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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the fiscal year ended June 30, 2000
[ ] 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 0-1912
SONOMAWEST HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
California 94-1069729
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification Number)
1448 Industrial Avenue, Sebastopol, California 95472-4848
(Address of principal executive offices)
(707) 824-2548
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
On September 13, 2000 non-affiliates of the Registrant held voting stock
with an aggregate market value of $6,300,337 computed by reference to the
average of the bid and asked prices of such stock on such date.
As of September 13, 2000, there were 1,522,350 shares of common stock, no
par value, outstanding.
Portions of the following document are incorporated by reference:
Proxy Statement for the 2000 Annual Meeting of Shareholders scheduled to be
held November 9, 2000 is incorporated by reference into Part III of this report.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
SonomaWest Holdings, Inc. (the Company) is including the following
cautionary statement in this Annual Report to make applicable and take advantage
of the safe harbor provisions of the Private Securities Litigation Reform Act of
1995 for any forward looking statements made by, or on behalf of, the Company.
Forward looking statements include statements concerning plans, objectives,
goals, strategies, future events or performance and underlying assumptions, and
other statements which are other than statements of historical facts. Certain
statements contained herein are forward looking statements and, accordingly,
involve risks and uncertainties which could cause actual results or outcomes to
differ materially from those expressed in the forward looking statements. The
Company's expectations, beliefs and projections are expressed in good faith and
are believed by the Company to have a reasonable basis, including without
limitation, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's expectations, beliefs or
projections will be achieved or accomplished.
PART I
Item 1. Business.
SonomaWest Holdings, Inc. (the Company or SonomaWest) was incorporated in
California on December 27, 1946 as Vacu-dry Company, and had been engaged in the
development, production and marketing of fruit products. As part of a strategic
reorientation, on July 30, 1999 the Company sold certain assets related to its
product lines of processed apple products and products containing processed
apple products to Tree Top, Inc. (Tree Top) for $13.9 million. The decision of
the Board to approve the asset sale followed intensive efforts over a three-year
period to evaluate and improve the returns achieved by the apple product lines.
The following product lines which are used in or related to the apple product
lines were not included in the sale: (i) processed apple products produced
primarily by means of a vacuum drying process; (ii) products which contain both
processed apple products and other processed fruit, nut or vegetable products,
provided such other processed fruit, nut or vegetable products comprise ten
percent (10%) or more of the finished product, by weight; (iii) products
containing processed apple products that are packaged by or on behalf of
SonomaWest for retail sale; and, (iv) organic and pesticide-free processed apple
products. In August 1999, the Company determined that these product lines, as
well as the food storage product line, would be discontinued and held for sale.
In the third quarter of fiscal 2000, the Company decided to discontinue and hold
for sale the assets and operations of its organic packaged goods subsidiary Made
In Nature Company, Inc. The intellectual property and most dried fruit
inventories related to the organic packaged goods operation were sold in May
2000 for $1.1 million to Premier Valley Foods, Inc. SonomaWest's sole line of
business will be its real estate management and rental operations upon the
disposal of the remaining assets (primarily inventory) of its discontinued
ingredients, food storage, and organic packaged goods businesses.
Industry Segment Information
For the year ended June 30, 2000, the Company operated in one reportable
segment, real estate management and rental operations. All other businesses have
been included in discontinued operations. See Item 2, Properties, and Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Environmental Matters
The Company has complied with all governmental regulations regarding
protection of the environment. No material capital expenditures are anticipated
for environmental control facilities during the next fiscal year.
Employees
The Company has historically employed an average of approximately 265
persons. The Company substantially reduced its workforce following the sale to
Tree Top, and currently has 7 employees supporting its real estate business and
the disposal of the remaining assets of the discontinued businesses. The number
of employees historically needed normally varied throughout each year and
increased during periods of high production. Of the 265 employees, the General
Truck Drivers, Warehouseman and Helpers Union, Teamsters Local #624, represented
approximately 200. A collective bargaining agreement with those union employees
expired June 30, 1999. Effects negotiations, as required by federal law, were
entered into between the union and the Company on June 24, 1999. During these
negotiations, the Company and the union approved a one-year extension to the
collective bargaining agreement with no changes. Negotiations between the
Company and the union were completed in December 1999, and the union contract
has now terminated.
Insurance
The Company maintains product, property, and general liability insurance
plus umbrella liability coverage. The Company does not carry any product recall
coverage. While management feels the limits and coverage are adequate relative
to the related risks, there is no assurance that this insurance will be adequate
to protect the Company from product recall claims. A product recall could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Risk Factors
Risks Associated with Investments in Real Estate
- ------------------------------------------------
Income from the properties may be adversely affected by, among other
things, increasing unemployment rates, oversupply of competing properties,
reduction in demand for properties in the area, increasing affordability of
single family homes, and adverse real estate, zoning and tax laws. Certain
significant expenditures associated with an investment in real estate (such as
mortgage payments, real estate taxes, and maintenance costs) constitute fixed
costs and do not decrease when circumstances cause a reduction in income from
the investment.
Potential Environmental Liability
- ---------------------------------
The Company could be held liable for the costs of removal or remediation of
any hazardous or toxic substances located on or in its properties. These laws
often impose such liability without regard to whether the owner knew of, or was
responsible for, the presence of the hazardous or toxic substances. The presence
of such substances, or the failure to remediate such substances properly, may
adversely affect the owner's ability to sell or rent the property or to borrow
using the property as collateral. Other Federal and state laws require the
removal of damaged material containing asbestos in the event of remodeling or
renovation.
Uninsured Loss
- --------------
The Company carries several types of insurance. There are, however, certain
types of extraordinary losses (such as losses from earthquakes) that may be
either uninsurable or not economically insurable. Should an uninsured loss
occur, the Company could lose its investment in and anticipated profits and cash
flow from a property and would continue to be obligated on any mortgage
indebtedness on the property.
Item 2. Properties.
The principal administrative offices of the Company were located in Santa
Rosa, California until March 2000. These offices consisted of approximately
9,200 square feet of office space and are leased through December 2003. This
space has been sublet through May 2002 at approximately the Company's lease
rate, with an option to renew through December 2003. The Company will actively
market this space to minimize the vacancy risk upon expiration of the sublease
if the option to renew is not exercised, but there can be no assurance that our
marketing efforts will be successful or that a suitable sublessee will be
located in a timely manner.
The Company owns 15 acres of land and approximately 103,000 square feet
under roof at 1448 Industrial Avenue, Sebastopol, California. The Company is
currently attempting to lease all of the available square footage to third
parties, except for a small portion housing the Company's principal
administrative offices since their relocation in March 2000 from leased premises
discussed above. Currently, approximately 21% of the available square footage is
vacant. The Company has a $2.0 million loan secured by this property which
matures in December 2003.
The Company also owns 66 acres of land and approximately 307,000 square
feet under roof (its former manufacturing plant) at 2064 Gravenstein Hwy. No.,
Sebastopol, California. With the closure of the plant as a result of the
discontinuance of the ingredients and food storage businesses, the Company is in
the process of converting all of its former plant space to
industrial/agricultural rentals. The available space includes offices,
production buildings and cold storage. The current zoning for this property
requires that the facility be used for diversified agricultural purposes. The
Company is attempting to broaden the use permit to allow other types of
activities, but there can be no assurance that such efforts will be successful.
The existing use permit may restrict the types of tenants that could occupy the
property, resulting in prolonged vacancy and/or lower rental rates, having a
material adverse effect on the Company's business, financial condition and
results of operations. Currently, approximately 60% of the available square
footage is vacant. The Company has no debt associated with this facility.
