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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the fiscal year ended June 30, 2004
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from _______ to _______.
Commission file number 0-1912
SONOMAWEST HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-1069729
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification Number)
2064 HIGHWAY 116 NORTH, SEBASTOPOL, CALIFORNIA 95472
(Address of principal executive offices)
(707) 824-2001
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). YES ___ NO _X_
Aggregate market value of common stock held by non-affiliates based on
the closing price of the registrant's common stock on the Nasdaq SmallCap Market
on December 31, 2003: $4,325,429. For the purposes of the foregoing
calculations, shares of common stock held by persons who hold more than 5% of
the outstanding shares of common stock and shares held by executive officers and
directors of the registrant have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliates is not necessarily
conclusive for this or any other purpose.
As of September 23, 2004, there were 1,114,257 shares of common stock,
no par value, outstanding which is the only class of shares publicly traded.
Portions of the following document are incorporated by reference from
the Registrant's Proxy Statement for Registrant's 2004 Annual Meeting of
Shareholders currently scheduled to be held October 27, 2004 and to be filed
with the Securities and Exchange Commission on or before 120 days after the end
of the 2004 fiscal year, including portions required under Part III of this
report.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
SonomaWest Holdings, Inc. (the "Company" or "Registrant") is including
the following cautionary statement in this Annual Report to make applicable and
take advantage of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 for any forward looking statements made by, or on
behalf of, the Company. The statements contained in this Report that are not
historical facts are "forward-looking statements" (as such term is defined in
Section 27A of the Securities Act of 1933 and section 21E of the Securities
Exchange Act of 1934), which can be identified by the use of forward-looking
terminology such as "estimated," "projects," "anticipated," "expects,"
"intends," "believes," or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy that involve risks and
uncertainties. Forward-looking statements include statements concerning plans,
objectives, goals, strategies, future events or performance and underlying
assumptions. Forward-looking statements involve risks and uncertainties, which
could cause actual results or outcomes to differ materially from those expressed
in the forward-looking statements. The Company's expectations, beliefs and
projections are expressed in good faith and are believed by the Company to have
a reasonable basis, although actual results may differ materially from those
described in any such forward looking statements. All written and oral
forward-looking statements made in connection with this Report which are
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the "Certain Factors" and other cautionary
statements set forth under "Management's Discussion and Analysis of Financial
Condition and Results of Operations". There can be no assurance that
management's expectations, beliefs or projections will be achieved or
accomplished, and the Company expressly disclaims any obligation to update any
forward looking statements.
PART I
ITEM 1. BUSINESS
SonomaWest Holdings, Inc., formerly Vacu-dry Company, ("SonomaWest" or
the "Company") was incorporated in 1946 and currently operates as a real estate
management and rental company. The Company also holds an investment in MetroPCS
Communications, Inc., a public reporting telecommunications company. The
Company's rental operations include industrial/agricultural property, some of
which was formerly used in its discontinued businesses. This commercial property
is now being rented to third parties.
INDUSTRY SEGMENT INFORMATION
For the year ended June 30, 2004, the Company operated in one reportable
segment, real estate management and rental operations. The Company's primary
business revenue is generated from the leasing of its two properties, located in
Sebastopol, California. The properties are leased to multiple tenants with
leases varying in length from month-to-month to ten years. The Company's
business is not seasonal and does not require significant working capital.
Revenue from the leasing activities is payable either on the 1st or 15th of the
month. As of June 30, 2004, one tenant, Benziger Family Winery, accounted for
18% of the Company's revenue.
The Company has completely funded its $3 million minority investment in
the Series D Preferred Stock of MetroPCS Communications, Inc., a public
reporting telecommunications company (File Number 000-50869).
Information regarding all other business income is included in the
discussion of discontinued operations.
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COMPETITION
The Company competes with numerous commercial property landlords which
offer warehouse, manufacturing and food processing properties in the greater
Petaluma/Santa Rosa area, located in central to southern Sonoma County of
California. The Company believes that its northern property enjoys a competitive
advantage over other similarly situated properties because of the wastewater
treatment facility located on the property, which is ideally suited for tenants
involved in the food processing industry and more particularly the wine
processing industry. The Company believes that both of its northern and southern
properties are competitively priced to the market. Some of the Company's
competitors enjoy the advantage that their properties are newer than the
Company's properties. Currently it is impractical to determine the degree and
timing of capital improvements necessary to achieve competitiveness with newer
properties owned by the Company's competitors. The Company competes on the basis
of location, price, service and tenant improvements, including the northern
property's wastewater treatment facility.
REVENUE RECOGNITION
Revenue is recognized on a monthly basis, based upon the dollar amount
specified in the related lease. The Company requires that all tenants be covered
by a lease. The Company does not have leases that include provisions that
require the lessee to pay the lessor any additional rent based upon the lessee's
sales or any other financial performance levels. Reimbursements of certain costs
received from tenants are recognized as tenant reimbursement revenues. During
the third quarter of fiscal 2004, the Company concluded that tenant
reimbursements are more appropriately classified as a separate line item of
revenue rather than as a reduction of operating costs. Accordingly, the
accompanying statements of operations reflect tenant reimbursements as a
separate line item of revenue. Comparative statements of operations have been
revised to reflect the current period presentation. The reclassifications have
no impact on previously reported operating income (loss), net loss or net loss
per share amounts.
ENVIRONMENTAL MATTERS
The Company believes it has complied with all governmental regulations
regarding protection of the environment. In connection with the renewal of its
wastewater permit (issued by the State of California), the Company was required
to modify its wastewater system to separate domestic waste from its processed
wastewater. As a result, the Company has made changes to comply with these
regulations and has incurred related capital expenditures of $82,000 during the
2004 fiscal year and $171,600 on the total project. The Company estimates that
they will incur an additional $5,000 to complete this project in fiscal 2005. In
addition to these capital expenditures, the Company could be held liable for the
costs of removal or remediation of any hazardous or toxic substances, if any,
that might be located on or in its properties in the future. These laws often
impose such liability without regard to whether the owner knew of, or was
responsible for, the presence of the hazardous or toxic substances. The presence
of such substances, or the failure to remediate such substances properly, may
adversely affect the owner's ability to sell or rent the property or to borrow
using the property as collateral. Other federal and state laws require the
removal of damaged material containing asbestos in the event of remodeling or
renovation.
EMPLOYEES
The Company currently employs 5 employees in a management or staff
capacity, none of whom is covered under a collective bargaining agreement.
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INSURANCE
The Company maintains workers compensation, commercial general
liability, property, extended coverage and rental loss insurance. While
management feels the limits and coverage are adequate relative to the related
risks, there is no assurance that this insurance will be adequate to protect the
Company from all unforeseen occurrences. The deductible on the Company's
property insurance policy has been reduced from $100,000 to $50,000.
INVESTMENT
As of December 10, 2003, the Company had completely funded its $3
million minority investment in the Series D Preferred Stock of MetroPCS, Inc., a
public reporting telecommunications company (File Number 333-111470). On March
23, 2004 MetroPCS filed a registration statement with the Securities and
Exchange Commission for an initial public offering of its common stock. On, July
13, 2004, a wholly-owned subsidiary of MetroPCS Communications, Inc. was merged
with MetroPCS, Inc. As a result, MetroPCS, Inc. became a wholly-owned subsidiary
of MetroPCS Communications, Inc. and all of the outstanding shares of MetroPCS,
Inc. were exchanged for shares of MetroPCS Communications, Inc., including the
Company's Series D Preferred Stock. On July 28, 2004 MetroPCS Communications
announced that it had determined not to proceed at that time with the planned
initial public offering of common stock pending a review of certain accounting
issues that had come to its attention relating to its previously disclosed
financial statements. On August 12, 2004 MetroPCS Communications, Inc. formally
withdrew the registration.
The Company accounts for its investment in MetroPCS Communications under
the cost method. The Company owns approximately 0.857% of the total outstanding
shares of Series D Preferred Stock and approximately 0.33% of the total
outstanding capital stock on an as-converted basis.
The Series D Preferred Stock is entitled to receive cumulative annual
dividends, prior to all other securities except the Series C Preferred Stock,
equal to 6% per annum of the liquidation value of the shares (initially equal to
$100 per share and subject to adjustment). No dividends have been declared to
date, but as of June 30, 2004, $382,702 of unpaid dividends has accrued with
respect to the Company's shares of Series D Preferred Stock.
The Series D Preferred Stock is convertible at the option of the holders
thereof or automatically upon (i) an initial public offering which results in
gross proceeds of at least $50 million and yields an adjusted equity valuation
of two times the liquidation value of the Series D Preferred Stock; (ii) the
trading on a national securities exchange for a 30-day consecutive period at a
price which implies a valuation of the Series D Preferred Stock in excess of
twice the aggregate initial purchase price; or (iii) a date specified by holders
of 66 2/3% of the then outstanding Series D Preferred Stock. There is a weighted
average adjustment to the conversion price in the event of certain additional
issuances of Common Stock (of any class) or securities convertible into Common
Stock (of any class).
The Series D Preferred Stock votes together on an as-converted basis
with the Class C Common Stock on most matters. Certain matters affecting the
Series D Preferred Stock require a separate vote of the Series D Preferred
Stock. The holders of Series D Preferred Stock as a class are entitled to
nominate one director to the Board of Directors.
The Series D Preferred Stock is entitled to payment along with the
Series C Preferred Stock of its liquidation preference prior to payment to any
other class of securities (other than the Series C Preferred Stock). The per
share liquidation price for the Series D Preferred Stock is $100 per share plus
the greater of accrued and unpaid dividends and the amount that would have been
paid in respect of each share had
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such share been converted to Common Stock immediately prior to the liquidation
event. Upon the occurrence of certain events, the Series D Preferred Stock must
be redeemed by MetroPCS Communications at a price equal to the liquidation value
plus accrued and unpaid dividends.
The Company has no relationships with MetroPCS Communications other than
its investment. A director of the Company has a small indirect stock interest in
MetroPCS Communications and the Company's largest shareholder is a member of the
Board of Directors of MetroPCS Communications.
CERTAIN FACTORS
In evaluating the Company and its business, the following factors should
be given careful consideration, in addition to the information mentioned
elsewhere in this Form 10-K.
FACTORS RELATED TO REAL ESTATE INDUSTRY SEGMENT.
- -----------------------------------------------
WE HAVE A LIMITED OPERATING HISTORY IN THE REAL ESTATE INDUSTRY AND CONSEQUENTLY
FACE SIGNIFICANT RISKS AND CHALLENGES IN BUILDING OUR BUSINESS.
While we have managed real estate and facilities issues for many years,
it is only recently that we have shifted our primary business focus to that
business segment and its investment activities. In addition, in an effort to cut
costs, we have outsourced all of our executive functions. While we believe we
have sufficient experience, resources and personnel to manage our properties
effectively, we do not have a long operating history that demonstrates such
effective management and there is no assurance that we will be successful.
OUR PROPERTIES DEPEND UPON THE NORTHERN CALIFORNIA AND PARTICULARLY THE SONOMA
COUNTY ECONOMY.
All of our rental revenues come from two properties located in Northern
California and more particularly Sonoma County. Events and conditions applicable
to owners and operators of real property that are beyond our control may
decrease the value of our properties. These events include: local oversupply or
reduction in demand for office, industrial or other commercial space; inability
to collect rent from tenants; vacancies or inability to rent spaces on favorable
terms; inability to finance property development on favorable terms; increased
operating costs, including insurance premiums, utilities, and real estate taxes;
costs of complying with changes in governmental regulations; the relative
illiquidity of real estate investments; changing sub-market demographics and
property damage resulting from seismic activity. The geographical concentration
of our properties may expose us to greater economic risks than if we owned
properties in several geographic regions. Any adverse economic or real estate
developments in the Sonoma County region could adversely impact our financial
condition, results from operations, cash flows, quoted per share trading price
of our common stock and ability to satisfy our debt service obligations. The
economic environment in Sonoma County has improved since last year. In a recent
report prepared for the Sonoma County Economic Development Board by Economy.com,
Inc., dated May 2004, they state "Sonoma County's economy is past its worst
point of the business cycle and will begin to improve in coming months." "A
clear path to recovery is not evident yet, but the local economy is beginning to
get back on its feet." As part of this economic recovery, we anticipate the
commercial, industrial and office markets in Sonoma County will also experience
positive effects from this recovery. Obtaining new tenants for our properties
generally requires taking tenants from competitor properties. There is no
assurance that the market will significantly improve in the near future.
-5-
INCREASING UTILITY COSTS AND POWER OUTAGES IN CALIFORNIA MAY HAVE AN ADVERSE
EFFECT ON OUR OPERATING RESULTS AND OCCUPANCY LEVELS.
