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, 2002
[ ] 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)
2064 HIGHWAY 116 NORTH, SEBASTOPOL, CALIFORNIA 95472
(Address of principal executive offices)
(707) 824-2001
(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 3, 2002 non-affiliates of the Registrant held voting stock
with an aggregate market value of $7,512,524 computed by reference to the
average of the bid and asked prices of such stock on such date. For the purposes
of the foregoing calculations, only directors and executive officers of the
Registrant are deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of September 3 2002, there were 1,104,783 shares of common stock, no par
value, outstanding which is the only class of shares publicly traded.
Portions of the following document are incorporated by reference from the
Registrant's Proxy Statement for Registrant's 2002 Annual Meeting of
Shareholders currently scheduled to be held October 30, 2002 and to be filed
with the Securities and Exchange Commission on or before 120 days after the end
of the 2002 fiscal year, including portions required under Part II, Item 5 of
this report and Part III of this report.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
SonomaWest Holdings, Inc. (the "Company" or "Registrant") 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. 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" 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.
PART I
ITEM 1. BUSINESS
SonomaWest Holdings, Inc., formerly Vacu-dry Company, (SonomaWest or the
Company) was incorporated in 1946 and currently operates as a real estate
management and rental company. The Company also holds an investment in MetroPCS,
Inc., a privately held telecommunications company. Its 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. Prior to June 30, 2000 the Company operated in three business
segments: organic packaged goods, real estate, and ingredients. In July 1999,
the Company consummated an asset purchase agreement to sell the majority of its
ingredients business (see Note 2 to the Financial Statements). 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 to the Financial
Statements).
INDUSTRY SEGMENT INFORMATION
For the year ended June 30, 2002, the Company operated in one reportable
segment, real estate management and rental operations. The Company's primary
business revenue is generated from the leasing of its two properties, located in
Sebastopol, California. The properties are leased to multiple tenants with
leases varying in length from month-to-month to seven years. The Company's
business is not seasonal and does not require significant working capital.
Revenue from the leasing activities is payable either the 1st or 15th of the
month. As of June 30, 2002, one tenant, Benziger Family Winery, accounted for
21% of the Company's revenue.
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 $1,402,000 was funded as of
June 30, 2002, and an additional $522,200 was funded on August 12, 2002.
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MetroPCS, Inc. was formed in 1994 with the goal of acquiring licenses to enable
the company to become a wireless service operator. MetroPCS offers customers
local service with one simple rate plan that enables them to talk all they want
for one flat monthly fee. MetroPCS operates an all-digital network based on
third generation infrastructure and handsets. MetroPCS owns C-Block licenses and
provides service in the following markets: Sacramento, California; Miami,
Florida; and Atlanta, Georgia. MetroPCS will launch services in September 2002
in San Francisco, California. The Company is not involved in the daily
operations or the management of MetroPCS, Inc.
Information regarding all other business income is included in the
discussion of discontinued operations.
COMPETITION
The Company competes with numerous commercial property landlords which
offer warehouse, manufacturing and food processing properties in the greater
Petaluma/Santa Rosa area, located in central to southern Sonoma County of
California. The Company believes that its northern property enjoys a competitive
advantage over other similarly situated properties because of the wastewater
treatment facility located on the property which is ideally suited for tenants
involved in the food processing industry and more particularly the wine
processing industry. The Company believes that both of its northern and southern
properties are competitively priced to the market. Some of the Company's
competitors enjoy the advantage that their properties are newer than the
Company's properties. Currently it is impractical to determine the degree and
timing of capital improvements necessary to achieve competitiveness with newer
properties owned by the Company's competitors. The Company competes on the basis
of location, price, service and tenant improvements, including the northern
property's wastewater treatment facility.
ENVIRONMENTAL MATTERS
The Company believes it has complied with all governmental regulations
regarding protection of the environment. Upon the expiration of the existing
waste water permit (issued by the State of California), the Company was notified
that to renew its permit, the Company's current waste water system would need to
be modified to separate domestic waste from its processed waste water. As a
result, the Company is in the process of making these changes to comply with
these regulations and has incurred related capital expenditures of $48,000
during the 2002 fiscal year. The Company anticipates additional capital
expenditures of approximately $171,000 to complete these changes during the 2003
fiscal year. In addition to these capital expenditures, the Company could be
held liable for the costs of removal or remediation of any hazardous or toxic
substances, if any, that might be located on or in its properties in the future.
