<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 June 30, 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
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(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 August 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 4. Submission of Matters to a Vote of Security Holders........14
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>
R.H. Phillips, Inc.
Balance Sheet
(In thousands, except share information)
<CAPTION>
June
30, 2000
--------
(Unaudited)
<S> <C>
Assets
Current assets:
Cash $ 121
Accounts receivable 4,371
Inventories 20,672
Prepaid expenses and other current assets 1,217
-------
Total current assets 26,381
Property, plant and equipment, net 38,310
Other assets 720
-------
$65,411
=======
Liabilities and shareholders' equity
Current liabilities:
Current maturities of long-term debt $ 2,378
Accounts payable 1,072
Accrued payroll and related 486
Accrued selling expenses 1,052
Other accrued liabilities 533
-------
Total current liabilities 5,521
Long-term debt 31,099
Subordinated debt 4,629
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
Additional paid-in capital 337
Retained earnings 6,332
-------
Total shareholders' equity 21,477
-------
$65,411
=======
</TABLE>
[FN]
See accompanying notes.
<PAGE> 5
<TABLE>
R.H. Phillips, Inc.
Statements of Income
(In thousands, except share information)
<CAPTION>
Six months ended Three months ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Net sales $14,453 $10,904 $ 7,392 $ 5,903
Cost of sales 6,841 4,969 3,491 2,631
------- ------- ------- -------
Gross profit 7,612 5,935 3,901 3,272
Selling expenses 4,229 2,895 2,449 1,584
General and administrative
expenses 586 566 281 306
------- ------- ------- -------
Operating income 2,797 2,474 1,171 1,382
Interest expense (1,436) (859) (769) (481)
Other income, net 54 105 29 42
------- ------- ------- -------
Income before provision
for income taxes 1,415 1,720 431 943
Provision for income taxes (570) (692) (174) (379)
------- ------- ------- -------
Net income and comprehensive
income $ 845 $ 1,028 $ 257 $ 564
======= ======= ======= =======
Net income and comprehensive
income $ 845 $ 1,028 $ 257 $ 564
Accretion on Redeemable
Preferred Stock (5) (91) -- (6)
------- ------- ------- -------
Net income applicable to
Common Shareholders $ 840 $ 937 $ 257 $ 558
======= ======= ======= =======
Net income per share -
basic and diluted $ .13 $ .14 $ .04 $ .08
======= ======= ======= =======
Shares used in per share
calculations:
- Basic 6,692,794 6,689,175 6,695,331 6,689,175
- Diluted 6,692,794 6,689,403 6,695,331 6,689,632
</TABLE>
[FN]
See accompanying notes.
<PAGE> 6
<TABLE>
R.H. Phillips, Inc.
Statements of Cash Flows
(In thousands)
<CAPTION>
Six months ended Three months ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income and comprehensive income $ 845 $ 1,028 $ 257 $ 564
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 1,734 1,322 878 653
Gain on disposal of property,
plant and equipment (9) (2) (8) (2)
Net changes in assets and liabilities:
Accounts receivable (250) (334) 309 (508)
Inventories (3,207) (2,447) (2,227) (1,792)
Prepaid expenses and other
current assets (8) 46 81 233
Other assets (26) (17) (12) 4
Accounts payable (519) 1,083 394 1,060
Accrued payroll and related 94 201 88 298
Accrued selling expenses 298 290 375 223
Other accrued liabilities (23) 292 (256) (53)
Net cash provided by (used in) ------- ------- ------- -------
operating activities (1,071) 1,462 (121) 680
Cash flows from investing activities:
Purchase of property, plant
and equipment (2,641) (4,116) (1,708) (2,869)
Proceeds from sale of property, plant
and equipment 14 5 8 5
------- ------- ------- -------
Net cash used in investing activities (2,627) (4,111) (1,700) (2,864)
Cash flows from financing activities:
Cash dividends paid -- (150) -- --
Proceeds from long-term debt 9,645 7,692 5,096 4,449
Principal payments on long-term debt (6,105) (4,544) (3,259) (2,100)
Other financing activities, net 16 (196) -- (87)
Net cash provided by financing ------- ------- ------- -------
activities 3,556 2,802 1,837 2,262
------- ------- ------- -------
Increase (decrease) in cash (142) 153 16 78
Cash at beginning of period 263 151 105 226
------- ------- ------- -------
Cash at end of period $ 121 $ 304 $ 121 $ 304
======= ======= ======= =======
Other cash flow information:
Interest paid (including capitalized
interest of $50 and $166 in 2000
and 1999, respectively) $ 1,310 $ 859 $ 581 $ 427
Income taxes paid $ 706 $ 453 $ 563 $ 453
Noncash transactions:
Issuance of stock dividend $ 150 $ 150 $ -- $ --
Accretion of redeemable
preferred stock $ 5 $ 16 $ -- $ 6
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
June 30, 2000
1. Summary of Significant Accounting Policies
The interim financial statements as of June 30, 2000 and for each of
the six and three month periods ended June 30, 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 six
and three month periods ended June 30, 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.
