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 March 31, 2002 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 April 30, 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 March 31, 2002 and
June 30, 2001....................................................3
Condensed Statements of Earnings - Three and Nine months
ended March 31, 2002 and 2001....................................4
Condensed Statement of Changes in Shareholders' Equity -
Nine months ended March 31, 2002.................................5
Condensed Statements of Cash Flows - Nine months ended
March 31, 2002 and 2001..........................................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
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
SONOMAWEST HOLDINGS, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
ASSETS 3/31/02 6/30/01
----------------- ----------------
CURRENT ASSETS:
Cash $ 3,143 $3,336
Restricted cash (see note 3) 600 600
Accounts receivable, less allowance for uncollectible accounts of $4
and $10 respectively 90 97
Other receivables 38 124
Prepaid income taxes - 287
Prepaid expenses and other assets 45 129
Current deferred income taxes, net 334 263
----------------- ----------------
Total current assets 4,250 4,836
----------------- ----------------
RENTAL PROPERTY, net 2,067 2,252
INVESTMENT, at cost 1,045 599
DEFERRED TAXES 38 -
PREPAID COMMISSIONS 52 -
----------------- ----------------
Total assets $ 7,452 $7,687
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 60 $ 57
Accounts payable 99 70
Accrued expenses 212 241
Accrued payroll and related liabilities 286 52
Unearned rents and deposits 210 176
Net liabilities of discontinued operations 210 281
----------------- ----------------
Total current liabilities 1,077 877
----------------- ----------------
LONG TERM DEBT, net of current maturities 1,872 1,917
DEFERRED INCOME TAXES, net - 45
----------------- ----------------
Total liabilities 2,949 2,839
----------------- ----------------
SHAREHOLDERS' EQUITY:
Preferred stock: 2,500 shares authorized; no shares outstanding - -
Common stock: 5,000 shares authorized, no par value; 1,104 and 1,024
shares outstanding, respectively 2,632 2,187
Stock subscriptions receivable (400) -
Retained earnings 2,271 2,661
----------------- ----------------
Total shareholders' equity 4,503 4,848
----------------- ----------------
Total liabilities and shareholders' equity $ 7,452 $ 7,687
================= ================
The accompanying notes are an integral part of these statements.
3
SONOMAWEST HOLDINGS, INC.
CONDENSED STATEMENTS OF EARNINGS
FOR THE NINE AND THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Nine Months Three Months
Ended March 31 Ended March 31
-------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
RENTAL REVENUE $1,095 $ 886 $ 362 $ 332
OPERATING COSTS 1,639 1,573 394 543
------------ ------------ ------------- ------------
OPERATING LOSS (544) (687) (32) (211)
INTEREST AND OTHER INCOME (EXPENSE), NET (60) 250 7 71
------------ ------------ ------------- ------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (604) (437) (25) (140)
BENEFIT (PROVISION) FOR INCOME TAXES 161 175 (1) 55
------------ ------------ ------------- ------------
NET LOSS FROM CONTINUING OPERATIONS (443) (262) (26) (85)
GAIN ON SALE OF DISCONTINUED OPERATIONS, net of income taxes 53 172 10 25
------------ ------------ ------------- ------------
NET LOSS $ (390) $ (90) $ (16) $ (60)
============ ============ ============= ============
WEIGHTED AVERAGE COMMON SHARES AND EQUIVALENTS:
Basic 1,042 1,523 1,043 1,523
Diluted 1,051 1,550 1,052 1,557
EARNINGS (LOSS) PER COMMON SHARE
Continuing operations
Basic $ (0.43) $ (0.17) $ (0.02) $ 0.39
Diluted $ (0.43) $ (0.17) $ (0.02) $ 0.38
Discontinued operations:
Basic $ 0.05 $ 0.11 $ 0.01 $ 0.02
Diluted $ 0.05 $ 0.11 $ 0.01 $ 0.02
Net loss:
Basic $ (0.37) $ (0.06) $ (0.02) $ 0.41
Diluted $ (0.37) $ (0.06) $ (0.02) $ 0.40
The accompanying notes are an integral part of these statements.
4
SONOMAWEST HOLDINGS, INC.