The State of California continues to address issues related to the
supply of electricity and natural gas. Since June 2000, shortages of electricity
have resulted in increased costs for consumers and certain interruptions in
service. Increased consumer costs and consumer perception that the State is not
able to effectively manage its energy needs may reduce demand for leased space
in California office and industrial properties. A significant reduction in
demand for industrial space would adversely affect our future financial
position, results of operations, cash flow, quoted per share trading price of
our common stock and ability to satisfy our debt service obligations.
POTENTIAL LOSSES MAY NOT BE COVERED BY INSURANCE.
We carry commercial general liability, property, extended coverage and
rental loss insurance covering all of our properties. Management believes the
policy specifications and insured limits are appropriate given the relative risk
of loss, the cost of the coverage and industry practice. We do not carry
earthquake coverage. We do not carry insurance for generally uninsurable losses
such as pollution, contamination, asbestos and seepage. Some of our policies are
subject to limitations involving large deductibles or co-payments and policy
limits. If we experience a loss, which is uninsured or which exceeds policy
limits, we could lose the capital invested in the damaged properties as well as
the anticipated future cash flows from those properties. In addition, if the
damaged properties were subject to recourse indebtedness, we would continue to
be liable for the indebtedness, even if the properties were irreparable.
DOWNTURNS IN TENANTS' BUSINESSES MAY REDUCE OUR CASH FLOW.
For the year ended June 30, 2004, we derived all of our continuing
operating revenues from rental income and tenant reimbursements. A tenant may
experience a downturn in its business, which may weaken its financial condition
and result in its failure to make timely rental payments. In the event of
default by a tenant, we may experience delays in enforcing our rights as
landlord and may incur substantial costs in protecting our investment. The
bankruptcy or insolvency of a major tenant also may adversely affect the income
produced by our properties. If any tenant becomes a debtor in a case under the
U.S. Bankruptcy Code, we cannot evict the tenant solely because of the
bankruptcy. In addition, the bankruptcy court might authorize the tenant to
reject and terminate its lease. Our claim against the tenant for unpaid, future
rent would be subject to a statutory cap that might be substantially less than
the remaining rent actually owed under the lease. Even so, our claim for unpaid
rent would likely not be paid in full. Any losses resulting from the bankruptcy
of any of our tenants could adversely impact our financial condition, results
from operations, cash flow, the quoted per share trading price of our common
stock and the ability to satisfy any debt service obligations. Although we have
not experienced material losses from tenant bankruptcies, tenants could file for
bankruptcy protection in the future.
WE MAY BE UNABLE TO RENEW LEASES OR RE-LET SPACE AS LEASES EXPIRE.
As of June 30, 2004, leases representing approximately 0% and 11% of the
square footage of our properties will expire in 2005 and 2006, respectively. If
leases expire with above market rental rates we may be forced to renew or
re-lease such expiring leases at lower rates. We cannot give any assurance that
leases will be renewed or that its properties will be re-leased at rental rates
equal to or above the current rental rates. If the rental rates for our
properties decrease, existing tenants do not renew their leases, or we do not
re-lease a significant portion of our available space, our financial position,
results of operations, cash flow, quoted per share trading price of our common
stock and ability to satisfy its debt service obligations would be adversely
affected.
-6-
OUR REAL ESTATE HOLDINGS COULD SUBJECT US TO POTENTIAL ENVIRONMENTAL LIABILITY.
We could be held liable for the costs of removal or remediation of any
hazardous or toxic substances located on or in our properties. These laws often
impose such liability without regard to whether the owner knew of, or was
responsible for, the presence of the hazardous or toxic substances. The presence
of such substances, or the failure to remediate such substances properly, may
adversely affect our ability to sell or rent the property or to borrow using the
property as collateral. Other federal and state laws require the removal of
damaged material containing asbestos in the event of remodeling or renovation.
The Company has recently contracted to remove the asbestos containing materials
at its South Sebastopol property. These materials were discovered as a result of
a Phase I environmental study. It is anticipated that these materials will be
removed by October 31, 2004.
WE RELY ON A MAJOR TENANT FOR A SIGNIFICANT PORTION OF OUR RENTAL REVENUES.
Benziger Family Winery accounted for 18%, 19% and 21% of our rental
revenues for the fiscal years ended June 30, 2004, 2003 and 2002, respectively.
In addition, Benziger Family Winery accounted for 23% and 24% of the accounts
receivable balance as of the fiscal years ended June 30, 2004 and 2003,
respectively. The loss of Benziger Family Winery as a tenant would have a
material adverse effect on the operating results of the real estate operations.
At June 30, 2004 and 2003, all rental amounts owing by Benziger Family Winery
were payable within the normal billing cycle and were not past due.
FACTORS RELATED TO INVESTMENT OPERATIONS
As of December 10, 2003, the Company has completely funded its $3
million minority investment in the Series D preferred stock of a public
reporting telecommunications company, MetroPCS Communications, Inc. The wireless
industry is unsettled, highly competitive and is marked by rapidly developing
and expanding technologies, which presents some risks. Even though management
believes that the investment in MetroPCS Communications represents an attractive
opportunity for the Company and will ultimately provide a positive return to the
Company, there is no assurance that this will occur.
On March 23, 2004 MetroPCS filed a registration statement with the
Securities and Exchange Commission for an initial public offering of its common
stock. On July 28, 2004 MetroPCS announced that it had determined not to proceed
at that time with the planned initial public offering of common stock pending a
review of certain accounting issues that had come to its attention relating to
its previously disclosed financial statements. On August 12, 2004 MetroPCS
formally withdrew the registration. There is no certainty that MetroPCS when or
if at all will be able to complete a public offering of its securities or that
the Company will be able to achieve liquidity for its investment.
OUR INVESTMENT IN METROPCS COMMUNICATIONS, INC. REPRESENTS A SIGNIFICANT PORTION
OF OUR ASSETS.
As of June 30, 2004, we have invested $3,001,200 the Series D Preferred
Stock of MetroPCS Communications, Inc., a public reporting telecommunications
company (File Number 000-50869). The Company accounts for its investment in
MetroPCS Communications under the cost method. The Company owns approximately
0.857% of the total outstanding shares of Series D Preferred Stock and
approximately 0.33% of the total outstanding capital stock on an as-converted
basis. Our investment represents 44% of our total assets. Our investment in
MetroPCS Communications is our only investment. Shareholders in the Company do
not have the benefits that would result from a diversified portfolio of
investments. Even though management believes that the investment in MetroPCS
Communications will ultimately provide a positive return to the Company, the
loss of our investment in MetroPCS Communications could have a material adverse
effect on our business, financial condition and results of operations.
-7-
ITEM 2. PROPERTIES
ADMINISTRATIVE OFFICES. The principal administrative offices of the
Company are located at 2064 Highway 116 North, Sebastopol, California. The
administrative offices occupy a small portion of this Company-owned property.
Prior to March 2000, the principal administrative offices of the Company were
located in Santa Rosa, California.
REAL PROPERTY. The Company owns two properties together comprising 82
acres in West Sonoma County approximately 56 miles north of San Francisco. The
properties are four miles apart, north and south of the town of Sebastopol
located in the "Russian River Valley" wine appellation district.
SONOMAWEST INDUSTRIAL PARK SOUTH. This property consists of 15.2 acres
of land immediately south of Sebastopol at 1365 Gravenstein Highway South. It is
in the City of Sebastopol's sphere of influence. The improvements consist of
five connected buildings on a parcel approximately five acres in size with an
aggregate of 84,724 square feet of leasable space under roof. The available
space is suited for commercial rental. All buildings have fire sprinkler
protection. Other features include ample parking, security and a location close
to major north-south and east-west traffic arteries. In addition, there is
16,543 square feet of paved parking area that is currently leased. The property
is zoned for "limited industrial" use, which means that permitted uses include
agricultural/food processing, light industry, related office to support
industrial tenant activities, warehousing or storage. Adjacent to these five
acres are two additional undeveloped Company owned parcels approximately two
acres and eight acres in size zoned "limited industrial" and "low density
residential", respectively.
As of June 30, 2004, 70% of the leasable space under roof has been
leased to seven tenants on a month-to-month or long-term basis. An additional
16,543 square feet of outside space has also been leased. Lease terms range from
month-to-month to ten years with options to extend beyond that.
The following table sets forth the schedule of future lease expirations
and other data related to the South property:
Number of Total Percent of 2004
Tenants Whose Square Feet Annual Rent Gross Rent
Year ending Leases Covered Represented Represented
June 30th Will Expire by Leases by Leases by Leases
- ------------- ------------- ----------- ----------- ---------------
2005 -- 73,692 $297,218 83%
2006 1 42,286 $135,774 38%
2007 2 12,669 $ 53,027 15%
2008 1 5,417 $ 8,642 2%
2009 1 -- -- --
2010 0 -- -- --
The federal tax basis of the property is $323,668. The accumulated book
depreciation is $967,869 and the book net carrying value is $297,641.
Depreciation expense is calculated on a straight-line basis for book purposes
and various methods for tax purposes.
The real estate taxes for this property for the fiscal year ended June
30, 2004 were $14,312.
The Company has a $1.7 million loan secured by this property, which
matures in December 2005.
SONOMAWEST INDUSTRIAL PARK NORTH. This property consists of 66.4 acres
of land approximately two miles north of Sebastopol at 2064 Gravenstein Highway
North. The improvements consist of twelve
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buildings located on approximately 27 acres with an aggregate of 305,986 square
feet of leasable space under roof. In addition, there is 55,454 square feet of
outside area that is currently leased. The balance of the property is dedicated
to wastewater treatment and a large pond for fire protection. This property is
zoned "diversified agriculture" in its entirety, which means that it can be used
for agricultural/food processing, warehousing and related office space to
support industrial tenant activities. SonomaWest is currently attempting to
broaden the permitted uses of the 2064 Gravenstein Highway North property to
allow other types of activities, but there can be no assurance that such efforts
will be successful. The existing use permit may restrict the types of tenants
that could occupy the property, resulting in prolonged vacancy and/or lower
rental rates, having a material adverse effect on the Company's business,
financial condition and results of operations.
As of June 30, 2004, 64% of the leasable space under roof has been
leased to twenty tenants on a month-to-month or long-term basis. An additional
55,454 square feet of outside space has also been leased. Leases range from
month-to-month to ten years with options to extend beyond that.
The following table sets forth the schedule of the future lease
expirations and other data related to the North property:
Number of Total Percent of 2004
Tenants Whose Square Feet Annual Rent Gross Rent
Year ending Leases Covered Represented Represented
June 30th Will Expire by Leases by Leases by Leases
- ------------- ------------- ----------- ----------- ---------------
2005 -- 180,538 $1,080,369 81%
2006 1 168,959 $ 997,892 74%
2007 3 106,105 $ 486,029 36%
2008 4 64,469 $ 223,317 17%
2009 2 36,984 $ 168,380 13%
2010 1 34,279 $ 152,611 11%
The federal tax basis of the property is $1,694,081. The accumulated
book depreciation is $4,281,604 and the book net carrying value is $1,332,214.
Depreciation expense is calculated on a straight-line basis for book purposes
and various methods for tax purposes.
The real estate taxes for this property for the fiscal year ended June
30, 2004 were $55,400.
The Company has no debt associated with this property. The Company
continues to market all of its properties. There can be no assurance that these
marketing efforts will be successful, or that suitable tenants will be found on
a timely basis. Significant, prolonged vacancies at the properties may have a
material adverse impact on the Company's business, financial condition and
results of operations.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the last
quarter of the fiscal year ended June 30, 2004.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the Nasdaq Small Cap Market
(symbol: SWHI). The quarterly high and low prices for the last two fiscal years
were as follows:
QUARTER ENDING LOW HIGH
-------------- ---- ----
09/30/02 5.37 7.77
12/31/02 5.41 6.78
3/31/03 5.05 6.39
6/30/03 4.21 6.20
9/30/03 4.65 8.20
12/31/03 6.76 13.30
3/31/04 7.78 9.25
6/30/04 9.02 11.05
The above quotations were obtained from the Yahoo Finance Historical
Quotes Online website.
On September 20, 2004, there were approximately 427 registered holders
of common stock. On that date, the average of the high and low price per share
of the Company's stock was $9.72.
The Company has not paid dividends on its common stock within the last
15 years. Even if its future operations result in profitability, as to which
there can be no assurance, there is no present anticipation that dividends will
be paid. Rather, the Company expects that any future earnings will be applied
toward the further development of the Company's business.
The Company's equity plan information required by this Item is
incorporated by reference from the information under the heading "Equity
Compensation Plan Information" in the Company's proxy statement for its Annual
Meeting of Stockholders to be held on October 27, 2004.
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ITEM 6. SELECTED FINANCIAL DATA.
