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, 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 February 13, 2003, there were 1,104,783 shares of common stock, no par
value, outstanding.
1
SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at December 31, 2002
and June 30, 2002................................................3
Condensed Consolidated Statements of Earnings - Three and
Six months ended December 31, 2002 and 2001......................4
Condensed Consolidated Statement of Changes in Shareholders'
Equity - Six Months ended December 31, 2002......................5
Condensed Consolidated Statements of Cash Flows - Six Months
ended December 31, 2002 and 2001.................................6
Notes to Condensed Consolidated Financial Statements.............7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................9
Item 4. Controls and Procedures.........................................13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................13
Item 2. Changes in Securities and Use of Proceeds......................13
Item 3. Defaults Upon Senior Securities ................................13
Item 4. Submission of Matters to a vote of Security Holders.............13
Item 5. Other Information...............................................14
Item 6. Exhibits and Reports on Form 8-K................................14
Signature.................................................................15
EXHIBIT INDEX.................................................................18
EXHIBITS......................................................................19
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
ASSETS 12/31/02 6/30/02
------------- -------------
(Unaudited)
CURRENT ASSETS:
Cash $ 1,762 $ 2,769
Restricted cash 600 600
Accounts receivable, less allowances for uncollectible accounts of $0 and $10 in
fiscal 2003 and 2002, respectively 100 118
Other receivables 34 20
Prepaid income taxes - 75
Prepaid expenses and other assets 57 121
Current deferred income taxes, net 127 335
------------- -------------
Total current assets 2,680 4,038
RENTAL PROPERTY, net 1,803 1,917
INVESTMENT, at cost 2,446 1,402
DEFERRED INCOME TAXES 253 31
PREPAID COMMISSIONS AND OTHER ASSETS 76 82
------------- -------------
Total assets $ 7,258 $7,470
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 1,887 $ 61
Accounts payable 106 108
Unearned rents and deposits 274 282
Accrued payroll and related liabilities 160 253
Accrued expenses 437 290
Net liabilities of discontinued operations 90 219
------------- -------------
Total current liabilities 2,954 1,213
LONG-TERM DEBT, net of current maturities - 1,856
------------- -------------
Total liabilities 2,954 3,069
------------- -------------
SHAREHOLDERS' EQUITY:
Preferred stock: 2,500 shares authorized; no shares outstanding - -
Common stock: 5,000 shares authorized, no par value; 1,105 shares outstanding in
fiscal 2003 and 2002 2,675 2,633
Stock subscription receivable (400) (400)
Retained earnings 2,029 2,168
------------- -------------
Total shareholders' equity 4,304 4,401
------------- -------------
Total liabilities and shareholders' equity $ 7,258 $ 7,470
============= =============
The accompanying notes are an integral part of these consolidated statements.
3
SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE SIX AND THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Six Months Three Months
Ended December 31 Ended December 31
----------------- -----------------
2002 2001 2002 2001
---- ---- ---- ----
RENTAL REVENUE $ 757 $ 733 $ 378 $ 382
OPERATING COSTS 1,061 1,245 600 434
-------------------------------------------------
OPERATING LOSS (304) (512) (222) (52)
INTEREST AND OTHER INCOME (EXPENSE), NET (48) (67) (11) (6)
-------------------------------------------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (352) (579) (233) (58)
BENEFIT FOR INCOME TAXES 93 162 70 24
--------------------------------------------------
NET LOSS FROM CONTINUING OPERATIONS (259) (417) (163) (34)
GAIN ON SALE OF DISCONTINUED OPERATIONS, net of income taxes 120 43 77 5
--------------------------------------------------
NET LOSS $ (139) $ (374) $ (86) $ (29)
==================================================
WEIGHTED AVERAGE COMMON SHARES AND EQUIVALENTS:
Basic 1,105 1,024 1,105 1,024
Diluted 1,110 1,059 1,110 1,058
EARNINGS (LOSS) PER COMMON SHARE
Continuing operations
Basic $(0.23) $ (0.41) $ (0.15) $ (0.03)
Diluted $(0.23) $ (0.41) $ (0.15) $ (0.03)
Discontinued operations:
Basic $ 0.11 $ 0.04 $ 0.07 $ 0.01
Diluted $ 0.11 $ 0.04 $ 0.07 $ 0.01
Net loss:
Basic $ 0.13) $ (0.37) $ (0.08) $ (0.03)
Diluted $(0.13) $ (0.37) $(0.08) $ (0.03)
The accompanying notes are an integral part of these consolidated statements.
