SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15 (d) of the
- ------- Securities Exchange Act of 1934. For the quarterly period
ended March 31, 2003 or
Transition Report Pursuant to Section 13 or 15(d) of the
- ------- Securities Exchange Act of 1934. For the transition period
from _________ to _________.
Commission File Number 01912
SONOMAWEST HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
California 94-1069729
(State of incorporation) (IRS Employer Identification #)
2064 Highway 116 North, Sebastopol, CA 95472-2662
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 707-824-2001
--------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES: X NO:
------- -------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.
YES: NO: X
------- -------
As of May 9, 2003, there were 1,104,783 shares of common stock, no par value,
outstanding.
SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2003
and June 30, 2002................................................3
Condensed Consolidated Statements of Earnings - Three
and Nine months ended March 31, 2003 and 2002....................4
Condensed Consolidated Statement of Changes in Shareholders'
Equity - Nine Months ended March 31, 2003........................5
Condensed Consolidated Statements of Cash Flows -
Nine Months ended March 31, 2003 and 2002........................6
Notes to Condensed Consolidated Financial Statements.............7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk......14
Item 4. Controls and Procedures.........................................14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................15
Item 2. Changes in Securities and Use of Proceeds......................15
Item 3. Defaults Upon Senior Securities ................................15
Item 4. Submission of Matters to a vote of Security Holders.............15
Item 5. Other Information...............................................15
Item 6. Exhibits and Reports on Form 8-K................................15
Signature ................................................................16
EXHIBIT INDEX.................................................................20
EXHIBITS......................................................................21
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
ASSETS 3/31/03 6/30/02
------------- -------------
(Unaudited)
CURRENT ASSETS:
Cash $ 1,656 $ 2,769
Restricted cash 600 600
Accounts receivable, less allowances for uncollectible accounts of $0 and $10 in
fiscal 2003 and 2002, respectively 112 118
Other receivables 22 20
Prepaid income taxes - 75
Prepaid expenses and other assets 18 121
Current deferred income taxes, net 100 335
---------------------------
Total current assets 2,508 4,038
RENTAL PROPERTY, net 1,818 1,917
INVESTMENT, at cost 2,446 1,402
DEFERRED INCOME TAXES 273 31
PREPAID COMMISSIONS AND OTHER ASSETS 70 82
---------------------------
Total assets $ 7,115 $ 7,470
===========================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 1,871 $ 61
Accounts payable 101 108
Unearned rents and deposits 270 282
Accrued payroll and related liabilities 124 253
Accrued expenses 378 290
Net liabilities of discontinued operations 64 219
---------------------------
Total current liabilities 2,808 1,213
LONG-TERM DEBT, net of current maturities - 1,856
---------------------------
Total liabilities 2,808 3,069
---------------------------
SHAREHOLDERS' EQUITY:
Preferred stock: 2,500 shares authorized; no shares outstanding - -
Common stock: 5,000 shares authorized, no par value; 1,105 shares outstanding in
fiscal 2003 and 2002 2,675 2,633
Stock subscription receivable (400) (400)
Retained earnings 2,032 2,168
---------------------------
Total shareholders' equity 4,307 4,401
---------------------------
Total liabilities and shareholders' equity $ 7,115 $ 7,470
===========================
The accompanying notes are an integral part of these consolidated statements.
3
SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE NINE AND THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Nine Months Three Months
Ended March 31 Ended March 31
-------------- --------------
2003 2002 2003 2002
---- ---- ---- ----
RENTAL REVENUE $ 1,138 $ 1,095 $ 381 $ 362
OPERATING COSTS 1,420 1,639 359 394
--------------------------------------------------
OPERATING (LOSS) INCOME
(282) (544) 22 (32)
INTEREST AND OTHER INCOME (EXPENSE), NET (54) (60) (6) 7
--------------------------------------------------
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
(336) (604) 16 (25)
84 161 (9) (1)
BENEFIT (PROVISION) FOR INCOME TAXES
--------------------------------------------------
NET (LOSS) INCOME FROM CONTINUING OPERATIONS (252) (443) 7 (26)
GAIN (LOSS) ON SALE OF DISCONTINUED OPERATIONS, net of income taxes 116 53 (4) 10
--------------------------------------------------
NET (LOSS) INCOME $ (136) $ (390) $ 3 $ (16)
==================================================
WEIGHTED AVERAGE COMMON SHARES AND EQUIVALENTS:
Basic 1,105 1,042 1,105 1,043
Diluted 1,110 1,051 1,108 1,052
EARNINGS (LOSS) PER COMMON SHARE
Continuing operations
Basic $ (0.23) $ (0.43) $ 0.01 $ (0.02)
Diluted $ (0.23) $ (0.43) $ 0.01 $ (0.02)
Discontinued operations:
Basic $ 0.10 $ 0.05 $ 0.00 $ 0.01
Diluted $ 0.10 $ 0.05 $ 0.00 $ 0.01
Net loss:
Basic $ (0.12) $ (0.37) $ 0.00 $ (0.02)
Diluted $ (0.12) $ (0.37) $ 0.00 $ (0.02)
The accompanying notes are an integral part of these consolidated statements.
