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 December 31,
2001 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 #)
2064 Highway 116 North, Sebastopol, CA 95472-2662
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 707-824-2001
--------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since
Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES: X NO:
------- ----------
As of February 1, 2002, there were 1,104,393 shares of common stock, no par
value, outstanding.
SONOMAWEST HOLDINGS, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Condensed Financial Statements
Condensed Balance Sheets at December 31, 2001 and
June 30, 2001....................................................3
Condensed Statements of Earnings - Three and Six months
ended December 31, 2001 and 2000.................................4
Condensed Statement of Changes in Shareholders' Equity -
Six months ended December 31, 2001...............................5
Condensed Statements of Cash Flows - Six months ended
December 31, 2001 and 2000.......................................6
Notes to Condensed Financial Statements..........................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................14
Item 6. Exhibits and Reports on Form 8-K................................14
Signature................................................................ 15
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
SONOMAWEST HOLDINGS, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
ASSETS 12/31/01 6/30/01
----------------- ----------------
CURRENT ASSETS:
Cash $2,939 $ 3,336
Restricted cash (see note 3) 600 600
Accounts receivable, less allowance for uncollectible accounts of $9
and $10 respectively 117 97
Other receivables 37 124
Prepaid income taxes 250 287
Prepaid expenses and other assets 49 129
Current deferred income taxes, net 361 263
----------------- ----------------
Total current assets 4,353 4,836
----------------- ----------------
RENTAL PROPERTY, net 2,152 2,252
INVESTMENT, at cost 1,045 599
LT DEFERRED TAXES 18 -
PREPAID COMMISSIONS 69 -
----------------- ----------------
Total assets $7,637 $7,687
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
$
Current maturities of long-term debt $ 59 57
Accounts payable 170 70
Accrued expenses 262 241
Accrued payroll and related liabilities 323 52
Unearned rents and deposits 216 176
Net liabilities of discontinued operations 223 281
----------------- ----------------
Total current liabilities 1,253 877
----------------- ----------------
LONG TERM DEBT, net of current maturities 1,887 1,917
----------------- ----------------
DEFERRED INCOME TAXES, net - 45
----------------- ----------------
Total liabilities 3,140 2,839
----------------- ----------------
SHAREHOLDERS' EQUITY:
Preferred stock: 2,500 shares authorized; no shares outstanding - -
Common stock: 5,000 shares authorized, no par value; 1,024 and 1,024
shares outstanding, respectively 2,210 2,187
Retained earnings 2,287 2,661
----------------- ----------------
Total shareholders' equity 4,497 4,848
----------------- ----------------
Total liabilities and shareholders' equity $7,637 $ 7,687
================= ================
The accompanying notes are an integral part of these statements.
3
SONOMAWEST HOLDINGS, INC.
CONDENSED STATEMENTS OF EARNINGS
FOR THE SIX AND THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Six Months Three Months
Ended December 31 Ended December 31
----------------- -----------------
2001 2000 2001 2000
---- ---- ---- ----
RENTAL REVENUE $ 733 $ 554 $ 382 $ 311
OPERATING COSTS 1,245 1,030 434 513
------------ ------------ ------------- ------------
OPERATING LOSS (512) (476) (52) (202)
INTEREST AND OTHER INCOME (EXPENSE), NET (67) 179 (6) 91
------------ ------------ ------------- ------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (579) (297) (58) (111)
120
BENEFIT FOR INCOME TAXES 162 24 45
------------ ------------ ------------- ------------
NET LOSS FROM CONTINUING OPERATIONS (417) (177) (34) (66)
147
GAIN ON SALE OF DISCONTINUED OPERATIONS, net of income taxes 43 5 57
------------ ------------ ------------- ------------
NET LOSS $ (374) $ (30) $ (29) $ (9)
============ ============ ============= ============
WEIGHTED AVERAGE COMMON SHARES AND EQUIVALENTS:
Basic 1,024 1,522 1,024 1,522
Diluted 1,059 1,545 1,058 1,548
EARNINGS (LOSS) PER COMMON SHARE
Continuing operations
Basic $ (0.41) $(0.12) $ (0.03) $ (0.05)
Diluted $ (0.41) $(0.12) $ (0.03) $ (0.05)
Discontinued operations:
Basic $ 0.04 $ 0.10 $ 0.01 $ 0.04
Diluted $ 0.04 $ 0.10 $ 0.01 $ 0.04
Net loss:
Basic $ (0.37) $ (0.02) $ (0.03) $ (0.01)
Diluted $ (0.37) $ (0.02) $ (0.03) $ (0.01)
4
The accompanying notes are an integral part of these statements.
