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, 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 February 13, 2006, 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 December 31, 2005 and
June 30, 2005 (unaudited)........................................3
Statements of Operations - Three and six months
ended December 31, 2005 and 2004 (unaudited).....................4
Statement of Changes in Shareholders' Equity -
Six months ended December 31, 2005 (unaudited)...................5
Statements of Cash Flows - Six months ended
December 31, 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.......................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk......16
Item 4. Controls and Procedures.........................................16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.....17
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.................................................................18
EXHIBIT INDEX.................................................................20
EXHIBITS......................................................................20
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SONOMAWEST HOLDINGS, INC.
BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
ASSETS 12/31/05 6/30/05
------ ------
CURRENT ASSETS:
Cash $3,840 $1,879
Accounts receivable 172 123
Other receivables 14 13
Prepaid expenses and other assets 63 129
Current deferred income taxes, net -- 298
------ ------
Total current assets 4,089 2,442
------ ------
RENTAL PROPERTY, net 1,479 1,553
------ ------
INVESTMENT, at cost 2,401 3,001
------ ------
DEFERRED INCOME TAXES 175 159
------ ------
PREPAID COMMISSIONS AND OTHER ASSETS 176 117
------ ------
Total assets $8,320 $7,272
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 80 $1,620
Accounts payable 107 121
Accrued payroll and related liabilities 15 31
Accrued expenses and other current liabilities 146 76
Income taxes payable 190 --
Unearned rents and deposits 419 364
Current deferred tax liability 8 --
------ ------
Total current liabilities 965 2,212
------ ------
LONG-TERM DEBT, net of current maturities 1,513 --
------ ------
OTHER LONG-TERM LIABILITIES -- 131
------ ------
Total liabilities 2,478 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 December 31, 2005 and June 30, 2005, respectively 2,913 2,770
Retained earnings 2,929 2,159
------ ------
Total shareholders' equity 5,842 4,929
------ ------
Total liabilities and shareholders' equity $8,320 $7,272
====== ======
The accompanying notes are an integral part of these statements.
-3-
SONOMAWEST HOLDINGS, INC.
STATEMENTS OF OPERATIONS
FOR THE SIX AND THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Six Months Three Months
Ended December 31 Ended December 31
------------------ ------------------
2005 2004 2005 2004
------- ------- ------- -------
RENTAL REVENUE -NET $ 996 $ 908 $ 520 $ 476
TENANT REIMBURSEMENTS 274 254 137 106
------- ------- ------- -------
TOTAL REVENUE $ 1,270 $ 1,162 $ 657 $ 582
------- ------- ------- -------
OPERATING COSTS 1,188 1,013 635 529
OPERATING COSTS -- RELATED PARTY EXPENSES 39 230 9 96
------- ------- ------- -------
TOTAL OPERATING COSTS 1,227 1,243 644 625
------- ------- ------- -------
OPERATING INCOME (LOSS) 43 (81) 13 (43)
INTEREST EXPENSE (57) (41) (30) (21)
INTEREST INCOME 47 14 31 8
DIVIDEND INCOME 122 -- 122 --
GAIN ON SALE OF INVESTMENTS 1,090 -- 1,090 --
OTHER INCOME 6 19 -- 18
------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES 1,251 (89) 1,226 (38)
INCOME TAX (PROVISION) BENEFIT (481) 33 (471) 14
------- ------- ------- -------
NET INCOME (LOSS ) $ 770 $ (56) $ 755 $ (24)
======= ======= ======= =======
WEIGHTED AVERAGE COMMON SHARES AND EQUIVALENTS:
Basic 1,122 1,114 1,124 1,114
Diluted 1,150 1,114 1,155 1,114
INCOME (LOSS) PER COMMON SHARE:
Basic $ 0.69 $ (0.05) $ 0.67 $ (0.02)
Diluted $ 0.67 $ (0.05) $ 0.65 $ (0.02)
The accompanying notes are an integral part of these financial statements.
