UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
/ / 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 001-15733
SUTTER HOLDING COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 59-2651232
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
220 Montgomery Street, Suite 2100
San Francisco, California 94104
(Address of principal executive office)
(Zip Code)
(415) 788-1441
(Registrant's telephone number, including area code)
150 Post Street, Suite 405, San Francisco, California 94108
(Former name, former address and former fiscal year,
if changed since last report)
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 and (2) has been subject to such filing
requirements for the past 90 days. YES /X/ NO / /
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES / / NO /X/
Number of shares of common stock outstanding as of April 26, 2004: 395,450
TABLE OF CONTENTS
SUTTER HOLDING COMPANY, INC.
FORM 10-Q
Page No.
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets --
March 31, 2004 and December 31, 2003 3
Consolidated Statements of Operations --
First Quarter 2004 and 2003 4
Consolidated Statements of Cash Flows --
First Quarter 2004 and 2003 5
Notes to Interim Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
Item 4. Controls and Procedures 13
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds 13
Item 6. Exhibits and Report on Form 8-K 13
Signature 13
Exhibits
31. Certifications Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32. Certifications Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
2
Part I - Financial Information
Item 1. Financial Statements
SUTTER HOLDING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in US dollars) As of As of
March 31, 2004 December 31, 2003
------------------ -------------------
ASSETS
Cash and cash equivalents $ 351,872 $ 96,971
Accounts receivable 51,289 37,212
Prepaid expenses 35,612 44,290
Mortgages held for sale 5,082,600 3,020,753
Investments, at cost 710,778 985,053
Property and equipment, net 278,840 258,706
Other Assets 332,844 330,785
Goodwill 4,486,134 4,483,746
------------------ -------------------
TOTAL ASSETS $ 11,329,969 $ 9,257,516
================== ===================
LIABILITIES & STOCKHOLDERS' EQUITY
Accounts payable & accrued expenses $ 336,204 $ 318,344
Related party accounts payable 89,126 -
Related party deferred gain 248,817 -
Mortgage warehouse line of credit 5,025,123 2,986,485
Interest payable 52,436 8,885
Debt to unrelated parties 2,078,984 588,551
Debt to related parties 2,269,240 3,953,735
Commitments and contingencies
Stockholders' Equity
Common Stock, $0.0001 par value 36 35
Additional Paid-In Capital 4,844,669 4,669,164
Treasury Stock (604,665) (604,665)
Accumulated deficit (3,010,001) (2,663,018)
------------------ -------------------
Total Stockholders' Equity 1,230,039 1,401,516
------------------ -------------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 11,329,969 $ 9,257,516
================== ===================
See accompanying Notes to Interim Consolidated Financial Statements
3
SUTTER HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
For the three For the three
months ended months ended
(in US dollars) March 31, March 31,
----------------------- -----------------------
2004 2003
----------------------- -----------------------
Revenues:
Gains on sales of mortgages $ 450,267 $ 312,082
Mortgage commissions 202,141 359,208
Miscellaneous income - 53,332
Interest & dividend income 32 1,142
Realized gains (losses), net 59,921 892
----------------------- -----------------------
Total revenues 712,361 726,656
----------------------- -----------------------
Expenses:
General & administrative 643,718 293,240
Depreciation & amortization 29,711 12,385
Interest expense 233,258 102,073
Professional fees and other expenses 120,584 47,865
Provision for impairment 32,043 -
Miscellaneous expenses 30 -
----------------------- -----------------------
Total expenses 1,059,344 455,563
----------------------- -----------------------
Loss before income taxes (346,983) 271,093
Provision for income taxes - -
----------------------- -----------------------
Net income (loss) $ (346,983) $ 271,093
======================= =======================
