SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934. For the quarterly period ended September 30, 2005 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)
Delaware 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: 707-824-2534
--------------------------------------------------
(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: [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.
YES: [_] NO: [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
YES: [_] NO: [X]
As of November 10, 2005, there were 1,124,257 shares of common stock, no par
value, outstanding.
SONOMA.WEST HOLDINGS, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Balance Sheets at September 30, 2005 and
June 30, 2005 (unaudited)......................................................................3
Statements of Operations - Three months
ended September 30, 2005 and 2004 (unaudited)..................................................4
Statement of Changes in Shareholders' Equity -
Three months ended September 30, 2005 (unaudited)..............................................5
Statements of Cash Flows - Three months ended
September 30, 2005 and 2004(unaudited).........................................................6
Notes to Financial Statements (unaudited)......................................................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................16
Item 4. Controls and Procedures.......................................................................16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...................................16
Item 3. Defaults Upon Senior Securities ..............................................................17
Item 4. Submission of Matters to a Vote of Security Holders...........................................17
Item 5. Other Information.............................................................................17
Item 6. Exhibits......................................................................................17
Signature ............................................................................................. 17
EXHIBIT INDEX.............................................................................................. 19
EXHIBITS....................................................................................................19
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SONOMAWEST HOLDINGS, INC.
BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
(unaudited)
ASSETS 9/30/05 6/30/05
------ ------
CURRENT ASSETS:
Cash $2,089 $1,879
Accounts receivable 96 123
Other receivables 15 13
Prepaid expenses and other assets 96 129
Current deferred income taxes, net 280 298
------ ------
Total current assets 2,576 2,442
------ ------
RENTAL PROPERTY, net 1,506 1,553
------ ------
INVESTMENT, at cost 3,001 3,001
------ ------
DEFERRED INCOME TAXES 167 159
------ ------
PREPAID COMMISSIONS AND OTHER ASSETS 106 117
------ ------
Total assets $7,356 $7,272
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 80 $1,620
Accounts payable 105 121
Accrued payroll and related liabilities 13 31
Accrued expenses 88 76
Other current liabilities 131 --
Unearned rents and deposits 407 364
------ ------
Total current liabilities 824 2,212
------ ------
LONG-TERM DEBT, net of current maturities 1,526 --
------ ------
OTHER LONG-TERM LIABILITIES -- 131
------ ------
Total liabilities 2,350 2,343
------ ------
SHAREHOLDERS' EQUITY:
Preferred stock: 2,500 shares authorized; no shares outstanding -- --
Common stock: 5,000 shares authorized, no par value; 1,124 and 1,114 shares
outstanding on September 30, 2005 and fiscal year end 2005, respectively 2,832 2,770
Retained earnings 2,174 2,159
------ ------
Total shareholders' equity 5,006 4,929
------ ------
Total liabilities and shareholders' equity $7,356 $7,272
====== ======
The accompanying notes are an integral part of these statements.
3
SONOMAWEST HOLDINGS, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2005 2004
------- -------
RENTAL REVENUE $ 476 $ 432
TENANT REIMBURSEMENTS 137 148
------- -------
TOTAL REVENUE 613 580
------- -------
OPERATING COSTS 553 484
OPERATING COSTS - RELATED PARTY EXPENSES 30 134
------- -------
TOTAL OPERATING COSTS 583 618
------- -------
OPERATING INCOME (LOSS) 30 (38)
INTEREST INCOME 16 6
INTEREST EXPENSE (27) (20)
OTHER INCOME 6 1
------- -------
INCOME (LOSS) BEFORE INCOME TAXES 25 (51)
INCOME TAX PROVISION (BENEFIT) 10 (19)
------- -------
NET INCOME (LOSS) $ 15 $ (32)
======= =======
WEIGHTED AVERAGE COMMON SHARES AND EQUIVALENTS:
Basic 1,120 1,114
Diluted 1,142 1,114
NET INCOME (LOSS) PER COMMON SHARE:
Basic $ 0.01 $ (0.03)
Diluted $ 0.01 $ (0.03)
The accompanying notes are an integral part of these financial statements.
