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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Commission File Number 01912

SONOMAWEST HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

California (State of incorporation)

94-1069729 (IRS Employer Identification #)

2064 Highway 116 North, Sebastopol, CA (Address of principal executive offices)

95472-2662 (Zip Code)

Registrant's telephone number, including area code:            707-824-2001

(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 (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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.

As of May 12, 2004, there were 1,114,257 shares of common stock, no par value, outstanding.

SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1.      Condensed Consolidated Financial Statements

SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)

The accompanying notes are an integral part of these financial statements.

SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE AND THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The accompanying notes are an integral part of these financial statements.

SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(UNAUDITED)
FOR THE NINE MONTHS ENDED MARCH 31, 2004
(AMOUNTS IN THOUSANDS)

The accompanying notes are an integral part of these financial statements.

SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED MARCH 31, 2004 AND 2003
(AMOUNTS IN THOUSANDS)

The accompanying notes are an integral part of these financial statements

SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 2004

Note 1 — Basis of Presentation

The accompanying unaudited interim statements have been prepared pursuant to the rules of the Securities and Exchange Commission. Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes these disclosures are adequate to make the information not misleading. In the opinion of management, all adjustments necessary for a fair presentation for the periods presented have been reflected and are of a normal recurring nature. These interim financial statements should be read in conjunction with the financial statements and notes thereto for each of the three years in the period ended June 30, 2003. The results of operations for the nine-month period ended March 31, 2004 are not necessarily indicative of the results that will be achieved for the entire year ending June 30, 2004.

Reclassifications

Certain reclassifications have been made to the 2003 unaudited interim financial statements to conform to the current year presentation. See Note 2.

Accounting Policies

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.

Valuation of investment in MetroPCS

The investment in MetroPCS 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, 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, following MetroPCS’ recent registration under the Securities Exchange Act of 1934 (File Number 333-111470).

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 was $3,001,200 and $2,696,000 as of March 31, 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 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, 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.

Note 2 – 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. Accordingly, the accompanying statements of operations for the three and nine months ended March 31, 2004 reflect tenant reimbursements as a separate line item of revenue. Comparative statements of operations for the three and nine months ended March 31, 2003 have been revised 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 $69,000, and $235,000 for the three and nine months ended March 31, 2003, 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 for the comparative periods presented, as well as those for the fiscal years ended June 30, 2003 and 2002 are as follows:

Statement of Operations Data:

Note 3 — Investment

As of March 31, 2004, the Company has 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). The Company accounts for its investment in MetroPCS 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 prior to all other securities, except the Series C Preferred Stock, cumulative annual dividends 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 December 31, 2003, $297,233 of unpaid dividends have 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 $100 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 such share been converted to Class C Common Stock immediately prior to the liquidation event. Upon the occurrence of certain events, the Series D Preferred Stock must be redeemed by MetroPCS at a price equal to the liquidation value plus accrued and unpaid dividends.

Note 4 – Stock Options

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 three months of fiscal 2004 the Company incurred a charge of $34,000 related to the issuance of 24,200 fully vested stock options to the directors, officers and certain employees of the Company. During the first three months of fiscal 2003 the Company incurred a charge of $42,000 related to the issuance of 24,200 fully vested stock options to the directors, officers and certain employees of the Company.

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 compensation expense has been recognized in the nine months ended March 31, 2004 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:

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 and 2003 grants, respectively: weighted average risk-free interest rates of 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 22.00 and 25.83 percent.

For options granted during the nine months ended March 31, 2004 and 2003, the weighted average fair values as of the grant date were $ 1.39 and $1.73, respectively.

Note 5 – Related Parties

David J. Bugatto, director, has entered into a consulting agreement with the Company pursuant to which he provides real estate consulting services to the Company for a monthly fee of $2,500. 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 was amended on December 31, 2003 and the termination date was extended from December 31, 2003 to June 30, 2004, or an earlier date specified by either party. During the nine months ended March 31, 2004 and March 31, 2003, the Company incurred $23,302 and $24,107, for real estate consulting services from David Bugatto, respectively. These expenses are included in Operating Costs – Related Party. As of March 31, 2004, the Company had a payable to David Bugatto of $2,500.

Gary L. Hess, director and former President and Chief Executive Officer, has entered into an agreement with the Company to sell its remaining Perma-Pak inventory and equipment. During the nine months ended March 31, 2004 and March 31, 2003, the Company incurred $1,500 in commissions under this agreement. These expenses are included under Operating Costs – Related Party. During the nine months ended March 31, 2003, the Company incurred $46,000 in commissions under this agreement. These expenses are included under Related Party Expenses—Discontinued Operations. As of March 31, 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 March 31, 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 March 31, 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 is 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 compensation charge in the third quarter ended March 31, 2002 of $22,501.

