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 June 30, 2004
OR
o 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 75-3111137
(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 o
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). YES o NO x
Number of shares of common stock outstanding as of August 16, 2004: 618,007
TABLE OF CONTENTS
SUTTER HOLDING COMPANY, INC.
FORM 10-Q
Page No.
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets-- June 30, 2004 (unaudited)
and December 31, 2003 3
Consolidated Statements of Operations-- Second Quarter and First
Half 2004 and 2003 (unaudited) 4
Consolidated Statements of Cash Flows-- Second Quarter and First
Half 2004 and 2003 (unaudited) 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 13
Item 4. Controls and Procedures 13
Part II - Other Information
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities 14
Item 5. Other Information and Subsequent Events 14
Item 6. Exhibits and Report on Form 8-K 14
Signature 15
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
(in US dollars) As of As of
June 30, 2004 December 31, 2003
------------------ -------------------
ASSETS (unaudited)
Cash and cash equivalents $ 39,224 $ 96,971
Accounts receivable 130,823 37,212
Prepaid expenses 36,198 44,290
Mortgages held for sale 2,617,173 3,020,753
Investments, at cost 710,778 985,053
Property and equipment, net 280,297 258,706
Identifiable intangible and other assets 298,400 330,785
Goodwill 4,534,193 4,483,746
------------------ -------------------
TOTAL ASSETS $ 8,647,086 $ 9,257,516
================== ===================
LIABILITIES & STOCKHOLDERS' EQUITY
Accounts payable & accrued expenses $ 266,320 $ 318,344
Related party deferred gain 248,817 -
Mortgage warehouse line of credit 2,676,828 2,986,485
Interest payable 21,194 8,885
Debt to unrelated parties 2,027,694 588,551
Debt to related parties 2,510,000 3,953,735
Commitments and contingencies
Stockholders' Equity
Common Stock, $0.0001 par value 40 35
Additional Paid-In Capital 5,155,945 4,669,164
Treasury Stock (915,945) (604,665)
Accumulated deficit (3,343,807) (2,663,018)
------------------ -------------------
Total Stockholders' Equity 896,233 1,401,516
------------------ -------------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 8,647,086 $ 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 months For the six months
(in US dollars) ended June 30, ended June 30,
--------------------------- ---------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Revenues:
Net gain on sales of mortgages $ 266,227 $ 225,828 $ 716,494 $ 537,910
Mortgage commissions on brokered loans 486,308 249,810 688,449 609,018
Miscellaneous income 10,000 3,146 10,000 57,089
Interest & dividend income 68 249 100 1,391
Realized gains (losses), net - (193) 59,921 699
------------- ------------- ------------- -------------
Total revenues 762,603 478,840 1,474,964 1,206,107
------------- ------------- ------------- -------------
Expenses:
General & administrative 737,780 302,209 1,381,498 595,449
Depreciation & amortization 34,247 12,468 63,958 24,853
Interest expense 163,321 95,521 396,579 197,594
Professional fees and other expenses 141,428 44,273 262,012 92,138
Provision for impairment - - 32,043 -
Other expenses 19,633 19,633
Miscellaneous expenses - - 30 -
------------- ------------- ------------- -------------
Total expenses 1,096,409 454,471 2,155,753 910,034
------------- ------------- ------------- -------------
Loss before income taxes (333,806) 24,369 (680,789) 296,073
Provision for income taxes - - - -
------------- ------------- ------------- -------------
Net income (loss) (333,806) 24,369 (680,789) 296,073
============= ============= ============= =============
Net income (loss) per share -- basic and diluted $ (1.00) $ 0.10 $ (2.07) $ 1.18
Weighted Average Shares Outstanding 332,723 252,313 329,261 250,836
See accompanying Notes to Interim Consolidated Financial Statements
4
SUTTER HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months ended June 30,
------------------- -------------------
(in US dollars) 2004 2003
------------------- -------------------
OPERATING ACTIVITIES
Net income (loss) $ (680,789) $ 296,073
Realized losses on sales of investments, net - -
Provision for impairment of investments 32,043 -