4
SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 2002
(AMOUNTS IN THOUSANDS)
Common Stock
---------------------------- Stock Total
Number Subscriptions Retained Shareholders'
of Shares Amount Receivable Earnings Equity
----------------------------------------------------------------------------
BALANCE, JUNE 30, 2002 1,105 $ 2,633 $ (400) $ 2,168 $ 4,401
Net loss - - - (139) (139)
Non-cash stock compensation charge - 42 - - 42
------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 1,105 $ 2,675 $ (400) $ 2,029 $ 4,304
==============================================================================
The accompanying notes are an integral part of these consolidated statements.
5
SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 2002 AND 2001
(AMOUNTS IN THOUSANDS)
2002 2001
-----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (139) $ (374)
-----------------------------------
Adjustments to reconcile net loss to net cash provided by operating
activities:
Loss on sale of fixed assets 7 -
Gain on sale of discontinued operations, net (120) (43)
Non-cash stock compensation charge 42 18
Depreciation and amortization expense 156 194
Changes in assets and liabilities:
Accounts receivable, net 18 (20)
Other receivables (14) 87
Deferred income tax provision (benefit) (94) (161)
Prepaid commissions and other assets 6 (69)
Prepaid income taxes 75 37
Prepaid expenses and other assets 64 80
Accounts payable and accrued expenses 145 121
Accrued payroll and related liabilities (93) 271
Unearned rents and deposits (8) 40
-----------------------------------
184 555
-----------------------------------
Net cash provided by continuing operations 45 181
Net cash provided by (used in) discontinued operations 71 (15)
-----------------------------------
Net cash provided by operating activities 116 166
-----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (49) (94)
Investment in MetroPCS (1,044) (446)
-----------------------------------
Net cash used in investing activities (1,093) (540)
-----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt (30) (28)
Issuance of common stock - 5
-----------------------------------
Net cash used for financing activities (30) (23)
-----------------------------------
NET DECREASE IN CASH (1,007) (397)
CASH AT BEGINNING OF YEAR (of which $600 is restricted) 3,369 3,936
-----------------------------------
CASH AT END OF YEAR (of which $600 is restricted) $ 2,362 $ 3,539
===================================
Supplemental Cash Flow Information
----------------------------------
2002 2001
----------------- ----------------
Interest paid $ 71 $ 74
Taxes paid $ 1 $ -
The accompanying notes are an integral part of these consolidated statements.
6
SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 2002
Note 1 - Basis of Presentation
The accompanying fiscal year 2003 and 2002 unaudited interim statements have
been prepared pursuant to the rules of the Securities and Exchange Commission.
Certain information and disclosures normally included in annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to such
rules and regulations, although the Company believes these disclosures are
adequate to make the information not misleading. In the opinion of management,
all adjustments necessary for a fair presentation for the periods presented have
been reflected and are of a normal recurring nature. These interim financial
statements should be read in conjunction with the financial statements and notes
thereto for each of the three years in the period ended June 30, 2002. The
results of operations for the six-month period ended December 31, 2002 are not
necessarily indicative of the results that will be achieved for the entire year
ending June 30, 2003.
