U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934. For the fiscal year ended June 30, 2003
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the transition period from _______ to _______.
Commission file number 0-1912
SONOMAWEST HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-1069729
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification Number)
2064 HIGHWAY 116 NORTH, SEBASTOPOL, CALIFORNIA 95472
(Address of principal executive offices)
(707) 824-2001
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES _X_ NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).
YES ___ NO _X_
On September 3, 2003 non-affiliates of the Registrant held voting stock
with an aggregate market value of $3,678,622 computed by reference to the
average of the bid and asked prices of such stock on such date. For the purposes
of the foregoing calculations, shares of common stock held by persons who hold
more than 5% of the outstanding shares of common stock and shares held by
executive officers and directors of the registrant have been excluded in that
such persons may be deemed to be affiliates. This determination of affiliates is
not necessarily conclusive for this or any other purpose.
As of September 3, 2003, there were 1,104,783 shares of common stock,
no par value, outstanding which is the only class of shares publicly traded.
Portions of the following document are incorporated by reference from
the Registrant's Proxy Statement for Registrant's 2003 Annual Meeting of
Shareholders currently scheduled to be held October 29, 2003 and to be filed
with the Securities and Exchange Commission on or before 120 days after the end
of the 2003 fiscal year, including portions required under Part III of this
report.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
SonomaWest Holdings, Inc. (the "Company" or "Registrant") is including
the following cautionary statement in this Annual Report to make applicable and
take advantage of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 for any forward looking statements made by, or on
behalf of, the Company. The statements contained in this Report that are not
historical facts are "forward-looking statements" (as such term is defined in
Section 27A of the Securities Act of 1933 and section 21E of the Securities
Exchange Act of 1934), which can be identified by the use of forward-looking
terminology such as "estimated," "projects," "anticipated," "expects,"
"intends," "believes," or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy that involve risks and
uncertainties. Forward looking statements include statements concerning plans,
objectives, goals, strategies, future events or performance and underlying
assumptions. Forward looking statements involve risks and uncertainties which
could cause actual results or outcomes to differ materially from those expressed
in the forward looking statements. The Company's expectations, beliefs and
projections are expressed in good faith and are believed by the Company to have
a reasonable basis, although actual results may differ materially from those
described in any such forward looking statements. All written and oral
forward-looking statements made in connection with this Report which are
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the "Certain Factors" and other cautionary
statements set forth under "Management's Discussion and Analysis of Financial
Condition and Results of Operations". There can be no assurance that
management's expectations, beliefs or projections will be achieved or
accomplished, and the Company expressly disclaims any obligation to update any
forward looking statements.
PART I
ITEM 1. BUSINESS
SonomaWest Holdings, Inc., formerly Vacu-dry Company, ("SonomaWest" or
the "Company") was incorporated in 1946 and currently operates as a real estate
management and rental company. The Company also holds an investment in MetroPCS,
Inc., a privately held telecommunications company. Its rental operations include
industrial/agricultural property, some of which was formerly used by the Company
in its discontinued businesses. This commercial property is now being rented to
third parties. Prior to June 30, 2002 the Company operated in three business
segments: organic packaged goods, real estate, and ingredients. In July 1999,
the Company consummated an asset purchase agreement to sell the majority of its
ingredients business (see Note 1 to the Financial Statements). In the third
quarter of fiscal 2000, the Company discontinued its organic packaged goods
business, operated through a subsidiary, Made In Nature Company, Inc. (MINCO),
and has sold the assets related to this segment (see Note 1 to the Financial
Statements).
INDUSTRY SEGMENT INFORMATION
For the year ended June 30, 2003, the Company operated in one
reportable segment, real estate management and rental operations. The Company's
primary business revenue is generated from the leasing of its two properties,
located in Sebastopol, California. The properties are leased to multiple tenants
with leases varying in length from month-to-month to ten years. The Company's
business is not seasonal and does not require significant working capital.
Revenue from the leasing activities is payable either on the 1st or 15th of the
month. As of June 30, 2003, one tenant, Benziger Family Winery, accounted for
19% of the Company's revenue.
-1-
The Company has made a financial commitment to make a $3 million
minority investment in the Series D preferred stock of a privately held
telecommunications company, MetroPCS, Inc., of which $2,695,800 was funded as of
June 30, 2003. MetroPCS, Inc. was formed in 1994 with the goal of acquiring
licenses to enable the company to become a wireless service operator. MetroPCS
offers customers local service with one simple rate plan that enables them to
talk all they want for one flat monthly fee. MetroPCS operates an all-digital
network based on third generation infrastructure and handsets. MetroPCS owns
C-Block licenses and provides service in the following markets: Sacramento and
San Francisco, California; Miami, Florida; and Atlanta, Georgia. The Company is
not involved in the daily operations or the management of MetroPCS, Inc.
Information regarding all other business income is included in the
discussion of discontinued operations.
COMPETITION
The Company competes with numerous commercial property landlords which
offer warehouse, manufacturing and food processing properties in the greater
Petaluma/Santa Rosa area, located in central to southern Sonoma County of
California. The Company believes that its northern property enjoys a competitive
advantage over other similarly situated properties because of the wastewater
treatment facility located on the property, which is ideally suited for tenants
involved in the food processing industry and more particularly the wine
processing industry. The Company believes that both of its northern and southern
properties are competitively priced to the market. Some of the Company's
competitors enjoy the advantage that their properties are newer than the
Company's properties. Currently it is impractical to determine the degree and
timing of capital improvements necessary to achieve competitiveness with newer
properties owned by the Company's competitors. The Company competes on the basis
of location, price, service and tenant improvements, including the northern
property's wastewater treatment facility.
ENVIRONMENTAL MATTERS
The Company believes it has complied with all governmental regulations
regarding protection of the environment. In connection with the renewal of its
wastewater permit (issued by the State of California), the Company was required
to modify its wastewater system to separate domestic waste from its processed
wastewater. As a result, the Company is in the process of making these changes
to comply with these regulations and has incurred related capital expenditures
of $29,000 during the 2003 fiscal year and $89,500 on the project to date. The
Company anticipates additional capital expenditures of approximately $183,000 to
complete these changes during the 2004 fiscal year. In addition to these capital
expenditures, the Company could be held liable for the costs of removal or
remediation of any hazardous or toxic substances, if any, that might be located
on or in its properties in the future. These laws often impose such liability
without regard to whether the owner knew of, or was responsible for, the
presence of the hazardous or toxic substances. The presence of such substances,
or the failure to remediate such substances properly, may adversely affect the
owner's ability to sell or rent the property or to borrow using the property as
collateral. Other federal and state laws require the removal of damaged material
containing asbestos in the event of remodeling or renovation.
EMPLOYEES
The Company currently employs 5 employees in a management or staff
capacity, none of whom is covered under a collective bargaining agreement.
2
INSURANCE
The Company maintains workers compensation, commercial general
liability, property, extended coverage and rental loss insurance. While
management feels the limits and coverage are adequate relative to the related
risks, there is no assurance that this insurance will be adequate to protect the
Company from all unforeseen occurrences. The deductible on the Company's
property insurance policy is currently $50,000.
CERTAIN FACTORS
In evaluating the Company and its business, the following factors
should be given careful consideration, in addition to the information mentioned
elsewhere in this Form 10-K.
FACTORS RELATED TO REAL ESTATE INDUSTRY SEGMENT.
WE HAVE A LIMITED OPERATING HISTORY IN THE REAL ESTATE INDUSTRY AND CONSEQUENTLY
FACE SIGNIFICANT RISKS AND CHALLENGES IN BUILDING OUR BUSINESS.
While we have managed real estate and facilities issues for many years,
it is only recently that we have shifted our primary business focus to that
business segment and its investment activities. While we believe we have
sufficient experience, resources and personnel to manage our properties
effectively, we do not have a long operating history that demonstrates such
effective management and there is no assurance that we will be successful.
OUR PROPERTIES DEPEND UPON THE NORTHERN CALIFORNIA AND PARTICULARLY THE SONOMA
COUNTY ECONOMY.
All of our rental revenues come from two properties located in Northern
California and more particularly Sonoma County. Events and conditions applicable
to owners and operators of real property that are beyond our control may
decrease the value of our properties. These events include: local oversupply or
reduction in demand for office, industrial or other commercial space; inability
to collect rent from tenants; vacancies or inability to rent spaces on favorable
terms; inability to finance property development on favorable terms; increased
operating costs, including insurance premiums, utilities, and real estate taxes;
costs of complying with changes in governmental regulations; the relative
illiquidity of real estate investments; changing sub-market demographics and
property damage resulting from seismic activity. The geographical concentration
of our properties may expose us to greater economic risks than if we owned
properties in several geographic regions. Any adverse economic or real estate
developments in the Sonoma County region could adversely impact our financial
condition, results from operations, cash flows, quoted per share trading price
of our common stock and ability to satisfy our debt service obligations. As
stated in the Spring 2003 issue of the Sonoma County Local Economic Report,
presented by the Sonoma County Economic Development Board in partnership with
the Sonoma County Workforce Investment Board, "Sonoma County is still in
recession, with simultaneous contractions in all the major industries" As part
of this economic downturn, the commercial, industrial and office markets in the
greater Petaluma/Santa Rosa area are also experiencing a recession. Obtaining
new tenants for our properties generally requires taking tenants from competitor
properties. There is no assurance that the market will significantly improve in
the near future.
INCREASING UTILITY COSTS AND POWER OUTAGES IN CALIFORNIA MAY HAVE AN ADVERSE
EFFECT ON OUR OPERATING RESULTS AND OCCUPANCY LEVELS.
3
The State of California continues to address issues related to the
supply of electricity and natural gas. Since June 2000, shortages of electricity
have resulted in increased costs for consumers and certain interruptions in
service. Increased consumer costs and consumer perception that the State is not
able to effectively manage its energy needs may reduce demand for leased space
in California office and industrial properties. A significant reduction in
demand for industrial space would adversely affect our future financial
position, results of operations, cash flow, quoted per share trading price of
our common stock and ability to satisfy our debt service obligations.
POTENTIAL LOSSES MAY NOT BE COVERED BY INSURANCE.
We carry commercial general liability, property, extended coverage and
rental loss insurance covering all of our properties. Management believes the
policy specifications and insured limits are appropriate given the relative risk
of loss, the cost of the coverage and industry practice. We do not carry
earthquake coverage. We do not carry insurance for generally uninsurable losses
such as pollution, contamination, asbestos and seepage. Some of our policies are
subject to limitations involving large deductibles or co-payments and policy
limits. If we experience a loss, which is uninsured or which exceeds policy
limits, we could lose the capital invested in the damaged properties as well as
the anticipated future cash flows from those properties. In addition, if the
damaged properties are subject to recourse indebtedness, we would continue to be
liable for the indebtedness, even if the properties were irreparable.
DOWNTURNS IN TENANTS' BUSINESSES MAY REDUCE OUR CASH FLOW.