4
SONOMAWEST HOLDINGS, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER, 30, 2005
(AMOUNTS IN THOUSANDS)
Common Stock
---------------------- Total
Number Retained Shareholders'
of Shares Amount Earnings Equity
------ ------ ------ ------
BALANCE, JUNE 30, 2005 1,114 $2,770 $2,159 $4,929
Net income 15 15
Exercise of stock options 10 62 62
------ ------ ------ ------
BALANCE, SEPTEMBER 30, 2005 1,124 $2,832 $2,174 $5,006
====== ====== ====== ======
The accompanying notes are an integral part of these financial statements.
5
SONOMAWEST HOLDINGS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(AMOUNTS IN THOUSANDS)
2005 2004
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 15 $ (32)
------- -------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Non-cash stock compensation charge -- 10
Depreciation and amortization expense 54 53
Changes in assets and liabilities:
Accounts receivable, net 27 (19)
Other receivables (2) 8
Related party interest receivable -- 3
Prepaid expenses and other assets 33 36
Deferred income tax provision (benefit) 10 (18)
Prepaid commissions and other assets 11 11
Accounts payable (16) 64
Accrued Expenses 12 (67)
Accrued payroll and related liabilities (18) (20)
Unearned rents and deposits 43 5
------- -------
154 66
------- -------
Net cash provided by operating activities 169 34
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (7) (11)
------- -------
Net cash used in investing activities (7) (11)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long term debt (14) (14)
Exercise of stock options 62 --
Proceeds from repayment of stock subscription receivable - Related Party -- 400
------- -------
Net cash provided by financing activities 48 386
------- -------
NET INCREASE IN CASH 210 409
CASH AT BEGINNING OF PERIOD 1,879 1,348
------- -------
CASH AT END OF PERIOD $ 2,089 $ 1,757
======= =======
Supplemental Cash Flow Information
2005 2004
------- -------
Interest paid $ 27 $ 19
Taxes paid $ 1 $ 1
The accompanying notes are an integral part of these financial statements.
6
SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2005
Note 1 - Basis of Presentation
The accompanying 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, 2005. The results of operations
for the three-month period ended September 30, 2005 are not necessarily
indicative of the results that will be achieved for the entire year ending June
30, 2006.
Revenue Recognition
Revenue is recognized on a monthly basis, based upon the dollar amount specified
in the related lease. The Company requires that all tenants be covered by a
lease. Lease incentives and construction allowances provided by the Company to
certain of its tenants are amortized as an offset to revenue on a straight-line
basis over the term of the respective lease. The Company does not have leases
that include provisions that require the lessee to pay the lessor any additional
rent based upon the lessee's sales or any other financial performance levels.
Reimbursements of certain costs received from tenants are recognized as tenant
reimbursement revenues.
Note 2 - Investment
Background. The Company holds an investment in MetroPCS Communications, Inc.
("MetroPCS"), a privately held telecommunications company. As of September 30,
2005, the Company had a $3 million minority investment in the Series D Preferred
Stock of MetroPCS. The Company owns less than one percent of the total
outstanding shares of Series D Preferred Stock and less than one percent of the
total outstanding capital stock of MetroPCS on an as-converted basis. The
Company accounts for its investment in MetroPCS under the cost method.
The Board of Directors of SonomaWest Holdings continues to actively monitor this
investment in order to maximize shareholder value. The Company has no
relationships with MetroPCS Communications other than its investment. Craig
Stapleton, the Company's largest stockholder and the father of Walker R.
Stapleton, the President, Chief Executive Officer and Chief Financial Officer of
the Company, is a shareholder of MetroPCS. A director of the Company has a small
indirect beneficial ownership interest in MetroPCS Communications stock.
On September 26, 2005, the Company tendered approximately 20% of the shares of
MetroPCS Series D Preferred Stock that it holds in response to a tender offer by
certain third parties to purchase shares of MetroPCS Series D Preferred Stock
and common stock. The price per share offered in the tender offer is
approximately three times the original investment amount per share paid by the
Company for its MetroPCS shares, including the cumulative unpaid dividends of
$563 as of June 30, 2005. All shares tendered by the Company were accepted. The
gross proceeds to the Company from the tender offer of $1.8 million were
received November 1, 2005. The Company's net operating loss carryforwards will
offset most of the gain recognized for federal and state tax purposes from the
sale of the MetroPCS shares.