SONOMAWEST HOLDINGS, INC.
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 2001
(AMOUNTS IN THOUSANDS)
Common Stock Total
----------------------------
Number Retained Shareholders'
of Shares Amount Earnings Equity
------------- -------------- -------------- ---------------
BALANCE, JUNE 30, 2001 1,024 $ 2,187 $ 2,661 $ 4,848
Net loss - - (345) (345)
Non-cash stock compensation charge - 18 - 18
Issuance of common stock - 2 - 2
------------- -------------- -------------- ---------------
BALANCE, SETPEMBER 30, 2001 1,024 $ 2,207 $ 2,316 $ 4,523
------------- -------------- -------------- ---------------
Net loss - - (29) (29)
Issuance of common stock - 3 - 3
------------- -------------- -------------- ---------------
BALANCE, DECEMBER 31, 2001 1,024 $ 2,210 $ 2,287 $ 4,497
============= ============== ============== ===============
5
The accompanying notes are an integral part of these statements.
SONOMAWEST HOLDINGS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000
(AMOUNTS IN THOUSANDS)
2001 2000
-------------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (374) $ (30)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Gain on sale of discontinued operations, net (43) (147)
Non-cash stock compensation charge 18 -
Depreciation expense 194 242
Changes in assets & liabilities:
Prepaid income taxes 37 500
Accounts receivable, net (20) 0
Other receivables 87 -
Prepaid expenses and other assets 80 25
Prepaid Commissions (69) -
Accounts payable and accrued expenses 121 (77)
Deferred income taxes, net (161) (22)
Accrued payroll and related liabilities 271 0
Unearned rents and deposits 40 19
-------------------- ----------------
Net cash provided by continuing operating activities 181 510
-------------------- ----------------
Net cash used in discontinued operations (15) (230)
-------------------- ----------------
Net cash provided by operating activities 166 280
-------------------- ----------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures, net (94) (11)
Investments (446) (329)
-------------------- ----------------
Net cash used in investing activities (540) (340)
-------------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long term debt (28) (589)
Warrant repurchase - (112)
Issuance of common stock 5 5
-------------------- ----------------
Net cash used for financing activities (23) (696)
-------------------- ----------------
NET DECREASE IN CASH (397) (756
CASH AT BEGINNING OF THE PERIOD 3,936 8,359
-------------------- ----------------
CASH AT THE END OF THE PERIOD $ 3,539 $ 7,603
==================== ================
6
The accompanying notes are an integral part of these statements.
SONOMAWEST HOLDINGS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 2001
Note 1-
The accompanying fiscal 2002 and 2001 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, 2001. The results of
operations for the six month period ended December 31, 2001 are not necessarily
indicative of the results that will be achieved for the entire year ending June
30, 2002.
Reclassifications - Certain previously reported amounts were reclassified to
conform to the current presentation.
Note 2-
The Company has committed itself to a $3 million investment in the preferred
stock of a privately held telecommunications company, Metro PCS, Inc. As of
December 31, 2001, the Company has invested $1,045,000 of its $3 million
commitment. The Company has accounted for the investment using the cost method.
It is expected that the Company will make the remaining investment in several
installments throughout the fiscal year ending June 30, 2002.
Note 3-
As of August 15, 2001, the Company and the bank agreed to a Restated and Amended
Addendum to its December 2000 loan agreement. This addendum amends and restates
the provisions of this agreement. 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 also requires that until such time as this ratio reaches 1.25 to
1, the Company must maintain restricted, unencumbered cash or marketable
securities of at least $600,000. As of December 31, 2001 the $600,000 continues
to be presented on the balance sheet as Restricted Cash, as the bank agreement
states that the test of the Debt Service coverage ratio be calculated as of each
fiscal year end. As of the last fiscal year end, the Company did not exceed the
required ratio to release this restriction. As a condition to decrease the
required debt service coverage ratio from 1.15 to 1.05, per the Amended
Addendum, the bank was granted a security interest in a money market account in
the amount of $90,000. This account balance is part of, not an addition to, the
restricted unencumbered cash balance of $600,000. As of December 31, 2001, the
Company's Debt Service coverage ratio was slightly under the minimum required
ratio of 1.05 as of the end of the fiscal year.
