<PAGE> 1
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to____________
Commission File No.: 0-26276
R.H. PHILLIPS, INC.
(Exact name of small business issuer in its charter)
California 68-0313739
- -----------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
26836 County Road 12A, Esparto, California 95627
- -----------------------------------------------------------------------
(Address of principal executive offices)
(530) 662-3215
- -----------------------------------------------------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
--- ---
Number of shares outstanding of each of the issuer's classes of common
equity as of October 31, 1998: 6,531,831
Transitional Small Business Disclosure Format: Yes No X
--- ---
This document consists of 18 pages, excluding exhibits.
The Exhibit Index is on page 18.
<PAGE> 2
R.H. PHILLIPS, INC.
INDEX
Part I. Financial Information (unaudited)
Item 1. Condensed Financial Statements .........................3
Balance Sheet ..........................................4
Statements of Operations ...............................5
Statements of Cash Flows ...............................6
Notes to Condensed Financial Statements ................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K ......................16
Signatures ...........................................................17
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<PAGE> 4
<TABLE>
R.H. PHILLIPS, INC.
BALANCE SHEET
SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT SHARE INFORMATION AND REDEMPTION PROVISION)
(UNAUDITED)
ASSETS
<S> <C>
CURRENT ASSETS:
Cash $ 139
Accounts receivable 3,010
Inventories 12,946
Deferred income taxes and prepaid expenses 651
-------
Total current assets 16,746
PROPERTY, PLANT, AND EQUIPMENT - net 32,895
OTHER ASSETS:
Note receivable from shareholders
and other affiliates 228
Deferred loan fees and other, net 433
-------
Total other assets 661
-------
TOTAL ASSETS $50,302
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 1,565
Accounts payable 1,439
Accrued liabilities 1,336
-------
Total current liabilities 4,340
LONG-TERM DEBT 22,092
DEFERRED INCOME TAXES 1,410
DEFERRED GAIN AND VINEYARD DEVELOPMENT COSTS 384
COMMITMENTS AND CONTINGENCIES --
REDEEMABLE PREFERRED STOCK,
redeemable at $5,000,000 4,543
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, 6,531,831 shares issued
and outstanding 14,342
Additional paid-in capital 337
Retained earnings 2,854
-------
Total shareholders' equity 17,533
-------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $50,302
=======
</TABLE>
[FN]
See accompanying notes to financial statements
<PAGE> 5
<TABLE>
R.H. PHILLIPS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(UNAUDITED)
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
----------------- ------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 12,002 $ 14,810 $ 4,333 $ 5,156
COST OF SALES 7,080 7,373 2,625 2,432
-------- -------- -------- --------
GROSS PROFIT 4,922 7,437 1,708 2,724
SELLING EXPENSES 2,251 3,423 721 1,205
GENERAL AND ADMINISTRATIVE
EXPENSES 678 735 214 250
-------- -------- -------- --------
OPERATING INCOME 1,993 3,279 773 1,269
INTEREST EXPENSE (682) (901) (209) (338)
OTHER INCOME (EXPENSE) - NET 72 (29) 66 (111)
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 1,383 2,349 630 820
PROVISION FOR INCOME TAXES (498) (945) (227) (330)
-------- -------- -------- --------
NET INCOME $ 885 $ 1,404 $ 403 $ 490
======== ======== ======== ========
NET INCOME $ 885 $ 1,404 $ 403 $ 490
DIVIDENDS AND ACCRETION ON
REDEEMABLE PREFERRED STOCK (252) (256) (85) (86)
-------- -------- -------- --------
NET INCOME APPLICABLE TO
COMMON STOCK $ 633 $ 1,148 $ 318 $ 404
======== ======== ======== ========
NET INCOME PER SHARE -
BASIC AND DILUTED $ .10 $ .18 $ .05 $ .06
WEIGHTED AVERAGE COMMON
SHARES AND DILUTIVE
POTENTIAL SHARES OUTSTANDING:
- BASIC 6,379,736 6,531,831 6,531,748 6,531,831
- DILUTED 6,380,386 6,532,381 6,537,597 6,533,030
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE> 6
<TABLE>
R.H. PHILLIPS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
----------------- ------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 885 $ 1,404 $ 403 $ 490
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,340 1,570 461 577
(Gain) loss on disposal of property,
plant and equipment 59 136 2 147
Net changes in assets and liabilities:
Accounts receivable 672 (497) 239 (179)
Inventories (1,844) (3,018) (1,616) (1,866)
Prepaid expenses (93) 195 (84) 35
Other assets 18 (42) -- 7
Accounts payable and accrued
liabilities 271 1,107 1,248 75
-------- -------- -------- --------
Net cash provided by (used in)