For the year ended June 30, 2003, we derived all of our continuing
operating revenues from rental income and tenant reimbursements. A tenant may
experience a downturn in its business, which may weaken its financial condition
and result in its failure to make timely rental payments. In the event of
default by a tenant, we may experience delays in enforcing our rights as
landlord and may incur substantial costs in protecting our investment. The
bankruptcy or insolvency of a major tenant also may adversely affect the income
produced by our properties. If any tenant becomes a debtor in a case under the
U.S. Bankruptcy Code, we cannot evict the tenant solely because of the
bankruptcy. In addition, the bankruptcy court might authorize the tenant to
reject and terminate its lease. Our claim against the tenant for unpaid, future
rent would be subject to a statutory cap that might be substantially less than
the remaining rent actually owed under the lease. Even so, our claim for unpaid
rent would likely not be paid in full. Any losses resulting from the bankruptcy
of any of our tenants could adversely impact our financial condition, results
from operations, cash flow, the quoted per share trading price of our common
stock and the ability to satisfy any debt service obligations. Although we have
not experienced material losses from tenant bankruptcies, tenants could file for
bankruptcy protection in the future.
WE MAY BE UNABLE TO RENEW LEASES OR RE-LET SPACE AS LEASES EXPIRE.
As of June 30, 2003, leases representing approximately 0% and 2% of the
square footage of our properties will expire in 2004 and 2005, respectively. If
leases expire with above market rental rates we may be forced to renew or
re-lease such expiring leases at lower rates. We cannot give any assurance that
leases will be renewed or that its properties will be re-leased at rental rates
equal to or above the current rental rates. If the rental rates for our
properties decrease, existing tenants do not renew their leases, or we do not
re-lease a significant portion of our available space, our financial position,
results of operations, cash flow, quoted per share trading price of our common
stock and ability to satisfy its debt service obligations would be adversely
affected.
4
OUR REAL ESTATE HOLDINGS COULD SUBJECT US TO POTENTIAL ENVIRONMENTAL LIABILITY.
We could be held liable for the costs of removal or remediation of any
hazardous or toxic substances located on or in our properties. These laws often
impose such liability without regard to whether the owner knew of, or was
responsible for, the presence of the hazardous or toxic substances. The presence
of such substances, or the failure to remediate such substances properly, may
adversely affect our ability to sell or rent the property or to borrow using the
property as collateral. Other federal and state laws require the removal of
damaged material containing asbestos in the event of remodeling or renovation.
WE RELY ON A MAJOR TENANT FOR A SIGNIFICANT PORTION OF OUR RENTAL REVENUES.
The Company has one major tenant, Benziger Family Winery, the loss of
which would have a material adverse effect on the operating results of the real
estate operations. Benziger Family Winery accounted for 19%, 21% and 26% of the
rental revenues for the fiscal years ended June 30, 2003, 2002 and 2001,
respectively. In addition, Benziger Family Winery accounted for 24% and 26% of
the accounts receivable balance as of the fiscal years ended June 30, 2003 and
2002, respectively. At June 30, 2003 and 2002, all rent amounts owing by
Benziger Family Winery were payable within the normal billing cycle and were not
past due.
FACTORS RELATED TO INVESTMENT OPERATIONS.
WE MAY NOT RECEIVE A RETURN OF OR ON OUR INVESTMENT IN METROPCS, INC.
The Company has made a financial commitment to make a $3 million
minority investment in the Series D preferred stock of a privately held
telecommunications company, MetroPCS, Inc., of which $2,695,800 was funded as of
June 30, 2003. The wireless industry is unsettled, highly competitive and is
marked by rapidly developing and expanding technologies, which presents some
risks. Even though management believes that the investment in MetroPCS
represents an attractive opportunity for the Company and will ultimately provide
a positive return to the Company, there is no assurance that this will occur.
OUR INVESTMENT IN METROPCS, INC. REPRESENTS A SIGNIFICANT PORTION OF OUR ASSETS.
As of June 30, 2003, we had invested $2,695,800 of our $3.0 million
commitment. Our investment of $2,695,800 represents 38% of our total assets and
assuming we had fully funded our $3.0 million commitment as of June 30, 2003,
would represent 40% of our total assets. Our investment in MetroPCS is our only
investment. Shareholders in the Company do not have the benefits that would
result from a diversified portfolio of investments. Even though management
believes that the investment in MetroPCS will ultimately provide a positive
return to the Company, the loss of our investment in MetroPCS could have a
material adverse effect on our business, financial condition and results of
operations.
ITEM 2. PROPERTIES
ADMINISTRATIVE OFFICES. As of August 25, 2001 the principal
administrative offices of the Company were relocated to 2064 Highway 116 North,
Sebastopol, California. The administrative offices occupy a small portion of
this Company-owned property. Prior to March 2000, the principal administrative
offices of the Company were located in Santa Rosa, California. The Santa Rosa
offices
5
consist of approximately 9,200 square feet of office space and are leased
through December 2003. This space has been sublet through the term of the lease
at approximately the Company's lease rate.
REAL PROPERTY. The Company owns two properties together comprising 82
acres in the "West County" wine area of Sonoma County approximately 56 miles
north of San Francisco. The properties are four miles apart, north and south of
the town of Sebastopol located in the "Russian River Valley" wine appellation
district.
SONOMAWEST INDUSTRIAL PARK SOUTH. This property consists of 15.2 acres
of land immediately south of Sebastopol at 1365 Gravenstein Highway South. It is
in the City of Sebastopol's sphere of influence. The improvements consist of
five connected buildings on a parcel approximately five acres in size with an
aggregate of 84,724 square feet of leasable space under roof. The available
space is suited for commercial rental. All buildings have fire sprinkler
protection. Other features include ample parking, security and a location close
to major north-south and east-west traffic arteries. In addition, there is
16,543 square feet of paved parking area that is currently leased. The property
is zoned for "limited industrial" use, which means that permitted uses include
agricultural/food processing, light industry, related office to support
industrial tenant activities, warehousing or storage. Adjacent to these five
acres are two additional undeveloped Company owned parcels approximately two
acres and eight acres in size zoned "limited industrial" and "low density
residential", respectively.
As of June 30, 2003, 78% of the leasable space under roof has been
leased to seven tenants on a month-to-month or long-term basis. An additional
16,543 square feet of outside space has also been leased. Lease terms range from
month-to-month to ten years with options to extend beyond that.
The following table sets forth the schedule of future lease expirations
and other data related to the South property:
Number of Total Percent of 2003
Tenants Whose Square Feet Annual Rent Gross Rent
Year ending Leases Will Covered by Represented Represented
June 30th Expire Leases by Leases by Leases
- --------------------------------------------------------------------------------
2004 -- 70,923 $318,938 80%
2005 -- 70,923 285,020 71%
2006 1 39,517 134,203 34%
2007 -- 12,669 52,396 13%
2008 1 5,417 8,556 2%
2009 1 -- -- --
The federal tax basis of the property is $329,802. The accumulated book
depreciation is $936,894 and the book net carrying value is $312,061.
Depreciation expense is calculated on a straight-line basis for book purposes
and various methods for tax purposes.
The real estate taxes for this property for the fiscal year ended June
30, 2003 were $13,981.
The Company has a $1.9 million loan secured by this property, which
matures in December 2003.
SONOMAWEST INDUSTRIAL PARK NORTH. This property consists of 66.4 acres
of land approximately two miles north of Sebastopol at 2064 Gravenstein Highway
North. The improvements consist of twelve buildings located on approximately 27
acres with an aggregate of 305,146 square feet of leasable space under roof. In
addition, there is 49,184 square feet of outside area that is currently leased.
The balance of the property is dedicated to wastewater treatment and a large
pond for fire protection. This property is
6
zoned "diversified agriculture" in its entirety, which means that it can be used
for agricultural/food processing, cold storage, warehousing and related office
space to support industrial tenant activities. SonomaWest is currently
attempting to broaden the permitted uses of the 2064 Gravenstein Highway North
property to allow other types of activities, but there can be no assurance that
such efforts will be successful. The existing use permit may restrict the types
of tenants that could occupy the property, resulting in prolonged vacancy and/or
lower rental rates, having a material adverse effect on the Company's business,
financial condition and results of operations.
As of June 30, 2003, 53% of the leasable space under roof has been
leased to twenty tenants on a month-to-month or long-term basis. An additional
49,184 square feet of outside space has also been leased. Leases range from
month-to-month to ten years with options to extend beyond that.
The following table sets forth the schedule of the future lease
expirations and other data related to the North property:
Number of Total Percent of 2003
Tenants Whose Square Feet Annual Rent Gross Rent
Year ending Leases Will Covered by Represented Represented
June 30th Expire Leases by Leases by Leases
- --------------------------------------------------------------------------------
2004 0 168,097 $1,051,848 95%
2005 2 155,280 992,550 90%
2006 1 143,701 920,065 83%
2007 2 91,247 458,326 41%
2008 4 50,539 207,382 19%
2009 2 23,999 154,109 14%
The federal tax basis of the property is $1,596,835. The accumulated
book depreciation is $4,126,001 and the book net carrying value is $1,302,666.
Depreciation expense is calculated on a straight-line basis for book purposes
and various methods for tax purposes.
The real estate taxes for this property for the fiscal year ended June
30, 2003 were $58,144.
The Company has no debt associated with this property. The Company is
evaluating whether it should seek development entitlements for this property.
The Company has engaged a major real estate brokerage firm on a commission basis
to assist in marketing all of its properties. There can be no assurance that
these marketing efforts will be successful, or that suitable tenants will be
found on a timely basis. Significant, prolonged vacancies at the properties may
have a material adverse impact on the Company's business, financial condition
and results of operations.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the last
quarter of the fiscal year ended June 30, 2003.
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the Nasdaq-Small Cap Market
(symbol: SWHI).The quarterly high and low prices for the last two fiscal years
were as follows:
QUARTER ENDING LOW HIGH
-------------- --- ----
09/30/01 7.05 8.20
12/31/01 6.50 9.70
3/31/02 6.75 8.99
6/30/02 6.56 9.27
9/30/02 5.37 7.77
12/31/02 5.41 6.78
3/31/03 5.05 6.39
6/30/03 4.21 6.20
The above quotations were obtained from the Yahoo Finance Historical
Quotes Online website.
On September 3, 2003, there were approximately 457 registered holders
of common stock. On that date, the average of the high and low price per share
of the Company's stock was $7.43.
In December 2000, the Company repurchased and retired 112,000 warrants
for $112,000. The warrants represented a right to purchase 112,000 shares of
common stock and had an exercise price of $8 per share. The warrants were
originally assigned a value of $456,000. Common stock was increased by the
difference between the repurchase price and the originally assigned value.
In October 2000, the Company's Board of Directors authorized the
repurchase of up to 500,000 shares of the Company's stock at $8.00 per share in
a tender offer. During the fourth quarter of fiscal 2001, 777,000 shares were
tendered resulting in the prorated repurchase of 64% (500,000) of the tendered
shares. In July 2002 the transfer company handling this tender offer reimbursed
the Company $3,120 for 390 shares at $8.00 per share. These shares could not be
processed due to improper paper work submitted during the tender offer and as a
result the funds were ultimately reimbursed to the Company.