7
The Company accounts for its investment in MetroPCS under the cost method, which
amounted to $3,001,000 as of September 30, 2005. The Company continues to
monitor the financial condition, cash flow, operational performance and other
relevant information about MetroPCS Communications, to evaluate the fair value
of this investment. This process is based primarily on information that we
request from MetroPCS. The Company also tracks MetroPCS information available to
the general public. Since MetroPCS is no longer subject to public disclosure
requirements, the basis for our evaluation is subject to the timing, accuracy
and disclosure of the data received. Based on the price per share offered in the
tender offer, the MetroPCS shares held by the Company would have a value, as of
September 30, 2005, of approximately $9 million. There can be no assurance,
however, that the Company will be able to achieve liquidity for its remaining
MetroPCS shares in the future at the price offered in the tender offer or at any
other price.
Note 3 - Long-term debt
As of September 30, 2005, long term debt consists of the following (Amounts in
Thousands):
Credit Agreement, bank, secured by a first deed of trust on the
Company's property located at 2064 Gravenstein Highway North,
Sebastopol, California, payable in monthly installments of
$7 including interest at the bank's prime rate plus .25% per
annum, final maturity October 1, 2010 $1,606
------
1,606
Less current portion 80
------
$1,525
======
Subsequent to the end of the quarter, in October 2005, the Company refinanced
its existing long-term debt agreement, consequently the debt balance as of
September 30, 2005 is presented as long-term debt in the accompanying balance
sheet.
The credit agreement replaces the Company's previous credit agreement with the
bank and, in part, refinances approximately $1.6 million of indebtedness under
the previous agreement. The term note bears interest at the bank's prime rate
plus .25% (or, at the Company's election, the LIBOR rate, as defined, plus
3.25%), with monthly principal payments of approximately $7,000 beginning
November 1, 2005. Unpaid principal and interest is due on the maturity date of
October 1, 2010. The note is secured by a first deed of trust on the Company's
property (the "North Property") located at 2064 Gravenstein Highway North,
Sebastopol, California. Under this credit agreement the company is required to
meet certain financial covenants. As of September 30, 2005 the company was in
compliance with such covenants.
In addition, the Company entered into a line of credit agreement with its bank
which is available through September 1, 2010 and provides for advances not to
exceed at any time an aggregate principal amount of $500,000. Advances under the
line of credit may be used to provide funds for tenant improvements. As of
September 30, 2005 no amounts were outstanding under the line of credit.
8
Principal payments for the years succeeding June 30, 2005, are as follows
(Amounts in Thousands):
Year Ending June 30,
Balance of 2006 $ 60
2007 80
2008 80
2009 80
2010 80
Thereafter 1,226
---------------
$ 1,606
===============
Cash paid for interest expense during the three months ended September 30, 2005
was $27,000. For the three months ended September 30, 2004 cash paid for
interest expense was $19,000.
Note 4 - Stock-Based Compensation
Effective July 1, 2005, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 123(R), Share-Based Payment, using the modified
prospective application transition method. Because the fair value recognition
provisions of SFAS No. 123, Stock-Based Compensation, and SFAS No. 123(R) were
materially consistent under our equity plans, the adoption of SFAS No. 123(R)
did not have an impact on our financial position or our results of operations.
Prior to our adoption of SFAS No. 123(R), benefits of tax deductions in excess
of recognized compensation costs were reported as operating cash flows. SFAS No.
123(R) requires excess tax benefits be reported as a financing cash inflow
rather than as a reduction of taxes paid.
Our net income for the three months ended September 30, 2005 includes no
compensation costs or income tax benefits related to our stock-based
compensation arrangements. Our net income for the three months ended September
30, 2004 included $10,000 of compensation related to our stock-based
compensation arrangements and $(4,000) of income tax benefit related to our
stock-based compensation arrangements.