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.
EMPLOYEES
The Company currently employs 5 employees in a management or staff
capacity, none of whom is covered under a collective bargaining agreement.
Historically the Company has employed an average of approximately 265
persons, many of whom were production workers and covered by a collective
bargaining agreement. The Company substantially reduced its workforce following
the sale of the bulk of its apple-based industrial ingredients product line to
Tree Top, Inc., of Selah, Washington in 1999, after which time none of its
employees has been covered under a collective bargaining agreement.
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INSURANCE
The Company maintains workers compensation, commercial general liability,
fire, extended coverage and rental loss insurance. 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 all
unforeseen occurrences.
CERTAIN FACTORS
In evaluating the Company and its business, the following factors should be
given careful consideration, in addition to the information mentioned elsewhere
in this Form 10-K.
FACTORS RELATED TO REAL ESTATE INDUSTRY SEGMENT.
WE HAVE A LIMITED OPERATING HISTORY IN THE REAL ESTATE INDUSTRY AND CONSEQUENTLY
FACE SIGNIFICANT RISKS AND CHALLENGES IN BUILDING OUR BUSINESS.
While we have managed real estate and facilities issues for many years, it
is only recently that we have shifted our primary business focus to that
business segment and its investment activities. While we believe we have
sufficient experience, resources and personnel to manage our properties
effectively, we do not have a long operating history that demonstrates such
effective management and there is no assurance that we will be successful.
OUR PROPERTIES DEPEND UPON THE NORTHERN CALIFORNIA AND PARTICULARLY THE SONOMA
COUNTY ECONOMY.
All of our rental revenues come from two properties located in Northern
California and more particularly Sonoma County. Events and conditions applicable
to owners and operators of real property that are beyond our control may
decrease the value of our properties. These events include: local oversupply or
reduction in demand for office, industrial or other commercial space; inability
to collect rent from tenants; vacancies or inability to rent spaces on favorable
terms; inability to finance property development on favorable terms; increased
operating costs, including insurance premiums, utilities, and real estate taxes;
costs of complying with changes in governmental regulations; the relative
illiquidity of real estate investments; changing sub-market demographics and
property damage resulting from seismic activity. The geographical concentration
of our properties may expose us to greater economic risks than if we owned
properties in several geographic regions. Any adverse economic or real estate
developments in the Sonoma County region could adversely impact our financial
condition, results from operations, cash flows, quoted per share trading price
of our common stock and ability to satisfy our debt service obligations.
Currently the commercial, industrial, office market in the greater
Petaluma/Santa Rosa area is experiencing a recession. Obtaining new tenants for
our properties generally requires taking tenants from competitor properties.
There is no assurance that the market will significantly improve in the near
future.
INCREASING UTILITY COSTS AND POWER OUTAGES IN CALIFORNIA MAY HAVE AN ADVERSE
EFFECT ON OUR OPERATING RESULTS AND OCCUPANCY LEVELS.
The State of California continues to address issues related to the supply
of electricity and natural gas. Since June 2000, shortages of electricity have
resulted in increased costs for consumers and certain interruptions in service.
Increased consumer costs and consumer perception that the State is not able to
effectively manage its energy needs may reduce demand for leased space in
California office and industrial properties. A significant reduction in demand
for industrial space would adversely affect our future financial position,
results of operations, cash flow, quoted per share trading price of our common
stock and ability to satisfy our debt service obligations.
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POTENTIAL LOSSES MAY NOT BE COVERED BY INSURANCE.
We carry commercial general liability, fire, extended coverage and rental
loss insurance covering all of our properties. Management believes the policy
specifications and insured limits are appropriate given the relative risk of
loss, the cost of the coverage and industry practice. We do not carry earthquake
coverage. We do not carry insurance for generally uninsurable losses such as
pollution, contamination, asbestos and seepage and terrorism. Some of our
policies are subject to limitations involving large deductibles or co-payments
and policy limits. If we experience a loss, which is uninsured or which exceeds
policy limits, we could lose the capital invested in the damaged properties as
well as the anticipated future cash flows from those properties. In addition, if
the damaged properties are subject to recourse indebtedness, we would continue
to be liable for the indebtedness, even if the properties were irreparable.
DOWNTURNS IN TENANTS' BUSINESSES MAY REDUCE OUR CASH FLOW.