The Company has not paid dividends on its common stock within the last
15 years. Even if its future operations result in profitability, as to which
there can be no assurance, there is no present anticipation that dividends will
be paid. Rather, the Company expects that any future earnings will be applied
toward the further development of the Company's business.
8
ITEM 6. SELECTED FINANCIAL DATA.
YEAR ENDED JUNE 30 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2003 2002 2001 2000 1999
----------------------------------------------
Total revenues (1) $1,514 $1,447 $1,192 $1,197 $ 665
Net loss from continuing
operations (202) (511) (355) (473) (759)
Net earnings (loss) from
discontinued operations 127 16 161 3,183 (2,170)
Net earnings (loss) (75) (495) (194) 2,710 (2,929)
Loss per share from continuing
operations
Basic (0.18) (0.49) (0.27) (0.31) (0.50)
Diluted (0.18) (0.49) (0.27) (0.31) (0.50)
Earnings (loss) per share from
discontinued operations
Basic 0.11 0.02 0.12 2.09 (1.43)
Diluted 0.11 0.02 0.12 2.06 (1.43)
Earnings (loss) per share
Basic (0.07) (0.47) (0.15) 1.78 (1.93)
Diluted (0.07) (0.47) (0.15) 1.75 (1.93)
Total Assets 7,126 7,470 7,687 12,969 17,023
Long Term Debt 131 1,856 1,917 1,974 2,860
(1) After the sale of the Company's apple-based industrial
ingredient business and the discontinuation of its organic packaged goods
business in fiscal 2000, the Selected Financial Data presented above was
reformatted to reflect this discontinuation in the ongoing business of the
Company. As a result, this chart now reflects the ongoing real estate business
as continuing operations and the financial results from the discontinuation of
its industrial ingredients and organic packaged goods business as discontinued
operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
OVERVIEW
As of fiscal 2003 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 privately held telecommunications company, MetroPCS, Inc.
Prior to the sale of its other business segments, SonomaWest operated in three
business segments: industrial dried fruit ingredients, organic packaged goods
and real estate. The Company commenced a strategic reorientation upon the
announcement of the proposed sale of its apple-based industrial ingredients
product line in June 1999. In August 1999 the decision was made to sell or
discontinue all product lines in the Company's industrial dried fruit
ingredients business. In January 2000, the Company decided to sell or
discontinue its organic packaged goods business. As a result of these decisions,
both of these business segments are considered discontinued operations and their
operating results, results of cash flows and net assets are reflected outside of
the Company's continuing operations.
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During fiscal 2001, the Company committed to a $3 million minority
investment in the Series D preferred stock of a telecommunications company,
MetroPCS, Inc. As of June 30, 2003, the Company had funded $2,695,800 of its
$3.0 million commitment.
RESULTS OF CONTINUING OPERATIONS
The Company's continuing line of business consists of its rental
operations, real estate management and an investment in MetroPCS. See Item 2,
Properties, above for a further discussion of the Company's real estate
operations.
FISCAL 2003 COMPARED TO FISCAL 2002
RENTAL REVENUE. The Company leases warehouse, production, and office
space as well as outside storage space at both of its properties. The two
properties have a combined leaseable area of approximately 455,597 square feet
(389,870 under roof and 65,727 outside) on 82 acres of land. As of the end of
fiscal year 2003, there were 27 leases covering 292,785 square feet of leasable
space (227,058 under roof and 65,727 outside) or 64%. As of the end of fiscal
2002, there were 26 leases that comprised 297,023 square feet of leaseable space
(216,136 under roof and 80,887 outside) or 63% of the total leasable area of
471,032 (389,870 under roof and 81,162 outside). Fiscal 2003 rental revenue
increased $67,000 or 5% from $1,447,000 in fiscal 2002 to $1,514,000 in fiscal
2003. Although the total leasable space decreased, the area under roof actually
increased. The rental revenue per square foot for the area under roof is
significantly higher than the outside area and as a result more than offset for
the loss of the revenue from the outside area. In addition, the revenue also
increased as a result of the normal CPI rate increases. Nonetheless, rental
revenue does not cover all operating costs and interest expense, yielding
deficits of $301,000 and $716,000 in fiscal years 2003 and 2002 respectively.
While the Company and its retained broker are 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.
OPERATING COSTS. Operating costs consist of direct costs related to
continuing operations and all general corporate costs. Only direct selling,
general and administrative costs related to the ingredients and organic packaged
goods businesses were charged to discontinued operations in the consolidated
statements of operations in 2003 and 2002. Fiscal 2003 operating costs decreased
$314,000 or 15% from $2,065,000 in fiscal 2002 to $1,751,000 in fiscal 2003.
This decrease was primarily the result of a nonrecurring charge in 2002 of
$362,500 for the separation costs related to the resignation of the Company's
former CEO. Of the $1,751,000 of operating expenses in fiscal 2003, $42,000 was
due to non-cash compensation charges as a result of the expensing of the stock
options issued on July 31, 2002. Efforts to reduce and/or maintain expenses
continue to be an important focus of the Company.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest and other income
(expense) consist primarily of interest income on the Company's cash balances,
interest expense on mortgage debt and the change in the fair value of the
Company's interest rate swap contract. Proceeds from the sale of the ingredients
business received in July 1999 were used to pay off the Company's revolving bank
line of credit and substantially reduce long-term debt. After this reduction of
the Company's total debt, the Company had unrestricted cash balances of $1.9
million and $2.8 million in fiscal 2003 and 2002, respectively. In fiscal 2003
the Company generated $46,000 of interest income, incurred $140,000 of interest
expense, and recorded a decrease in the fair value of the interest rate swap
contract of $34,000. This compared to $102,000 of interest income, $144,000 of
interest expense and a decrease in the fair value of the interest rate swap
contract of $59,000, in fiscal 2002.
10
INCOME TAXES. The effective tax (benefit) rate decreased from 29% in
fiscal 2002 to 17% in fiscal 2003. The rate declined primarily because the
permanent timing differences incurred in fiscal 2003 were a larger percentage of
the income before taxes than in fiscal 2002. In addition to the effect of the
permanent differences, the rates in fiscal 2003 and fiscal 2002 were lower than
the normal combined federal and state rate of 40% as a result of an additional
valuation allowance placed on state deferred tax assets due to the uncertainty
of the future realization of such deferred tax assets and future taxable income
against which the state net operating losses could be offset.
FISCAL 2002 COMPARED TO FISCAL 2001
RENTAL REVENUE. Fiscal 2002 rental revenue increased $255,000 or 21%
from $1,192,000 in fiscal 2001 to $1,447,000 in fiscal 2002. This increase was
primarily the result of increased occupancy.
OPERATING COSTS. For fiscal 2002, operating costs increased 5% or
$91,000 from $1,974,000 in fiscal 2001 to $2,065,000 in fiscal 2002. Since
fiscal 2001, the operating costs of the continuing operations have begun to
normalize and as a result the Company's expenses have not changed materially
from the fiscal 2001 level of $1,974,000. Included in the fiscal 2002 operating
costs is the separation costs related to the resignation of the Company's CEO
pursuant to the terms of a separation agreement.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest and other income
(expense) consist primarily of interest income on the Company's cash balances,
interest expense on mortgage debt and the change in the fair value of the
Company's interest rate swap contract. Proceeds from the sale of the ingredients
business received in July 1999 were used to pay off the Company's revolving bank
line of credit and substantially reduce long-term debt. After this reduction of
the Company's total debt, the Company had substantial unrestricted cash balances
of $2.8 million and $3.3 million in fiscal 2002 and 2001, respectively. In
fiscal 2002 the Company generated $102,000 of interest income, incurred $144,000
of interest expense, and recorded a decrease in the fair value of the interest
rate swap contract of $59,000, compared to $418,000 of interest income and
$145,000 of interest expense and a decrease in the fair value of the interest
rate swap contract of $11,000, in fiscal 2001.
INCOME TAXES. The fiscal 2002 effective tax benefit rate decreased to
29% from the fiscal 2001 effective tax benefit rate of 33%. The decrease is due
to a valuation allowance placed on state net operating losses generated in
fiscal 2002 due to the uncertainty of the future realization of such deferred
tax assets and future taxable income against which the state net operating
losses could be offset.
DISCONTINUED OPERATIONS
In July 1999, the Company sold the bulk of its apple-based industrial
ingredients product line to Tree Top, Inc., of Selah, Washington. Following
completion of the sale, the Company determined in August 1999 that the remaining
product lines in the Company's vacuum ingredients segment of its business would
be discontinued and held for sale. These product lines included the Company's
dried ingredients, Perma-Pak long-term food storage, and drink mix businesses.
In January 2000, the Company decided to sell or discontinue its organic packaged
goods business. As a result of these decisions, the Company has classified these
business segments as discontinued operations. Accordingly, the Company has
segregated the net assets of the discontinued operations in the consolidated
balance sheets as of June 30, 2003 and 2002, the operating results of the
discontinued operations in the consolidated statements of operations for fiscal
2003, 2002, and 2001 and the cash flows from discontinued operations in the
consolidated statements of cash flows for fiscal 2003, 2002, and 2001.
For fiscal 2003, the Company recorded an after-tax gain from
discontinued operations of $127,000. This compares to an after-tax gain from
discontinued operations of $16,000 for 2002 and
11
$161,000 for 2001. The increase in 2003 is a result of the sale of the Company's
Perma-Pak finished goods and other property.
On October 3, 2002 the Company entered into a sale agreement with
Commercial Sales and Leasing, Inc. for the remaining Perma-Pak finished goods
and other Perma-Pak property for a total sale price of $240,000. The agreement
calls for a down payment of $175,000 with the balance of $65,000 secured by a
non-interest bearing promissory note. The promissory note calls for payments of
$20,000 on October 25, 2002, $30,000 on April 4, 2003 and $15,000 on July 4,
2003. As of September 3, 2003, the Company has not received the final payment of
$15,000 due under the promissory note. Revenue pursuant to this sale is recorded
at the time payments are received. Pursuant to a separation agreement, the
Company agreed to pay Gary Hess (the Company's former Chief Executive Officer
and a current Board Member), a commission of 7% on the net purchase price for
sales of $250,000 of Perma-Pak finished goods and other property and 50% on the
net purchase price for sales above $250,000. As of June 30, 2003, the Company
has paid Gary Hess a commission of $59,329 with respect to the sale of Perma-Pak
assets to Commercial Sales and Leasing, Inc. Upon receipt of the final payment
of $15,000 on the purchase price the Company will owe Gary Hess the final
commission payment of $7,500.
Remaining liabilities of discontinued operations of $39,000 and
$219,000, as of June 30, 2003 and June 30, 2002, respectively, relate to
reserves for rental repairs necessary to ready one of the Company's properties
previously used in the discontinued operations for future rentals. The original
reserve was recorded as a charge to discontinued operations during 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash of $1.9 million at June 30, 2003 (all of which was
unrestricted), and current maturities of long-term debt of $1,856,000. Although
the Company generated a pre-tax loss of $301,000 from operating activities, the
Company generated positive cash flow from operating activities of $38,000. The
decrease in the cash balance of $1,430,000, from $3,369,000 at June 30, 2002 to
$1,939,000 at June 30, 2003, was primarily a result of the investment of
$1,294,000 in MetroPCS, Inc. and capital expenditures of $114,000.