Net income (loss) per share -- basic and diluted $ (0.98) $ 1.09
Weighted Average Shares Outstanding 352,575 247,786
See accompanying Notes to Interim Consolidated Financial Statements
4
SUTTER HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the three For the three
months ended months ended
(in US dollars) March 31, 2004 March 31, 2003
--------------------- ---------------------
OPERATING ACTIVITIES
Net income (loss) $ (346,983) $ 271,093
Realized losses on sales of investments, net - -
Provision for impairment of investments 32,043 -
Depreciation & amortization 29,711 12,385
Amortization of discount on debt 110,198 -
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Accounts receivable (14,077) (18,859)
Prepaid expenses 8,678 11,997
Mortgages held for sale (2,061,847) 1,390,849
Accounts payable & accrued expenses 106,986 80,612
Income taxes payable - (6,648)
Interest payable 54,658 14,208
Other assets (22,559) -
--------------------- ---------------------
Net cash provided by (used in) operating activities (2,103,192) 1,755,637
--------------------- ---------------------
INVESTING ACTIVITIES
Capital expenditures (29,345) -
Proceeds from sales of investments 191,049 -
Purchases of securities, subsidiaries & other investments (2,388) (3,789,158)
Purchases of other investments - (40,000)
--------------------- ---------------------
Net cash (used in) provided by investing activities 159,316 (3,829,158)
--------------------- ---------------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 68,006 40,000
Proceeds from issuance of notes payable 120,000 3,125,000
Increase (decrease) in mortgage warehouse line of credit 2,038,638 (1,411,276)
Repayment of notes payable (27,867) (140,160)
Purchases of stock for treasury - -
--------------------- ---------------------
Net cash provided by financing activities 2,198,777 1,613,564
--------------------- ---------------------
Net change in cash and cash equivalents for the period 254,901 (459,957)
Cash and cash equivalents, beginning of period 96,971 625,491
--------------------- ---------------------
Cash and cash equivalents, end of period $ 351,872 $ 165,534
===================== =====================
See accompanying Notes to Interim Consolidated Financial Statements
5
SUTTER HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
1. General
The accompanying unaudited Consolidated Financial Statements include
the accounts of Sutter Holding Company, Inc. ("Sutter" or "Company")
consolidated with the accounts of all subsidiaries and affiliates that Sutter
controls as of the financial statement date. Reference is made to Sutter's
recently issued annual report on Form 10-K filed with the SEC that included
information necessary or useful to understanding Sutter's businesses and
financial statement presentations. In particular, Sutter's significant
accounting policies and practices were presented in Note 1 to the Consolidated
Financial Statements included in that annual report, and there have been no
changes during the quarter. Certain amounts in 2004 have been reclassified to
conform to the current period presentation.
Financial information in this Report reflects any adjustments
(consisting only of normal recurring adjustments) that are, in the opinion of
management, necessary to a fair statement of results for the interim periods in
accordance with generally accepted accounting principles ("GAAP").
Sutter's results, and that of its subsidiaries, for interim periods are
not necessarily indicative of results to be expected for the year.
2. Significant Business Acquisitions
Sutter made no business acquisitions during the first quarter of 2004.
As has been previously disclosed in public Company reports on Form 10-K and Form
8-K, Sutter acquired Easton Mortgage Corporation ("Easton") at the beginning of
the first quarter of 2003. The first quarter of 2004 includes the operations of
Sutter's two subsidiaries, Easton and Progressive Lending, LLC, while the first
quarter of 2003 includes only the operations of Sutter's Easton subsidiary.
3. Receivables
Trade accounts receivable consist primarily of revenues and fees
receivable from mortgage origination activities. Receivables were $51,289 and
$37,212 at March 31, 2004 and December 31, 2003, respectively.