operating activities 1,308 855 653 (714)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (6,547) (5,658) (2,055) (2,468)
Proceeds from property, plant and
equipment sold 5,402 14 8 --
-------- -------- -------- --------
Net cash used in investing activities (1,145) (5,644) (2,047) (2,468)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of cash dividend (300) (300) (150) (150)
Proceeds from long-term debt
and notes payable 13,523 13,868 4,405 6,580
Principal payments on long-term debt
and notes payable (13,201) (8,237) (2,548) (3,133)
Payments for development of leased
vineyards (464) (508) (464) (193)
Other financing activities (7) (4) (70) --
-------- -------- -------- --------
Net cash provided by (used in)
financing activities (449) 4,819 1,173 3,104
-------- -------- -------- --------
INCREASE (DECREASE) IN CASH (286) 30 (221) (78)
CASH AT BEGINNING OF PERIOD 308 109 243 217
-------- -------- -------- --------
CASH AT END OF PERIOD $ 22 $ 139 $ 22 $ 139
======== ======== ======== ========
OTHER CASH FLOW INFORMATION:
Interest paid (including capitalized
interest of $450 and $350 during the
nine months ended September 30,
1997 and 1998, respectively) $ 1,025 $ 1,172 $ 318 $ 492
Income tax paid $ 551 $ 726 $ 2 $ 413
NONCASH TRANSACTIONS:
Issuance of notes payable to finance
inventory, property, plant and
equipment purchased $ 478 $ 4 $ 396 $ --
Issuance of stock dividend $ 300 $ 300 $ 150 $ 150
Accretion of redeemable preferred stock $ 27 $ 31 $ 9 $ 11
Conversion of subordinated debt into
common stock $ 1,395 $ -- $ 1,395 $ --
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE> 7
R.H. PHILLIPS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The interim financial statements as of September
30, 1998 and for each of the nine and three month periods
ended September 30, 1997 and 1998 have been prepared
by R.H. Phillips, Inc. (the "Company"), and are
unaudited. In the opinion of management, the financial
statements include all adjustments (which include only
normal recurring entries) necessary for a fair presentation.
The operating results for the nine and three month periods
ended September 30, 1997 and 1998 are not necessarily
indicative of the results which might be realized for the
full year. Certain information and footnote disclosures
normally included in annual financial statements prepared
in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to
generally accepted accounting principles applicable for
interim periods. These statements should be read in
conjunction with the financial statements and notes
included in the Company's Annual Report on Form 10-
KSB for the fiscal year ended December 31, 1997.
2. COMPUTATION OF NET INCOME PER SHARE
The Company has adopted Statement of
Financial Accounting Standards No. 128, which requires
the presentation of basic and diluted net income per share.
Basic net income per share for the nine and three month
periods ended September 30, 1997 and 1998 was
computed using the weighted average number of common
shares outstanding during each period. Diluted net
income per share was computed using the weighted
average number of common shares and dilutive potential
common shares outstanding during each period. Dilutive
potential common shares outstanding totaled 550 and
1,199 for the nine and three month periods ended
September 30, 1998, respectively. Potential common
shares outstanding which could have a dilutive effect in
the future, but were anti-dilutive for the nine and three
month periods ended September 30, 1998, totaled
2,773,013 and 2,772,364, respectively. Basic and diluted
net income per share and the weighted average number of
common shares outstanding for the nine and three month
periods ended September 30, 1997 have been restated to
reflect stock dividends of 50,578 shares issued in March
1998 and 48,071 shares issued in September 1998.
3. RECENT PRONOUNCEMENTS
The Company has adopted Statement of
Financial Accounting Standards No. 130, which
establishes standards for the reporting and display of
comprehensive income and its components.
Comprehensive income includes revenues, expenses, gains
and losses that are excluded from net income under
current accounting standards. Comprehensive income and
net income are the same for each of the nine and three
month periods ending September 30, 1997 and 1998.
4. LONG-TERM DEBT
The Company obtained three long-term loans
totaling $1,365,000 from General Electric Capital
Corporation during the nine month period ended
September 30, 1998. The loans bear interest at annual
rates of 7.73%, 7.68% and 7.44%. The loans are
collateralized by equipment, and principal and interest are
due in 60 monthly installments.