4
SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
FOR THE NINE MONTHS ENDED MARCH 31, 2003
(AMOUNTS IN THOUSANDS)
Common Stock
---------------------------- Stock Total
Number Subscriptions Retained Shareholders'
of Shares Amount Receivable Earnings Equity
-----------------------------------------------------------------------------
BALANCE, JUNE 30, 2002 1,105 $ 2,633 $ (400) $ 2,168 $ 4,401
Net loss - - - (136) (136)
Non-cash stock compensation charge - 42 - - 42
------------------------------------------------------------------------------
BALANCE, MARCH 31, 2003 1,105 $ 2,675 $ (400) $ 2,032 $ 4,307
==============================================================================
The accompanying notes are an integral part of these consolidated statements.
5
SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED MARCH 31, 2003 AND 2002
(AMOUNTS IN THOUSANDS)
2003 2002
-----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (136) $ (390)
-----------------------------------
Adjustments to reconcile net loss to net cash provided by operating
activities:
Loss on sale of fixed assets 7 -
Gain on sale of discontinued operations, net (116) (53)
Non-cash stock compensation charge 42 40
Depreciation and amortization expense 234 297
Changes in assets and liabilities:
Accounts receivable, net 6 7
Other receivables (2) 86
Deferred income tax benefit (7) (154)
Prepaid commissions and other assets 12 (52)
Prepaid income taxes 75 287
Prepaid expenses and other assets 103 84
Accounts payable and accrued expenses 81 -
Accrued payroll and related liabilities (129) 234
Unearned rents and deposits (12) 34
-----------------------------------
294 810
-----------------------------------
Net cash provided by continuing operations 158 420
Net cash used in discontinued operations (39) (17)
-----------------------------------
Net cash provided by operating activities 119 403
-----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (142) (113)
Investment in MetroPCS (1,044) (446)
-----------------------------------
Net cash used in investing activities (1,186) (559)
-----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt (46) (42)
Issuance of common stock - 5
-----------------------------------
Net cash used for financing activities (46) (37)
-----------------------------------
NET DECREASE IN CASH (1,113) (193)
CASH AT BEGINNING OF YEAR (of which $600 is restricted) 3,369 3,936
-----------------------------------
CASH AT END OF YEAR (of which $600 is restricted) $ 2,256 $ 3,743
===================================
Supplemental Cash Flow Information
2003 2002
----------------------------------
Interest paid $ 106 $ 109
Taxes paid $ 1 $ 2
The accompanying notes are an integral part of these consolidated statements.
6
SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 2003
Note 1 - Basis of Presentation
The accompanying fiscal year 2003 and 2002 unaudited interim statements have
been prepared pursuant to the rules of the Securities and Exchange Commission.
Certain information and disclosures normally included in annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to such
rules and regulations, although the Company believes these disclosures are
adequate to make the information not misleading. In the opinion of management,
all adjustments necessary for a fair presentation for the periods presented have
been reflected and are of a normal recurring nature. These interim financial
statements should be read in conjunction with the financial statements and notes
thereto for each of the three years in the period ended June 30, 2002. The
results of operations for the nine-month period ended March 31, 2003 are not
necessarily indicative of the results that will be achieved for the entire year
ending June 30, 2003.
Note 2 - Investment
The Company has made a financial commitment to make a $3 million minority
investment in the Series D preferred stock of a privately held
telecommunications company, MetroPCS, Inc., of which $2,446,000 was funded as of
March 31, 2003. The Company accounts for the investment using the cost method.
It is anticipated that the remaining $554,000 will be funded by the end of the
2003 fiscal year.