Depreciation & amortization 59,533 24,852
Amortization of discount on debt 116,337 -
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Accounts receivable (93,611) 15,003
Prepaid expenses 8,092 (659)
Mortgages held for sale 403,580 (1,179,200)
Accounts payable & accrued expenses 25,845 26,594
Income taxes payable - (3,773)
Interest payable 23,416 28,876
Other assets 11,885 -
------------------- -------------------
Net cash used in operating activities (93,669) (792,234)
------------------- -------------------
INVESTING ACTIVITIES
Capital expenditures (60,624) (4,655)
Proceeds from sales of investments 191,049 -
Purchases of securities, subsidiaries & other investments (21,694) (4,020,849)
Purchases of other investments - (40,000)
------------------- -------------------
Net cash provided by (used in) investing activities 108,731 (4,065,504)
------------------- -------------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 68,006 270,000
Proceeds from issuance of notes payable 304,140 3,145,000
Increase (decrease) in mortgage warehouse line of credit (309,657) 1,174,959
Repayment of notes payable (135,298) (280,320)
------------------- -------------------
Net cash provided by (used in) financing activities (72,809) 4,309,639
------------------- -------------------
Net change in cash and cash equivalents for the period (57,747) (548,099)
Cash and cash equivalents, beginning of period 96,971 625,491
------------------- -------------------
Cash and cash equivalents, end of period $ 39,224 $ 77,392
=================== ===================
Additional cash flow information:
Cash interest paid $ 92,352 $ 81,624
See accompanying Notes to Interim Consolidated Financial Statements
5
SUTTER HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 2003
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 2003 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, as well as those of its subsidiaries, for interim
periods are not necessarily indicative of results to be expected for the year.
At present, the Company has limited cash resources with which to
conduct its operations, particularly in relation to its short-term obligations.
The Company has approximately $170,000 in cash and receivables against
approximately $595,000 in payables and other short-term obligations. While cash
and receivables, in the aggregate, increased during the period since December
31, 2003, and payables and other short-term obligations decreased during the
same period, in the short-term, the Company has increased liquidity risk.
Management is aware of the Company's limited cash resources and is in the
process of raising capital for working capital and other general operating
purposes. During the current fiscal quarter, management anticipates being able
to raise cash sufficient to provide for additional liquidity and operating
needs. The Company's ability to continue as a going concern is dependent upon
its ability to raise additional capital and increase cash flows from operations.
2. Significant Business Acquisitions
Sutter made no business acquisitions during the second 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 and acquired Progressive Lending LLC in December 2003.
Accordingly, the first half of 2004 includes the operations of Sutter's two
subsidiaries, Easton and Progressive Lending, LLC, while the first half 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 $130,823 and
$37,212 at June 30, 2004 and December 31, 2003, respectively.
4. Investments
Investments are comprised of the following at June 30, 2004 and
December 31, 2003:
June 30, 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
=================== ===================
6
Gross Unrealized Gross Unrealized
June 30, 2004 Cost Gains Losses Reported Value
---------------- ------------------- ------------------- -------------------
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
On March 29, 2004, 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 126,140 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. As of June 30, 2004, the Company's investment in KFI represents a 39%
equity interest, and accordingly the Company accounts for this investment under
the equity method. For additional information, please see Footnote 10. Certain
Relationships and Related Party Transactions.
