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U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [No Fee Required]
For the transition period from ______ to _________________
Commission File No. 0-26276
R.H. PHILLIPS, INC.
(Name of small business issuer in its charter)
California 68-0313739
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
26836 County Road 12A, Esparto, California 95627
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (916) 662-3215
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
No Par Common Stock
(Title of Class)
Warrants to Purchase Common Stock, Expiring October 1, 1998
(Title of Class)
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
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year: $16,928,545
Aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold on
March 24, 1997: $15,532,779
Number of shares outstanding of each of the issuer's classes of common
equity as of March 18, 1997: 5,957,750
Transitional Small Business Disclosure Format: Yes No X
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PART I
Item 1. Description of Business
General
As used herein, "R.H. Phillips business" will refer to the R.H.
Phillips vineyard and winery business. The "Company" will refer to
R.H. Phillips, Inc., the issuer to which this report pertains.
The Company makes and sells premium varietal table vines. The
Company's vineyard, winery and corporate headquarters is located in the
Dunnigan Hills region of California, approximately 30 miles northeast
of the Napa Valley wine region. The Company's wines are sold
throughout the United States and in several other countries. Since John
and Karl Giguiere, the Co-Chief Executive Officers of the Company,
founded R.H. Phillips in the early 1980s, sales of R.H. Phillips' wines
have increased from 4,552 cases of wine in 1984 to 402,000 cases of
wine in 1996.
Business of Issuer
Products
The Company produces and sells wines in the category
commonly referred to as "table wines." Table wines are those with 7%
to 14% alcohol by volume and which are generally consumed with
foods. Table wines that retail for less than $3.00 per 750 ml (milliliter)
bottle are generally referred to as generic or "jug" wines. Table wines
which retail in the $3.00 to $7.00 range are referred to as "premium" or
"popular premium" wines. Wines which retail between $7.00 and
$14.00 per bottle are considered "super premium" wines and those
which retail above $14.00 per bottle are considered "ultra premium"
wines.
R.H. Phillips has developed a diverse line of products including
popular premium and super premium varietal table wines. The
Company markets its products under primary and secondary labels.
Primary label products feature the "R.H. Phillips" name, and are divided
into three brand groups, with each group distinguished by a type of wine
and price structure. The secondary label wines have a lower cost base
and are intended to compete aggressively with other lower-priced
premium wines.
The EXP Series comprises two varietals, Syrah and Viognier,
which are traditional to France's southern Rhone Valley. The EXP
Series wines are bottled in 750 ml bottles and retail for about $12 each.
Chardonnay and Cabernet Sauvignon are the two R.H. Phillips
wines considered the Classic Varietals. R.H. Phillips has become a
recognized quality leader for Chardonnay and Cabernet Sauvignon
priced under $10 per bottle and receives significant positive recognition
from well-known wine critics such as Robert Parker. The lower
viticultural cost associated with the Dunnigan Hills region has made it
possible for R.H. Phillips to improve wine quality by applying a portion
of production savings to oak barrel fermentation and barrel aging.
These processes give the wines a competitive quality edge within their
price structure. The Chardonnay and Cabernet Sauvignon are bottled
in 750 ml and 1.5 liter bottles, and retail for about $8 or $14 per bottle,
depending on the size.
The Night Harvest series consists of blends of varietal wines
which are named for the innovative night harvesting methods developed
by the Company to retain grape freshness. This series includes
Sauvignon Blanc, Mistura and White Zinfandel. The method of night
harvesting allows the processing of
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cooler fruit, producing maximum flavor from the grapes without
extracting the bitterness which emerges at higher processing
temperatures. Wines in this group are delicate, smooth-textured blends
which are designed to gain maximum flavor from the blending process.
Night Harvest wines are bottled in 500 ml, 750 ml and 1.5 liter bottles.
Retail prices for blends in this group, depending on bottle size, range
from about $4 to $10 per bottle.
The Diamond G and Chateau St. Nicholas wines are secondary
labels, and the R.H. Phillips name does not appear on the label. These
wines are not barrel aged, allowing the wines to be produced and sold
at a lower price. Due to its lower retail cost, Diamond G wine can
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 $6 or $10 per bottle. Chateau St.
Nicholas is sold only during the holiday season, and is 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 $6-7 for the 750 ml bottles, and $12 for the
gift pack. Management believes that Chateau St. Nicholas is a mature
brand, sales of which are not likely to increase.
The Company plans to introduce its new Toasted Head Series in April 1997.
This series will consist of barrel aged Chardonnay
packaged in a 750 ml bottle, and will retail for about $12. Management
believes this series will be competitive with wines priced in the ultra
premium category.
Sales By Product
The varietal makeup of R.H. Phillips wines has changed since the
business was founded. In the first years of full product line sales,
generic white and red table wine represented a larger portion of R.H.
Phillips' sales than any of its varietals. In 1996, generic table wines
represented approximately 1% of total sales, while sales of Chardonnay
and White Zinfandel totaled approximately 48% and 15% of total sales,
respectively.
Management is reducing production of Chateau St. Nicholas to
prevent competition with the R.H. Phillips brand during the holidays,
and to focus its distributors' efforts on building the R.H. Phillips brand.
Sales of Chateau St. Nicholas, which peaked at a high of approximately
68,000 cases in 1991, declined to approximately 27,000 cases in 1996.
Although R.H. Phillips primarily focuses on building its
proprietary wines, the Company continues to process a small amount of
private label wine. Private label wines are packaged and labeled to the
specifications of the customer, and the R.H. Phillips name does not
appear on the face label. In 1996, private label sales represented
approximately 4% of total sales.
Distribution
The Company's sales strategy has focused on the creation,
retention and expansion of a large, nationwide distributor network
supported by sales personnel. The Company's brands are distributed
nationwide by a network of 95 unrelated wine distributors who buy
inventory at wholesale prices. Four direct sales representatives, who are
employees of R.H. Phillips, work with certain distributors and receive
a salary plus volume bonuses. Seven independent wine brokers have
been appointed by R.H. Phillips to work with other distributors and are
paid a commission on their sales. 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 R.H. Phillips representative is the critical link between
the
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winery and the wholesaler, and works to facilitate communication, deals
with special promotions, and monitors sales performance. The
Company also employs a National Sales Manager, whose responsibilities
include reviewing regional sales performances and the extent of brand
penetration within each region.
The Company's non-employee sales representatives and wine
brokers are paid a commission based on a percentage of the dollar
amount of wine orders they obtain from the Company's distributors.
The sales representatives generally are not subject to agreements which
obligate them to market the Company's wines for any specific period,
or which prohibit the Company from replacing any sales representative
upon notice to the representative. However, one sales representative,
Citadel Trading Corp. ("Citadel"), which accounted for 49% of all
orders placed by distributors for the Company's wines in 1996, has an
agreement with the Company which provides that Citadel is the
exclusive sales representative of the Company in the states of Maine,
New Hampshire, Vermont, Connecticut, New York, Massachusetts,
New Jersey, Pennsylvania and Rhode Island. The agreement will expire
on January 1, 1998, unless terminated before that date by either party
for cause. The agreement provides that Citadel will relinquish its
marketing rights to the Company's wines if there is a substantial decline
in sales in Citadel's territory. During the term of that agreement,
Citadel may not act as representative of another California winery in
competition with the Company without the Company's consent.
There has been substantial consolidation among beverage
distributors during the last several years. Virtually all of the distributors
the Company uses 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 R.H. Phillips' wines are Lauber
Imports, Ltd., Wine Warehouse, and M.S. Walker. In 1996, Lauber
Imports, which distributes wines in the northeastern United States,
accounted for approximately 13% of sales. Wine Warehouse distributes
wine in California, and accounted for approximately 11% of sales. M.S.
Walker, also located in the northeast, accounted for approximately 10%
of total sales.
The Company's wines are sold throughout the United States and
in several other countries. The northeastern United States was the
region which accounted for the highest percentage of R.H. Phillips' sales
in 1996, constituting approximately 35% of total sales. The northern
Midwest was R.H. Phillips' second largest region, with approximately
11% of total sales in 1996. California, which is divided into two sales
regions, also accounted for approximately 11% of sales. Approximately
1% of total sales were to other countries, primarily Canada and the
United Kingdom.
The Company's standard sales terms provide that payments for
wines purchased by distributors are due 30 to 60 days after shipment at
prices set forth on the Company's price lists. The Company does not
have contracts with any of its distributors which obligate them to
purchase any specified amount of wine over any defined period. It is
therefore possible for a distributor, including one of the Company's
major distributors, to cease purchases of the Company's wines at any
time.
Management estimates that the end customers of the Company's
wine and spirits distributors consist of approximately 40% liquor stores,
40% grocery stores, and 20% bars and restaurants.
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Sales and Marketing
The Company's sales expenditures take various forms. The
Company pays salaries, wages and commissions to its sales and sales
support personnel. In addition, the Company uses advertising and sales
promotional expenses to promote products in either a "push" or "pull"
manner. "Push" programs include such sales tools as promotional
allowance rebates or discounts, product samples, and spiffs (dollar sales
incentives) paid to distributor sales personnel. "Pull" programs include
media advertising, travel and entertainment, point of sale materials, a
tasting room, and various promotional events. Management considers
"push" programs to be the most productive way to generate new sales
per dollar. Although pull programs are more costly to implement,
management believes that they will provide a greater return over the
long run by building brand recognition.
Suppliers
The Company purchases raw materials from outside parties to
conduct its business. Raw materials include items such as grapevines
and trellis materials, fertilizers and pesticides, and packaging supplies
such as bottles, corks, boxes and labels. Management believes that it has
strong relationships with all of its major vendors, is not dependent on
any single supplier, and would be able to find substitute suppliers if
necessary.
Because sales of the Company's products exceed the Company's
current grape production, it has been necessary to purchase bulk wine
and grapes from outside suppliers. In 1996, approximately 55% of the
wine sold by the Company came from bulk grapes and wine bought on
the open 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, as described
in Phylloxera, Other Diseases. Another factor during 1995 and 1996
was adverse weather conditions, which further reduced grape harvest 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 also has a considerable impact upon the average price of bulk
wines and grapes in the wine industry.
Research and Development
R.H. Phillips maintains a three-acre experimental vineyard where
new grape varieties are planted and small-scale viticultural experiments
conducted. Such variables as the amount of irrigation water received by
a vine, crop level per vine, 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:
Dry Land Red Grape Production The Rhone varieties are being
planted in a dry land, semiarid format. By shrinking the fruit cluster and
berry size, R.H. Phillips hopes to improve wine color, flavor and
richness.
Vertical Trellising The Company is investigating ways to
increase the exposure of fruit to the sun to increase the fruitiness of the
wines;
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pH Manipulation In the warm climate of the Dunnigan Hills,
high pH can cause shifts in fruit flavor and reduce the shelf life of the
finished wine. Experiments with soil potassium levels, irrigation
amounts and maturity levels at harvest are being conducted;
Organic Viticulture Experiments are underway to actively
promote elimination of both insecticides and herbicides from the
vineyards;
Winemaking A number of winemaking experiments are carried
out each year. Wine variables are changed and the results are evaluated
through blind tastings and statistical analyses. Yeast strains and
fermentation temperatures are examples of two winemaking variables
that are tested.
R.H. Phillips actively exchanges viticultural and winemaking
information with other firms in the industry. A close working
relationship with the faculty of the Department of Enology and
Viticulture at the University of California at Davis is also maintained.
Staff members of R.H. Phillips have visited several wineries in Europe
and Australia, and personnel from French, Australian and South African
wineries and vineyards have toured its facilities. These visits have
resulted in a valuable exchange of technical information.
Competition
The California table wine industry in 1996 had approximately
$5.2 billion in sales according to the December 1996 edition of
WINEDATA published by Gomberg, Fredrikson and Associates. There
are currently about 800 commercial wineries in California, which are
concentrated in the major viticultural regions of the state. The three
largest wineries, known as "the Big Three," are E. & J. Gallo,
Canandaigua West, and The Wine Group. The shipment volume of the
Big Three in 1996 accounted for approximately 63% of total wine sales
in California. The Company is the 21st largest shipper of wines in
California, according to the 1996 edition of WINEDATA.
The California wine industry is extremely competitive. Many
new wineries have been established in the last few years which compete
to some extent with the Company. The competitive environment will
continue to be intense in all likelihood and management believes it is
doubtful that many of the smaller wineries with comparatively high costs
of production and limited financial resources will be able to survive.
Management believes that competition in the wine industry will likely
increase, which could potentially reduce future profits.
Per capita wine consumption in the United States has increased
steadily in the last five years, according to the December 1996 edition
of WINEDATA. The increase appears to be due to favorable news
about the health benefits of moderate wine consumption, a strong
economy, and innovative packaging introduced by the wine industry,
according to the 1996 edition of WINEDATA.
Trademarks
The Company has obtained from the U.S. Patent & Trademark
Office a federal registration for its EXP and Chateau St. Nicholas
trademarks and has applied for registration of several additional
trademarks as well. The Company has adopted a program to establish
and protect its rights in its trademarks and trade names.
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Employees
R.H. Phillips employs approximately 190 people full-time. In
addition to the full-time positions, the Company employs temporary
labor for vineyard development, pruning, harvest, and peak bottling
season. None of the Company's employees are covered by a collective
bargaining agreement and the Company is unaware of any labor disputes
with its employees.
Agricultural Hazards
The growing of grapes for wine production is heavily dependent
upon favorable weather conditions. Drought or excessive rain can
adversely affect production. Excessive heat or cold, especially near the
time for harvest, can adversely affect the quality of grapes for wine
production. The Company experienced lower than normal crop yields
in 1996 due to adverse weather conditions. Management estimates that
the yields were approximately 23% lower than normal, and plans to
purchase additional bulk wine on the open market to compensate.
Management believes that this will cause an increase in the costs of
production in 1997, and plans to raise its prices to compensate.
Phylloxera, Other Diseases
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
causes 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 was expected to be reduced by
up to 28% due to Phylloxera infestation and Sonoma production was
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 somewhat.
However, the Company removed during 1996 approximately 80 acres
of the vineyards showing the greatest evidence of decline from
Phylloxera infestation. Of the Company's current 1,201 acres of
vineyards, approximately 289 acres have rootstock known to be
susceptible to Phylloxera. Based on tests management has performed,
management believes that of these 289 acres, portions of up to 150
acres have the presence of Phylloxera. The Company is using a variety
of methods to combat Phylloxera infestation. The Company is applying
grafting techniques by which those vines which are less damaged or are
not yet infested are grafted onto resistant rootstock, and an interplanting
technique in which new vines on resistant rootstock are planted between
the susceptible vines, which are then allowed to deteriorate. More
damaged vines, as well as those Phylloxera susceptible vines bearing
grape varieties which the Company plans to de-emphasize, are being
replaced. 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
steps include the use of chemical treatments and organic methods, such
as use of natural insect enemies of the pests.
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Water Supply
The Company uses drip irrigation from well water supplies to
irrigate its vineyards. The wells have been a reliable source of water for
the Company. Although management believes that these sources of
water will remain available for the foreseeable future, there can be no
assurance that sufficient water will be available from underground
aquifers. The Company is experimenting with dry land 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 U.S. 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. These regulations include 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 greater than 14% is greater than the tax assessed on
wine with a lesser alcohol content. 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.
Missouri and Wisconsin also collect excise taxes based on the volume
of sales into those states.
State governments also regulate the production and shipment of
wine. In California, the wine regulatory agency is the Department of
Alcoholic Beverage Control. 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
other 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 addition to alcohol-related governmental regulations, grape
growers, wine producers and wine shippers are subject to a broad range
of other regulatory requirements, such as local zoning regulations.
Other regulations govern 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 R.H. Phillips' business. Management is unaware of any
environmental problems on or near the vineyard and winery.
Seasonality
The Company usually experiences substantial seasonal
fluctuations in revenue and expenditures. Sales volumes generally
increase during the holiday season, which causes a large percentage of
sales to occur during the last three months of each year. In 1996,
approximately 33% of total sales occurred during this period. The
Company's expenditures fluctuate throughout the year based on
vineyard and winery activities. Expenditures typically peak during the
summer and early autumn, due to harvest and crush activities and
expenditures to fund vineyard and winery expansions.
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Working Capital
The Company typically keeps large amounts of inventories on
hand. Inventories include unfinished products such as the current grape
crop, bulk wine stored in tanks and barrels, and packaging supplies, as
well as finished wines. The Company generally keeps sufficient finished
product on hand to allow rapid turnaround of wine orders.
Management believes that large inventories are standard in the wine
industry for these reasons.
Several of the Company's largest customers receive payment
terms in excess of its standard thirty day terms. The extended payment
terms are offered to remain competitive with other wineries, and they
have the effect of increasing accounts receivable. As of December 31,
1996, approximately 34% of trade accounts receivable were aged more
than thirty days due to extended terms.
Item 2. Description of Property
The Company owns 2,696 acres of land in California's Dunnigan
Hills region, located in northern Yolo County. A total of 1,201 acres
are currently planted in vineyards. All the vineyards are harvested for
wines produced by R.H. Phillips, with the exception of 45 acres on
which grapes are grown under a production contract with Heublein, Inc.