Note 2 - Investment
The Company has made a financial commitment to make a $3 million minority
investment in the Series D preferred stock of a privately held
telecommunications company, MetroPCS, Inc., of which $2,446,000 was funded as of
December 31, 2002. The Company accounts for the investment using the cost
method. It is expected that the remaining $554,000 will be funded in several
installments throughout the fiscal year ending June 30, 2003.
Note 3 - Discontinued Operations
The after tax gains of $120,000 and $43,000 on the sale of discontinued
operations presented in the accompanying statements of earnings for the three
and six months ended December 31, 2002 and 2001, respectively, represent the
sales of remaining discontinued inventories and fixed assets net of related
selling costs and income taxes.
On October 3, 2002 the Company entered into a sale agreement with Commercial
Sales and Leasing, Inc. for the remaining Perma-Pak finished goods and other
Perma-Pak property for a total sale price of $240,000. The agreement calls for a
down payment of $175,000 with the balance of $65,000 secured by a non-interest
bearing promissory note. The promissory note calls for payments of $20,000 on
October 25, 2002, $30,000 on April 4, 2003 and $15,000 on July 4, 2003. Revenue
pursuant to this sale is recorded at the time payments are received. Pursuant to
the severance agreement with the former Chief Executive Officer, Gary L. Hess
(who is a current board member), the Company paid Mr. Hess a commission of
$44,329, based upon the cash received from the sale of Perma-Pak assets to
Commercial Sales and Leasing, Inc.
Remaining liabilities of discontinued operations of $90,000 and $219,000, as of
December 31, 2002 and June 30, 2002, respectively, relate to reserves for rental
repairs necessary to ready one of the Company's properties previously used in
the discontinued operations for future rentals. All remaining fixed assets of
discontinued operations are fully reserved.
7
Note 4 - Change in Accounting Policy
Effective July 1, 2002, the Company has elected to account for all prospective
stock options in accordance with SFAS 123, "Accounting for Stock-Based
Compensation". As a result, during the first quarter of fiscal 2003 the Company
incurred a charge included in continuing operations of $42,000 related to the
issuance of 24,200 fully vested stock options to the directors, officers and
certain employees of the Company.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
SonomaWest Holdings, Inc. (the "Company" or "Registrant") is including the
following cautionary statement in this Quarterly Report to make applicable and
take advantage of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 for any forward-looking statements made by, or on
behalf of, the Company. The statements contained in this Report that are not
historical facts are "forward-looking statements" (as such term is defined in
Section 27A of the Securities Act of 1933 and section 21E of the Securities
Exchange Act of 1934), which can be identified by the use of forward-looking
terminology such as "estimated," "projects," "anticipated," "expects,"
"intends," "believes," or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy that involve risks and
uncertainties. Forward-looking statements include statements concerning plans,
objectives, goals, strategies, future events or performance and underlying
assumptions. Forward-looking statements involve risks and uncertainties, which
could cause actual results or outcomes to differ materially from those expressed
in the forward-looking statements. The Company's expectations, beliefs and
projections are expressed in good faith and are believed by the Company to have
a reasonable basis, although actual results may differ materially from those
described in any such forward-looking statements. All written and oral
forward-looking statements made in connection with this Report which are
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the "Certain Factors" as set forth in our Annual
Report for the fiscal year ended June 30, 2002 filed on September 20, 2002, and
other cautionary statements set forth under "Management's Discussion and
Analysis of Financial Condition and Results of Operations". There can be no
assurance that management's expectations, beliefs or projections will be
achieved or accomplished, and the Company expressly disclaims any obligation to
update any forward-looking statements.
The financial statements herein presented for the three and six months ending
December 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
results of operations for the periods then ended. All adjustments during the
periods presented are of a normal recurring nature.
OVERVIEW
As of December 31, 2002, the Company's business consists of its real estate
management and rental operations and its minority investment in the Series D
preferred stock of a privately held telecommunications company, MetroPCS, Inc.