The Company has engaged a major real estate brokerage firm on a commission
basis to assist in marketing all of its properties. There can be no assurance
that these marketing efforts will be successful, or that suitable tenants will
be found on a timely basis. Significant, prolonged vacancies at the properties
may have a material adverse impact on the Company's business, financial
condition and results of operations.
Item 3. Legal Proceedings.
A complaint was filed February 23, 2000 by several local apple growers
naming the Company and Tree Top, Inc. as defendants. The complaint alleged that
the July 1999 sale of the Company's apple ingredients business to Tree Top, Inc.
was an unlawful combination in restraint of trade in the dried apple business
under federal and California law; that the Company conspired with Tree Top, Inc.
to monopolize the dried apple business; and that such acts also constitute
unlawful business practices under the California Business and Professions Code.
The suit sought treble damages, punitive damages, interest, and attorneys' fees,
all in unnamed amounts. On August 4, 2000 the Company's motion to dismiss the
complaint was granted without prejudice and with leave to amend. To date no
amended complaint has been filed. Should an amended complaint be filed, the
Company would defend itself vigorously.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the last
quarter of the year ended June 30, 2000.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock is traded on the Nasdaq National Market System
(symbol: SWHI).
The quarterly high and low prices for the last two fiscal years were as
follows:
Quarter Ending Low Bid High Bid
-------------- ------- --------
09/30/98 6-1/4 9
12/31/98 5-3/4 9
03/31/99 6-3/4 13
06/30/99 5-5/8 10-1/16
09/30/99 6-3/4 10-1/2
12/31/99 5-3/8 7
03/31/00 4-7/8 6-1/8
06/30/00 4-1/4 6-1/2
The above quotations were obtained from the Nasdaq-Amex Online website.
On September 13, 2000, there were approximately 569 registered holders of
common stock and 660 shareholders that held stock in street name. On that date,
the average of the high and low price per share of the Company's stock was
$6.19. This price does not include dealer mark-ups, mark-downs or commissions.
The Company is considering a share repurchase program and/or a cash
distribution. See Item 7, Liquidity and Capital Resources, for further
discussion of the actions being considered.
Item 6. Selected Financial Data.
YEAR ENDED JUNE 30 (in thousands, except per share amounts)
2000 1999 1998 1997 1996
------------- ------------- ------------ ------------- --------------
Total revenues $1,197 $665 $518 $537 $441
Net (loss) from continuing (473) (759) (573) (509) (546)
operations
Net earnings (loss) from 3,183 (2,170) 1,472 1,026 980
discontinued operations
Net earnings 2,710 (2,929) 899 517 434
Earnings per share from
continuing operations
Basic (0.31) (0.50) (0.36) (0.31) (0.32)
Diluted (0.31) (0.50) (0.36) (0.31) (0.32)
Earnings per share from
discontinued operations
Basic 2.09 (1.43) 0.93 0.62 0.57
Diluted 2.06 (1.43) 0.92 0.62 0.57
Earnings Per Share
Basic 1.78 (1.93) 0.57 0.31 0.25
Diluted 1.75 (1.93) 0.56 0.31 0.25
Total Assets 12,969 17,023 17,008 14,576 13,587
Long Term Debt 1,974 2,860 1,703 1,808 1,628
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
OVERVIEW
When the Company acquired the assets and certain liabilities of Made in
Nature, Inc. on June 11, 1998, SonomaWest operated in three business segments:
industrial dried fruit ingredients, organic packaged goods and real estate. The
Company commenced a strategic reorientation upon the announcement of the
proposed sale of its apple-based industrial ingredients product line in June
1999. In August 1999 the decision was made to sell or discontinue all product
lines in the Company's industrial dried fruit ingredients business. In January
2000, the Company decided to sell or discontinue its organic packaged goods
business. As a result of these decisions, both of these business segments are
considered discontinued operations and their operating results, results of cash
flows and net assets are reflected outside of the Company's continuing
operations. The Company's sole remaining line of business is its real estate
management and rental operations.
DISCONTINUED OPERATIONS
In July 1999, the Company sold the bulk of its apple-based industrial
ingredients product line to Tree Top, Inc., of Selah, Washington. This product
line represented 55% and 81% of the Company's sales for the years ended June 30,
1999 and 1998, respectively. This sale, which was recorded in the first quarter
of fiscal 2000, is an important element of the Company's strategic plan to
increase the return on its investments and increase shareholder value by exiting
businesses with low returns and high capital requirements. The transaction
provided financial resources to support the Company's real estate and other
business opportunities. Following completion of the sale, the Company determined
in August 1999 that the remaining product lines in the Company's vacuum
ingredients segment of its business would be discontinued and held for sale.
These product lines included the Company's dried ingredients, Perma-Pak
long-term food storage, and drink mix businesses. In January 2000, the Company
decided to sell or discontinue its organic packaged goods business. As a result
of these decisions, the Company has classified these business segments as
discontinued operations. Accordingly, the Company has segregated the net assets
of the discontinued operations in the consolidated balance sheets at June 30,
2000 and 1999, the operating results of the discontinued operations in the
consolidated statements of operations for fiscal 2000, 1999, and 1998 and the
cash flows from discontinued operations in the consolidated statements of cash
flows for fiscal 2000, 1999, and 1998.
In fiscal 2000, the Company recorded after-tax earnings from discontinued
operations of $32,000 on sales of $9.5 million for the ingredients business and
$2.2 million for the organic packaged goods business. This compares to an
after-tax loss of $2.2 million on sales of $35.2 million for the ingredients
business and $2.7 million for the organic packaged goods business in fiscal
1999. The decline in sales in the ingredients business is due to the sale of the
apple ingredients business during the first quarter of fiscal 2000 and a
significant decline in the sales of Perma-Pak food storage products. The decline
in sales in the organic packaged goods business is due to the sale of the dried
fruit business in the fourth quarter of fiscal 2000. After the allocation of
selling, general and administrative expenses between continuing and discontinued
operations, the discontinued businesses generated $53,000 of operating income in
fiscal 2000 versus an operating loss of $4.1 million in fiscal 1999. Included in
cost of sales, however, in fiscal 1999 is the write-down of food storage
inventories by $3.5 million to reflect estimated net realizable value. While the
Company experienced exceptionally strong food storage sales through the third
quarter of fiscal 1999, sales have declined substantially since that time. The
organic packaged goods business generated an operating loss of $2.4 million in
fiscal 1999.
The Company is actively marketing all remaining assets of its discontinued
businesses (primarily inventory), but there can be no assurances that there will
be a sale of all or any of the remaining assets.
RESULTS OF CONTINUING OPERATIONS
The Company's sole continuing line of business is its real estate
management and rental operations. See Item 2, Properties, above for a further
discussion of the Company's real estate operations.
SUBSEQUENT EVENT
The Company elected to prepay in full the remaining shareholder note
payable (scheduled to mature in 2003) as of August 31, 2000, in the amount of
$564,000 plus accrued interest. Accordingly, this amount is reflected in current
liabilities in the consolidated balance sheet.
FISCAL 2000 COMPARED TO FISCAL 1999
Rental Revenue.