-4-
SONOMAWEST HOLDINGS, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 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 770 770
Non-cash stock compensation charge 81 81
Exercise of stock options 10 62 62
------------- ----------- ---------- -------------
BALANCE, DECEMBER 31, 2005 1,124 $ 2,913 $ 2,929 $ 5,842
============= =========== ========== =============
The accompanying notes are an integral part of these financial statements.
-5-
SONOMAWEST HOLDINGS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 2005 AND 2004
(AMOUNTS IN THOUSANDS)
2005 2004
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 770 $ (56)
------- -------
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Gain on sale of investments (1,090) --
Dividends received from investments (122) --
Non-cash stock compensation charge 81 10
Depreciation and amortization expense 108 107
Changes in assets and liabilities:
Accounts receivable, net (49) 8
Other receivables (1) 26
Related party interest receivable -- 3
Prepaid expenses and other assets 66 72
Deferred income tax provision (benefit) 290 (33)
Prepaid commissions and other assets (59) 23
Accounts payable (14) (130)
Accrued Expenses and other current liabilities 70 --
Income taxes payable 190 --
Accrued payroll and related liabilities (16) (20)
Unearned rents and deposits 55 55
Other long-term liabilities (131) --
------- -------
(622) 121
------- -------
Net cash provided by operating activities 148 65
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (34) (59)
Proceeds from sale of investments 1,690 --
Dividends received from investments 122 --
------- -------
Net cash provided by, (used in) investing activities 1,778 (59)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt refinancing 1,606
Principal payments of long term debt (1,633) (28)
Exercise of stock options 62 400
------- -------
Net cash provided by financing activities 35 372
------- -------
NET INCREASE IN CASH 1,961 378
CASH AT BEGINNING OF PERIOD 1,879 1,348
------- -------
CASH AT END OF PERIOD $ 3,840 $ 1,726
======= =======
Supplemental Cash Flow Information
2005 2004
------- -------
Interest paid $ 55 $ 40
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
SIX MONTHS ENDED DECEMBER 31, 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 six-month period ended December 31, 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 December 31,
2005, the Company had a $2.4 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 other than its investment. However, 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. Additionally, 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 held 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 was
approximately three times the original investment amount per share paid by the
Company for its MetroPCS shares, including the cumulative unpaid dividends as of
December 31, 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, resulting in a net gain of $1,090,000 on sale of investments,
and dividend income of $122,000. The Company's existing net operating loss
carryforwards will offset much 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 $2,401,000 as of December 31, 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 such information that we may
request and that MetroPCS may provide to us. 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 December 31, 2005, of approximately $7.2 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 December 31, 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 $7,000
plus interest at the bank's prime rate plus .25% per annum, final
maturity October 1, 2010
$ 1,593
---------
1,593
Less current portion 80
---------
$ 1,513
=========
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 December 31, 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
December 31, 2005 no amounts were outstanding under the line of credit.
-8-
Principal payments for the years succeeding December 31, 2005, are as follows:
Amounts in
Year Ending June 30, Thousands
-------------------- ------------
Balance of 2006 $ 40
2007 80
2008 80
2009 80
2010 80
Thereafter 1,233
------------
$ 1,593
============
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, and because all of the Company's
stock options were fully vested as of July 1, 2005, 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 six months ended December 31, 2005 includes $81,000 in
costs, $48,000 of this cost is due to non-qualified stock options with $(19,000)
of income tax benefits related to our stock-based compensation arrangements. The
remaining $33,000 in costs reflect incentive stock options with no tax benefit.
Our net income for the six months ended December 31, 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 15,000 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.