Certain amounts in the financial statements as of June 30, 1999 and
for the six and three month periods ended June 30, 1999 have been
reclassified to conform with the current year's presentation.
2. Computation of Net Income per Share
Basic net income per share for the six and three month periods ended
June 30, 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 six and three month periods
ended June 30, 2000. Potential common shares outstanding which
could have a dilutive effect in the future but were anti-dilutive as of
June 30, 2000 totaled 2,185,853. Basic and diluted net income per
share and the weighted average number of common shares
outstanding for the six and three month periods ended June 30, 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. Long-term debt
R.H. Phillips obtained a capital lease in the amount of $524,000 from
General Electric Capital Corporation during the six month period
ended June 30, 2000. The leased assets consist of recently purchased
winery equipment, and the lease will be paid in 72 monthly payments.
In July 2000, R.H. Phillips obtained a capital lease in the amount of
$813,000 from General Electric Capital Corporation. The leased
assets consist of recently purchased winery equipment, and the lease
will be paid in 72 monthly payments.
R.H. Phillips has a line of credit of $16,000,000 with U.S. Bank
National Association ("U.S. Bank") which contains certain restrictive
and financial covenants measured on a quarterly basis. R.H. Phillips
<PAGE> 8
was not in compliance with one of the covenants at June 30, 2000.
U.S. Bank waived the covenant requirement for June 30, 2000.
4. 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.
5. 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 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
open market. Management believes that such events could increase
R.H. Phillips' costs of production.
Selling Expenses. R.H. Phillips has recently substantially
increased its sales labor and promotional expenditures in an effort to
increase sales and continue its shift into super premium wines, and
expects the higher expenses to continue. Management believes that,
although the increased expenditures will result in higher sales and net
income over time, they will continue to reduce earnings in the near
future.
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.
Diseases and Pests. Many California vineyards have been
infested with Pierce's Disease. Pierce's Disease is caused by a
bacterium which kills grapevines by blocking their water
transportation tissue. The bacterium is spread by insects known as
sharpshooters, of which the most damaging is the glassy-winged
sharpshooter. A population of glassy-winged sharpshooters was
recently found within 50
<PAGE> 10
miles of R.H. Phillips. A vine with Pierce's
Disease usually produces no crop and dies within two years.
Although the wine industry is researching possible methods of
preventing and eradicating Pierce's Disease, there is currently no
known prevention or cure. Pierce's Disease has been found in
vineyards located in Napa, Sonoma and Riverside counties. It is not
believed to be present in Yolo County, where R.H. Phillips' vineyards
are located.
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,
fluctuations 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 prior to the holiday season, which causes a large percentage
of sales to occur 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 second half of the year.
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 six month period ended June 30, 2000 were
$14,453,000, a 33% increase over net sales of $10,904,000 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 30,000 cases for the six month period
ended June 30, 1999 to 46,000 cases for the same period in 2000.
The shift toward higher priced products resulted in an average price
per case of $56.86 for the six month period ended June 30, 2000,
compared to $54.56 for the same period in 1999. R.H. Phillips sold
228,000 cases during the six month period ended June 30, 2000,
compared to 190,000 in the corresponding period of the prior year.
Sales of bulk wines and other items totaled $1,498,000 for the six
month period ended June 30, 2000, compared to $536,000 for the
corresponding period in 1999. Management does not expect the
increase in bulk wine revenue to continue.
Gross Profit
Gross profit was $7,612,000 for the six month period ended
June 30, 2000, a 28% increase over $5,935,000 for the same period
in 1999. Excluding sales of bulk wines and other items, gross profit was
<PAGE> 11
$7,257,000 in 2000, compared to $5,860,000 in 1999. Gross
margins were 53% for the six month period ended June 30, 2000,
compared to 54% in 1999. The higher price per case in 2000
discussed above was partly offset by an increase in the average cost
per case from $23.72 in 1999 to $25.01 in 2000. The increase in
lower margin bulk wine sales also reduced gross margins in 2000.
Selling Expenses
Selling expenses were $4,229,000, or 29% of net sales, for
the six month period ended June 30, 2000, an increase from
$2,895,000, or 27% of net sales, for the same period in 1999. The
$1,334,000 increase is primarily due to increased labor and
promotional costs. R.H. Phillips is expanding its sales force and
increasing promotional activities in an effort to increase sales and
continue its shift into super premium wines.