YEAR ENDED JUNE 30 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2004 2003 2002 2001 2000
---------------- ----------------- ----------------- ------------- --------------
Total revenues (1) $2,050 $1,841 $1,664 $1,371 $1,292
Net earnings (loss) from continuing 62 (202) (511) (355) (473)
operations
Net earnings (loss) from discontinued
operations -- 127 16 161 3,183
Net earnings (loss) 62 (75) (495) (194) 2,710
Earnings (loss) per share from
continuing operations
Basic 0.06 (0.18) (0.49) (0.27) (0.31)
Diluted 0.05 (0.18) (0.49) (0.27) (0.31)
Earnings (loss) per share from
discontinued operations
Basic -- 0.11 0.02 0.12 2.09
Diluted -- 0.11 0.02 0.12 2.06
Earnings (loss) per share
Basic 0.06 (0.07) (0.47) (0.15) 1.78
Diluted 0.05 (0.07) (0.47) (0.15) 1.75
Total Assets 7,006 7,126 7,470 7,687 12,969
Long Term Debt 1,620 -- 1,856 1,917 1,974
(1) After the sale of the Company's apple-based industrial ingredient business
and the discontinuation of its organic packaged goods business in fiscal
2000, the Selected Financial Data presented above was reformatted to
reflect this discontinuation in the ongoing business of the Company. As a
result, this chart now reflects the ongoing real estate business as
continuing operations and the financial results from the discontinuation of
its industrial ingredients and organic packaged goods business as
discontinued operations.
-11-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
OVERVIEW
As of fiscal 2004 the Company's business consists of its real estate
management and rental operations and its minority investment in the Series D
preferred stock of a public reporting telecommunications company, MetroPCS
Communications, Inc.
In 2000 and 2001, the Company liquidated its fruit processing
operations, but continued to hold its real estate and other assets. Thereafter,
an opportunity was made available to the Company to invest in MetroPCS
Communications, Inc., a public reporting telecommunications company with
operations, in part, in Northern California. The Company believed and continues
to believe that such an investment was a good investment, which provided a
diversification of its assets.
The Company accounts for its investment in MetroPCS Communications
under the cost method. The Company's interest in the Series D offering is
approximately 0.857% (30,012 shares of 3,500,987) and on an as converted basis
is approximately 0.33% (638,576 shares of 193,513,851).
During the third quarter of fiscal 2004, the Company concluded that
tenant reimbursements are more appropriately classified as a separate line item
of revenue rather than as a reduction of operating costs. Accordingly, the
accompanying statements of operations for the year ended June 30, 2004 reflect
tenant reimbursements as a separate line item of revenue. Comparative statements
of operations for the years ended June 30, 2002 and 2003 have been reclassified
to reflect the current period presentation. The revenue and operating cost
reclassifications below reflect an increase in revenue and a corresponding
increase in operating costs in the amounts of $217,000, and $327,000 for the
years ended June 30, 2002 and 2003, respectively. There classifications have no
impact on previously reported operating income (loss), net loss or net loss per
share amounts.
The results of the reclassifications are as follows: Statement of
Operations Data:
Year ended June 30, 2002
As originally reported Reclassifications As Adjusted
Tenant Reimbursements $ -- $217,000 $ 217,000
Total Revenues $1,447,000 $217,000 $1,664,000
Operating Costs $2,065,000 $217,000 $2,282,000
Year ended June 30, 2003
As originally reported Reclassifications As Adjusted
Tenant Reimbursements $ -- $327,000 $ 327,000
Total Revenues $1,514,000 $327,000 $1,841,000
Operating Costs $1,751,000 $327,000 $2,078,000
The Company has no tenant related reimbursements that are not part of tenant
lease agreements.
-12-
RESULTS OF CONTINUING OPERATIONS
The Company's continuing line of business consists of its rental
operations, real estate management and an investment in MetroPCS. See Item 2,
Properties, above for a further discussion of the Company's real estate
operations.
FISCAL 2004 COMPARED TO FISCAL 2003
RENTAL REVENUE. The Company leases warehouse, production, and office
space as well as outside storage space at both of its properties. The two
properties have a combined leasable area of approximately 477,509 square feet
(390,710 under roof and 86,799 outside) on 82 acres of land. As of the end of
fiscal year 2004, there were 27 leases covering 326,014 square feet of leasable
space (254,017 under roof and 71,997 outside) or 68%. As of the end of fiscal
2003, there were 27 leases that comprised 292,785 square feet of leasable space
(227,058 under roof and 65,727 outside) or 64% of the total leasable area of
455,597 (389,870 under roof and 65,727 outside). Fiscal 2004 rental revenue
increased $118,000 or 8% from $1,514,000 in fiscal 2003 to $1,637,000 in fiscal
2004. Overall the rental rates for space under roof remained relatively the
same. The additional occupancy accounted for the increase in the revenue between
fiscal years. Rental revenue does not cover all operating costs and interest
expense, yielding deficits of $49,000 and $301,000 in fiscal years 2004 and 2003
respectively. While the Company continues to market the properties to
prospective tenants, there can be no assurance that tenants will be found in the
near term or at rates comparable with existing leases. As a result, the
Company's operating results will be negatively impacted as long as the tenant
rental revenue stream fails to cover existing operating costs.
TENANT REIMBURSEMENTS. During the third quarter of fiscal 2004, the
Company concluded that tenant reimbursements are more appropriately classified
as a separate line item of revenue rather than as a reduction of operating
costs. The comparative statements of operations for the fiscal years ended 2003
and 2002 have been revised to reflect the current year's presentation. For the
fiscal year 2004, tenant reimbursements increased $86,000 or 26% as compared to
fiscal year 2003. Such reimbursements related primarily to utility costs. The
majority of the increase is a result of additional energy consumption by
tenants. The combined impact of electric and gas rate changes were relatively
minor. Tenant reimbursements are passed along to the tenants at the Company's
cost.
OPERATING COSTS. Total operating costs consist of direct costs related
to continuing operations and all general corporate costs. Fiscal 2004 total
operating costs of $2,060,000, decreased $18,000 or 1% from $2,078,000 in fiscal
2003. This decrease of $18,000 was a result of a decrease of $178,000 due to
property damages from winter storms of $100,000 during fiscal 2003 that did not
recur in fiscal 2004 and decreased repairs and maintenance of $89,000 offset by
an increase of $160,000 in related party legal costs incurred in strategic
planning. The Company continues to closely scrutinize all discretionary
spending. Efforts to reduce and/or maintain expenses continue to be an important
focus of the Company.
Interest Income. In fiscal 2004 the Company generated $25,000 of
interest income on its cash balances, this compares to $46,000 in fiscal 2003.
The lower interest income in fiscal 2004 is a result of a decrease in the
available invested cash and slightly lower interest rates.
INTEREST EXPENSE. Interest expense consists primarily of interest
expense on mortgage debt and the change in the value of the Company's interest
rate swap contract. For fiscal year 2004, the Company incurred $97,000 of
interest expense and recorded a positive swap contract adjustment upon the
termination of the swap of $37,000. This compares to $140,000 of interest
expense and a positive swap contract adjustment of $34,000 for the corresponding
period in the prior year. As of December 1, 2004, the Company's swap contract
with its bank terminated.
-13-
OTHER INCOME AND EXPENSE. In fiscal 2004 the Company incurred a net
loss of $4,000 from other income and expense. This was comprised of a loss on
the sale of fixed assets of $24,000, which was partially offset by other income
of $20,000. The other income of $20,000 was from multiple sources. In fiscal
2003, the Company incurred $4,000 of other expenses.
INCOME TAXES. The effective tax (benefit) rate changed from a provision
of 17% in fiscal 2003 to a benefit of 227% in fiscal 2004. The large benefit
percentage in fiscal 2004 was a result of the elimination of the valuation
allowance on state net operating losses. Though the Company has reported taxable
losses in recent years, the pending initial public offering of MetroPCS is
expected to result in significant realized investment gains as the Company plans
to sell a portion of it's investment upon completion of the aforementioned
initial public offering. Consequently, management believes that it is more
likely than not that the Company will generate sufficient taxable income in the
foreseeable future, allowing the utilization of 100% of its deferred tax assets.
As a result, the valuation allowance was reversed. In fiscal 2003 the provision
percentage of 17% was lower than the normal combined rate of 40%, as a result of
the valuation allowance placed on state deferred tax assets due to the
uncertainty of the future realization of such deferred tax assets and future
taxable income against which the state net operating losses could be offset.
FISCAL 2003 COMPARED TO FISCAL 2002
RENTAL REVENUE. As of the end of fiscal year 2003, there were 27 leases
covering 292,785 square feet of leasable space (227,058 under roof and 65,727
outside) or 64%. As of the end of fiscal 2002, there were 26 leases that
comprised 297,023 square feet of leasable space (216,136 under roof and 80,887
outside) or 63% of the total leasable area of 471,032 (389,870 under roof and
81,162 outside). Fiscal 2003 rental revenue increased $67,000 or 5% from
$1,447,000 in fiscal 2002 to $1,514,000 in fiscal 2003. Although the total
leasable space decreased, the area under roof actually increased. The rental
revenue per square foot for the area under roof is significantly higher than the
outside area and as a result more than offset for the loss of the revenue from
the outside area. In addition, the revenue also increased as a result of the
normal CPI rate increases.
REIMBURSEMENTS. For the fiscal year 2003 tenant reimbursements
increased $110,000 or 51% to $327,000 as compared to fiscal year 2002 of
$217,000. Such reimbursements related primarily to utility costs. The majority
of the increase is a result of additional energy consumption by tenants. The
combined impact of the electric and gas rate changes were relatively minor
Operating Costs. During fiscal 2003, operating costs increased 10% or $169,000
from $1,668,000 in fiscal 2002 to $1,837,000. Whereas the related party expenses
decreased during fiscal 2003 by $373,000 or 61% from $614,000 in fiscal 2002 to
$241,000 in fiscal 2003. The increase in fiscal 2002 was primarily a result of
the charge of $362,500 against earnings from the separation agreement for Gary
Hess, the former President and Chief Executive Officer of the Company.
INTEREST INCOME. In fiscal 2003 the Company generated $46,000 of
interest income on its cash balances. This compared to $102,000 in fiscal 2002.
The decline in income is a result of the lower cash balances and a decline in
interest rate.
INTEREST EXPENSE. Interest expense consists of interest expense on the
Company's mortgage debt and the change in the value of the Company's interest
rate swap contract. Interest expense net of the swap contract adjustments
increased from $203,000 as of fiscal 2002 ($144,000 of interest on mortgage debt
plus $59,000 from a negative swap contract adjustment) to $106,000 in fiscal
2003 ($140,000 of interest on mortgage debt less $34,000 from a positive swap
contract adjustment).
-14-
OTHER INCOME AND EXPENSE. In fiscal 2003 the Company incurred $4,000 of
other expenses, which compares to $3,000 of other income in fiscal 2002.
INCOME TAXES. The fiscal 2003 effective tax benefit rate decreased to
17% from the fiscal 2002 effective tax benefit rate of 29%. The rate declined
primarily because the permanent differences in fiscal 2003 were a larger
percentage of the income before taxes than in fiscal 2002. In addition to the
effect of the permanent differences, the rates in fiscal 2003 and fiscal 2002
were lower than the normal combined federal and state rate of 40% as a result of
an additional valuation allowance placed on state deferred tax assets due to the
uncertainty of the future realization of such deferred tax assets and future
taxable income against which the state net operating losses could be offset.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash of $1.3 million at June 30, 2004 (all of which was
unrestricted), and current maturities of long-term debt of $56,000. Although the
Company incurred a net loss of $53,000 from continuing operations, it generated
positive cash flow from operating activities of $37,000. The decrease in the
cash balance of $591,000, from $1,939,000 at June 30, 2003 to $1,348,000 at June
30, 2004, was a result of the final funding of the $3.0 million minority
investment in MetroPCS of $305,000, principal payments on long-term debt of
$181,000 and capital expenditures of $196,000, offset by slightly positive cash
flows. The Company anticipates that its fiscal 2005 cash commitments will
consist of $56,000 of principal debt reduction and approximately $360,000 of
capital expenditures. The anticipated decline in cash for fiscal 2005 of
approximately $100,000 will be funded out of the Company's cash balances.
On March 1, 2004, the Company entered into a credit agreement with its
bank to refinance $1,690,000 of its long-term debt of $1,813,000. The balance of
the refinancing of $123,000 was paid by the Company in cash. The term note bears
interest at the bank's prime rate plus .25%, with monthly principal payments of
$4,650 beginning April 1, 2004 with a final installment of the remaining
principal due on December 1, 2005. The note is secured by a first deed of trust
on the Company's property located at 1365 Gravenstein Highway South, Sebastopol,
California. As of June 30, 2004, the Company's debt service coverage ratio was
1.43 to 1, which is greater than the required minimum of 1.25 to 1.