During December 2000, the Company entered into an agreement with its
sole lender to modify the terms of its lending agreement. As a result, the
financial based debt covenant was amended. The new covenant required the
Company, at the end of each fiscal year, to maintain a debt service coverage
ratio of at least 1.15 to 1. Until such time as this ratio reaches 1.25 to 1,
the Company was required to maintain restricted, unencumbered cash or marketable
securities of at least $600,000. Furthermore, the terms of the loan restrict the
Company from incurring any additional indebtedness during the term of the loan.
As of August 15, 2001, the Company and the bank agreed to a Restated and Amended
Addendum ("Addendum") to this agreement. This Addendum amended and restated the
provisions of the agreement stated above. The new Addendum requires that the
Company, at the end of each fiscal year, maintain a debt service coverage ratio
of at least 1.05 to 1. It still requires that until such time as this ratio
reaches 1.25 to 1, the Company is required to maintain restricted, unencumbered
cash or marketable securities of at least $600,000. In addition to the lien on
the Real Property (South Property only) it grants the bank a lien on a money
market account, in the amount of $90,000. Management is confident that in the
future it can remain in compliance with this new debt service coverage ratio.
The $90,000 Money Market account balance is part of, not an addition to, the
restricted unencumbered cash balance of $600,000. As of June 30, 2003, the
Company's debt service ratio was 1.28 to 1, which exceeds the minimum ratio of
1.25 to 1. As a result, all of the cash on the balance sheet as of June 30, 2003
is classified as unrestricted. The Company is actively pursuing the refinancing
of this loan, which matures in December 2003.
12
The Company has a variable rate borrowing tied to the LIBOR rate. To
reduce its exposure to changes in the LIBOR rate, the Company entered into an
interest rate swap contract. Under the terms of the interest rate swap, the
Company exchanges - monthly, the difference between fixed and floating interest
amounts calculated on an initial agreed-upon notional amount of $2,100,000. The
notional amount is amortized monthly based on the Company's principal payments
and was $1,856,000 as of June 30, 2003. The interest rate contract has a
five-year term that coincides with the term of the borrowing, both of which
began on December 1, 1998 and end on December 1, 2003. The swap contract
requires the Company's counter party to pay it a floating rate of interest based
on USD-LIBOR due monthly. In return, the Company pays its counter party a fixed
rate of 5.10% interest due monthly. In accordance with Statement of Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"), the Company reports all changes in the fair value of its swap
contract in earnings. The Company has not designated this swap as a formal
hedge. During the year ended June 30, 2003, the Company recorded a decrease in
the fair value of this swap contract of $33,899. This amount is included in
interest expense.
The Company has committed itself to a $3 million minority investment in
the Series D preferred stock of a privately held telecommunications company,
MetroPCS, Inc. As of June 30, 2003, the Company had invested $2,695,800 of its
$3 million commitment. The Company has accounted for the investment using the
cost method. It is expected that the remaining $304,200 will be funded in the
first half of the fiscal year ending June 30, 2004.
In December 2000, the Company repurchased and retired 112,000 warrants
for $112,000. The warrants represented a right to purchase 112,000 shares of
common stock and had an exercise price of $8 per share. The warrants were
originally assigned a valued of $456,000. Common stock was increased by the
difference between the repurchase price and the originally assigned value.
During fiscal 2001, the Company repurchased 500,000 shares of the
Company's stock at $8.00 per share in a tender offer. The tender offer was
oversubscribed, as 777,000 shares were tendered resulting in the pro rated
repurchase of 64% (500,000 shares) of the tendered shares. In July 2002 the
transfer company handling this tender offer reimbursed the Company $3,120 for
390 shares at $8.00 per share. These shares could not be processed due to
improper paper work submitted during the tender offer and as a result the funds
were ultimately reimbursed to the Company.
On September 4, 2001, the Company authorized the waiver of the
provision of Craig R. Stapleton's (a shareholder and former director) stock
options, providing for the termination of the options 90 days following service.
Consequently, Craig Stapleton's option to purchase 10,000 shares was extended,
and a one-time non-cash compensation charge of $18,000 was recorded in September
2001.
Effective July 1, 2002, the Company has elected to account for all
prospective stock options in accordance with SFAS 123, "Accounting for
Stock-Based Compensation". As a result, during the first quarter of fiscal 2003
the Company incurred a charge against continuing operations of $42,000 related
to the issuance of 24,200 fully vested stock options to the Directors, Officers
and specific employees of the Company.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, which require the
Company to make estimates and assumptions (see Note 1 to the financial
statements). The Company believes that of its significant accounting policies
(see Note 1 to the financial statements), the following may involve a higher
degree of judgment and complexity.
13
The most critical accounting policies were determined to be those
related to: valuation of the Company's investment in MetroPCS, discontinued
operations reserves 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 that we
request from MetroPCS and conversations with MetroPCS management. The Company
also tracks MetroPCS information available to the general public. Since MetroPCS
is a privately held company, it is not subject to the same disclosure
requirements of public companies and as such, the basis for our evaluation is
subject to the timing, accuracy and disclosure of the data received. If as a
result of the review of this information, 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.
DISCONTINUED OPERATIONS RESERVES
As a result of the discontinuance of the Company's industrial
ingredients and organic packaged goods businesses, the Company established
reserves to account for potential charges that are expected to arise in future
periods related to discontinued operations. As of June 30, 2003 there is only
one remaining reserve of $39,000 for repairs to the North Property related to
the expenses necessary to modify the facility from a food processing operation
to a multi-tenant property. Once this reserve is depleted if there are any
additional repairs needed to complete this modification of the facility, these
expenses will be charged directly against "operating expenses" on the
consolidated statement of operations to the extent they cannot be capitalized.
With the sale of the Perma-Pak finished goods inventory and other property,
there are no remaining discontinued operational assets of any significance.
VALUATION ALLOWANCE ON DEFERRED TAXES
The Company records deferred tax assets and/or liabilities based upon
its estimate of the taxes payable in future years, taking into consideration any
change in tax rates and other statutory provisions. The Company continues to
post losses from its continuing operations. The losses have generated federal
tax net operating losses ("NOLs") which have been carried back to offset prior
years' taxable income. As of June 30, 2002 the Company carried back all of its
remaining allowable NOLs. The Company has received tax refunds from the Internal
Revenue Service of $75,135, $250,442 and $763,768 as a result of the NOLs
generated from the fiscal years ended June 30, 2002, 2001 and 2000,
respectively. After the carryback of the June 30, 2002 Federal NOL there are no
remaining federal NOLs as of June 30, 2002. For state tax purposes, 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, state net operating losses will begin to expire in fiscal 2005. As
a result, the Company has established a valuation allowance for state deferred
tax assets for which future realization is uncertain. At June 30, 2003, the
Company had recorded, net deferred tax assets of $383,000.
14
SUBSEQUENT EVENTS
STOCK OPTIONS
On July 30, 2003, the Company's Board of Directors granted options
under the 2002 Plan exercisable in the aggregate for 24,200 shares of common
stock to the following Directors: Roger S. Mertz - 7,500, David J. Bugatto -
5,000, Gary L. Hess - 5,000, Fredric Selinger - 5,000. In addition to the
Directors, the Board of Directors also granted options under the 2002 Plan
exercisable in the aggregate for 1,700 shares of common stock to other officers
and employees. All of these common stock options were granted at the market
price on the date of grant of $5.05 per share and are all fully vested at the
time of issuance.
15
MINIMUM LEASE INCOME
The Company has been leasing warehouse space, generating revenues of $1,514,000
in 2003, $1,447,000 in 2002 and $1,192,000 in 2001. The leases have varying
terms, which range from month-to-month to expiration dates through 2013. As of
June 30, 2003, assuming none of the existing leases is renewed or no additional
space is leased, the following will be the future minimum lease income (in
thousands):
YEAR ENDING
JUNE 30
-------------------------------
2004 1,371
2005 1,278
2006 1,054
2007 511
2008 216
Thereafter 679
---------------
Total $5,109
===============
RELATED PARTY TRANSACTIONS
David J. Bugatto, director, has entered into a consulting agreement with the
Company, whereby David Bugatto will provide real estate consulting services to
the Company for a monthly fee of $2,500. In addition, in the event that either
of the Company's Sonoma County properties are sold during the term of the
agreement, David Bugatto would be paid a fee of 2.5% of the sales price if no
broker commission is involved and 1.25% of the sales price if a broker is
involved in the sale. In the event that either property is refinanced during the
term of the agreement, David Bugatto will be paid a fee equal to 1% of the
amount of the proceeds received by the Company in excess of its current debt.
The agreement is effective until the earlier of its termination by either party
or December 31, 2003. During fiscal 2003, the Company paid David Bugatto
$32,000, for real estate consulting services. As of June 30, 2003, the Company
has a payable to David Bugatto of $2,603.
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 fiscal 2003, the Company incurred $60,194 in
commissions under this agreement and $7,979 during fiscal 2002. As of June 30,
2003, the Company did not owe Gary Hess any commissions under this agreement. On
July 17, 2001 the Company entered into a separation agreement in principle,
which was thereafter executed, with Gary Hess, replacing his existing employment
agreement. Pursuant to the separation agreement, Gary Hess continued as
President and Chief Executive Officer, first on a full-time basis and then on a
part-time basis, through October 31, 2001. Effective September 2001, the Company
began paying separation payments to Gary Hess in the amount of $12,500 monthly
for 29 months, replacing all payment obligations under his prior employment
agreement. The Company's obligation under this agreement of $362,500 was
recorded in operating expenses in the first quarter of fiscal 2002. As of June
30, 2003, the remaining obligation under this agreement is $75,000. 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
16
goods inventory and other Perma-Pak property. As of June 30, 2003 the Company
received $225,000 of the $240,000 total purchase price. The Company has paid
commissions to Gary Hess of $59,329 pursuant to this sale and $68,173 in total
pursuant to this agreement. Upon receipt of the balance of the total purchase
price of $15,000, the Company will owe a commission to Gary Hess of $7,500. 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). 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 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 2003, 2002, and 2001, the Company incurred $204,000, $186,000
and $214,000 respectively, for legal services from Allen Matkins. As of June 30,
2003, the Company has a payable to Allen Matkins of $9,331.
On September 4, 2001, the Company authorized the waiver of the provision of
Craig R. Stapleton's (a shareholder and former director) stock options,
providing for the termination of the options 90 days following service.
Consequently Craig Stapleton's option to purchase 10,000 shares was extended,
and a one-time non-cash compensation charge of $18,000 was recorded in September
2001.