4. Investments
Investments are comprised of the following at March 31, 2004 and
December 31, 2003:
March 31, December 31,
2004 2003
------------------- -------------------
Niman Ranch Inc. $0 $753,010
Knight Fuller, Inc. ("KFI") 510,778 0
Tesoro Gold Co. 200,000 200,000
Other investments 0 32,043
------------------- -------------------
Total $710,778 $985,053
=================== ===================
Gross Unrealized Gross Unrealized
Cost Gains Losses Reported Value
-------------------------------------------------------------------------
March 31, 2004
Non-marketable securities held for investment $1,207,237 $0 $496,459 $710,778
December 31, 2003
Non-marketable securities held for investment $1,481,512 $0 $496,459 $985,053
6
On March 29, 2003, the Company sold its interest in Niman Ranch with a
cost of $753,010 to Sutter Opportunity Fund 2, LLC ("SOF2"), a related party,
for $1,001,827 (the "Niman Ranch Transaction"). Consideration received by the
Company consisted of $191,049 in cash, the assumption of $300,000 in the
Company's debt, and the assignment by SOF2 to the Company of 126,118 common
shares of KFI, another related party, valued at $510,778. The net gain of
$248,817 has been deferred as this sale is to a related party that controls the
Company. The Company's investment in KFI represents a 39% equity interest, and
accordingly the Company accounts for this investment under the equity method.
5. Property and Equipment, Net
Property and equipment consist of the following at March 31, 2004 and
December 31, 2003:
March 31, December 31,
2004 2003
------------------- -------------------
Furniture, equipment &
leasehold improvements $304,327 $274,981
Accumulated depreciation (25,487) (16,275)
------------------- -------------------
Furniture, equipment &
leasehold improvements, net $278,840 $258,706
=================== ===================
6. Identifiable Intangible Assets, Net
Identifiable intangible assets consist of the following at March 31,
2004 and December 31, 2003:
March 31, December 31,
2004 2003
------------------- -------------------
Customer list, net of
accumulated amortization of
$15,796 and $2,796 at March 31,
2004 and December 31, 2003 $244,204 $257,204
Non-compete agreement, net of
accumultated amortization of
$9,113 and $1,613 at March 31,
2004 and December 31, 2003 50,887 58,387
------------------- -------------------
Total identifiable intangible
assets, net $295,091 $315,591
=================== ===================
7. Commitments and Contingencies
Net Worth Requirements - The Company's subsidiaries, Easton and
Progressive, are required to maintain certain specified levels of minimum net
worth to maintain their approved status with HUD and other investors. At March
31, 2004, the highest minimum net worth requirement applicable to the Company
was $400,000. As of March 31, 2004, the Company's subsidiaries met their
respective net worth requirements.
8. Debt to Unrelated and Related Parties
Debt to unrelated and related parties of Sutter and its subsidiaries
consisted of the following as of March 31, 2004 and December 31, 2003:
March 31, December 31,
2004 2003
------------------- ------------------
Debt to unrelated parties:
8.00% convertible note due 2006,
net of unamortized discount
of $36,020 and beneficial
conversion of $39,492 at
March 31, 2004, and $78,211
at December 31, 2003 $224,488 $521,789
4.00% notes due 2007 1,854,496 66,762
------------------- ------------------
Total $2,078,984 $588,551
=================== ==================
7
Debt to related parties:
25.00% convertible note due 2005 $40,000 $0
8.00% note due 2005 1,757,107 1,666,000
6.00% note due 2007 472,133 500,000
4.00% note due 2007 0 1,787,735
------------------- ------------------
Total $2,269,240 $3,953,735
=================== ==================
The 25.00% convertible note is an obligation of Progressive Nevada LLC;
a joint venture 50% owned by Progressive and 50% owned by a related party. It is
not convertible at the holder's option, but rather automatically converts into
equity of Progressive Nevada LLC upon the issuance to and receipt by Progressive
Nevada LLC of a Nevada mortgage license. This note is not an obligation of
Sutter and is non-recourse to Sutter.
As part of the consideration received in conjunction with the Niman
Ranch Transaction, half, or $300,000, of the original $600,000 principal amount
of the 8.00% convertible note to an unrelated party was assumed by SOF2. Also as
a result of this transaction, half of the unamortized discount associated with
this convertible note, or $36,020, as well as half of the beneficial interest
conversion feature, or $53,750 were expensed by the Company.