The Company's long-term debt is a five-year note, secured by real property,
payable in monthly installments of principal and interest with a maturity of
December 2003. The interest rate is tied to LIBOR and is synthetically fixed at
7.35 percent. To reduce its exposure to changes in the LIBOR rate, the Company
has entered into an interest rate swap contract. Under 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 $1,946,000 as of December 31, 2001. 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. The Company reports all
changes in fair value of its swap contract in earnings. During the six months
ended December 31, 2001, the Company recorded a decrease in the value of this
swap of $56,800, which is included in interest expense. The cumulative effect of
adopting this standard effective July 1, 2000 was not significant.
Note 4-
On July 17, 2001 the Company entered into a separation agreement in principle,
which was thereafter executed, with its President and Chief Executive Officer
replacing the executive's existing employment agreement. Pursuant to the
separation agreement, the executive 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 Mr. 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 2001. Mr. Hess has been designated as the
Company's exclusive sales representative in its efforts to sell any and all
remaining Perma-Pak finished good inventory and other Perma-Pak property
(inventory and property related to discontinued operations). As part of the
separation agreement, Mr. Hess was given until January 29, 2002 to decide
whether to extend the period within which he was eligible to exercise the stock
options previously granted to him. On January 29, 2002, Mr. Hess elected to
exercise his option to purchase 80,000 shares of his total outstanding options
of 89,474 shares. Mr. 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 or January 31, 2004. The Company has committed to loan Mr. Hess $400,000
(80,000 at $5.00 per share) to allow Mr. Hess to exercise the aforementioned
options. The note dated January 29, 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 on August 1, 2004. The Note is recourse, 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 9,474
shares, the Company will incur a non-cash stock compensation charge against
earnings in the third quarter ended March 31, 2002 of $ 22,501.
On September 4, 2001 the Company authorized the waiver of the provision of a
resigning board member's options providing for the termination 90 days following
service. Consequently, a non-cash compensation charge of $18,000 was recorded in
September, 2001.
Note 5-
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
increase 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 condensed consolidated balance sheets at
December 31, 2001 and 2000, the operating results of the discontinued operations
in the consolidated statements of operations and the cash flows from
discontinued operations in the consolidated statements of cash flows for period
ending December 31, 2001 and 2000.
Upon the disposal of the Company's remaining ingredients assets, the sole
remaining line of business will be its real estate management and rental
operations and its investment in the preferred stock of a private
telecommunications company, Metro PCS, Inc.
The gain on the sale of discontinued operations presented in the accompanying
statements of earnings for the six months ended December 31, 2001 and 2000,
respectively represent the sales of remaining discontinued inventories and fixed
assets net of related selling costs and income taxes. Remaining liabilities of
discontinued operations of $223,000 and $281,000, as of December 31, 2001 and
June 30, 2001, respectively relate to reserves for rental repairs necessary to
ready warehouses previously used in the discontinued operations for future
rentals and estimated lease obligations at the Company's former corporate
headquarters in excess of projected sublease income. All remaining inventories
and fixed assets of discontinued operations are fully reserved.
Note 6 -
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 $ 74 $ 83
Income taxes paid $ - $ -
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
SonomaWest Holdings, Inc. (the "Company" or "Registrant") is including the
following cautionary statement in this 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. 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 real estate market, performance of the Company's investment, and
manage-ment of growth. 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. Risks inherent in the Registrant's business and
factors that could cause or contribute to such differences include, without
limitation, the considerations set forth under "Management's Discussion and
Analysis of Financial Condition and Results of Operations". There can be no
assurance that management's expectations, beliefs or projections will be
achieved or accomplished, and the Company expressly disclaims any obligation to
update any forward looking statements.
The financial statements herein presented for the three and six months ended
December 31, 2001 and 2000 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
As of December 31, 2001, the Company's business consists of its real estate
management and rental operations and its investment in the preferred stock of a
private telecommunications company, Metro PCS, 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 it's 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.
During fiscal 2001, the Company committed to a $3 million minority investment in
a telecommunications company. As of December 31, 2001, the Company had invested
$1,045,000 of its $3.0 million commitment.
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, was 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
liabilities of the discontinued operations in the consolidated balance sheets at
December 31, 2001 and June 30, 2001, the operating results of the discontinued
operations in the consolidated statements of operations for the three and six
months ended December 31, 2001 and 2000 and the cash flows from discontinued
operations in the consolidated statements of cash flows for the six months ended
December 31, 2001 and 2000.
For the six months ended December 31, 2001, the Company recorded an after-tax
gain from discontinued operations of $43,000. This compares to an after-tax gain
of $147,000 for the six months ended December 31, 2000. The gains on the sale of
discontinued operations relate to the Company's continued efforts to sell the
remaining discontinued inventories and fixed assets.
The Company continues to actively market 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 and all amounts
have been fully reserved.