Effective July 1, 2002, the Company elected to account for all
prospective stock options in accordance with SFAS 123, "Accounting for
Stock-Based Compensation". As a result, during the first quarter of fiscal 2004
the Company incurred a charge against continuing operations of $34,000 related
to the issuance of 24,200 fully vested stock options to the Directors, Officers
and specific employees of the Company. In the first quarter of fiscal 2003 the
Company incurred a charge against continuing operations of $42,000 related to
the issuance of 24,200 fully vested stock options to the Directors, Officers and
specific employees of the Company.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, which require the
Company to make estimates and assumptions (see Note 1 to the financial
statements). The Company believes that of its significant accounting policies
(see Note 1 to the financial statements), the following may involve a higher
degree of judgment and complexity.
The most critical accounting policies were determined to be those
related to: valuation of the Company's investment in MetroPCS Communications and
the valuation allowances on deferred tax assets.
-15-
VALUATION OF INVESTMENT IN METROPCS COMMUNICATIONS
The investment in MetroPCS Communications is accounted for using the
cost method. The Company continues to monitor the financial condition, cash
flow, operational performance and other relevant information about MetroPCS
Communications , to evaluate the fair value of this investment. This process is
based primarily on information disclosed in MetroPCS periodic filings with the
Securities and Exchange Commission. It is impracticable for the Company to
determine the fair value of the Company's investment in MetroPCS without
incurring excessive costs.
The Company accounts for its investment in MetroPCS under the cost
method, which amounted to $3,001,200 and $2,696,000 as of June 30, 2004 and June
30, 2003, respectively. The Company owns approximately 0.857% of the total
outstanding shares of MetroPCS' Series D Preferred Stock and approximately 0.33%
of its total outstanding capital stock on an as-converted basis. In its report
on Form 10-K for the year ended December 31, 2003, MetroPCS reported on its
consolidated balance sheet total assets of $902,494,000, revenues of
$459,482,000, net income of $1,817,000, total stockholder's equity of
$84,888,000, and Series D Preferred Stock of $379,401,000. If as a result of its
review of information available to the Company regarding MetroPCS, the Company
believes its investment should be reduced to a fair value below its cost, the
reduction would be charged to "loss on investments" in the consolidated
statements of operations.
VALUATION ALLOWANCE ON DEFERRED TAXES
The Company records deferred tax assets and/or liabilities based upon
its estimate of the taxes payable in future years, taking into consideration any
change in tax rates and other statutory provisions. The Company continues to
post losses from its continuing operations. The losses have generated federal
tax net operating losses ("NOLs") which have been carried back to offset prior
years' taxable income. As of June 30, 2002 the Company carried back all of its
remaining allowable NOLs. After the carryback of the June 30, 2002 federal NOL,
the Company cannot carry back any more losses to prior years and as a result any
losses incurred subsequent to June 30, 2002 will be carried over to offset
future taxable income. California does not allow corporations to carry back
their NOLs, and corporations can only carry forward a portion of the NOLs to
future years to offset net operating profits. Furthermore, state net operating
losses will begin to expire in fiscal 2005. As a result, the Company has
established a valuation allowance for state deferred tax assets for which future
realization is uncertain. At June 30, 2004 and 2003, the Company had recorded,
net deferred tax assets of $379,000 and $383,000, respectively.
SUBSEQUENT EVENTS
STOCK OPTIONS
On July 28, 2004, the Company's Board of Directors granted options
under the 2002 Stock Incentive Plan exercisable in the aggregate for 1,700
shares of common stock to the Chief Financial Officer (500), Secretary (500) and
two employees (700). All of these common stock options were granted at not less
than the fair market value of the common stock on the date of grant, $10.00 per
share, and were all fully vested at the time of issuance.
CONSULTING AGREEMENTS
Effective July 1,2004, the Company and Bugatto Investment Company (of
which David Bugatto, a director of the Company, is the President) entered into a
consulting agreement that supersedes the agreement dated July 17, 2001, as
amended, between the Company and Bugatto Investment Company's principal, David
J. Bugatto. Under the new agreement, Bugatto Investment Company is paid an
hourly
-16-
fee of $225.00 for all services provided, instead of the monthly fee of $2,500.
In addition, in the event either of the Company's Sonoma County properties is
sold during the term of the agreement, Bugatto Investment Company will be paid a
fee of 2% of the gross sales price regardless of whether or not a broker is
involved.
Effective August 1, 2004, the Company entered into a consulting
agreement with Thomas Eakin, the Company's Chief Financial Officer. Under this
agreement, Thomas Eakin provides financial management and accounting services to
the Company at an hourly billing rate of $115.00 per hour, plus expenses.
MINIMUM LEASE INCOME
The Company has been leasing warehouse space, generating revenues of
$1,637,000 in 2004, $1,514,000 in 2003 and $1,447,000 in 2002. The leases have
varying terms, which range from month-to-month to expiration dates through 2013.
As of June 30, 2004, assuming none of the existing leases is renewed or no
additional space is leased, the following will be the future minimum lease
income (in thousands):
YEAR ENDING
JUNE 30
-------------------------------
2005 1,378
2006 1,134
2007 539
2008 232
2009 168
Thereafter 580
------------------
Total $4,031
==================
RELATED PARTY TRANSACTIONS
David J. Bugatto, director, entered into a consulting agreement with
the Company, whereby David Bugatto provides real estate consulting services to
the Company for a monthly fee of $2,500. In addition, in the event that either
of the Company's Sonoma County properties are sold during the term of the
agreement, David Bugatto will be paid a fee of 2.5% of the sales price if no
broker commission is involved and 1.25% of the sales price if a broker is
involved in the sale. In the event that either property is refinanced during the
term of the agreement, David Bugatto will be paid a fee equal to 1% of the
amount of the proceeds received by the Company in excess of its current debt.
The agreement is effective until the earlier of its termination by either party
or December 31, 2003. During fiscal 2004 and 2003, the Company paid David
Bugatto $26,000 and $32,000 for real estate consulting services. As of June 30,
2004, the Company owed David Bugatto $2,500. Effective July 1,2004, the Company
and Bugatto Investment Company (of which David Bugatto is the President) entered
into a consulting agreement that supersedes the agreement dated July 17, 2001,
as amended, between the Company and Bugatto Investment Company's principal,
David J. Bugatto. Under the new agreement, Bugatto Investment Company is paid an
hourly fee of $225.00 for all services provided, instead of the monthly fee of
$2,500. In addition, in the event either of the Company's Sonoma County
properties is sold during the term of the agreement, Bugatto Investment Company
will be paid a fee of 2% of the gross sales price regardless of whether or not a
broker is involved.
-17-
Thomas R. Eakin, Chief Financial Officer, entered into a consulting
agreement with the Company, whereby Thomas Eakin provides financial management
and accounting services to the Company. During fiscal 2004 and 2003, the Company
incurred $51,000 and $65,000 for financial management and accounting consulting
services provided by Thomas Eakin. As of June 30, 2004, there was a payable to
Thomas Eakin of $1,200. The independent consulting agreement terminated on July
31, 2004. The Company entered into a new consulting agreement with Thomas Eakin,
effective August 1, 2004. Under the agreement, Thomas Eakin provides financial
management and accounting services to the Company at an hourly billing rate of
$115.00 per hour, plus expenses.
Gary L. Hess, director and former President and Chief Executive
Officer, entered into an agreement with the Company to sell its remaining
Perma-Pak inventory and equipment. During the fiscal year 2004 the Company
incurred $1,500 in commissions under this agreement. These expenses are included
under Operating Costs - Related Party. As of June 30, 2004, the Company did not
owe Gary Hess any commissions under this agreement. On July 17,2001, the Company
entered into a separation agreement in principle, which was thereafter executed,
with Gary Hess, replacing his existing employment agreement.
Pursuant to the separation agreement, Gary Hess continued as President
and Chief Executive Officer, first on a full-time basis and then on a part-time
basis, through October 31, 2001. Effective September 2001, the Company began
paying separation payments to Gary Hess in the amount of $12,500 monthly for 29
months, replacing all payment obligations under his prior employment agreement.
The Company's obligation under this agreement of $362,500 was recorded in
operating expenses in the first quarter of fiscal 2002. As of June 30, 2004, the
Company has paid all of its obligations under this agreement. Pursuant to this
separation agreement, the Company also designated Gary Hess for the period
beginning July 17, 2001 and ending December 31, 2002, as the Company's exclusive
sales representative to sell any and all remaining Perma-Pak finished goods
inventory and other Perma-Pak property (inventory and property related to
discontinued operations). Under the agreement, Gary Hess was entitled to a
commission of 7% on the net purchase price received by the Company up to
$250,000 and 50% on the net purchase price above $250,000. As of October 3,
2002, the Company entered into an agreement to sell all of the remaining
Perma-Pak finished goods inventory and other Perma-Pak property. As of June 30,
2004, the Company has received $228,000 of the $240,000 total purchase price.
The Company has paid commissions to Gary Hess of $60,829 pursuant to this sale
and $69,673 in total pursuant to this agreement. Upon receipt of the balance of
the total purchase price of $12,000, the Company will owe a commission to Gary
Hess of $6,000.
As part of the separation agreement, Gary Hess was given until January
29, 2002 to decide whether to extend the period in which he was eligible to
exercise the stock options previously granted to him. On January 28, 2002, Gary
Hess elected to exercise his option to purchase 80,000 shares of his total
outstanding options of 89,474 shares. Gary Hess elected to extend the
termination date on his option to purchase the remaining 9,474 shares, through
the last date of the severance period (January 31, 2004). On January 23, 2004,
Gary Hess elected to exercise his option to purchase the remaining 9,474 shares.
As part of the separation agreement the Company agreed to loan Gary Hess up to
$447,370 to allow Gary Hess to exercise the aforementioned options. Gary Hess
elected to borrow $400,000 to exercise 80,000 stock options at $5 per share. The
note dated January 28, 2002 in the amount of $400,000, bears interest at the
Applicable Federal Rate (AFR) for loans of three years or less on the date of
the note (the AFR at January 28, 2002 was 2.73%), payable quarterly. The note
receivable is shown under the Shareholders' Equity section of the balance sheet
as Stock Subscription Receivable - Related Party. The interest receivable on
this note is included under Interest Receivable - Related Party, on the balance
sheet. The Note was payable in full on August 1, 2004. The Note is full recourse
and specifically secured by the stock certificates and evidenced in the form of
a loan and security agreement. As a result of the extension of the option to
purchase the remaining 9,474 shares, the Company incurred a non-cash stock
-18-
compensation charge in the third quarter ended March 31, 2002 of $22,501. As of
August 3, 2004, the Company received payment in full of the note, including
accrued interest.
Roger S. Mertz, Chairman of the Board, is a partner of the law firm
Allen Matkins Leck Gamble & Mallory LLP, which firm serves as the Company's
general counsel. During 2004, 2003, and 2002, the Company incurred $323,000,
$204,000 and $186,000 respectively, for legal services provided by Allen
Matkins. As of June 30, 2004, the Company owed Allen Matkins $19,000.
Craig Stapleton, a former director and the Company's largest
shareholder is a member of the Board of Directors of MetroPCS Communications.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Consolidated Financial Statements and Consolidated Financial
Statement Schedule
Report of Independent Registered Public Accounting Firm.................. F-1
Consolidated Balance Sheets at June 30, 2004 and 2003.................... F-3
Consolidated Statements of Operations for the years ended June 30, 2004,
2003 and 2002............................................................ F-4
Consolidated Statements of Changes in Shareholders' Equity for the years
ended June 30, 2004, 2003 and 2002....................................... F-5
Consolidated Statements of Cash Flows for the years ended June 30, 2004,
2003 and 2002............................................................ F-6
Notes to Consolidated Financial Statements............................... F-7
-19-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
SonomaWest Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of SonomaWest
Holdings, Inc. (a California corporation) and Subsidiary as of June 30, 2004 and
2003, and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended June 30, 2004. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SonomaWest Holdings,
Inc. and Subsidiary as of June 30, 2004 and 2003, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 2004, in conformity with accounting principles generally accepted in
the United States of America.
We have also audited Schedule III for each of the three years in the period
ended June 30, 2004. In our opinion, this schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information therein.
The accompanying consolidated financial statements for the years ended June 30,
2003 and 2002 have been adjusted to reflect the accounting change discussed in
Note 2.