---------------
The Company leases warehouse, production, and office space as well as
outside storage space at both of its properties. There are leases with
approximately twenty tenants that have varying original terms ranging from
month-to-month to eight years with options to extend. Fiscal 2000 rental revenue
increased 80% or $532,000 over fiscal 1999. This increase was primarily a result
of leasing activities at the Company's former production facility. This facility
is approximately 40% occupied. The Company's other property is approximately 79%
occupied. While the Company and its retained broker are actively marketing the
properties to prospective tenants, there can be no assurance that tenants will
be found in the near term. As a result, the Company's operating results will be
negatively impacted as long as the tenant rental revenue stream fails to cover
existing operating costs.
Operating Costs.
-----------------
Operating costs consist of direct costs related to continuing operations
and all general corporate costs. Only direct selling, general and administrative
costs related to the ingredients and organic packaged goods businesses were
allocated to discontinued operations in the consolidated statements of
operations.
In fiscal 2000, operating costs related to continuing operations increased
15% or $282,000 from the prior year. This change was primarily due to increased
temporary labor costs incurred during the first two quarters of fiscal 2000.
Interest and Other Income (Expense), Net.
--------------------------------------------
Interest and other income (expense) net consists primarily of interest
income on the Company's cash balances, and interest expense on mortgage debt and
shareholder loans. Proceeds from the sale of the ingredients business received
in July 1999 were used to pay off the Company's revolving bank line of credit
and substantially reduce long-term debt. As a result, in fiscal 2000, the
Company was a net investor of cash, generating $409,000 of interest income and
incurring $218,000 of interest expense, while in the prior year it was a net
borrower, generating interest income of $2,000 and incurring interest expense of
$179,000.
Income Taxes.
-------------
The fiscal 2000 effective tax rate changed from a benefit of 43% to a
charge of 40%, due primarily to lower tax credits in fiscal 2000.
FISCAL 1999 COMPARED TO FISCAL 1998
Rental Revenue.
---------------
Rental revenue in fiscal 1999 increased 28% or $147,000 from fiscal 1998.
This increase was a result of higher market rental rates, CPI increases and the
leasing of some previously vacant space.
Operating Costs.
----------------
Operating costs increased 37% or $515,000, due to salaries and benefits
associated with increased staffing, increased legal and professional fees, and
increased temporary labor costs.
Interest and Other Income (Expense), Net.
------------------------------------------
Other expense increased 426% or $145,000, due primarily to the interest
expense on the mortgage debt originated in fiscal 1999, and the full-year impact
of the interest expense on the shareholder notes originated in fiscal 1998.
Income Taxes.
---------------
The effective tax rate changed from a charge of 37% to a benefit of 43%,
primarily due to an increase in tax credits.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash of $8.4 million at June 30, 2000, and current
maturities of long-term debt of $617,000. The Company used a portion of the
$16.1 million net proceeds from its discontinued businesses to pay off
borrowings under its bank line of credit and retire a significant portion of its
long-term debt. Cash balances increased from $548,000 at June 30, 1999 primarily
as a result of these net proceeds. The Company has contingently committed itself
to a $3 million investment in a privately-held telecommunications company,
MetroPCS, Inc., which is expected to be funded in fiscal 2001 if certain
agreed-upon contingencies are satisfied. The Company is considering a potential
share repurchase program, or, alternatively, a shareholder distribution of any
cash balances in excess of that required for the MetroPCS, Inc. investment and
support of the Company's real estate management and rental operations. There can
be no assurance that any or all of the contemplated actions will take place.
Item 8. Financial Statements and Supplementary Data.
Independent Auditor's Report........................................... F-1
Consolited Balance Sheets at June 30, 2000 and 1999 ................... F-2
Consolidated Statements of Operations for the years ended June 30, 2000
1999 and 1998 ......................................................... F-3
Consolidated Statements of Changes in Shareholders' Equity for the years
ended June 30, 2000, 1999 and 1998 .................................... F-4
Consolidated Statements of Cash Flows for the years ended June 30, 2000,
1999 and 1998 ......................................................... F-5
Notes to Consolidated Financial Statements............................. F-6
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
SonomaWest Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of SonomaWest
Holdings, Inc. (a California corporation) and Subsidiary as of June 30, 2000 and
1999, and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for the three years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SonomaWest Holdings, Inc. and
Subsidiary as of June 30, 2000 and 1999, and the results of its operations and
its cash flows for the three years then ended, in conformity with accounting
principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to the
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not a required part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
San Francisco, California,
August 18, 2000
F-1
SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND 1999
(AMOUNTS IN THOUSANDS)
ASSETS 2000 1999
------- -------
CURRENT ASSETS:
Cash $ 8,359 $ 548
Accounts receivable, less allowances for uncollectible accounts of $47 and $0 in 110 -
fiscal 2000 and 1999, respectively
Prepaid income taxes 816 566
Prepaid expenses 87 165
Current deferred income taxes, net 621 2,032
Net current assets of discontinued operations - 6,392
---------------- ----------------
Total current assets 9,993 9,703
---------------- ----------------
RENTAL PROPERTY, net 2,854 3,089
---------------- ----------------
NET ASSETS OF DISCONTINUED OPERATIONS 122 3,905
---------------- ----------------
DEFERRED INCOME TAXES, net - 326
---------------- ----------------
Total assets $12,969 $ 17,023
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings under line of credit $ - $ 5,745
Current maturities of long-term debt 617 1,416
Accounts payable 24 89
Accrued payroll and related liabilities 78 277
Other accrued expenses 266 126
Net liabilities of discontinued operations 628 -
---------------- ----------------
Total current liabilities 1,613 7,653
---------------- ----------------
LONG-TERM DEBT, net of current maturities 1,974 2,860
---------------- ----------------
DEFERRED INCOME TAXES, net 147 -
---------------- ----------------
Total liabilities 3,734 10,513
---------------- ----------------
SHAREHOLDERS' EQUITY:
Preferred stock: 2,500 shares authorized; no shares outstanding - -
Common stock: 5,000 shares authorized, no par value; 1,522 and 1,519 shares 2,905 2,890
outstanding in fiscal 2000 and 1999, respectively
Warrants for common stock 456 456
Retained earnings 5,874 3,164
---------------- ----------------
Total shareholders' equity 9,235 6,510
---------------- ----------------
Total liabilities and shareholders' equity $ 12,969 $ 17,023
================ ================
The accompanying notes are an integral part of these consolidated statements.
F-2
SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2000, 1999, AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 1999 1998
-------------- ------------- ------------
RENTAL REVENUE $ 1,197 $ 665 $ 518
-------------- ------------- ------------
OPERATING COSTS 2,190 1,908 1,393
-------------- ------------- ------------
INTEREST AND OTHER INCOME (EXPENSE), NET 204 (179) (34)
-------------- ------------- ------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX (789) (1,422) (909)
BENEFIT FOR INCOME TAXES (316) (663) (336)
-------------- ------------- ------------
NET LOSS FROM CONTINUING OPERATIONS (473) (759) (573)
-------------- ------------- ------------
DISCONTINUED OPERATIONS:
Earnings (loss) from discontinued operations, net of income taxes 32 (2,170) 1,472
Gain on sale of discontinued operations, net of income taxes 3,151 - -
-------------- ------------- ------------
NET EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS 3,183 (2,170) 1,472
-------------- ------------- ------------
NET EARNINGS (LOSS) $ 2,710 $ (2,929) $ 899
============== ============= ============
WEIGHTED AVERAGE COMMON SHARES AND EQUIVALENTS:
Basic 1,520 1,514 1,581
Diluted 1,548 1,549 1,600
EARNINGS (LOSS) PER COMMON SHARE:
Continuing operations:
Basic $(0.31) $(0.50) $(0.36)
Diluted (0.31) (0.50) (0.36)
Discontinued operations:
Basic 2.09 (1.43) 0.93
Diluted 2.06 (1.43) 0.92
Net earnings (loss):
Basic 1.78 (1.93) 0.57
Diluted 1.75 (1.93) 0.56
The accompanying notes are an integral part of these consolidated statements.