The Company also farms 485 additional acres of vineyards under an
annually renewable contract for C. Mondavi & Sons.
Of the wine sold by the Company during 1996, approximately
45% was produced from grapes grown on land owned by the Company.
On site production was supplemented by grapes and bulk wine
purchased from other vineyards and wineries. The Company is in the
process of expanding its vineyards in an effort to reduce or eliminate
outside grape and bulk wine purchases. The Company planted 435
acres of new vineyards during 1996, and currently plans to plant an
additional 350 acres in 1997, 175 acres in 1998, and 50 acres each in
1999 and 2000. The additional acres are being planted on land the
Company currently owns or may purchase in the future, including 100
acres the Company purchased in February 1997. 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 expand the vineyards
at that rate.
The Company's winery facility and administrative headquarters
are located on the Company's land. The winery facility contains
bottling, barrel storage and warehouse buildings, and several exterior
tank and mechanical pads. Present storage capacity in the Company's
warehouse is approximately 55,000 cases of wine, which is fully utilized.
The Company owns or leases approximately 5,600 oak barrels, and
storage capacity in its barrel room is approximately 7,500 barrels. The
barrels are capable of holding approximately 330,000 gallons, and the
Company's current wine tank capacity is approximately 1,445,000
gallons, for a total capacity of approximately 1,775,000 gallons. The
maximum bulk wine on hand at one time during 1996 was
approximately 1,055,000 gallons.
The Company has granted to Metropolitan Life Insurance
Company ("Metropolitan") a deed of trust on its real property and a
security interest in certain equipment and other assets as security for a
long term loan the Company received from Metropolitan. 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 its business.
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Item 3. Legal Proceedings
The Company is not the subject of any material litigation, other
than routine litigation incidental to the Company's business.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its 1996 Annual Meeting of Shareholders on
October 17, 1996 at the Company's winery. A total of 3,963,152
shares, or approximately 67% of the outstanding shares of Common
Stock, were present or represented at the meeting.
The following persons were elected to the Board of Directors of
the Corporation, each of whom was an existing director of the
Corporation at that time: John E. Giguiere, Karl E. Giguiere, Lane C.
Giguiere, R. Ken Coit and Victor L. Motto. The number of shares
voting in favor of each nominee was 3,962,452 and the number of
shares voting against each nominee was 700. No other persons were
nominated for election to the Board of Directors.
The shareholders also voted to reappoint KPMG Peat Marwick
LLP ("KPMG") as the Company's independent auditors. A total of
3,962,252 votes were cast in favor of the reappointment of KPMG, 200
votes were cast against the reappointment, and 700 votes abstained.
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters.
The Company's Common Stock and warrants to purchase
Common Stock are listed on the Nasdaq National Market. As of March
18, 1997, there were 303 holders of record of the Company's Common
Stock.
On March 31, 1995, the Company completed an initial public
offering of 493,563 equity 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
now traded on the Nasdaq National Market.
The high and low bid prices for the Common Stock by quarter
for the past two years while the Common Stock has been traded
separately are as follows:
Year Ended December 31, 1995 High Low
Fourth Quarter . . . . . . . . . . . $3.25 $3.00
Year Ended December 31, 1996
First Quarter. . . . . . . . . . . . $6.75 $3.00
Second Quarter . . . . . . . . . . . $6.75 $4.88
Third Quarter. . . . . . . . . . . . $6.50 $3.75
Fourth Quarter . . . . . . . . . . . $4.12 $2.75
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The high and low bid prices for the units prior to the time that
the Common Stock was separately tradeable were as follows:
Year Ended December 31, 1995 High Low
Second Quarter . . . . . . . . . . . $7.75 $7.25
Third Quarter. . . . . . . . . . . . $7.75 $7.00
The information concerning the high and low bid prices was
based on reports the Company received from the Nasdaq Stock Market.
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 Common Stock dividends
for the foreseeable future. The Board of Directors may reevaluate its
policies with respect to the payment of Common Stock dividends in the
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"). In addition, the Senior Preferred
Stock of the Company, which is described below, provides that semi-
annual dividends payable on those shares must be paid in full or set aside
for payment before any dividends are paid on the Common Stock.
The Company issued 500,000 shares of 12% Senior Redeemable
Preferred Stock (the "Senior Preferred Stock") and warrants to
purchase up to 1,346,788 shares of Common Stock in a private
placement to John Hancock Mutual Life Insurance Company
("Hancock") on March 27, 1996. The shares were issued without
registration under the Securities Act of 1933 (the "Act") pursuant to the
exemption to registration contained in Rule 506 of Regulation D and
Section 4(2) of the Act. The net proceeds the Company derived from
the sale of the Senior Preferred Stock and the warrants, after payment
of offering expenses, were approximately $4,798,000. The warrants to
purchase Common Stock were valued at approximately $336,000,
making the net value of the Senior Preferred Stock approximately
$4,462,000. Accretion of approximately $25,000 was recorded during
1996, making the value of the Senior Preferred Stock approximately
$4,487,000 as of December 31, 1996.
Item 6. 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
R.H. Phillips, Inc. The discussion of the results and trends does not
necessarily imply that these results and trends will continue. For the
following discussion, a "case" means a 9-liter case of wine.
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Seasonality
The Company usually experiences substantial seasonal
fluctuations in revenue and expenditures. Sales volumes generally
increase during the holiday season, which causes a large percentage of
sales to occur during the last three months of each year. In 1996,
approximately 33% of total sales occurred during this period. The
Company's expenditures fluctuate throughout the year based on
vineyard and winery activities. Expenditures typically peak during the
summer and early autumn, due to harvest and crush activities and
expenditures to fund vineyard and winery expansions.
Costs of Production
The Company in 1996 experienced a significant increase in its
cost of production due to reduced harvests caused by adverse weather
conditions, and many California vineyards suffered similar or greater
reductions. The reduction in the Company's grape supply has caused
the Company to purchase a larger amount of grapes and bulk wines
from outside sources to meet customer demand for the Company's
wines. Management believes that the Company's costs of producing
wines from grapes or bulk wines from outside sources is significantly
higher than the costs associated with producing wines from its own
grapes. In addition, the cost of bulk wines and grapes has increased
substantially during the past two years due to the overall reduction of
the California grape harvest and the resulting shortage of grapes and
bulk wines. These factors are likely to increase the Company's cost of
production for at least the near future.
Management believes that its vineyard and winery expansion
program will serve to reduce the Company's costs of production in
future years. The recently completed winery expansion has eliminated
the Company's need to rely on outside sources of processing and
storage for its wines, and the Company is in the process of expanding
the size of its vineyards in order to lessen its dependence on outside
sources of bulk wines and grapes.
Liquidity and Capital Resources
The Company has financed its working capital and capital
expansion needs through internally generated funds, outside credit
facilities and equity financing. The Company has made substantial
capital expenditures to expand its vineyards and winery facilities, and
intends to continue these expansions. The purpose of the expansion is
to increase the Company's production capabilities so that the Company
can lessen or eliminate its dependence on outside grape and bulk wine
purchases and wine processing. The Company's cash flows from
operations alone have not been sufficient to satisfy all of the working
capital and capital expenditure requirements needed to keep pace with
its growth. Consequently, the Company has depended upon, and
continues to rely upon, debt and equity financing for its working capital
and expansion needs.
The Company's financial obligations consist of long- and short-
term debt, short-term credit facilities and redeemable preferred stock.
The Company obtained in January 1995 a ten year term loan from
Metropolitan with a principal amount of $7,500,000. As of December
31, 1996, the total outstanding under this loan was $6,950,000. The
Company also issued convertible promissory notes, with an aggregate
principal amount of $1,500,000. Amounts owing under these notes bear
interest at a rate of 6% per annum, payable annually, and the principal
amount of the notes is due and payable in December 1999. All principal
and interest owing under the convertible promissory notes are
automatically convertible into Common Stock of the Company if the
average of the closing bid and ask price for the Common Stock exceeds
$3.50 for any five consecutive trading days subsequent to December 6,
1996.
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The Company has a credit facility with U.S. Bank to finance
working capital requirements. The Company may borrow a maximum
of $6,000,000 under the facility, which is comprised of an operating line
of credit of $5,000,000 and a temporary increase on the operating line
of $1,000,000. The operating line of credit is secured by accounts
receivable and inventories and matures in April 1998, at which time all
principal and unpaid interest will be due and payable. However, the
operating line of credit will be reviewed in April 1997, at which time
U.S. Bank may extend the maturity to April 1999. The annual interest
rate on the operating line is either U.S. Bank's prime rate or IBOR plus
200 basis points, at the Company's option. The temporary increase on
the operating line bears interest at U.S. Bank's prime rate plus 100 basis
points, is secured by the grape crop and farm equipment, and expires
in March 1997. As of December 31, 1996, the total outstanding on
both lines of credit was approximately $5,472,000, leaving an available
balance of approximately $528,000.
In February 1997 the Company obtained an additional
$1,000,000 line of credit with U.S. Bank. This line of credit bears
interest at U.S. Bank's prime rate plus one percent, is secured by a deed
of trust, and expires in April 1997.
In March 1996, the Company completed a sale of 500,000
shares of Senior Redeemable Preferred Stock (the "Senior Preferred
Stock") and warrants to purchase up to 1,346,788 shares of Common
Stock. The net proceeds the Company derived from the sale of the
Senior Preferred Stock and the warrants, after payment of offering
expenses, were approximately $4,798,000. The warrants to purchase
Common Stock were valued at approximately $336,000, making the net
value of the Senior Preferred Stock approximately $4,462,000.
Accretion of approximately $25,000 was recorded during 1996, making
the value of the Senior Preferred Stock approximately $4,487,000 as of
December 31, 1996. The Senior Preferred Stock bears a 12%
cumulative annual dividend, payable semiannually. During the first four
years after issuance, 50% of the dividend will be paid in cash and 50%
of the dividend will be paid in shares of Common Stock at a price equal
to the lower of the market price at the dividend payment date or $4.00
per share. The Company will be required to redeem one-third of the
Senior Preferred Stock eight years after issuance, and one-third in each
of the succeeding years at a price of $10.00 per share.
In 1995 and 1996, the Company also raised capital through the
sale of Common Stock in two public offerings. The Company
completed a sale of Common Stock and warrants to purchase Common
Stock in its initial public offering during 1995. Net proceeds from the
offering, after payment of commissions and expenses, totaled
approximately $2,873,000. The Company issued 493,563 units at a
price of $7.25 per unit, with each unit consisting of two shares of
Common Stock and a warrant to purchase one share of Common Stock.
The warrants are currently exercisable at a price of $3.875 per share,
and the Board of Directors recently decided to extend the expiration
date of the warrants to October 1, 1998. As of December 31, 1996,
warrants to purchase 17,065 shares of Common Stock had been
exercised, with net proceeds to the Company totaling approximately
$66,000. If the warrants are exercised in full, management estimates
that it will receive additional proceeds of approximately $1,847,000.
The Company completed a second public offering of Common
Stock in July 1996. The Company issued 1,270,000 shares of Common
Stock in connection with the offering at a price of $4.375 per share, and
the managing underwriter of the offering, Van Kasper & Company,
received a warrant to purchase up to 122,000 shares of Common Stock
at a price of $5.25 per share. The net proceeds from the offering, after
payment of underwriting discounts and offering expenses, totaled
approximately $4,484,000.
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The Company's net working capital as of December 31, 1996
was approximately $7,016,000, as compared to approximately
$5,369,000 as of December 31, 1995. The primary reason for the
increase was an increase in inventories, from approximately $6,354,000
at December 31, 1995 to approximately $7,808,000 at December 31,
1996. This increase is indicative of the higher costs of purchasing
grapes and bulk wines during 1996 due to the below average crop yields
experienced by many vineyards in 1995 and 1996, and of the below
average crop yields experienced by the Company in 1996.
Net cash provided by operating activities for the year ending
December 31, 1996 was approximately $2,911,000, consisting
primarily of net income of approximately $1,293,000, depreciation and
amortization of approximately $1,591,000 and cash used in changes in
assets and liabilities of approximately $329,000. Net cash used in
investing activities in 1996 was approximately $12,351,000.
Investments during 1996 included approximately $1,266,000 invested
in land, approximately $5,489,000 in vineyard development,
approximately $1,506,000 in buildings, and approximately $4,139,000
in equipment. These investments were offset somewhat by the sale of
certain equipment. Net cash provided by financing activities totaled
approximately $9,431,000, consisting primarily of approximately
$4,798,000 received from the sale of Redeemable Preferred Stock,
approximately $4,550,000 received from the sale of Common Stock,
approximately $17,238,000 borrowed from U.S. Bank, and $1,700,000
borrowed from U.S. Bancorp. These cash inflows were partially offset
by principal payments made to U.S. Bank totaling approximately
$17,137,000, to Metropolitan totaling $550,000, and to various lenders
totaling approximately $975,000. Other factors affecting net cash
provided by financing activities included payment of a cash dividend on
the Senior Preferred Stock, payment of loan origination fees, and
payments to shareholders. As a result of the factors described above,
cash decreased by approximately $9,000 during 1996.
Over the past two years, the Company has added three buildings
used for bottling, barrel storage, chemical storage and a tasting area to
its winery facility. Several tank pads, a crush pad, a mechanical pad,
and equipment including 86 stainless steel wine tanks were added during
the same time period. The Company's wine tank storage capacity
increased from approximately 123,000 gallons to approximately
1,445,000 gallons. The winery expansion has enabled the Company to
discontinue its former practice of having its wine fermented and stored
at outside facilities, thus reducing the cost of producing its wine while
enabling the winemaking staff to maintain closer controls over wine
quality. The total cost of the two year expansion was approximately
$9,246,000, of which approximately $4,706,000 is attributable to the
phase completed in 1996.
Although the Company plans to continue its winery expansion
in 1997, current plans call for a smaller project. The Company currently
intends to purchase 24 stainless steel wine tanks and to construct tank
pads for them, and to purchase barrels and other equipment. The 1997
project also currently contains plans to add 8,000 square feet to the
existing warehouse, and to finish and expand the tasting room area.
Management estimates that the cost of the third phase of the winery
expansion will be approximately $2,200,000.
The Company planted approximately 435 acres of new vineyards
in 1996, and currently intends to plant an additional 350 acres in 1997,
175 acres in 1998, and 50 acres each in 1999 and 2000. The additional
acres are being planted on land the Company currently owns or may
purchase in the future, including approximately 900 acres of land which
the Company purchased in June 1996 and an additional 100 acres
purchased in February 1997. By the year 2000, the Company plans 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.
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Management estimates that the total costs of the current phase
of the vineyard and winery expansion will be approximately
$18,500,000 from 1996 through 1997. The 1996 phase of the
expansion was financed primarily with the proceeds from the sale of the
Senior Preferred Stock and the proceeds from its secondary public
offering. The Company intends to satisfy additional financing
requirements for further expansion through internally generated funds,
the sale of certain of its land, and borrowings on working capital lines
of credit, although additional long-term debt or equity financing may be
necessary.
Phylloxera infestation may have a negative impact on the
Company's future grape production. Phylloxera is a root louse which
feeds on the roots of grapes, causing reduced production and eventual
vine death. Of the 1,201 acres currently under cultivation by the
Company, 289 acres have root stock which is susceptible to Phylloxera.
Management estimates that the commercially productive life of these
vineyards is ten years from January 1, 1994, as compared with the
twenty-five year life generally estimated for vineyards, and that the
reduction in the useful life of these vineyards will result in an increase
in depreciation of approximately $65,000 per year. The Company is
chemically treating all vineyards believed to be currently at risk for
Phylloxera, and estimates that these treatments cost approximately
$45,000 per year. Both the increased depreciation charges and the cost
of treatment are added to the cost of grapes harvested, thus increasing
cost of sales. The Company plans to remove and replace all Phylloxera-
infested or susceptible vines with rootstock believed to be resistant to
Phylloxera. Methods of replacement include removing and replacing the
vines, the use of grafting methods whereby existing vines are grafted
onto resistant rootstock, and the use of interplanting, in which vines on
resistant rootstock are planted between the susceptible vines, which are
then allowed to deteriorate. The Company removed 68 acres in 1995,
and 80 acres were removed in 1996. Thirty-three acres have been
replanted. The Company plans to continue the removal and replanting
of these vines at a rate of approximately 30 acres per year.
The above discussion concerning future financing needs,
vineyard and winery expansion, the impact of Phylloxera and factors
affecting liquidity are forward looking statements. Although
management believes that these statements are reasonable in view of the
facts available to it, the Company's past experience, and trends in the
wine 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 the control of the Company. These factors include, but are
not limited to, interest rates, the availability of sources of financing and
the exercise of warrants issued in the Company's initial public offering.
If all of the warrants are not exercised, interest rates increase, or other
financing becomes unavailable or more costly to obtain, the Company
may need to reduce its rate of expansion.
Costs of Expansion. Management has based its assumptions
concerning the costs of expansion on estimates which it believes are
reasonable. However, there can be no assurance that the Company's
estimates as to the costs of expansion will prove to be correct. If these
costs are higher than anticipated, the Company may be required to raise
an even greater amount of financing or reduce the rate of expansion of
its facilities.