RESULTS OF CONTINUING OPERATIONS
The Company's continuing line of business is its real estate management and
rental operations. Additionally, the Company has committed to a $3 million
minority investment in a telecommunications company, Metro PCS, Inc. As of
December 31, 2001, the Company has invested $1,045,000 of its commitment.
Currently, there are no plans to make any additional commitments to other
investments.
Results of Operations
- ---------------------
The Company leases warehouse, production, and office space as well as outside
storage space at both of its properties. The two properties have a combined
leaseable area of approximately 472,000 square feet on 81.5 acres of land. As of
December 31, 2001, the Company has twenty-eight tenants that have varying
original lease terms ranging from month-to-month to eight years with options to
extend the leases. As of December 31, 2001, the Company's tenants occupy
approximately 301,000 square feet or 64% of the properties' available space.
Rental Revenue. For the six months ended December 31, 2001 rental revenue
increased $179,000 or 32% as compared to the corresponding period in the prior
year. For the three months ended December 31, 2001 rental revenue increased
$71,000 or 23% as compared to the corresponding period in the prior year. Both
of these increases were attributable to increased occupancy in the current
fiscal year. The Company has increased the number of tenants by 17% from 24 as
of December 31, 2000 to 28 as of December 31, 2001.
Operating Costs. Operating costs consist of direct costs related to continuing
operations and all general corporate costs. Only direct selling expenses related
to the discontinued packaged goods businesses were charged to discontinued
operations in the statements of operations. For the six months ended December
31, 2001 operating costs increased $215,000 or 21% compared to the six months
ended December 31, 2000, this increase was primarily due to separation costs of
$362,500 expensed during the three months ended September 30, 2001, related to
the termination of the Company's CEO offset by efficiencies gained as the
Company continues to minimize costs. Operating costs also include a non-cash
compensation charge of $18,000 related to the extension of a former Board
Member's stock options during the three months ended September 30, 2001.
Excluding the impact of separation costs and the non-cash compensation charge,
the Company's total operating costs exceeded the gross rental revenue. Cost
reduction efforts to minimize any avoidable spending have been undertaken to
minimize these negative operating results while the Company actively searches
for additional tenant revenue. 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.
For the three months ended December 31, 2001 operating costs decreased $79,000
or 15% compared to the three months ended December 31, 2000. This is primarily
due to a decrease in staff and consulting expenses.
Interest and Other Income (Expense), Net. Interest and other income (expense)
consists primarily of interest income on the Company's cash balances offset by
interest expense on mortgage debt and the decrease in the value of its interest
rate swap contract. For the six months ending December 31, 2001, the Company
generated $64,000 of interest income and incurred $130,000 of interest expense,
compared to $260,000 of interest income and $83,000 of interest expense for the
corresponding period in the prior year. The decrease in interest income is due
to a reduced comparative cash balance in fiscal 2001 versus fiscal 2000. This
decrease was a result of a stock repurchase of $4.0 million in October 2000, the
Company's investment in Metro PCS and lower interest rates.
For the three months ending December 31, 2001, the Company generated $28,000 of
interest income and incurred $33,000 of interest expense, compared to $131,000
of interest income and $35,000 of interest expense for the corresponding period
in the prior year. This was primarily due to the stock repurchase of $4.0
million in October 2000 and the investment in Metro PCS
Income Taxes. The effective tax rate for the six months ended December 31, 2001
decreased to 27% from 40% as of December 31, 2000. This decrease is due to the
fact that the Company established a valuation allowance on the state NOL's
generated prior to September 30, 2001. For the three months ended December 31,
2001, the effective tax rate is 42% compared to 40% for the three months ended
December 31, 2000. The 42% effective tax rate is due to the impact of permanent
items on a small amount of taxable income offset by the fact that the Company is
benefiting deferred taxes at 50% for state purposes, due to the Company's
continuing operating losses.
Liquidity and Capital Resources
- -------------------------------
The Company had unrestricted cash of $2.9 million at December 31, 2001, and
current maturities of long-term debt of $59,000. The Company's cash balance
decreased $397,000 during the six months ended December 31, 2001. This decrease
was primarily a result of the investment of $446,000 in Metro PCS, Inc., and
capital expenditures of $94,000. These expenditures of cash were partially
offset by cash provided from operations of $166,000.
