<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 March 31, 2000
[ ] 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
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(Address of principal executive offices)
(530) 662-3215
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
--- ---
Number of shares outstanding of each of the issuer's classes of
common equity as of May 1, 2000: 6,695,331
Transitional Small Business Disclosure Format: Yes No X
--- ---
This document consists of 16 pages, excluding exhibits. The Exhibit
Index is on page 16.
<PAGE> 2
R.H. PHILLIPS, INC.
INDEX
Part I. Financial Information
Item 1. Financial Statements..................................3
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.....................14
Signatures ......................................................15
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<PAGE> 4
<TABLE>
<CAPTION>
R.H. Phillips, Inc.
Balance Sheet
(In thousands, except share information)
March
31, 2000
(Unaudited)
<S> <C>
Assets
Current assets:
Cash $ 105
Accounts receivable 4,681
Inventories 18,445
Prepaid expenses and other current assets 1,298
-------
Total current assets 24,529
Property, plant and equipment, net 37,448
Other assets 726
-------
$62,703
=======
Liabilities and shareholders' equity
Current liabilities:
Current maturities of long-term debt $ 2,324
Accounts payable 679
Accrued payroll and related 399
Accrued selling expenses 677
Accrued income taxes 394
Other accrued liabilities 395
-------
Total current liabilities 4,868
Long-term debt 29,316
Subordinated debt 4,615
Deferred income taxes 2,670
Deferred gain and vineyard development costs 15
Commitments and contingencies
Shareholders' equity:
Non-redeemable preferred stock, no par value,
5,000,000 shares authorized, none issued
and outstanding --
Common stock, no par value, 12,500,000 shares
authorized, 6,695,331 shares issued and outstanding 14,808 14,808
Additional paid-in capital 337
Retained earnings 6,074
-------
Total shareholders' equity 21,219
-------
$62,703
=======
</TABLE>
[FN]
See accompanying notes.
<PAGE> 5
<TABLE>
<CAPTION>
R.H. Phillips, Inc.
Statements of Income
(In thousands, except share information)
Three months ended
March 31,
---------
2000 1999
---- ----
<S> <C> <C>
Net sales $7,061 $5,001
Cost of sales 3,350 2,338
------ ------
Gross profit 3,711 2,663
Selling expenses 1,780 1,311
General and administrative expenses 305 260
------ ------
Operating income 1,626 1,092
Interest expense (667) (378)
Other income, net 25 63
------ ------
Income before provision for income taxes 984 777
Provision for income taxes (396) (313)
------ ------
Net income and comprehensive income $ 588 $ 464
====== ======
Net income and comprehensive income $ 588 $ 464
Accretion on Redeemable Preferred Stock (5) (85)
------ ------
Net income applicable to Common Shareholders $ 583 $ 379
====== ======
Net income per share - basic and diluted $ .09 $ .06
====== ======
Shares used in per share calculations:
- Basic 6,690,257 6,689,175
- Diluted 6,690,257 6,689,175
</TABLE>
[FN]
See accompanying notes.
<PAGE> 6
<TABLE>
<CAPTION>
R.H. Phillips, Inc.