5. Property and Equipment, Net
Property and equipment consist of the following at June 30, 2004 and
December 31, 2003:
June 30, December 31,
2004 2003
---------------- -----------------
Furniture, equipment
& leasehold improvements $307,196 $274,981
Accumulated depreciation (26,899) (16,275)
---------------- -----------------
Furniture, equipment
& leasehold improvements, net $280,297 $258,706
================ =================
6. Identifiable Intangible and Other Assets, Net
Identifiable intangible and other assets consist of the following at
June 30, 2004 and December 31, 2003:
June 30, December 31,
2004 2003
---------------- -----------------
Customer list, net of
accumulated amortization
of $28,796 and $2,796 at
June 30, 2004 and December
31, 2003 $231,204 $257,204
Non-compete agreement, net of
accumulated amortization of
$16,613 and $1,613 at June
30, 2004 and December 31, 2003 43,387 58,387
Other assets 23,809 15,194
---------------- -----------------
Total identifiable intangible and
other assets, net $298,400 $330,785
================ =================
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 the US Federal Department of
Housing and Urban Development ("HUD") and with other investors. At June 30,
2004, the highest minimum net worth requirement applicable to the Company was
$400,000. As of June 30, 2004, the Company's subsidiaries met their respective
net worth requirements.
7
8. Debt to Unrelated and Related Parties
Debt to unrelated and related parties of Sutter and its subsidiaries
consisted of the following as of June 30, 2004 and December 31, 2003:
June 30, December 31,
2004 2003
---------------- -----------------
Debt to unrelated parties:
- -------------------------
15.00% note facility $50,000 $0
10.00% notes due 2007 1,747,066 66,762
8.00% note due 2006, net
of unamortized discount
of $42,159 and beneficial
conversion of $39,492 at
June 30, 2004, and $78,211
at December 31, 2003 230,627 521,789
---------------- -----------------
Total $2,027,693 $588,551
================ =================
Debt to related parties:
- -----------------------
25.00% convertible note due 2005 $40,000 $0
8.00% convertible note due 2005 1,970,000 1,666,000
6.00% note due 2007 500,000 500,000
4.00% note due 2007 0 1,787,735
---------------- -----------------
Total $2,510,000 $3,953,735
================ =================
On June 24, 2004, the Company entered into a new Loan Agreement with
Knight Fuller, Inc. (KFI), pursuant to which (i) the Company borrowed an
additional $120,000 from KFI, (ii) KFI was given the option to convert all or a
portion of the Company's debt obligations to KFI into common stock of the
Company, and (iii) under certain circumstances, the Company was entitled to
repay any and all outstanding debt obligations to KFI using the Company's common
stock at a price equal to the lesser of (a) $7.25 per share, (b) the lowest
price at which the Company sells primary shares after the date of the Loan
Agreement and prior to such conversion, if any, or (c) the 10-day weighted
average closing price of the Company's common stock on the date of notice to
convert. On July 30, 2004, an independent, third party acquired control of KFI
(the "KFI Change of Control"). In conjunction with the KFI Change of Control,
the Company elected to pay in full its debt obligation plus accrued interest of
$1,992,348 to KFI by issuing approximately 332,058 shares of its common stock to
KFI at a value of $6.00 per share. Concurrent with those transactions, the
Company also settled, in full, the entirety of its Progressive subsidiary's
obligations to KFI of $43,717 in debt, including accrued and unpaid interest,
and KFI's option to acquire 100% of Progressive's Nevada office (using a Black
Scholes methodology, the option was valued at approximately $43,600), by issuing
14,553 shares of Sutter common stock. For additional information, please see
Footnote 10 Certain Relationships and Related Party Transactions.
On June 30, 2004, the Company entered into a short-term note agreement
(the "Note Facility") in the amount of $50,000 with an unrelated third party for
the purpose of establishing a temporary warehouse facility that would enable the
Company's mortgage subsidiaries to fund second mortgages that are originated in
conjunction with first mortgages that the Company's subsidiaries occasionally
fund on certain residential properties. This Note Facility carries a 15.00%
annual interest rate and is non-recourse to the Company. The full amount of the
Note Facility was drawn on June 30 and has been subsequently repaid in full
along with any accrued interest.