On July 31, 2002, the Company's Board of Directors approved the SonomaWest
Holdings, Inc. 2002 Stock Incentive Plan (the "2002 Plan"). The 2002 Plan is
designed to benefit the Company and its shareholders by providing incentive
based compensation to encourage officers, directors, consultants and other key
employees of the Company and its affiliates to attain high performance and
encourage stock ownership in the Company. The maximum number of shares of common
stock issuable over the term of the 2002 Stock Option Plan is 150,000 shares. No
participant in the 2002 Plan may be granted stock options, direct stock
issuances and share right awards for more than 1,500 shares of common stock in
total in any calendar year. The exercise price of all incentive stock options
granted under the 2002 Plan must be at least equal to the fair market value of
the Common Stock on the date of grant. The exercise price of non-statutory stock
options must at least be equal to 85% of the fair market value of the Common
Stock on the date of grant. The contractual life of the options is ten years. To
date, all options issued under this plan have been issued fully vested.
Prior to adoption of the 2002 Stock Incentive Plan, the Company administered the
1996 Stock Option Plan (the "1996 Plan"). As amended, the 1996 Plan provided for
the issuance of options to employees and non-employee consultants exercisable
for an aggregate of 275,000 shares of common stock. In connection with adoption
of the 2002 Plan, no future options will be granted under the 1996 Plan.
A summary of the status of the Company's stock option plans at September 30,
2005 with changes during the three months ended September 30, 2005 are presented
in the table below:
9
Weighted Aggregate
Average Intrinsic
Weighted Remaining Value
Options (in Average Contractual (in thousands)
thousands) Exercise Price Term (years)
Balance, June 30, 2005 93 $ 6.41
Granted - -
Cancelled (2) $ 7.42
Exercised (10) $ 6.24
Balance, September 30, 2005 81 $ 6.43 7.0 $522
Exercisable, September 30, 2005 81 $ 6.43 7.0 $522
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model, with the following weighted-average
assumptions used for the fiscal 2005 grants: weighted average risk-free interest
rate of 3.67 percent; expected dividend yield of 0 percent; expected life of
five years for the Plan options; and expected volatility of 53 percent. All
outstanding options were fully vested as of September 30, 2005; and thus, there
was no unrecognized compensation cost related to stock options.
Cash received from stock option exercises during the three months ended
September 30, 2005 was $62,000. We issue new shares to satisfy stock option
exercises.
Subsequent to September 30, 2005, the outstanding options held by former
directors of the Company and by the Company's former chief financial officer,
which in the aggregate are exercisable to purchase a total of 36.5 shares of
common stock, were amended to extend the term of such options to a period of
twelve months from the date of termination of service to the Company.. The
Company expects to record non-cash compensation expense of approximately $14.5
for the quarter ended December 31, 2005, relating to these amendments.
Note 5 - Related Parties
On July 1, 2005, Bugatto Investment Company (of which David J. Bugatto, a
director of the Company, is the president) entered into a consulting agreement
pursuant to which Bugatto Investment Company provides real estate consulting
services to the Company for an hourly fee of $225. The agreement replaces a
similar agreement entered into on July 1, 2004. Under the agreement, if either
of the Company's Sonoma County properties is sold during the term of the
agreement, Bugatto Investment Company is entitled to receive a fee equal to 1.5%
of the sales prices regardless of whether or not a broker is involved, and
Bugatto Investment Company is entitled to receive a fee equal to the greater of
1.5% of the gross value of the real estate or $150,000 upon any transaction that
would result in the Company becoming a private company. The term of the
agreement is through July 30, 2006, but the agreement can be terminated earlier
upon the occurrence of certain events, including notice of termination by either
party. During the three months ended September 30, 2005, the Company incurred
$6,000 for real estate consulting services from Bugatto Investment Company.
These expenses are included in Operating Costs - Related Party. As of September
30, 2005, the Company had a payable to Bugatto Investment Company of $1,000.