<PAGE> 8
5. IMPAIRED ASSETS
In October 1998 the Company determined that
23 acres of vineyard were producing crop of unacceptable
quality. Consequently, the Company removed the
grapevines in the vineyard and plans to replace them with
a varietal more suitable to the vineyard's growing
conditions and trellis system. Accordingly, in September
1998 the Company recorded an impairment loss of
$146,000 which is included in other income (expense) -
net.
<PAGE> 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
In reviewing the following management's
discussion and analysis, the reader should refer to the
historical financial statements of 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.
All numbers are approximate.
Forward-Looking Statements
The Company provides in this report and
elsewhere from time to time forward-looking statements
regarding the Company, its products, the wine business,
and general business and economic conditions. Examples
of forward-looking statements include projections
regarding future expansion, trends in the wine industry,
sources of supply, costs of production, profit margins,
and availability and sources of financing. The actual
results of the Company may vary due to a variety of
factors, including the following:
Availability of Future Financing. The
Company may continue to heavily depend upon its ability
to raise additional debt or equity financing for its working
capital and capital expansion needs. 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 financing sources, and general
economic conditions. If interest rates increase or other
financing becomes unavailable or more costly to obtain,
the Company may not be able to raise sufficient capital to
supply its needs.
Costs of Expansion. Management has based its
assumptions concerning the costs of expansion on
assumptions which it believes are reasonable. However,
there can be no assurance that the Company's estimates
will prove to be correct. If costs are higher than
anticipated, the Company may be required to raise an
even greater amount of financing or reduce the rate of
expansion.
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 the cost and
availability of bulk wine and grapes from the spot market.
For example, if 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. 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
management's beliefs 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 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.
Other Factors. A variety of other factors could
affect the actual results of the Company. These include
changes in economic conditions, unexpected adverse weather
or growing conditions, reduction or increases in consumer
demand, changes in governmental regulation concerning the
production and sale of wine, and increased competition from
foreign or domestic wine producers.
<PAGE> 10
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. The Company's expenditures
fluctuate throughout the year based on vineyard and winery
activities. Expenditures typically peak during the summer
and early autumn.
Costs of Production
The Company realized above average yields
from its 1997 crop, primarily due to favorable growing
conditions and yields from new vineyards. The increased
1997 grape tonnage reduced the cost per gallon of wine
produced from Company vineyards. Management
believes that the higher yields will reduce the Company's
cost of goods as the 1997 vintage is sold.
The 1998 California grape growing season was
adversely affected by unusual weather patterns, including
a wet, cool spring and rains during harvest. However, the
Company harvested approximately 7,500 tons of grapes
from its vineyards, an increase of 46% over the 1997
harvest. The increase is primarily due to production from
recently planted vineyards. Management believes that the
higher grape production will further reduce the cost of
goods, and that the full benefit of the vineyard expansion
should continue to be realized over the next several years
as the vines mature.
Results of Operations
Net Sales
Net sales for the nine month period ended
September 30, 1998 were $14,810,000, a 23% increase
over net sales of $12,002,000 for the corresponding
period of the prior year. Net sales included sales of bulk
wines and other items totaling $776,000 for the nine
month period ended September 30, 1998, compared to
$896,000 for the corresponding period in 1997. The
increase in net sales was primarily due to a greater
proportion of higher priced, super premium wines, and
price increases. These factors resulted in an average
selling price per case of $51.12 for the nine month period
ended September 30, 1998, compared to $43.16 for the
same period in 1997. Higher sales volumes also
contributed to the increase in net sales. The Company
sold 275,000 cases during the nine month period ended
September 30, 1998, compared to 257,000 in the
corresponding period of the prior year.
Gross profit
Gross profit was $7,437,000 for the nine month
period ended September 30, 1998, a 51% increase over
$4,922,000 for the same period in 1997. Excluding sales
of bulk wines and other items, gross profit was
$7,442,000 in 1998, compared to $4,754,000 in 1997.
Gross margins were 50% for the nine month period ended
September 30, 1998, compared to 41% for the same
period in 1997. The increase in 1998 gross margins is
primarily attributable to the higher average selling prices
discussed above and, to a lesser degree, to a decrease in
the average cost per case. The average cost per case for
the nine month period ended September 30, 1998 was
$24.01, compared to $24.69 for the same period in 1997.