GRANT THORNTON LLP
San Francisco, California,
July 25, 2004
F-1
SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2004 AND 2003
(AMOUNTS IN THOUSANDS)
ASSETS 2004 2003
------- -------
CURRENT ASSETS:
Cash $ 1,348 $ 1,939
Accounts receivable 131 136
Other receivables 33 12
Interest receivable - Related party 3 3
Prepaid expenses and other assets 135 145
Current deferred income taxes, net 77 124
------- -------
Total current assets 1,727 2,359
------- -------
RENTAL PROPERTY, net 1,698 1,731
------- -------
INVESTMENT, at cost 3,001 2,696
------- -------
DEFERRED INCOME TAXES 417 259
------- -------
PREPAID COMMISSIONS AND OTHER ASSETS 163 81
------- -------
Total assets $ 7,006 $ 7,126
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 56 $ 1,857
Accounts payable 127 108
Accrued payroll and related liabilities 33 104
Accrued expenses 241 271
Unearned rents and deposits 287 287
------- -------
Total current liabilities 744 2,627
------- -------
LONG-TERM DEBT, net of current maturities 1,620 --
------- -------
OTHER LONG-TERM LIABILITIES 131 131
------- -------
Total liabilities 2,495 2,758
------- -------
SHAREHOLDERS' EQUITY:
Preferred stock: 2,500 shares authorized;
no shares outstanding -- --
Common stock: 5,000 shares authorized, no par
value; 1,114 and 1,105 shares outstanding at
June 30 2004 and 2003, respectively 2,756 2,675
Stock subscription receivable - Related Party (400) (400)
Retained earnings 2,155 2,093
------- -------
Total shareholders' equity 4,511 4,368
------- -------
Total liabilities and
shareholders' equity $ 7,006 $ 7,126
======= =======
The accompanying notes are an integral part of these consolidated statements.
F-2
SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2004, 2003, AND 2002
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2004 2003 2002
AS ADJUSTED AS ADJUSTED
------- ----------- -----------
RENTAL REVENUE $ 1,637 $ 1,514 $ 1,447
TENANT REIMBURSEMENTS 413 327 217
------- ------- -------
TOTAL REVENUE $ 2,050 $ 1,841 $ 1,664
------- ------- -------
OPERATING COSTS 1,659 1,837 1,668
OPERATING COSTS - RELATED PARTY EXPENSES 401 241 614
------- ------- -------
TOTAL OPERATING COSTS 2,060 2,078 2,282
------- ------- -------
OPERATING LOSS (10) (237) (618)
INTEREST INCOME 25 46 102
INTEREST EXPENSE (60) (106) (203)
OTHER INCOME AND EXPENSE (4) (4) 3
------- ------- -------
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES (49) (301) (716)
INCOME TAX BENEFIT (111) (99) (205)
------- ------- -------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS 62 (202) (511)
------- ------- -------
INCOME FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAXES -- 177 37
DISCONTINUED OPERATIONS - RELATED PARTY
EXPENSES, NET OF INCOME TAXES -- (50) (21)
------- ------- -------
INCOME FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAXES -- 127 16
------- ------- -------
NET INCOME (LOSS) $ 62 $ (75) $ (495)
======= ======= =======
WEIGHTED AVERAGE COMMON SHARES
AND EQUIVALENTS:
Basic 1,109 1,105 1,052
Diluted 1,128 1,105 1,052
EARNINGS (LOSS) PER COMMON SHARE:
Continuing operations:
Basic $ 0.06 $ (0.18) $ (0.49)
Diluted $ 0.05 $ (0.18) $ (0.49)
Discontinued operations:
Basic $ -- $ 0.11 $ 0.02
Diluted $ -- $ 0.11 $ 0.02
Net income (loss):
Basic $ 0.06 $ (0.07) $ (0.47)
Diluted $ 0.05 $ (0.07) $ (0.47)
The accompanying notes are an integral part of these consolidated statements.
F-3
SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2004, 2003, AND 2002
(AMOUNTS IN THOUSANDS)
COMMON STOCK
------------------------
STOCK TOTAL
NUMBER SUBSCRIPTIONS RETAINED SHAREHOLDERS'
OF SHARES AMOUNT RECEIVABLE EARNINGS EQUITY
---------- ----------- ------------- ------------ ---------------
BALANCE, JUNE 30, 2001 1,024 $ 2,187 $ -- $ 2,661 $ 4,848
Net loss -- -- -- (495) (495)
Tender offer reimbursement -- 1 -- 2 3
Exercise of stock options 80 400 (400) -- --
Non-cash stock compensation -- 40 -- -- 40
Issuance of common stock 1 5 -- -- 5
----- ------- ------- ------- -------
BALANCE, JUNE 30, 2002 1,105 $ 2,633 $ (400) $ 2,168 $ 4,401
Net loss -- -- -- (75) (75)
Non-cash stock compensation -- 42 -- -- 42
----- ------- ------- ------- -------
BALANCE, JUNE 30, 2003 1,105 $ 2,675 $ (400) $ 2,093 $ 4,368
Net income -- -- -- 62 62
Non-cash stock compensation -- 34 -- -- 34
Exercise of stock options 9 47 -- -- 47
----- ------- ------- ------- -------
BALANCE, JUNE 30, 2004 1,114 $ 2,756 $ (400) $ 2,155 $ 4,511
===== ======= ======= ======= =======
The accompanying notes are an integral part of these consolidated statements.
F-4
SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2004, 2003, AND 2002
(AMOUNTS IN THOUSANDS)
2004 2003 2002
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 62 $ (75) $ (495)
---------- ---------- ----------
Adjustments to reconcile net loss to net cash
provided by operating activities:
Loss on the disposition of fixed assets 24 7 --
Income from discontinued operations, net -- (127) (16)
Non-cash stock compensation charge 34 42 40
Depreciation and amortization expense 198 293 383
Changes in assets and liabilities:
Accounts receivable, net 5 (18) (21)
Other receivables (21) 5 101
Interest receivable - Related party -- -- 3
Prepaid income taxes -- 75 212
Prepaid expenses and other assets 10 (24) 8
Deferred income taxes (111) (17) (148)
Prepaid commissions and other assets (82) 1 (82)
Accounts payable and accrued expenses (11) 73 56
Accrued payroll and related liabilities (71) (149) 201
Unearned rents and deposits -- 5 106
Other long-term liabilities -- -- 31
---------- ---------- ----------
(25) 166 874
---------- ---------- ----------
Net cash provided by continuing operations 37 91 379
---------- ---------- ----------
Net cash (used in) provided by discontinued operations -- (53) 35
---------- ---------- ----------
Net cash provided by operating activities 37 38 414
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets 7 -- --
Capital expenditures (196) (114) (129)
Investment in MetroPCS (305) (1,294) (803)
---------- ---------- ----------
Net cash used in investing activities (494) (1,408) (932)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt refinancing 1,690
Repayment of debt (1,813)
Principal payments of long-term debt (58) (60) (57)
Stock repurchase -- -- 3
Exercise of common stock options 47 -- 5
---------- ---------- ----------
Net cash used for financing activities (134) (60) (49)
---------- ---------- ----------
NET DECREASE IN CASH (591) (1,430) (567)
CASH AT BEGINNING OF YEAR (of which $600 was restricted in 2002) 1,939 3,369 3,936
---------- ---------- ----------
CASH AT END OF YEAR (of which $600 was restricted in 2002) $ 1,348 $ 1,939 $ 3,369
========== ========== ==========
The accompanying notes are an integral part of these consolidated statements.
F-5
SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004, 2003 AND 2002
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
SonomaWest Holdings, Inc., formerly Vacu-dry Company, ("SonomaWest" or
the "Company") was incorporated in 1946 and currently operates as a real estate
management and rental company with an investment in MetroPCS Communications,
Inc., a public reporting telecommunications company. The Company's rental
operations include industrial/agricultural property, some of which was formerly
used by the Company in its discontinued businesses. This commercial property is
now being rented to third parties. Prior to June 30, 2000 the Company operated
in three business segments: organic packaged goods, real estate, and
ingredients. In July 1999, the Company consummated an asset purchase agreement
to sell the majority of its ingredients business. In the third quarter of fiscal
2000, the Company discontinued its organic packaged goods business, operated
through a subsidiary, Made In Nature Company, Inc. (MINCO), and has sold the
assets related to this segment.
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of
SonomaWest and its 85 percent-owned subsidiary, MINCO. As of June 30, 2001, all
of the remaining assets of MINCO have been sold and in 2002 MINCO was
liquidated. The accompanying consolidated statements of operations reflect the
financial results of MINCO as part of discontinued operations. All significant
intercompany transactions have been eliminated in consolidation.
SUPPLEMENTAL STATEMENTS OF CASH FLOWS INFORMATION
2004 2003 2002
-------- -------- --------
Cash paid for:
Interest $ 102 $ 140 $ 145
======== ======== ========
Income taxes $ 1 $ 1 $ 2
======== ======== ========
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method based upon the estimated useful lives of the
assets as follows:
Buildings and improvements 5 to 45 years
Machinery and office equipment 3 to 15 years
F-6
Rental property consists of the following as of June 30:
2004 2003
---------- ----------
Land $ 231 $ 231
Buildings, machinery and improvements 6,907 6,652
Office equipment and autos 90 144
Construction in progress 33 110
---------- ----------
Total rental property 7,261 7,137
Accumulated depreciation (5,563) (5,406)
---------- ----------
Net rental property $ 1,698 $ 1,731
========== ==========
Improvements that extend the life of the asset are capitalized; other
maintenance and repairs are expensed. The cost of maintenance and repairs was
$30 in 2004, $89 in 2003, and $63 in 2002.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets whenever events or circumstances
indicate that the carrying amount of such assets may not be fully recoverable.
The Company evaluates the recoverability of long-lived assets by measuring the
carrying amount of the assets against the estimated undiscounted cash flows
associated with these assets. At the time such evaluations indicate that the
future undiscounted cash flows of certain long-lived assets are not sufficient
to recover the assets' carrying value, the assets are adjusted to their fair
values.
INVESTMENT
The investment in MetroPCS Communications is accounted for using the
cost method. The Company continues to monitor the financial condition, cash
flow, operational performance and other relevant information about MetroPCS
Communications, to evaluate the fair value of this investment. This process is
based primarily on information disclosed in MetroPCS Communications' periodic
filings with the Securities and Exchange Commission. It is impracticable for the
Company to determine the fair value of the Company's investment in MetroPCS
without incurring excessive costs.
The Company accounts for its investment in MetroPCS Communications
under the cost method, which amounted to $3,001,200 and $2,696,000 as of June
30, 2004 and June 30, 2003, respectively. The Company owns approximately 0.857%
of the total outstanding shares of MetroPCS Communications' Series D Preferred
Stock and approximately 0.33% of its total outstanding capital stock on an
as-converted basis. In its report on Form 10-K for the year ended December 31,
2003, MetroPCS Communications reported on its consolidated balance sheet total
assets of $902,494,000, revenues of $459,482,000, net income of $1,817,000,
total stockholder's equity of $84,888,000, and stockholders' equity attributable
to the Series D Preferred Stock of $379,401,000. If as a result of its review of
information available to the Company regarding MetroPCS Communications , the
Company believes its investment should be reduced to a fair value below its
cost, the reduction would be charged to "loss on investments" on the
consolidated statements of operations.
On March 23, 2004 MetroPCS filed a registration statement with the
Securities and Exchange Commission for an initial public offering of its common
stock. On July 28, 2004 MetroPCS announced that it had determined not to proceed
at that time with the planned initial public offering of common stock pending a
review of certain accounting issues that had come to its attention relating to
its previously
F-7
disclosed financial statements. On August 12, 2004 MetroPCS formally withdrew
the registration. There is no certainty about when, or if at all MetroPCS will
be able to complete a public offering of its securities or that the Company will
be able to achieve liquidity for its investment.
PREPAID COMMISSIONS
The Company capitalizes rental commissions paid to real estate brokers
and amortizes these commissions over the term of the lease.
EARNINGS PER SHARE CALCULATION
Basic net earnings (loss) per share is computed by dividing net
earnings (loss) by the weighted average number of shares outstanding. Diluted
net earnings (loss) per share is computed by dividing net earnings (loss) by the
sum of the weighted average number of shares outstanding plus the dilutive
potential common shares. The dilutive effect of stock options is computed using
the treasury stock method. Dilutive securities are excluded from the diluted net
earnings (loss) per share computation if their effect is anti-dilutive. During
2004, 2003 and 2002, 0, 51 and 2 stock options were excluded from diluted shares
used in the computation of diluted earnings per share from discontinued
operations as their effect was anti-dilutive. During 2004, 2003 and 2002, 0, 76
and 52 stock options were excluded from the diluted loss per share from
continuing operations as their effect was anti-dilutive.