Statements of Cash Flows
(In thousands)
Three months
ended
March 31,
---------
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income and comprehensive income $ 588 $ 464
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 856 669
Gain on disposal of property, plant and equipment (1) --
Net changes in assets and liabilities:
Accounts receivable (559) 174
Inventories (980) (655)
Prepaid expenses and other current assets (89) (187)
Other assets (14) (21)
Accounts payable (913) 23
Accrued payroll and related 6 (97)
Accrued selling expenses (77) 67
Accrued income taxes 253 318
Other accrued liabilities (20) 27
------ ------
Net cash provided by (used in) operating activities (950) 782
Cash flows from investing activities:
Purchase of property, plant and equipment (933) (1,247)
Proceeds from sale of property, plant and equipment 6 --
------ ------
Net cash used in investing activities (927) (1,247)
Cash flows from financing activities:
Cash dividends paid -- (150)
Proceeds from long-term debt 4,549 3,243
Principal payments on long-term debt (2,846) (2,444)
Other financing activities, net 16 (109)
------ ------
Net cash provided by financing activities 1,719 540
------ ------
Increase (decrease) in cash (158) 75
Cash at beginning of period 263 151 151
------ ------
Cash at end of period $ 105 $ 226
====== ======
Other cash flow information:
Interest paid (including capitalized interest of
$18 and $85 in 2000 and 1999, respectively) $ 729 $ 432
Income taxes paid $ 143 --
Noncash transactions:
Issuance of stock dividend $ 150 $ 150
Accretion of redeemable preferred stock $ 5 $ 10
Conversion of preferred stock to subordinated debt $2,306 $2,281
</TABLE>
[FN]
See accompanying notes.
<PAGE> 7
R.H. Phillips, Inc.
Notes to Financial Statements
March 31, 2000
1. Summary of Significant Accounting Policies
The interim financial statements as of March 31, 2000 and for each of the
three month periods ended March 31, 2000 and 1999 have been
prepared by R.H. Phillips, Inc. ("R.H. Phillips"), 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 three month periods
ended March 31, 2000 and 1999 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 R.H. Phillips' Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1999.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
2. Computation of Net Income per Share
Basic net income per share for the three month periods ended March 31,
2000 and 1999 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. There were no dilutive potential common shares outstanding for
the three month period ended March 31, 2000. Potential common
shares outstanding which could have a dilutive effect in the future but
were anti-dilutive for the three month period ended March 31, 2000
totaled 2,229,437. Basic and diluted net income per share and the
weighted average number of common shares outstanding for the three
month period ended March 31, 1999 have been restated to reflect stock
dividends of 50,578 shares issued in September 1999 and 56,038 shares
issued in March 2000.
3. Subordinated Debt and Preferred Stock
In March 2000, R.H. Phillips exchanged, at par, 250,000 shares of
Redeemable Exchangeable Preferred Stock for unsecured subordinated
debt with a principal amount of $2,500,000. The subordinated debt
carries an annual interest rate of 14%, payable semiannually, and R.H.
Phillips has the option to pay the principal after March 15, 2001. R.H.
Phillips is required to make principal payments, including principal
previously owed, of $1,666,666 in 2004, $1,666,667 in 2005 and
$1,666,667 in 2006.
4. Litigation
Phillips Farms, a partnership operating a winery in Lodi, California, filed
a lawsuit against R.H. Phillips on August 5, 1999 in the Superior Court
of the State of California, County of San Joaquin. Phillips Farms is suing
R.H. Phillips for trademark infringement, dilution and unfair competition
arising out of R.H. Phillips' use of the name "Phillips" in connection with
the sale of wine. Phillips Farms also alleges that R.H. Phillips has
<PAGE> 8
publicly disparaged the quality of the wine Phillips Farms sells. Phillips
Farms is seeking damages in an amount to be determined by the court at trial,
but in no event less than $500,000, and a preliminary and permanent
injunction prohibiting R.H. Phillips' use of any infringing trademarks
among other relief.
R.H. Phillips believes that it has meritorious defenses to the claims of
Phillips Farms and also has legal claims against Phillips Farms. On
October 4, 1999, R.H. Phillips filed a cross complaint against Phillips
Farms for infringement of R.H. Phillips' trademarks and trade dress,
among other actions. If Phillips Farms is successful in its suit, R.H.
Phillips could be required to cease use of the "R.H. Phillips" trademarks,
which could have an adverse effect upon the business and financial
condition of R.H. Phillips.