<PAGE> 11
Selling Expenses
Selling expenses were $3,423,000, or 23% of
net sales, for the nine month period ended September 30,
1998, an increase from $2,251,000, or 19% of net sales,
for the same period in 1997. The $1,172,000 increase is
primarily due to increased sales promotion and labor
costs. Selling expenses are expected to continue to
increase in the future as the Company executes its plan to
increase sales. There can be no assurance that sales will
actually increase in the future.
General and Administrative Expenses
General and administrative expenses were
$735,000, or 5% of net sales, for the nine month period
ended September 30, 1998, compared to $678,000, or
6% of net sales, for the same period in 1997. The
$57,000 increase is primarily due to increased labor costs.
Interest Expense
Interest expense for the nine month period
ended September 30, 1998 was $901,000, compared to
$682,000 for the same period in 1997. The Company
capitalized $350,000 of additional interest pertaining to
vineyard and winery development during the nine month
period ended September 30, 1998, and $450,000 during
the same period in 1997. The Company had fewer
vineyards under development during the first nine months
of 1998 than during the same period in 1997, causing
capitalized interest to decrease. The interest is
attributable to the Company's debt obligations and bank
line of credit.
Other Income (Expense), net
Other income (expense), net for the nine month period
ended September 30, 1998 was an expense of ($29,000)
compared to income of $72,000 for the same period in 1997. The
expense consisted primarily of a $146,000 write-off
of impaired vineyards, which was partly offset by
income of $58,000 from vineyard management fees.
Net Income
The Company generated net income of
$1,404,000 for the nine month period ended September
30, 1998, compared to $885,000 for the same period in
1997. The $519,000 increase was primarily due to higher
gross profit, which was partially offset by increased
selling expenses.
Liquidity and Capital Resources
The Company has financed its working capital
and capital expansion needs through internally generated
funds, outside credit facilities, equity financing, and the
sale and leaseback of certain assets. The Company has
made substantial capital expenditures to expand its
vineyards and winery facilities, obtain production
efficiencies, and raise wine quality. The Company's cash
flows from operations 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 debt,
equity, and lease financing for its working capital and
capital expansion needs.
The Company had cash totaling $139,000 on
September 30, 1998, an increase from $109,000 on
December 31, 1997. Sources of cash during the nine
month period ended September
<PAGE> 12
30, 1998 included cash
from operations of $855,000 and proceeds from long-
term debt of $13,868,000. Cash used during that period
included $5,658,000 invested in property, plant and
equipment, $8,237,000 to repay debt, $508,000 for the
development of leased vineyards, and $300,000 to pay
cash dividends.
Current assets increased by $3,350,000 during
the nine month period ended September 30, 1998,
primarily due to an increase in inventories from
$9,928,000 on December 31, 1997 to $12,946,000 on
September 30, 1998. The increase is primarily due to
inventoried work in progress pertaining to the 1998 grape
crop. Current liabilities increased by $943,000 during the
nine month period ended September 30, 1998, primarily
due to an increase in accounts payable resulting from
seasonal expenditures. These factors caused net working
capital to increase $2,407,000, from $9,999,000 on
December 31, 1997 to $12,406,000 on September 30,
1998.
The Company has several long-term loans, the
largest of which was obtained from Metropolitan Life
Insurance Company ("Metropolitan"). The Company has
borrowed $11,000,000 from Metropolitan, of which
$10,460,000 was outstanding at September 30, 1998.
The unpaid principal under the loan accrues interest at an
annual rate of 7.79%. The interest rate is subject to
adjustment by Metropolitan every three years, beginning
on January 1, 2001. The Company is required to make
monthly principal payments of $60,000 plus accrued
interest, and the loan matures in January 2013.
The Company has a line of credit of
$10,000,000 with U.S. Bank of California ("U.S. Bank")
to finance its working capital requirements. The line of
credit is secured by accounts receivable, inventory, the
grape crop, and unencumbered farm equipment, and
matures in April 2000. The annual interest rate on the
line is either U.S. Bank's prime rate or IBOR plus 150
basis points, at the Company's option. The balance on
the line at September 30, 1998 was $8,921,000.
In addition to loans with Metropolitan and U.S.
Bank, the Company has several smaller loans, which are
generally secured by equipment, and capital leases. The
maturity dates range from May 1999 to December 2003
and, excluding capital leases, the interest rates range from
7.0% to 10.9%. The balances due on these items totaled
$4,276,000 at September 30, 1998.