F-3
SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2000, 1999, AND 1998
(AMOUNTS IN THOUSANDS)
Common Stock Warrants for Total
----------------------------
Number Common Retained Shareholders'
of Shares Amount Stock Earnings Equity
------------- -------------- --------------- -------------- ----------------
BALANCE, JUNE 30, 1997 1,643 $ 3,635 $ - $ 5,194 $ 8,829
Net earnings - - - 899 899
Repurchase of common stock (139) (835) - - (835)
Issuance of common stock 7 37 - - 37
Issuance of warrants - - 456 - 456
------------- -------------- --------------- -------------- ----------------
BALANCE, JUNE 30, 1998 1,511 2,837 456 6,093 9,386
Net loss - - - (2,929) (2,929)
Issuance of common stock 8 53 - - 53
------------- -------------- --------------- -------------- ----------------
BALANCE, JUNE 30, 1999 1,519 2,890 456 3,164 6,510
Net earnings - - - 2,710 2,710
Issuance of common stock 3 15 - - 15
------------- -------------- --------------- -------------- ----------------
BALANCE, JUNE 30, 2000 1,522 $ 2,905 $ 456 $ 5,874 $ 9,235
============= ============== =============== ============== ================
The accompanying notes are an integral part of these consolidated statements.
F-4
SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2000, 1999, AND 1998
(AMOUNTS IN THOUSANDS)
2000 1999 1998
-----------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 2,710 $ (2,929) $ 899
-----------------------------------------------------
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
(Income) loss from discontinued operations, net (32) 2,170 (1,472)
Gain on sale of discontinued operations, net (3,151) - -
Depreciation and amortization expense 414 468 333
Changes in assets and liabilities:
Accounts receivable, net (110) - -
Deferred income tax provision (benefit) 1,884 (2,863) 27
Prepaid income taxes (250) (439) (57)
Prepaid expenses 78 5 -
Accounts payable (65) (2,006) -
Accrued payroll and related liabilities (199) 277 -
Accrued expenses 140 (30) -
-----------------------------------------------------
(1,291) (2,418) (1,169)
-----------------------------------------------------
Net cash provided by (used in) continuing operations 1,419 (5,347) (270)
-----------------------------------------------------
Net cash provided by discontinued operations 11,887 1,573 1,343
-----------------------------------------------------
Net cash provided by (used in) operating activities 13,306 (3,774) 1,073
-----------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (179) (379) (89)
Investing activities of discontinued operations 2,099 (820) (803)
-----------------------------------------------------
Net cash provided by (used for) investing activities 1,920 (1,199) (892)
-----------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under the line of credit 3,727 26,924 11,245
Payments on the line of credit (9,472) (23,476) (10,302)
Principal payments of long-term debt (1,685) (465) (1,059)
Issuance of common stock 15 53 37
Financing activities of discontinued operations - 2,100 -
-----------------------------------------------------
Net cash provided by (used for) financing activities (7,415) 5,136 (79)
-----------------------------------------------------
NET INCREASE IN CASH 7,811 163 102
CASH AT BEGINNING OF YEAR 548 385 283
-----------------------------------------------------
CASH AT END OF YEAR $ 8,359 $ 548 $ 385
=====================================================
The accompanying notes are an integral part of these consolidated statements.
F-5
SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(AMOUNTS IN THOUSANDS)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
SonomaWest Holdings, Inc., formerly Vacu-dry Company, (SonomaWest or the
Company) was incorporated in 1946 and through June 30, 1999 operated in three
business segments: organic packaged goods, real estate and ingredients. As of
June 30, 1999, the Company discontinued its ingredients business and was in the
process of selling the assets related to this segment (see Note 2). The business
included low-moisture fruits, bulk apple juice, apple juice concentrate, private
label drink mixes, and low-moisture food products, which were sold to
manufacturers principally in the United States and Canada. In the third quarter
of fiscal 2000, the Company discontinued its organic packaged goods business,
operated through a subsidiary, Made In Nature Company, Inc. (MINCO), and has
sold the assets related to this segment (see Note 2). This subsidiary was formed
on June 11, 1998 upon the acquisition of certain assets and liabilities of Made
In Nature, Inc. (see Note 3). The business included the marketing of organic
packaged foods and chilled pasteurized beverages, which were sold to
distributors and retailers principally in the United States and Canada. As of
June 30, 2000, the Company's sole continuing line of business is its real estate
management and rental operations.
The Company's real estate management and rental operations include
industrial/agricultural property, some of which was formerly used by the Company
in its discontinued businesses. This commercial property is now being rented to
third parties.
Basis of Presentation
- ---------------------
The accompanying financial statements include the accounts of SonomaWest and its
85 percent-owned subsidiary, MINCO. The accompanying consolidated statements of
operations for the year ended June 30, 1998, include the accounts of MINCO for
the period from June 11, 1998, to June 30, 1998, now classified as discontinued
operations. All significant intercompany transactions have been eliminated in
consolidation.
Discontinued Operations
- -----------------------
In July 1999, the Company consummated the sale of its processed apple products
business line to Tree Top, Inc. (see Note 2). Subsequent to the sale, the
Company decided to discontinue its entire ingredients segment and began pursuing
potential buyers for other product lines within this segment. In January 2000,
the Company decided to discontinue its entire organic packaged goods business
and sold a significant portion of MINCO's assets to Premier Valley Foods, Inc.
(see Note 2). The Company's continuing operations consist solely of its real
estate management and rental operations. As a result of these decisions,
SonomaWest has classified its ingredients and organic packaged goods operations
as discontinued operations for all years presented and, accordingly, has
segregated the net assets and liabilities of the discontinued operations in the
consolidated balance sheets as of June 30, 2000 and 1999. All corporate overhead
costs are presented as a component of continuing operations for the periods
presented.
As of June 30, 2000, the Company has completed its winddown of discontinued
operations and has disposed of all discontinued assets with the exception of
certain inventories and fixed assets. All corporate overhead costs are presented
as a component of continuing operations.
F-6
Supplemental Statements of Cash Flows Information
2000 1999 1998
------------- ---------------- -------------
Cash paid for:
Interest $ 326 $ 528 $ 309
============= ================ =============
Income taxes $ 420 $ 783 $ 657
============= ================ =============
Supplemental disclosure of non-cash transactions:
Repurchase of common stock through issuance $ - $ - $ 835
of notes payable
============= ================ =============
Details of acquisition of MINCO:
Fair value of assets acquired $ - $ - $ 5,374
Liabilities assumed - - (3,964)
Creditor debt subsequently converted to equity - - (517)
Warrants issued - - (456)
Accrued acquisition costs - - (101)
------------- ---------------- -------------
Cash paid - - 336
Less: Cash acquired - - (39)
------------- ---------------- -------------
Net cash paid for acquisition $ - $ - $ 297
============= ================ =============
Inventories
- -----------
Company inventories of $4,801 consisting of Perma-Pak food storage items,
organic dried fruit items, and organic orange juice concentrate are priced using
the first-in, first-out (FIFO) method, are fully reserved, and are included in
discontinued operations.