Note 3 - Discontinued Operations
The after tax gains of $116,000 and $53,000 on the sale of discontinued
operations presented in the accompanying statements of earnings for the three
and nine months ended March 31, 2003 and 2002, respectively, represent the sales
of remaining discontinued inventories and fixed assets net of related selling
costs and income taxes.
On October 3, 2002 the Company entered into a sale agreement with Commercial
Sales and Leasing, Inc. for the remaining Perma-Pak finished goods and other
Perma-Pak property for a total sale price of $240,000. The agreement calls for a
down payment of $175,000 with the balance of $65,000 secured by a non-interest
bearing promissory note. The promissory note calls for payments of $20,000 on
October 25, 2002, $30,000 on April 4, 2003 and $15,000 on July 4, 2003. The
Company has received the October and April payments. Revenue pursuant to this
sale is recorded at the time payments are received. Pursuant to the separation
agreement with the former Chief Executive Officer, Gary L. Hess, "Mr. Hess",
(who is a current board member), the Company agreed to pay Mr. Hess a commission
of 7% on the aggregate sales of $250,000 of Perma-Pak finished goods and other
property and 50% on sales above $250,000. As of March 31, 2003, the Company has
paid Mr. Hess a commission of $44,329 with respect to the sale of Perma-Pak
assets to Commercial Sales and Leasing, Inc. Upon receipt of the balance of the
total purchase price of $45,000, the Company will owe an additional commission
to Mr. Hess of $27,500.
Remaining liabilities of discontinued operations of $64,000 and $219,000, as of
March 31, 2003 and June 30, 2002, respectively, relate to reserves for rental
repairs necessary to ready one of the Company's properties previously used in
the discontinued operations for future rentals. The original reserve was
recorded as a charge to discontinued operations during 2000. All remaining
un-sold fixed assets of discontinued operations are fully written off.
7
Note 4 - Stock Options
Effective July 1, 2002, the Company has elected to account for all prospective
stock options in accordance with SFAS 123, "Accounting for Stock-Based
Compensation". As a result, during the first nine months of fiscal 2003 the
Company incurred a charge included in continuing operations of $42,000 related
to the issuance of 24,200 fully vested stock options to the directors, officers
and certain employees of the Company. No additional stock options have been
granted as of March 31, 2003. The Company recorded an additional charge of
$18,000 during the three months ended September 30, 2002 related to the
extension of a former board member's stock option exercise period.
Prior to July 1, 2002, The Company accounted for stock-based compensation plans
in accordance with Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," under which compensation cost was
recorded as the difference between the fair value and the exercise price at the
date of grant, and was recorded on a straight-line basis over the vesting period
of the underlying options. Prior to July 1, 2002, the Company had adopted the
disclosure only provisions of Statement of Financial Standards ("SFAS") No. 123,
"Accounting for Stock Based Compensation". The Company continues to account for
stock options granted prior to July 1, 2002 in accordance with APB 25; and thus,
continues to apply the disclosure only provisions of SFAS 123 to such options.
During the three months ended March 31, 2002, the Company recognized a
compensation charge of $22,501 related to the extension of a board members'
stock option exercise period. No other compensation expense has been recognized
in the accompanying financial statements pursuant to stock options issued prior
to July 1, 2002 as the option terms are fixed and the exercise price equals the
market price of the underlying stock on the date of grant for all options
granted by the Company.