INCOME TAXES
The Company records income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
SFAS No. 109 requires the Company to compute deferred taxes based upon the
amount of taxes payable in future years after considering changes in tax rates
and other statutory provisions that will be in effect in those years.
Deferred taxes are recorded based upon differences between the
financial statement and tax bases of assets and liabilities and available tax
credit carryforwards. A valuation allowance is provided for deferred tax assets,
if their realization is uncertain.
REVENUE RECOGNITION
Revenue is recognized on a monthly basis, based upon the dollar amount
specified in the related lease. The Company requires that all tenants be covered
by a lease. The Company does not have leases that include provisions that
require the lessee to pay the lessor any additional rent based upon the lessee's
sales or any other financial performance levels. Reimbursements of certain costs
received from tenants are recognized as tenant reimbursement revenues.
F-8
MINIMUM LEASE INCOME
The Company leases warehouse space that generated revenues of
$1,637,000 in 2004, $1,514,000 in 2003 and $1,447,000 in 2002. The leases have
varying terms, which range from month-to-month to expiration dates through 2013.
As of June 30, 2004, assuming none of the existing leases is renewed or no
additional space is leased, the following is the future minimum lease income (in
thousands):
YEAR ENDING
JUNE 30
-------------------------------
2005 1,378
2006 1,134
2007 539
2008 232
2009 168
Thereafter 580
------------------
Total $4,031
==================
ALLOWANCES FOR DOUBTFUL ACCOUNTS
The Company makes judgments as to its ability to collect outstanding
receivables and provide allowances for the portion of receivables when
collection becomes doubtful. Provisions are made based upon a specific review of
all outstanding invoices. As of June 30, 2004, no allowances for outstanding
receivables were considered necessary. The Company performs a credit review
process on all prospective tenants. The extent of the credit review is dependant
on the dollar value of the lease.
CONCENTRATION OF CREDIT RISK
Benziger Family Winery accounted for 18%, 19% and 21% of rental
revenues for the fiscal years ended June 30, 2004, 2003 and 2002, respectively.
In addition, Benziger Family Winery accounted for and 23% and 24% of the
accounts receivable balance as of the fiscal years ended June 30, 2004 and 2003,
respectively. The loss of Benziger Family Winery as a tenant would have a
material adverse effect on the operating results of the real estate operations.
GEOGRAPHIC CONCENTRATION
The Company's rental revenues come from two properties located in
Northern California and more particularly Sonoma County. Events and conditions
applicable to owners and operators of real property that are beyond our control
may decrease the value of our properties. These events include: local oversupply
or reduction in demand for office, industrial or other commercial space;
inability to collect rent from tenants; vacancies or inability to rent spaces on
favorable terms; inability to finance property development on favorable terms;
increased operating costs, including insurance premiums, utilities, and real
estate taxes; costs of complying with changes in governmental regulations; the
relative illiquidity of real estate investments; changing sub-market
demographics and property damage resulting from seismic activity. The
geographical concentration of our properties may expose us to greater economic
risks than if we owned properties in several geographic regions. Any adverse
economic or real estate developments in the Sonoma County region could adversely
impact our financial condition, results from operations, cash flows, quoted per
share trading price of our common stock and ability to satisfy our debt service
obligations. The economic environment in Sonoma County has improved since last
year. In a recent report prepared for the Sonoma County Economic Development
Board by Economy.com, Inc., dated May 2004, they state "Sonoma County's economy
is past its worst point of the business cycle and will begin to
F-9
improve in coming months." "A clear path to recovery is not evident yet, but the
local economy is beginning to get back on its feet. " As part of this economic
recovery, we anticipate the commercial, industrial and office markets in Sonoma
County will also experience positive effects from this recovery. Obtaining new
tenants for our properties generally requires taking tenants from competitor
properties. There is no assurance that the market will significantly improve in
the near future.
STOCK-BASED COMPENSATION
Effective July 1, 2002, the Company has elected to account for all
prospective stock options in accordance with SFAS 123, "Accounting for
Stock-Based Compensation", and as permitted by SFAS 148. As a result, during
fiscal 2004 and 2003, the Company incurred charges included in continuing
operations of $34 and $42 related to the issuance of 24 and 24 fully vested
stock options to the directors, officers and certain employees of the Company,
respectively. No additional stock options had been granted as of June 30, 2004.
Prior to July 1, 2002, The Company accounted for stock-based
compensation plans in accordance with Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," under which
compensation cost was recorded as the difference between the fair value and the
exercise price at the date of grant, and was recorded on a straight-line basis
over the vesting period of the underlying options. Prior to July 1, 2002, the
Company had adopted the disclosure only provisions of Statement of Financial
Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation". The
Company continues to account for stock options granted prior to July 1, 2002 in
accordance with APB 25; and thus, continues to apply the disclosure only
provisions of SFAS 123 to such options. No other compensation expense has been
recognized in the accompanying financial statements pursuant to stock options
issued prior to July 1, 2002 as the option terms are fixed and the exercise
price equals the market price of the underlying stock on the date of grant for
all options granted by the Company.
Had compensation cost for the stock options granted prior to July 1,
2002 been determined based upon the fair value at grant dates for awards under
those plans consistent with the method prescribed by SFAS 123, the net loss
would have been increased to the pro forma amounts indicated below:
FOR THE YEAR ENDED JUNE 30,
2004 2003 2002
Net Income (Loss), as reported $62 $(75) $(495)
Add back: Actual Stock Compensation
Expense--Net of taxes $20 $25 $28
Less: Proforma Stock Compensation
Change--Net of taxes $(24) $(30) $(73)
Pro-forma Net Income (Loss) $58 $(80) $(540)
Earnings (Loss) Per Share:
Basic and diluted- as reported $0.05 $(0.07) $(0.47)
Basic and diluted- pro-forma $0.05 $(0.07) $(0.51)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model, with the following
weighted-average assumptions used for the 2004, 2003 and 2002
F-10
grants, respectively: weighted average risk-free interest rates of 3.08, 3.54
and 4.78 percent; expected dividend yield of 0 percent; expected life of four
years for the Plan options; and expected volatility of 24, 23.8 and 25.8
percent.
For options granted during the fiscal years ended June 30,2004, 2003
and 2002, the weighted average fair value as of the grant date was $2.13, $1.95,
and 1.39 respectively.
USE OF ESTIMATES
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States ("GAAP"). These
accounting principles require management to make certain estimates, judgments
and assumptions. We believe that the estimates, judgments and assumptions upon
which we rely are reasonable based upon information available to us at the time
that these estimates, judgments and assumptions are made. These estimates,
judgments and assumptions can affect the reported amounts of assets and
liabilities as of the date of the financial statements as well as the reported
amounts of revenues and expenses during the periods presented. Our financial
statements would be affected to the extent there are material differences
between these estimates and actual results. In many cases, the accounting
treatment of a particular transaction is specifically dictated by GAAP and does
not require management's judgment in its application. There are also areas in
which management's judgment in selecting any available alternative would not
produce a materially different result.
DERIVATIVES
The Company had a variable rate borrowing tied to the LIBOR rate. To
reduce its exposure to changes in the LIBOR rate, the Company entered into an
interest rate swap contract. The swap contract terminated on December 1, 2003.
Under the terms of the swap contract, the Company exchanged monthly, the
difference between fixed and floating interest amounts calculated on an initial
agreed-upon notional amount of $2,100. The notional amount was amortized monthly
based on the Company's principal payments. The interest rate contract had a
five-year term that coincided with the term of the borrowing, both of which
began on December 1, 1998 and end on December 1, 2003. In accordance with
Statement of Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") the Company reports all changes
in fair value of its swap contract in earnings. The Company did not designate
this swap as a formal hedge. As of the termination of this swap contract on
December 1, 2003, the Company wrote-off the remaining value of this swap
contract of $37. This amount was included as a reduction of interest expense.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2003 and 2002
consolidated financial statements to conform to the current year presentation
adopted for fiscal 2004 and as required with respect to discontinued operations.
2. REVISION OF PREVIOUSLY REPORTED AMOUNTS
During the third quarter of fiscal 2004, the Company concluded that
tenant reimbursements are more appropriately classified as a separate line item
of revenue rather than as a reduction of operating costs. Accordingly, the
accompanying statements of operations for the year ended June 30, 2004 reflect
tenant reimbursements as a separate line item of revenue. Comparative statements
of operations for the years ended June 30, 2002 and 2003 have been reclassified
to reflect the current period presentation. The revenue and operating cost
reclassifications below reflect an increase in revenue and a corresponding
increase in operating costs in the amounts of $217, and $327 for the years ended
June 30, 2002 and 2003,
F-11
respectively. The reclassifications have no impact on previously reported
operating income (loss), net loss or net loss per share amounts.
The results of the reclassifications are as follows: Statement of Operations
Data:
Year ended June 30, 2002
As originally reported Reclassifications As Adjusted
Tenant Reimbursements $ -- $217 $217
Total Revenues $1,447 $217 $1,664
Operating Costs $2,065 $217 $2,282
Year ended June 30, 2003
As originally reported Reclassifications As Adjusted
Tenant Reimbursements $ -- $327 $327
Total Revenues $1,514 $327 $1,841
Operating Costs $1,751 $327 $2,078
The Company has no tenant related reimbursements that are not part of tenant
lease agreements.
3. LONG-TERM DEBT:
Long-term debt consists of the following:
2004 2003
---------- ----------
Note payable: term loan due December 1, 2005,
fluctuating interest rate equal to the banks
prime rate plus .25%, principal payments of
$5 due monthly, secured by real property 1,676 --
Note payable: five-year note, interest
effectively fixed at 7.35 percent, interest
and principal due monthly, maturing in
December 2003, secured by real property
1,857
---------- ----------
Less: Current maturities (56) (1,857)
---------- ----------
Long-term debt $ 1,620 $ 0
========== ==========
On March 1, 2004, the Company entered into a credit agreement with its
bank to loan the Company $1,690, the proceeds of which were used to refinance
the balance outstanding to the bank as of February 28, 2004 of $1,813, on the
$2.1 million promissory note dated November 17, 1988. The balance of the
refinancing of $123, was paid by the Company in cash. The term note bears
interest at the bank's prime rate plus .25%, with monthly principal payments of
$4.6 beginning April 1, 2004 with a final installment of the remaining principal
due on December 1, 2005. The note is secured by a first deed of trust on the
Company's property located at 1365 Gravenstein Highway South, Sebastopol, CA. As
of June 30, 2004, the Company's debt service coverage ratio was 1.43 to 1, which
is greater than the required minimum of 1.25 to 1.
Prior to entering into the new credit agreement with the Company's bank
on March 1, 2004, the Company had a lending agreement with its bank that
contained certain covenants and conditions. This agreement had been amended over
time, the last of which was on August 15, 2001, whereby the bank agreed to
modify the financial covenant to provide that the Company, at the end of each
fiscal year,
F-12
maintain a debt service coverage ratio of at least 1.05 to 1. It required that
until such time as this ratio reaches 1.25 to 1, the Company was required to
maintain restricted, unencumbered cash or marketable securities of at least
$600. Furthermore, the terms of the loan restrict the Company from incurring any
additional indebtedness during the term of the loan. The new addendum required
that in addition to the lien on the Real Property (South Property only) it
granted the bank a lien on a Money Market account, in the amount of $90. As of
June 30, 2003, the Company achieved the debt service coverage ratio of 1.25 to 1
and as a result the $600 of cash or marketable securities and the lien on the
Money Market account were no longer required.
4. PROVISION FOR INCOME TAXES AND DEFERRED INCOME TAXES:
At June 30, 2004 the Company reversed the 100% valuation allowance that
had been maintained against its deferred tax assets since the fiscal year ended
June 30, 2001. As a result, the Company recorded a reversal of valuation
allowance in the amount of $115, resulting in a total income tax benefit of $111
for year ended June 30, 2004. For the years ended June 30, 2004, 2003, and 2002,
the provision or benefit from income taxes consisted of the following:
2004 2003 2002
-------- -------- --------
Current:
Federal $ -- $ -- $ (75)
State -- -- --
Deferred:
Federal 5 (17) (153)
State (116) 2 29
-------- -------- --------
Provision (Benefit) $ (111) $ (15) $ (199)
======== ======== ========
The components of the provision (benefit) related to continuing operations and
discontinued operations are as follows:
2004 2003 2002
-------- -------- --------
Continuing operations $ (111) $ (99) $ (205)
-------- -------- --------
Discontinued operations -- 84 6
-------- -------- --------
Provision (Benefit) $ (111) $ (15) $ (199)
======== ======== ========
A reconciliation of the federal statutory rate to the tax provision for the
years ended June 30 follows:
2004 2003 2002
% % %
-------- -------- --------
Benefit at federal statutory rate 34% 34% 34%
State taxes, less federal tax benefit 2% 2% 6%
Valuation allowance on deferred state tax (236%) (18%) (9%)
Tax credits and other (27)% (1%) (2%)
-------- -------- --------
Total Provision (Benefit) (227)% 17% 29%
======== ======== ========
F-13
Deferred tax assets and liabilities consisted of the following:
2004 2003
-------- --------
Deferred tax assets:
Employee benefit accruals $ 6 $ 34
Accrued liabilities and reserves 10 16
Depreciation 140 130
Interest rate swap -- 15
Net operating losses 276 211
Other 95 94
-------- --------
Total deferred tax assets 527 500
-------- --------
Deferred tax liabilities:
Property taxes (34) (34)
-------- --------
Total deferred tax liabilities (34) (34)
-------- --------
Valuation allowance -- (83)
-------- --------
$ 493 $ 383
======== ========
As of June 30,2004 the Company had federal net operating loss carry
forwards ("NOLs") totaling approximately $666 that expire at various times
through 2024. For state purposes, the Company had net operating loss carry
forwards totaling approximately $858, which expire at various times through
2009.