Property, Plant, and Equipment
- ------------------------------
Property and equipment acquired in connection with the acquisition of Made In
Nature were recorded at estimated fair value on the acquisition date. All other
property, plant, and equipment are stated at cost. The remaining machinery and
equipment of the ingredients segment are included in net assets of discontinued
operations (see Note 2). Depreciation is computed using the straight-line method
based upon the estimated useful lives of the assets as follows:
Buildings and improvements 5 to 40 years
Machinery and equipment 3 to 15 years
No depreciation is charged on property, plant, and equipment classified in
discontinued operations.
F-7
Rental property (excluding those assets classified as part of discontinued
operations) consist of the following as of June 30:
2000 1999
------------------ -----------------
Land $ 231 $ 231
Buildings and improvements 7,192 7,160
Office equipment 354 207
------------------ -----------------
Total rental property 7,777 7,598
Accumulated depreciation (4,923) (4,509)
------------------ -----------------
Net rental property $ 2,854 $ 3,089
================== =================
Included in rental property above is office equipment utilized in the Company's
administrative offices. Improvements that extend the life of the asset are
capitalized; other maintenance and repairs are expensed. The cost of maintenance
and repairs was $113 in 2000, $1,041 in 1999, and $1,142 in 1998.
Impairment of Long-Lived Assets
- -------------------------------
The Company reviews long-lived assets and identifiable intangibles whenever
events or circumstances indicate that the carrying amount of such assets may not
be fully recoverable. The Company evaluates the recoverability of long-lived
assets by measuring the carrying amount of the assets against the estimated
undiscounted cash flows associated with these assets. At the time such
evaluations indicate that the future undiscounted cash flows of certain
long-lived assets are not sufficient to recover the assets' carrying value, the
assets are adjusted to their fair values (based upon discounted cash flows).
During fiscal 1998, the Company acquired certain assets and liabilities of MINCO
(Note 3). This acquisition was accounted for under the purchase method, with the
excess of cost over management's estimated fair value of the net assets acquired
of $3,103 allocated to goodwill.
During 1999, management reviewed the estimated future cash flows related to this
operation and deemed them to be insufficient to fully recover the carrying value
of the assets acquired. Accordingly, the Company recognized a $2,935 impairment
expense during the fourth quarter of fiscal 1999 to write-off all unamortized
goodwill as of that date.
Income Taxes
- ------------
The Company records income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109
requires the Company to compute deferred taxes based upon the amount of taxes
payable in future years after considering changes in tax rates and other
statutory provisions that will be in effect in those years.
Deferred taxes are recorded based upon differences between the financial
statement and tax bases of assets and liabilities and available tax credit
carryforwards.
Revenue
- -------
The Company recognizes rental income on a straight-line basis over the term of
occupancy in accordance with the provisions of the leases.
F-8
Stock-Based Compensation
- ------------------------
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), and related interpretations
in accounting for its employee stock options. Under APB 25, because the exercise
price of employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recorded. The Company has
adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock
Based Compensation."
Earnings per Common Share
- -------------------------
Basic earnings per common share are computed by dividing net earnings by the
weighted average number of shares of stock outstanding during the period.
Diluted earnings per common share include the impact of stock options using the
treasury stock method, if dilutive.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
New Accounting Standards
- ------------------------
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities". This statement will be adopted effective July 1, 2000
and is not expected to materially impact the Company's financial statements.
Reclassifications
- -----------------
Certain reclassifications have been made to the 1999 and 1998 consolidated
financial statements to conform to the current year presentation adopted for
fiscal 2000 and as required with respect to discontinued operations.
2. DISCONTINUED OPERATIONS:
In July 1999, the Company consummated an asset purchase agreement (the Purchase
Agreement) with Tree Top, Inc. The Purchase Agreement governed the sale of all
intangible assets (primarily trademarks, know-how, and customer lists) and
certain of the equipment relating to the Company's processed apple products
line. Although the Purchase Agreement excludes other product lines within the
Company's ingredient segment, the Company decided to actively seek buyers for
the remaining product lines of the ingredients segment and has discontinued
production of all ingredients segment products. Consequently, the ingredients
segment has been presented as a discontinued operation in the accompanying
consolidated financial statements for all periods presented. The purchase price
for the sale of the processed apple products line of $12 million was paid in
cash at the closing date of the sale on July 30, 1999. In addition, equipment
with a net book value of $1,478 was sold for $500, and apple product inventories
with a cost of $1.7 million were purchased for $1.9 million. Tree Top, Inc. did
not assume any of the Company's liabilities. In connection with the Purchase
Agreement, the Company and certain shareholders, directors, and management have
agreed not to compete with Tree Top, Inc. in processed apple product lines for a
period of three to ten years. In addition, as part of the transaction, the
Company sold the Vacu-dry trademark. Thus, the Company changed its name to
SonomaWest Holdings, Inc. in December 1999. In February 2000, certain local
apple growers filed suit against the Company and Tree Top, Inc. alleging that
this sale and related activities created a monopoly in the dried apple business
in violation of federal and California law. The growers are seeking treble
damages, punitive damages, interest, and attorney fees, all in unnamed amounts.
On August 4, 2000, the Company's motion to dismiss the complaint was granted
with leave to amend. The Company feels the suit is without merit and intends to
continue to defend itself vigorously should an amended complaint be filed.
In the third quarter of fiscal 2000, the Company decided to dispose of its
organic packaged foods operations. Accordingly, the organic packaged foods
segment is included in discontinued operations in the accompanying consolidated
financial statements for all periods presented. The Company received $1.1
million for all intellectual property, consisting of the Made In Nature brand
name and all related trademarks, and certain dried fruit inventory of the
organic packaged goods segment from Premier Valley Foods, Inc. in May 2000.
Remaining assets of this segment consist primarily of organic orange juice
concentrate inventories, which are being actively marketed by the Company for
liquidation.
F-9
Upon the disposal of the Company's remaining ingredients and organic packaged
foods assets, the sole remaining line of business will be its real estate
management and rental operations.
During fiscal 2000, the Company recorded a net after-tax gain of $3.2 million
from the sale of the processed apple product line and the disposal of the
remaining product lines of the ingredients segment and the organic packaged
foods segment. The net after-tax gain included $16.1 million of proceeds from
the sales offset by: a) the write-down of assets related to the discontinued
segments to their estimated net realizable value (assets which were impaired as
a direct result of the decision to discontinue the segments); b) costs incurred
in closing the discontinued segments (consisting primarily of severance costs,
professional fees, relocation costs and lease buy-outs); c) estimated operating
losses to be incurred during the wind-down period; and d) losses on sale of
equipment.