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<PAGE> 16
Costs of Production. Statements with respect to the general
decline in the Company's cost of production are based on management's
assumptions concerning the likely levels of future sales by the Company,
projected yields from the Company's vineyards and beliefs as to the cost
and availability of bulk wine and grapes from the spot market. If, for
example, the Company's sales increase at a faster rate than anticipated
or the Company's grape production is lower than projected, the
Company could be forced to make additional purchases of grapes and
wine on the spot market. In view of current prices and lack of
availability of good quality California bulk wines and grapes,
management believes that such events could increase the Company's
costs of production.
Market Conditions. Assumptions as to the desirability of
expansion are based to a great extent on the Company's belief
concerning the current status of and trends within the wine industry.
Market conditions in the wine industry have changed substantially from
time to time. To the extent that market conditions change substantially
in the future, the rate at which the Company deems it advisable to
expand its vineyard and winery facilities may be adjusted.
Results of Operations
Year Ended December 31, 1995
Net Sales
Net sales for the year ended December 31, 1995 were
approximately $15,498,000, an increase of approximately 20% over
those for the prior year. The number of cases shipped in 1995 increased
approximately 11% over the previous year, to approximately 401,000.
The average selling price per case was approximately $36.50 in 1995,
an increase of approximately $1.90 over the previous year. The increase
in the average selling price per case resulted partially from a price
increase in the third quarter on the Company's Night Harvest line of
wines, and partially 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 was approximately $5,838,000, or approximately
38% of sales in 1995, an increase of approximately 5% over the prior
year. Net sales and cost of sales include the sales of bulk wines and
grapes. Excluding these sales, the gross margin was approximately 37%
in 1995, an increase of approximately 2% over the previous year. The
higher gross margin in 1995 was primarily due to the price increase, the
marketing shift to Chardonnay, and lower costs on the 1994 vintage of
Chardonnay, which was sold primarily in 1995, as compared to the 1993
vintage sold in 1994.
Operating Expenses
Selling, general and administrative expenses were approximately
$3,803,000 in 1995, a decrease of approximately 1% as a percentage of
sales to approximately 25%. Although these expenses were higher in
1995 than they were in the previous year, the increase was offset by
higher sales revenue. The increase in expenses was primarily due to
increased sales labor costs and sales promotion costs required to
support the higher levels of sales in 1995. Sales labor and commissions
increased by approximately 14% from the prior year, to approximately
$1,405,000 in 1995. Promotional expenses increased by approximately
29%, to approximately $1,300,000. General and administrative
expenses remained substantially the same over the two years.
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Interest Expense
Total interest expense for 1995 was approximately $1,025,000,
or approximately 7% of sales. The Company capitalized approximately
$295,000 of additional interest pertaining to vineyard development and
winery expansion during 1995. Total interest expense in the prior year
was approximately $1,121,000, or approximately 9% of sales.
Approximately $122,000 of additional interest was capitalized during
that year. The increase in total interest, consisting of interest expense
and capitalized interest, during 1995 compared with the prior year was
primarily due to increased levels of borrowing by the Company to
finance the 1995 phase of the vineyard and winery expansions.
Other Income (Expense)
Other income (expense) - net changed from expense of
approximately ($409,000) in 1994 to income of approximately $29,500
for 1995. The large expense in 1994 was primarily due to
management's determination that certain R.H. Phillips wines stored at
another facility did not meet the Company's standards for inclusion in
its wine program. These wines, which were all sold by December 31,
1995, had been written down to their estimated fair market value in the
prior year. This resulted in a charge of approximately $360,000 to other
income (expense). In addition, the Company wrote off approximately
$110,000 of intangible assets, consisting mainly of organizational costs
of R.H. Phillips Partners, due to the conversion of R.H. Phillips from a
limited partnership to a corporation through the merger with the
Company.
Income Taxes
In 1995, the Company had income tax expense of approximately
$289,000, compared with approximately $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
Financial Accounting Standards No. 109 (FAS 109, "Accounting for
Income Taxes").
Net Income (Loss)
Net income changed from a net loss of approximately
$1,001,000 in 1994 to net income of approximately $751,000 in 1995.
The increased net income in 1995 was primarily due to the higher sales
and gross margins recorded in 1995 as compared to 1994, as discussed
above.
Year Ended December 31, 1996
Net Sales
Net sales for the year ended December 31, 1996 were
approximately $16,929,000, an increase of approximately 9% over net
sales of approximately $15,498,000 recorded in 1995. Net sales during
both periods included the sale of bulk wines and grapes, and in 1996
also included the sale of grain. Excluding these sales, net sales of case
wines were approximately $15,820,000 in 1996, an increase of
approximately 9% over case sales totaling approximately $14,549,000
in 1995. The average selling price per case
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<PAGE> 18
increased from approximately $36.50 during 1995 to approximately
$39.33 in 1996. The increase in the average selling price resulted
primarily from price increases on the Company's Chardonnay and
Cabernet Sauvignon. The number of cases sold during 1996 was
approximately 402,000, substantially the same as the approximately
401,000 cases shipped in 1995.
Gross Profit
Gross profit increased from approximately 38% of sales for year
ended December 31, 1995 to approximately 40% of sales for the year
ended December 31, 1996. Excluding the sales of grapes, bulk wine
and grain, the gross margins were approximately 37% in 1995 and 41%
in 1996. The higher gross margin in 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 1995.
The average cost per case sold in 1996 decreased by approximately 6%
from that sold in 1995, from approximately $20.29 per case to
approximately $19.08 per case. The increase in gross margins and
reduction in costs per case is attributable primarily to the increased
production the Company derived from its vineyards in 1995, and the
installation in 1995 and 1996 of its expanded winery production
facilities, which eliminated the Company's use of more expensive
outside storage and processing facilities.
Management believes that the trend toward lower costs will
reverse in 1997, and that the Company will experience higher costs per
case in the near future due to the below average yields obtained recently
from the Company's vineyards as well as from other wineries from
whom the Company purchases grapes and bulk wines. The Company
plans to increase its prices in 1997 to compensate. However,
management cannot determine at this point whether the price increases
will be sufficient to offset the increase in costs.
Operating Expenses
Although selling, general and administrative expenses remained
substantially the same for the year ended December 31, 1996 as
compared to the year ended December 31, 1995, these expenses
decreased as a percentage of sales, from approximately 25% in 1995 to
approximately 23% in 1996. The decrease in these expenses as a
percentage of sales was primarily due to increased sales revenue during
1996 as compared to 1995, as discussed above. Selling expenses
decreased from approximately $3,186,000 in 1995 to approximately
$3,055,000 in 1996, primarily due to lower sales program expenses.
General and administrative expenses increased from approximately
$542,000 in 1995 to approximately $721,000 in 1996, primarily due to
the write off of an insolvent account receivable and the partial reclass of
an officer's salary from sales to general and administrative in 1996.
Interest Expense
Total interest expense for the year ended December 31, 1996
was approximately $862,000, or approximately 5% of net sales,
compared to approximately $1,025,000, or approximately 7% of net
sales, for the year ended December 31, 1995. The Company capitalized
approximately $599,000 of additional interest pertaining to vineyard and
winery development in 1996, and approximately $295,000 in 1995. The
increase in total interest cost during 1996 as compared to 1995 was
primarily due to increased levels of borrowing by the Company to
finance vineyard and winery expansion in 1996. The increase in
capitalized interest in 1996 as compared to 1995 reflects the increase in
vineyards under development during 1996.
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Other Income (Expense)
Other income (expense) for the year ended December 31, 1996
was an expense of approximately $152,000, compared to income of
approximately $29,000 for the year ended December 31, 1995. The
large expense in 1996 was primarily due to a provision for impairment
of vineyards believed to be susceptible to Phylloxera, as discussed above
in Liquidity and Capital Resources. An accelerated depreciation
schedule was based on management's original plan to remove and
replace approximately 30 acres per year. However, the decision was
made to remove a total of 148 acres during 1995 and 1996. The
provision for impairment was recorded to reduce the book value of the
remaining vineyards to their estimated economic value as of December
31, 1996.
Net Income
The Company recorded net income of approximately $1,293,000
for the year ended December 31, 1996, compared with net income of
approximately $751,000 for the year ended December 31, 1995. This
increase was primarily due to higher sales prices and lower product
costs, which resulted in higher profit margins.
Item 7. Financial Statements
The audited financial statements of the Company are set forth in
this report beginning at page F-1.
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Form 8-K, Item 4. Changes in Registrant's Certifying
Accountants, dated August 1, 1995, was filed with the Securities and
Exchange Commission on August 8, 1995, and is incorporated by
reference.
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PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act
The directors, executive officers and other key personnel, their
positions and ages are as follows:
Name Position Age
John E. Giguiere Co-President, Co-Chief Executive 45
Officer, Chairman of the Board, Director
Karl E. Giguiere Co-President, Co-Chief Executive 51
Officer, Vice-Chairman of the Board,
Director
Lane C. Giguiere Vice President Operations, Director 43
Robert T. Moore Vice President Finance, Chief Financial 51
Officer, Secretary
Richard A. Pierce Controller, Chief Accounting Officer 45
Barry L. Bergman Winemaker 38
Steven L. Crosta Sales Manager 46
R. Ken Coit Director 53
Victor L. Motto Director 57
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.
John E. Giguiere. Raised on the Giguiere family farm, John
Giguiere has spent his entire professional life in agribusiness. With his
brother Karl, Mr. Giguiere founded R.H. Phillips in 1981. Mr. Giguiere
is the President of The R.H. Phillips Vineyard, Inc., the second largest
shareholder of the Company, and he has managed the sales and
marketing aspects of R.H. Phillips since 1983. 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. Since 1983, Mr. Giguiere has managed the farming and
vineyard operations of R.H. Phillips. Karl Giguiere is the President of
RHP Vineyards, Inc., the largest shareholder of the Company. Mr.
Giguiere graduated from California State Polytechnic University with
a B.A. in Agribusiness. Mr. Giguiere resides in Woodland, California.
Lane C. Giguiere. Ms. Giguiere, wife of John Giguiere, is the
Vice President Operations, and has managed the sales administration
aspects of R.H. Phillips since the business was established in 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.
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Robert T. Moore. Mr. Moore is the Chief Financial Officer of
the Company. Mr. Moore joined R.H. Phillips as Chief Financial Officer
in 1991. 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. Mr. Moore resides in
Vacaville, California.
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. 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
and a Certified Computing Professional. Mr. Pierce resides in Brooks,
California.
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. He is a graduate of the University of
California at Davis, where he received a B.S. degree in Fermentation
Science. Mr. Bergman resides in Woodland, California.
Steven L. Crosta. Mr. Crosta was hired in August 1994 to
serve as the Company's National Sales Manager. Mr. Crosta was the
South Bay Regional Manager of Wine Warehouse, a major alcohol
distributor, from 1992 until he joined the Company, and was National
Sales Manager of Flora Springs Wine Company of St. Helena,
California from 1991 through 1992. Mr. Crosta received a B.A. from
the University of California at Davis. Mr. Crosta resides in Davis,
California.
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 of Walnut Creek,
California and from 1988 to June 1994 was a registered representative
of American Investors Company of Hayward, California. Mr. Coit
received an M.B.A. from Pepperdine University and a B.S. in Pharmacy
from the University of Arizona. Mr. Coit resides in Danville, California.
Victor L. Motto. Mr. Motto was elected to the Board of
Directors in June 1996. Mr. Motto is a founding partner of Motto,
Kryla & Fisher, an accounting and business consulting firm devoted
exclusively to the wine industry. Mr. Motto is also a partner of MKF
Systems, a wine industry computer systems business. Mr. Motto serves
as a director or financial advisor to several wine industry trade groups,
teaches university courses and is a frequent lecturer on wine industry
issues. Mr. Motto is also a frequent contributor to Wine Business
Update, a quarterly newsletter published by Motto, Kryla & Fisher, as
well as to various other wine industry publications. Mr. Motto is a
Certified Public Accountant. Mr. Motto received a B.A. in Business
from the University of South Florida.
Directors are elected at the annual meetings of the shareholders.
Directors serve terms of one year and until their successors have been
duly elected and qualified. The Company's Bylaws provide that the
authorized number of directors is fixed between 4 and 7, with the exact
number of directors within that range to be determined by the Board of
Directors. The Board of Directors has fixed the current authorized
number of directors at 5.
21
<PAGE> 22
Based on its review of all filings on Form 3, 4 and 5 the
Company received from its directors, executive officers and principal
shareholders, the Company is unaware of any such person who was
required to file any of these forms pursuant to Section 16 of the
Securities Exchange Act of 1934 who did not do so in a timely manner.
Item 10. Executive Compensation
The following is a summary of all compensation paid for services
rendered to R.H. Phillips during 1994, 1995 and 1996 by John and Karl
Giguiere, the Company's current Co-Chief Executive Officers of the
Company (the "Named Executive Officers"). No other employee or
officer received a salary and bonus in excess of $100,000 in 1996.
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards
Name and
Principal Position Year Salary Bonus($) ($) Awards (#) Options(#)
John Giguiere, Co- 1996 $80,625 $26,662 20,000(1) 0 0
President, Co-
Chief Executive 1995 80,625 662 20,000(1) 0 54,480
Officer
1994 87,394 16,258 20,000(1) 0 0
Karl Giguiere, Co- 1996 80,625 26,662 0 0 0
President, Co-
Chief Executive 1995 80,625 662 0 0 81,720
Officer
1994 87,394 16,258 0 0 0
(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 R.H. Phillips winery where John
and Lane Giguiere reside on a rent-free basis. Management estimates
that the fair rental value of the housing is approximately $14,000 per
year.
22
<PAGE> 23
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End
Option/SAR Values
(a) (b) (c) (d) (e)
Number of
Securites Value of
Underlying Unexercised
Options/SARs at Options/SARs at
FY-End(#) FY-End($)(1)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise Value Realized ($)Unexercisable Unexercisable
John Giguiere 0 0 13,620 $ 0(2)
40,860
Karl Giguiere 0 0 20,430 0(2)
61,290
(1) Based on the closing price of the Common Stock on December
31, 1996, as reported by the Nasdaq National Market ($2.87 per
share).
(2) The exercise price was in excess of the market price at
December 31, 1996.
The Company does not have written employment agreements
with any of its employees which obligate those persons to remain
employed by the Company for any specific term or otherwise restrict
their right to leave their employment at any time.
There are no agreements between the Company and any of its
officers or directors which concern changes of control of the Company.
However, the loan agreement with Metropolitan provides that all
principal and interest will be due and payable, at Metropolitan's option,
if any person or group other than John or Karl Giguiere or their
immediate families control a majority of the Board of Directors.
Metropolitan has represented to the Company that this provision 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 for at least 5 years.
Victor Motto receives compensation of $1,000 per meeting and
travel expenses for attending meetings of the Board of Directors. He
is also to receive options to purchase a maximum of 20,000 shares of
Common Stock at a price equal to the fair market value of the
Company's Common Stock, subject to approval of a final stock option
agreement by Mr. Motto and the Board of Directors. The total
compensation paid Victor Motto in 1996 for attending meetings of the
Board of Directors was $8,000. No other members of the Board of
Directors are currently 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 near future.
23
<PAGE> 24
Item 11. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth certain information regarding the
number of shares of the voting securities which each director and
executive officer of the Company owns as of March 18, 1997 as well as
the percentage of shares which the executive officers own as a group.
Name and Address of Position with the Company Amount and Nature Percent of
Beneficial Owner of Beneficial Class
Owner(1)
John E. Giguiere(2)(3) Co-President, Co-Chief 1,618,324 27.16
26836 County Road 12A Executive Officer,
Esparto, CA 95627 Chairman
Karl E. Giguiere(2)(4) Co-President, Co-Chief 1,600,306 26.86
26836 County Road 12A Executive Officer, Vice-
Esparto, CA 95627 Chairman
Lane C. Giguiere(2)(5) Vice-President Operations, 1,614,919 27.10
26836 County Road 12A Director
Esparto, CA 95627
R. Ken Coit(6) Director 300,322 5.04
1655 North Main Street #270
Walnut Creek, CA 94596
Victor L. Motto Director 0 0
899 Adams Street
St. Helena, CA 94574
All Executive Officers and Directors(7) 1,949,291 32.71
(1) This table is based upon information supplied by officers,
directors and principal shareholders and Schedules 13D and 13G
filed with the Securities Exchange Commission (the
"Commission"). Unless otherwise indicated in the footnotes to
this table subject to community property laws where applicable,
the Company believes 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 5,957,750 shares of Common Stock outstanding on March
18, 1997, adjusted as required by the rules of the Commission.
(2) Includes 865,773 shares of Common Stock owned by RHP
Vineyards, Inc. and 714,103 shares of Common Stock owned by
R.H. Phillips Vineyard, Inc. John and Karl Giguiere each own
33.33% of the outstanding stock of RHP Vineyards, Inc.,
constitute two of the three members of the Board of Directors,
and are the Secretary and President, respectively, of that
corporation. John and Karl Giguiere also own a majority of the
outstanding shares of R.H. Phillips Vineyard, Inc., constitute
two of the three members of the Board of Directors and serve
as the President and Secretary, respectively, of that 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.