-9-
A summary of the status of the Company's stock option plans at December 31, 2005
with changes during the six months ended December 31, 2005 are presented in the
table below:
Simple
Weighted Average Aggregate
Average Remaining Intrinsic
Options Exercise Contractual Value
(in thousands) Price Term (years) (in thousands)
----------- ----------- ----------- -----------
Balance, June 30, 2005 93 $ 6.41
Granted 15 $ 10.95
Cancelled (2) $ 7.42
Exercised (10) $ 6.24
----------- -----------
Balance, December 31, 2005 96 $ 7.12 6.26 $ 686
----------- -----------
Exercisable,
December 31, 2005 96 $ 7.12 6.26 $ 686
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model, with the following simple-average
assumptions used for the fiscal 2006 grants: weighted average risk-free interest
rate of 4.37 percent; expected dividend yield of 0 percent; expected life of two
years for the Plan options; and expected volatility of 49 percent. All
outstanding options were fully vested as of December 31, 2005; and thus, there
was no unrecognized compensation cost related to stock options.
Cash received from stock option exercises during the six months ended December
31, 2005 was $62,000. We issue new shares to satisfy stock option exercises.
During the six months ended December 31, 2005, 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 36,500
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 recorded non-cash compensation expense of $32,000 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 are 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 six months ended December 31, 2005, the Company incurred
$13,000 for real estate consulting services from Bugatto Investment Company.
These expenses are included in Operating Costs - Related Party. As of December
31, 2005, the Company had a payable to Bugatto Investment Company of $2,700.
-10-
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 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 six months ended December 31, 2005, the Company
incurred $18,000 for services from Thomas R. Eakin. As of December 31, 2005, the
Company did not have a payable to Mr. Eakin. These expenses are included in
Operating Costs - Related Party.
Gary L. Hess, former 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 December 31, 2005, the
Company did not owe Mr. Hess any commissions under this agreement. As of the
2005 annual meeting of stockholders, Mr. Hess is no longer a board member.
Roger S. Mertz, former Chairman of the Board and former director, 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 six months ended
December 31, 2005, the Company incurred $9,000 for legal services provided by
Allen Matkins. As of December 31, 2005, the Company had no payable to Allen
Matkins. As of the 2005 annual meeting of stockholders, Mr. Mertz is no longer a
board member.
Walker Stapleton, a director was elected President and Chief Executive Officer
on June 16, 2005.
On December 23, 2005, the Compensation Committee of the Board of Directors
("Board") the Company approved compensation arrangements for directors of the
Company for the 2006 fiscal year (the year ending June 30, 2006). Outside
directors will receive the following compensation: $3,000 per quarter, plus
reimbursement for reasonable out-of-pocket expenses incurred in connection with
attendance at meetings; $1,500 for each Board and shareholder meeting attended;
for service on the Audit Committee or the Compensation Committee, $1,000 per
quarter for each such committee; and for service on special or other committees
authorized by the Board, $1,000 per meeting of such committee. The committee
also awarded options to purchase 2,500 shares of the Company's common stock to
each director who is not also an employee of the Company, and awarded options to
purchase 10,000 shares of the Company's common stock to Walker R. Stapleton, the
Company's Chief Executive Officer. The exercise price of all options is equal to
the fair market value of the common stock on the date of grant.
Note 6 - Minimum Lease Income
The Company leases warehouse space, generating rental revenues for the six
months ended December 31, 2005 and December 31, 2004 of $996,000 and $908,000,
respectively. The leases have varying terms, which range from month-to-month to
expiration dates through 2013. As of December 31, 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 Amounts in
June 30 Thousands
- ------------------------------- ------------------
Balance of 2006 701
2007 856
2008 521
2009 356
2010 321
Thereafter 632
------------------
Total $3,387
==================
-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 as of, and for the three
and six months ending December 31, 2005 and 2004 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.
Recent Developments
On February 8, 2006, the Company issued a press release announcing that it
had received from Walker R. Stapleton, the Company's President and Chief
Executive Officer, a letter expressing an interest in initiating a
management-led buyout transaction of the Company by an investment group
including Mr. Stapleton and members of his family, including Craig Stapleton,
who is the company's largest stockholder. Based on the most recent Schedule 13D
filed by Craig Stapleton and certain other persons, Craig Stapleton beneficially
owns approximately 48% of the outstanding shares of the Company's common stock.