Effective March 1, 2004, the 4.00% notes issued by Sutter in connection
with the acquisition of Easton are recourse to Sutter. In return, the holders of
such notes have agreed to accept interest only payments for the remainder of
2004.
Effective March 6, 2004, the 8.00% note to a related party was modified
to increase the face value of the note to $1,757,107 through additional cash
proceeds and to allow the Company to defer monthly payments for up to one year.
In any month in which the Company elects to defer making a cash payment, the
interest rate increases to 12% for that month. The entire principal balance of
the Note and any deferred interest accrued is due on April 6, 2005.
During the quarter ended March 31, 2004, the 4.00% note payable to
related parties became note payable to unrelated parties, as the relationship
was terminated.
9. Common Stock
Changes in issued and outstanding Sutter common stock for the quarter
ended March 31, 2004 are shown in the table below.
Common Stock, $0.0001 Par Value
(1,875,000 shares authorized)
Shares issued and outstanding
-------------------------------
Balance at December 31, 2003 351,942
Issuances during the quarter 7,556
---------
Balance at March 31, 2004 359,498
---------
The above issuances during the quarter were for cash of $68,006.
10. Certain Relationships and Related Party Transactions
On March 22, 2004, Michael Collins, a director and officer of Sutter,
purchased 5,556 shares of Sutter common stock for $50,000 cash.
8
On March 31, 2004, SOF2, LLC purchased 2,000 shares of Sutter common
stock for $18,000 cash.
All of the shares purchased above are unregistered and restricted
shares as defined by the Securities Act of 1933, as amended, promulgated by the
Securities and Exchange Commission.
On March 29, 2003, the Company sold its interest in Niman Ranch with a
cost of $753,010 to Sutter Opportunity Fund 2, LLC ("SOF2"), a related party,
for $1,001,827 (the "Niman Ranch Transaction"). Consideration received by the
Company consisted of $191,049 in cash, the assumption of $300,000 in the
Company's debt, and the assignment by SOF2 to the Company of 126,118 common
shares of KFI, another related party, valued at $510,778. The net gain of
$248,817 has been deferred as this sale is to a related party that controls the
Company. The Company's investment in KFI represents a 39% equity interest, and
accordingly the Company accounts for this investment under the equity method.
In March, 2004, Sutter's Progressive subsidiary entered into a joint
venture agreement (the "Joint Venture") with KFI to open a mortgage banking
office in Las Vegas, Nevada..KFI agreed to contribute between $40,000 and
$80,000 to the Joint Venture, and Progressive agreed to contribute furniture,
computers, other office equipment, and personnel. Progressive and KFI will each
participate in 50% of the profits and losses of the Joint Venture. In addition,
KFI has an option to acquire 100% of the Joint Venture by issuing 100,000 shares
of KFI common stock to Progressive.
In March, 2004, Progressive entered into a revolving line of credit
agreement with KFI for a maximum loan amount of $100,000. Pursuant to the terms
of the credit agreement, Progressive is required to pay a $40 origination fee
per draw, and 10% interest on any outstanding balances.
11. Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51", which addresses consolidation by
business enterprises of variable interest entities (VIEs) either: (1) that do
not have sufficient equity investment at risk to permit the entity to finance
its activities without additional subordinated financial support, or (2) in
which the equity investors lack an essential characteristic of a controlling
financial interest. In December 2003, the FASB completed deliberations of
proposed modifications to FIN 46 (Revised Interpretations) resulting in multiple
effective dates based on the nature as well as the creation date of the VIE.