(3) 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 set forth above.
24
<PAGE>> 25
(4) Also includes 20,430 shares subject to that portion of a stock
option which is exercisable within 60 days of the date set forth
above.
(5) Also includes 16,552 shares of Common Stock held as joint
tenants with John Giguiere, a warrant, which is presently
exercisable, to purchase 8,276 shares of Common Stock which
she holds as a joint tenant with John Giguiere, and 10,215 shares
subject to that portion of a stock option exercisable within 60
days of the date of the date set forth above.
(6) Mr. Coit holds 252,634 shares as a joint tenant with Donna
Coit, his wife, and 47,688 shares are held individually by Mr.
Coit.
(7) Includes shares purchasable upon exercise of stock options
within 60 days of the date of the date set forth above.
The following table sets forth information with respect to
persons or entities, in addition to those listed above, who are known by
the Company to own 5% or more of the Company's voting securities.
Name and Address of Shareholder Amount and Nature of Percent of
Beneficial Owner(1) Class
John Hancock Mutual Life Insurance 1,462,173 19.80
Company (2)
200 Clarendon Street
Boston, MA 02117
RHP Vineyards Inc. (3) 865,773 14.53
26836 County Road 12A
Esparto, CA 95627
The R.H. Phillips Vineyard, Inc. (3) 714,103 11.98
26836 County Road 12A
Esparto, CA 95627
(1) This table is based upon information and assumptions set forth
in footnote 1 of the previous table.
(2) This includes shares purchasable by Hancock under stock
purchase warrants the Company granted in 1996, and stock
dividends issued to Hancock by the Company. The Company
issued to Hancock warrants to purchase up to 1,346,788 shares
of Common Stock in March 1996. By operation of the anti-
dilution provisions of those warrants following the Company's
second public offering, Hancock may, as of the date set forth
above, purchase up to 1,381,321 shares of Common Stock at
a price of $3.90 per share pursuant to those stock purchase
warrants. Hancock received a stock dividend of 37,500 shares
of Common Stock during 1996, and in March 1997, the
Company issued 43,352 additional shares of Common Stock to
Hancock as a stock dividend.
(3) John and Karl Giguiere own a majority of the outstanding shares
of RHP Vineyards, Inc. and The R.H. Phillips Vineyard, Inc. and
constitute a majority of those corporation's boards of directors.
See footnote 1 of the previous table for further information
regarding these corporations.
25
<PAGE> 26
Item 12. Certain Relationships and Related Transactions.
R. Ken Coit received a commission payment for his services in
connection with the Company's initial public offering completed in 1995
and another commission payment in connection with the Company's
secondary public offering in 1996. The commissions for obtaining
purchasers of the equity units had terms similar to those granted to other
participating broker-dealers in the offerings.
The Company is the holder of a promissory note payable by
RHP Vineyards, Inc. The note evidences a loan to that corporation by
R.H. Phillips Partners and the assumption in 1993 of payment
obligations of certain persons to R.H. Phillips Partners. The amount
payable under the note as of December 31, 1996 was $210,410. The
note bears interest at a rate of 7% per annum. The note and other
obligations are payable in full on June 30, 1999.
The Board of Directors has adopted a policy pursuant to which
all future 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 future 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.
Item 13. Exhibits and Reports on Form 8-K
(a) Audited Financial Statements of the Company are attached
to this annual report beginning on page F-1. Other exhibits attached to
this annual report are as follows:
(a) Exhibits
Exhibit No. Description
3.1* Articles of Incorporation
3.2** Bylaws
4.1** Form of Common Stock Certificate
4.2** Form of Publicly Traded Warrant
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 June 7, 1996.
10.3* Loan Agreement between the Company and Heller Financial and
Related Documents, dated October 20, 1995
10.4** Promissory Note, dated December 31, 1993, by RHP Vineyards,
Inc., payable to R.H. Phillips Partners
10.5** Form of Convertible Promissory Note Purchase Agreement and
Form of 6% 5 Year Convertible Promissory Note.
26
<PAGE> 27
10.6*** R.H. Phillips, Inc. 1995 Stock Option Plan and Forms of
Incentive Stock Option and Nonstatutory Stock Option
Agreements
10.7** Securities Purchase Agreement between the Company and John
Hancock Mutual Life Insurance Company, dated March 27, 1996
10.8** Form of Common Stock Purchase Warrant issued to John Hancock
Mutual Life Insurance Company, dated March 27, 1996
10.9 Common Stock Purchase Warrant, dated July 30, 1996, issued
to Van Kasper & Company
10.10**** Underwriting Agreement, dated July 30, 1996, between the
Company and Van Kasper & Company
10.11** Common Stock Purchase Warrant issued to Capitol Bay
Securities, dated March 31, 1995.
10.12***** Description of Compensation Arrangements with Victor Motto,
director of the Company
10.13 Loan agreement between the Company and U.S. Bancorp and
related Agreements, dated December 31, 1996
16.1****** Letter from Deloitte & Touche LLP with respect to change of
Certified Public Accountant
20.1***** Current Report on Form 8-K, Item 4, dated August 1, 1995 and
filed with the Securities and Exchange Commission on August
8, 1995
23.1 Consent of KPMG Peat Marwick LLP, Certified Public
Accountants
* 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 Registration Statement on
Form SB-2, dated June 5, 1996, and incorporated by reference herein.
***** Filed as an exhibit to the Company's Registration Statement on
Form SB-2, Amendment No. 2, dated July 16, 1996, 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
(b) Current Reports on Form 8-K.
None.
27
<PAGE> 28 SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
R.H. PHILLIPS, INC.
By: //s/ John E. Giguiere
John E. Giguiere, Co-President and
Co-Chief Executive Officer
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Signature Title Date
//s// John E. Giguiere March 31, 1997
John E. Giguiere Co-President, Co-Chief
Executive Officer, Director
(Principal Executive Officer)
//s// Karl E. Giguiere March 31, 1997
Karl E. Giguiere Co-President, Co-Chief
Executive Officer, Director
(Principal Executive Officer)
//s// Robert T. Moore March 31, 1997
Robert T. Moore Vice President, Finance
(Principal Financial Officer)
//s// Richard Allen Pierce March 31, 1997
Richard Allen Pierce Controller (Principal Accounting
Officer)
//s// Lane C. Giguiere March 31, 1997
Lane C. Giguiere Vice-President Operations,
Director
//s// Victor L. Motto March 28, 1997
Victor L. Motto Director
28
<PAGE> 29
R.H. PHILLIPS, INC., dba
THE R.H. PHILLIPS VINEYARD
(A California Corporation)
INDEX TO FINANCIAL STATEMENTS
Page
INDEPENDENT AUDITORS' REPORT F1
FINANCIAL STATEMENTS AS OF DECEMBER 31,
1996 AND FOR THE YEARS ENDED DECEMBER
31, 1995 AND 1996:
Balance Sheet F2
Statements of Operations F3
Statements of Shareholders' Equity F4
Statements of Cash Flows F5
Notes to Financial Statements F6-F15
<PAGE>30
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, 1996, and the related statements of operations,
shareholders' equity, and cash flows for each of the years in the two
year period ended December 31, 1996. 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
audits.
We conducted our audits 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 audits provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of R.H. Phillips,
Inc. as of December 31, 1996, and the results of its operations and its
cash flows for each of the years in the two year period ended
December 31, 1996 in conformity with generally accepted accounting
principles.
//s// KPMG Peat Marwick LLP
Sacramento, California
March 5, 1997
F1
<PAGE> 31
R.H. PHILLIPS, INC., dba
THE R.H. PHILLIPS VINEYARD
(A California Corporation)
BALANCE SHEET
DECEMBER 31, 1996
ASSETS
CURRENT ASSETS:
Cash $ 308,535
Accounts receivable 3,131,250
Inventories 7,807,711
Deferred income taxes and prepaid expenses 471,538
-----------
Total current assets 11,719,034
PROPERTY, PLANT, AND EQUIPMENT - net 27,429,675
OTHER ASSETS:
Note receivable from shareholder 210,410
Deferred loan fees and other, net 570,281
-----------
Total other assets 780,691
-----------
TOTAL ASSETS $39,929,400
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 1,073,000
Notes payable 440,167
Accounts payable 2,177,989
Accrued liabilities 1,011,602
-----------
Total current liabilities 4,702,758
LONG-TERM DEBT 14,334,476
SUBORDINATED DEBT 1,500,000
DEFERRED INCOME TAXES 935,000
COMMITMENTS AND CONTINGENCIES --
REDEEMABLE PREFERRED STOCK, redeemable at $5,000,000 4,486,780
SHAREHOLDERS' EQUITY:
Non-redeemable preferred stock, no par value, 4,500,000 --
shares authorized, none issued and outstanding
Common stock, no par value, 12,500,000 shares authorized, 12,323,475
5,957,550 shares issued and outstanding
Additional paid-in capital 336,697
Retained earnings 1,310,214
-----------
Total shareholders' equity 13,970,386
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $39,929,400
===========
See accompanying notes to financial statements.
F2
<PAGE> 32
R.H. PHILLIPS, INC., dba
THE R.H. PHILLIPS VINEYARD
(A California Corporation)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1996
1995 1996
NET SALES $15,498,210 $16,928,545
COST OF SALES 9,660,266 10,135,896
----------- -----------
GROSS PROFIT 5,837,944 6,792,649
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,802,538 3,854,791
----------- -----------
OPERATING INCOME 2,035,406 2,937,858
INTEREST EXPENSE (1,025,142) (861,659)
OTHER INCOME (EXPENSE) - NET 29,492 (151,943)
----------- -----------
INCOME BEFORE INCOME TAXES 1,039,756 1,924,256
PROVISION FOR INCOME TAXES (289,000) (631,000)
----------- -----------
NET INCOME $ 750,756 $ 1,293,256
=========== ===========
NET INCOME $ 750,756 $ 1,293,256
DIVIDENDS ON REDEEMABLE PREFERRED STOCK -- (225,000)
ACCRETION OF REDEEMABLE PREFERRED STOCK -- (25,099)
----------- -----------
NET INCOME APPLICABLE TO COMMON STOCK $ 750,756 $ 1,043,157
=========== ===========
NET INCOME PER SHARE $ .17 $ .20
=========== ===========
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 4,442,454 5,231,870
=========== ===========
See accompanying notes to financial statements.
F3
<PAGE> 33
<TABLE>
R.H. PHILLIPS, INC., dba
THE R.H. PHILLIPS VINEYARD
(A California Corporation)
STATEMENTS OF SHAREHOLDERS' EQUITY
<CAPTION>
Non- Retained
Series A Series A-1 Series A-2 Redeemable Additional Earnings/
Preferred Preferred Preferred Preferred Common Paid-in (Accumulated
Stock Stock Stock Stock Stock Capital Deficit) Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDERS' EQUITY
JANUARY 31, 1995 $ 1,087,150 $ 230,608 $ 1,829,466 $ -- $ 1,428,771 $ -- $ (333,699) $ 4,242,296
ISSUANCE OF
COMMON STOCK -- -- -- -- 3,047,019 -- -- 3,047,019
CONVERSION OF PREFERRED
STOCK TO COMMON
STOCK (1,087,150) (230,608) (1,829,466) -- 3,147,224 -- -- --
NET INCOME YEAR ENDED
DECEMBER 31, 1995 -- -- -- -- -- -- 750,756 750,756
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
SHAREHOLDERS' EQUITY
DECEMBER 31, 1995 -- -- -- -- 7,623,014 -- 417,057 8,040,071
WARRANTS ASSOCIATED
WITH REDEEMABLE
PREFERRED STOCK -- -- -- -- -- 336,697 -- 336,697
ACCRETION OF
REDEEMABLE
PREFERRED STOCK -- -- -- -- -- -- (25,099) (25,099)
ISSUANCE OF
COMMON STOCK -- -- -- -- 4,550,461 -- -- 4,550,461
DIVIDEND -- -- -- -- -- -- (225,000) (225,000)
ISSUANCE OF STOCK
DIVIDEND -- -- -- -- 150,000 -- (150,000) --
NET INCOME YEAR ENDED
DECEMBER 31, 1996 -- -- -- -- -- -- 1,293,256 1,293,256
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
SHAREHOLDERS' EQUITY
DECEMBER 31, 1996 $ -- $ -- $ -- $ -- $12,323,475 $ 336,697 $ 1,310,214 $13,970,386
=========== =========== =========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements
F4
<PAGE> 34
R.H. PHILLIPS, INC., dba
THE R.H. PHILLIPS VINEYARD
(A California Corporation)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1996
1995 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 750,756 $ 1,293,256
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes 62,000 126,000
Depreciation and amortization 1,002,405 1,590,630
Loss on disposal of property, plant and equipment 22,645 230,746
Changes in assets and liabilities:
Accounts receivable (830,406) (64,562)
Inventories (285,292) (1,013,074)
Prepaid expenses (103,895) 75,397
Other assets (6,370) (85,082)
Accounts payable and accrued liabilities 556,741 757,865
Deferred revenue (227,220) --
----------- -----------
Net cash provided by operating activities 941,364 2,911,176
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (7,284,426) (12,400,233)
Proceeds from equipment sold 56,810 49,348
----------- -----------
Net cash used in investing activities (7,227,616) (12,350,885)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of redeemable preferred stock -- 4,798,378
Issuance of common stock 3,047,019 4,550,461
Payment of cash dividend -- (150,000)
Proceeds from long-term debt and notes payable 22,601,355 18,937,804
Principal payments on long-term debt and
notes payable (18,519,026) (18,662,429)
Payment of loan origination fees (533,628) (25,524)
Note to shareholder (22,389) (18,070)
----------- -----------
Net cash provided by financing activities 6,573,331 9,430,620
INCREASE (DECREASE) IN CASH 287,079 (9,089)
CASH AT BEGINNING OF PERIOD 30,545 317,624
----------- -----------
CASH AT END OF PERIOD $ 317,624 $ 308,535
=========== ===========
OTHER CASH FLOW INFORMATION:
Interest paid (including capitalized interest of
$295,000 and $599,000 in 1995 and
1996, respectively) $ 1,382,428 $ 1,224,638
NONCASH TRANSACTIONS: =========== ===========
Issuance of notes payable to finance inventory,
property, plant and equipment purchased $ 1,368,757 $ 554,584
=========== ===========
Issuance of stock dividend $ -- $ 150,000
=========== ===========
Accrual of cash dividend $ -- $ 75,000
=========== ===========
Accretion of redeemable preferred stock $ -- $ 25,099
=========== ===========
See accompanying notes to financial statements.
F5
<PAGE> 35
R.H. PHILLIPS, INC. dba
THE R.H. PHILLIPS VINEYARD
(A California Corporation)
NOTES TO FINANCIAL
STATEMENTS
December 31, 1996
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 and
succeeded to 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 issued 500,000
shares of Senior Redeemable Preferred Stock in a private placement
in March 1996. An additional 1,270,000 shares of Common Stock
were issued by the Company in its secondary public offering in July
1996.
The Company produces, markets, and sells premium quality California
table wines. The Company also farms vineyards which supply a
portion 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, which range from 3 to 45 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. Interest capitalized
amounted to $295,000 and $599,000 in 1995 and 1996, respectively.
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 2 to 5 years. Accumulated amortization was $251,824 at
December 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.
F6 (Continued)
<PAGE> 36
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 13%, 12% and
11% of sales for the year ended December 31, 1995 and 13%, 11%
and 10% for the year ended December 31, 1996. Accounts receivable
from these distributors at December 31, 1996 totaled approximately
$1,380,000.
The Company has eleven sales representatives. The sales
representative who generated the largest sales volume accounted for
approximately $7,375,000, or 48% of total sales in 1995 and
approximately $7,722,000, or 46% of total sales in 1996.
Net income per share - Net income per share has been computed
based on the number of common and common equivalent shares
outstanding. The Company's warrants to purchase Common Stock
and employee stock options which were outstanding at December 31,
1995 and December 31, 1996 were anti-dilutive and were therefore
not included in the calculation of earnings per share. Net income per
share and common shares outstanding for the year ended December
31, 1995 has been restated to reflect a stock dividend of 37,500 shares
issued in September 1996.
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.
Recent Pronouncements - The Company adopted the provisions of
Statement of Financial Accounting Standards No. 121, Accounting for
Impairment of Long-lived Assets and Long-lived Assets to be
Disposed of (SFAS 121) as of January 1, 1996. This statement
requires that long-lived assets and certain identifiable intangibles held
and used by the Company be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. This statement also requires that
long-lived assets and certain identifiable intangibles to be disposed of
be reported at the lower of carrying or fair value, less cost to sell. The
adoption of SFAS 121 did not have a material effect on the Company.
Prior to January 1, 1996, the Company accounted for its stock option
plan in accordance with the provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25),
and related interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. On January 1, 1996, the
Company adopted SFAS 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date
of grant. Alternatively, SFAS 123 also allows entities to continue to
apply the provisions of APB 25 and provide pro forma net income and
pro forma earnings per share disclosures for employee stock option
grants made in 1995 and future years as if the fair-value-based method
defined in SFAS 123 had been applied. The Company has elected to
continue to apply the provisions of APB 25 and provide the pro forma
disclosure provisions of SFAS 123.