<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
R.H. Phillips provides in this report and elsewhere from time to
time forward-looking statements regarding R.H. Phillips, 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 R.H. Phillips may vary due to a variety of factors,
including the following:
Availability of Future Financing. R.H. Phillips 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 R.H. Phillips. 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, R.H. Phillips 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 R.H. Phillips'
estimates will prove to be correct. If costs are higher than anticipated,
R.H. Phillips may be required to raise an even greater amount of
financing or reduce the rate of expansion.
Costs of Production. Statements with respect to R.H. Phillips'
general cost of production are based on management's assumptions
concerning the likely levels of future sales by R.H. Phillips, projected
yields from R.H. Phillips' vineyards and the cost and availability of bulk
wine and grapes. For example, if R.H. Phillips' sales increase at a faster
rate than anticipated or R.H. Phillips' grape production is lower than
projected, R.H. Phillips could be forced to make additional purchases of
grapes and wine on the spot market. Management believes that such
events could increase R.H. Phillips' 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 R.H. Phillips 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 R.H. Phillips. 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.
Seasonality
R.H. Phillips 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
<PAGE> 10
during the last three months of each year. R.H. Phillips' expenditures
fluctuate throughout the year based on vineyard and winery activities.
Expenditures typically peak during the summer and early autumn.
Costs of Production
R.H. Phillips' vineyards produced 9,500 tons of grapes in 1999,
compared to 7,700 tons in 1998. The increase was primarily due to
production from vineyards planted in recent years. R.H. Phillips has
expanded the size of its vineyards to lessen its dependence on outside
sources of bulk wines and grapes and reduce its wine costs.
Management anticipates that the full benefit of the vineyard expansion
should continue to be realized over the next several years as the vines
mature.
R.H. Phillips has increased production of its super premium wines
over the past few years. Although these products are sold at a higher
price than R.H. Phillips' other wines, they also cost more to produce due
to higher packaging costs and longer aging. The production and sale of
super premium wines is expected to increase in the future, and these
products are expected to become a larger portion of R.H. Phillips'
product mix.
Results of Operations
Net Sales
Net sales for the three month period ended March 31, 2000
were $7,061,000, an 41% increase over net sales of $5,001,000 for the
corresponding period of the prior year. The increase in net sales was
primarily due to a greater proportion of higher priced, super premium
wines, higher sales volumes, and bulk wine sales. Sales of super
premium wines increased from 15,000 cases for the three month period
ended March 31, 1999 to 22,000 cases for the same period in 2000.
The shift toward higher priced products resulted in an average price per
case of $56.10 for the three month period ended March 31, 2000,
compared to $54.24 for the same period in 1999. R.H. Phillips sold
108,000 cases during the three month period ended March 31, 2000,
compared to 88,000 in the corresponding period of the prior year. Sales
of bulk wines and other items totaled $975,000 for the three month
period ended March 31, 2000, compared to $246,000 for the
corresponding period in 1999. Management does not expect the
increase in bulk wine revenue to continue.
Gross Profit
Gross profit was $3,711,000 for the three month period ended
March 31, 2000, a 39% increase over $2,663,000 for the same period
in 1999. Excluding sales of bulk wines and other items, gross profit was
$3,330,000 in 2000, compared to $2,635,000 in 1999. Gross margins
were 53% for each of the three month periods ended March 31, 2000
and 1999. The higher price per case in 2000 discussed above was partly
offset by an increase in the average cost per case from $24.18 in 1999
to $25.40 in 2000. The increase in lower margin bulk wine sales also
negatively impacted gross margins in 2000.
Selling Expenses
Selling expenses were $1,780,000, or 25% of net sales, for the
three month period ended March 31, 2000, an increase from
$1,311,000, or 26% of net sales, for the same period in 1999. The
$469,000 increase is primarily due to increased labor costs. R.H.
Phillips is expanding its sales force in an effort to increase sales and
continue its shift into super premium wines.
<PAGE> 11
General and Administrative Expenses
General and administrative expenses were $305,000, or 4% of
net sales, for the three month period ended March 31, 2000. General
and administrative expenses were $260,000, or 5% of sales, for the three
month period ended March 31, 1999. The $45,000 increase is
primarily due to higher legal and accounting expenses.