In May 1997, the Company sold 371 acres of
land partially developed into vineyard to John Hancock
Mutual Life Insurance Company ("Hancock"). In
connection with the transaction, the Company now
manages, operates and leases the land and vineyards from
a subtenant of Hancock, Farmland Management Services,
for a term that expires on December 31, 2012. The
Company received proceeds of $5,384,000 from the sale.
The lease, which is accounted for as an operating lease,
provides that the Company will pay rent of $161,000 per
calendar quarter beginning in January 1999.
In March 1996, the Company sold 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 to Hancock. The
net proceeds the Company derived from the sale of the
Senior Preferred Stock and warrants, after payment of
offering expenses, were $4,785,000. The Senior
Preferred Stock bears a cumulative annual dividend of
$1.20 per share, payable semiannually. During the first
four years after issuance, 50% of the dividend is payable
in cash and 50% of the dividend is payable in shares of
Common Stock at a price equal to the lower of $4.00 or
the average daily market price over a period of 20
consecutive trading days before the dividend payment
date per share. The Company is required
<PAGE> 13
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.
The Company has invested in substantial
improvements to its winery facility and vineyards over the
past several years, and plans to continue the expansion.
The Company invested $3,905,000 in building
improvements, tanks, barrels and other winery equipment
during the nine month period ended September 30, 1998.
A new tasting room and conference facility is under
construction. The Company plans to expend an
additional $400,000 to complete the tasting room.
Additional winery expansion projects are planned for the
future to handle the increased production from the
Company's recently planted vineyards. The Company
invested $1,756,000 in farm equipment and the continued
development of recently planted vineyards during the nine
month period ended September 30, 1998, and plans to
invest an additional $783,000 during the remainder of the
year. The Company is funding 1998 capital projects with
internally generated funds and additional debt.
Phylloxera infestation and other diseases may
have a negative impact on the Company's future grape
production. Phylloxera is a root louse which feeds on
grape roots, causing reduced production and eventual
vine death. Of the Company's 1,557 acres of vineyard,
187 acres have root stock which is not resistant to
Phylloxera. Management estimates these vineyards will
be commercially productive until 2004, which is
substantially less than the twenty-five year life generally
estimated for vineyards without Phylloxera. The
Company has incurred additional expenses because of
Phylloxera, including increased depreciation and
maintenance expense. The Company is in the process of
replacing the majority of Phylloxera-infested and non-
resistant vines with rootstock believed to be resistant to
Phylloxera.
In October 1998 the Company determined that
23 acres of vineyard were producing crop of
unacceptable quality. Consequently, the Company
removed the grapevines in the vineyard and plans to
replace them with a varietal more suitable to the
vineyard's growing conditions and trellis system.
Accordingly, in September 1998 the Company recorded
an impairment loss of $146,000 which is included in other
income (expense) - net.
The Company expects that cash flows generated
from operations, together with borrowing availability,
will be adequate to fund the Company's operations,
capital expansion efforts and debt service requirements
over the next twelve months. However, a significant
decline in the Company's expected operating
performance could have a material adverse effect on the
Company's liquidity. In such case, the Company would
adjust its level of capital expenditures as necessary,
obtain additional debt financing or issue equity securities;
however, there can be no assurance that such financing
will be available and, if available, that it could be obtained
in terms favorable to the Company.
Year 2000
The Company is reviewing its potential
exposure to the "Year 2000 Problem", which results from
computer programs being written using two digits rather
than four to define the applicable year. As a result of this
problem, computer programs that are not "Year 2000
compliant" may recognize a date using "00" as the year
1900 rather than 2000. The impact of the Year 2000
Problem on the Company is difficult to assess at this time,
but the Year 2000 Problem could result in a system
failure or miscalculation causing disruptions of
operations, including a temporary inability to process
sales, send invoices, retain accurate data or engage in
normal business activities. The Year 2000 Problem
<PAGE> 14
may also affect the operations of suppliers, distributors,
vendors and others with whom the Company does
business, thereby adversely affecting the Company as
well.
The Company is conducting an assessment of its
own information technology systems and non-
information technology systems to ascertain whether they
are Year 2000 compliant. The Company is also in the
process of assessing the potential effect upon its
operations of Year 2000 Problems encountered by its
suppliers, customers, bank and others with whom it does
business. Although the Company is implementing
measures to reduce its potential exposure to the Year
2000 Problem, management believes that the problem is
so complex that it is not able to predict with any precision
the impact the Year 2000 Problem will have on the
Company.