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 the nine months ended March 31, 2004 and March 31, 2003, the Company incurred $257,253 and $130,203 respectively, for legal services from Allen Matkins. These expenses are included in Operating Costs – Related Party. As of March 31, 2004, the Company had a payable to Allen Matkins of $28,408.

Thomas R. Eakin, CFO, entered into a consulting agreement with the Company, whereby Thomas Eakin will provide financial management and accounting services to the Company. During the nine months ended March 31, 2004 and March 31, 2003, the Company incurred $37,901 and $52,914 for financial management and accounting consulting services from Thomas Eakin, respectively. As of March 31, 2004 the Company did not have a payable to Thomas Eakin. The independent consulting agreement terminates on July 31, 2004. Per the terms of the agreement, Thomas Eakin is compensated at an hourly billing rate of $110 per hour, plus expenses.

Note 6 – Minimum Lease Income

The Company has been leasing warehouse space, generating rental revenues for the nine months ended March 31, 2004 and March 31, 2003 of $1,176,000 and $1,138,000, respectively. The leases have varying terms, which range from month-to-month to expiration dates through 2013. As of March 31, 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):

Item 2.      Management's Discussion and Analysis of Financial Condition and Results of Operations

SonomaWest Holdings, Inc. (the “Company” or “Registrant”) is including the following cautionary statement in this Quarterly 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” as set forth in our Annual Report for the fiscal year ended June 30, 2003 filed on September 12, 2003, 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.

The financial statements herein presented for the three and nine months ending March 31, 2004 and 2003 reflect all the adjustments that in the opinion of management are necessary for the fair presentation of the financial position and results of operations for the periods then ended. All adjustments during the periods presented are of a normal recurring nature.

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. The Company believes that of its significant accounting policies, 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 and the valuation allowances on deferred tax assets.

Valuation of investment in MetroPCS

The investment in MetroPCS 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, 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, following MetroPCS’ recent registration under the Securities Exchange Act of 1934 (File Number 333-111470).

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 was $3,001,200 and $2,696,000 as of March 31, 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 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, 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.

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”), some of 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 carryback any more losses, and as a result all taxable losses incurred subsequent to June 30, 2002 will be carried forward to offset future taxable income. California does not allow corporations to carry back their NOLs, and corporations can only carry forward 55% of the NOLs to future years to offset net operating profits. Furthermore, the Company’s California NOLs will begin to expire in fiscal 2005. As a result, the Company has established a valuation allowance against all of its state net deferred tax assets due to the uncertainty of future realization. At March 31, 2004, the Company had recorded, net deferred tax assets of $417,000, which compares to $383,000 of net deferred tax assets as of June 30, 2003.

OVERVIEW

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, 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, Inc., a privately-held communications company with operations, in part, in Northern California. The Company believed that such an investment was a good investment, which provided a diversification of its assets.

As of March 31, 2004, the Company continues to hold its real estate assets in Sebastopol, California and has completely funded its $3 million minority investment in the Series D preferred stock of MetroPCS, Inc. In accordance with APB Opinion 18, the Company accounts for its investment in MetroPCS 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). MetroPCS, Inc. is now a reporting company under the Securities Exchange Act of 1934 (File Number 333-111470).

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 three and nine months ended March 31, 2004 reflect tenant reimbursements as a separate line item of revenue. Comparative statements of operations for the three and nine months ended March 31, 2003 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.

RESULTS OF CONTINUING OPERATIONS

Results of Operations

The Company leases warehouse, production, and office space as well as outside storage space at both of its properties. The two properties are located on 82 acres of land and have a combined leaseable area under roof of 390,000 square feet. As of March 31, 2004 the Company had a total of 26 tenants as compared to 27 tenants as of March 31, 2003. The tenants have varying original lease terms ranging from month-to-month to ten years with options to extend the leases. As of March 31, 2004, the tenants occupied approximately 235,000 square feet under roof, or 60% of the leasable area under roof. This compares to 218,000 square feet under roof, or 56% of the leasable area under roof as of March 31, 2003. In addition to the area under roof, the Company had 87,000 square feet of outside area under lease as of March 31, 2004 and 84,000 as of March 31, 2003.

Rental Revenue.    For the nine months ended March 31, 2004 rental revenue increased $38,000 or 3% as compared to the corresponding period in the prior year. The increase in rental revenue is attributable to the increase in leased square footage.

For the three months ended March 31, 2004 rental revenue decreased $15,000 or 4% as compared to the three months ended March 31, 2003. This decrease was primarily a result of the increase in the allowance for uncollectible accounts of $84,000 ($50,000 of which was applied against rental revenue and $34,000 was applied to bad debt expense). This increase in the allowance is a result of one tenant with an account balance as of March 31, 2004 of $84,000. The Company is aggressively pursuing all alternatives for the collection of this balance, but at this time it is uncertain whether this balance will be collected.