Interest Expense
Interest expense for the three month period ended March 31,
2000 was $667,000, compared to $378,000 for the same period in
1999. R.H. Phillips capitalized $18,000 of additional interest pertaining
to vineyard and winery development during the three month period ended
March 31, 2000, and $85,000 during the same period in 1999. The
increase in total interest is primarily due to borrowings to fund capital
improvements and the conversion of $2,500,000 of preferred stock to
subordinated debt in both March 1999 and March 2000. The interest
is attributable to R.H. Phillips' debt obligations and bank line of credit.
Provision for Income Taxes
Provision for income taxes for the three month period ended
March 31, 2000 was $396,000, compared to $313,000 for the same
period in 1999. The $83,000 increase is primarily due to higher
income.
Net Income Applicable to Common Shareholders
R.H. Phillips generated net income applicable to common
shareholders of $583,000 for the three month period ended March 31,
2000, compared to $379,000 for the same period in 1999. The
$204,000 increase was primarily due to higher gross profit in 2000,
which was partially offset by increased selling expenses and interest
expense.
Liquidity and Capital Resources
R.H. Phillips 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.
R.H. Phillips has made substantial capital expenditures to expand its
vineyards and winery facilities, obtain production efficiencies, and
improve wine quality. R.H. Phillips' 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.
R.H. Phillips had cash totaling $105,000 on March 31, 2000, a
decrease from $263,000 on December 31, 1999. Sources of cash
during the three month period ended March 31, 2000 included proceeds
from long-term debt of $4,549,000. Cash used during that period
included cash used in operations of $950,000, $933,000 invested in
property, plant and equipment, and $2,846,000 to repay debt.
Current assets increased by $1,471,000 during the three month
period ended March 31, 2000, primarily due to an increase in inventories
from $17,465,000 on December 31, 1999 to $18,445,000 on March
31, 2000. Current liabilities decreased by $672,000 during the three
month period ended March 31, 2000, primarily due to the timing of
accounts payable. These factors caused net working capital to increase
$2,143,000, from $17,518,000 on December 31, 1999 to $19,661,000
on March 31, 2000.
R.H. Phillips has several long-term loans, one of which was
obtained from Metropolitan Life Insurance Company ("Metropolitan").
At March 31, 2000, $9,380,000 was outstanding on the loan. The
unpaid principal under the loan accrues interest at an annual rate of
8.04%. The interest rate is subject to
<PAGE> 12
adjustment by Metropolitan every
three years, beginning on January 1, 2001. R.H. Phillips is required to
make monthly principal payments of $60,000 plus accrued interest. The
loan matures in January 2013, at which time R.H. Phillips will be required
to make a balloon payment of $200,000.
At March 31, 2000, R.H. Phillips had a line of credit of $15,000,000
with U.S. Bank National Association ("U.S. Bank") to finance its working
capital requirements. The credit limit was increased to $16,000,000 in
April 2000. The line of credit is secured by accounts receivable,
inventory, the grape crop, and unencumbered farm equipment, and
matures April 2002. The annual interest rate on the line is either U.S.
Bank's prime rate or IBOR plus 150 basis points, at R.H. Phillips'
option. The balance on the line at March 31, 2000 was $13,811,000.
In addition to loans with Metropolitan and U.S. Bank, R.H.
Phillips has several smaller loans, which are generally secured by
equipment, and capital leases. The maturity dates range from December
2000 to December 2007 and the interest rates range from 4.8% to
10.0%. The balances due on these items totaled $8,449,000 at March
31, 2000.
In May 1997, R.H. Phillips sold 371 acres of land partially
developed into vineyard to John Hancock Life Insurance Company
("Hancock"). In connection with the transaction, R.H. Phillips 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. R.H. Phillips received proceeds of $5,384,000
from the sale and pays rent of $161,000 per calendar quarter. The lease
is accounted for as an operating lease.