The letter indicates an interest in acquiring all of the company's outstanding
shares not held by the investment group at a price of $11.03 per share. The
letter does not propose a form of transaction. The letter indicates that the
investment group is very confident in its ability to secure appropriate
financing for the transaction.
The board of directors has appointed a special committee composed of David
Bugatto and Fredric Selinger, both independent directors of the Company, to
consider the expression of interest and, if the committee deems appropriate,
enter into negotiations with the investment group or take other actions
regarding the expression of interest. The committee has the authority to retain
independent financial advisors and independent legal counsel.
-12-
There can be no assurance that any definitive offer will be made, that any
agreement will be executed or that any transaction will be initiated or
consummated.
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.
Valuation of investment in MetroPCS Communications, Inc.
The Company accounts for its investment in MetroPCS under the cost method, which
amounted to $2,401,000 as of December 31, 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 such information that we may
request and that MetroPCS may provide to us. 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 December 31, 2005, of approximately $7.2 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. 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.
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") some of which
have been previously carried back to offset prior years' taxable income. During
fiscal 2006, the Company expects to utilize all of its remaining NOLs as a
result of a significant tax gain generated by the Company's partial tender offer
of its MetroPCS investment.
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.
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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.
RESULTS OF 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 December 31, 2005 and 2004 the Company had a total of 32 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 December
31, 2005, the tenants occupied approximately 307,000 square feet under roof, or
79% of the leasable area under roof. This compares to 295,000 square feet under
roof, or 75% of the leasable area under roof as of December 31, 2004. In
addition to the area under roof, the Company had 64,000 square feet of outside
area under lease as of December 10, 2005 and 76,000 as of December 31, 2004.
Rental Revenue. For the six months ended December 31, 2005 rental revenue
increased $88,000 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. This increase is primarily a result of expansion by the existing
tenants under short-term leases for $60,000 and one new larger tenant for
$100,000, these were offset by vacating tenants and CPI increases for a credit
of $72,000. This increase in demand was not anticipated and was primarily a
result of an increase in a tenant's business volume.
For the three months ended December 31, 2005 rental revenue increased $44,000 or
9% as compared to the three months ended December 31, 2004. The increase in
rental revenue is attributable to an increase in leased square footage. This
increase is primarily a result of expansion by existing tenants referred to
above.
Tenant Reimbursements. For the six months ended December 31, 2005 tenant
reimbursements increased $20,000 or 8% as compared to the six months ended
December 31, 2004. Such reimbursements typically fluctuate based upon the
increase or decrease in utilities rates and the amount of space occupied by
tenants. Of the $20,000 increase, a reduction of $6,000 resulted from
non-utility related reimbursements and the balance resulted from increased
utility rates and usage by the tenants.
For the three months ended December 31, 2005 tenant reimbursements increased
$31,000 or 29% as compared to the three months ended December 31, 2004. The
increase in utilities during the quarter is primarily a result of increased
activity by three manufacturing tenants.
Operating Costs. For the six months ended December 31, 2005 total operating
costs decreased $16,000 or 1% compared to the six months ended December 31,
2004. Of this decrease, operating costs--related party decreased $191,000 and
operating costs increased $175,000. The decrease in related party expenses was
the result of reduced legal expenses related to the firm of which a former
director of the Company is a partner of $172,000, due primarily to the use of
another firm for services, along with a combined reduction of $14,000 in
accounting and real estate consulting fees and $5,000 reduction in related party
commission.
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The increase of $175,000 in operating costs was a result of non-related party
legal expenses of $81,000 due to the engagement of a new legal firm, increased
non-cash stock compensation of $71,000 for stock option extensions and new
options, salary and compensation arrangements of $59,000 for the quarter for
Walker R. Stapleton who became the President and Chief Executive Officer of the
Company in June 2005, utility cost increases of $22,000 due primarily to the
increase in utility rates, audit and accounting fees of approximately $8,000,
property insurance deductible of $11,000, facility water system of $10,000,
marketing expense of $7,000, non-related accounting of $6,000 due to the hiring
of a consultant firm, and other of $31,000. These increases were offset by
decreases in repairs and maintenance of $104,000 due to the significant
painting, roof repairs and storm damage maintenance in 2004 and development
costs of $27,000. 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.