Had compensation cost for the stock options granted prior to July 1, 2002 been
determined based upon the fair value at grant dates for awards under those plans
consistent with the method prescribed by SFAS 123, the net income (loss) would
have been decreased (increased) to the pro forma amounts indicated below:
-------------------------------------------------------------------------------------------------------
(in thousands, except per Three Months Ended March 31, Nine Months Ended March 31,
share amounts)
----------------------------------------------------------------------
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------
Net (Loss) Income, as reported $ 3 $ (16) $(136) $ (390)
- ------------------------------------------------------------------------------------------------------------
Pro-forma Net Loss $ 2 $ (18) $(141) $ (435)
- ------------------------------------------------------------------------------------------------------------
Earnings (Loss) Per Share:
- ------------------------------------------------------------------------------------------------------------
Basic - as reported $ 0.00 $(0.02) $(0.12) $(0.37)
- ------------------------------------------------------------------------------------------------------------
Basic - pro-forma $ 0.00 $(0.02) $(0.13) $(0.42)
- ------------------------------------------------------------------------------------------------------------
Diluted - as reported $ 0.00 $(0.02) $(0.12) $(0.37)
- ------------------------------------------------------------------------------------------------------------
Diluted - proforma $ 0.00 $(0.02) $(0.13) $(0.42)
- ---------------------------------------------------------------------------------------- -------------------
8
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 2002, 2000, 1999 and 1996 grants, respectively:
weighted average risk-free interest rates of 4.78, 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 25.83, 39.54, 63.85 and 37.44 percent. For
options outstanding as of March 31, 2003, the weighted average fair value as of
the grant date was $2.13.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
SonomaWest Holdings, Inc. (the "Company" or "Registrant") is including the
following cautionary statement in this Quarterly Report to make applicable and
take advantage of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 for any forward-looking statements made by, or on
behalf of, the Company. The statements contained in this Report that are not
historical facts are "forward-looking statements" (as such term is defined in
Section 27A of the Securities Act of 1933 and section 21E of the Securities
Exchange Act of 1934), which can be identified by the use of forward-looking
terminology such as "estimated," "projects," "anticipated," "expects,"
"intends," "believes," or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy that involve risks and
uncertainties. Forward-looking statements include statements concerning plans,
objectives, goals, strategies, future events or performance and underlying
assumptions. Forward-looking statements involve risks and uncertainties, which
could cause actual results or outcomes to differ materially from those expressed
in the forward-looking statements. The Company's expectations, beliefs and
projections are expressed in good faith and are believed by the Company to have
a reasonable basis, although actual results may differ materially from those
described in any such forward-looking statements. All written and oral
forward-looking statements made in connection with this Report which are
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the "Certain Factors" as set forth in our Annual
Report for the fiscal year ended June 30, 2002 filed on September 20, 2002, and
other cautionary statements set forth under "Management's Discussion and
Analysis of Financial Condition and Results of Operations". There can be no
assurance that management's expectations, beliefs or projections will be
achieved or accomplished, and the Company expressly disclaims any obligation to
update any forward-looking statements.
The financial statements herein presented for the three and nine months ending
March 31, 2003 and 2002 reflect all the adjustments that in the opinion of
management are necessary for the fair presentation of the financial position and
results of operations for the periods then ended. All adjustments during the
periods presented are of a normal recurring nature.
OVERVIEW
As of March 31, 2003, the Company's business consists of its real estate
management and rental operations and its minority investment in the Series D
preferred stock of a privately held telecommunications company, MetroPCS, Inc.
Prior to the sale of its other business segments, SonomaWest operated in three
business segments: industrial dried fruit ingredients, organic packaged goods
and real estate. The Company commenced a strategic reorientation upon the
announcement of the proposed sale of its apple-based industrial ingredients
product line in June 1999. In August 1999 the decision was made to sell or
discontinue all product lines in the Company's industrial dried fruit
ingredients business. In January 2000, the Company decided to sell or
discontinue its organic packaged goods business. As a result of these decisions,
both of these business segments are considered discontinued operations and their
operating results, results of cash flows and net assets are reflected outside of
the Company's continuing operations.
During fiscal 2002, the Company committed to a $3 million minority investment in
a telecommunications company. As of March 31, 2003, the Company had invested
$2,446,000 of its $3.0 million commitment.
10
DISCONTINUED OPERATIONS
For the nine months ended March 31, 2003, the Company recorded an after-tax gain
from discontinued operations of $116,000. The after-tax gain for the nine-months
ended March 31, 2003 was primarily a result of the gain of $91,000 ($151,000
pretax) on the sale of the Perma-Pak inventory and equipment and the reversal of
the reserve of $44,000 ($74,000 pretax) for the expected sublease shortfall of
the Company's former corporate headquarters. The reversal of the reserve was a
result of the acceptance of the option by the sublessee to extend the sublease
through the original term of the Company's lease; thus, eliminating the
shortfall. This compares to an after-tax gain of $53,000 for the nine months
ended March 31, 2002.
RESULTS OF CONTINUING OPERATIONS
The Company's continuing line of business is its real estate management and
rental operations and an investment in MetroPCS, Inc.