Summarized historical information of the discontinued operations is as follows:
Fiscal Year Ended June 30
---------------- ----------------- ----------------
2000 1999 1998
---------------- ----------------- ----------------
Income statement data:
Revenues $ 9,264 $ 37,879 $ 26,162
Costs and expenses (9,211) (41,943) (23,825)
---------------- ----------------- ----------------
Operating income 53 (4,064) 2,337
Income tax (provision) benefit (21) 1,894 (865)
---------------- ----------------- ----------------
Income (loss) from discontinued operations, net $ 32 $ (2,170) $ 1,472
of income taxes
================ ================= ================
Balance sheet data: June 30, 2000 June 30, 1999
------------- -------------
Accounts receivable, net of reserves of $ - $ 2,614
$57 and $463
Inventories, net of reserves of $4,801 and $4,346 - 8,715
Prepaid expense - 323
---------------- -----------------
Total current assets of discontinued - 11,652
operations
---------------- -----------------
Property, plant, and equipment, net 122 4,494
---------------- -----------------
Total assets of discontinued operations 122 16,146
---------------- -----------------
Accounts payable 234 3,841
Accrued payroll and related liabilities - 972
Capital lease liability for computer system - 799
Other accrued expenses - 237
Provision for severance, transaction costs, wind-down costs 394 -
and other liabilities related to the decision to discontinue
the segments
---------------- -----------------
Total liabilities of discontinued 628 5,849
operations
---------------- -----------------
Net assets (liabilities) of discontinued $ (506) $ 10,297
operations
================ =================
F-10
3. ACQUISITION OF MADE IN NATURE:
On April 22, 1998, Made In Nature Company, Inc. (MINCO) was formed for the
purpose of acquiring certain assets and liabilities of Made In Nature, Inc. On
June 11, 1998, SonomaWest acquired the assets and certain liabilities of Made In
Nature, Inc. In addition to the assumption of certain liabilities, SonomaWest
paid $336 in cash and issued to Made In Nature, Inc. and its primary shareholder
a total of 112 warrants to purchase SonomaWest's common stock at $8.00 per
share, expiring through June 2003. The warrant price was equal to the market
price of the Company's stock on June 11, 1998. The value assigned to the
warrants at acquisition date was $456 and is included in equity as warrants for
common stock. Subsequent to the purchase, the Company entered into an agreement
with a creditor of Made In Nature, Inc. whereby this creditor converted its debt
into a 15 percent equity interest in MINCO. The acquisition was accounted for
using the purchase method of accounting. The excess of purchase price over the
estimated fair values of assets acquired and liabilities assumed of $3,103 was
recorded as goodwill and was being amortized on a straight-line basis over 20
years during fiscal 1999. During the fourth quarter of fiscal 1999, the
Company's analysis showed that cash flow projections did not support the
recorded value of MINCO goodwill. Consequently, a charge of $2,935 was recorded
to write-off the unamortized balance of MINCO goodwill. The estimated fair value
of assets acquired and liabilities assumed is summarized as follows:
Assets:
Current assets $ 2,230
Property and equipment 41
---------------
Total assets 2,271
---------------
Liabilities:
Other current liabilities 1,369
Creditor debt subsequently converted to equity 517
Short-term notes payable 2,095
Other long-term debt 500
-------------
Total liabilities 4,481
-------------
Net liabilities acquired $ 2,210
===============
Goodwill is calculated as follows:
Cash purchase price $ 336
Acquisition costs 101
Value of warrants issued 456
Excess of liabilities assumed over assets acquired 2,210
---------------
Goodwill $ 3,103
===============
The following unaudited pro forma condensed consolidated results of continuing
operations for the year ended June 30, 1998 is presented as if the Made In
Nature acquisition had been made at the beginning of the period. The unaudited
pro forma information is not necessarily indicative of either the results of
operations that would have occurred had the purchase been made at the beginning
of fiscal 1998 or the future results of the combined operations. Consolidated
results of operations for the years ended June 30, 2000 and 1999, are presented
in the accompanying consolidated statements of operations in discontinued
operations.
1998
----------------
(unaudited)
Net sales $ 4,767
Net loss (1,648)
Basic loss per common share $ (1.04)
F-11
4. BORROWINGS UNDER LINE OF CREDIT:
Borrowings under the line of credit were secured by the Company's inventory and
accounts receivable. Interest accrued monthly at the bank's prime lending rate.
2000 1999
-------------------------- -------------------------
Balance at June 30 $ - $5,745
Maximum amount available under the line of $ - $8,000
credit at June 30
Average borrowings $479 $3,684
Maximum borrowings $5,745 $5,851
Interest at Prime Prime
Interest rate at June 30 - 7.75%
Weighted average interest rate 7.75% 7.98%
Expiration date December 31, 1999 November 1, 2000
In accordance with the covenants of the revolving line of credit note with the
Company's bank, the Company could not, without prior written consent of the
bank, declare or pay any dividend or distribution either in cash, stock, or any
other property on the Company's stock. No dividends were declared in fiscal
2000, 1999, or 1998. Among the restrictions under the line of credit were
provisions that required the Company to maintain certain financial ratios. The
Company obtained a waiver for the repurchase of stock during fiscal 1998 (see
Note 7) and amended a financial covenant during 1998 to remain in compliance
with the agreement. The Company was in violation of a financial ratio covenant
as of June 30, 1999 for which it obtained a waiver as of June 30, 1999. In
August 1999, the line of credit was paid in full with a portion of the proceeds
from the Tree Top sale. Consequently, the amount outstanding under the line as
of June 30, 1999 is classified as current in the accompanying consolidated
financial statements. In August 1999, the bank amended the line of credit
agreement, reducing the maximum line of credit to $2,000. This amended line of
credit expired on December 31, 1999 and was not renewed.
5. LONG-TERM DEBT:
Long-term debt consists of the following:
2000 1999
--------------- ---------------
Note payable: seven-year consolidation note, interest fixed at $ - $ 932
7.75 percent, interest and principal due monthly, paid in full in August
1999
Note payable: five-year note, interest at the yield of 30-day commercial - 434
paper plus 2.1 percent (7.29 percent at payoff), interest and principal
due monthly, paid in full in August 1999
Notes payable: unsecured five-year notes resulting from repurchase of 564 835
stock, interest at 8.5 percent, interest due monthly, principal
due in January 2003, paid in full in January and August 2000
Note payable: five-year note, interest synthetically fixed at 2,027 2,075
7.35 percent, interest and principal due monthly, maturing in
December 2003, secured by real property
--------------- ---------------
Total 2,591 4,276
Less: Current maturities (617) (1,416)
--------------- ---------------
Long-term debt $ 1,974 $ 2,860
=============== ===============
The Company retired two shareholder notes totaling $271 in the third quarter of
fiscal 2000 and retired the remaining stockholder note of $564 in August 2000.
The real property loan is expected to be paid off based on its normal payment
schedule. Interest expense related to the shareholder notes and the real
property note is included in continuing operations. Remaining interest expense
of $45 and $386, attributed to the ingredients and organic packaged foods
segments, is included in earnings from discontinued operations for fiscal 2000
and 1999, respectively.
F-12
The real property note includes an interest rate swap agreement in which the
Company agrees to exchange, at specified intervals, the difference between fixed
and variable interest amounts. The purpose of the swap is to manage the
Company's interest cost. Under the agreement, the Company is obligated to pay
the lower of the fixed or variable rate. The swap is designated to hedge the
underlying debt obligation. The interest rate differential is reflected as an
adjustment to interest expense over the life of the swap and is not material to
the financial statements as a whole.