Prior to the sale of its other business segments, SonomaWest operated in three
business segments: industrial dried fruit ingredients, organic packaged goods
and real estate. The Company commenced a strategic reorientation upon the
announcement of the proposed sale of its apple-based industrial ingredients
product line in June 1999. In August 1999 the decision was made to sell or
discontinue all product lines in the Company's industrial dried fruit
ingredients business. In January 2000, the Company decided to sell or
discontinue its organic packaged goods business. As a result of these decisions,
both of these business segments are considered discontinued operations and their
operating results, results of cash flows and net assets are reflected outside of
the Company's continuing operations.
During fiscal 2001, the Company committed to a $3 million minority investment in
a telecommunications company. As of December 31, 2002, the Company had invested
$2,446,000 of its $3.0 million commitment.
9
DISCONTINUED OPERATIONS
For the six months ended December 31, 2002, the Company recorded an after-tax
gain from discontinued operations of $120,000. The after-tax gain for the
six-months ended December 31, 2002 was primarily a result of the gain of $91,000
($151,000 pretax) on the sale of the Perma-Pak inventory and equipment and the
reversal of the reserve of $44,000 ($74,000 pretax) for the sublease of the
Company's former corporate headquarters. The reversal of the reserve was a
result of the acceptance of the option by the sublessee to extend the sublease
through the original term of the Company's lease. This compares to an after-tax
gain of $43,000 for the six months ended December 31, 2001.
RESULTS OF CONTINUING OPERATIONS
The Company's continuing line of business is its real estate management and
rental operations and an investment in MetroPCS, Inc.
Results of Operations
- ---------------------
The Company leases warehouse, production, and office space as well as outside
storage space at both of its properties. The two properties are located on 82
acres of land and have a combined leaseable area under roof of 390,000 square
feet. As of December 31, 2002 and 2001, the Company had a total of 28 tenants.
The tenants have varying original lease terms ranging from month-to-month to
seven years with options to extend the leases. As of December 31, 2002, the
tenants occupied approximately 223,000 square feet under roof or 57% of the
leasable area under roof. This compares to 218,000 square feet under roof or 56%
as of December 31, 2001. In addition to the area under roof, the Company had
82,000 square feet of outside area under lease as of December 31, 2002 and 2001.
Rental Revenue. For the six months ended December 31, 2002 rental revenue
increased $24,000 or 3% as compared to the corresponding period in the prior
year. Although the number of tenants as of December 31, 2002 and 2001 are the
same, the increase in rental revenue is attributable to increased occupancy
throughout the first six months of the 2003 fiscal year as compared to the first
six months of the 2002 fiscal year.
For the three months ended December 31, 2002 rental revenue decreased $4,000 or
1% from the three months ended December 31, 2001. This decrease was a result of
the loss of a tenant that occupied the cold storage portion of the North
Property at a substantially higher gross rate per square foot. This increased
rate per square foot was due to the inclusion of utility costs as part of the
rental rate. These utility costs are reflected in Operating Costs and are not
netted against the related rental revenue. The rate decline was partially offset
by the increased occupancy between the comparative periods.
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 discontinued packaged goods businesses were
charged to discontinued operations in the consolidated statements of operations.
For the six months ended December 31, 2002 operating costs decreased $184,000 or
15% compared to the six months ended December 31, 2001. The decrease from fiscal
2001 was primarily due to separation costs of $362,500 related to the
termination of the Company's Chief Executive Officer, which were expensed during
the six months ended December 31, 2001, offset by the accrual of the
non-reimbursable costs incurred as a result of storm damage incurred in December
of 2002 of $173,000. The Company's total operating costs exceeded the tenant
rental revenue for the six months ended December 31, 2002 and 2001. The Company
continues to closely scrutinize all discretionary spending. In addition, the
Company continues to actively search for additional tenant revenue to eliminate
these negative operating results. 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.
10
During December 2002 the Company experienced two severe storms with high winds.