As of August 15, 2001, the Company and the bank agreed to a Restated and Amended
Addendum to it's December 2000 loan agreement. This addendum amends and restates
the provisions of this agreement. 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 also requires that until such time as this ratio reaches 1.25 to
1, the Company must maintain restricted, unencumbered cash or marketable
securities of at least $600,000. As of December 31, 2001 the $600,000 continues
to be presented on the balance sheet as Restricted Cash, as the bank agreement
states that the test of the Debt Service coverage ratio be calculated as of each
fiscal year end. As of the last fiscal year end, the Company did not exceed the
required ratio to release this restriction. As a condition to decrease the
required debt service coverage ratio from 1.15 to 1.05, per the Amended
Addendum, the bank was granted a security interest in a money market account in
the amount of $90,000. This account balance is part of, not an addition to, the
restricted unencumbered cash balance of $600,000. As of December 31, 2001, the
Company's Debt Service coverage ratio was slightly under the minimum required
ratio of 1.05 as of the end of the fiscal year.
The Company has a capital expenditure budget for fiscal 2002 of $ 159,000. The
Company intends to fund these capital additions from internally generated funds.
As of the six months ended December 31, 2001, the Company incurred $94,000 of
the $159,000 fiscal 2002 budget.
The Company has committed itself to a $3 million investment in the preferred
stock of a privately held telecommunications company, Metro PCS, Inc. As of
December 31, 2001, the Company has invested $1,045,000 of its $3 million
commitment. The Company has accounted for the investment using the cost method.
It is expected that the remaining $1,955,000 will be funded in several
installments throughout the fiscal year ending June 30, 2002.
On July 17, 2001 the Company entered into a separation agreement in principle,
which was thereafter executed, with its President and Chief Executive Officer
replacing the executive's existing employment agreement. Pursuant to the
separation agreement, the executive 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 Mr. 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 2001. Mr. Hess has been designated as the
Company's exclusive sales representative in its efforts to sell any and all
remaining Perma-Pak finished good inventory and other Perma-Pak property
(inventory and property related to discontinued operations). As part of the
separation agreement, Mr. Hess was given until January 29, 2002 to decide
whether to extend the period within which he was eligible to exercise the stock
options previously granted to him. On January 29, 2002, Mr. Hess elected to
exercise his option to purchase 80,000 shares of his total outstanding options
of 89,474 shares. Mr. 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 or January 31, 2004. The Company has committed to loan Mr. Hess $400,000
(80,000 at $5.00 per share) to allow Mr. Hess to exercise the aforementioned
options. The note dated January 29, 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 on August 1, 2004. The Note is recourse, 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 9,474
shares, the Company will incur a non-cash stock compensation charge against
earnings in the third quarter ended March 31, 2002 of $ 22,501.
On September 4, 2001 the Company authorized the waiver of the provision of a
resigning Board Member's options providing for the termination 90 days following
service, consequently, a non-cash compensation charge of $18,000 was recorded in
September, 2001.
As long as the demand for real estate does not decline, the Company expects that
cash flow from operations will continue to be positive and available resources
will be sufficient to cover the Metro PCS, Inc. commitment and fund operations
for the foreseeable future.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Registrant's Annual Meeting of Stockholders held on October 31, 2001
the following proposals were adopted by the margins indicated:
Number of Shares
----------------------------------------------
Voted For Withheld
------------------ --------------
1. To elect a four Directors to hold office until the Annual
Meeting of Stockholders to be held in 2002 or until their
respective successors have been elected or appointed
David J. Bugatto 934,490 2,890
Gary L. Hess 934,490 2,890
Roger S. Mertz 934,490 2,890
Fredric Selinger 934,490 2,890
Number of Shares
--------------- ---------------- ------------- --------------
Broker
Voted For Voted Against Withheld Non-Vote
--------------- ---------------- ------------- --------------
2. To ratify the appointment of the accounting firm of
Arthur Andersen LLP as independent auditors for the
fiscal year ending June 30, 2002 935,730 600 1,050 0
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
None
b. Reports on Form 8-K
1. On November 7, 2001, the Registrant filed a report on Form 8-K
announcing that David J. Bugatto, Fredric Selinger, Gary L. Hess and
Roger S. Mertz were elected as directors of the Company to serve until
the 2002 annual meeting and that the Company's Board of Directors
named Roger S. Mertz as Chairman of the Board and Thomas R. Eakin as
Chief Financial Officer.
2. On December 20, 2001, the Registrant filed a report on Form
8-K announcing that effective December 21, 2001, its common stock
would be listed on The Nasdaq Small Cap Market.
No other reports on Form 8-K were filed during the three months
ended December 31, 2001.
All other items specified by Part II of this report are inapplicable and
accordingly have been omitted.
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: February 11, 2002
/s/ Thomas R. Eakin
- -------------------
Thomas R. Eakin,
Chief Financial Officer