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 fiscal 2003, the Company incurred $65,000 for financial
management and accounting consulting services from Thomas Eakin. As of June 30,
2003, there was a payable to Thomas Eakin of $627. The independent consulting
agreement terminated on July 31, 2003. Subsequent to year-end, the Company
entered into a new Consulting Agreement with Thomas Eakin. Under the agreement,
Thomas Eakin will provide financial management and accounting services to the
Company. Thomas Eakin is compensated at an hourly billing rate of $110 per hour,
plus expenses.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During fiscal 1999, the Company entered into a note payable with an initial
principal amount of $2,100,000. The note has a variable interest rate tied to
the LIBOR rate. To reduce its exposure to changes in the LIBOR rate, the Company
entered into an interest-rate swap agreement. The interest rate swap agreement
has a five-year term that coincides with the term of the borrowing, both of
which began on December 1, 1998 and end on December 1, 2003. The swap contract
requires the Company's counter party to pay it a floating rate of interest based
on USD-LIBOR due monthly. In return, the Company pays its counter party a fixed
rate of 5.10% interest due monthly. The interest amounts are calculated based
upon the notional amount, which is amortized monthly based on the Company's
principal payments and was $1,855,560 as of June 30, 2003. The initial
notational amount was $2,100,000. The Company has not designated this swap as a
formal hedge. During the 2003 fiscal year, the Company recorded a
17
decrease in the value of this swap agreement of $33,899. The fair value of the
interest rate swap was $(37,033) as of June 30, 2003, and is included in accrued
liabilities in the accompanying condensed consolidated financial statements.
TABLE OF INTEREST RATE SWAP:
VARIABLE FIXED VARIABLE EFFECTIVE
INTEREST RATE RATE INTEREST
NOTIONAL RATE PAID ON RECEIVED RATE ON
AMOUNT ON NOTE SWAP ON SWAP NOTE
---------- -------- ------- -------- ---------
Matures in December 2003 $1,855,560 3.57% 5.10% (1.32)% 7.35%
---------- ---- ---- ----- ----
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Consolidated Financial Statements and Consolidated Financial Statement
Schedule
Independent Auditor's Report ............................................... F-1
Independent Auditor's Report (Arthur Andersen LLP) ......................... F-2
Consolidated Balance Sheets at June 30, 2003 and 2002 ...................... F-3
Consolidated Statements of Operations for the years ended
June 30, 2003, 2002 and 2001 ............................................... F-4
Consolidated Statements of Changes in Shareholders' Equity
for the years ended June 30, 2003, 2002 and 2001 ........................... F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 2003, 2002 and 2001 ............................................... F-6
Notes to Consolidated Financial Statements ................................. F-7
19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
SonomaWest Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of SonomaWest
Holdings, Inc. (a California corporation) and Subsidiary as of June 30, 2003 and
2002, and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The financial statements of SonomaWest Holdings, Inc. and Subsidiary
for the year ended June 30, 2001 were audited by other auditors who have ceased
operations. Those auditors expressed an unqualified opinion on those financial
statements in their report dated August 6, 2001.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SonomaWest Holdings,
Inc. and Subsidiary as of June 30, 2003 and 2002, and the results of its
operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
We have also audited Schedule III for each of the two years in the period ended
June 30, 2003. In our opinion, this schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all material
respects, the information therein.
GRANT THORNTON LLP
San Francisco, California,
July 28, 2003
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
SonomaWest Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of SonomaWest
Holdings, Inc. (a California corporation) and Subsidiary as of June 30, 2001 and
2000, and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for the three years then ended. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SonomaWest Holdings, Inc. and
Subsidiary as of June 30, 2001 and 2000, and the results of its operations and
its cash flows for the three years then ended, in conformity with accounting
principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Schedule listed in the index to the
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not a required part of the basic
financial statements. This Schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
San Francisco, California,
August 6, 2001
THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP IN
CONNECTION WITH THE COMPANY'S FILING ON FORM 10-K FOR THE YEAR ENDED JUNE 30,
2001. THIS AUDIT REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP IN
CONNECTION WITH THIS FILING ON FORM 10-K. SEE EXHIBIT 23.2 FOR FURTHER
DISCUSSION.
F-2
SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2003 AND 2002
(AMOUNTS IN THOUSANDS)
ASSETS 2003 2002
------- -------
CURRENT ASSETS:
Cash $ 1,939 $ 2,769
Restricted cash -- 600
Accounts receivable 136 118
Other receivables 15 20
Prepaid income taxes -- 75
Prepaid expenses and other assets 145 121
Current deferred income taxes, net 124 335
------- -------
Total current assets 2,359 4,038
------- -------
RENTAL PROPERTY, net 1,731 1,917
------- -------
INVESTMENT, at cost 2,696 1,402
------- -------
DEFERRED TAXES 259 31
------- -------
PREPAID COMMISSIONS AND OTHER ASSETS 81 82
------- -------
Total assets $ 7,126 $ 7,470
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 1,857 $ 61
Accounts payable 108 108
Accrued payroll and related liabilities 104 253
Accrued expenses 232 159
Unearned rents and deposits 287 282
Net liabilities of discontinued operations 39 219
------- -------
Total current liabilities 2,627 1,082
------- -------
LONG-TERM DEBT, net of current maturities -- 1,856
------- -------
OTHER LONG-TERM LIABILITIES 131 131
------- -------
Total liabilities 2,758 3,069
------- -------
SHAREHOLDERS' EQUITY:
Preferred stock: 2,500 shares authorized;
no shares outstanding -- --
Common stock: 5,000 shares authorized,
no par value; 1,105 shares outstanding
in fiscal 2003 and 2002 2,675 2,633
Stock subscription receivable (400) (400)
Retained earnings 2,093 2,168
------- -------
Total shareholders' equity 4,368 4,401
------- -------
Total liabilities and shareholders' equity $ 7,126 $ 7,470
======= =======
The accompanying notes are an integral part of these consolidated statements.
F-3
SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2003, 2002, AND 2001
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2003 2002 2001
---------------------------
RENTAL REVENUE $ 1,514 $ 1,447 $ 1,192
---------------------------
OPERATING COSTS 1,751 2,065 1,974
---------------------------
INTEREST AND OTHER INCOME (EXPENSE), NET (64) (98) 250
---------------------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX (301) (716) (532)
INCOME TAX PROVISION (BENEFIT) 99 (205) (177)
---------------------------
NET LOSS FROM CONTINUING OPERATIONS (202) (511) (355)
---------------------------
GAIN ON SALE OF DISCONTINUED OPERATIONS,
NET OF INCOME TAXES 127 16 161
---------------------------
NET LOSS $ (75) $ (495) $ (194)
===========================
WEIGHTED AVERAGE COMMON SHARES AND EQUIVALENTS:
Basic 1,105 1,052 1,291
Diluted 1,109 1,061 1,319
EARNINGS (LOSS) PER COMMON SHARE:
Continuing operations:
Basic $ (0.18) $ (0.49) $ (0.27)
Diluted $ (0.18) $ (0.49) $ (0.27)
Discontinued operations:
Basic $ 0.11 $ 0.02 $ 0.12
Diluted $ 0.11 $ 0.02 $ 0.12
Net loss:
Basic $ (0.07) $ (0.47) $ (0.15)
Diluted $ (0.07) $ (0.47) $ (0.15)
The accompanying notes are an integral part of these consolidated statements.
F-4
SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2003, 2002, AND 2001
(AMOUNTS IN THOUSANDS)
WARRANTS FOR STOCK TOTAL
COMMON SUBSCRIPTIONS RETAINED SHAREHOLDERS'
COMMON STOCK STOCK RECEIVABLE EARNINGS EQUITY
-------------------------
NUMBER
OF SHARES AMOUNT
----------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2000 1,522 $ 2,905 $ 456 $ -- $ 5,874 $ 9,235
Net loss -- -- -- (194) (194)
Repurchase of common stock (500) (1,068) -- (3,019) (4,087)
Repurchase and retire warrants 344 (456) -- (112)
Issuance of common stock 2 6 -- -- 6
----------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2001 1,024 $ 2,187 $ -- $ -- $ 2,661 $ 4,848
----------------------------------------------------------------------------------------------
Net loss -- -- -- -- (495) (495)
Tender offer reimbursement -- 1 -- -- 2 3
Exercise of stock options 80 400 -- (400) -- --
Non-cash stock compensation -- 40 -- -- -- 40
Issuance of common stock 1 5 -- -- -- 5
----------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2002 1,105 $ 2,633 $ -- $ (400) $ 2,168 $ 4,401
----------------------------------------------------------------------------------------------
Net loss -- -- -- -- (75) (75)
Non-cash stock compensation -- 42 -- -- -- 42
----------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2003 1,105 $ 2,675 $ -- $ (400) $ 2,093 $ 4,368
==============================================================================================
The accompanying notes are an integral part of these consolidated statements.
F-5
SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2003, 2002, AND 2001
(AMOUNTS IN THOUSANDS)
2003 2002 2001
-------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (75) $ (495) $ (194)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Loss on the disposition of fixed assets 7 -- --
Gain on sale of discontinued operations, net (127) (16) (161)
Non-cash stock compensation charge 42 40 --
Depreciation and amortization expense 293 383 419
Changes in assets and liabilities:
Accounts receivable, net (18) (21) 13
Other receivables 5 104 (124)
Prepaid income taxes 75 212 529
Prepaid expenses and other assets (24) 8 (42)
Deferred income taxes (17) (148) 256
Prepaid commissions and other assets 1 (82) --
Accounts payable and accrued expenses 73 56 64
Accrued payroll and related liabilities (149) 201 (26)
Unearned rents and deposits 5 106 33
Other long-term liabilities -- 31 100
-------------------------------
166 874 1,061
-------------------------------
Net cash provided by continuing operations 91 379 867
-------------------------------
Net cash (used in) provided by discontinued operations (53) 35 144
-------------------------------
Net cash provided by operating activities 38 414 1,011
-------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (114) (129) (25)
Investment in MetroPCS (1,294) (803) (599)
-------------------------------
Net cash used in investing activities (1,408) (932) (624)
-------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt (60) (57) (53)
Principal payments of shareholder debt -- -- (564)
Stock repurchase -- 3 (4,087)
Warrant repurchase -- -- (112)
Issuance of common stock -- 5 6
-------------------------------
Net cash used for financing activities (60) (49) (4,810)
-------------------------------
NET DECREASE IN CASH (1,430) (567) (4,423)
CASH AT BEGINNING OF YEAR (of which $600 is restricted) 3,369 3,936 8,359
-------------------------------
CASH AT END OF YEAR (of which $600 is restricted in 2002 and 2001) $ 1,939 $ 3,369 $ 3,936
===============================
The accompanying notes are an integral part of these consolidated statements.
F-6
SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
SonomaWest Holdings, Inc., formerly Vacu-dry Company, (SonomaWest or the
Company) was incorporated in 1946 and currently operates as a real estate
management and rental company with an investment in MetroPCS, Inc., a privately
held telecommunications company. Its rental operations include
industrial/agricultural property, some of which was formerly used by the Company
in its discontinued businesses. This commercial property is now being rented to
third parties. Prior to June 30, 2000 the Company operated in three business
segments: organic packaged goods, real estate, and ingredients. In July 1999,
the Company consummated an asset purchase agreement to sell the majority of its
ingredients business. In the third quarter of fiscal 2000, the Company
discontinued its organic packaged goods business, operated through a subsidiary,
Made In Nature Company, Inc. (MINCO), and has sold the assets related to this
segment.