The Company estimates that they will incur $173,000 of costs to repair the
damages from the two storms that will not be covered by the Company's insurance
as a result of the deductible of $100,000 per occurrence.
For the three months ended December 31, 2002 operating costs increased $166,000
or 38%. This increase is a result of the storm damage accrual of $173,000.
Without this accrual the expenses would have decreased $7,000 or 2%.
Interest and Other Income (Expense), Net. Interest and other income (expense)
consist primarily of interest income on the Company's cash balances, interest
expense on mortgage debt and the change in the value of the Company's interest
rate swap contract. For the six months ending December 31, 2002, the Company
generated $29,000 of interest income, incurred $70,000 of interest expense
(which includes a positive swap contract adjustment of $2,000) and incurred a
loss on the abandonment of fixed assets of $7,000. This compares to $64,000 of
interest income and $130,000 of interest expense (which includes a negative swap
contract adjustment of $69,000) for the corresponding period in the prior year.
The decrease in interest income is due to a reduced cash balance in fiscal 2003
and a decline in interest rates. The decrease in interest expense of $60,000 is
a result of the large decrease in the swap contract valuation as of December 31,
2001.
Income Taxes. The effective tax rate for the six months ended December 31, 2002
decreased to 9% from 27% as of December 31, 2001. As of June 30, 2002 the
Company has carried back all of its federal losses to offset prior years taxable
income. Any tax losses incurred subsequent to the June 30, 2002 will be carried
forward to offset future taxable income. Due to the uncertainty of future
realization, a valuation allowance is recorded against state net operating
losses. The primary reason for the lower effective rate as of December 31, 2002,
was the impact of permanent differences (primarily the $42,000 stock
compensation charge) on a small amount of taxable loss and the valuation
allowance recorded against state net operating losses.
Liquidity and Capital Resources
- -------------------------------
The Company had unrestricted cash of $1.8 million at December 31, 2002 and
current maturities of long-term debt of $1.9 million. The Company's long-term
debt is due and payable in December 2003, and as a result, the entire debt is
recorded under current maturities of long-term debt. The Company anticipates
refinancing this debt and has begun the process of discussing this refinancing
with lenders. The Company's cash balance decreased $1,000,000 during the six
months ended December 31, 2002, primarily as a result of the investment of
$1,044,000 in MetroPCS, Inc. and capital expenditures of $49,000.
During December 2000, the Company entered into an agreement with its sole lender
to modify the terms of its lending agreement. As a result, the financial based
debt covenant was amended. The new covenant required the Company, at the end of
each fiscal year, to maintain a debt service coverage ratio at least 1.15 to 1.
Until such time as this ratio reaches 1.25 to 1, the Company was required to
maintain restricted, unencumbered cash or marketable securities of at least
$600,000. Furthermore, the terms of the loan restrict the Company from incurring
any additional indebtedness during the term of the loan. As of August 15, 2001,
the Company and the bank agreed to a Restated and Amended Addendum ("Addendum")
to this agreement. This Addendum amended and restated the provisions of the
agreement stated above. The new Addendum requires that the Company, at the end
of each fiscal year, maintain a debt service coverage ratio of at least 1.05 to
1. It still requires that until such time as this ratio reaches 1.25 to 1, the
Company is required to maintain restricted, unencumbered cash or marketable
securities of at least $600,000. In addition to the lien on the Company's South
Sebastopol Property it grants the bank a lien on a money market account, in the
amount of $90,000. Management believes that in the future it can remain in
compliance with this new debt service coverage ratio. The $90,000 Money Market
account balance is part of, not an addition to, the restricted unencumbered cash
balance of $600,000. As of June 30, 2002, the Company's debt service ratio was
1.18 to 1. Consequently, $600,000 is classified as restricted cash on the
accompanying balance sheet. As of December 31, 2002, the Company's debt service
coverage ratio was 1.34 to 1.
