SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15 (d) of the
- ------- Securities Exchange Act of 1934. For the quarterly period
ended September 30, 2000 or
Transition Report Pursuant to Section 13 or 15(d) of the
- ------ Securities Exchange Act of 1934. For the transition period
from _________ to _________.
Commission File Number 01912
SONOMAWEST HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
California 94-1069729
(State of incorporation) (IRS Employer Identification #)
1448 Industrial Avenue, Sebastopol, CA 95472-4848
- -------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 707/824-2548
--------------------------------------------------
(Former Name,Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES: X NO:
------- ----------
As of October 26, 2000, there were 1,522,350 shares of common stock, no par
value, outstanding.
1
SONOMAWEST HOLDINGS, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2000 and
June 30, 2000...................................................3
Condensed Consolidated Statements of Earnings - Three Months
Ended September 30, 2000 and 1999...............................4
Condensed Consolidated Statements of Cash Flows - Three Months
Ended September 30, 2000 and 1999...............................5
Notes to Condensed Consolidated Financial Statements............6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................10
Item 6. Exhibits and Reports on Form 8-K...............................10
Signature .....................................................10
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
SONOMAWEST HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
AMOUNTS IN THOUSANDS
--------------------
CURRENT ASSETS: 9/30/00 6/30/00
- --------------- ------- -------
Cash $ 7,446 $8,359
Accounts Receivable, less allowance for uncollectible accounts of $8 and $47,
respectively 107 110
Prepaid income taxes 816 816
Prepaid expenses 65 87
Current deferred income taxes, net 637 621
----- -----
Total current assets 9,071 9,993
----- -----
Real property, net 2,743 2,854
Net assets of discontinued operations 151 122
Other assets 61 -
-------- ----------
Total Assets $12,026 $12,969
======= =======
CURRENT LIABILITIES:
- --------------------
Current maturities of long term debt $ 54 $ 617
Accounts payable and accrued expenses 164 147
Unearned rents and deposits 152 143
Accrued payroll and related liabilities 44 78
Net liabilities of discounted operations 291 628
-------- --------
Total current liabilities 705 1,613
-------- --------
Long term debt-net of current maturities 1,960 1,974
-------- --------
Deferred income taxes, net 147 147
-------- --------
Total Liabilities 2,812 3,734
-------- --------
SHAREHOLDERS' EQUITY:
- ---------------------
Preferred stock: 2,500 shares authorized; no shares outstanding - -
Common stock: 5,000 shares authorized, no par value; 1,522 shares outstanding 2,905 2,905
Warrants for common stock 456 456
Retained earnings 5,853 5,874
------- -------
Total shareholders' equity 9,214 9,235
------- -------
Total Liabilities and Shareholders' Equity $12,026 $12,969
======= =======
See Notes to Condensed Consolidated Financial Statements
3
SONOMAWEST HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
----------------------------------------------
Three Months
Ended September 30
------------------
2000 1999
---- ----
Rental revenue $ 243 $ 201
Operating costs 517 378
Interest and Other income (expense), net 88 (49)
---------- ----------
Loss from continuing operations before income taxes (186) (226)
Benefit for income taxes (75) (90)
---------- ----------
Net loss from continuing operations (111) (136)
DISCONTINUED OPERATIONS:
Earnings (loss) from discontinued operations, net of income taxes 90 412
Gain (loss) on sale of discontinued business, net of income taxes - 3,249
---------- ---------
NET EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS 90 3,661
---------- --------
NET EARNINGS (LOSS) $ (21) $ 3,525
========== ========
WEIGHTED AVERAGE COMMON SHARES AND
EQUIVALENTS:
Basic 1,522 1,519
Diluted 1,542 1,566
EARNINGS (LOSS) PER COMMON SHARE
Continuing operations
Basic $ (0.07) $ (0.09)
Diluted $ (0.07) $ (0.09)
Discontinued operations:
Basic $ 0.06 $ 2.41
Diluted $ 0.06 $ 2.34
Net Earnings (loss):
Basic $ (0.01) $ 2.32
Diluted $ (0.01) $ 2.25
See Notes to Condensed Consolidated Financial Statements
4
SONOMAWEST HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
AMOUNTS IN THOUSANDS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES 2000 1999
---- ----
Net earnings (loss) $(21) $3,525
Adjustments to reconcile net earnings (loss