Effective August 1, 2005, the Company entered into a consulting agreement with
Thomas Eakin, the Company's former Chief Financial Officer. Under the agreement,
Mr. Eakin provided financial management and accounting services to the Company
at an hourly billing rate of $115.00 per hour, plus expenses. The term of the
agreement was initially through July 31, 2006; however, in September 2005, Mr.
Eakin delivered a notice of termination of the consulting agreement, effective
October 12, 2005. During the three months ended September 30, 2005, the Company
incurred $15,000 for services from Thomas R. Eakin. As of September 30, 2005,
the Company did not have a payable to Mr. Eakin. These expenses are included in
Operating Costs - Related Party.
10
Gary L. Hess, director and former President and Chief Executive Officer, entered
into an agreement with the Company to sell its remaining PermaPak inventory and
equipment. During the fiscal year ended June 30, 2005 the Company received the
final payment on the sale of the PermaPak inventory and equipment. Pursuant to
the terms of the agreement with Mr. Hess, the Company paid $8,000 in commissions
to Mr. Hess as a result of this payment. These expenses were included under
Operating Costs - Related Party. As of September 30, 2005, the Company did not
owe Mr. Hess any commissions under this agreement.
Roger S. Mertz, former Chairman of the Board, is a partner of the law firm Allen
Matkins Leck Gamble & Mallory LLP, which firm served as the Company's general
counsel during fiscal 2005. During the three months ended September 30, 2005,
the Company incurred $9,000 for legal services provided by Allen Matkins. As of
September 30, 2005, the Company had no payable to Allen Matkins.
Walker Stapleton, a director and the son of the Company's largest shareholder,
was elected President and Chief Executive Officer on June 16, 2005.
Note 6 - Minimum Lease Income
The Company leases warehouse space, generating rental revenues for the three
months ended September 30, 2005 and September 30, 2004 of $476,000 and $432,000,
respectively. The leases have varying terms, which range from month-to-month to
expiration dates through 2013. As of September 30, 2005, assuming that all
current month-to-month leases continue unchanged throughout the periods
presented in the table, and that there are no changes to the other leases other
than expiration of the leases at the end of their stated terms and no additional
space is leased, the following will be the future minimum lease income (in
thousands):
Year Ending
June 30
- -------------------------------
Balance of 2006 865
2007 632
2008 368
2009 196
2010 160
Thereafter 454
------------------
Total $2,675
==================
11
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, 2005 and other cautionary statements
set forth therein and in this Report 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 included herein are presented for the three months
ending September 30, 2005 and 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 and recurring nature.
Critical Accounting Policies
The financial statements are prepared in accordance with accounting principles
generally accepted in the United States, which require the Company to make
estimates and assumptions. The Company believes that of its significant
accounting policies, the following may involve a higher degree of judgment and
complexity.
The most critical accounting policies were determined to be those related to
valuation of the Company's investment in MetroPCS Communications and the
valuation allowance on deferred tax assets.
Valuation of investment in MetroPCS Communications, Inc.
The Company accounts for its investment in MetroPCS under the cost method, which
amounted to $3,001,200 as of September 30, 2005. The Company continues to
monitor the financial condition, cash flow, operational performance and other
relevant information about MetroPCS Communications, to evaluate the fair value
of this investment. This process is based primarily on information that we
request from MetroPCS. The Company also tracks MetroPCS information available to
the general public. Since MetroPCS is no longer subject to public disclosure
requirements, the basis for our evaluation is subject to the timing, accuracy
and disclosure of the data received. However, the price per share offered in the
tender offer recently received by the Company relating to its MetroPCS shares is
approximately three times the original $3 million investment amount paid by the
Company for its MetroPCS shares, including the cumulative unpaid dividends of
$562,529 as of June 30, 2005. See Note 2 above for further information.
The Company owns less than one percent of the total outstanding shares of
MetroPCS' Series D Preferred Stock and less than one percent of its total
outstanding capital stock on an as-converted basis. If as a result of its review
of information available to the Company regarding MetroPCS, the Company believes
its investment should be reduced to a fair value below its cost, the reduction
would be charged to "loss on investments" in the statements of operations.