For the year ended June 30, 2002, we derived all of our continuing
operating revenues from rental income and tenant reimbursements. A tenant may
experience a downturn in its business, which may weaken its financial condition
and result in its failure to make timely rental payments. In the event of
default by a tenant, we may experience delays in enforcing our rights as
landlord and may incur substantial costs in protecting our investment. The
bankruptcy or insolvency of a major tenant also may adversely affect the income
produced by our properties. If any tenant becomes a debtor in a case under the
U.S. Bankruptcy Code, we cannot evict the tenant solely because of the
bankruptcy. In addition, the bankruptcy court might authorize the tenant to
reject and terminate its lease. Our claim against the tenant for unpaid, future
rent would be subject to a statutory cap that might be substantially less than
the remaining rent actually owed under the lease. Even so, our claim for unpaid
rent would likely not be paid in full. Any losses resulting from the bankruptcy
of any of our tenants could adversely impact our financial condition, results
from operations, cash flow, the quoted per share trading price of our common
stock and the ability to satisfy any debt service obligations. Although we have
not experienced material losses from tenant bankruptcies, tenants could file for
bankruptcy protection in the future.
WE MAY BE UNABLE TO RENEW LEASES OR RE-LET SPACE AS LEASES EXPIRE.
As of June 30, 2002, leases representing approximately 0% and 9% of the
square footage of our properties will expire in 2003 and 2004, respectively. If
leases expire with above market rental rates we may be forced to renew or
re-lease such expiring leases at lower rates. We cannot give any assurance that
leases will be renewed or that its properties will be re-leased at rental rates
equal to or above the current rental rates. If the rental rates for our
properties decrease, existing tenants do not renew their leases, or we do not
re-lease a significant portion of our available space, our financial position,
results of operations, cash flow, quoted per share trading price of our common
stock and ability to satisfy its debt service obligations would be adversely
affected.
OUR REAL ESTATE HOLDINGS COULD SUBJECT US TO POTENTIAL ENVIRONMENTAL LIABILITY.
We could be held liable for the costs of removal or remediation of any
hazardous or toxic substances located on or in our 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 our 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.
5
WE RELY ON A MAJOR TENANT FOR A SIGNIFICANT PORTION OF OUR RENTAL REVENUES.
The Company has one major tenant, Benziger Family Winery, the loss of which
would have a material adverse effect on the operating results of the real estate
operations. Benziger Family Winery accounted for 21%, 26% and 21% of the rental
revenues for the fiscal years ended June 30, 2002, 2001 and 2000, respectively.
In 9addition, Benziger Family Winery accounted for 26% and 33% of the accounts
receivable balance as of the fiscal years ended June 30, 2002 and 2001,
respectively. At June 30, 2002 and 2001, all rent amounts owing by Benziger
Family Winery were payable within the normal billing cycle and were not overdue.
FACTORS RELATED TO INVESTMENT OPERATIONS.
WE MAY NOT RECEIVE A RETURN ON OUR INVESTMENT IN METROPCS, INC.
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 $1,402,000 was funded as of
June 30, 2002, and an additional $522,200 was funded on August 12, 2002. The
wireless industry is unsettled, highly competitive and is marked by rapidly
developing and expanding technologies, which presents some risks. Even though
management believes that the investment in MetroPCS represents an attractive
opportunity for the Company and will ultimately provide a positive return to the
Company, there is no assurance that this will occur.
OUR INVESTMENT IN METROPCS, INC. REPRESENTS A SIGNIFICANT PORTION OF OUR ASSETS.
As of June 30, 2002, we had invested $1,402,000 of our $3.0 million
commitment. Our investment of $1,402,000 represents 18.7% of our total assets
and assuming we had fully funded our $3.0 million commitment as of June 30,
2002, would represent 40% of our total assets. Our investment in MetroPCS is our
only investment. Shareholders in the Company do not have the benefits that would
result from a diversified portfolio of investments. Even though management
believes that the investment in MetroPCS will ultimately provide a positive
return to the Company, the loss of our investment in MetroPCS could have a
material adverse effect on our business, financial condition and results of
operations.