9. Common Stock
Changes in issued and outstanding Sutter common stock for the six
months ended June 30, 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 year-to-date 44,832
--------------
Balance at June 30, 2004 396,774
==============
The above issuances year-to-date were made to investors for cash in the
amount of $68,006, and to the Company's Easton subsidiary in the amount of
$311,280 to supplement Easton's tangible net worth.
8
10. Certain Relationships and Related Party Transactions
On June 24, 2004, the Company entered into a new Loan Agreement with
Knight Fuller, Inc. (KFI), pursuant to which (i) the Company borrowed an
additional $120,000 from KFI, (ii) KFI was given the option to convert all or a
portion of the Company's debt obligations to KFI into common stock of the
Company, and (iii) under certain circumstances, the Company was entitled to
repay any and all outstanding debt obligations to KFI using the Company's common
stock at a price equal to the lesser of (a) $7.25 per share, (b) the lowest
price at which the Company sells primary shares after the date of the Loan
Agreement and prior to such conversion, if any, or (c) the 10-day weighted
average closing price of the Company's common stock on the date of notice to
convert. On July 30, 2004, an independent, third party acquired control of KFI
(the "KFI Change of Control"). In conjunction with the KFI Change of Control,
the Company elected to pay in full its debt obligation of $1,992,348 to KFI by
issuing approximately 332,058 shares of its common stock to KFI at a value of
$6.00 per share. Concurrent with those transactions, the Company also settled,
in full, the entirety of its Progressive subsidiary's obligations to KFI of
$43,717 in debt, including accrued and unpaid interest, and KFI's option to
acquire 100% of Progressive's Nevada office (using a Black Scholes methodology,
the option was valued at approximately $43,600), by issuing 14,553 shares of
Sutter common stock. In addition thereto, the Company issued to KFI
approximately 762 additional shares of common stock for approximately $4,570 in
cash. In total, the Company issued 347,373 shares of common stock to KFI of
aggregate consideration totaling $2,084,235. Simultaneous with these
transactions, KFI declared a stock dividend on its common stock in which
shareholders of KFI immediately prior to the KFI Change of Control received one
share of the Company's common stock for every share of KFI common stock held by
such shareholder. Effective July 30, 2004, Sutter has an 18% equity interest in
KFI and, due to the resignation of its officers from KFI's board of directors,
Sutter no longer has any representation on KFI's board.
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. Sutter's management has
reviewed its investments and obligations, and has determined that it does not
have any VIEs requiring disclosure.
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 June 30, 2004 as compared with the
quarter ended June 30, 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
June 30, 2004, while the Company benefited only from the ownership of Easton
during the quarter ended June 30, 2003.
Revenues
Total revenues for the quarter ended June 30, 2004 were $762,603 versus
$478,840 for the quarter ended June 30, 2003. The increase in revenues is
primarily the result of the addition of Progressive's revenues for the quarter.
Progressive's new office in Las Vegas, Nevada which opened May 1, 2004 also
contributed somewhat to the increase in revenues for the quarter.
Expenses
Total expenses were $1,096,409, for the quarter ended June 30, 2004 as
compared to $454,471 for the quarter ended June 30, 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 June 30, 2004 as compared to the quarter
ended June 30, 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 $163,321 for the quarter ended
June 30, 2004 as compared to interest expense of $95,521 for the quarter ended
June 30, 2003. The increase in interest expense is primarily due to two factors:
(1) non-cash interest expense associated with the KFI loan increased
significantly during the quarter (For additional information, please refer to
footnote 10: Certain Relationships and Related Party Transactions); and
(2) growth in loan volume at our Progressive subsidiary outpaced our warehouse
provider's rate of loan purchases during the quarter extending the average
amount of time between a loan's funding and its ultimate purchase by an
investor. The above figures include interest expense related to the Company's
mortgage warehouse lines.
Interest expense related to the Company's mortgage warehouse lines of
credit consisted of $36,682 for the quarter ended June 30, 2004 as compared to
$34,103 for the quarter ended June 30, 2003.