12
Valuation Allowance on Deferred Taxes
The Company records deferred tax assets and/or liabilities based upon its
estimate of the taxes payable in future years, taking into consideration any
change in tax rates and other statutory provisions. The Company's previous
losses have generated federal tax net operating losses ("NOLs") which have been
carried back to offset prior years' taxable income to the extent allowable. As
of June 30, 2002 the Company carried back all of its remaining allowable NOLs.
After the carryback of the June 30, 2002 federal NOL, the Company cannot carry
back any more losses to prior years and as a result any losses incurred
subsequent to June 30, 2002 have been carried over to offset future taxable
income. California state income tax law does not allow corporations to carry
back their NOLs, and corporations can only carry forward a portion of the NOLs
to future years to offset net operating profits. Furthermore, state net
operating losses will begin to expire in fiscal 2012. At September 30, 2005, the
Company had recorded, net deferred tax assets of $447,000, which compares to
$457,000 of net deferred tax assets as of June 30, 2005.
As of September 30, 2005, the Company had net operating loss carryforwards of
approximately $1.6 million for federal and state tax purposes, these NOLs have
been reclassified as current assets due to the expected utilization in fiscal
2006 as a result of the gain generated by the tender offer.
OVERVIEW
The Company's business consists of its real estate management and rental
operations. The Company also owns a minority investment in the Series D
Preferred Stock of a private telecommunications company, MetroPCS
Communications, Inc. In 2000 and 2001, the Company liquidated its fruit
processing operations, but continued to hold its real estate and other assets.
Thereafter, an opportunity was made available to the Company to invest in
MetroPCS Communications, Inc., which has operations, in part, in Northern
California. The Company believed and continues to believe that acquiring the
Series D Preferred Stock was a good investment, which provided a diversification
of its assets.
The Company's rental operations include industrial/agricultural property, some
of which was formerly used in its discontinued businesses. This commercial
property is now being rented to third parties. The Company's primary business
revenue is generated from the leasing of its two properties, located in
Sebastopol, California.
The properties are leased to multiple tenants with leases varying in length from
month-to-month to ten years. Revenue from lease rental is recognized on a
monthly basis, based upon the dollar amount specified in the related lease.
Lease incentives and construction allowances provided by the Company to certain
of its tenants are amortized as an offset to revenue on a straight-line basis
over the term of the respective lease. The Company requires that all tenants be
covered by a lease. The Company does not have leases that include provisions
that require the lessee to pay the lessor any additional rent based upon the
lessee's sales or any other financial performance levels. The Company has no
tenant related reimbursements that are not part of tenant lease agreements.
13
RESULTS OF CONTINUING OPERATIONS
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 391,000 square
feet. As of September 30, 2005 and 2004 the Company had a total of 31 and 28
tenants respectively. The tenants have varying original lease terms ranging from
month-to-month to ten years with options to extend the leases. As of September
30, 2005, the tenants occupied approximately 304,000 square feet under roof, or
78% of the leasable area under roof. This compares to 266,000 square feet under
roof, or 68% of the leasable area under roof as of September 30, 2004. In
addition to the area under roof, the Company had 57,000 square feet of outside
area under lease as of September 30, 2005 and 72,000 as of September 30, 2004.
Rental Revenue. For the three months ended September 30, 2005 rental revenue
increased $44,000 or 10% as compared to the corresponding period in the prior
year. The increase in rental revenue was attributable to the increase in leased
square footage.
Tenant Reimbursements. For the three months ended September 30, 2005 tenant
reimbursements decreased $11,000 or 7% as compared to the three months ended
September 30, 2004. Such reimbursements typically fluctuate based on utility
costs and tenant occupied space. During the three months ended September 30,
2005, the decrease was primarly a result of the 2004 reimbursements received
from a tenant for roof repairs of $7,000 and reduced utility consumption.
Operating Costs. For the three months ended September 30, 2005 total operating
costs decreased $35,000 or 6% compared to the three months ended September 30,
2004. Of this decrease, operating costs--related party decreased $104,000 and
operating costs increased $69,000. The decrease in related party expenses was
the result of reduced legal expenses related to the firm of which a director of
the Company is a partner of $97,000, due primarily to the use of another firm
for services, along with a combined reduction of $7,000 in accounting and real
estate consulting fees.