On September 15, 1999, R.H. Phillips purchased 313 acres of
land for $490,000, and immediately began development of 115 acres of
the land into vineyard. On September 29, 1999, R.H. Phillips sold the
land and improvements to David L. Gemmer and Shirley A. Gemmer
("Gemmer") for $989,000, and entered into a Vineyard Development
and Lease Agreement (the "Agreement") with Gemmer. Mr. Gemmer
is a shareholder of R.H. Phillips, attends meetings of the Board of
Directors, and serves as an advisor. Under the terms of the Agreement,
R.H. Phillips is required to complete the development of the 115 acre
vineyard. The development period begins September 29, 1999 and ends
December 31, 2001 (the "Development Period"). Subject to certain
limitations, Gemmer shall reimburse all costs incurred by R.H. Phillips
during the Development Period. R.H. Phillips is required to lease and
operate the vineyards for the ten year period ended December 31, 2011,
and is entitled to all crop produced during this period. Rent payments are
due quarterly beginning January 1, 2002, and are equal to 2.8% of (i)
development costs and (ii) finance costs equal to 11.2% per annum of
vineyard development and land costs.
In March 1996, R.H. Phillips 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 R.H. Phillips derived from the sale of the
Senior Preferred Stock and the warrants, after payment of offering
expenses, were $4,785,000. The Senior Preferred Stock bore a
cumulative annual dividend of $1.20 per share, payable semiannually.
During the first four years after issuance, 50% of the dividend was
payable in cash and 50% of the dividend was payable in shares of
Common Stock at a price equal to the lower of the average daily market
price over a period of twenty consecutive trading days before the
dividend payment date or $4.00 per share.
In March 1999, R.H. Phillips exchanged, at par, all shares of the
Senior Preferred Stock for unsecured subordinated debt with a principal
amount of $2,500,000 and 250,000 shares of Redeemable
Exchangeable Preferred Stock ("Exchangeable Preferred"). The
subordinated debt carries an annual interest rate of 14%, payable
semiannually. The Exchangeable Preferred bore a cumulative annual
dividend of $1.20 per share payable semiannually in shares of Common
Stock at a price equal to the lower of the average daily market price over
a period of twenty consecutive trading days before the dividend payment
date or $4.00 per
<PAGE> 13
share. In March 2000, R.H. Phillips exchanged, at par,
all shares of the Exchangeable Preferred to unsecured subordinated debt
with a principal amount of $2,500,000 and an annual interest rate of 14%,
payable semiannually. The subordinated debt can be paid, at R.H. Phillips'
option, after March 15, 2001. R.H. Phillips is required to make principal
payments of $1,666,666 in 2004, $1,666,667 in 2005 and $1,666,667
in 2006.
R.H. Phillips has invested in substantial improvements to its
winery facility and vineyards over the past several years, and plans to
continue the expansion. R.H. Phillips invested $670,000 during the first
three months of 2000 in barrels, winery equipment and buildings, and
plans to invest approximately $3,530,000 more during the balance of the
year. Additional winery expansion projects are planned for the future to
handle the increased production from R.H. Phillips' recently planted
vineyards. R.H. Phillips invested $260,000 during the first three months
of 2000 in farm equipment and the continued development of vineyards,
and plans to invest an additional $940,000 during the remainder of 2000.
R.H. Phillips is funding 2000 capital projects with proceeds from the
U.S. Bank line of credit increase, long-term debt, lease financing, and
cash flows from operations.
Management believes that cash flows from operations and funds
available for borrowing will be adequate to fund R.H. Phillips'
operations, capital expansion efforts and debt service requirements over
the next twelve months. However, a significant decline in R.H. Phillips'
expected operating performance could have a material adverse effect on
R.H. Phillips' liquidity. In such case, R.H. Phillips 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 R.H. Phillips.