The Company uses several information
technology systems, some of which may be affected by
the Year 2000 Problem. Management has reviewed its
critical computer systems in order to determine whether
any software requires updating or replacement, and has
determined that its primary financial and operating
software is not Year 2000 compliant. The software
supplier is modifying it for the purpose of making the
software Year 2000 compliant, and the supplier has
advised the Company that the supplier will bear the costs
of the modification. Although the supplier has informed
the Company that the software will be Year 2000
compliant by March 1999, the Company cannot be
certain that the supplier will be able to meet this deadline.
The Company has also been required by the supplier to
provide personnel to assist in the software testing
scheduled for late 1998 through early 1999. The costs
incurred by the Company in connection with this testing
will be expensed as incurred. Management does not
believe that these costs will have a material impact on the
Company's financial condition. If the supplier does not
make the software Year 2000 compliant within this time,
it may be necessary for the Company to purchase
alternate financial and operating software. The Company
believes that the cost of purchasing and installing new
financial and operating software would not have a
material impact on the Company's financial condition.
The Company is also reviewing its non-
information technology systems for potential exposure to
the Year 2000 Problem. Although the review is not
complete, management expects to complete its review
and any necessary corrections or replacements to its non-
information technology systems by early 1999. The
costs to correct or modify these systems will be expensed
as incurred, while any replacement costs will be
capitalized. Management does not believe that the total
cost of making these systems Year 2000 compliant will
be material.
Outside parties whose exposure to Year 2000
Problems may have a material impact on the Company's
operations include its bank, major customers, and major
suppliers. Management plans to review the issue with
bank representatives, and believes that the Year 2000
Problem will not materially affect the Company's banking
operations. Management believes that one or more of the
Company's customers could have their operations
interrupted or terminated by Year 2000 problems. Such
an event could result in the delay of payments to the
Company. Management believes that it would be
impractical to attempt to measure the potential risk of
such an occurrence, and that correction of Year 2000
Problems the Company's customers experience is outside
of the Company's control. Similarly, the Company's
major suppliers may experience Year 2000 Problems,
potentially delaying the shipment of necessary materials.
Management believes that it would be able to find
alternate suppliers should this occur.
The costs of the project and the date on which
the Company believes it will complete the Year 2000
modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of
future events, including the continued availability of
certain resources
<PAGE> 15
and other factors. However, there can
be no guarantee that these estimates will be achieved and
actual results could differ materially from those
anticipated. Specific factors that might cause such
material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes,
and similar uncertainties.
<PAGE> 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this
report to the signed on its behalf by the undersigned,
thereunto duly authorized.
R.H. PHILLIPS, INC.
(Registrant)
Date: November 12, 1998
By//s//John E. Giguiere
_________________________________
John E. Giguiere, Co-President
Co-Chief Executive Officer
By//s//Michael J. Motroni
__________________________________
Michael J. Motroni, Chief Financial Officer
Principal Financial Officer
<PAGE> 18
EXHIBIT INDEX
Exhibit No. Description
27.1 Financial Data Schedules
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE SEPTEMBER 30, 1998 BALANCE SHEET, STATEMENTS OF OPERATIONS
AND STATEMENTS OF CASH FLOWS, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<S> <C>
<CASH> 139
<SECURITIES> 0
<RECEIVABLES> 3,054
<ALLOWANCES> 44
<INVENTORY> 12,946
<CURRENT-ASSETS> 16,746
<PP&E> 40,232
<DEPRECIATION> 7,337
<TOTAL-ASSETS> 50,302
<CURRENT-LIABILITIES> 4,340
<BONDS> 22,092
<COMMON> 14,342
4,543
0
<OTHER-SE> 3,191
<TOTAL-LIABILITY-AND-EQUITY> 50,302
<SALES> 14,810
<TOTAL-REVENUES> 14,810
<CGS> 7,373
<TOTAL-COSTS> 7,373
<OTHER-EXPENSES> 29
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 901
<INCOME-PRETAX> 2,349
<INCOME-TAX> 945
<INCOME-CONTINUING> 1,404
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,404
<EPS-PRIMARY> .18
<EPS-DILUTED> .06
</TABLE>