VIEs created after January 31, 2003, but prior to January 1, 2004, may be
accounted for either based on the original interpretation or the Revised
Interpretations. However, the Revised Interpretations must be applied no later
than the first quarter of fiscal year 2004. VIEs created after January 1, 2004
must be accounted for under the Revised Interpretations. The Company believes
that it's investment in KFI does not meet the definition of a VIE. However,
should the company increase its borrowings from KFI or interest in KFI, it may
be required to consolidate the entity.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
Investors are cautioned that certain statements contained in this
document, as well as some statements by the Company in periodic press releases
and some oral statements of Company officials during presentations about the
Company, are "forward-looking" statements within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Act"). Forward-looking statements
include statements which are predictive in nature, which depend upon or refer to
future events or conditions, which include words such as "expects,"
"anticipates," "intends," "plans," "believes," "estimates," or similar
expressions. In addition, any statements concerning future financial performance
(including future revenues, earnings or growth rates), ongoing business
strategies or prospects, and possible future Company actions, which may be
provided by management, are also forward-looking statements as defined by the
Act. Forward-looking statements are based on current expectations and
projections about future events and are subject to risks, uncertainties, and
assumptions about the Company, economic and market factors and the industries in
which the Company does business, among other things. These statements are not
guaranties of future performance and the Company has no specific intention to
update these statements.
9
Actual events and results may differ materially from those expressed or
forecasted in forward-looking statements due to a number of factors. The
principal important risk factors that could cause the Company's actual
performance and future events and actions to differ materially from such
forward-looking statements, include, but are not limited to, changes in
applicable Federal or State laws or regulations, changes in Federal income tax
laws, and changes in general economic and market factors that affect the prices
of securities or the industries in which Sutter and its affiliates do business,
especially those affecting the mortgage banking industry.
Results of Operations
Executive Summary
Sutter is a holding company that owns two operating businesses in the
mortgage banking industry. Sutter's mortgage subsidiaries, Easton and
Progressive, earn revenue by originating, processing, funding and brokering
primarily residential mortgages. Sutter also has minority, non-core investments
in private companies involved in various industries from real estate to precious
metal mining claims. These private investments are not considered by management
to be an integral part of the future operations or plans of the Company.
Presently, management desires and intends to grow Sutter through continued
acquisitions in the financial services industry that are most likely to
complement its current financial service businesses.
Operating results for the quarter ended March 31, 2004 as compared with the
quarter ended March 31, 2003
For period comparison purposes, it is important to note that the Company
benefited from the ownership of Easton and Progressive during the quarter ended
March 31, 2004, while the Company benefited only from the ownership of Easton
during the quarter ended March 31, 2003.
Revenues
Total revenues for the quarter ended March 31, 2004 were $712,331
versus $726,656 for the quarter ended March 31, 2003. The decrease in revenues
is primarily the result of underperformance at our Easton subsidiary for the
quarter which was somewhat offset by the addition of Progressive's revenues for
the quarter.
Sutter's Progressive subsidiary recently obtained a license to conduct
mortgage business in Nevada. On May 1, 2004, Progressive opened a new office in
downtown Las Vegas. Sutter anticipates that this new office will begin producing
revenue sometime late in the second fiscal quarter of 2004. Progressive is also
currently pursuing business development opportunities in California, and Easton,
under new sales leadership, is pursuing new business development activities in
various states throughout the US.
Expenses
Total expenses were $1,059,314 for the quarter ended March 31, 2004 as
compared to $455,563 for the quarter ended March 31, 2003. The increase in total
expenses is primarily the result of the Company's acquisition of Progressive in
December 2003, as well as increases in general and administrative expenses and
professional fees. The additional operating expenses of Progressive, Sutter's
newest subsidiary, were the most significant contributing factor to the increase
in total expenses for the quarter ended March 31, 2004 as compared to the
quarter ended March 31, 2003. As the Company mentioned in its recent annual
report on Form 10-K, general and administrative expenses are expected to
increase in the coming year due to growth at Sutter and its subsidiaries.
Interest Expense
The Company incurred interest expense of $233,258 for the quarter ended
March 31, 2004 as compared to interest expense of $102,073 for the quarter ended
March 31, 2003. The increase in interest expense is primarily due to the 8.00%
note payable to an unrelated party. Due to a non-cash beneficial conversion
feature associated with this note, accretion of the unamortized portion of the
beneficial conversion feature and the assumption of half of this note by SOF2 in
connection with the Niman Ranch Transaction totaling approximately $105,000 was
incurred as a non-cash interest expense during the quarter ended March 31, 2004.