Reclassification - Certain 1995 amounts have been reclassified for
comparative purposes to conform to present year presentation.
F7 (Continued)
<PAGE> 37
2. INVENTORIES
Inventories consist of the following at December 31, 1996:
Bulk and bottled wine $ 6,853,329
Bottling supplies and other 414,960
Deferred crop costs 539,422
-----------
Total $ 7,807,711
===========
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December
31, 1996:
Land $ 3,097,081
Vineyard improvements 3,943,337
Buildings 5,318,871
Machinery and equipment 10,888,613
Vehicles and office fixtures 758,342
-----------
Total 24,006,244
Less accumulated depreciation 4,721,501
-----------
Total 19,284,743
Vineyard improvements under development 8,144,932
-----------
Property, plant, and equipment - net $27,429,675
===========
Total depreciation expense during the years ended December 31, 1995
and 1996 was approximately $938,000 and $1,383,000, respectively.
Property, plant and equipment under capital leases as of December 31,
1996 is as follows:
Machinery and equipment $ 808,325
Less accumulated depreciation 299,757
-----------
Net $ 508,568
===========
Depreciation expense for machinery and equipment under capital
leases was approximately $172,000 and $118,000 for the years ended
December 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% and is unsecured. The
note is due June 30, 1999.
5. NOTES PAYABLE
Notes payable at December 31, 1996 consists of a note payable to a
grower in the amount of $440,167. The note bears interest at an
annual rate of 9.25% and is unsecured. Principal and interest are due
in eight equal monthly installments beginning January 1997.
F8 (Continued)
<PAGE> 38
6. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1996:
Note payable to insurance company, with interest on $ 6,950,000
$4,262,663 of principal at 9.05% per annum, $1,297,337
of principal at 8.55% and $1,390,000 of principal
at 8.10%. Principal and interest payable monthly
through February 2005, secured by various assets of
the Company
Note payable to bank, interest at prime or IBOR plus 200 4,772,010
basis points, principal due April 1998, interest payable
monthly, collateralized by accounts receivable
and inventory (1)
Note payable to bank, interest at one month LIBOR plus 330 1,700,000
basis points, principal and interest due in 42 monthly
payments of $19,911 followed by 42 monthly payments of
$29,867, balance due December 2004, secured by certain
equipment
Note payable to bank, interest at prime plus 1%, 700,000
principal due March 1997, interest payable monthly,
collateralized by grape crop and farm equipment (2)
Note payable to finance company, payable in sixty monthly 498,799
installments of $10,744 plus interest at one month LIBOR
plus 332 basis points, due November 2000, secured by
certain equipment
Note payable to individual, payable $1,322 per month including 125,140
interest at 9%, balance of $104,729 due September 2000,
secured by land
Notes payable to shareholders and affiliates, interest at 55,305
various rates, due June 1999
Capital lease obligations 520,356
Other 85,866
-----------
Total 15,407,476
Less current maturities 1,073,000
-----------
Long-term portion $14,334,476
===========
(1) Maximum amount that can be borrowed on the note is $5,000,000. The
amount outstanding as of December 31, 1996 consists of $4,373,069 borrowed
against the line and $398,941 in outstanding checks. $227,990 was available at
December 31, 1996.
(2) Maximum amount that can be borrowed on the note is $1,000,000, of which
$300,000 was available at December 31, 1996.
Principal payments required on long-term debt (other than capital
leases) for each of the next five years ending December 31, are as
follows:
1997 $ 925,418
1998 6,324,178
1999 859,809
2000 1,008,106
2001 865,875
Thereafter 4,903,735
-----------
Total $14,887,120
===========
F9 (Continued)
<PAGE> 39
The Company leases certain winery and other equipment under
noncancellable capital leases. Future minimum lease payments under
these leases for each of the next five years ending December 31 are as
follows:
1997 $ 210,814
1998 213,452
1999 201,486
2000 10,412
2001 8,678
-----------
Total 644,842
Less amounts representing interest 124,486
-----------
Net minimum lease payments $ 520,356
===========
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 when the average of the bid and ask price
of such stock as quoted on a national securities exchange or
Nasdaq equals or exceeds $3.50 per share for five consecutive
days, subsequent to December 6, 1996. 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 (Biotype A). During 1995 and 1996, the
Company removed a total of 148 acres of vineyards, 143 of which
were removed because of Phylloxera and 5 of which were removed
for winery expansion, leaving a total of 289 acres which management
believes may be susceptible to Phylloxera. Based on tests management
has performed, management believes that of these 289 acres, portions
of up to 150 acres have the presence of Phylloxera. The Company is
using a variety of methods to combat Phylloxera infestation. Although
this acreage will ultimately require replanting, at this time management
expects that these vineyards will remain commercially productive for
approximately seven more years. The Company has reduced the
depreciable life of these vineyards to reflect the expected remaining
useful life (see Note 11).
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.
9. SHAREHOLDERS' EQUITY
Effective March 31, 1995, the Company completed its initial public
offering of Common Stock. A total of 493,563 units were sold at a
price of $7.25 per unit. A unit consisted 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 are currently exercisable and
were due to expire on April 1, 1997. The Board of Directors may
lengthen the exercise period for the warrants at any time at its
discretion. In March 1997, the Board of Directors extended the
exercise period to October 1, 1998. 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. 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 of
approximately $2,873,000.
F10 (Continued)
<PAGE> 40
In connection with the initial public offering, all shares of Preferred
Stock which were outstanding at that time 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.
The Company completed a second public offering of Common Stock
in July 1996. The Company issued 1,270,000 shares of Common
Stock in connection with the offering at a price of $4.375 per share.
The net proceeds from the offering, after payment of underwriting
discounts and offering expenses, totaled approximately $4,484,000.
As of December 31, 1996, warrants to purchase 17,065 shares of
Common Stock had been exercised, with net proceeds to the
Company of approximately $66,000. The Company issued an
additional 37,500 shares of Common Stock to the holder of its
Redeemable Preferred Stock as a stock dividend in September 1996.
In addition to the warrants issued in connection with the Company's
initial public offering, warrants have been issued to the underwriters
of both public offerings and to the holder of its Redeemable Preferred
Stock. The Company issued warrants to purchase 98,713 shares of
Common Stock to the underwriter of the initial public offering. These
warrants are exercisable at $5.57 per share. The Company issued
warrants to purchase 122,000 shares of Common Stock at a price of
$5.25 to the underwriter of its secondary public offering. The holder
of the Company's Redeemable Preferred Stock received warrants to
purchase 1,381,321 shares of Common Stock at a price of $3.90. All
underwriter warrants and warrants held by the holder of the
Company's Redeemable Preferred Stock are currently exercisable.
The total number of warrants outstanding as of December 31, 1996
was 2,078,532.
10. REDEEMABLE PREFERRED STOCK
In March 1996, the Company completed a private placement sale of
500,000 shares of Senior Preferred Redeemable Stock and warrants
to purchase up to 1,381,321 shares of Common Stock. 500,000
shares of Senior Redeemable Preferred Stock are authorized, issued
and outstanding as of December 31, 1996. The net proceeds the
Company derived from the sale of the Redeemable Preferred Stock
and the warrants, after offering expenses, totaled approximately
$4,798,000. 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 Company will be required to redeem
one-third of the Redeemable Preferred Stock eight years after issuance
and one-third of the Redeemable Preferred Stock in each of the
succeeding years at a price of $10.00 per share. The carrying value
of the Redeemable Preferred Stock was approximately $4,462,000,
net of offering expenses and the estimated value of the warrants. The
Redeemable Preferred Stock is redeemable at $5,000,000. The
difference between the carrying value and the redemption value will
be accreted over the life of the Redeemable Preferred Stock using the
interest method.
11. OTHER INCOME (EXPENSE)
Other expense for the year ended December 31, 1996 includes
$237,000, representing a provision for impairment of the vineyards
believed to be susceptible to Phylloxera, as discussed in Footnote 8.
Management accelerated the depreciation on these vineyards over a
ten year period to correspond with the planned removal of
approximately 30 acres per year. However, the decision was made to
remove a total of 148 acres during 1995 and 1996. The provision for
impairment was made to reduce the book value of the remaining
vineyards to their estimated economic value as of December 31, 1996.
F11 (Continued)
<PAGE> 41
12. INCOME TAXES
The provision for income taxes consists of the following for the
years ended December 31:
Current:
1995 1996
---------- ----------
Federal $ 219,200 $ 490,000
State 7,800 15,000
---------- ----------
Total current provision 227,000 505,000
Deferred:
Federal (11,000) 155,000
State 73,000 (29,000)
---------- -----------
Total deferred provision 62,000 126,000
---------- -----------
$ 289,000 $ 631,000
========== ===========
Deferred income taxes included in the balance sheet at December
31, 1996 are as follows:
Current deferred tax assets:
Nondeductible reserves and difference between
book and tax basis of inventory $ 226,000
State manufacturer's investment credit 157,000
Noncurrent deferred tax assets:
Difference between book and tax basis of intangible assets 141,000
Other 1,000
-----------
Total deferred tax asset 525,000
Noncurrent deferred tax liability:
Difference between book and tax basis of property,
plant and equipment 1,077,000
-----------
Net deferred tax liability $ 552,000
===========
Management believes that it is more likely than not that all the
deferred tax assets as of December 31, 1996 will be realized and,
therefore, no allowance for deferred tax assets has been made.
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
of $1,039,756 and $1,924,256 for the years ended December 31,
1995 and 1996, respectively, as a result of the following:
1995 1996
-------- --------
Expected U.S. Federal income tax 34% 34%
State franchise tax, net of federal benefit 6% 6%
Permanent difference in basis of assets 2% 1%
Net operating loss carry forward from 1994, federal (11%) 0%
State manufacturer's investment credit (6%) (7%)
Other 3% (1%)
-------- --------
Total 28% 33%
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 and approximately $138,000
in 1996. The remaining carry forward of approximately $157,000 is
due to expire in 2006.
F12 (Continued)
<PAGE> 42
13. STOCK COMPENSATION PLANS
At December 31, 1996, the Company had three stock-based
compensation plans, which are described below. The Company
applies APB Opinion No. 25 in accounting for its stock compensation
plans. Accordingly, no compensation cost has been recognized for its
fixed stock option plan and underwriter warrant plans. Had
compensation cost for the Company's three stock-based compensation
plans been recognized consistent with FASB Statement No. 123, the
Company's net income and earnings per share would have the pro
forma amounts indicated below:
1995 1996
Net income: ----------- -----------
As reported $ 750,756 $ 1,293,256
Pro forma 725,797 1,246,794
Earnings per share:
As reported $0.17 $ 0.20
Pro forma 0.16 0.19
Fixed Stock Option Plan - Under the 1995 Employee Stock Option
Plan, the Company may grant options to its employees for up to
815,000 shares of Common Stock. The exercise price of each option
is no less than the market price of the Company's stock on the date of
the grant and an option's maximum term is ten years. Options vest
ratably over the four years following the date of grant.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with a dividend yield of
0% for all years, an expected volatility of 15%, a risk free interest rate
of 6.35% and an expected term of six years. All assumptions in the
Black-Scholes option pricing model were based on their weighted
averages.
A summary of the status of the Company's fixed option plan as of
December 31, 1995 and 1996 and changes during the years ended on
those dates is presented below:
1995 1996
------------------- ------------------
Average Average
Exercise Exercise
Shares Price Shares Price
------- -------- ------- --------
Outstanding at beginning of year -- $ -- 449,460 $ 3.90
Granted 449,460 3.90 -- --
Exercised -- -- -- --
Forfeited -- -- (21,792) 3.75
------- -------- ------- --------
Outstanding at end of year 449,460 $ 3.90 427,668 $ 3.90
======= ======== ======= ========
Options exercisable at year end -- $ 3.90 106,917 $ 3.90
======= ======== ======= ========
Weighted average fair value of
Options granted during year $ 0.71 $ --
======== ========
F13 (Continued)
<PAGE> 43
The following summarizes information about fixed options
outstanding at December 31, 1996:
Range of exercise $3.75 to $4.12
Number outstanding at December 31, 1996 427,668
Options outstanding:
Weighted average remaining contractual life 8.5 years
Weighted average exercise price $3.90
Options exercisable:
Number exercisable at December 31, 1996 106,917
Weighted average exercise price $3.90
Underwriter Warrant Plans - The Company granted warrants for
shares of Common Stock to each of its underwriters for its two public
stock offerings. The number of shares granted was 98,713 for the
Company's initial public offering, and 122,000 for the Company's
secondary public offering. Under both plans, the exercise price was
above the market price of the Company's stock on the date of the
grant and each warrant's maximum term is five years.
The fair value of each warrant grant is estimated on the date of grant
using the Black-Scholes option pricing model with a dividend yield of
0% for all years, an expected volatility of 15%, a risk free interest rate
of 6% and an expected term of five years. All assumptions in the
Black-Scholes option pricing model were based on their weighted
averages for grants in 1995 and 1996.
A summary of the status of the Company's underwriter warrant plans
as of December 31, 1995 and 1996 and changes during the years
ended on those dates is presented below:
1995 1996
------------------- -------------------
Average Average
Exercise Exercise
Shares Price Shares Price
------- --------- ------- ---------
Outstanding at beginning of year 98,713 $ 5.57 98,713 $ 5.57
Granted -- -- 122,000 5.25
Exercised -- -- -- --
Forfeited -- -- -- --
------- --------- ------- ---------
Outstanding at end of year 98,713 $ 5.57 220,713 $ 5.39
======= ========= ======= =========
Warrants exercisable at year end 98,713 $ 5.57 98,713 $ 5.57
======= ========= ======= =========
Weighted average fair value of
Warrants granted during year $ -- $ 0.69
========= =========
The following summarizes information about underwriter warrants
outstanding at December 31, 1996:
Range of exercise price $5.25 to $5.57
Number of warrants outstanding at December 31, 1996 220,713
Options outstanding:
Weighted average remaining on contractual life 3.7 years
Weighted average exercise price $5.39
Options exercisable:
Number of warrants exercisable at December 31, 1996 98,713
Weighted average exercise price $5.57
F14 (Continued)
<PAGE> 44
14. 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, notes receivable from shareholders, accrued liabilities and notes
payable approximate fair value because of the short maturity of those
instruments. The fair value of the Company's long-term debt is
estimated based on the quoted market prices for the same or similar
issues or on the current rates offered to the Company for debt of the
same remaining maturities and approximates the carrying value. It is
not practicable for the Company to determine the fair value of its
subordinated debt because the subordinated debt is non-transferable
(except for certain limited exceptions) and because no public market
for the subordinated debt exists.
15. SUBSEQUENT EVENT
The Company has entered into an agreement providing for the sale
and leaseback of 370 acres of its vineyards. Under the terms of the
agreement, the Company will receive payments of $5,400,000 in
1997. The projected gain on the transaction is $400,000. Payments
on the lease are to begin in 1999 and continue through 2012 at an
annual rate of $645,000. The Company will have the option to
repurchase the property in 2012 at a price of $8,400,000. The
completion of the sale and lease back under the terms described above
is subject to the satisfaction of several conditions set forth in that
agreement. It is therefore possible that the sale and lease back may not
be completed.
F15
<PAGE> 1
COPY
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 FOR A PERIOD OF ONE YEAR EXCEPT TO
OFFICERS OF VAN KASPER.
JULY 30, 1996
WARRANT
TO SUBSCRIBE FOR AND PURCHASE COMMON
STOCK OF R. H. PHILLIPS, INC.
VOID AFTER 5:00 P.M., SAN FRANCISCO TIME, ON JULY 24,
2001, OR IF NOT A BUSINESS DAY, AS DEFINED HEREIN,
AT 5:00 P.M., SAN FRANCISCO TIME, ON THE
IMMEDIATELY PRECEDING BUSINESS DAY
NO. W-1
THIS CERTIFIES that for and in consideration of $ 1. 00,
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 $5.25 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
122,000 fully paid, nonas sessable 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.
The shares of Common Stock purchasable upon exercise of this
Warrant are hereafter referred to as the "Warrant Shares."
"Commencement Date" shall mean July 24, 1997, which is one
year from the date hereof. "Expiration Date" shall mean 5:00 p.m.,
San Francisco time, on July 24, 2001, 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 clay other than a Saturday,
Sunday or other day on which banks in the State of California are
authorized by law to remain closed.
This Warrant may represent a portion of a warrant that was
originally issued to Van Kasper & Company on July 30, 1996 to
purchase up to 122,000 shares of Common Stock (the "Original
Warrant"). To the extent that Van Kasper & Company may have
transferred all or a portion of such warrant or shares issuable
thereunder, the capitalized term "Warrants" as used in this Warrant
shall mean all warrants (including this Warrant) that constituted a
portion of the Original Warrant.
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
comple tion 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 l(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 off-ice 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.
-2-
<PAGE> 3
A = the Current Market Price (as determined pursuant
to Subsection l(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, unless this Warrant has expired, a
new Warrant representing the number of shares (ex cept 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 deter-mined
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-Securitie s 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
-3-
<PAGE> 4
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 of Common Stock. (calculated to the nearest tenth of a
share) obtained by multiplying the Warrant Price in effect
immediately prior to such adjustment by the number of shares
purchasable pursuant hereto immediately prior to such adjustment
and dividing the product thereof b y 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 share's 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 suc h 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.