Tenant Reimbursements.    For the nine months ended March 31, 2004 tenant reimbursements increased $78,000 or 33% as compared to the nine months ended March 31, 2003. Such reimbursements relate primarily to utilities costs.. The majority of the $78,000 increase is a result of additional energy consumption by tenants. The combined impact of the electrical and gas rate changes was relatively minor.

For the three months ended March 31, 2004 tenant reimbursements increased $12,000 or 17% as compared to three months ended March 31, 2003. This increase is due primarily to the increase in the reimbursements for utilities. All of the $12,000 increase is a result of additional energy consumption.

Operating Costs.    For the nine months ended March 31, 2004 total operating costs decreased $48,000 or 3% compared to the nine months ended March 31, 2003. This decrease of $48,000 is comprised of an increase in Operating Costs—Related Party of $133,000 and a decrease of $181,000 of Operating Costs. The increase of $133,000 was primarily a result of strategic planning costs and the decrease from fiscal 2003 was primarily a result of the estimated loss of $173,000 from storm related damages to the North Property on December 31, 2002. The Company’s total operating costs exceeded the tenant rental revenue for the nine months ended March 31, 2004 and 2003. The Company continues to closely scrutinize all discretionary spending. In addition, the Company continues to actively search for additional tenant revenue to eliminate these negative operating results. The Company, directly and through a broker is actively marketing 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.

For the three months ended March 31, 2004 total operating costs increased $95,000 or 22%. This increase is a result of the increase in the allowance for uncollectible accounts of $34,000 ($50,000 of the total adjustment of $84,000 was applied against rental revenue), Legal Expense of $43,000, along with an increase in Salaries and related expenses of $25,000 that were applied to Discontinued Operations reserve in 2003 and were expensed directly to operating costs in 2004.

Interest and Other Income.    Interest and other income consist primarily of interest income on the Company’s cash balances. For the nine months ended March 31, 2004, the Company generated $19,000 of interest income, $20,000 of other income and posted a loss on the sale of fixed assets of $24,000. This compares to $38,000 of interest income and $2,000 of other expenses for the corresponding period in the prior year. The decrease in interest income is due to a reduced cash balance in fiscal 2004 and a decline in 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 the nine months ended March 31, 2004, the Company incurred $79,000 of interest expense and recorded a positive swap contract adjustment of $37,000 on the termination of the swap contract. This compares to 106,000 of interest expense and a positive swap contract adjustment of $16,000 for the corresponding period in the prior year. As of December 1, 2003, the Company’s swap contract with Wells Fargo Bank, N.A. terminated and the due date of the note was extended until March 1, 2004.

Income Taxes.    The effective tax rate for the nine months ended March 31, 2004 decreased to a benefit of 23% from a benefit of 25% for the nine months ended March 31, 2003. Due to the uncertainty of future realization, a valuation allowance is recorded against California net operating losses.

Liquidity and Capital Resources

The Company had cash of $1.3 million at March 31, 2004 and current maturities of long-term debt of $56,000. The Company’s long-term debt was due and payable on March 1, 2004. However, on March 1, 2004, the Company and Wells Fargo Bank agreed to refinance the terms and conditions of $1,690,000 of the Company’s long-term debt. Principal is paid in monthly payments of $4,650 through November 1, 2005, with a final installment of the unpaid principal 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. The note bears interest at a fluctuating rate equal to the bank’s prime rate plus .25%. The Company’s cash balance decreased $635,000 during the nine months ended March 31, 2004. This was primarily a result of, the final funding of the MetroPCS commitment of $305,000, capital expenditures of $223,000 and principal debt reduction of $167,000. The Company had positive cash provided by operating activities for the nine months ended March 31, 2004 of $6,000.

As of March 31, 2004, the Company has completely funded its $3 million minority investment in the Series D preferred stock of MetroPCS, Inc. The Company has accounted for the investment using the cost method.

Item 4. Controls and Procedures

As of March 31, 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 of Directors 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 of Directors 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 of Directors and Chief Financial Officer, do not expect that the Company’s disclosure controls or our 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 the inherent limitations in a cost-effective control system, misstatements due to error and/or fraud may occur and not be detected.

PART II.    OTHER INFORMATION

Item 1.    Legal Proceedings

      None

Item 2.    Changes in Securities and Use of Proceeds

      None

Item 3.    Defaults Upon Senior Securities.

      None

Item 4.    Submission of Matters to a vote of Security Holders.

      None

Item 5.    Other Information

      None

Item 6.    Exhibits and Reports on Form 8-K

      a.   Exhibits

      b.   Reports on Form 8-K

             None

SIGNATURES

Pursuant to the requirements 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: May 14, 2004

EXHIBIT INDEX