For the three months ended December 31, 2005 total operating costs increased
$19,000 or 3%. Of this increase, operating costs--related party decreased
$87,000 and operating costs increased $106,000 which was primarily a result of
increases in non-cash stock compensation of $81,000 and repairs and maintenance.
Interest Income. For the six months ended December 31, 2005, the Company
generated $47,000 of interest income on its cash balances as compared to $14,000
in the six months ended December 31, 2004. The sale of a portion of the
Company's MetroPCS stock in October 2005 in response to a tender offer has
increased the invested cash accounts.
For the three months ended December 31, 2005, the Company generated $31,000 of
interest income on its cash balances as compared to $8,000 in the three months
ended December 31, 2004. Again, the increase was primarily due to increased cash
generated by the sale of Metro PCS shares in October 2005.
Interest Expense. Interest expense consists solely of interest expense on
mortgage debt. Interest expense increased to $57,000 for the six months ended
December 31, 2005, compared to $41,000 for the corresponding period in the prior
year due primarily to increased interest rates on the Company's outstanding
debt.
For the three months ended December 31, 2005, the Company had $30,000 of
interest expense as compared to $21,000 in the three months ended December 31,
2004 primarly due to interest rate increases on the outstanding debt.
Gain on Sale of Investment and Dividends. For the six months ended December 31,
2005, the Company received $1,813,000 for the tender of 20% of its shares in
MetroPCS, resulting in a gain on sale of investments of $1,090,000 and dividend
income of $122,000.
Other Income and Expense. For the six months ended December 31, 2005, the
Company incurred a net increase in other income of $6,000 which includes $5,000
from the sale of a dust collection system and other discontinued equipment.
Income Taxes. The effective tax rate for the six months ended December 31, 2005
increased to a provision of 38.45% from a benefit of 37% for the six months
ended December 31, 2004. As of December 31, 2005, the Company had no operating
loss carryforwards. Though the Company had reported taxable losses until 2005,
as of the end of fiscal 2005 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 2005. Although the initial public
offering was later withdrawn, the Company completed a tender offer with Metro
PCS in October 2005 that will allow for utilization of all of the Company's
remaining net operating loss carryforwards during fiscal 2006.
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Liquidity and Capital Resources
The Company had cash of $3.8 million at December 31, 2005, and current
maturities of long-term debt of $80,000. The increase in cash and cash
equivalents of $1,961,000 since June 30, 2005 was primarily a result of the cash
proceeds from the sale of 20% of the Company's MetroPCS holdings, of $1,813,000
cash received from the exercise of stock options of $62,000 and cash provided by
operating activities of $147,000, which were partially offset by principal
payment on long-term debt of $27,000 and capital expenditures of $34,000.
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 $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 December 31, 2005 the
company was in compliance with such covenants.
The Company anticipates that material cash commitments during the third and
fourth quarters of fiscal 2006 will include $40,000 of principal debt reduction
and approximately $160,000 of capital expenditures. Cash flows from operating
activities are expected to remain positive and 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.
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 December 31, 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 $2,401,000 as of December 31, 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 December 31, 2005.
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Item 4. Controls and Procedures
As of December 31, 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 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
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
Results of the registrant's annual meeting of stockholders held on
November 17, 2005, were previously reported on a Form 8-K filed with the
Securities and Exchange Commission on November 23, 2005.
Item 5. Other Information
None
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Item 6. Exhibits
10.9 Credit Agreement dated October 1, 2005 between SonomaWest Holdings
and Wells Fargo Bank.*
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.
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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, 2006
/s/ Walker R. Stapleton
- --------------------------------------------
Walker R. Stapleton, Chief Financial Officer
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EXHIBIT INDEX
Exhibit No. Document Description
- ---------- ------------------------------------------------------------------
10.9 Credit Agreement dated October 1, 2005 between SonomaWest Holdings
and Wells Fargo Bank.*
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
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