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<PAGE> 5
(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, the 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 the Warrantholder would have been entitled if the
Warrantholder had exercise d 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 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 Warrant Shares shall be d
etermined 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 t
he 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
retained earnings) 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
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<PAGE> 6
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 suc h 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 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 this
Warrant immediately prior to such distribution shall be
adjusted so that the holder of this 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 this 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 a
nything 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
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<PAGE> 7
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.
(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) Termination 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 res ult 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 War-rant 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
consum mation of any event described in the previous sentence,
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. An 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
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<PAGE> 8
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.
(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 other-wise 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 issu ed 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 I ncorporation. 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.
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<PAGE>
<PAGE> 9
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, 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.
4. Registration Rights
(a) Demand Registration. Beginning as of the
Commencement Date and ending on July 24, 2001, if at any time
the holder or holders of Warrants to purchase no less than 50 % of
the Warrant Shares or holder or holders of no less than 50 % of all
outstanding Warrant Shares shall request that the, Company
register the offer and sale of such Warrant Shares to the public
under the Securities Act, the Company shall file a registration
statement with the Securities and Exchange Commission
("SEC") for the purpos e of registering such Warrant Shares (but
not this Warrant) under the Securities Act. The request described
above shall be made in writing directed to the Company at the
address set forth in Section 8 of this Warrant (the "Demand
Registration Notice").
Within ten days after receiving a Demand Registration
Notice, the Company shall issue a notice ("Company's Notice")
informing all holders of Warrants or Warrant Shares who did not
issue a Demand Registration Notice ("Other Holders") offering to
include the Warrant Shares of the Other Holders in that
registration statement for sale to the public. Each Other Holder
must notify the Company by no later than 10 days after the
Company's Notice is sent whether that Other Holder wishes to
include his, her or its Warrant Shares in the registration
statement. If any Other Holder delivers such a notice to the
Company in a timely manner, that Other Holder's Warrant Shares
will be included in the Registration Statement. If any other Holder
does not inform the Company in writing that his, her or its
Warrant Shares are to be included in such registration statement,
that Other Holder will be deemed to have waived all rights to
include his, her or its Warrant Shares in the registration statement.
For the purposes of this Warrant, all Warrant Shares for
which a demand for registration has been made shall be referred to
as "Subject Stock." Promptly upon receipt of a Demand Notice
and the expiration of the period by which the Other Holders must
submit a notice requesting inclusion of their Warrant Shares in the
registration statement, the Company shall file with the SEC a
registration statement on the applicable form for the registration
of the Subject Stock and use its best efforts to
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<PAGE> 10
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 shall be 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) Reparation 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 ma
terials 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.
(c) Piggyback Registration. If (but without any obligation to
do so) the Company proposes to register, prior to July 24, 2003,
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 (but not this Warrant)
specified in such request in such registration state ment (and any
related qualification under blue sky laws or other compliance)
and the Company shall keep each such registration statement in
effect
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<PAGE> 11
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
Warrant Shares 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 Wa rrant
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) t
ake such action as shall be desirable or necessary to qualify the
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 trans fer agent and
registrar for all Subject Stock registered pursuant to such
registration statement and CUSIP number for all such Subject
Stock
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<PAGE> 12
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 a
nd disbursements of its counsel and independent certified public
accountants; provided that, if a registration of Subject Stock
pursuant to Section 4(a) is withdrawn at the request of the
Warrantholder, the Warrantholder shall reimburse the Company
for all expenses the Company has reasonably incurred in
connection with such registration. 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
amendme nt 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 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
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<PAGE> 13
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 a ssumed, 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 confl ict 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 retained earnings), or
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
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<PAGE> 14
(c) any voluntary or involuntary dissolution, liquidation or
winding-upof 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 holde rs 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 10 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 u nder the Securities Act of 1933, as amended, or to a
favor-able 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 such action.
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 such loss, theft or destruction of
such Warrant a nd 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 her---under shall be in writing,
and shall be delivered or shall be sent by certified or
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<PAGE> 15
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 for a period of one year from
the date of this Warrant, except to officers of the Van Kasper in
accordance with all applicable laws. This Warrant shall bear a
legend setting forth the foregoing restriction.
10. Compliance with Securities Act.
This Warrant and the Warrant Shares may not be offered or
sold except in compliance with the Securities Act of 1933, as
amended, and then only against receipt of an agreement of such
person to whom such offer of sale is made to comply with the
provisions of this Section 10 with respect to any resale or other
disposition of the Warrant or Warrant Shares. The Company may
cause the following legend to be set forth on this Warrant and each
certificate representing the Warrant Shares to the extent that the
offer and sale of the Warrant Shares has not been registered under
the Securities Act o f 1933 pursuant to Section 4 hereof, unless
counsel for the Company is of the opinion as to any such
certificate that such legend is unnecessary;
THIS WARRANT [THESE SHARES] 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.
11. 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.
12. 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
-15-
<PAGE> 16
Warrant shall be interpreted as if such provision were so excluded
and shall be enforceable in accordance with its terms.
13. 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.
14. Headings
The headings in this Warrant are for purposes of reference
only and shall not limit or otherwise affect any of the terms hereof.
IN WITNESS WHEREOF, the Company has executed this
Warrant on and as of the day and year first above written.
R. H. Phillips, Inc.
a California corporation
/s/John E. Giguiere
___________________________________
John E. Giguiere
Co-Chief Executive Officer
-16-
<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.)
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<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.)
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<PAGE> 1
SCHEDULE TO MASTER LOAN AGREEMENT
R.H. Phillips, Inc.
26836 County Road 12A
Esparto, California 95627
$1,700,000.00 Effective Date:__________ Loan
Transaction Number
1. THIS SCHEDULE is made between R.H.Phillips, Inc., as
Debtor, and U.S. BANCORP LEASING & FINANCIAL
(which, together with its successor and assigns, will be called
the "Secured Party") pursuant to the Master Loan Agreement
dated as of November 25, 1996 (The "Loan Agreement"), the
terms of which (including the definitions) are incorporated
herein. If any terms hereof are inconsistent with the terms of
the Loan Agreement, the terms hereof shall prevail.
2. FOR VALUE RECEIVED, Debtor hereby promises to pay to
the order of Secured Party the principal amount of One Million,
Seven Hundred Thousand, and 00/100 Dollars ($1,700,000.00)
with interest on any outstanding principal balance at the rate(s)
specified herein from the Effective Date hereof until this
Schedule shall have been paid in full in accordance with the
following payment schedule: Forty-Two (42) installments of
$19,911.24 each, including the entire amount of interest
accrued on this Schedule at the time of payment of each
installment followed by Forty-Two (42) installments of
$29,866.86 each, including the entire amount of interest
accrued on this Schedule at the time of payment of each
installment. The first payment shall be due on January 10. 1997
and like payment shall be due on the same day of each
succeeding month thereafter until the entire principal and
interest have been paid. At the time of the final installment
hereon, all unpaid principal and interest shall be due and owing.
Each payment shall be applied first to accrued and unpaid
interest, and the balance to the outstanding principal hereof. As
a result, such final installment may be substantially more or
substantially less than the installments specified herein.
3. The Debtor promises to pay interest on the principal balance
outstanding at a rate which is 330 basis points over the one
month London Interbank Offered Rate ("LIBOR") as such rate
shall vary from month to month, as published in the "Money
Rates" section of the Wall Street Journal on the first business
day of the month preceding the month for which the rate is to
be calculated. As of the first business day of the month in
which this Schedule is being executed, LIBOR is 5.375 percent.
As long as no event of default has occurred and is continuing,
for a fee of five hundred dollars ($500.00) the Debtor may
exercise a one time option (with thirty (30) days prior written
notice) to fix the interest rate at rate which is 182 basis points
over the daily bid quotes for U.S. Treasury Issues with like
maturity and closest to par as published in the Wall Street
Journal on the first business day of the month during which the
interest rate is to be fixed. If no issue is quoted, the quote
published for the next month out will be used.
4. Secured Party may, from time to time, in its sole desecration,
increase or decrease the amount of unpaid installments to an
amount Secured Party deems necessary to amortize the
outstanding principal balance of this Schedule by the due date
of the final installment. Secured Party shall notify the Debtor of
each such change in writing. Whether or not the installment
amount is increased or decreased, the Debtor understands that,
as a result of increases or decreases in the rate of interest in
accordance herewith, the final installment may be substantially
more or substantially less than the installments specified herein,
but in no event shall the rate of interest be higher than allowed
by law.
5. The Undersigned may prepay this Schedule, in whole or in part,
by paying simultaneously with and in addition to the
prepayment, a premium for such prepayment privilege equal to
the specified percent of the amount prepaid in accordance with
the following schedule, one (1) to twelve (12) months five
(5.00)%, thirteen (13) to twenty-four (24) months four
(4.00)%, twenty-five (25) to thirty-six (6) months three
(3.00)%, thirty-seven (37) to forty-eight (48) months two
(2.00)%, forty-nine (49) to sixty (60) months one (1.00)%,
sixty-one (61) to eighty-four (84) months zero (0.00)%.
Notwithstanding the foregoing, payments made within 30 days of the
date an installment is due which do not exceed the scheduled amount of
such installment shall not be considered prepayments.
6. Each of Debtor, if more than one, and all other parties who at
any time may be liable hereon in any capacity, hereby
0232.596 ADDRESS FOR ALL NOTICES:
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Portland, OR 97232
<PAGE> 2
jointly and severely waive diligence, demand, presentment, presentment
for payment, protest, notice of protest and notice of dishonor of this
Schedule, and the Secured Party, without notice, to grant extensions in
the time of payment of and reductions in the rate of interest on any
moneys owing on this Schedule.
7. The following property is hereby made Collateral for all
purposes under the Loan Agreement:
See Exhibit "A" attached hereto and made a part hereof
8. The Collateral hereunder shall be based at the following
location(s):
26836 County Road 12A
Esparto, California 95627
COUNTY: Yolo
IN WITNESS WHEREOF, Debtor has executed this Schedule this
________day of ___________________. 199______
R.H. Phillips, Inc.
By:__________________________
Robert Moore
Chief Financial Officer
0232.596 ADDRESS FOR ALL NOTICES:
825 N.E. Multnomah, Suite 800
Portland, OR 97232
<PAGE> 3
MASTER LOAN AGREEMENT
1.0 PARTIES, COLLATERAL AND OBLIGATIONS
1.1 This Agreement is dated as of November 26,
1996. For
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, R.H. Phillips, Inc. (Hereinafter called "Debtor") with
offices at 26836 County Road 12A, Esparto, California 95627
intending to be legally bound, hereby promises to pay to U.S.
BANCORP LEASING & FINANCIAL, and Oregon corporation
having offices at 825 N.E. Multnomah, Suite 800, Portland, Oregon
97232 (hereinafter called "Secured Party"), any amounts set forth on
any Schedule to Master Loan Agreement hereunder (the "Schedule(s)",
all the terms of which are incorporated herein) and grants a security
interest in and assigns, transfers and sets over to and to the successors
and assigns thereof, the property specified in any Schedule hereunder
wherever located, and any and all proceeds thereof, insurance
recoveries, and all replacements, additions, accessions, accessories and
substitutions thereto or therefor (hereinafter called the "Collateral")
The accurity interest granted hereby is to secure payment of any and all
liabilities or obligations of Debtor to the Secured Party, matured or
unmatured, direct or indirect, absolute or contingent, heretofore
arising, now existing or hereafter arising, and whether under this
Agreement or under any other writing between Debtor and Secured
Party (all hereinafter called the "obligations" and/or the "liabilities").
1.2 Joint and Several Liability; Payment Terms. In
the event there is more than one Debtor, all obligations shall be
considered as joint and several obligations of all Debtors regardless of
the source of Collateral or the particular Debtor with which the
obligation originated. Interest shall be calculated on the basis of a 360-
day year. All payments on any Schedule hereunder shall be made in
lawful money of the United States at the post office address of the
Secured Party or at such other places as the Secured Party may
designate to Debtor in writing from time to time. In no event shall any
Schedule hereunder be enforced in any way which permits Secured
Party to collect interest in excess of the maximum lawful rate. Secured
Party shall refund such excess interest to Debtor. In such event,
Debtor agrees that Secured Party shall not be subject to any penalties
for contracting for or collecting interest in excess of the maximum
lawful rate.
1.3 Late Charge. If any of the obligations remains
overdue for more than ten (10) days, Debtor hereby agrees to pay on
demand, as a late charge, an amount equal to the lesser of ( I ) five
percent (5.0%) of each such overdue amount; or ( ii ) the maximum
percentage of any such overdue amount permitted by applicable law as
a late charge. Debtor agrees that the amount of such late charge
represents a reasonable estimate of the cost to Secured Party of
processing a delinquent payment and that the acceptance of any late
charge shall not constitute a waiver of default with respect to the
overdue amount on or prevent Secured Party from exercising any other
available rights and remedies.
2.0 WARRANTIES AND COVENANTS OF DEBTOR Debtor
hereby represents, warrants and covenants that:
2.1 Business Organization Status and Authority. (
I ) Debtor is duly organized, validly existing and in good standing under
the laws of the state of its organization and is qualified to do business in
all states and countries in which such qualification is necessary; ( ii )
Debtor has the lawful power and authority to won its assets and to
conduct the business in which it is engaged; and to execute and comply
with the provisions of this Agreement and any related documents; (iii )
the execution and delivery of this Agreement and any related
documents have been duly authorized by all necessary action; ( iv ) no
authorization, consent, approval, license or exemption of, or filing or
registration with, any or all of the owners of Debtor or any
governmental entity was, is or will be necessary to the valid execution,
delivery, performance or full enforceability of this Agreement and any
related documents. Except as specifically disclosed to Secured Party,
Debtor utilizes not trade names in the conduct of its business and/or has
not changed its name within the past five years.
2.2 Merger; Transfer of Assets. Debtor will not
consolidate or merge with or into any other entity, liquidate or dissolve,
distribute, well, lease, transfer or dispose of all of its properties or
assets or any substantial portion thereof other than in the ordinary
course of its business, unless the Secured Party shall give its prior
written consent (which shall not be reasonable withheld), and the
surviving, or successor entity or the transferee of such assets, as the
case may be, shall assume, by a written instrument which is legal, valid
and enforceable against such surviving or successor entity or transferee,
all of the obligations of Debtor to Secured Party or any affiliate of
Secured Party.
2.3 No Violation of Covenants or Laws. Debtor is
not party to any agreement or subject to any restrictions which
materially and adversely affects its ability to perform its obligations
under this Agreement and any related documents. The execution of
and compliance with the terms of this Agreement and any related
documents does not and will not ( I ) violate any provision of law, or (
ii ) conflict with or result in a breach of any order, injunction or decree
of any court or governmental authority or the formation documents of
Debtor, or ( iii ) constitute or result in a default under agreement, bond
or indenture by which Debtor is bound or to which any of its property
is subject, or ( iv ) result in the imposition of any lien or encumbrance
upon any of Debtor's assets, except for any liens created hereunder or
under any related documents.
2.4 Accurate Information. All financial information
submitted to the Secured Party In regard to Debtor or any shareholder,
officer director, member, or partner thereof, or any guarantor of any of
the obligations thereof, was prepared in accordance with generally
accepted accounting principles, consistently applied, and fairly and
accurately depicts the financial position and results of operations of
Debtor or such other person, as of the respective dates or for the
respective periods, to which such information pertains. Debtor had
good, valid and marketable title to all the properties and assets reflected
as being owned by it on any balance sheets of Debtor submitted to
Secured Party as of the dates thereof.
2.5 Judgements; Pending Legal Action. There are no
judgements outstanding against Debtor, and there are no actions or
proceedings pending or, to the best knowledge of Debtor, threatened
against or affecting Debtor or any of its properties in any court or
before any governmental entity which, if determined adversely to
Debtor, or would materially and adversely affect the ability of Debtor
to satisfy its obligations under this Agreement and any related
documents.
2.6 No Breach of Other Agreements; compliance with
Applicable Laws. Debtor is not in breach of or in default under any
loan
0251.796 ADDRESS FOR ALL NOTICES:
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Portland, OR 97232
<PAGE> 4
agreement, indenture, bond, note or other evidence of indebtedness, or
any other material agreement or any court order, injunction or decree
or any lien, statute, rule or regulation. The operations of Debtor
comply with all laws, ordinances and governmental rules and
regulations applicable to them. Debtor has filed all Federal, state and
municipal income tax returns which are required to be filed and has
paid all taxes as shown on said returns and on all assessments billed to
it to the extent that such taxes or assessments have become due.
Debtor does not know of any other proposed tax assessment against it
or of any basis for one.
2.7 Sale Prohibited. Debtor will not sell, dispose of or
offer to sell or otherwise transfer the Collateral or any interest therein
without the prior written consent of Secured Party, which shall not be
unreasonably withheld.