ITEM 2. PROPERTIES
ADMINISTRATIVE OFFICES. As of August 25, 2001 the principal administrative
offices of the Company were relocated to 2064 Highway 116 North, Sebastopol,
California. The administrative offices occupy a small portion of this
Company-owned property. Prior to March 2000, the principal administrative
offices of the Company were located in Santa Rosa, California. The Santa Rosa
offices consist of approximately 9,200 square feet of office space and are
leased through December 2003. This space has been sublet through February 2003
at approximately the Company's lease rate, with an option to renew through
December 2003. If in management's opinion it is probable that the sublessee will
not exercise the option through December 2003, the Company will actively market
this space to minimize the vacancy risk upon expiration of the sublease. There
can be no assurance that these marketing efforts will be successful or that a
suitable sublessee will be located in a timely manner.
REAL PROPERTY. The Company owns two properties together comprising 82 acres
in the "West County" wine area of Sonoma County approximately 56 miles north of
San Francisco. The properties are four miles apart, north and south of the town
of Sebastopol located in the "Russian River Valley" wine appellation district.
SONOMAWEST INDUSTRIAL PARK SOUTH. This property consists of 15.2 acres of
land immediately south of Sebastopol at 1365 Gravenstein Highway South. It is in
the City of Sebastopol's sphere of
6
influence. The improvements consist of five connected buildings on a parcel
approximately five acres in size with an aggregate of 84,724 square feet of
leasable space under roof. The available space is suited for commercial rental.
All buildings have fire sprinkler protection. Other features include ample
parking, security and a location close to major north-south and east-west
traffic arteries. In addition, there is 16,543 square feet of paved parking area
that is currently leased. The property is zoned for "limited industrial" use,
which means that permitted uses include agricultural/food processing, light
industry, related office to support industrial tenant activities, warehousing or
storage. Adjacent to these five acres are two additional undeveloped Company
owned parcels approximately two acres and eight acres in size zoned "limited
industrial" and "low density residential", respectively.
As of June 30, 2002, 84% of the leasable space under roof has been leased
to eight tenants on a month-to-month or long-term basis. An additional 16,543
square feet of outside space has also been leased. Lease terms range from
month-to-month to six years with options to extend beyond that.
The following table sets forth the schedule of future lease expirations and
other data related to the South property:
Percent of 2002
Number of Tenants Total Square Annual Rent Gross Rent
Year ending Whose Leases Will Feet Covered by Represented by Represented by
June 30th Expire Leases Leases Leases
- ----------------------------------------------------------------------------------------------
2003 - 71,247 $298,516 68%
2004 2 63,671 272,888 62%
2005 - 63,671 240,053 54%
2006 1 32,265 160,312 36%
2007 - 32,265 75,937 17%
2008 2 - - -
The federal tax basis of the property is $343,831. The accumulated book
depreciation is $906,173 and the book net carrying value is $331,875.
Depreciation expense is calculated on a straight-line basis for book purposes
and various methods for tax purposes.
The real estate taxes for this property for the fiscal year ended June 30,
2002 were $15,132.
The Company has a $1.9 million loan secured by this property, which matures
in December 2003.
SONOMAWEST INDUSTRIAL PARK NORTH. This property consists of 66.4 acres of
land approximately two miles north of Sebastopol at 2064 Gravenstein Highway
North. The improvements consist of twelve buildings located on approximately 27
acres with an aggregate of 305,356 square feet of leasable space under roof. In
addition, there is 64,344 square feet of outside area that is currently leased.
The balance of the property is dedicated to wastewater treatment and a large
pond for fire protection. This property is zoned "diversified agriculture" in
its entirety, which means that it can be used for agricultural/food processing,
cold storage, warehousing and related office space to support industrial tenant
activities. SonomaWest is currently attempting to broaden the permitted uses of
the 2064 Gravenstein Highway North property 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.
As of June 30, 2002, 47% of the leasable space under roof has been leased
to eighteen tenants on a month-to-month or long-term basis. An additional 64,344
square feet of outside space has also been leased. Leases range from
month-to-month to six years with options to extend beyond that.
7
The following table sets forth the schedule of the future lease expirations
and other data related to the North property:
Percent of 2002
Number of Tenants Total Square Annual Rent Gross Rent
Year ending Whose Leases Will Feet Covered by Represented by Represented by
June 30th Expire Leases Leases Leases
- ----------------- ---------------------- ------------------ ------------------ ------------------
2003 - 145,826 $807,337 75%
2004 4 119,963 767,396 71%
2005 - 119,963 758,435 71%
2006 1 117,558 630,594 59%
2007 2 55,633 165,100 15%
2008 5 17,628 29,086 3%
The federal tax basis of the property is $1,595,115. The accumulated book
depreciation is $3,874,986 and the book net carrying value is $1,447,984.