to net cash used for operating activities:
Earnings from discontinued operations, net (90) (412)
Gain on sale of discontinued business, net 0 (3,249)
Depreciation and amortization expense 121 92
Changes in assets & liabilities:
Accounts receivable, net 3 -
Prepaid income taxes - 1,750
Prepaid and other assets (39) 114
Accounts payable and accrued expenses 17 (38)
Deferred income taxes, net (16) 849
Accrued payroll & related liabilities (34) (138)
Unearned rents and deposits 9 -
------------ ------------
Net cash provided by (used for) continuing operating (50) 2,493
activities ------------ ------------
Net cash provided by (used for) discontinued operations (281) 8,634
------------ ------------
Net cash provided by (used for) operating activities (331) 11,127
------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Capital expenditures (5) (6)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under the line of credit - 3,727
Payments on the line of credit - (9,472)
Principal payments of long term debt (577) (1,377)
Payments on capital leases - (69)
Issuance of common stock - 4
----------- ----------
Net cash used for financing activities (577) (7,187)
----------- ----------
NET INCREASE (DECREASE) IN CASH (913) 3,934
CASH AT THE BEGINNING OF THE YEAR 8,359 548
----------- ----------
TOTAL CASH AT THE END OF THE PERIOD $7,446 $4,482
=========== ==========
See Notes to Condensed Consolidated Financial Statements
5
SONOMAWEST HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2000
Note 1-
The accompanying fiscal 2001 and 2000 unaudited interim statements have been
prepared pursuant to the rules of the Securities and Exchange Commission.
Certain information and disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
the Company believes these disclosures are adequate to make the information not
misleading. In the opinion of management, all adjustments necessary for a fair
presentation for the periods presented have been reflected and are of a normal
recurring nature except as discussed below. These interim financial statements
should be read in conjunction with the financial statements and notes thereto
for each of the three years in the period ended June 30, 2000. The results of
operations for the three month period ended September 30, 2000 are not
indicative of the results that will be achieved for the entire year ending June
30, 2001.
Reclassifications - Certain previously reported amounts were reclassified to
conform to the current presentation with respect to discontinued operations.
Note 2-
In July 1999, the Company consummated an asset purchase agreement (the Purchase
Agreement) with Tree Top, Inc. The Purchase Agreement governed the sale of all
intangible assets (primarily trademarks, know-how, and customer lists) and
certain of the equipment relating to the Company's processed apple products
line. Although the Purchase Agreement excludes other product lines within the
Company's ingredient segment, the Company decided to actively seek buyers for
the remaining product lines of the ingredients segment and has discontinued
production of all ingredients segment products. Consequently, the ingredients
segment has been presented as a discontinued operation in the accompanying
consolidated financial statements for all periods presented. The purchase price
for the sale of the processed apple products line of $12 million was paid in
cash at the closing date of the sale on July 30, 1999. In addition, equipment
with a net book value of $1,478,000 was sold for $500,000 and apple product
inventories with a cost of $1.7 million were purchased for $1.9 million. Tree
Top, Inc. did not assume any of the Company's liabilities. In connection with
the Purchase Agreement, the Company and certain shareholders, directors, and
management have agreed not to compete with Tree Top, Inc. in processed apple
product lines for a period of three to ten years. In addition, as part of the
transaction, the Company sold the Vacu-dry trademark. Thus, the Company changed
its name to SonomaWest Holdings, Inc. in December 1999. In February 2000,
certain local apple growers filed suit against the Company and Tree Top, Inc.
alleging that this sale and related activities created a monopoly in the dried
apple business in violation of federal and California law. The growers are
seeking treble damages, punitive damages, interest, and attorney fees, all in
unnamed amounts. On August 4, 2000, the Company's motion to dismiss the
complaint was granted with leave to amend. The Company feels the suit is without
merit and intends to continue to defend itself vigorously should an amended
complaint be filed.