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of SonomaWest and its
85 percent-owned subsidiary, MINCO. As of June 30, 2001, all of the remaining
assets of MINCO have been sold and in 2002 MINCO was liquidated. The
accompanying consolidated statements of operations reflect the financial results
of MINCO as part of discontinued operations. All significant intercompany
transactions have been eliminated in consolidation.
DISCONTINUED OPERATIONS
In July 1999, the Company consummated the sale of its processed apple products
business line to Tree Top, Inc. Subsequent to the sale, the Company decided to
discontinue its entire ingredients segment and began pursuing potential buyers
for other product lines within that segment. In January 2000, the Company
decided to discontinue its entire organic packaged goods business and sold a
significant portion of MINCO's assets to Premier Valley Foods, Inc. The
Company's continuing operations consist of its real estate management, rental
operations and an investment in MetroPCS. As a result of these decisions,
SonomaWest has classified its ingredients and organic packaged goods operations
as discontinued operations for all years presented and, accordingly, has
segregated the net assets and liabilities of the discontinued operations in the
consolidated balance sheets as of June 30, 2003 and 2002.
As of June 30, 2003 the Company has disposed of all discontinued assets. During
fiscal 2002 and fiscal 2001, the Company recorded after tax gains on
discontinued operations of $16, and $161, respectively related to the wind-down
of the ingredients and organic packaged foods segment. The gains were a result
of product sold at higher than anticipated prices and residual equipment sales.
During fiscal 2003, the Company recorded an additional after tax gain of $127
related to the sale of the PermaPak Line and the elimination of the remaining
discontinued operational assets.
The Company's remaining line of business is its real estate management, rental
operations and an investment in MetroPCS, Inc.
F-7
Summarized historical information of the discontinued operations reserves is as
follows:
JUNE 30, JUNE 30, JUNE 30,
2003 2002 2001
------- ------- -------
Beginning Balance $ 219 $ 281 $ 394
Additions to Reserve -- -- 48
Reserves Utilized (180) (62) (161)
---------------------------------
Liability for severance, transaction
costs, wind-down costs and other
liabilities related to the decision
to discontinue the segments $ 39 $ 219 $ 281
=================================
The Company's remaining net liability for discontinued operations of $39 as of
June 30, 2003, relates to necessary repairs to unoccupied space at the North
Property. This reserve was recorded in fiscal 2000, when the related operations
were discontinued and it became necessary to ready the Company's former
operating facilities for rental. The rental repairs reserve is reduced as the
Company readies existing property for rental, and will be fully utilized during
fiscal 2004.
SUPPLEMENTAL STATEMENTS OF CASH FLOWS INFORMATION
2003 2002 2001
---------------------------------
Cash paid for:
Interest $ 140 $ 145 $ 159
=================================
Income taxes $ 1 $ 2 $ 2
=================================
INVENTORIES
As of June 30, 2003 the Company had no remaining inventories.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method based upon the estimated useful lives of the assets as
follows:
Buildings and improvements 5 to 45 years
Machinery and office equipment 3 to 15 years
F-8
Rental property consists of the following as of June 30:
2003 2002
----------------------
Land $ 231 $ 231
Buildings, machinery and improvements 6,652 6,649
Office equipment and autos 144 143
Construction in progress 110 80
----------------------
Total rental property 7,137 7,103
Accumulated depreciation (5,406) (5,186)
----------------------
Net rental property $ 1,731 $ 1,917
======================
Improvements that extend the life of the asset are capitalized; other
maintenance and repairs are expensed. The cost of maintenance and repairs was
$89 in 2003, $63 in 2002, and $139 in 2001.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets and identifiable intangibles whenever
events or circumstances indicate that the carrying amount of such assets may not
be fully recoverable. The Company evaluates the recoverability of long-lived
assets by measuring the carrying amount of the assets against the estimated
undiscounted cash flows associated with these assets. At the time such
evaluations indicate that the future undiscounted cash flows of certain
long-lived assets are not sufficient to recover the assets' carrying value, the
assets are adjusted to their fair values.
PREPAID COMMISSIONS
The Company capitalizes rental commissions paid to real estate brokers and
amortizes these commission over the term of the lease.
EARNINGS PER SHARE CALCULATION
Basic net earnings (loss) per share is computed by dividing net earnings (loss)
by the weighted average number of shares outstanding. Diluted net earnings
(loss) per share is computed by dividing net earnings (loss) by the sum of the
weighted average number of shares outstanding plus the dilutive potential common
shares. The dilutive effect of stock options is computed using the treasury
stock method. Dilutive securities are excluded from the diluted net earnings
(loss) per share computation if their effect is anti-dilutive. During 2003,
2002, and 2001, 51, 2, and 2 stock options were excluded from diluted shares
used in the computation of diluted earnings per share from discontinued
operations as their effect was anti-dilutive. During 2003, 2002, and 2001, 76,
52, and 108 stock options were excluded from the diluted loss per share from
continuing operations as their effect was anti-dilutive.
INCOME TAXES
The Company records income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109
requires the Company to compute deferred taxes based upon the amount of taxes
payable in future years after considering changes in tax rates and other
statutory provisions that will be in effect in those years.
F-9
Deferred taxes are recorded based upon differences between the financial
statement and tax bases of assets and liabilities and available tax credit
carryforwards. A valuation allowance is provided for deferred tax assets, if
their realization is uncertain.
REVENUE
The Company recognizes rental income on a straight-line basis over the term of
occupancy in accordance with the provisions of the leases.
ALLOWANCES FOR DOUBTFUL ACCOUNTS AND RETURNS
We make judgments as to our ability to collect outstanding receivables and
provide allowances for the portion of receivables when collection becomes
doubtful. Provisions are made based upon a specific review of all outstanding
invoices. As of June 30, 2003, no allowances for outstanding receivables were
considered necessary. The Company goes through a credit review process on all
prospective tenants. The extent of the credit review is dependant on the dollar
value of the lease.
CONCENTRATION OF CREDIT RISK
The Company has one major tenant, Benziger Family Winery, the loss of which
would have a material adverse effect on the operating results of the real estate
operations. Benziger Family Winery accounted for 19%, 21% and 26% of the rental
revenues for the fiscal years ended June 30, 2003, 2002 and 2001, respectively.
In addition, Benziger Family Winery accounted for and 24% and 26% of the
accounts receivable balance as of the fiscal years ended June 30, 2003 and 2002,
respectively.
STOCK-BASED COMPENSATION
Effective July 1, 2002, the Company has elected to account for all prospective
stock options in accordance with SFAS 123, "Accounting for Stock-Based
Compensation", and as permitted by SFAS 148. As a result, during fiscal 2003 the
Company incurred a charge included in continuing operations of $42 related to
the issuance of 24,200 fully vested stock options to the directors, officers and
certain employees of the Company. No additional stock options had been granted
as of June 30, 2003.
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.
During the year ended June 30, 2002, the Company recognized a compensation
charge of $40 related to the extension of a board members' stock option exercise
period. No other compensation expense has been recognized in the accompanying
financial statements pursuant to stock options issued prior to July 1, 2002 as
the option terms are fixed and the exercise price equals the market price of the
underlying stock on the date of grant for all options granted by the Company.
Had compensation cost for the stock options granted prior to July 1, 2002 been
determined based upon the fair value at grant dates for awards under those plans
consistent with the method prescribed by SFAS 123, the net loss would have been
increased to the pro forma amounts indicated below:
F-10
FOR THE YEAR ENDED JUNE 30,
2003 2002
Net Loss, as reported $ (75) $ (495)
Proforma Stock Compensation Charge
(5) (45)
------ ------
Pro-forma Net Loss $ (80) $ (540)
Earnings (Loss) Per Share:
Basic - as reported $(0.07) $(0.47)
Basic - pro-forma $(0.07) $(0.51)
Diluted - as reported $(0.07) $(0.47)
Diluted - proforma $(0.07) $(0.51)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model, with the following weighted-average
assumptions used for the 2003 and 2002 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. There were no options granted during the
2001 fiscal year.
For options granted during June 30, 2003 and June 30, 2002, the weighted average
fair value as of the grant date was $1.95 and $2.13, respectively.
USE OF ESTIMATES
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States ("GAAP"). These accounting
principles require us to make certain estimates, judgments and assumptions. We
believe that the estimates, judgments and assumptions upon which we rely are
reasonable based upon information available to us at the time that these
estimates, judgments and assumptions are made. These estimates, judgments and
assumptions can affect the reported amounts of assets and liabilities as of the
date of the financial statements as well as the reported amounts of revenues and
expenses during the periods presented. Our financial statements would be
affected to the extent there are material differences between these estimates
and actual results. In many cases, the accounting treatment of a particular
transaction is specifically dictated by GAAP and does not require management's
judgment in its application. There are also areas in which management's judgment
in selecting any available alternative would not produce a materially different
result.
DERIVATIVES
The Company has a variable rate borrowing tied to the LIBOR rate. To reduce its
exposure to changes in the LIBOR rate, the Company has entered into an interest
rate swap contract. Under the terms of the swap contract, the Company exchanges
monthly, the difference between fixed and floating interest amounts calculated
on an initial agreed-upon notional amount of $2,100. The notional amount is
F-11
amortized monthly based on the Company's principal payments and was $1,857 as of
June 30, 2003. The interest rate contract has a five-year term that coincides
with the term of the borrowing, both of which began on December 1, 1998 and end
on December 1, 2003. The swap contract requires the Company's counter party to
pay it a floating rate of interest based on USD-LIBOR due monthly. In return,
the Company pays its counter party a fixed rate of 5.10% interest due monthly.
In accordance with Statement of Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") the Company reports
all changes in fair value of its swap contract in earnings. The Company has not
designated this swap as a formal hedge. During the year ended June 30, 2003, the
Company recorded a decrease in the value of this swap of $34. This amount is
included in interest expense.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2002 and 2001 consolidated
financial statements to conform to the current year presentation adopted for
fiscal 2003 and as required with respect to discontinued operations.
2. LONG-TERM DEBT:
Long-term debt consists of the following:
2003 2002
-----------------------
Note payable: five-year note, interest effectively
fixed at 7.35 percent, interest and principal
due monthly, maturing in December 2003,
secured by real property
1,857 1,917
Less: Current maturities (1,857) (61)
-----------------------
Long-term debt $ 0 $ 1,856
=======================
During December 2000, the Company entered into an agreement with its sole lender
to modify the terms of its lending agreement. As a result, the financial based
debt covenant was amended. The new covenant required the Company, at the end of
each fiscal year, to maintain a debt service coverage ratio at least 1.15 to 1.
Until such time as this ratio reaches 1.25 to 1, the Company was required to
maintain restricted, unencumbered cash or marketable securities of at least
$600. Furthermore, the terms of the loan restrict the Company from incurring any
additional indebtedness during the term of the loan. As of August 15, 2001, the
Company and the Bank agreed to a Restated and Amended Addendum to this
agreement. This addendum amended and restated the provisions of the agreement
stated above. The new addendum requires that the Company, at the end of each
fiscal year, maintain a debt service coverage ratio of at least 1.05 to 1. It
still requires that until such time as this ratio reaches 1.25 to 1, the Company
is required to maintain restricted, unencumbered cash or marketable securities
of at least $600. In addition to the lien on the Real Property (South Property
only) it grants the bank a lien on a Money Market account, in the amount of $90.