2.8 Location of Collateral. The Collateral will be
kept at the
location(s) shown on the Schedule(s) hereunder and Debtor will
promptly notify Secured Party of any change in the location(s) of the
Collateral. Debtor will not remove the Collateral from sais location(s)
without the prior written consent of Secured Party.
2.9 Collateral not a Fixture. The Collateral is not
attached, and Debtor will not permit the Collateral to become attached,
to real estate in such a way that it would be considered part of the
reality or designated a "fixture". Notwithstanding any presumption of
applicable law, and irrespective of any manner of attachment, the
Collateral shall not be deemed real property but shall retain its
character as personal property. However, Debtor will at the option of
Secured Party furnish the latter with a waiver or waivers in recordable
form, signed by all persons having an interest in the real estate, of any
interest in the Collateral which is or might be deemed to be prior to
Secured Party's interest.
2.10 Perfection of Security Interest. Except for ( I )
the security interest granted hereby and ( ii) any other security interest
previously disclosed by Debtor to Secured Party in writing, Debtor is
the owner of the Collateral free from any adverse lien, security interest
or encumbrance. Debtor will defend the Collateral against all claims
and demands of all persons at any time claiming any interest therein.
Except as previously disclosed in writing to Secured Party, no financing
statement covering any collateral or any proceeds thereof is on file in
any public office. At the request of Secured Party, Debtor will execute,
acknowledge and deliver to Secured Party in recordable or fileable
form, any document or instrument required by Secured Party to further
the purposes of this Agreement, or to perfect its interest in the
Collateral or to maintain such perfected interest in full force and effect,
including (without limitation) any fixture filings and financing
statements and any amendments and continuation statements thereto
pursuant to the Uniform Commercial Code, in form satisfactory to
Secured Party, and will pay the cost of filing the same or filing or
recording this Agreement in all public offices wherever filing or
recording is deemed by Secured Party to be necessary or desirable.
Debtor hereby agrees that this Agreement shall be and constitute a
financing statement for purposes of the Uniform Commercial Code.
2.11 Insurance. Unless otherwise agreed, Debtor will
have and maintain insurance from financially sound carriers at all times
with respect to all Collateral against risks of fire (including so-called
extended coverage), theft, collision, flood "mysterious disappearance"
and such other risks as Secured Party may require, containing such
terms, in such form, for such periods and written by such companies as
may be satisfactory to Secured Party; each insurance policy shall name
Secured Party as loss payee and shall be payable to Secured Party and
Debtor as their interest may appear, all policies of insurance shall
provide for ten days' written minimum cancellation notice to Secured
Party; Debtor shall furnish secured Party with certificates or other
evidence satisfactory to Secured Party of compliance with the
Foregoing insurance provisions.
2.12 Use of the Collateral. Debtor will use the
Collateral for business purposes only and operate it by qualified
personnel in accordance with applicable manufacturers' manuals.
Debtors will keep the Collateral free from any adverse lien or
encumbrances and in good working order, condition and repair and will
not waste or destroy the Collateral or any part thereof; Debtor will
keep the Collateral appropriately protected from elements, and will
furnish all required parts and servicing (including any contract service
necessary to maintain the benefit of any warranty of the manufacturer);
Debtor will not use the Collateral in violation of any statute, ordinance,
regulation or order, and Secured Party may examine and inspect the
Collateral and any and all books and record of Debtor during business
hours at any time; such right of inspection shall include the right to
copy Debtor's books and records and to converse with Debtor's
officers, employees, agents, and independent accountants.
2.13 Taxes and Assessments. Debtor will pay
promptly when due all taxes, assessment, levies, imposts, duties and
charges, or any kind or nature, imposed upon the Collateral or for its
use or operation or upon this Agreement or upon any instruments
evidencing the obligations.
2.14 Financial Statements. Debtor shall furnish
Secured Party within ninety (90) days after the close of each fiscal year
of Debtor, its financial statements (including, without limitations, a
balance sheet, a statement of income and surplus account and a
statement of changes in financial position) for the immediately
preceding fiscal year, settling forth the corresponding figures for the
prior fiscal year in comparative form, all in reasonable detail without
any qualification or exception deemed material by Secured Party. Such
financial statements shall be prepared at least as a review by Debtor's
independent certified accountants and, if prepared as an audit, shall be
certified by such accountants. Debtor shall also furnish Secured Party
with any other financial information deemed necessary by Secured
Party. Each financial statement submitted by Debtor to Secured Party
shall be accompanied by a certificate signed by the chief executive
officer, the chief operating officer or the chief financial officer of
Debtor, certifying that ( I ) such financial statement was prepared
inaccordance with generally accepted accounting principles consistently
applied and fairly and accurately presents the Debtor's financial
condition and results of operations for the period to which it pertains,
and (ii) no event of default has occurred under this Agreement during
the period to which such financial statement pertains.
3.0 Events of Default
3.1 The following shall be considered events of
default: (I) failure on the part of Debtor to promptly perform in
complete accordance with it representations, warranties and covenants
made in this Agreement or in any other agreement with Secured Party,
including, but not limited to, the payment of any liability, with interest,
when due, or default by Debtor under the provisions of any other
material agreement to which Debtor is party; (ii) the death of Debtor if
an individual or the dissolution of Debtor if a business organization; (iii)
a change in the present management of Debtor, above the level of
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Portland, OR 97232
<PAGE> 5
Executive Vice President except to fill vacancies resulting from the
death or disability of an individual; (iv) the filing of any petition or
complaint under the Federal Bankruptcy Code or other federal or state
acts of similar nature, by or against Debtor; or an assignment for the
benefit of creditors by Debtor, (v) and application for or the
appointment of a Receiver, Trustee or Conservator, voluntary, by or
against Debtor or for any substantial assets of Debtor; (vi) insolvency
of Debtor under either the Federal Bankruptcy Code or applicable
principles of equity; (vii) entry of judgement, issuance of any
garnishment or attachment, or filing of any lien, claim or government
attachment against the Collateral et which, in Secured party's sole
discretion, might impair the Collateral; (viii) the determination by
Secured Party that a material misrepresentation of fact has been made
by Debtor in this Agreement or in any writing supplementary or
ancillary hereto; (ix) a reasonable determination by Secured Party that
Debtor has suffered a material adverse change in its financial condition,
business or operations from the date of this Agreement; or (x)
bankruptcy, insolvency, termination, death, dissolution or default of any
guarantor for Debtor.
4.0 REMEDIES
4.1 Upon the happening of any event of default which is not
cured within ten (10) days, or at any time thereafter; (i) all liabilities of
Debtor shall, at the option of Secured Party, become immediately due
and payable; (ii) Secured Party shall have and may exercise all of the
rights and remedies granted to a secured party under the Uniform
Commercial Code; (iii) Secured Party shall have the right, immediately,
and without notice or other action, to set-off against any of Debtor's
liabilities to Secured Party any money owed by Secured Party in any
capacity to Debtor, whether or not due, and Secured Party shall be
deemed to have exercised such right of set-off and to have made a
charge against any such money immediately upon the occurrence of
such default event though actual book entries may be made at some
time subsequent thereto; (iv) Secured Party may proceed with or
without judicial process to take possession of all or any part of the
Collateral; Debtor agrees that upon receipt of notice of Secured Party's
intention to take possession of all or any part of said Collateral, Debtor
will do everything necessary to make same available to Secured Party
(including, without limitation, assembling the Collateral and making it
available to Secured Party at a place designated by Secured Party
which is reasonably convenient to Debtor and Secured Party); and so
long as Secured Party acts in a commercially reasonable manner,
Debtor agrees to assign, Transfer and deliver at any time the whole or
any portion of the Collateral or any rights or interest therein in
accordance with the Uniform Commercial Code and without limiting
the scope of Secured Party's rights thereunder; (v) Secured Party may
sell the Collateral at public or private sale or in any other commercially
reasonable manner and, at the option of Secured Party, in bulk or in
parcels and with or without having the Collateral at the sale or other
disposition, and Debtor agrees that in case of sale or other disposition
of the Collateral, or any portion thereof, Secured Party shall apply all
proceeds first to all costs and expenses of disposition, including
attorneys' fees, and then to Debtor's obligations to Secured Party; (Vi)
Secured Party may elect to retain the Collateral or any part thereof in
satisfaction of all sums due from Debtor upon notice to Debtor and any
other party as may be required by the Uniform Commercial Code. All
remedies provided in the paragraph shall be cumulative. Secured Party
may exercise any one or more of such remedies in addition to any and
all other remedies Secured Party may have under any applicable law or
in equity.
4.2 Expenses; Disposition. Upon default, all amounts due and
to become due hereunder shall, without notice, bear interest at the
lesser of (i) fifteen percent (15%) per annum or (ii) the maximum rate
per annum which Secured Party is permitted by law to charge from the
date such amounts are due until paid. Shall pay all reasonable expenses
of realizing upon the Collateral hereunder upon default and collection
all liabilities of Debtor to Secured Party, which reasonable expenses
shall include attorneys' fees, whether or not litigation is commenced
and whether incurred at trial, on appeal, or in any other proceeding.
Any notification of a sale or other disposition of Collateral or of any
action by Secured Party required to be given by Secured party, will be
sufficient if given personally, mailed, or delivered by facsimile machine
or overnight carrier not less than five (5) days prior to the day on which
such sale or other disposition will be made or action taken, and such
notification shall be deemed reasonable notice.
5.0 MISCELLANEOUS
5.1 No Implied Waivers; Entire Agreement. The waiver by
Secured Party of any default hereunder or of any provisions hereof shall
not discharge any party hereto from liability hereunder and such waiver
shall be limited to the particular event of default and shall not operate
as a waiver of any subsequent default. This Agreement and any
Schedule hereunder are non-cancelable. No modification of this
Agreement or waiver of any right of Secured Party hereunder shall be
valid unless in writing and signed by an authorized officer of Secured
party. No failure on the part of Secured Party to exercise, or delay in
exercising, any right or remedy hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any right or remedy
hereunder preclude any other or further exercise thereof or the exercise
of any other right or remedy. The provisions of this Agreement and the
rights and remedies granted to Secured Party herein shall be in addition
to, and not in limitation of those of any other agreement with Secured
party or any other evidence of any liability held by Secured party. This
Agreement and any Schedule hereunder (a "Transaction") embody the
entire agreement between the parties and supersede all prior
agreements and understandings relating to the same subject matter,
except in any case where the Secured Party takes an assignment from a
vendor of its security interest in the same Collateral, in which case the
terms of the Transaction shall be incorporated into the assigned
agreement and shall prevail over any inconsistent terms therein but shall
not be construed to create a new contract.
5.2 Choice of Law. This Agreement and the rights of the parties
hereto shall be governed by applicable Federal law and the laws of the
State of California. Any action arising out of this Agreement may be
litigated under the laws of California and submitted to the jurisdiction
of California, and that service of process by certified mail, returned
receipt requested, will be sufficient to confer personal jurisdiction over
the Debtor.
5.3 Protection of the Collateral. At its option, Secured party
may discharge taxes, liens or other encumbrances at any time levied or
placed on the Collateral, may pay for insurance on the Collateral and
may pay for the maintenance and preservation of the Collateral. Debtor
agrees to reimburse Secured Party on demand for any payment made or
any expense incurred by Secured Party pursuant to the foregoing
authorization. Any payments made by Secured party shall be
immediately due and payable by Debtor and shall bear interest at the
rate of fifteen percent (15%) per annum. Until default, Debtor may
retain possession of the Collateral and use it in any lawful manner not
inconsistent with the provisions of this Agreement and any other
agreement between Debtor and Secured Party, and not inconsistent
with any policy of insurance thereon.
5.4 Binding Agreement; Time of the essence. This Agreement
shall take effect as a sealed instrument and shall be binding upon and
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825 N.E. Multnornah, Suite 800
Portland, OR 97232
<PAGE> 6
shall inure to the benefit of the parties hereto, their respective heirs,
executors, administrators, successors, and assigns. Time is of the
essence with respect to the performance of Debtor's obligations under
this Agreement and any other agreement between Debtor and Secured
Party.
5.5 Enforce ability. Any term, clause or provision of this
Agreement or of any evidence of indebtedness from Debtor to Secured
Party which is unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective only to the extent of such prohibition or
unenforceablity without invalidating the remaining terms or clauses of
such provision or the remaining provisions hereof, and any such
prohibition or unenforceablity in any jurisdiction shall not invalidate or
render unenforceable such term, clause or provision in any other
jurisdiction.
5.6 Notices. Any notices or demands required to be given
herein shall be given to the parties in writing by United States first class
mail (express, certified or otherwise) at the addresses set forth on page
1 of this Agreement or to such other addresses as the parties may
hereafter substitute by written notice given in the manner prescribed in
this paragraph.
5.7 Additional Security. If there shall be any other collateral for
any of the obligator's, or for the obligations of any guarantor thereof,
Secured Party may proceed against and/or enforce any or all of the
Collateral and such Collateral in whatever order it may, in its sole
discretion, deem appropriate. Any amount(s) received by Secured Party
from whatever source and applied by it to any of the obligations shall
be applied in such order of application as Secured Party shall from time
to time, in its sole discretion, elect.
6.0 ASSIGNMENT
6.1 SECURED PARTY MAY SELL OR ASSIGN ANY AND
ALL RIGHT, TITLE AND INTEREST IT HAS IN THE
COLLATERAL AND/OR ARISING UNDER THIS AGREEMENT.
DEBTOR SHALL, UPON THE DIRECTION OF SECURED
PARTY: 1) EXECUTE ALL DOCUMENTS NECESSARY TO
EFFECTUATE SUCH ASSIGNMENT AND, 2) PAY DIRECTLY
AND PROMPTLY TO SECURED PARTY'S ASSIGNEE
WITHOUT ABATEMENT, DEDUCTION OR SET-OFF, ALL
AMOUNTS WHICH HAVE BECOME DUE UNDER THE
ASSIGNED AGREEMENTS, SECURED PARTY'S ASSIGNEE
SHALL HAVE ANY AND ALL RIGHTS, IMMUNITIES AND
DISCRETION OF SECURED PARTY HEREUNDER AND SHALL
BE ENTITLED TO EXERCISE ANY REMEDIES OF SECURED
PARTY HEREUNDER. ALL REFERENCES HEREIN TO
SECURED PARTY SHALL INCLUDE SECURED PARTY'S
ASSIGNEE (EXCEPT THAT SAID ASSIGNEE SHALL NOT BE
CHARGEABLE WITH ANY OBLIGATIONS OR LIABILITIES
HEREUNDER OR IN RESPECT HEREOF). DEBTOR WILL NOT
ASSERT AGAINST SECURED PARTY'S ASSIGNEE ANY
DEFENSE, COUNTERCLAIM OR SET-OFF WHICH DEBTOR
MAY HAVE AGAINST SECURED PARTY.
6.2 DEBTOR SHALL NOT ASSIGN OR IN ANY WAY
DISPOSE OF ALL OR ANY OF ITS RIGHTS OR OBLIGATIONS
UNDER THIS AGREEMENT OR ENTER INTO ANY
AGREEMENT REGARDING OF ALL OR ANY PART OF THE
COLLATERAL WITHOUT THE PRIOR WRITTEN CONSENT OF
SECURED PARTY WHICH SHALL NOT BE UNREASONABLY
WITHHELD. IN CONNECTION WITH THE GRANTING OF
SUCH CONSENT AND THE PREPARATION OF NECESSARY
DOCUMENTATION, A FEE SHALL BE ASSESSED EQUAL TO
ONE PERCENT (1%) OF THE TOTAL REMAINING BALANCE
THEN DUE HEREUNDER.
7.0 POWER OF ATTORNEY
7.1 Secured Party is hereby appointed Debtor's attorney-in-fact
to sign Debtor's name and to make non-material amendments
(including completing and conforming the description of the Collateral)
on any document in connection with this Agreement (including any
financing statement) and to obtain, adjust, settle, and cancel any
insurance required by this Agreement and to endorse any drafts in
connection with such insurance.
8.0 NOTICE
8.1 Under Oregon law, most agreements, promises and
commitments made by Debtor after October 3, 1989, concerning loans
and other credit extensions which are not for personal, family or
household purposes or secured solely by the Debtor's residence must
be in writing, express consideration and be signed by Debtor to be
enforceable.
In Witness Whereof, the parties hereto have caused this Agreement to
be duly executed the ______ day of ____________, 19______.
U.S. BANCORP LEASING & FINANCIAL R.H. Phillips, Inc.