The majority of the NOLs originated primarily from taxable losses
incurred subsequent to the Company's sale of its apple processing business.
Though the Company has reported taxable losses in recent years, the pending
initial public offering of MetroPCS is expected to result in significant
realized investment gains as the Company plans to sell a portion of it's
investment upon completion of the MetroPCS initial public offering.
Consequently, management believes that it is more likely than not that the
Company will generate sufficient taxable income in the foreseeable future, to
utilize all of its deferred tax assets.
5. STOCK APPRECIATION RIGHTS PLAN:
In fiscal 2002, the Company terminated its stock appreciation rights
(SAR) plan. In prior years, key employees were granted rights entitling them to
market price increases in the Company's stock. As of June 30, 2001, 100 SARs
were authorized. The Company has not granted SARs since 1995, and all employees
holding SARs were among those terminated during fiscal 2000 in connection with
the discontinuation of the ingredients segment. As a result, all remaining SARs
were canceled during fiscal 2000. In 2002 there was no charge against earnings
as a result of the SAR plan.
6. EMPLOYEE STOCK PURCHASE PLAN:
In fiscal 2002, the Company terminated its Employee Stock Purchase Plan.
Prior to termination, the Plan enabled substantially all employees to purchase a
specified number of shares of the Company's common stock at 85 percent of the
market value on the first or last business day of the quarterly offering period,
whichever is lower. A maximum of 100 shares were authorized for issuance over
the ten-year term of the plan that began on January 1, 1994. The following
shares were issued under the terms of the plan during the five fiscal years
ending June 30:
Shares Issued Average Price Per Share
------------- -----------------------
2004 -0- $-0-
2003 -0- $-0-
2002 1 $6.00
F-14
7. EMPLOYEE STOCK OPTION PLAN:
On July 31, 2002, the Company's Board of Directors approved the
SonomaWest Holdings, Inc. 2002 Stock Incentive Plan (the "2002 Plan"). The 2002
Plan is designed to benefit the Company and its shareholders by providing
incentive based compensation to encourage officers, directors, consultants and
other key employees of the Company and its affiliates to attain high performance
and encourage stock ownership in the Company. The 2002 Plan serves as the
successor program to the Company's previously adopted 1996 Stock Option Plan. No
further options will be granted under the 1996 Stock Option Plan. The maximum
number of shares of Common Stock issuable over the term of the 2002 Plan will
initially be limited to 75 shares.
On July 30, 2003, the Company's Board of Directors granted options
under the 2002 Plan exercisable in the aggregate for 22.5 shares of common stock
to the following Directors: Roger S. Mertz - 7.5, David J. Bugatto - 5.0, Gary
L. Hess - 5.0, Fredric Selinger - 5.0. In addition to the Directors, the Board
of Directors also granted options under the 2002 Plan exercisable in the
aggregate for 1.7 shares of common stock to other officers and employees. All of
these common stock options were granted at the market price on the date of grant
of $5.05 per share.
Prior to adoption of the 2002 Stock Incentive Plan, the Company
administered the 1996 Stock Option Plan (the "1996 Plan"). As amended, the 1996
Plan provided for the issuance of options to employees and non-employee
consultants exercisable for an aggregate of 275 shares of common stock. During
May 1999, the Company modified its 1996 Plan to include all non-bargaining
employees. The modification allowed all employees who were employed as of April
26, 1999, to participate in the Plan, resulting in the issuance of 123 stock
options. In connection with adoption of the 2002 Plan, no future options will be
granted under the 1996 Plan.
F-15
A summary of the status of the Company's stock option plan at June 30,
2004, 2003 and 2002 with changes during the years ended are presented in the
table below:
OPTIONS WEIGHTED AVERAGE
EXERCISE PRICE
Balance, June 30, 2001 108 $5.06
Granted 25 7.48
Cancelled (1) (5.28)
Exercised (80) (5.00)
Balance, June 30, 2002 52 $6.31
Granted 24 7.20
Cancelled 0 -
Exercised 0 -
Balance, June 30, 2003 76 $ 6.59
Granted 24 5.05
Cancelled 0 -
Exercised (9) ($ 5.00)
--------------------------------------------
Balance, June 30, 2004 91 $ 6.35
============================================
Options outstanding, exercisable, and vested by price range at June 30, 2004,
are as follows:
WEIGHTED AVERAGE WEIGHTED AVERAGE
OPTIONS VESTED AND REMAINING FAIR VALUE OF
OPTIONS OUTSTANDING EXERCISABLE AT CONTRACTUAL LIFE OPTIONS GRANTED, AT
EXERCISE PRICE AT JUNE 30, 2004 JUNE 30, 2004 (YEARS) GRANT DATE
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
$ 5.00 15 15 5.8 $ 1.98
$ 5.05 24 24 9.1 1.39
$ 5.28 1 1 5.7 2.10
$ 7.20 24 24 8.1 1.95
$ 7.48 25 25 7.0 2.13
$ 8.00 2 2 4.8 4.24
---------------------------------------------- ----------------------
91 91 $ 1.91
============================================== ======================
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model, with the following
weighted-average assumptions used for the 2004, 2003 and 2002 grants,
respectively: weighted average risk-free interest rates of 3.08, 3.60 and 4.78
percent; expected dividend yield of 0 percent; expected life of five years for
the Plan options; and expected volatility of 24, 22 and 25.83 percent.
Pursuant to his separation agreement (see Note 10), the Company's
former President and Chief Executive Officer, Gary L. Hess, was given until
January 29, 2002 to decide whether to extend the period in which he was eligible
to exercise the stock options previously granted to him. On January 28, 2002,
Gary Hess elected to exercise his option to purchase 80 shares of his total
outstanding options of 89 shares. Gary Hess elected to extend the termination
date on his option to purchase the remaining 9 shares, through the last date of
the severance period (January 31, 2004). As part of the separation agreement the
Company agreed to loan Gary Hess up to $447 to allow Gary Hess to exercise the
aforementioned options. Gary Hess elected to borrow $400 to exercise 80 stock
options at $.005 per share. The note dated January 28, 2002 in the amount of
$400 bears interest at the Applicable Federal Rate (AFR) for loans of three
years or less on the date of the note (the AFR at January 28, 2002 was 2.73%),
payable quarterly. The Note was payable in full on August 1, 2004. The Note is
full recourse and specifically secured by the stock certificates and evidenced
in the form of a loan and security agreement. As a result
F-16
of the extension of the option to purchase the remaining 9 shares, the Company
incurred a non-cash stock compensation charge in the third quarter ended March
31, 2002 of $22. As of August 3, 2004 the Company received payment in full of
the note, including accrued interest.
8. COMMITMENT AND CONTINGENCIES:
The Company leased office space under an operating lease that expired
in December 2003. The space had been sublet through the term of the lease at
approximately the Company's lease rate. For the year ended June 30, 2004,
minimum rental payments exceeded sublease receipts by $(3).
Rental expense under operating leases was $68 in 2004, $85 in 2003 and
$183 in 2002. Related sub-lease income was $71, $189, and $184 in 2004, 2003 and
2002 respectively.
As of June 30, 2004, the Company has completely funded its $3 million
minority investment in the Series D Preferred Stock of MetroPCS Communications,
Inc., a public reporting telecommunications company. The Company accounts for
its investment in MetroPCS Communications under the cost method. The Company
owns approximately 0.857% of the total outstanding shares of Series D Preferred
Stock and approximately 0.33% of the total outstanding capital stock on an
as-converted basis.
LITIGATION
From time to time, the Company is a party to lawsuits and claims arising
out of the normal course of business. As of June 30, 2004, the Company was not a
party to any legal proceedings.
9. RETIREMENT PLANS:
In fiscal 2002, the Company terminated its contributory retirement savings
and profit sharing plan. The Plan called for Company contributions of one and
one-half times the first 3 percent of employee contributions to the retirement
savings plan. Profit-sharing contributions were derived using a specific formula
based upon the Company's earnings. The Company did not make contributions to the
retirement savings and profit sharing plan in 2002.
10. RELATED-PARTY TRANSACTIONS:
David J. Bugatto, director, entered into a consulting agreement with the
Company, whereby David Bugatto provides real estate consulting services to the
Company for a monthly fee of $2.5. In addition, in the event that either of the
Company's Sonoma County properties are sold during the term of the agreement,
David Bugatto will be paid a fee of 2.5% of the sales price if no broker
commission is involved and 1.25% of the sales price if a broker is involved in
the sale. In the event that either property is refinanced during the term of the
agreement, David Bugatto will be paid a fee equal to 1% of the amount of the
proceeds received by the Company in excess of its current debt. The agreement is
effective until the earlier of its termination by either party or December 31,
2003. During fiscal 2004 and 2003, the Company paid David Bugatto $26 and $32,
for real estate consulting services. As of June 30, 2004, the Company owed David
Bugatto $3. Effective July 1,2004, the Company and Bugatto Investment Company
(of which David Bugatto is the President) entered into a consulting agreement
that supercedes the agreement dated July 17, 2001, as amended, between the
Company and Bugatto Investment Company's principal, David J. Bugatto. Under the
new agreement, Bugatto Investment Company is paid an hourly fee of $225.00 for
all services provided, instead of the monthly fee of $2.5. In addition, in the
event either of the Company's Sonoma County properties is sold during the term
of the agreement, Bugatto Investment Company will be paid a fee of 2% of the
gross sales price regardless of whether or not a broker is involved.
F-17
Thomas R. Eakin, CFO, entered into a consulting agreement with the Company,
whereby Thomas Eakin provides financial management and accounting services to
the Company. During fiscal 2004 and 2003, the Company incurred $51 and $65, for
financial management and accounting consulting services provided by Thomas
Eakin. As of June 30, 2004, there was a payable to Thomas Eakin of $1. The
independent consulting agreement terminated on July 31, 2004. The Company
entered into a new consulting agreement with Thomas Eakin, effective August 1,
2004. Under the agreement, Thomas Eakin provides financial management and
accounting services to the Company at an hourly billing rate of $115.00 per
hour, plus expenses.
Gary L. Hess, director, entered into an agreement with the Company to sell
its Perma-Pak inventory and equipment. During fiscal 2004, the Company incurred
$2 in commissions under this agreement. As of June 30, 2004, there was $0
payable to Gary Hess. On July 17,2001, the Company entered into a separation
agreement in principle, which was thereafter executed, with its President and
Chief Executive Officer, a current board member, Gary L. Hess, replacing Gary
Hess' existing employment agreement. Pursuant to the separation agreement, Gary
Hess continued as President and Chief Executive Officer, first on a full-time
basis and then on a part-time basis, through October 31, 2001. Effective
September 2001, the Company began paying separation payments to Gary Hess in the
amount of $12.5 monthly for 29 months, replacing all payment obligations under
his prior employment agreement. The Company's obligation under this agreement of
$362.5 was recorded in operating expenses in the first quarter of fiscal 2002.
As part of the separation agreement, Gary Hess was given until January 29, 2002
to decide whether to extend the period in which he was eligible to exercise the
stock options previously granted to him. On January 28, 2002, Gary Hess elected
to exercise his option to purchase 80 shares of his total outstanding options of
89 shares. Gary Hess elected to extend the termination date on his option to
purchase the remaining 9 shares, through the last date of the severance period
(January 31, 2004). As part of the separation agreement the Company agreed to
loan Gary Hess up to $447 to allow Gary Hess to exercise the aforementioned
options. Gary Hess elected to borrow $400 to exercise 80 stock options at $5.00
per share. The note dated January 28, 2002 in the amount of $400 bears interest
at the Applicable Federal Rate (AFR) for loans of three years or less on the
date of the note (the AFR at January 28, 2002 was 2.73%), payable quarterly. The
Note was payable in full on August 1, 2004. The Note is full recourse and
specifically secured by the stock certificates and evidenced in the form of a
loan and security agreement. As a result of the extension of the option to
purchase the remaining 9 shares, the Company incurred a non-cash stock
compensation charge in the third quarter ended March 31, 2003 of $43. As of
August 3, 2004 the Company received payment in full of the note, including
accrued interest.