Another reason for the increase is due to the interest expense on the 8.00% note
payable to a related party.
10
Interest expense related to the Company's mortgage warehouse lines of
credit consisted of $37,264 for the quarter ended March 31, 2004 as compared to
$48,831 for the quarter ended March 31, 2003.
Net Earnings and Losses
The Company reported a net loss of ($346,983) for the quarter ended
March 31, 2004 as compared to net income of $271,093 for the quarter ended March
31, 2003. The decrease in earnings is the result of increased expenses, a
significant portion of which is non-cash interest expense from an unrelated
party note payable, for the quarter ended March 31, 2004, as well as weaker than
anticipated performance from one of Sutter's subsidiaries.
Liquidity and Capital Resources
Sutter had cash and cash equivalents of $351,872 and $96,971 as of
March 31, 2004 and December 31, 2003, respectively.
Cash used in operating activities was $2,182,305 as compared to cash
provided by operating activities of $1,755,636 for the periods ended March 31,
2004 and 2003, respectively. This decrease in operating cash flow is primarily
the result of a decrease in mortgages held for sale relative to the same period
last year. Cash provided by investing activities was $159,316 as compared to
cash used in investing activities of $3,829,158 for the periods ended March 31,
2004 and 2003, respectively. Cash provided by financing activities was
$2,277,890 and $1,613,564 for the periods ended March 31, 2004 and 2003,
respectively. Management believes there is sufficient cash flow from existing
operations to fund any capital expenditures that may arise during the coming
year.
As of March 31, 2004, Sutter had borrowings of $4,348,224 at an average
annual interest rate of approximately 8%. On March 29, 2004, the Company reached
an agreement with the RCH noteholders that changed the Company's note payments
from fully amortizing to interest-only payments for the balance of 2004. These
notes payable, with a balance of $1,854,496 at March 31, 2004, are due in 2007.
Effective March 6, 2004, the 8.00% note to a related party was modified
to increase the face value of the note to $1,757,107 through additional cash
proceeds and to allow the Company to defer monthly payments for up to one year.
In any month in which the Company elects to defer making a principal payment,
the interest rate increases to 12% for that month. The entire principal balance
of the note and any deferred interest accrued is due on April 6, 2005. The
Company anticipates being able to refinance or restructure this note on
favorable terms prior to maturity.
Sutter anticipates that its mortgage banking subsidiaries will continue
to have access to its warehouse lines of credit as necessary to conduct ongoing
mortgage banking activities.
Sutter raised $259,049 in cash during the quarter ended March 31, 2004;
$191,049 of which came from the sale of its Niman Ranch investment, $50,000 of
which came from a direct investment by one of Sutter's officers, and $18,000 of
which came from a direct investment by SOF2.
Sutter believes that it currently maintains sufficient liquidity to
cover its existing requirements and operations, and provide for any future
contingent liquidity needs.
Critical Accounting Policies
As presented in detail in the Company's annual report on Form 10-K
filed with the SEC, the most critical accounting policies for the Company are
those involving revenue recognition, investments, and gains and losses on
investments.
11
Revenue Recognition
When the Company funds a loan to a borrower through its warehouse line
of credit but prior to selling the loan, it records the principal amount of the
loan as mortgages held for sale. Once a loan is purchased by an investor (e.g.
Flagstar Bank), usually within ten business days of funding, the principal
amount of the loan is deducted from the Company's outstanding balance on its
warehouse line of credit. It then recognizes mortgage sales along with
origination and related fees. The costs and fees associated with originating,
processing and, where appropriate, brokering the mortgage loans, are included in
cost of sales at the time the loan is sold.
Investments
Investments consist of non-marketable equity securities. Non-marketable
equity securities include securities that are not publicly traded. We review
these assets at least quarterly for possible other-than-temporary impairment.