R.H. Phillips incurred unusual selling expenses during the
six month period ended June 30, 2000 due to a major distributor
promotional event in June, and the purchase of marketing
rights that increased the markets serviced directly by R.H. Phillips'
expanded sales force. These expenses, which totaled $314,000,
were incurred to better position R.H. Phillips for long term sales and
profitability growth.
General and Administrative Expenses
General and administrative expenses were $586,000, or 4%
of net sales, for the six month period ended June 30, 2000,
substantially the same as the $566,000, or 5% of net sales, during the
six month period ended June 30, 1999.
Interest Expense
Interest expense for the six month period ended June 30,
2000 was $1,436,000, compared to $859,000 for the same period in
1999. R.H. Phillips capitalized $50,000 of additional interest
pertaining to vineyard and winery development during the six month
period ended June 30, 2000, and $166,000 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 six month period ended
June 30, 2000 was $570,000, compared to $692,000 for the same
period in 1999. The $122,000 decrease is due to lower pre-tax net
income.
Net Income Applicable to Common Shareholders
R.H. Phillips generated net income applicable to common
shareholders of $840,000 for the six month period ended June 30,
2000, compared to $937,000 for the same period in 1999. The
$97,000 decrease was primarily due to higher selling expenses and
interest expense, which were partly offset by the higher gross profit
in 2000.
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. Substantial capital expenditures have been made to expand
vineyards and winery facilities, obtain
<PAGE> 12
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 $121,000 on June 30, 2000, a
decrease from $263,000 on December 31, 1999. Sources of cash
during the six month period ended June 30, 2000 included proceeds
from long-term debt of $9,645,000. Cash used during that period
included cash used in operations of $1,071,000, $2,641,000 invested
in property, plant and equipment, and $6,105,000 to repay debt.
Current assets increased by $3,323,000 during the six month
period ended June 30, 2000, primarily due to an increase in
inventories from $17,465,000 on December 31, 1999 to $20,672,000
on June 30, 2000. Current liabilities decreased by $19,000 during the
six month period ended June 30, 2000. These factors caused net
working capital to increase $3,342,000, from $17,518,000 on
December 31, 1999 to $20,860,000 on June 30, 2000.
R.H. Phillips has several long-term loans, one of which was
obtained from Metropolitan Life Insurance Company
("Metropolitan"). At June 30, 2000, $9,200,000 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 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.
R.H. Phillips has a line of credit of $16,000,000 with U.S.
Bank National Association ("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 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 June 30, 2000
was $15,682,000. The line of credit agreement contains certain
restrictive and financial covenants measured on a quarterly basis.
R.H. Phillips was not in compliance with one of the covenants at June 30,
2000. U.S. Bank waived the covenant requirement for June 30,
2000.
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 $8,595,000
at June 30, 2000.
In July 2000, R.H. Phillips obtained a additional capital lease
in the amount of $813,000 from General Electric Capital
Corporation. The leased assets consist of recently purchased winery
equipment, and the lease will be paid in 72 monthly payments.
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
<PAGE> 13
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 develop the
115 acre vineyard. The development period began September 29,
1999 and ends December 31, 2001 (the "Development Period").
Subject to certain limitations, Gemmer is required to 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 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 made substantial improvements to its winery
facility and vineyards over the past several years, and plans to
continue the expansion. R.H. Phillips invested $1,970,000 during the
first six months of 2000 in barrels, winery equipment and buildings,
and plans to invest approximately $2,230,000 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 $670,000
during the first six months of 2000 in farm equipment and the
continued development of vineyards, and plans to invest an additional
$530,000 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 4. Submission of Matters to a Vote of Security Holders
R.H. Phillips held its 2000 Annual Meeting of Shareholders
on May 23, 2000 at the winery. A total of 4,738,075 shares, or
approximately 71% 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. No other persons
were nominated for election to the Board of Directors. The number
of shares voting for and withheld from each nominee is set forth
below:
Director Votes for Votes withheld
-------- --------- --------------
John E. Giguiere 4,715,625 22,450
Karl E. Giguiere 4,715,625 22,450
Lane C. Giguiere 4,715,625 22,450
Victor L. Motto 4,712,425 25,650
R. Ken Coit 4,713,925 24,150
The shareholders also voted to reappoint Ernst & Young LLP
as R.H. Phillips' independent auditors. A total of 4,729,225 shares
voted in favor of Ernst & Young LLP, 4,750 shares voted against,
and 4,100 shares abstained.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
10.1 Certificate of Amendment of the Certificate of
Determination of Preferences of the 12% Series
A Senior Redeemable Exchangeable Preferred Stock
of R.H. Phillips, Inc.
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: August 14, 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 Certificate of Amendment of the Certificate
of Determination of Preferences of the 12%
Series A Senior Redeemable Exchangeable
Preferred Stock of R.H. Phillips, Inc.
27.1 Financial Data Schedules