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
FOR THE NINE MONTHS ENDED MARCH 31, 2002
(AMOUNTS IN THOUSANDS)
Common Stock
---------------------------- Stock Total
Number Subscriptions Retained Shareholders'
of Shares Amount Receivable 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, SEPTEMBER 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
------------- -------------- ---------------- -------------- ----------------
Net loss - - - (16) (16)
Non-cash stock compensation charge - 22 - - 22
Exercise of stock options 80 400 (400) - -
------------- -------------- ---------------- -------------- ----------------
BALANCE, MARCH 31, 2002 1,104 $ 2,632 $ (400) $ 2,271 $ 4,503
============= ============== ================ ============== ================
The accompanying notes are an integral part of these statements.
5
SONOMAWEST HOLDINGS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED MARCH 31, 2002 AND 2001
(AMOUNTS IN THOUSANDS)
2002 2001
-------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (390) $ (90)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Gain on sale of discontinued operations, net (53) (172)
Non-cash stock compensation charge 40 -
Depreciation expense 297 362
Changes in assets & liabilities:
Accounts receivable, net 7 (13)
Other receivables 86 -
Prepaid income taxes 287 422
Prepaid expenses and other assets 84 11
Deferred income taxes, net (154) 18
Prepaid Commissions (52) -
Accounts payable and accrued expenses - (54)
Accrued payroll and related liabilities 234 -
Unearned rents and deposits 34 27
-------------------- -------------------
Net cash provided by continuing operating activities 420 511
-------------------- -------------------
Net cash used in discontinued operations (17) (202)
-------------------- -------------------
Net cash provided by operating activities 403 309
-------------------- -------------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures, net (113) (10)
Investments (446) (466)
-------------------- -------------------
Net cash used in investing activities (559) (476)
-------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long term debt (42) (603)
Warrant repurchase - (112)
Issuance of common stock 5 5
-------------------- -------------------
Net cash used for financing activities (37) (710)
-------------------- -------------------
NET DECREASE IN CASH (193) (877)
CASH AT BEGINNING OF THE PERIOD 3,936 8,359
-------------------- --------------------
CASH AT THE END OF THE PERIOD $ 3,743 $ 7,482
==================== ====================
The accompanying notes are an integral part of these statements.
6
SONOMAWEST HOLDINGS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 2002
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 the information and disclosures included 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 nine month period ended
March 31, 2002 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 minority investment in the
Series D preferred stock of a privately held telecommunications company,
MetroPCS, Inc. As of March 31, 2002, the Company has invested $1,045,000 of its
$3 million commitment. The Company has accounted for the investment using the
cost method. At this time the Company anticipates an additional capital call by
MetroPCS, Inc. in May or June of 2002. SonomaWest's portion of this capital call
is approximately $350,000. The Company anticipates that there may be additional
capital calls by the end of the 2002 calendar year.
Note 3-
As of August 15, 2001, the Company and the bank agreed to a Restated and Amended
Addendum (the "Addendum") to its December 2000 loan agreement. The Addendum
amends and restates the provisions of this agreement. The 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 (formerly 1.15 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 the last
fiscal year end, the Company did not meet the required ratio to release this
restriction. As a result, $600,000 continues to be presented as Restricted Cash
on the accompanying balance sheet as of March 31, 2002. As a condition to
decrease the required debt service coverage ratio from 1.15 to 1.05, 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 March 31, 2002, the Company's Debt
Service coverage ratio was 1.15 to 1.
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 set at LIBOR plus 2.25%. To reduce its
exposure to changes in the LIBOR rate, the Company has entered into an interest
rate swap contract to effectively fix the interest rate at 7.35%. Under the
interest rate swap, the Company exchanges monthly, the difference between fixed
and floating interest amounts calculated on an initial agreed-upon notional
7
amount of $2,100,000. The notional amount is amortized monthly based on the
Company's principal payments and was $1,932,000 as of March 31, 2002. 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 Financial Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities", the Company reports all changes in fair
value of its swap contract in earnings. During the nine months ended March 31,
2002, the Company recorded a decrease in the value of this swap of $38,000,
which is included in interest expense. The cumulative effect of adopting SFAS
No. 133 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
(the "Executive") 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 the Executive 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. The
Executive 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) and will receive a commission if such sales occur. As part of the
separation agreement, the Executive 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 28, 2002, the Executive elected to
exercise his option to purchase 80,000 shares of his total outstanding options
of 89,474 shares and 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 the Executive up to $447,370 to allow the Executive to exercise the
aforementioned options. The Executive elected to borrow the money to purchase
the 80,000 shares from the company. 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 on August 1, 2004. The
Note is full 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 incurred a non-cash stock
compensation charge in the third quarter ended March 31, 2002 of $22,501. The
Executive remains a board member of the Company.
