10.2** Loan Agreement between U.S. Bank and the Company and Related
Agreements, dated May 26, 1995.
10.3** R.H. Phillips, Inc. 1995 Stock Option Plan and forms of
Incentive Stock Option Agreement and Non-Statutory Stock
Option Agreement.
* Documents were filed as exhibits to the Annual Report of the Company on
Form 10-KSB for the year ended December 31, 1994 and are incorporated by
reference.
** Documents were files as exhibits to the Quarterly Report of the Company on
Form 10-QSB for the period ended June 30, 1995 and are incorporated by
reference.
(b) Reports on Form 8-K.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to the signed on its behalf by the undersigned, thereunto
duly authorized.
R.H. PHILLIPS, INC.
(Registrant)
Date: April 13, 1996 /s/ Karl E. Giguiere
Karl E.Giguiere,
Co-Chief Executive Officer
Date: April 13, 1996 /s/ Robert T. Moore
Robert T. Moore,
Principal Financial Officer