The increase of $69,000 in operating costs was a result of increased 2005
non-related party legal expenses of $45,000 due to the engagement of a new legal
firm, salary and compensation arrangements relating to the appointment on June
16, 2005 of Walker R. Stapleton as the President and Chief Executive Officer of
the Company of $36,000, audit and accounting fees of approximately $11,000,
marketing expense of $8,000, facility water system expense of $8,000 and other
of $12,000. These increases were offset by decreases in repairs and maintenance
of $41,000 and non-cash stock compensation of $10,000. The Company continues to
closely scrutinize all discretionary spending. Efforts to reduce and/or maintain
expenses continue to be an important focus of the Company. Total operating
expenses are expected to remain relatively consistent over the remainder of
fiscal 2006.
Interest Income. For the three months ended September 30, 2005, the Company
generated $16,000 of interest income on its cash balances as compared to $6,000
in the three months ended September 30, 2004. The increase in rental deposits
and decrease in expenses have increased the invested cash accounts.
Interest Expense. Historically, interest expense has consisted primarily of
interest expense on mortgage debt and the changes in the value of the Company's
interest rate swap contract. However, as of December 1, 2003, the Company's swap
contract with its bank terminated. As a result, interest expense of $27,000 for
the three months ended September 30, 2005, consists solely of interest on the
Company's outstanding debt. This compares to $20,000 of interest expense for the
corresponding period in the prior year.
Other Income and Expense. For the three months ended September 30, 2005, the
Company incurred a net increase in other income of $6,000 from the sale of a
dust collection system and other discontinued equipment. This compares to $1,000
of other income for the period ending September 30, 2004.
14
Income Taxes. The effective tax rate for the three months ended September 30,
2005 increased to a provision of 40% from a benefit of 37% for the three months
ended September 30, 2004. As of September 30, 2005, the Company had net
operating loss carryforwards of approximately $980,000 and $586,000 for federal
and state tax purposes, respectively. Such carryforwards begin to expire in 2022
and 2012, respectively for federal and state purposes. Though the Company had
reported taxable losses until 2005, as of the end of fiscal 2004 management
believed that the pending initial public offering of MetroPCS was expected to
result in significant realized investment gains as the Company planned to sell a
portion of its investment upon completion of the aforementioned initial public
offering. Consequently, management believed that it was more likely than not
that the Company would generate sufficient taxable income in the foreseeable
future, allowing for the expected utilization of 100% of its deferred tax
assets. As a result, the valuation allowance was reversed in the fourth quarter
of fiscal 2004. Although the initial public offering was later withdrawn, the
Company completed a tender offer with Metro PCS in October 2005 that is expected
to allow for utilization of substantially all of the Company's net operating
loss carryforwards during fiscal 2006
Liquidity and Capital Resources
The Company had cash of $2 million at September 30, 2005, and current maturities
of long-term debt of $80,000. The positive cash flow of $210,000 was primarily a
result of the receipt of $62,000 for exercise of stock options coupled with
positive cash flow from operating activities of $169,000. This increase was
partially offset by a decrease of $14,000 for principal payments on long-term
debt and $7,000 of capital expenditures.
In October 2005, the Company, entered into a credit agreement with Wells Fargo
Bank, National Association. The credit agreement replaces the Company's previous
credit agreement with the bank and, in part, refinances approximately $1.6
million of indebtedness under the previous agreement. The credit agreement
provides for a line of credit, which is available through September 1, 2010. The
line of credit provides for advances not to exceed at any time an aggregate
principal amount of $500,000, and advances under the line of credit may be used
to provide funds for tenant improvements. The term note bears interest at the
bank's prime rate plus .25% (or, at the Company's election, the LIBOR rate, as
defined, plus 3.25%), with monthly principal payments of approximately $6,700
beginning November 1, 2005. Unpaid principal and interest is due on the maturity
date of October 1, 2010. The note is secured by a first deed of trust on the
Company's property (the "North Property") located at 2064 Gravenstein Highway
North, Sebastopol, California. Under this credit agreement the company is
required to meet certain financial covenants, as of September 30, 2005 the
company was in compliance with such covenants.