<PAGE> 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
- ----------- -----------
10.1 Second Modification Agreement dated
April 25, 2000 between R.H. Phillips, Inc.
and U.S. Bank National Association
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE> 15
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: May 15, 2000
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> 16
EXHIBIT INDEX
Exhibit No. Description
10.1 Second Modification Agreement dated April 25,
2000 between R.H. Phillips, Inc.
and U.S. Bank National Association
27.1 Financial Data Schedules
SECOND MODIFICATION AGREEMENT
This Second Modification Agreement (this "Agreement") is
entered into by and between R.H. Phillips, Inc., a California corporation
("Borrower"), and U.S. Bank National Association, a national banking
association ("Lender"), as of April 25, 2000.
RECITALS
Borrower and Lender entered into a Loan Agreement dated as
of May 1, 1999 (the "Original Loan Agreement"). In connection
therewith, Borrower, as maker, made a promissory note (the "Original
Note") in favor of Lender, as payee, in the principal amount of up to
$15,000,000.00 dated as of May 1, 1999, and Borrower, as grantor,
made an Agricultural Security Agreement (the "Original Security
Agreement") for the benefit of Lender, as secured party.
B.
Borrower and Lender entered into a Modification Agreement
(the "First Modification Agreement") dated as of October 8, 1999,
pursuant to which Borrower and Lender agreed to modify and amend
certain terms and conditions of the Original Loan Agreement, the Original
Note and the Original Security Agreement.
C.
Borrower and Lender desire further to modify and amend the
terms and conditions of the Original Loan Agreement, the Original Note
and the Original Security Agreement, as amended by the First
Modification Agreement, on the terms and conditions set forth herein.
Now, therefore, for good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
Section 1. Certain Definitions.
(a) As used in the Loan Documents, the
following terms shall now and hereafter have the following meanings:
(i) "Loan Agreement": The Original
Loan Agreement as modified and amended by the First Modification
Agreement and this Agreement.
(ii) "Note": The Original Note as
modified and amended by the First Modification Agreement and this
Agreement.
(iii) "Security Agreement": The
Original Security Agreement as modified and amended by the First
Modification Agreement and this Agreement.
(b) All capitalized terms used but not defined
herein shall have the meanings ascribed in the Loan Agreement.
Section 2. Amount of Loan.
Section 2.1 Note. The figure "$15,000,000.00" is
hereby deleted from the heading to the Note and replaced with
"$16,000,000.00." The words and figure "Fifteen Million Dollars
($15,000,000.00)" are hereby deleted from Section 2 of the Note and
replaced with the words and figure "Sixteen Million and no/100 Dollars
($16,000,000.00)."
Section 2.2 Loan Agreement. The words and figure
"Fifteen Million Dollars ($15,000,000.00)" are hereby deleted from
Section 2(g) of the Loan Agreement and replaced with the words and
figure "Sixteen Million and no/100 Dollars ($16,000,000.00)."
Section 2.3 Security Agreement. The words and
figure "Fifteen Million Dollars ($15,000,000.00)" are hereby deleted
from Section 1(f) of the Security Agreement and replaced with the words
and figure "Sixteen Million and no/100 Dollars ($16,000,000.00)."
Section 3. Term. The maturity date of the Note, as
specified in Section 5(a) thereof, is hereby extended from April 30,
2001, to April 30, 2002. The date "April 30, 2001" is hereby deleted
from Section
Section 4. Tangible Net Worth. The words and figure
"Twenty-One Million and no/100 Dollars ($21,000,000.00)" are hereby
deleted from Section 6(e)(1) of the Loan Agreement and replaced with
"Twenty-Three Million Five Hundred Thousand and no/100 Dollars
($23,500,000.00)."