Maturities of long-term debt are as follows:
Year Ending
June 30
-----------------
2001 $ 617
2002 57
2003 61
2004 1,856
2005 -
---------------
Total $ 2,591
===============
6. INCOME TAXES:
The following is a summary of the Company's provision for income taxes:
2000 1999 1998
------------------- ------------- -------------
Current:
Federal $ (60) $ 238 $ 486
State (18) 15 71
Deferred:
Federal 1,448 (2,168) 49
State 436 (695) (76)
------------------- ------------- -------------
Provision (benefit) $ 1,806 $ (2,610) $ 530
=================== ============= =============
The components of the provision (benefit) related to continuing operations and
discontinued operations are as follows:
2000 1999 1998
-------------- ------------- --------------
Continuing operations $ (316) $ (663) $ (336)
Discontinued operations 2,122 (1,947) 866
-------------- ------------- --------------
Provision (benefit) $ 1,806 $ (2,610) $ 530
============== ============= ==============
A reconciliation of the income tax provision to the expected provision at the
federal statutory income tax rate is as follows:
2000 % 1999 % 1998 %
------------------ -------- ------------ -------- ------------ ------
Provision (benefit) at federal statutory rate $ 1,535 34% $ (2,056) 34% $ 486 34%
State taxes, less federal tax benefit 260 6 (370) 6 88 6
Tax credits and other 11 - (184) 3 (44) (3)
------------------ -------- ------------ -------- ------------ ------
Total provision (benefit) $ 1,806 40% $ (2,610) 43% $ 530 37%
================== ======== ============ ======== ============ ======
F-13
Temporary differences that gave rise to deferred tax assets and liabilities for
2000 and 1999 were as follows:
2000 1999
-------------- --------------
Deferred tax assets:
Employee benefit accruals $ 15 $ 155
Unicap and inventory reserves 354 1,741
Tax credit carryforwards - 117
State income taxes - 20
Bad debt reserves 28 186
Discontinued operations reserves 204 -
Goodwill - 963
Other 20 10
-------------- --------------
Total deferred tax assets 621 3,192
-------------- --------------
Deferred tax liabilities:
Depreciation (147) (782)
Property taxes - (52)
-------------- --------------
Total deferred tax liabilities (147) (834)
-------------- --------------
$ 474 $ 2,358
============== ==============
7. STOCK REPURCHASE:
During the year ended June 30, 1998, the Company repurchased 139 shares from
three existing shareholders in exchange for notes payable in the amount of $835.
The purchase price was determined based upon the market price at or about the
time of the negotiated transaction. There were no repurchases during fiscal 1999
or fiscal 2000.
8. STOCK APPRECIATION RIGHTS PLAN:
The Company has a stock appreciation rights (SAR) plan as an incentive for key
employees. Under the SAR plan, key employees are granted rights entitling them
to market price increases in the Company's stock. At June 30, 2000 and 1999, 100
SARs were authorized. The Company has not granted SARs since 1995, and all
employees holding SARs were among those terminated during fiscal 2000 in
connection with the discontinuation of the ingredients segment. As a result, all
remaining SARs were canceled during fiscal 2000.
F-14
A summary of the outstanding SARs is as follows:
Rights Outstanding
at June 30
--------------------------
Price per Right 2000 1999
------------- ------------
$2.69 - 2
3.75 - 1
4.63 - -
8.88 - 1
9.63 - 3
------------- ------------
- 7
============= ============
All rights are granted at fair market value at the date of grant. Rights
generally vest ratably over a period from the second to the sixth anniversary
date of the grant. The SAR liability and expense or credit recorded quarterly is
based on the market price of the Company's stock as of the balance sheet date.
In 2000, 1999, and 1998, the Company increased (decreased) operating costs by
$0, ($41), and $43, respectively, in order to reflect the current SAR liability.
9. EMPLOYEE STOCK PURCHASE PLAN:
The Employee Stock Purchase Plan enables substantially all employees to purchase
a specified number of shares of the Company's common stock at 85 percent of the
market value on the first or last business day of the quarterly offering period,
whichever is lower. A maximum of 100 shares is authorized for issuance over the
ten-year term of the plan that began on January 1, 1994. At June 30, 2000, 38
shares remain available for purchase under the plan. The following shares were
issued under the terms of the plan during the three fiscal years ending June 30:
Shares Average Price
Issued per Share
---------- ------------------
2000 3 $5.19
1999 8 6.34
1998 7 4.98
10. EMPLOYEE STOCK OPTION PLAN:
During 1996, the Board of Directors (the Board) approved a stock option plan
(the Plan) for employees and nonemployee consultants authorizing issuance of
options for up to 90 shares of common stock. In 1998, the Plan limit was
increased to 150 shares of common stock. In 1999, the Plan limit was increased
to 275 shares of common stock. The Plan includes incentive stock options (ISOs)
and nonqualified stock options (NSOs). Some of the terms and conditions of the
Plan are different for ISOs and NSOs. The purchase price of each ISO granted
will not be less than the fair market value of the Company's common shares at
the date of grant. The purchase price of each NSO granted shall be determined by
the Board in its absolute discretion, but in no event shall such price be less
than 85 percent of the fair market value at the time of grant. NSO and ISO
options granted have a ten-year life from the date of grant. Vested options can
be exercised until the earlier of: 1) their expiration; or 2) 90 days from the
termination of the employment or consulting relationship. Options normally vest
in 25% annual increments from the date of hire.
The number of shares available for granting future options was 128 as of June
30, 2000, 64 as of June 30, 1999, and 61 as of June 30, 1998.
During May 1999, the Company modified its 1996 Stock Option program (the Plan)
to include all nonbargaining employees. The modification allowed all employees
who were employed as of April 26, 1999, to participate in the Plan, resulting in
the issuance of 123 stock options.
F-15
A summary of the status of the Company's stock option plan at June 30, 2000, and
changes during the year ended are presented in the table below:
Weighted Average
Options Exercise Price
--------------------- --------------------
Balance, June 30, 1999 211 $6.73
Granted 32 5.63
Cancelled (95) 8.00
Exercised - -
--------------------- --------------------
Balance, June 30, 2000 148 $ 5.68
===================== ====================
Options outstanding, exercisable, and vested by price range at June 30, 2000,
are as follows:
Weighted Average Weighted Average
Options Options Vested Remaining Fair Value of
Outstanding at and Exercisable Contractual Life Options Granted, at
Exercise Price June 30, 2000 at June 30, 2000 (Years) Grant Date
- ---------------- ----------------- ------------------ ------------------- ---------------------
$ 5.00 104 104 5.5 $ 1.94
5.28 2 - 9.8 2.10
6.30 15 - 9.4 2.47
8.00 27 7 8.8 4.24
----------------- ------------------ ---------------------
148 111 $ 2.42
================= ================== =====================
The Company accounts for the Plan under APB Opinion No. 25, under which no
compensation cost has been recognized for employee grants of options under the
plan. Had compensation cost for the Plan been determined consistent with SFAS
No. 123, the Company's net income and earnings per share would have been reduced
to the following pro forma amounts:
2000 1999 1998
--------------- ---------- ------------
Net income (loss):
As reported $ 2,710 $ (2,929) $ 899
Pro forma 2,550 (2,995) 854
Basic earnings per share:
As reported 1.78 (1.93) 0.57
Pro forma 1.68 (1.98) 0.54
Diluted earnings per share:
As reported 1.75 (1.93) 0.56
Pro forma 1.65 (1.98) 0.53
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 2000, 1999 and 1996 grants, respectively: weighted
average risk-free interest rate of 6.19, 5.13 and 6.61 percent; expected
dividend yield of 0 percent; expected life of four years for the Plan options;
and expected volatility of 39.54, 63.85 and 37.44 percent.
11. EARNINGS PER SHARE CALCULATION:
The Company computes earnings per share in accordance with SFAS No. 128,
"Earnings per Share." In 2000, 1999 and 1998, the effect of potentially dilutive
stock options and warrants has not been computed where the effect would be
anti-dilutive due to a loss from continuing operations, discontinued operations
and/or a net loss.
F-16
12. COMMITMENTs:
The Company leases office space under an operating lease that expires in 2004.
At June 30, 2000, future minimum rental payments for the operating lease are as
follows:
Operating Lease
2001 $ 176
2002 176
2003 176
2004 81
2005 -
--------------------------
$ 609
==========================
Rental expense under operating leases was $176 in 2000, $403 in 1999, and $259
in 1998.