On November 1, 2005, the Company received $1.8 million from sale of the shares
of MetroPCS pursuant to a tender offer. See Note 2 above for further
information.
The Company anticipates that material fiscal 2006 cash commitments will include
$60,000 of principal debt reduction and approximately $200,000 of capital
expenditures. The Company anticipates funding these payments out its new line of
credit. Cash flows from operating activities are expected to remain relatively
consistent given current tenant occupancy and rental agreements in place.
The Company believes that its existing resources, together with anticipated cash
from operating activities, will be sufficient to satisfy its current and
projected cash requirements for the foreseeable future. The Company holds
certain cash and cash equivalents for non-trading purposes that are sensitive to
changes in the interest rate market. The Company does not believe that changes
in the interest rate market affecting these financial instruments will have a
material impact, either favorable or unfavorable, on its financial position or
results of operations.
15
The Company does not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company currently has no derivative financial instruments that expose the
Company to market risk. The Company is exposed to cash flow and fair value risk
due to changes in interest rates with respect to its notes payable and in
changes in the fair value of its investment in MetroPCS Communications, Inc. As
of September 30, 2005, the Company believes that the carrying amounts for cash,
accounts receivable and accounts payable approximate their fair value. The
Company believes the note payable approximates fair market value as the term to
maturity is short (October 1, 2010) and as a result of this short term maturity,
the Company believes its exposure to market risk for significant changes in the
variable interest rate (prime + .25%) will be immaterial. Based on the price per
share offered in the October 2005 tender offer, the Company believes that the
investment in MetroPCS Communications exceeds its carrying amount. The Company
accounts for its investment in MetroPCS Communications under the cost method,
which was $3,001,200 as of September 30, 2005. The Company owned approximately
0.857% of the total outstanding shares of MetroPCS Communications' Series D
Preferred Stock and approximately 0.33% of its total outstanding capital stock
on an as-converted basis as of September 30, 2005.
Item 4. Controls and Procedures
As of September 30, 2005, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures (as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e)).
Based upon that evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective at a reasonable level 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 has been no change in the Company's internal control over financial
reporting that occurred during the Company's most recent fiscal quarter that has
materially affected or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, do not expect that the Company's disclosure controls or
internal controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met due to
numerous factors, ranging from errors to conscious acts of an individual, or
individuals acting together. In addition, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of inherent
limitations in a cost-effective control system, misstatements due to error
and/or fraud may occur and not be detected.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
16
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
3.1 Restated Certificate of Incorporation (1)
3.2 Bylaws (1)
10.1 Consulting Agreement dated August 1, 2005 between SonomaWest
Holdings, Inc. and Thomas R. Eakin, d.b.a. Eakin Consulting. (2)
10.2 Consulting Agreement effective as of July 1, 2005 between SonomaWest
Holdings, Inc. and Bugatto Investment Company. (2)
31.1 Chief Executive Officer and Chief Financial Officer Certification of
Periodic Financial Report Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002*
32.1 Chief Executive Officer and Chief Financial Officer Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section
906 of the Sarbanes-Oxley Act of 2002. +
- --------------
(1) Incorporated by reference to the registrant's Quarterly Report on Form
10-Q (File No. 000-01912) for the fiscal quarter ended December 31, 2004,
filed on February 14, 2005.
(2) Incorporated by reference to the registrant's Annual Report on Form 10-K
(File No. 000-01912) for the year ended June 30, 2005, filed on September
28, 2005.
* Filed herewith.
+ Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 10, 2005
/s/ Walker R. Stapleton
- -----------------------
Walker R. Stapleton, Chief Financial Officer
17
EXHIBIT INDEX
Exhibit No. Document Description
31.1 Chief Executive Officer and Chief Financial Officer Certification of
Periodic Financial Report Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002*
32.1 Chief Executive Officer and Chief Financial Officer Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section
906 of the Sarbanes-Oxley Act of 2002. +
* Filed herewith
+ Furnished herewith
18