Management is confident that in the future it can remain in compliance with this
new debt service coverage ratio. The $90 Money Market account balance is part
of, not an addition to, the restricted unencumbered cash balance of $600. As of
June 30, 2003, the Company's debt service coverage ratio was 1.28 to 1, which is
greater than the required ratio of 1.25 to 1 and as a result the $600 is
reclassified as unrestricted cash as of June 30, 2003 on the accompanying
balance sheet. The Company is in the process of refinancing this loan.
3. INCOME TAXES:
The following is a summary of the Company's income tax provision (benefit):
F-12
2003 2002 2001
-----------------------------
Current:
Federal $ -- $ (75) $(288)
State -- -- --
Deferred:
Federal (17) (153) 194
State 2 29 --
-----------------------------
Benefit $(15) $(199) $ (94)
=============================
The components of the provision (benefit) related to continuing operations and
discontinued operations are as follows:
2003 2002 2001
-----------------------------
Continuing operations $(99) $(205) $(177)
Discontinued operations 84 6 83
-----------------------------
Benefit $(15) $(199) $ (94)
=============================
A reconciliation of the income tax benefit to the expected benefit at the
federal statutory income tax rate is as follows:
2003 % 2002 % 2001 %
----------------------------------------------------------------------
Benefit at federal statutory rate $ (31) 34% $ (236) 34% $ (98) 34%
State taxes, less federal tax benefit (2) 2% (40) 6% (17) 6%
Valuation allowance on state tax deferreds 16 (18%) 60 (9%) 17 (6%)
Tax credits and other 2 (1%) 17 (2%) 4 (1%)
----------------------------------------------------------------------
Total benefit $ (15) 17% $ (199) 29% $ (94) 33%
=========== ========= =========== ============ =========== ===========
Temporary differences that gave rise to deferred tax assets and liabilities for
2002 and 2001 were as follows:
2003 2002
-------------------
Deferred tax assets:
Employee benefit accruals $ 34 $ 93
Bad debt reserves -- 2
Discontinued operations reserves 16 217
Depreciation 130 32
Interest rate swap 15 28
Net operating losses 211 68
Other 94 52
-------------------
Total deferred tax assets 500 492
-------------------
Deferred tax liabilities:
Property taxes (34) (34)
-------------------
Total deferred tax liabilities (34) (34)
Valuation allowance (83) (92)
-------------------
$ 383 $ 366
===================
F-13
As of June 30, 2003, the Company had state net operating loss carryforwards of
approximately $84, which are fully reserved for. The company has $127 federal
net operating loss carryforwards as of June 30, 2003.
4. STOCK REPURCHASE:
In December 2000, the Company repurchased and retired 112 warrants for $112. The
warrants represented a right to purchase 112 shares of common stock and had an
exercise price of $.008 per share. The warrants were originally assigned a value
of $456. Common stock was increased by the difference between the repurchase
price and the originally assigned value.
In October 2000, the Company's Board of Directors authorized the repurchase of
up to 500 shares of the Company's stock at $8 per share in a tender offer. In
the fourth quarter of fiscal 2001, 777 shares were tendered resulting in the pro
rated repurchase of 64% (500 shares) of the tendered shares. In July 2002, the
transfer company handling this tender offer, reimbursed the Company $3 for 0.4
shares. These shares could not be processed due to improper paper work submitted
during the tender offer and as a result $3 was ultimately reimbursed to the
Company.
5. STOCK APPRECIATION RIGHTS PLAN:
In fiscal 2002, the Company terminated its stock appreciation rights (SAR) plan.
In prior years, key employees were granted rights entitling them to market price
increases in the Company's stock. As of June 30, 2001 and 2000, 100 SARs were
authorized. The Company has not granted SARs since 1995, and all employees
holding SARs were among those terminated during fiscal 2000 in connection with
the discontinuation of the ingredients segment. As a result, all remaining SARs
were canceled during fiscal 2000. In 2003, 2002, and 2001, there was no charge
against earnings as a result of the SAR plan.
6. EMPLOYEE STOCK PURCHASE PLAN:
In fiscal 2002, the Company terminated its Employee Stock Purchase Plan. Prior
to termination, the Plan enabled substantially all employees to purchase a
specified number of shares of the Company's common stock at 85 percent of the
market value on the first or last business day of the quarterly offering period,
whichever is lower. A maximum of 100 shares was authorized for issuance over the
ten-year term of the plan that began on January 1, 1994. The following shares
were issued under the terms of the plan during the five fiscal years ending June
30:
SHARES AVERAGE PRICE PER
ISSUED SHARE
-----------------------------------
2002 1 $ 6.00
2001 1 $ 5.58
2000 3 $ 5.19
1999 8 $ 6.34
7. EMPLOYEE STOCK OPTION PLAN:
On July 31, 2002, the Company's Board of Directors approved the SonomaWest
Holdings, Inc. 2002 Stock Incentive Plan (the "2002 Plan"). The 2002 Plan is
designed to benefit the Company and its shareholders by providing incentive
based compensation to encourage officers, directors, consultants and other key
employees of the Company and its affiliates to attain high performance and
encourage stock ownership in the Company. The 2002 Plan serves as the successor
program to the Company's previously adopted 1996 Stock Option Plan. No further
options will be granted under the 1996 Stock Option Plan.
F-14
The maximum number of shares of Common Stock issuable over the term of the 2002
Plan will initially be limited to 75 shares.
On July 31, 2002, the Company's Board of Directors granted options under the
2002 Plan exercisable in the aggregate for 22.5 shares of common stock to the
following Directors: Roger S. Mertz - 7.5, David J. Bugatto - 5.0, Gary L. Hess
- - 5.0, Fredric Selinger - 5.0. In addition to the Directors, the Board of
Directors also granted options under the 2002 Plan exercisable in the aggregate
for 1.7 shares of common stock to other officers and employees. All of these
common stock options were granted at the market price on the date of grant of
$7.20 per share.
Prior to adoption of the 2002 Stock Incentive Plan, the Company administered the
1996 Stock Option Plan (the "1996 Plan"). As amended, the 1996 Plan provided for
the issuance of options to employees and non-employee consultants exercisable
for an aggregate of 275 shares of common stock. During May 1999, the Company
modified its 1996 Plan to include all non-bargaining employees. The modification
allowed all employees who were employed as of April 26, 1999, to participate in
the Plan, resulting in the issuance of 123 stock options. In connection with
adoption of the 2002 Plan, no future options will be granted under the 1996
Plan.
A summary of the status of the Company's stock option plan at June 30, 2003, and
changes during the year ended are presented in the table below:
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
----------------------------
Balance, June 30, 2002 52 $ 6.31
Granted 24 7.20
Cancelled 0 --
Exercised 0 --
----------------------------
Balance, June 30, 2003 76 $ 6.59
============================
Options outstanding, exercisable, and vested by price range at June 30, 2003,
are as follows:
WEIGHTED AVERAGE WEIGHTED AVERAGE
OPTIONS VESTED AND REMAINING FAIR VALUE OF
OPTIONS OUTSTANDING EXERCISABLE AT CONTRACTUAL LIFE OPTIONS GRANTED, AT
EXERCISE PRICE AT JUNE 30, 2003 JUNE 30, 2003 (YEARS) GRANT DATE
- -------------------------------------------------------------------------------------------------------------------
$ 5.00 24 24 5.3 $ 1.96
$ 5.28 1 -- 6.7 2.10
$ 7.20 24 24 9.0 1.95
$ 7.48 25 25 8.0 2.13
$ 8.00 2 2 5.8 4.24
---------------------------------------------- ----------------------
76 76 $ 2.08
============================================== ======================
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 2003 and 2002 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. There were no options granted during the
2001 fiscal year.
Pursuant to his separation agreement (see Note 10), the Company's former
President and Chief Executive Officer, Gary L. Hess, was given until January 29,
2002 to decide whether to extend the period in which he was eligible to exercise
the stock options previously granted to him. On January 28, 2002, Gary Hess
elected to exercise his option to purchase 80 shares of his total outstanding
options of 89 shares. Gary Hess elected to extend the termination date on his
option to purchase the remaining 9 shares, through the last date of the
severance period (January 31, 2004). As part of the separation agreement the
Company
F-15
agreed to loan Gary Hess up to $447 to allow Gary Hess to exercise the
aforementioned options. Gary Hess elected to borrow $400 to exercise 80 stock
options at $.005 per share. The note dated January 28, 2002 in the amount of
$400 bears interest at the Applicable Federal Rate (AFR) for loans of three
years or less on the date of the note (the AFR at January 28, 2002 was 2.73%),
payable quarterly. The Note 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 shares, the Company incurred a non-cash
stock compensation charge in the third quarter ended March 31, 2002 of $22.
On September 4, 2001, the Company authorized the waiver of the provision of
Craig R. Stapleton's (a shareholder and former director) stock options,
providing for the termination of his options 90 days following service.
Consequently Craig Stapleton's option to purchase 10,000 shares was extended,
and a one-time non-cash compensation charge of $18 was recorded in September
2001.
8. COMMITMENT AND CONTINGENCIES:
The Company leases office space under an operating lease that expires in
December 2003. The space has been sublet through the term of the lease at
approximately the Company's lease rate. As of June 30, 2003, sublease receipts
net of minimum rental payments amount to $(3) for fiscal year 2004.
Rental expense under operating leases was $185 in 2003, $183 in 2002 and $178 in
2001. Related sub-lease income was $189, $184, and $178 in 2003, 2002 and 2001
respectively.
The Company has committed itself to a $3,000 minority investment in the Series D
preferred stock of a privately held telecommunications company, MetroPCS, Inc.
As of June 30, 2003, the Company had invested $2,696 of its $3,000 commitment.
The Company has accounted for the investment using the cost method. It is
expected that the remaining $304 will be funded during the first half of fiscal
2004.
LITIGATION
From time to time, the Company is a party to lawsuits and claims arising out of
the normal course of business. As of June 30, 2003, the Company was not a party
to any legal proceedings.
9. RETIREMENT PLANS:
In fiscal 2002, the Company terminated its contributory retirement savings and
profit sharing plan. The Plan called for Company contributions of one and
one-half times the first 3 percent of employee contributions to the retirement
savings plan. Profit-sharing contributions were derived using a specific formula
based upon the Company's earnings. Company contributions to the retirement
savings and profit sharing plan were $0 in 2002 and $20 in 2001.
10. RELATED-PARTY TRANSACTIONS:
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 2003, 2002, and 2001, the Company incurred $204, $186 and $214
respectively, for legal services from Allen Matkins. As of June 30, 2003, the
Company owed Allen Matkins $9.