[Debtor]
By:_____________________________ By: //s// Robert Moore
An authorized officer thereof Robert Moore
Chief Financial Officer
0251.796 ADDRESS FOR ALL NOTICES:
825 N.E. Multnornah, Suite 800
Portland, OR 97232
<PAGE> 7<PAGE>
MUST BE SIGNED BY DEBTOR
UNIFORM COMMERCIAL CODE-FINANCING STATEMENT
FORM UCC-1(1)
This Financing Statement is presented to filing officer pursuant to the
Uniform Commercial Code. This statement remains effective for a
period of five years from the date of filing subject to extensions for
additional periods of five years by refilling or filing a continuation
statement (UCC-3)
1.a Debtor(s): 2a Secured party(ies)
R.H. Phillips, Inc. U.S. Bancorp Leasing &
Financial
Tax I.D. 68-0313739 Tax I.D. #93-0594454
1b Mailing address(es) 2b. Address of Secured party
from which Security Information is
obtainable
26836 County Road 12A 825 N.E. Multnomah Street, Suite 800
Esparto, California 95627 Portland, Oregon 97232-2151
Phone # 503 797-0200
3. This financing statement covers the following types (or items) of
Collateral wich is subject to a Loan Agreement dated November 25,
1996. This filing is made as a precaution, in case any of the Collateral is
deemed to be fixtures
See Exhibit "A" attached hereto and made a part hereof
The item(s) of Collateral are to become fixtures on REAL ESTATE
LOCATED AT 26836 County Road 12A, Esparto, California 95627,
County of Yolo. (Described real estate); See Exhibit "B" attached
hereto and made a part hereof.
TOGETHER WITH ALL REPLACEMENTS, PARTS, REPAIRS,
ADDITIONS, ACCESSIONS AND ACCESSORIES
INCORPORATED THEREIN OR AFFIXED OR ATTACHED
THERETO AND ANY AND ALL PROCEEDS OF THE
FOREGOING, INCLUDING WITHOUT LIMITATION,
INSURANCE RECOVERIES.
And the financing statement is to be filed in the real estate records
The name of the record owner is: R.H. Phillips, Inc.
4A. Assignee of Secured
Party if any
4b. Address of Assignee:
This statement is filed without the Debtor's signature to perfect a
security interest in collateral. (Check [x] if so)
[ ] already subject to a security interest in another jurisdiction when it
was brought into this state.
[ ] which is proceeds of the original collateral described above in which
a security interest was perfected:
Check [x] if covered: [x] Proceeds of collateral are also covered [ ]
Products of collateral are also covered.
Filed with: County Real Estate Filing Officer Yolo County CA
R.H. Phillips, Inc. U.S. BANCORP LEASING &
FINANCIAL
By: //s// Robert Moore
By:______________________________
Robert Moore, Document Specialist
Chief Financial Officer
Signature(s) of Debtors Signature(s) of Secured Party(ies)
STANDARD FORM - FORM UCC-1.
Return to:
U.S. BANCORP LEASING & FINANCIAL
ATTEN, COLLATERAL REVIEW DEPT.
825 N.E. MULTNOMAH, SUITE 800
PORTLAND, OREGON 97232
RE: LEASE#
<PAGE> 8
INSURANCE AUTHORIZATION
To: George Peterson [Agent]
239 w. Court St. Suite A [Street Address]
Woodland, CA 95695 [City, State, Zip]
916 668-2777 [Phone]
From: R.H. Phillips, Inc.
26836 County Road 12A
Esparto, California 95627
In connection with one or more financing arrangements (the
"Transactions") between ourselves and U.S. BANCORP LEASING &
FINANCIAL (USBLF), you are hereby authorized to issue a certificate
of insurance naming U.S. BANCORP LEASING & FINANCIAL OR
ASSIGNEE THEREOF as Additional Insured and as Loss Payee as its
interest may appear
Property Cost: $1,700,000.00;
With respect to physical damage coverage, please describe USBLF's
interest as follows:
"Certificate Holder is an Additional Insured and Loss Payee
with regard to all equipment financed or leased by Policy Holder
through or from Certificate Holder."
The required coverage is to be as provided in the Transaction,
including, without limitation, fire, extended coverage, vandalism, theft
and general liability.
We understand that if such certificate is not provided, U.S. BANCORP
LEASING & FINANCIAL has the right under the Transactions to
purchase such insurance at our expense.
R.H. Phillips, Inc.
By: //s// Robert Moore
Robert Moore
Chief Financial Officer
0273.896 ADDRESS FOR ALL NOTICES:
825 N.E. Multnomah, Suite 800
Portland, OR 97232
<PAGE> 9
EQUIPMENT ACCEPTANCE AND
AUTHORIZATION TO PAY PROCEEDS
AND LOAN AMENDMENT
[AS IS - WHERE IS]
Loan Transaction
Number
To: U.S. BANCORP LEASING & FINANCIAL
Re: Schedule to Master Loan Agreement Dated as of ___________
(the "Agreement") between U.S. BANCORP LEASING &
FINANCIAL, as Secured Party, and R.H. Phillips, Inc., Debtor.
YOU ARE HEREBY AUTHORIZED to disburse the proceeds
of the loan evidenced by the Agreement as follows for the purchase of
the personal property specified (the "Collateral"):
$1,700,000.00 U.S. Bank of California
See Exhibit "A" attached hereto and made a part thereof
TOTAL AMOUNT TO BE DISBURSED - $1,700,000.00
YOU ARE HEREBY FURTHER AUTHORIZED to insert in
the Agreement the date of disbursement of funds under this
Authorization as the Effective Date of the Agreement.
WE HEREBY CERTIFY AND ACKNOWLEDGE FOR THE
BENEFIT OF SECURED PARTY THAT: a) although the Collateral
has not been delivered to us, we hereby accept the Collateral on an
"AS-IS, WHERE-IS" basis for all purposes as of the date hereof; b)
upon the disbursement of the proceeds of the loan as set forth above,
the Secured Party will have fully and satisfactorily satisfied all its
obligations under the Agreement; c) any and all conditions to the
effectiveness of the Agreement or to our obligations under the
Agreement have been satisfied; d) we have no defenses, set-offs or
counterclaims to any such obligations; and e) the Agreement is in full
force and effect.
WE HEREBY REPRESENT AND WARRANT FOR THE
BENEFIT OF SECURED PARTY THAT: a) any right we may have
now or in the future to reject the Collateral or to revoke or acceptance
thereof has terminated as of the date hereof; b) we hereby waive any
such right by the execution hereof; c) the date of this Authorization is
the earliest date upon which the certifications, acknowledgments,
representations and warranties made herein could be correctly and
properly made. We hereby acknowledge that the Secured Party is
relying on this Authorization as a condition to disbursing the proceeds
of the loan as set forth above.
IN WITNESS WHEREOF, we have executed this
Authorization as of the _________ day of ____________, 19____.
SIGN, DATE AND RETURN TO:
R.H. Phillips, Inc.
U.S. BANCORP LEASING & FINANCIAL
825 N.E. Multnomah, Suite 800
Portland, Oregon 97232
By: //s// Robert
Moore Robert Moore
Chief Financial Officer
0243.296 ADDRESS FOR ALL NOTICES:
825 N.E. Multnomah, Suite 800
Portland, OR 97232
<PAGE> 10
CORPORATE RESOLUTION
(LEASE / LOAN)
I HEREBY CERTIFY to and for the benefit of U.S. BANCORP
LEASING & FINANCIAL ("USBLF") that; a) I am the duly elected
qualified and currently serving _________ Secretary of R.H. Phillips,
Inc., a corporation organized under the laws of the State of California
(the "Corporation"); b) I am authorized to execute this Certificate; c)
the following is a true and correct copy of certain Resolutions duly
adopted by the Board of Directors of the Corporation; d) I have placed
a copy of such Resolutions in the official records of the Corporation; e)
such Resolutions have not been rescinded, amended or otherwise
altered or affected or repealed; f) such Resolutions are now in full force
and effect; and, g) there is no provision of the corporate charter and/or
Certificate of Incorporation o the By-laws of the Corporation limiting
the power of the Board of Directors to adopt such Resolutions and that
such Resolutions are in full conformity therewith.
RESOLVED:
That the Corporation from time to time leases personal property from
USBLF and/or borrows money or obtain credit from time to time from
USBLF, and that the entire amount of borrowing or credit under this
resolution at any one time, whether direct or indirect, absolute or
contingent, shall be unlimited.
RESOLVED:
That any one of the following persons:
Chief Financial Officer
is hereby authorized to borrow money and to obtain credit and other
financial accommodations (including the leasing of personal property)
for the Corporation on such terms as may seem to them advisable; and
to execute and deliver on behalf of the Corporation, and affix the seal
of the Corporation to, any and all documentation required in
connection therewith in such form and containing such terms and
conditions as the officer(s) executing such documents shall approve as
being advisable and proper and in the best interests of the Corporation;
and that the execution thereof by such officer(s) shall be conclusive
evidence of such approval; and, as security for the Corporation's
obligations to USBLF, to pledge, assign, transfer, mortgage, grant a
security interest in, hypothecate, or otherwise encumber any and all
property of the Corporation whether tangible or intangible property of
the Corporation with full authority to endorse or guarantee the same in
the name of the Corporation; and to execute and deliver all instruments
of assignment and transfer and to affix the corporate seal; and to
discount any bills receivable or other negotiable paper held by the
Corporation with full authority to endorse the same n the name of the
Corporation;
RESOLVED:
That the officers of the Corporation are hereby further authorized to
take any and all such other actions as may be necessary to carry out the
intent and purposes of the foregoing Resolutions, and that any and all
actions taken by such officers to carry out such intent and purposes
prior to the adoption of these Resolutions are hereby ratified and
confirmed by, and adopted as the action of, the Board of Directors of
the Corporation;
RESOLVED:
That this resolution shall constitute a continuing authority to the
designated person or persons to act on behalf of the Corporation, and
the powers and authority granted herein shall continue until revoked by
the Corporation, and formal written notice of such revocation shall
have been given to USBLF. This resolution does not supersede similar
prior resolutions given to USBLF or any entity related to or affiliated
therewith.
0110.396 ADDRESS FOR ALL NOTICES:
825 N.E. Multnomah, Suite 800
Portland, OR 97232
<PAGE> 11
RESOLVED:
That any officer of the Corporation is hereby authorized to certify to
USBLF the foregoing Resolutions, and that the provisions thereof are
in conformity with the corporate charter and/or Certificate of
incorporation and the By-laws of the Corporation.
I HEREBY FURTHER CERTIFY that pursuant to the corporate
charter and/or Certificate of Incorporation and the By-laws of the
Corporation, and any other appropriate documents of the Corporation
as may be necessary, the following named person(s) have been properly
designated and appointed to the office(s) indicated below, that such
person(s) continue to hold such office(s) at the time of execution of the
documentation for the transaction(s) with USBLF, and that the
signature(s) of such person(s) shown below are genuine.
OFFICE NAME SIGNATURE
Chief Financial Officer Robert Moore //s// Robert Moore
__________Secretary //s// Robert Moore //s// Robert Moore
I HEREBY FURTHER CERTIFY that, pursuant to the corporate
charter and/or Certificate of Incorporation and By-laws of the
Corporation, and any other appropriate documents of the Corporation
as may be necessary, I have the power and authority to execute this
Certificate on behalf of the Corporation, and that I have so executed
this Certificate on the 13th day of Dec., 1996.
By: //s// Robert Moore
________ Secretary
*If the certifying officer is authorized to sign alone, this resolution must
also be certified by a Director.
I, Lane Giguiere, a Director of the Corporation, hereby certify as
follows:
1. That I am duly qualified and acting Director of the Corporation.
2. That Robert Moore is the duly elected, qualified and acting _______
Secretary of the Corporation; and that such person has duly and with
lawful corporate power and authority, executed and sealed the above
Certificate on behalf of the Corporation; and that the statements
contained in such Certificate are true and accurate in all respects.
By: //s// Lane Giguiere
Director
0110.396 ADDRESS FOR ALL NOTICES:
825 N.E. Multnomah, Suite 800
Portland, OR 97232
<PAGE> 12
Exhibit "A"
Mueller;
Insulated Wine Tanks as described;
Ten (10) 25,000 Gallon, s/n's 1758944, 1758946, 1758948, 1758949,
17589410, 1758941, 1758942, 1758943, 1758945, 1758947
Twelve (12) 6,000 Gallon, s/n's 1758941, 1759942, 1759943,
1759944, 1759945, 1759946, 17589412, 17589413, 17589421,
17589422, 17589423, 17589424
One (1) 12,000 Gallon, s/n 17589413
One (1) 18,000 Gallon, s/n 17589414
Two (2) 50,000 Gallon, s/n's 1777661, 1777662
P & L Specialties;
One (1) 8' X 30' SS Grape Receiving Hopper with inclined conveyor,
s/n __________
FP Packaging, Invoice #55553 dated 8/7/96;
One (1) Diemme AR320 32000 Litre Tank Press, s/n ___________
RLS Equipment Co.,
One (1) AMOS Destemmer, s/n __________
One (1) Kiesel Progressive Cavity Pump, s/n ___________
Les Tonnelleries De Bourgogne;
Eighty (80) 228 Liter Bordeaux Export Barrels, Allier Oak Medium
Toast
Lafitte Tonnellerie D'Art;
Twenty (2) 225 Liter Bordeaux Export Barrels, Medium Toast
One Hundred (100) 225 Liter Bordeaux Export Barrels, Medium +
Toast
Tonnellerie Mercier;
Three Hundred (300) 225 Liter French Oak Barrels, Bordeaux Export
Style (190 Allier Medium toast, 110 Allier Medium Toast +)
Eight (8) 500 Liter French Oak Barrels (6 Allier Medium Toast+, 2
Allier Medium Toast)
Tonnellerie Francaise;
Ten (10) 225 Liter T/F Trpt Cen MT TH Barrels
Ten (10) 225 Liter T/F AO MO MT TH Barrels
Ten (10) 225 Liter T/F AO VA MT TH Barrels
0110.396 ADDRESS FOR ALL NOTICES:
825 N.E. Multnomah, Suite 800
Portland, OR 97232
<PAGE> 13
Ten (10) 225 Liter T/F AO PA MT TH Barrels
Ten (10) 225 Liter T/F OO MT TH Barrels
Two (2) 225 Liter T/F Trpt AO Tight MT TH Barrels
Two (2) 225 Liter T/F Trpt AO Tight HT TH Barrels
Two (2) 225 Liter T/F Trpt AO Loose MT TH Barrels
Two (2) 225 Liter T/F Trpt AO Loose HT TH Barrels
Eighty (80) 225 Liter T/F Trpt AO PA MT+ TH Barrels
Eighty-Two (82) 225 Liter TRPT AO MO MT+TH Barrels
The Boswell Company;
Ten (10) Mendocino American Oak Barrels
Seguin Moreau Nap Cooperage;
Thirty (30) Bordeaux Export American Oak
Medium Toast w/TH Barrels
Twenty (20) Bordeaux Export American Oak
Medium + Toast w/TH
World Cooperage Co.
Eighty-Six (86) 59 Gallon A/O Medium Toast + Barrels
One Hundred (100) 59 Gallon A/O Medium Toast Barrels
Sixty (60) 59 Gallon A/O Medium Toast Barrels
Forty (40) 59 Gallon A/O Medium Toast + Barrels
Fourteen (14) 59 Gallon A/O Medium Toast + Barrels
Demptos
One (1) 112 Liter Bordeaux Allier Oak Barrel
One Hundred Fifty (150) Napa 225 Liter 90cm
Export American Oak Barrels
Seventy (70) Napa 225 Liter 90cm Export
American Oak Barrels
Sixty (60) Bordeaux 225 Liter 95cm Export Center
of France Barrels
Ten (10) Bordeaux 225 Liter 95cm Export Center
of France Barrels
Each of the above units are complete as equipped
Including, but not limited to, all attachments,
accessories and replacements relating thereto.
R.H. Phillips, Inc.
//s// Robert Moore
Robert Moore
Chief Financial Officer
0232.596 ADDRESS FOR ALL NOTICES:
825 N.E. Multnomah, Suite 800
Portland, OR 97232
The Board of Directors
R.H. Phillips, Inc.
We consent to incorporation by reference in the post-effective
amendment no. 2 on Form S-3 to the registration statement (No.
33-83914-LA) on Form SB-2 and in the registration statement (No.
33-93654) on Form S-8 of R.H. Phillips, Inc. of our report dated
March 5, 1997, relating to the balance sheet of R.H. Phillips, Inc. as
of December 31, 1996, and the related statements of operations,
shareholders' equity, and cash flows for each of the years in the two
year period ended December 31, 1996, which report appears in the
December 31, 1996, annual report on Form 10-KSB of R.H.
Phillips, Inc.
KPMG Peat Marwick LLP
Sacramento, California
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE DECEMBER 31, 1996 BALANCE SHEET, STATEMENT OF OPERATIONS
AND STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Dec-31-1996
<CASH> 308535
<SECURITIES> 0
<RECEIVABLES> 3168276
<ALLOWANCES> 37026
<INVENTORY> 7807711
<CURRENT-ASSETS> 11719034
<PP&E> 32151176
<DEPRECIATION> 4721501
<TOTAL-ASSETS> 39929400
<CURRENT-LIABILITIES> 4702758
<BONDS> 16769476
<COMMON> 12323475
4486780
0
<OTHER-SE> 1646911
<TOTAL-LIABILITY-AND-EQUITY> 39929400
<SALES> 16928545
<TOTAL-REVENUES> 16928545
<CGS> 10135896
<TOTAL-COSTS> 10135896
<OTHER-EXPENSES> 151943
<LOSS-PROVISION> 35525
<INTEREST-EXPENSE> 861659
<INCOME-PRETAX> 1924256
<INCOME-TAX> 631000
<INCOME-CONTINUING> 1293256
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1293256
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20
</TABLE>