Net Earnings and Losses
The Company reported a net loss of $333,806 for the quarter ended June
30, 2004 as compared to net income of $24,369 for the quarter ended June 30,
2003. The decrease in earnings is the result of increased expenses, a
significant portion of which is non-cash interest expense, for the quarter ended
June 30, 2004, as well as weaker than anticipated performance from the Company's
mortgage banking subsidiaries.
Operating results for the first half of 2004 as compared with the first half of
2003
Revenues
Total revenues for the first half of 2004 were $1,474,964 versus
$1,206,107 for the first half of 2003. The increase in revenues is primarily the
10
result of the addition of Progressive's revenues for the first half of the year.
While the Company did not own Progressive during the first half of fiscal 2003,
Progressive's revenues for the first half of 2004 show little change and compare
favorably to Progressive's first half of 2003 revenue performance.
Expenses
Total expenses were $2,155,753 for the first half of 2004 as compared
to $910,034 for the first half of 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 first half of 2004 as compared to the first half of
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 $396,579 for the first half of
2004 as compared to interest expense of $197,594 for the first half of 2003.
Most of the increase is associated with non-cash interest expense. The increase
in interest expense is due to the 8.00% note payable to an unrelated party, and
the 8.00% note due to KFI. Approximately $217,000 of interest expense for the
first half of 2004 was non-cash interest expense incurred in conjunction with
these two notes.
Interest expense related to the Company's mortgage warehouse lines of
credit consisted of $86,663 for the first half of 2004 as compared to $82,934
for the first half of 2003.
Net Earnings and Losses
The Company reported a net loss of $680,789 for the first half of 2004
as compared to net income of $296,073 for the first half of 2003. The decrease
in earnings is the result of increased expenses, a significant portion of which
is non-cash interest expense, for the first half of 2004, as well as weaker than
anticipated performance from the Company's mortgage banking subsidiaries.
Liquidity and Capital Resources
Sutter had cash and cash equivalents of $39,224 and $96,971 as of June
30, 2004 and December 31, 2003, respectively.
Cash used in operating activities was $93,669 as compared to $792,234
for the periods ended June 30, 2004 and 2003, respectively. This increase in
operating cash flow is primarily the result of an increase in mortgages held for
sale for the first half of 2004. Cash provided by investing activities was
$108,731 as compared to cash used in investing activities of $4,065,504 for the
periods ended June 30, 2004 and 2003, respectively. Cash used in financing
activities was $72,809 as compared to cash provided by financing activities of
$4,309,639 for the periods ended June 30, 2004 and 2003, respectively. The
Company did not make any acquisitions of businesses during the first half of
2004 which is the cause for the significant change in cash associated with
investing and financing activities during the period. Management believes there
is sufficient cash flow from existing operations to fund any capital
expenditures that may arise during the second half of the fiscal year.
As of June 30, 2004, Sutter and its subsidiaries had borrowings of
$4,537,694 at an average annual interest rate of approximately 8%. On June 24,
2004, the Company entered into a new Loan Agreement with Knight Fuller, Inc.
(KFI), pursuant to which (i) the Company borrowed an additional $120,000 from
KFI, (ii) KFI was given the option to convert all or a portion of the Company's
debt obligations to KFI into common stock of the Company, and (iii) under
certain circumstances, the Company was entitled to repay any and all outstanding
debt obligations to KFI using the Company's common stock at a price equal to the
lesser of (a) $7.25 per share, (b) the lowest price at which the Company sells
primary shares after the date of the Loan Agreement and prior to such
conversion, if any, or (c) the 10-day weighted average closing price of the
Company's common stock on the date of notice to convert. On July 30, 2004, an
independent, third party acquired control of KFI (the KFI Change of Control). In
conjunction with the KFI Change of Control, the Company elected to pay in full
its debt obligation of $1,992,348 to KFI by issuing approximately 332,058 shares
of its common stock to KFI at a value of $6.00 per share. Concurrent with those
11
transactions, the Company also settled, in full, the entirety of its Progressive
subsidiary's obligations to KFI of $43,717 in debt, including accrued and unpaid
interest, and KFI's option to acquire 100% of Progressive's Nevada office (using
a Black Scholes methodology, the option was valued at approximately $43,600), by
issuing 14,553 shares of Sutter common stock.