Section 5. Funding Losses. Section 3(c)(6) of the
Original Note is hereby deleted in its entirety and replaced with the
following:
Borrower will indemnify Lender upon demand against any
loss or expense which Lender may sustain or incur (including,
without limitation, any loss or expense sustained or incurred in
obtaining, liquidating or employing deposits or other funds
acquired to effect, fund, or maintain any LIBOR Amount) as a
consequence of (a) any failure of Borrower to make any
payment when due of any LIBOR Amount, (b) any failure of
Borrower to borrow, continue or prepay any LIBOR Amount
or convert any portion of the Prime Rate Amount to a LIBOR
Amount on a date specified therefor in a notice thereof, or (c)
any payment or prepayment of any LIBOR Amount,
termination of the LIBOR Borrowing Rate (as defined in the
Original Note) or conversion of a LIBOR Amount to a Prime
Rate Amount on a date other than the last day of the LIBOR
Interest Period therefor. Determinations by Lender of the
amount required to indemnify Lender shall be conclusive in the
absence of manifest error.
Section 6. Discretion of Bank as to Manner of Funding.
Notwithstanding any provision of the Note to the contrary, Lender shall
be entitled to fund and maintain its funding of all or any part of any
LIBOR Amount in any manner it elects; it being understood, however,
that all determinations hereunder shall be made as if Lender had actually
funded and maintained each LIBOR Amount during the LIBOR Interest
Period therefor through the purchase of deposits having a term
corresponding to such LIBOR Interest Period and bearing an interest
rate equal to the LIBOR Rate (as defined in the Original Note) for such
LIBOR Interest Period (whether or not Lender shall have granted any
participations in such LIBOR Amount).
Section 7. Costs and Fees. Without limiting any other
provisions of this Agreement, Borrower hereby agrees to pay Lender on
demand an amount equal to all costs and expenses incurred by Lender
in connection with the negotiation, preparation, execution, and closing of
this Agreement and the transaction contemplated herein.
Section 8. No Other Modification; Full Force and Effect.
Except as specifically provided herein, the Original Loan Agreement, the
Original Note and the Original Security Agreement, as modified by the
First Modification Agreement, are not modified or amended in any
respect and remain in full force and effect.
Section 9. Integration. Subject to Section 8 hereof, this
Agreement constitutes the entire agreement of the parties on the subject
matter hereof and supersedes and replaces all prior agreements, oral and
written, on such subject matter.
Section 10. Counterparts. This Agreement may be executed
in any number of counterparts. Each signed counterpart shall be deemed
an original, and all of the counterparts taken together shall be deemed to
constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed
this Agreement as of the year and date first written above.
BORROWER: LENDER:
R.H. Phillips, Inc., U.S. Bank National Association,
a California corporation a national banking association
By://s//Michael Motroni By://s//Karen McManus
--------------------------- ------------------------
Title: Chief Financial Officer Title: Vice President
----------------------- ------------------------
By:
Title:
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE MARCH 31, 2000 BALANCE SHEET, STATEMENTS OF
INCOME AND STATEMENTS OF CASH FLOWS, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1000
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<S> <C>
<CASH> 105
<SECURITIES> 0
<RECEIVABLES> 4,724
<ALLOWANCES> 43
<INVENTORY> 18,445
<CURRENT-ASSETS> 24,529
<PP&E> 48,995
<DEPRECIATION> 11,547
<TOTAL-ASSETS> 62,703
<CURRENT-LIABILITIES> 4,868
<BONDS> 33,931
<COMMON> 14,808
0
0
<OTHER-SE> 6,411
<TOTAL-LIABILITY-AND-EQUITY> 62,703
<SALES> 7,061
<TOTAL-REVENUES> 7,061
<CGS> 3,350
<TOTAL-COSTS> 3,350
<OTHER-EXPENSES> 2,085
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 667
<INCOME-PRETAX> 984
<INCOME-TAX> 396
<INCOME-CONTINUING> 588
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 588
<EPS-BASIC> .09
<EPS-DILUTED> .09
</TABLE>