David J. Bugatto, director, has entered into a consulting agreement with the
Company, whereby David Bugatto will provide real estate consulting services to
the Company for a monthly fee of $2.5. In addition, in the event that either of
the Company's Sonoma County properties are sold during the term of
F-16
the agreement, David Bugatto would be paid a fee of 2.5% of the sales price if
no broker commission is involved and 1.25% of the sales price if a broker is
involved in the sale. In the event that either property is refinanced during the
term of the agreement, David Bugatto will be paid a fee equal to 1% of the
amount of the proceeds received by the Company in excess of its current debt.
The agreement is effective until the earlier of its termination by either party
or December 31, 2003. During fiscal 2003, the Company paid David Bugatto $32,
for real estate consulting services. As of June 30, 2003, the Company owed David
Bugatto $3.
Gary L. Hess, director, has entered into an agreement with the Company to sell
its Perma-Pak inventory and equipment. During fiscal 2003, the Company incurred
$60 in commissions under this agreement. As of June 30, 2003, there was $0
payable to Gary Hess. On July 17, 2001 the Company entered into a separation
agreement in principle, which was thereafter executed, with its President and
Chief Executive Officer, a current board member, Gary L. Hess, replacing Gary
Hess' existing employment agreement. Pursuant to the separation agreement, Gary
Hess continued as President and Chief Executive Officer, first on a full-time
basis and then on a part-time basis, through October 31, 2001. Effective
September 2001, the Company began paying separation payments to Gary Hess in the
amount of $12.5 monthly for 29 months, replacing all payment obligations under
his prior employment agreement. The Company's obligation under this agreement of
$362.5 was recorded in operating expenses in the first quarter of fiscal 2002.
As part of the separation agreement, Gary Hess was given until January 29, 2002
to decide whether to extend the period in which he was eligible to exercise the
stock options previously granted to him. On January 28, 2002, Gary Hess elected
to exercise his option to purchase 80 shares of his total outstanding options of
89 shares. Gary Hess elected to extend the termination date on his option to
purchase the remaining 9 shares, through the last date of the severance period
(January 31, 2004). As part of the separation agreement the Company agreed to
loan Gary Hess up to $447 to allow Gary Hess to exercise the aforementioned
options. Gary Hess elected to borrow $400 to exercise 80 stock options at $5.00
per share. The note dated January 28, 2002 in the amount of $400 bears interest
at the Applicable Federal Rate (AFR) for loans of three years or less on the
date of the note (the AFR at January 28, 2002 was 2.73%), payable quarterly. The
Note 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 shares, the Company incurred a non-cash stock
compensation charge in the third quarter ended March 31, 2003 of $43.
On September 4, 2001 the Company authorized the waiver of the provision of Craig
R. Stapleton's (a shareholder and former director) stock options, providing for
the termination of his options 90 days following service. Consequently Craig
Stapleton's option to purchase 10 shares was extended, and a one-time non-cash
compensation charge of $18 was recorded in September 2001.
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 fiscal 2003, the Company incurred $65, for financial
management and accounting consulting services provided by Thomas Eakin. As of
June 30, 2003, there was a payable to Thomas Eakin of $1. The independent
consulting agreement terminated on July 31, 2003. As of August 1, 2003, the
Company entered into a new Consulting Agreement with Thomas Eakin. Under the
agreement, Thomas Eakin will provide financial management and accounting
services to the Company. Thomas Eakin is compensated at an hourly billing rate
of $110.00 per hour, plus expenses.
F-17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company engaged the services of Grant Thornton LLP as its
independent auditors to replace Arthur Andersen LLP, effective July 10, 2002.
For additional information, see the Company's Current Report on Form 8-K filed
on July 10, 2002.
Please see Exhibit 23.2 for an explanation regarding obtaining a
written consent from Arthur Andersen for incorporating previously filed
financial statements into registration statements filed by the Company.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information regarding directors and executive officers appearing under the
heading "Proposal 1: Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" of our proxy statement relating to our 2003
Annual Meeting of Stockholders to be held on October 29, 2003 (the "2003 Proxy
Statement") is incorporated into this item by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the headings "Compensation of Directors,"
"Compensation Committee Report," "Executive Compensation" and "Performance
Graph" of our 2003 Proxy Statement is incorporated into this item by reference
(except to the extent allowed by Item 402(a)(8) of Regulation S-K).
ITEM 12. SECURITY OWNERSHIP OF DIRECTORS, OFFICERS AND CERTAIN BENEFICIAL OWNERS
The information appearing under the heading "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Directors and Executive Officers"
of our 2003 Proxy Statement is incorporated into this item by reference. In
addition, the information regarding equity compensation plans appearing under
the heading "Equity Compensation Plan Information" of our 2003 Proxy Statement
is incorporated into this item by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing under the heading "Certain Relationships and Related
Transactions" of our 2003 Proxy Statement is incorporated into this item by
reference.
ITEM 14. CONTROLS AND PROCEDURES
As of June 30, 2003, 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-14(c)). 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 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 have been no
significant changes in the Company's internal controls or, to the Company's
knowledge, in other factors that could significantly affect those
20
internal controls subsequent to the date the Company carried out its evaluation,
and there have been no corrective actions with respect to significant
deficiencies and material weaknesses.
The Company's management, including the Chairman of the Board and Chief
Financial Officer, does not expect that our 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. Further, 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 all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K.
I. Documents filed as part of this Report:
(a)(1) Financial Statements
The information required by this Item appears in Item 8 of this Annual
Report on Form 10-K.
(a)(2) Financial Statement Schedules
Financial statement schedules not included herein have been omitted
because of the absence of conditions under which they are required or because
the required information, where material, is shown in the financial statements
or notes thereto.
Schedule III.* Real Estate and Accumulated Depreciation
*Schedule included after signature page.
(a)(3) EXHIBITS
EXHIBIT NO. DOCUMENT DESCRIPTION
3.1(4) Articles of Incorporation, as amended to date
3.2(1) ByLaws, as amended to date
10.1(2) Employment Agreement between Vacu-dry Company and Gary L. Hess,
dated March 14, 1996
10.2(3) 1996 Stock Option Plan, as amended
21
10.3(4) June 20, 1999 Amendment to Employment Agreement between Vacu-dry
Company and Gary L. Hess, dated March 14, 1996.
10.4(5) Independent Consultant Agreement dated July 17, 2001 between
SonomaWest Holdings, Inc. and David J. Bugatto.
10.5(5) Severance Agreement dated July 17, 2001 between SonomaWest
Holdings, Inc. and Gary L. Hess
10.6(5) Restated and Amended Addendum to Promissory Note, dated August 15,
2001 between Sonoma West Holdings, Inc. and Wells Fargo Bank, NA.
10.7(6) SonomaWest Holdings, Inc. 2002 Stock Incentive Plan
10.8 Consulting Agreement dated August 1, 2003 between SonomaWest
Holdings, Inc. and Thomas R. Eakin, d.b.a. Eakin Consulting.
11.1 Computation of Per Share Earnings
23.1 Consent of Independent Public Accountants
23.2 Notice Regarding Consent of Arthur Andersen LLP
31.1+ Chairman of the Board Certification of Periodic Financial Report
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2+ Chief Financial Officer Certification of Periodic Financial Report
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Chairman of the Board Certification Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act
of 2002
32.2* Chief Financial Officer Certification Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002
- ----------
(1) Incorporated by reference to the registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1992
(2) Incorporated by reference to the registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1996
(3) Incorporated by reference to the registrant's Registration Statement on
Form S-8 (No. 333-84295) filed on August 2, 1999
(4) Incorporated by reference to the registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 2000.
(6) Incorporated by reference to the registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 2001.
+ Filed herewith.
* Furnished herewith.
22
(b) REPORTS ON FORM 8-K
During the quarter ended June 30, 2003, the Company did not file any
reports on Form 8-K.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: September 12, 2003 SONOMAWEST HOLDINGS, INC.
By: /s/ ROGER S. MERTZ
-----------------------------------------
Roger S. Mertz, Chairman of the Board
By: /s/ THOMAS R. EAKIN
-----------------------------------------
Thomas R. Eakin, Chief Financial Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints Roger
S. Mertz and Thomas R. Eakin, and each of them, his attorneys-in-fact, each with
the power of substitution, for him in any and all capacities, to sign any
amendments to this Report on Form 10-K, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting to said attorneys-in-fact, or his substitute or
substitutes, the power and authority to perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ ROGER S. MERTZ
- -----------------------
Roger S. Mertz Chairman of the Board September 12, 2003
-
/s/ GARY L. HESS
- -----------------------
Gary L. Hess Director September 12, 2003
-
/s/ FREDRIC SELINGER
- -----------------------
Fredric Selinger Director September 12, 2003
/s/ DAVID J. BUGATTO
- -----------------------
David J. Bugatto Director September 12, 2003
24
SCHEDULE III
SonomaWest Holdings, Inc.
REAL ESTATE AND ACCUMULATED DEPRECIATION
June 30, 2003
(DOLLARS IN THOUSANDS)
Column A Column B Column C Column D Column E Column F Column G Column H
Costs Gross Amount at
Initial Cost Subsequently which Carried
to Company Capitalized at Close of Year
-------------------------------------------------------
Buildings Buildings
and and Accumulated Year of
Improve- Improve- Improve- Total Depre- Construc- Year
Description Encumbrances Land ments ments Land ments (Note 1) ciation tion Acquired
- ------------------------------------------------------------------------------------------------------------------------------------
1365 Gravenstein Hwy. So.,
Sebastopol, CA 1,850 72 308 891 72 1,199 1,271 958 N/A 1964
2064 Gravenstein Hwy. No.,
Sebastopol, CA -- 159 2,312 3,180 159 5,492 5,651 4,340 N/A 1983
----------------------------------------------------------------------------
1,974 231 2,620 4,071 231 6,691 6,992 5,298
============================================================================
Note 1. The changes in the total cost of land, buildings, and improvements for
the three years ended June 30, are as follows:
2003 2002 2001
------ ------ ------
Balance at beginning of period 6,880 6,880 7,423
Additions 120 60 12
Assets of discontinued operations (0) (2) (537)
Cost of disposed property (78) (58) (18)
----------------------------------
Balance at end of period 6,922 6,880 6,880
==================================
Note 2. The changes in accumulated depreciation for the three years ended June
30, are as follows:
2003 2002 2001
------ ------ ------
Balance at beginning of period 5,083 4,813 4,826
Depreciation expense 286 317 336
Assets of discontinued operations (0) (2) (331)
Relief of accumulated balances
related to disposed property (71) (45) (18)
----------------------------------
Balance at end of period 5,298 5,083 4,813
==================================
25
EXHIBIT INDEX
-------------
EXHIBIT NO. DOCUMENT DESCRIPTION
10.8 Consulting Agreement dated August 1, 2003 between SonomaWest
Holdings, Inc. and Thomas R. Eakin, d.b.a. Eakin Consulting.
11.1 Computation of Per Share Earnings
23.1 Consent of Independent Public Accountants
23.2 Notice Regarding Consent of Arthur Andersen LLP
31.1+ Chairman of the Board Certification of Periodic Financial Report
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2+ Chief Financial Officer Certification of Periodic Financial Report
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Chairman of the Board Certification Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act
of 2002
32.2* Chief Financial Officer Certification Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002
+ Filed herewith
* Furnished herewith