Our review typically includes an analysis of the facts and circumstances of each
investment, the expectations for the investment's cash flows and capital needs,
the viability of its business model and our exit strategy. These securities,
except for the investment in KFI, generally are accounted for at cost and are
included in other assets. We reduce the asset value when we consider declines in
value to be other-than-temporary. We recognize the estimated loss from equity
investments in provision for impairment. The investment in KFI is accounted for
under the equity method of accounting, as the Company holds a 39% equity
interest.
Realized investment gains and losses are also recognized when
investments are sold or disposed. Realized investment gains may fluctuate
significantly from period to period, resulting in a meaningful effect on
reported net earnings. The Company had no realized investment gains or losses
for the quarters ended March 31, 2004 and 2003.
Realized investment gains and losses are also recognized when
investments are sold or disposed. Realized investment gains may fluctuate
significantly from period to period, resulting in a meaningful effect on
reported net earnings. The Company had no realized investment gains or losses
for the quarters ended March 31, 2004 and 2003.
Goodwill and Intangible Assets
A significant amount of judgment is required in performing goodwill and
identifiable intangible asset impairment tests. Sutter reviews and subjects
these assets to periodic impairment tests. Such tests include periodically
determining or reviewing the estimated fair value of Sutter's reporting units.
Under Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and
Other Intangible Assets," fair value refers to the amount for which the entire
reporting unit may be bought or sold. There are several methods of estimating
reporting unit values, including market quotations, asset and liability fair
values and other valuation techniques, such as discounted cash flows and
multiples of earnings or revenues. If the carrying amount of a reporting unit,
including goodwill, exceeds the estimated fair value, then individual assets,
including identifiable intangible assets and liabilities of the reporting unit
are estimated at fair value. The excess of the estimated fair value of the
reporting unit over the estimated fair value of net assets would establish the
implied value of goodwill. The excess of the recorded amount of goodwill over
the implied value is then charged to earnings as an impairment loss.
Sutter's consolidated financial position reflects material amounts of
investments in private businesses. These investments are carried at the lower of
cost or fair value. In the case of investments carried at fair value,
considerable judgment is required in determining the assumptions used in
arriving at fair value and to what extent, if any, such investments are
impaired. Significant changes in these assumptions can have a significant effect
on carrying values.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Reference is made to Sutter's recently issued report on Form 10-K filed
with the SEC and in particular the "Market Risk Disclosures" included in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." As of March 31, 2004, there have been no material changes in the
market risks as described in Sutter's recently issued report on Form 10-K.
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Item 4. Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form
10-Q, the Corporation carried out an evaluation, under the supervision and with
the participation of the Corporation's management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Corporation's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that the Corporation's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Corporation (including its consolidated
subsidiaries) required to be included in the Corporation's periodic SEC filings.
Subsequent to the date of that evaluation, there have been no significant
changes in the Corporation's internal controls over financial reporting or in
other factors that could significantly affect internal controls over financial
reporting, nor were any corrective actions required with regard to significant
deficiencies and material weaknesses.
Part II Other Information
Item 2. Changes in Securities and Use of Proceeds
On March 22, 2004, Michael Collins, a director and officer of Sutter,
purchased 5,556 shares of Sutter common stock for $50,000 cash.
On March 31, 2004, Sutter Opportunity Fund 2, LLC purchased 2,000
shares of Sutter common stock for $18,000 cash.
Proceeds from the above issuances will be used for working capital
purposes. All of the shares purchased above are unregistered and restricted
shares as defined by the Securities Act of 1933, as amended, promulgated by the
Securities and Exchange Commission.
Item 6. Exhibits
a. Exhibits
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(Chief Executive Officer)
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(Chief Financial Officer)
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Executive Officer)
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Financial Officer)
SIGNATURE
Pursuant to the requirement 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.
SUTTER HOLDING COMPANY, INC.
Date: May 14, 2004 /s/ William G. Knuff, III
-------------------------------
William G. Knuff, III
Chief Financial Officer
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