In the third quarter of fiscal 2000, the Company decided to dispose of its
organic packaged foods operations. Accordingly, the organic packaged foods
segment is included in discontinued operations in the accompanying consolidated
financial statements for all periods presented. The Company received $1.1
million for all intellectual property, consisting of the Made In Nature brand
name and all related trademarks, and certain dried fruit inventory of the
organic packaged goods segment from Premier Valley Foods, Inc. in May 2000.
Remaining assets of this segment consist primarily of organic orange juice
concentrate inventories, which are being actively marketed by the Company for
liquidation.
Upon the disposal of the Company's remaining ingredients and organic packaged
foods assets, the sole remaining line of business will be its real estate
management and rental operations.
During fiscal 2000, the Company recorded a net after-tax gain of $3.2 million
from the sale of the processed apple product line and the disposal of the
remaining product lines of the ingredients segment and the organic packaged
foods segment. The net after-tax gain included $16.1 million of proceeds from
the sales offset by: a) the write-down of assets related to the discontinued
segments to their estimated net realizable value (assets which were impaired as
a direct result of the decision to discontinue the segments); b) costs incurred
in closing the discontinued segments (consisting primarily of severance costs,
professional fees, relocation costs and lease buy-outs); c) estimated operating
losses to be incurred during the wind-down period; and d) losses on sale of
equipment.
6
Summarized historical information of the discontinued operations is as follows:
(in thousands) Three Months Ended September 30,
--------------------------------
2000 1999
---- ----
Income statement data:
Revenues $206 $8,345
Costs and expenses (56) (7,659)
---- -------
Operating income 150 686
Income tax expense (60) (274)
---- -----
Income from discontinued operations, net of income taxes $ 90 $412
==== ====
September 30, 2000 June 30, 2000
------------------ -------------
Balance sheet data:
Accounts receivable, net of reserves of $0 and $37 $ 29 $ -
---- ---
Total current assets of discontinued operations 29 -
Property, plant and equipment, net 122 122
--- ---
Total assets of discontinued operations 151 122
=== ===
Accounts payable - 234
Provision for severance, transaction costs, wind-down costs and 291 394
--- ----
Total liabilities of discontinued operations 291 628
--- ---
Net assets (liabilities) of discontinued operations $(140) $(506)
====== ======
Note 3 -
Statement of Cash Flows - Interest and income tax payments reflected in the
Consolidated Statement of Cash Flows were as follows:
(in thousands) 2001 2000
---- ----
Interest paid $ 45 $160
Income taxes paid $ - $ -
Note 4 -
Long-term debt - At September 30, 2000, the Company was not in compliance with
certain covenants of the lending agreements with its finance institution lender.
Subsequently, the Company received a one-year wavier regarding the breach of the
lending covenants. Accordingly, this debt is classified as long-term debt on the
balance sheet at September 30, 2000. The Company is currently working with its
lender to revise its loan agreement and conform it to its current operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
SonomaWest Holdings, Inc. (the "Company") is including the following
cautionary statement in this Form 10-Q 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.
Forward looking statements include statements concerning plans, objectives,
goals, strategies, future events or performance and underlying assumptions, and
other statements which are other than statements of historical facts. Certain
statements contained herein are forward looking statements and, accordingly,
involve risks and uncertainties which could cause actual results or outcomes to
differ materially from those expressed in the forward looking statements. In
addition to other factors and matters discussed elsewhere herein, these risks
and uncertainties include, but are not limited to, uncertainties affecting the
food processing industry, risks associated with fluctuations in the price and
availability of raw materials, management of growth, adverse publicity affecting
organic foods or the Company's products, and product recalls. The Company's
expectations, beliefs and projections are expressed in good faith and are
believed by the Company to have a reasonable basis, including without
limitation, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's expectations, beliefs or
7
projections will result or be achieved or accomplished. The Company disclaims
any obligation to update any forward-looking statements to reflect events or
circumstances after the date hereof.