Results of Operations
- ---------------------
The Company leases warehouse, production, and office space as well as outside
storage space at both of its properties. The two properties are located on 82
acres of land and have a combined leaseable area under roof of 390,000 square
feet. As of March 31, 2003 the Company had a total of 27 tenants compared to 28
tenants in March 31, 2002. The tenants have varying original lease terms ranging
from month-to-month to seven years with options to extend the leases. As of
March 31, 2003, the tenants occupied approximately 218,000 square feet under
roof or 56% of the leasable area under roof. This compares to 209,000 square
feet under roof or 54% as of March 31, 2002. In addition to the area under roof,
the Company had 84,000 square feet of outside area under lease as of March 31,
2003 and 81,000 in 2002.
Rental Revenue. For the nine months ended March 31, 2003 rental revenue
increased $43,000 or 4% as compared to the corresponding period in the prior
year. Although the number of tenants decreased from March 31, 2003 and 2002, the
increase in rental revenue is attributable to increased square footage occupancy
throughout the first nine months of the 2003 fiscal year as compared to the
first nine months of the 2002 fiscal year.
For the three months ended March 31, 2003 rental revenue increased $19,000 or 5%
as compared to the corresponding period in the prior year. This increase was a
primarily the result of the current tenants increasing their space and overall
increases in rental rates as a result of CPI and other lease related charges.
Operating Costs. Operating costs consist of direct costs related to continuing
operations and all general corporate costs. Only direct selling, general and
administrative costs related to the discontinued packaged goods businesses were
charged to discontinued operations in the consolidated statements of operations.
For the nine months ended March 31, 2003 operating costs decreased $219,000 or
13% compared to the nine months ended March 31, 2002. The decrease from fiscal
2002 was primarily due to separation costs of $362,500 related to the
termination of the Company's Chief Executive Officer, which were expensed during
the nine months ended March 31, 2002, offset by the accrual of the expected
non-reimbursable costs to be incurred as a result of storm damage incurred in
December of 2002 of $173,000. The Company's total operating costs exceeded the
tenant rental revenue for the nine months ended March 31, 2003 and 2002. The
Company continues to closely scrutinize all discretionary spending. In addition,
the Company continues to actively search for additional tenant revenue to
eliminate these negative operating results. While the Company and its retained
broker are actively marketing the properties to prospective tenants, there can
be no assurance that tenants will be found in the near term or at rates
comparable with existing leases. As a result, the Company's operating results
will be negatively impacted as long as the tenant rental revenue stream fails to
cover existing operating costs.
11
During December 2002 the Company experienced two severe storms with high winds.
The Company estimates that they will incur $173,000 of costs to repair the
damages and demolish portions of buildings damaged during the two storms that
will not be covered by the Company's insurance as a result of the deductible of
$100,000 per occurrence.
For the three months ended March 31, 2003 operating costs decreased $35,000 or
9%. This decrease was a result of lower depreciation expense and bad debt
expense.
Interest and Other Income (Expense), Net. Interest and other income (expense)
consist primarily of interest income on the Company's cash balances, interest
expense on mortgage debt and the change in the value of the Company's interest
rate swap contract. For the nine months ending March 31, 2003, the Company
generated $38,000 of interest income, incurred $106,000 of interest expense, and
recorded a positive swap contract adjustment of $16,000. This compares to
$84,000 of interest income, $109,000 of interest expense and a negative swap
contract adjustment of $38,000 for the corresponding period in the prior year.
The decrease in interest income is due to a reduced cash balance in fiscal 2003
and a decline in interest rates.
Income Taxes. The effective tax rate for the nine months ended March 31, 2003
decreased to 25% from 27% as of March 31, 2002. As of June 30, 2002 the Company
has carried back all of its federal losses to offset prior years taxable income.
Any tax losses incurred subsequent to the June 30, 2002 will be carried forward
to offset future taxable income. Due to the uncertainty of future realization, a
valuation allowance is recorded against state net operating losses. The primary
reason for the lower effective rate as of March 31, 2003, was the impact of
permanent differences (primarily the $42,000 stock compensation charge) on a
small amount of taxable loss and the valuation allowance recorded against state
net operating losses.
Liquidity and Capital Resources
- -------------------------------
The Company had unrestricted cash of $1.7 million at March 31, 2003 and current
maturities of long-term debt of $1.9 million. The Company's long-term debt is
due and payable in December 2003, and as a result, the entire debt is recorded
under current maturities of long-term debt. The Company anticipates refinancing
this debt and has begun the process of discussing this refinancing with lenders.
The Company's cash balance decreased $1,113,000 during the nine months ended
March 31, 2003, primarily as a result of the investment of $1,044,000 in
MetroPCS, Inc. and capital expenditures of $142,000.