Roger S. Mertz, Chairman of the Board, is a partner of the law firm Allen
Matkins Leck Gamble & Mallory LLP, which firm serves as the Company's general
counsel. During 2004, 2003, and 2002, the Company incurred $323, $204 and $186
respectively, for legal services provided by Allen Matkins. As of June 30, 2004,
the Company owed Allen Matkins $19.
Craig Stapleton, a former director and the Company's largest shareholder is
a member of the Board of Directors of MetroPCS Communications.
F-18
11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Quarter Ended 9/30/02 12/31/02 3/31/03 6/30/03 9/30/03 12/31/03 3/31/04 6/30/04
As As As As As As
Adjusted Adjusted Adjusted Adjusted Adjusted Adjusted
--------------------------------------------------------------------------------------------
Total revenue $469 $454 $450 $468 $542 $500 $447 $561
Operating profit (loss) $(82) $(222) $22 $45 $(46) $4 $(76) $108
Net income (loss) from continuing $(96) $(163) $7 $50 $(47) $(16) $(48) $173
operations
Income (loss) from discontinued $43 $77 $(4) $11 -- -- -- --
operations, Net of income taxes
Net income (loss) $(53) $(86) $3 $61 $(47) $(16) $(48) $173
Earnings (loss) per share:
Continuing operations $(.09) $(.15) $.01 $.05 $(.04) $(.01) $(.04) $.16
Discontinued operations $.04 $.07 $.00 $.01 -- -- -- --
Net income (loss) $(.05) $(.08) $.00 $.06 $(.04) $(.01) $(.04) $.15
F-19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
As of June 30, 2004, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chairman of the Board and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures (as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e)).
Based upon that evaluation, the Company's Chairman of the Board and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective at a reasonable level in timely alerting them to
material information relating to the Company that is required to be included in
the Company's periodic filings with the Securities and Exchange Commission.
There has been no change in the Company's internal control over financial
reporting that occurred during the Company's most recent fiscal quarter that has
materially affected or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
The Company's management, including the Chairman of the Board and Chief
Financial Officer, do not expect that the Company's disclosure controls or
internal controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met due to
numerous factors, ranging from errors to conscious acts of an individual, or
individuals acting together. In addition, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of inherent
limitations in a cost-effective control system, misstatements due to error
and/or fraud may occur and not be detected.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information regarding directors and executive officers appearing
under the heading "Proposal 1: Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" of our proxy statement relating to
our 2004 Annual Meeting of Stockholders to be held on October 27, 2004 (the
"2004 Proxy Statement") is incorporated into this item by reference.
The Company has adopted a code of ethics that applies to all employees,
including its principal executive officer, principal financial officer,
principal accounting officer and its Board of Directors. A copy of the code of
ethics attached as an exhibit to this Report.
The names of the executive officers and directors of the Company and
their ages, titles, and biographies as of the date hereof are set forth below:
ROGER S. MERTZ; AGE 60; CHAIRMAN OF THE BOARD.
Mr. Mertz was appointed Chairman of the Board on October 31, 2001. Mr.
Mertz is an attorney-at-law. He is a partner of the California law firm of Allen
Matkins Leck Gamble & Mallory LLP. Prior to October 1999, Mr. Mertz was a
partner of the San Francisco, California law firm of Severson & Werson.
-21-
THOMAS R. EAKIN; AGE 50; CHIEF FINANCIAL OFFICER.
Mr. Eakin has served as the Company's Chief Financial Officer since
October 31, 2001 and also served in such capacity from March 1987 to April 1999.
Mr. Eakin served as the Company's Controller from December 1983 to February
1987. Since July 2000, Mr. Eakin has also owned, managed and served as a
consultant for Eakin Consulting. From April 1999 to June 2000, Mr. Eakin served
as Chief Financial Officer for Associated Vintage Group, a custom wine producer
in Graton, California.
DAVID J. BUGATTO; 40; DIRECTOR.
Mr. Bugatto is President and Chief Executive Officer of Alleghany
Properties, Inc. ("API") and Sacramento Properties Holdings Inc. ("SPHI") (real
estate investments), which are subsidiaries of Alleghany Corporation, a publicly
traded corporation on the NYSE. Mr. Bugatto is also a Director of both API and
SPHI.
GARY L. HESS; 52; DIRECTOR.
Mr. Hess served as President and Chief Executive Officer of the
Company from May 1, 1996 until October 31, 2001, and Chief Financial Officer
from June 14, 1999 until October 31, 2001. Prior thereto he was a Senior Vice
President of Dole Food Company, Inc. (fresh and processed fruit) (1993-1996);
President of Cadace Enterprises, Inc. (water conservation products) and The
Marketing Partnership 1992-1993; and Director of Marketing, E. & J. Gallo Winery
(wine and distilled spirits) (1987-1992).
FREDRIC SELINGER; 65; DIRECTOR.
Mr. Selinger is Senior Managing Director of Corporate Finance of
Sutter Securities, Incorporated (investment banking and consulting). Prior to
March 1995, Mr. Selinger was Managing Director of Jackson Square Capital Corp.
(private investment banking and consulting).
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the headings "Compensation of
Directors," "Compensation Committee Report," "Executive Compensation",
"Compensation Committee Interlocks and Insider Participation", and "Performance
Graph" of our 2004 Proxy Statement is incorporated into this item by reference
(except to the extent allowed by Item 402(a)(8) of Regulation S-K).
ITEM 12. SECURITY OWNERSHIP OF DIRECTORS, OFFICERS AND CERTAIN BENEFICIAL OWNERS
The information appearing under the heading "Security Ownership of
Certain Beneficial Owners" and "Security Ownership of Directors and Executive
Officers" of our 2004 Proxy Statement is incorporated into this item by
reference. In addition, the information regarding equity compensation plans
appearing under the heading "Equity Compensation Plan Information" of our 2004
Proxy Statement is incorporated into this item by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing under the heading "Certain Relationships and
Related Transactions" of our 2004 Proxy Statement is incorporated into this item
by reference.
ITEM 14. Principal Accountant Fees and Services
The information appearing under the heading "Fees to Independent
Auditors for Fiscal 2004 and 2003" of our 2004 Proxy Statement is incorporated
into this item by reference.
-22-
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K.
I. Documents filed as part of this Report:
(a)(1) Financial Statements
The information required by this Item appears in Item 8 of this Annual
Report on Form 10-K.
(a)(2) Financial Statement Schedules
Financial statement schedules not included herein have been omitted
because of the absence of conditions under which they are required or because
the required information, where material, is shown in the financial statements
or notes thereto.
Schedule III.* Real Estate and Accumulated Depreciation
*Schedule included after signature page.
(a)(3) EXHIBITS
Exhibit No. Document Description
3.1(1) Restated Articles of Incorporation
3.2 Bylaws
10.1(2) 1996 Stock Option Plan, as amended
10.2(3) Severance Agreement dated July 17, 2001 between SonomaWest
Holdings, Inc. and Gary L. Hess
10.3(4) SonomaWest Holdings, Inc. 2002 Stock Incentive Plan
10.4 Consulting Agreement dated August 1, 2004 between SonomaWest
Holdings, Inc. and Thomas R. Eakin, d.b.a. Eakin Consulting.
10.5 Consulting Agreement dated July 1, 2004 between SonomaWest
Holdings, Inc. and Bugatto Investment Company.
11.1 Computation of Per Share Earnings
14.1 Code of Business Conduct and Ethics
23.1 Consent of Independent Registered Public Accounting Firm
31.1+ Chairman of the Board Certification of Periodic Financial Report
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2+ Chief Financial Officer Certification of Periodic Financial
Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
-23-
32.1* Chairman of the Board Certification Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002
32.2* Chief Financial Officer Certification Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002
99.1 Complaint Procedure and Nonretaliation Policy for Accounting,
Securities and Shareholder Matters
- ---------------------
(1) Incorporated by reference to the registrant's Current Report on Form
8-K(File No. 000-01912) filed on January 2, 2001.
(2) Incorporated by reference to the registrant's Registration Statement on
Form S-8 (File No. 333-84295) filed on August 2, 1999.
(3) Incorporated by reference to the registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 2001, filed on September 28,
2001 (File No. 000-01912).
(4) Incorporated by reference to the registrant's Annual Report on Form
10-K for the fiscal year ended June 30,2002, filed on September 20,
2002 (File No. 000-01912).
+ Filed herewith.
* Furnished herewith.
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the quarter
ended June 30, 2004.
-24-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Date: September 28, 2004 SONOMAWEST HOLDINGS, INC.
By: /S/ ROGER S. MERTZ
-----------------------------------------
Roger S. Mertz, Chairman of the Board
By: /S/ THOMAS R. EAKIN
-----------------------------------------
Thomas R. Eakin, Chief Financial Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints Roger
S. Mertz and Thomas R. Eakin, and each of them, his attorneys-in-fact, each with
the power of substitution, for him in any and all capacities, to sign any
amendments to this Report on Form 10-K, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting to said attorneys-in-fact, or his substitute or
substitutes, the power and authority to perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
/S/ ROGER S. MERTZ
Roger S. Mertz Chairman of the Board September 28, 2004
/S/ GARY L. HESS
Gary L. Hess Director September 28, 2004
/S/ FREDERIC SELINGER
Fredric Selinger Director September 28, 2004
/S/ DAVID J. BUGATTO
David J. Bugatto Director September 28, 2004
-25-
SCHEDULE III
SonomaWest Holdings, Inc.
REAL ESTATE AND ACCUMULATED DEPRECIATION
June 30, 2004
(DOLLARS IN THOUSANDS)
Column A Column B Column C Column D
Costs
Subsequently
Initial Cost to Company Capitalized
---------------------------------------------------------------------------
Buildings
and
Description Encumbrances Land Improvements Improvements
- ------------------------------------------------------------------------------------------------------------------------------------
1365 Gravenstein Hwy. So.,
Sebastopol, CA 1,850 72 308 908
2064 Gravenstein Hwy. No.,
Sebastopol, CA -- 159 2,312 3,382
----------------------------------------------------------------------------------------------
1,850 231 2,620 4,290
====================================================================================================================================
Column E Column F Column G Column H
Gross Amount at which Carried
at Close of Year
- ------------------------------------------------------------
Buildings
and Total Accumulated Year of Year
Land Improvements (Note 1) Depreciation Construction Acquired
- ----------------------------------------------------------------------------------------------------------------------
72 1,216 1,288 989 N/A 1964
159 5,691 5,850 4,500 N/A 1983
- ----------------------------------------------------------------------------------------------------------------------
231 6,907 7,138 5,489
======================================================================================================================
Note 1. The changes in the total cost of land, buildings, and improvements for
the three years ended June 30, are as follows:
2004 2003 2002
---- ---- ----
Balance at beginning of period 6,880 6,877 6,877
Additions 258 81 60
Assets of discontinued operations (0) (0) (2)
Cost of disposed property ( 0) (78) (58)
--------------------------------------------------------------------
Balance at end of period 7,138 6,880 6,877
====================================================================
Note 2. The changes in accumulated depreciation for the three years ended
June 30, are as follows:
2004 2003 2002
---- ---- ----
Balance at beginning of period 5,297 5,083 4,813
Depreciation expense 292 286 317
Assets of discontinued operations (0) (0) (2)
Relief of accumulated balances
related to disposed property ( 0) (71) (45)
--------------------------------------------------------------------
Balance at end of period 5,489 5,297 5,083
====================================================================
-26-
EXHIBIT INDEX
EXHIBIT NO. DOCUMENT DESCRIPTION
3.2 Bylaws
10.4 Consulting Agreement dated August 1, 2004 between SonomaWest
Holdings, Inc. and Thomas R. Eakin, d.b.a. Eakin Consulting.
10.5 Consulting Agreement dated July 1, 2004 between SonomaWest
Holdings, Inc. and Bugatto Investment Company.
11.1 Computation of Per Share Earnings
14.1 Code of Business Conduct and Ethics
23.1 Consent of Independent Registered Public Accounting Firm
31.1+ Chairman of the Board Certification of Periodic Financial Report
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2+ Chief Financial Officer Certification of Periodic Financial
Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Chairman of the Board Certification Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002
32.2* Chief Financial Officer Certification Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002
99.1 Complaint Procedure and Nonretaliation Policy for Accounting,
Securities and Shareholder Matters
+ Filed herewith.
* Furnished herewith.
-27-