The financial statements herein presented for the quarters ending
September 30, 2000 and 1999 reflect all the adjustments that in the opinion of
management are necessary for the fair presentation of the financial position and
results of operations for the periods then ended. All adjustments during the
periods presented are of a normal recurring nature unless otherwise stated.
OVERVIEW
Since the Company acquired certain of the assets and liabilities of
Made in Nature, Inc. in June 1998, the Company has operated in three business
segments: industrial dried fruit ingredients, organic packaged foods and real
estate. The Company commenced a strategic reorganization 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
segment. In January 2000, the Company decided to sell or discontinue its organic
packaged foods business. As a result of these decisions, both business segments
are considered discontinued operations and their operating results, results of
cash flows, net assets and liabilities are reflected outside of the Company's
continuing operations. The Company's sole remaining line of business is its real
estate management and rental operations.
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. This product
line represented 55% and 81% of the Company's sales for the years ended June 30,
1999 and 1998, respectively. This sale, which was recorded in the first quarter
of fiscal 2000, is an important element of the Company's strategic plan to
improve the return on its investments and increase shareholder value by exiting
businesses with low returns and high capital requirements. The transaction
provided financial resources to support the Company's real estate and other
business opportunities. 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 at September
30 and June 30, 2000, the operating results of the discontinued operations in
the consolidated statements of operations for the three months ended September
30, 2000 and 1999 and the cash flows from discontinued operations in the
consolidated statements of cash flows for the three months ended September 30,
2000 and 1999.
For the three months ended September 30, 2000, the Company recorded
after-tax earnings from discontinued operations of $90,000 on revenue of
$206,000. This compares to an after-tax earnings of $412,000 on revenue of $8.3
million for the three months ended September 30, 1999. The decline in revenue in
the discontinued operations is due to the sale of the apple ingredients and
organic packaged goods businesses in fiscal 2000. After the allocation of
selling, general and administrative expenses between continuing and discontinued
operations, the discontinued businesses generated $150,000 of operating income
for the three months ended September 30, 2000 versus an operating income of
$686,000 for the three months ended September 30, 1999.
The Company is actively marketing all remaining assets of its
discontinued businesses (primarily inventory), but there can be no assurances
that there will be a sale of all or any of the remaining assets.
8
RESULTS OF CONTINUING OPERATIONS
The Company's continuing line of business consists of the leasing and
development of the Company's real estate. The Company intends to develop its
real estate largely for agricultural and industrial rental. The current use
permit for the Company's former production site requires that the facility be
used exclusively for diversified agricultural purposes. The Company is
attempting to broaden the use permit to allow other types of activities, but
there can be no assurance that such efforts will be successful. The Company's
other piece of real estate is already zoned for industrial use.
Results of Operations
- ---------------------
The Company's sole continuing line of business is its real estate
management and rental operations consisting of several buildings and yards on
two property locations. The two properties have a combined leaseable area of
approximately 410,000 square feet on 81 acres of land. Twenty-three tenants that
have varying original lease terms ranging from month-to-month to eight years
with options to extend lease approximately 205,000 square feet or 50% of the
properties' available lease space.
Rental Revenue. The Company leases warehouse, cold storage, production,
and office space as well as outside storage space at both of its properties. For
the three months ending September 30, 2000, rental revenue increased 21% or
$42,000 to $243,000 compared to the corresponding period in the prior year. This
increase was primarily a result of leasing activities at the Company's former
production facility. This facility is approximately 41% occupied. The Company's
other property is approximately 76% occupied. 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.
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 allocated to discontinued operations in the consolidated
statements of operations. The Company's operating results will be negatively
impacted as long as the tenant rental revenue stream fails to cover existing
operating costs. Cost reduction efforts to minimize any avoidable spending have
been undertaken to minimize negative operating results while the tenant search
continues. For the three months ending September 30, 2000, operating costs
increased 37% or $139,000 to $517,000 compared to the corresponding period in
the prior year. Included in operating cost, however, for the three months ending
September 30, 1999 is an expense offset for over-accrued bonuses in fiscal year
1999 of $169,000.