11
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 December 31, 2002, the Company had invested $2,446,000 of
its $3 million commitment. The Company has accounted for the investment using
the cost method. It is expected that the remaining $554,000 will be funded in
several installments throughout the remainder of the 2003 fiscal 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,
Gary L. Hess ("Mr. Hess") replacing Mr. Hess' existing employment agreement.
Pursuant to the separation agreement, Mr. Hess continued as President and Chief
Executive Officer, first on a full-time basis and then on a part-time basis,
through October 31, 2001. Effective September 2001, the Company began paying
separation payments to 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 2002. As of December 31, 2002, the
remaining obligation under this agreement is $150,000. Mr. Hess has been
designated as the Company's exclusive sales representative in its efforts to
sell any and all remaining Perma-Pak finished goods inventory and other
Perma-Pak property (inventory and property related to discontinued operations)
and will receive commissions as such sales occur. As of October 3, 2002, the
Company entered into an agreement to sell all of the remaining Perma-Pak
finished goods inventory and other Perma-Pak property. As of December 31, 2002
the Company received $195,000 of the $240,000 total purchase price. The Company
has paid commissions to Mr. Hess of $ 44,329 pursuant to this sale and $ 53,173
in total pursuant to this agreement. As part of the separation agreement, Mr.
Hess was given until January 29, 2002 to decide whether to extend the period in
which he was eligible to exercise the stock options previously granted to him.
On January 28, 2002, 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 (January 31, 2004). As
part of the separation agreement the Company agreed to loan Mr. Hess up to
$447,370 to allow Mr. Hess to exercise the aforementioned options. Mr. Hess
elected to borrow $400,000 to exercise 80,000 stock options at $5 per share. The
note dated January 28, 2002 in the amount of $400,000, bears interest at the
Applicable Federal Rate (AFR) for loans of three years or less on the date of
the note (the AFR at January 28, 2002 was 2.73%), payable quarterly. The Note is
payable in full on August 1, 2004. The Note is full recourse and specifically
secured by the stock certificates and evidenced in the form of a loan and
security agreement. As a result of the extension of the option to purchase the
remaining 9,474 shares, the Company incurred a non-cash stock compensation
charge in the third quarter ended March 31, 2002 of $22,501.
On September 4, 2001, the Company authorized the waiver of the provision of
Craig R. Stapleton's (a shareholder and former director) stock options,
providing for the termination of the options 90 days following termination of
service to the Company. Consequently, the period in which Mr. Stapleton is
entitled to exercise his option to purchase 10,000 shares was extended, and a
one-time non-cash compensation charge of $18,000 was recorded in September 2001.
Effective July 1, 2002, the Company has elected to account for all prospective
stock options in accordance with SFAS 123, "Accounting for Stock-Based
Compensation". As a result, during the first quarter of fiscal 2003 the Company
incurred a charge against continuing operations of $42,000 related to the
issuance of 24,200 fully vested stock options to the Directors, Officers and
specific employees of the Company.
12
Item 4. Controls and Procedures
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chairman of the Board of Directors and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Company's Chairman of the Board of
Directors and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company that is required to be included in the
Company's periodic filings with the Securities and Exchange Commission. There
have been no significant changes in the Company's internal controls or, to the
Company's knowledge, in other factors that could significantly affect those
internal controls subsequent to the date the Company carried out its evaluation,
and there have been no corrective actions with respect to significant
deficiencies and material weaknesses.
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.