Sutter's mortgage subsidiaries have revolving warehouse lines of credit
from banks of up to approximately $14 million to facilitate the temporary
funding of mortgage loans. Sutter anticipates that its mortgage banking
subsidiaries will continue to have access to warehouse lines of credit as
necessary to conduct ongoing mortgage banking activities.
At present, the Company has limited cash resources with which to
conduct its operations, particularly in relation to its short-term obligations.
The Company has approximately $170,000 in cash and receivables against
approximately $595,000 in payables and other short-term obligations. While cash
and receivables, in the aggregate, increased during the period since December
31, 2003, and payables and other short-term obligations decreased during the
same period, the Company has increased liquidity risk in the short-term.
Management is aware of the Company's limited cash resources and is in the
process of raising capital for working capital and other general operating
purposes. During the current fiscal quarter, management anticipates being able
to raise cash sufficient to provide for additional liquidity and operating
needs.
In addition to its needs for capital to fund its current business
operations, the Company may in the future require capital for the purpose of
completing strategic acquisitions it may identify in pursuit of its business
plan. As the Company has disclosed elsewhere, its business plan involves
identifying, evaluating and making business acquisitions. The Company is
currently involved in, and intends to continue, this process. Depending upon the
nature and structure of any potential future acquisitions, the Company may
exchange newly issued securities for the acquisition of strategic assets or
entire businesses, and/or the Company may issue securities to raise cash for
such acquisitions. Any such acquisition activities would therefore likely have
significant effects on the Company's capital structure and liquidity. Until the
terms of any potential acquisitions are determined, however, the Company cannot
quantify or estimate the impact they will have on its capital resources.
The Company's ability to continue as a going concern is dependent upon
its ability to raise additional capital and increase cash flows from operations.
However, as in the past, Messrs. Collins, Dixon and Knuff are prepared to
continue to support the Company in its liquidity and capital needs as necessary
from time to time.
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.
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 loan at cost (sometimes
referred to as "payoff amount"), which is comprised of the principal amount of
the loan net of deferred direct origination costs and fees, under current assets
as mortgages held for sale. The Company simultaneously records a current
liability, equal to the amount advanced to the borrower (the "advanced amount"),
on its warehouse line of credit. Once a loan is purchased by an investor (e.g.
Flagstar Bank), usually within ten business days of funding, total proceeds are
recorded and the amount advanced by the Company to the borrower on the loan is
deducted from the Company's outstanding balance on its warehouse line of credit.
At this time, the Company recognizes any remaining proceeds as part of net gain
on sales of mortgages. The costs and fees associated with originating and
processing mortgage loans are netted against the net gain on sale of mortgages.
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. For additional information on our KFI investment, please see Part II,
Item 5, Other Information and Subsequent Events.
12
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 June 30, 2004 and 2003.
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.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Reference is made to Sutter's 2003 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
June 30, 2004, there have been no material changes in the market risks as
described in Sutter's 2003 report on Form 10-K.
Item 4. Controls and Procedures
During the quarter, the Company identified inconsistencies with the
manner in which its mortgage subsidiaries had been carrying mortgages held for
sale and subsequently classifying commission income. These inconsistencies
resulted in a reclassification of revenues from one category to another, but had
no material effect on reported revenue or net loss for the quarter. As defined
under Public Company Accounting Oversight Board's ("PCAOB's") new Auditing
Standards No. 2, these inconsistencies constituted a material weakness. Sutter's
management addressed these inconsistencies by replacing a part-time,
independently contracted bookkeeper with a full-time, in-house certified public
accountant (CPA) and instituted additional management reviews as part of the
process.