Interest and Other Income (Expense), Net. Interest and other income
(expense) net consists primarily of interest income on the Company's cash
balances, and interest expense on mortgage debt and shareholder loans. In Fiscal
2000, proceeds from the sale of the ingredients business were used to pay off
the Company's revolving bank line of credit and substantially reduce long-term
debt. As a result, for the three months ending September 30, 2000, the Company
was a net investor of cash, generating $128,000 of interest income and incurring
$45,000 of interest expense, while in the corresponding period in prior year it
was a net borrower, generating interest income of $58,000 and incurring interest
expense of $116,000.
Income Taxes. The effective tax rate for the three months ended
September 30, 2000 was 40%, or approximately the statutory rate after the
federal benefit for state income taxes.
Liquidity and Capital Resources
- -------------------------------
The Company had cash of $ 7.4 million at September 30, 2000, and
current maturities of long-term debt of $54,000. In fiscal 2000, the Company
used a portion of the $16.1 million net proceeds from its discontinued
businesses to pay off borrowings under its bank line of credit and retire a
significant portion of its long-term debt. In August 2000, the Company elected
to prepay in full a remaining shareholder note payable (scheduled to mature in
2003), in the amount of $564,000 plus accrued interest. The cash balances
decreased from $8.4 million at June 30, 2000 primarily as a result of the
shareholder note payoff and payments of liabilities regarding discontinued
operations.
At September 30, 2000, the Company was not in compliance with certain
covenants of the lending agreements with its finance institution lender on its
long-term debt. Subsequently, the Company received a one-year wavier regarding
the breach of the lending covenants. The Company is currently working with its
lender to revise its loan agreement and conform it to its current operations.
Alternatively, the Company has the ability to payoff its long-term debt position
in cash.
9
The Company has contingently committed itself to a $3 million
investment in a privately held telecommunications company, MetroPCS, Inc., which
is expected to be funded in fiscal 2001. Subsequent events have eliminated the
contingency converting this investment to a full commitment. It is anticipated
that the Company will make its $3 million investment in several stages beginning
November 2000.
The Company's Board of Directors has authorized a program to repurchase
up to 375,000 shares of the Company's stock at $8.00 per share. The offer is
subject to regulatory filings and approvals and approval by the Company's
lender. The Company anticipates that the offer will be made in early calendar
year 2001.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On February 23, 200 several local apple growers filed a complaint in the United
States District Court for the Northern District of California naming the Company
and Tree Top, Inc. as defendants. The complaint alleged that the July 1999 sale
of the Company's apple ingredients business to Tree Top, Inc. was an unlawful
combination in restraint of trade in the dried apple business under federal and
California law; that the Company conspired with Tree Top, Inc. to monopolize the
dried apple business; and that such acts also constitute unlawful business
practices under the California Business and Professions Code. The suit sought
treble damages, punitive damages, interest and attorney fees, all in unnamed
amounts. On August 4, 2000, the Company's motion to dismiss the complaint was
granted with leave to amend. To date there has been no amendment. The Company
believes the suit was without merit and will defend itself vigorously should an
amended complaint be filed.
On October 10, 2000 the holder of 95,000 warrants to purchase the Company's
common stock filed a complaint in the Superior Court in and for Sonoma County
against the Company. The complaint alleges breach of contract with respect to
the warrants and seeks declaratory relief as to the holder's rights, the
imposition of a constructive trust, damages, and a preliminary injunction baring
the Company from distributing certain cash proceeds resulting from the
liquidation of operating assets. The Company has not answered the complaint. The
Company believes this complaint is without merit and intends to defend itself
vigorously.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
10. MetroPCS 6% Subordinated Convertible Note, dated July 17, 2000
27. Financial Data Schedule
b. Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 2000
/s/ Gary L. Hess
- ----------------
Gary L. Hess,
Chief Executive Officer, President and Chief Financial Officer
10