The Company has been leasing warehouse space, generating revenues of $1,197 in
2000, $665 in 1999, and $518 in 1998. The leases have varying terms, which range
from month-to-month to expiration dates through 2007. Future minimum lease
income as of June 30, 2000, is as follows:
Year Ending
June 30
--------------
2001 $ 765
2002 581
2003 553
2004 553
2005 522
Thereafter 385
---------------
Total $ 3,359
===============
The Company has contingently committed to a $3,000 investment in a
privately-held telecommunications company, MetroPCS, Inc., which will be funded
in fiscal 2001 if certain agreed-upon contingencies are satisfied.
13. RETIREMENT PLANS:
The Company has a contributory retirement savings and profit sharing plan
covering nonunion employees. The Company contributes one and one-half times the
first 3 percent of employee contributions to the retirement savings plan.
Profit-sharing contributions are derived using a specific formula based upon the
Company's earnings. Company contributions to the retirement savings and profit
sharing plan are funded currently and were approximately $58 in 2000, $160 in
1999, and $148 in 1998. The employer's contributions for any fiscal year may not
exceed the amount lawfully deductible by the Company under the provisions of the
Internal Revenue Code.
The Company contributed to a defined contribution plan for employees covered by
collective bargaining agreement. These contributions, funded currently, were
$144 in 2000, $628 in 1999, and $477 in 1998, and were included in discontinued
operations.
14. RELATED-PARTY TRANSACTIONS:
A member of the Company's Board is a member of the law firm that serves as the
Company's general counsel. During 2000, 1999, and 1998, the Company incurred
$271, $124, and $168, respectively, for legal services from this firm and from
another firm of which the director was a member prior to October 16, 1999.
Amounts payable to this firm as of June 30, 2000, totaled $25.
During fiscal 1999, the Company incurred $150 for consulting services from a
current shareholder of the Company.
F-17
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Items 10, 11, 12 and 13.
The information required in Items 10, 11, 12 and 13 will be included in the
definitive Proxy Statement for Registrant's 2000 Annual Meeting of Shareholders
or in an amendment to the Form 10-K. The information required in this Part III
will be filed with the Securities and Exchange Commission no later than 120 days
after the end of the Company's fiscal year.
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K.
I. Documents filed as part of this Report:
(a)(1) Financial Statements
The information required by this Item appears in Item 8 of this Annual
Report on Form 10-K.
(a)(2) Financial Statement Schedules
Financial statement schedules not included herein have been omitted because
of the absence of conditions under which they are required or because the
required information, where material, is shown in the financial statements or
notes thereto.
Schedule No. Description
- -----------------------------------
Schedule III* Real Estate and Accumulated Depreciation.
* Schedule included after signature page.
(a)(3) Exhibits
Exhibit No. Document Description
- --------------------------------------------
3.1 Articles of Incorporation, as amended to date
3.2(1) ByLaws, as amended to date
10.1(2) Employment Agreement between Vacu-dry Company and Gary L. Hess,
dated March 14, 1996
10.2(1) Stock Appreciation Rights Plan
10.3(3) 1996 Stock Option Plan, as amended
10.4(4) 1993 Employee Stock Purchase Plan
10.5(5) Agreement dated June 11, 1998 between MIN Acquisition Corp.,
Vacu-dry Company and Global Walk, Inc.
10.6(5) Co-Sale Agreement dated June 11, 1998 between Vacu-dry Company
and Global Walk, Inc.
10.7(5) Asset Purchase Agreement dated June 11, 1998 between Vacu-dry
Company, MIN Acquisition Corp., Made In Nature, Inc. and Gerald
Prolman
10.8(5) Warrant to Purchase Common Stock dated June 11, 1998 issued
by Vacu-dry Company to Made In Nature, Inc.
10.9(5) Warrant to Purchase Common Stock dated June 11, 1998 issued by
Vacu-dry Company to Gerald E. Prolman
10.10(6) Asset Purchase Agreement dated June 21, 1999 between Vacu-dry
Company and Tree Top, Inc.
10.11 June 20, 1999 Amendment to Employment Agreement between Vacu-dry
Company and Gary L. Hess dated March 14, 1996
10.12 Asset Purchase Agreement dated May 25, 2000 between Premier
Valley Foods, Inc., Made In Nature Company, Inc., and SonomaWest
Holdings, Inc.
11 Computation of Per Share Earnings
21 Subsidiaries of the registrant
23 Consent of Independent Public Accountants
27 Financial Data Schedule (EDGAR Filing Only)
- ---------------------
(1) Incorporated by reference to the registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1992
(2) Incorporated by reference to the registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996
(3) Incorporated by reference to the registrant's Registration Statement on
Form S-8 (No. 333-84295) filed on August 2, 1999
(4) Incorporated by reference to the registrant's Registration Statement on
Form S-8 (No. 033-70870) filed on October 27, 1993
(5) Incorporated by reference to the registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1998
(6) Incorporated by reference to Annex A to the registrant's Consent Statement
on Schedule 14A filed on July 14, 1999
(b) Reports on Form 8-K
During the quarter ended June 30, 2000, the Company did not file any
reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: September 25, 2000 SONOMAWEST HOLDINGS, INC.
By: /s/ Gary L. Hess
-----------------------------
Gary L. Hess
Chief Executive Officer
President
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
- ---------- ----- ----
/s/ Gary L. Hess Chief Executive Officer, September 25, 2000
- -------------------- Chief Financial Officer, President
Gary L. Hess and Director
/s/ Roger S. Mertz
- -------------------- Director September 25, 2000
Roger S. Mertz
/s/ Fredric Selinger
- -------------------- Director September 25, 2000
Fredric Selinger
/s/ Craig Stapleton
- -------------------- Director September 25, 2000
Craig Stapleton
SCHEDULE III
SonomaWest Holdings, Inc.
REAL ESTATE AND ACCUMULATED DEPRECIATION
June 30, 2000
(DOLLARS IN THOUSANDS)
Column A Column B Column C Column D Column E Column F Column G Column H Column I
Costs Gross Amount at
Subsequently which Carried at
Initial Cost to Company Capitalized Close of Year
---------------------------------------------------------------------
--------------------------------------------------------------------------------
Bldgs Bldgs Life on
and and Total Accumulated Year of Year which
Description Encumbrances Land Improve- Improve- Land Improve- (Note 1) Depre- Cons- Acquired Depre-
ments ments ments ciation truction ciation
is
Computed
- -----------------------------------------------------------------------------------------------------------------------------------
1365 Gravenstein 2,027 72 308 879 72 1,187 1,259 859 N/A 1964 5-40
Hwy. So.
Sebastopol, CA
2064 Gravenstein - 159 2,312 3,693 159 6,005 6,164 3,967 N/A 1983 5-20
Hwy. No.
Sebastopol, CA
-----------------------------------------------------------------------------------------------------------
2,027 231 2,620 4,572 231 7,192 7,423 4,826
===========================================================================================================
Note 1. The changes in the total cost of land, buildings, and improvements for
the three years ended June 30, are as follows:
2000 1999 1998
---- ---- ----
Balance at beginning of period 7,391 7,019 6,971
Additions 32 372 48
---------------------------
Balance at end of period 7,423 7,391 7,019
===========================
Note 2. The changes in accumulated depreciation for the three years ended June
30, are as follows:
2000 1999 1998
---- ---- ----
Balance at beginning of period 4,465 4,143 3,826
Depreciation expense 361 322 317
-----------------------------
Balance at end of period 4,826 4,465 4,143
=============================