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 one-time 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 sale was
recorded in the first quarter of fiscal 2000. 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
8
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 balance sheets, the operating results of the discontinued operations
in the statements of operations and the cash flows from discontinued operations
in the statements of cash flows for each of the periods presented.
Upon the disposal of the Company's remaining ingredients assets, the sole
remaining lines of business will be its real estate management and rental
operations and its investment in the preferred stock of a private
telecommunications company, MetroPCS, Inc.
The gain on the sale of discontinued operations presented in the accompanying
statements of earnings for the three and nine months ended March 31, 2002 and
2001, 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 $210,000 and $281,000, as of March 31,
2002 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)
2002 2001
----------------- ----------------
Interest paid $ 109 $ 119
Income taxes paid $ 2 $ -
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 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 management 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 nine months ended
March 31, 2002 and 2001 reflect all the adjustments that in the opinion of
management are necessary for the fair presentation of the financial position and
9
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 March 31, 2002, 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, MetroPCS, Inc. Prior to the sale of its
other business segments, the Company 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.
During fiscal 2001, the Company committed to a $3 million minority investment in
the Series D preferred stock of a privately held telecommunications company. As
of March 31, 2002, 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 sale was
recorded in the first quarter of fiscal 2000. 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 March 31, 2002 and June 30, 2001, the operating
results of the discontinued operations in the consolidated statements of
operations for the three and nine months ended March 31, 2002 and 2001 and the
cash flows from discontinued operations in the consolidated statements of cash
flows for the nine months ended March 31, 2002 and 2001.
For the nine months ended March 31, 2002, the Company recorded an after-tax gain
from discontinued operations of $53,000. This compares to an after-tax gain of
$172,000 for the nine months ended March 31, 2001. 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 privately held telecommunications company, MetroPCS,
Inc. As of March 31, 2002, the Company has invested $1,045,000 of its
commitment. Currently, there are no plans to make any additional commitments to
other investments.
10
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 390,000 square feet on 81.5 acres of land. As of
March 31, 2002, the Company has twenty-seven tenants that have varying original
lease terms ranging from month-to-month to eight years with options to extend
the leases. As of March 31, 2002, the Company's tenants occupy approximately
209,000 square feet or 54% of the properties' available space.
Rental Revenue. For the nine months ended March 31, 2002, rental revenue
increased $209,000 or 24% as compared to the corresponding period in the prior
year. For the three months ended March 31, 2002 rental revenue increased $30,000
or 9% 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 13% from 24 as of March 31,
2001 to 27 as of March 31, 2002.
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 nine months ended March 31,
2002 operating costs increased $66,000 or 4% compared to the nine months ended
March 31, 2001. Some of the increase in operating costs was the result of 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
and $22,500 related to the extension of a current Board Member's stock options
during the three months ended March 31, 2002 and the separation costs of
$362,500 expensed during the three months ended September 30, 2001 related to
the termination of the Company's CEO. These increased operating costs were
substantially offset by efficiencies gained as the Company continues to minimize
costs; such as reductions in payroll and related expenses of $156,000, telephone
and utilities of $70,000, professional fees of $70,000 and other overall
reductions in overhead.
For the three months ended March 31, 2002 operating costs decreased $149,000 or
27% compared to the three months ended March 31, 2001. This decrease is
partially the result of the elimination of the $76,000 of expenses associated
with the stock repurchase and a decrease of $59,000 of accounting fees in
addition to other efficiencies gained as the Company continues to minimize
costs. Operating costs for the three months ended March 31, 2002 include a
non-cash compensation charge of $22,500 related to the extension of a current
Board Member's stock options.