At the Registrant's Annual Meeting of Stockholders held on October 30, 2002 the
following proposals were adopted by the margins indicated:
Number of Shares
----------------
Voted For Withheld
--------- --------
1. To elect four Directors to hold office
until the Annual Meeting of Stockholders
to be held in 2003 or until their
respective successors have been elected
or appointed
David J. Bugatto 1,026,768 7,955
Gary L. Hess 1,020,143 14,580
Roger S. Mertz 1,032,868 1,855
Fredric Selinger 1,032,868 1,855
13
Number of Shares
------------------------------------------------------------
Voted For Voted Against Withheld Not Voted
--------- ------------- -------- ---------
2. To approve the SonomaWest Holdings, 726,110 73,402 19,676 215,535
Inc. 2002 Stock Incentive Plan
Number of Shares
------------------------------------------------------------
Voted For Voted Against Withheld
--------- ------------- --------
3. To ratify the appointment of the
accounting firm of Grant Thornton LLP
as independent auditors for
the fiscal year ending June 30, 2003 1,001,198 33,308 217
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
3.1(1) Articles of Incorporation, as amended to date
3.2(2) Bylaws, as amended to date
10.1 Indemnification Agreement dated October 30, 2002 between
SonomaWest Holdings, Inc. and Roger S. Mertz
10.2 Indemnification Agreement dated October 30, 2002 between
SonomaWest Holdings, Inc. and David J. Bugatto
10.3 Indemnification Agreement dated October 30, 2002 between
SonomaWest Holdings, Inc. and Gary L. Hess
10.4 Indemnification Agreement dated October 30, 2002 between
SonomaWest Holdings, Inc. and Frederic Selinger
10.5 Indemnification Agreement dated October 30, 2002 between
SonomaWest Holdings, Inc. and Matthew J. Ertman
10.6 Indemnification Agreement dated December 18, 2002 between
SonomaWest Holdings, Inc. and Thomas R. Eakin
10.7 Agreement for the sale of the Perma-Pak Inventory and Equipment
dated October 3, 2002 between SonomaWest Holdings, Inc. and
Commercial Sales and Leasing, Inc.
14
99.1 Certification Pursuant to Section 906 of Sarbanes-Oxley Act of
2002
99.2 Certification Pursuant to Section 906 of Sarbanes-Oxley Act of
2002
-------------------------
(1) Incorporated by reference to the registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 2000.
(2) Incorporated by reference to the registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 1992.
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: February 13, 2003
/s/ Thomas R. Eakin
- ----------------------------------------
Thomas R. Eakin, Chief Financial Officer
15
CERTIFICATIONS
- --------------
I, Roger S. Mertz, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SonomaWest
Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 13, 2003
/s/ Roger S. Mertz
-----------------------------------------
Roger S. Mertz
Chairman of the Board of Directors
16
CERTIFICATIONS
- --------------
I, Thomas R. Eakin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SonomaWest
Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 13, 2003
/s/ Thomas R. Eakin
-----------------------------------------
Thomas R. Eakin
Chief Financial Officer
17
EXHIBIT INDEX
Exhibit No. Document Description
----------- ----------------------
10.1 Indemnification Agreement dated October 30, 2002 between
SonomaWest Holdings, Inc. and Roger S. Mertz
10.2 Indemnification Agreement dated October 30, 2002 between
SonomaWest Holdings, Inc. and David J. Bugatto
10.3 Indemnification Agreement dated October 30, 2002 between
SonomaWest Holdings, Inc. and Gary L. Hess
10.4 Indemnification Agreement dated October 30, 2002 between
SonomaWest Holdings, Inc. and Frederic Selinger
10.5 Indemnification Agreement dated October 30, 2002 between
SonomaWest Holdings, Inc. and Matthew J. Ertman
10.6 Indemnification Agreement dated December 18, 2002 between
SonomaWest Holdings, Inc. and Thomas R. Eakin
10.7 Agreement for the sale of the Perma-Pak Inventory and
Equipment dated October 3, 2002 between SonomaWest
Holdings, Inc. and Commercial Sales and Leasing, Inc.
99.1 Certification Pursuant to Section 906 of Sarbanes-Oxley Act
of 2002
99.2 Certification Pursuant to Section 906 of Sarbanes-Oxley Act
of 2002
18