During December 2000, the Company entered into an agreement with its sole lender
to modify the terms of its lending agreement. As a result, the financial based
debt covenant was amended. The new covenant required the Company, at the end of
each fiscal year, to maintain a debt service coverage ratio at least 1.15 to 1.
Until such time as this ratio reaches 1.25 to 1 at the Company's fiscal year
end, the Company is required to maintain restricted, unencumbered cash or
marketable securities of at least $600,000. Furthermore, the terms of the loan
restrict the Company from incurring any additional indebtedness during the term
of the loan. As of August 15, 2002, the Company and the bank agreed to a
Restated and Amended Addendum ("Addendum") to this agreement. This Addendum
amended and restated the provisions of the agreement stated above. The new
Addendum requires that the Company, at the end of each fiscal year, maintain a
debt service coverage ratio of at least 1.05 to 1. It still requires that until
such time as this ratio reaches 1.25 to 1, the Company is required to maintain
restricted, unencumbered cash or marketable securities of at least $600,000. In
addition to the lien on the Company's South Sebastopol Property it grants the
bank a lien on a money market account, in the amount of $90,000. Management
believes that in the future it can remain in compliance with this new debt
service coverage ratio. The $90,000 Money Market account balance is part of, not
an addition to, the restricted unencumbered cash balance of $600,000. As of June
30, 2002, the Company's debt service ratio was 1.18 to 1. Consequently, $600,000
is classified as restricted cash on the accompanying balance sheet. As of March
31, 2003, the Company's debt service coverage ratio was 1.33 to 1.
12
The Company has committed itself to a $3 million minority investment in the
Series D preferred stock of a privately held telecommunications company,
MetroPCS, Inc. As of March 31, 2003, the Company had invested $2,446,000 of its
$3 million commitment. The Company has accounted for the investment using the
cost method. It is expected that the remaining $554,000 will be partially funded
during the fourth quarter of fiscal 2003 with the balance funded in fiscal 2004.
On July 17, 2002 the Company entered into a separation agreement in principle,
which was thereafter executed, with its President and Chief Executive Officer,
Gary L. Hess ("Mr. Hess"), a current board member, replacing Mr. Hess' existing
employment agreement. Pursuant to the separation agreement, Mr. Hess continued
as President and Chief Executive Officer, first on a full-time basis and then on
a part-time basis, through October 31, 2002. Effective September 2002, the
Company began paying separation payments to Mr. Hess in the amount of $12,500
monthly for 29 months, replacing all payment obligations under his prior
employment agreement. The Company's obligation under this agreement of $362,500
was recorded in operating expenses in the first quarter of fiscal 2002. As of
March 31, 2003, the remaining obligation under this agreement is $112,500.
Pursuant to this separation agreement, Mr. Hess has been designated as the
Company's exclusive sales representative in its efforts to sell any and all
remaining Perma-Pak finished goods inventory and other Perma-Pak property
(inventory and property related to discontinued operations) and will receive
commissions of 7% on the aggregate sales up to $250,000 and 50% on the sales
above $250,000. As of October 3, 2002, the Company entered into an agreement to
sell all of the remaining Perma-Pak finished goods inventory and other Perma-Pak
property. As of March 31, 2003 the Company received $195,000 of the $240,000
total purchase price. The Company has paid commissions to Mr. Hess of $ 44,329
pursuant to this sale and $ 53,173 in total pursuant to this agreement. Upon
receipt of the balance of the total purchase price of $45,000, the Company will
owe a commission to Mr. Hess of $27,500. As part of the separation agreement,
Mr. Hess was given until January 29, 2002 to decide whether to extend the period
in which he was eligible to exercise the stock options previously granted to
him. On January 28, 2002, Mr. Hess elected to exercise his option to purchase
80,000 shares of his total outstanding options of 89,474 shares. Mr. Hess
elected to extend the termination date on his option to purchase the remaining
9,474 shares, through the last date of the severance period (January 31, 2004).
As part of the separation agreement the Company agreed to loan Mr. Hess up to
$447,370 to allow Mr. Hess to exercise the aforementioned options. Mr. Hess
elected to borrow $400,000 to exercise 80,000 stock options at $5 per share. The
note dated January 28, 2002 in the amount of $400,000, bears interest at the
Applicable Federal Rate (AFR) for loans of three years or less on the date of
the note (the AFR at January 28, 2002 was 2.73%), payable quarterly. The Note is
payable in full on August 1, 2004. The Note is full recourse and specifically
secured by the stock certificates and evidenced in the form of a loan and
security agreement. As a result of the extension of the option to purchase the
remaining 9,474 shares, the Company incurred a non-cash stock compensation
charge in the third quarter ended March 31, 2002 of $22,501.