Even excluding the impact of separation costs and the non-cash compensation
charges, the Company's total operating costs exceeded gross rental revenue for
the three and nine months ended March 31, 2002. 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.
Interest and Other Income (Expense), Net. Interest and other income (expense)
consist 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 nine months ending March 31, 2002, the Company
generated $84,000 of interest income and incurred $147,000 of interest expense,
compared to $369,000 of interest income and $119,000 of interest expense for the
corresponding period in the prior year. The decrease in interest income is due
primarily to reduced cash balances in fiscal 2002 versus fiscal 2001. The
11
decrease in cash was primarily a result of a stock repurchase of $4.0 million in
October 2000 and the Company's investment in MetroPCS, Inc.
For the three months ending March 31, 2002, the Company generated $20,000 of
interest income and incurred $16,000 of interest expense, compared to $110,000
of interest income and $37,000 of interest expense for the corresponding period
in the prior year. This decrease was primarily due to a reduced cash balance due
to the stock repurchase of $4.0 million in October 2000 and the Company's
investment in MetroPCS, Inc. in addition to lower interest rates in fiscal 2002.
Income Taxes. The effective tax rate for the nine months ended March 31, 2002
decreased to 27% from 40% as of March 31, 2001. This decrease is due to the fact
that the Company established a valuation allowance on the state net operating
losses generated prior to September 30, 2001. For the three months ended March
31, 2002, the effective tax rate is 4% compared to 39% for the three months
ended March 31, 2001. The 4% effective tax rate is primarily due to the impact
of permanent items on a small amount of taxable income.
Liquidity and Capital Resources
- -------------------------------
The Company had unrestricted cash of $3.1 million at March 31, 2002, and current
maturities of long-term debt of $60,000. The Company's cash balance decreased
$193,000 during the nine months ended March 31, 2002. This decrease was
primarily a result of the investment of $446,000 in MetroPCS, Inc., and capital
expenditures of $113,000. These expenditures of cash were substantially offset
by cash provided from operations of $418,000.
As of August 15, 2001, the Company and the bank agreed to a Restated and Amended
Addendum (the "Addendum") to its December 2000 loan agreement. The Addendum
amends and restates the provisions of this agreement. The 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 (formerly 1.15 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 the last
fiscal year end, the Company did not meet the required ratio to release this
restriction. As a result, the $600,000 continues to be presented as Restricted
Cash on the accompanying balance sheet as of March 31, 2002. As a condition to
decrease the required debt service coverage ratio from 1.15 to 1.05, 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 March 31, 2002, the Company's Debt
Service coverage ratio was 1.15 to 1.
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 nine months ended March 31, 2002, the Company incurred $113,000 of the
$159,000 fiscal 2002 budget.
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 March 31, 2002, the Company has invested $1,045,000 of its
$3 million commitment. The Company has accounted for the investment using the
cost method. At this time the Company anticipates an additional capital call by
MetroPCS, Inc. in May or June of 2002. SonomaWest's portion of this capital call
is approximately $350,000. The Company anticipates that there may be additional
capital calls by the end of the 2002 calendar year.
On July 17, 2001 the Company entered into a separation agreement in principle,
which was thereafter executed, with its President and Chief Executive Officer
(the "Executive") 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
12
paying separation payments to the Executive 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. The
Executive 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) and will receive a commission if such sales occur. As part of the
separation agreement, the Executive 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 28, 2002, the Executive elected to
exercise his option to purchase 80,000 shares of his total outstanding options
of 89,474 shares. The Executive 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 has agreed to loan the Executive up to $447,370 to allow the Executive
to exercise the aforementioned options. The Executive elected to borrow the
money to purchase the 80,000 shares from the Company. 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 on August 1,
2004. The Note is full 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 incurred a non-cash stock
compensation charge in the third quarter ended March 31, 2002 of $22,501.
As long as the demand for real estate does not decline, the Company expects
available resources will be sufficient to cover the MetroPCS, Inc. commitment
and fund operations for the foreseeable future.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a vote of Security Holders.
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
None
b. Reports on Form 8-K
No reports where filed on Form 8-K during the quarter ended March
31, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 9, 2002
/s/ Thomas R. Eakin
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Thomas R. Eakin
Chief Financial Officer
14