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.
13
Part II Other Information
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
On May 6, 2004, the Company issued 1,324 shares of Sutter common stock
to its wholly owned Easton subsidiary in consideration for interest paid. These
shares are treated as treasury shares by the Company on a consolidated basis. In
addition, following the end of the quarter covered by this report, the Company
issued an aggregate of 221,233 of its shares of common stock to Knight Fuller,
Inc. in three transactions described below in Item 5 of this report.
All of the shares issued above are unregistered and restricted shares
as defined by the Securities Act of 1933, as amended, promulgated by the
Securities and Exchange Commission.
Item 5. Other Information and Subsequent Events
On June 24, 2004, the Company entered into a new Loan Agreement with
Knight Fuller, Inc. (KFI), pursuant to which (i) the Company borrowed an
additional $120,000 from KFI, (ii) KFI was given the option to convert all or a
portion of the Company's debt obligations to KFI into common stock of the
Company, and (iii) under certain circumstances, the Company was entitled to
repay any and all outstanding debt obligations to KFI using the Company's common
stock. On July 30, 2004, an independent, third party acquired control of KFI
(the KFI Change of Control). In conjunction with the KFI Change of Control, the
Company elected to pay in full its debt obligation of $1,992,348 to KFI by
issuing approximately 332,058 shares of its common stock to KFI at a value of
$6.00 per share. Concurrent with those transactions, the Company also settled,
in full, the entirety of its Progressive subsidiary's obligations to KFI of
$43,717 in debt, including accrued and unpaid interest, and KFI's option to
acquire 100% of Progressive's Nevada office (using a Black Scholes methodology,
the option was valued at approximately $43,600), by issuing 14,553 shares of
Sutter common stock. In addition thereto, the Company issued to KFI
approximately 762 additional shares of common stock for approximately $4,570 in
cash. In total, the Company issued 347,373 shares of common stock to KFI
aggregate consideration of $2,084,235. Simultaneous with these transactions, KFI
declared a stock dividend on its common stock in which shareholders of KFI
immediately prior to the KFI Change of Control received one share of the
Company's common stock for every share of KFI common stock held by such
shareholder. Because the Company's common stock issued in these transactions was
unregistered stock, the dividend was issued into escrow pending registration of
such shares (the Escrow Shares), and the Company agreed to act as escrow agent
until the Escrow Shares were registered. While in escrow, the Company has voting
control over the Escrow Shares. By virtue of the Company's ownership of 126,140
shares of KFI common stock, 126,140 of the shares issued to KFI were returned to
the Company and cancelled, for a net issuance of 221,233 shares of the Company's
common stock. Effective July 30, 2004, Sutter has an 18% equity interest in KFI
and, due to the resignation of its officers from KFI's board of directors,
Sutter no longer has any representation on KFI's board.
On June 28, 2004, at Sutter's annual meeting of shareholders, the
Company's shareholders approved the adoption of a stock option plan (the "Sutter
Holding Company, Inc. 2004 Stock Option Plan" or "Stock Option Plan"). The
purpose of the Stock Option Plan is to give the Company a competitive advantage
in attracting, retaining and motivating officers, employees, directors and/or
consultants and to provide the Company and its Subsidiaries and Affiliates with
a stock option plan providing incentives directly linked to the success of the
Company's businesses and increases in the Company's shareholder value. For
additional information regarding the Company's Stock Option Plan, please refer
to the Definitive Information Statement on Form 14-C filed on June 8, 2004 with
the SEC, which is incorporated herein by reference.
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)
14
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.
(Registrant)
Date: August 18, 2003 /s/ William G. Knuff, III
--------------------------------
(Signature)
William G. Knuff, III
Chief Financial Officer
15