On September 4, 2002, the Company authorized the waiver of the provision of
Craig R. Stapleton's (a shareholder and former director) stock options,
providing for the termination of the options 90 days following termination of
service to the Company. Consequently, the period in which Mr. Stapleton is
entitled to exercise his option to purchase 10,000 shares was extended, and a
one-time non-cash compensation charge of $18,000 was recorded in September 2002.
Effective July 1, 2002, the Company has elected to account for all prospective
stock options in accordance with SFAS 123, "Accounting for Stock-Based
Compensation". As a result, during the first quarter of fiscal 2003 the Company
incurred a charge against continuing operations of $42,000 related to the
issuance of 24,200 fully vested stock options to the Directors, Officers and
specific employees of the Company.
13
Item 3. Quantitative and Qualitative Disclosures About Market Risk
During fiscal 1999, the Company entered into a note payable with an initial
principal amount of $2,100,000. The note has a variable interest rate tied to
the LIBOR rate. To reduce its exposure to changes in the LIBOR rate, the Company
entered into an interest-rate swap agreement. The interest rate swap agreement
has a five-year term that coincides with the term of the borrowing, both of
which began on December 1, 1998 and end on December 1, 2003. The swap contract
requires the Company's counter party to pay it a floating rate of interest based
on USD-LIBOR due monthly. In return, the Company pays its counter party a fixed
rate of 5.10% interest due monthly. The interest amounts are calculated based
upon the notional amount, which is amortized monthly based on the Company's
principal payments and was $1,871,502 as of March 31, 2003. The initial
notational amount was $2,100,000. During the nine months ended March 31, 2003,
the Company recorded a decrease in the value of this swap agreement of $14,828.
The fair value of the interest rate swap was $(54,482) as of March 31, 2003, and
is included in accrued liabilities in the accompanying condensed consolidated
financial statements.
Table of Interest Rate Swap:
Notional Variable Interest Fixed Rate Variable Rate Effective
Amount Rate on Note Paid on Received on Interest Rate
Swap Swap on Note
- ---------------------------------------- ----------- ----------------- ---------- -------------- --------------
Matures in December 2003 $1,871,502 3.55% 5.10% (1.30)% 7.35%
Item 4. Controls and Procedures
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chairman of the Board of Directors and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Company's Chairman of the Board of
Directors and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company that is required to be included in the
Company's periodic filings with the Securities and Exchange Commission. There
have been no significant changes in the Company's internal controls or, to the
Company's knowledge, in other factors that could significantly affect those
internal controls subsequent to the date the Company carried out its evaluation,
and there have been no corrective actions with respect to significant
deficiencies and material weaknesses.
The Company's management, including the Chairman of the Board and Chief
Financial Officer, does not expect that our disclosure controls or our 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. Further, 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 the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a vote of Security Holders.
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
3.1(1) Articles of Incorporation, as amended to date
3.2(2) Bylaws, as amended to date
99.1 Certification Pursuant to Section 906 of Sarbanes-Oxley Act
of 2002
99.2 Certification Pursuant to Section 906 of Sarbanes-Oxley Act
of 2002
-------------------------
(1) Incorporated by reference to the registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 2000.
(2) Incorporated by reference to the registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 1992.
b. Reports on Form 8-K
None
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 13, 2003
/s/ Thomas R. Eakin
- ----------------------------------------
Thomas R. Eakin, Chief Financial Officer
16
CERTIFICATIONS
- --------------
I, Roger S. Mertz, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SonomaWest
Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 13, 2003
/s/ Roger S. Mertz
-----------------------------------------------
Roger S. Mertz
Chairman of the Board of Directors
17
CERTIFICATIONS
- --------------
I, Thomas R. Eakin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SonomaWest
Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 13, 2003
/s/ Thomas R. Eakin
----------------------------------------
Thomas R. Eakin
Chief Financial Officer
18
EXHIBIT INDEX
Exhibit No. Document Description
- ------------ --------------------
99.1 Certification Pursuant to Section 906 of Sarbanes Oxley Act of 2002
99.2 Certification Pursuant to Section 906 of Sarbanes Oxley Act of 2002
19