Depreciation expense is calculated on a straight-line basis for book purposes
and various methods for tax purposes.
The real estate taxes for this property for the fiscal year ended June 30,
2002 were $58,347.
The Company has no debt associated with this property. The Company is
evaluating whether it should seek development entitlements for this property.
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.
The Company is not a party to any legal proceedings.
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 fiscal year ended June 30, 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the Nasdaq-Small Cap Market
(symbol: SWHI).
The quarterly high and low prices for the last two fiscal years were as
follows:
QUARTER ENDING LOW HIGH
--------------- ---- ----
09/30/00 5.75 6.44
12/31/00 5.94 7.50
03/31/01 6.94 8.00
06/30/01 6.40 7.83
09/30/01 7.05 8.20
12/31/01 6.50 9.70
8
3/31/02 6.75 8.99
6/30/02 6.56 9.27
The above quotations were obtained from the Yahoo Finance Historical Quotes
Online website.
On September 3, 2002, there were approximately 449 registered holders of
common stock and 50 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
$6.80.
In December 2000, the Company repurchased and retired 112,000 warrants
for $112,000. The warrants represented a right to purchase 112,000 shares of
common stock and had an exercise price of $8 per share. The warrants were
originally assigned a value of $456,000. Common stock was increased by the
difference between the repurchase price and the originally assigned value.
In October 2000, the Company's Board of Directors authorized the
repurchase of up to 500,000 shares of the Company's stock at $8.00 per share in
a tender offer. During the fourth quarter of fiscal 2001, 777,000 shares were
tendered resulting in the pro rated repurchase of 64% (500,000) of the tendered
shares. In July 2002 the transfer company handling this tender offer reimbursed
the Company $3,120 for 390 shares at $8.00 per share. These shares could not be
processed due to improper paper work submitted during the tender offer and as a
result the funds were ultimately reimbursed to the Company.
The Company has not paid dividends on its common stock within the last
15 years. Even if its future operations result in profitability, as to which
there can be no assurance, there is no present anticipation that dividends will
be paid. Rather, the Company expects that any future earnings will be applied
toward the further development of the Company's business.
The information regarding equity compensation plans appearing under the
heading "Equity Compensation Plan Information" of our proxy statement relating
to our 2002 Annual Meeting of Stockholders to be held on October 30, 2002 is
incorporated into this item by reference.
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ITEM 6. SELECTED FINANCIAL DATA.
YEAR ENDED JUNE 30 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2002 2001 2000 1999 1998
---------------------------------------------------------------------------------
Total revenues (1) $ 1,447 $ 1,192 $ 1,197 $ 665 $ 518
Net loss from continuing (511) (355) (473) (759) (573)
operations
Net earnings (loss) from
discontinued operations 16 161 3,183 (2,170) 1,472
Net earnings (loss) (495) (194) 2,710 (2,929) 899
Loss per share from continuing
operations
Basic (0.49) (0.27) (0.31) (0.50) (0.36)
Diluted (0.49) (0.27) (0.31) (0.50) (0.36)
Earnings (loss) per share from
discontinued operations
Basic 0.02 0.12 2.09 (1.43) 0.93
Diluted 0.02 0.12 2.06 (1.43) 0.92
Earnings (loss) per share
Basic (0.47) (0.15) 1.78 (1.93) 0.57
Diluted (0.47) (0.15) 1.75 (1.93) 0.56
Total Assets 7,470 7,687 12,969 17,023 17,008
Long Term Debt 1,856 1,917 1,974 2,860 1,703
(1) After the sale of the Company's apple-based industrial ingredient
business and the discontinuation of its organic packaged goods business in
fiscal 2000, the Selected Financial Data presented above was reformatted to
reflect this discontinuation in the ongoing business of the Company. As a
result, this chart now reflects the ongoing real estate business as continuing
operations and the financial results from the discontinuation of its industrial
ingredients and organic packaged goods business as discontinued operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
OVERVIEW
As of fiscal 2002 the Company's business consists of its real estate
management and rental operations and its minority investment in the Series D
preferred stock of a privately held telecommunications company, MetroPCS, Inc.
Prior to the sale of its other business segments, SonomaWest operated in three
business segments: industrial dried fruit ingredients, organic packaged goods
and real estate. The Company commenced a strategic reorientation upon the
announcement of the proposed sale of its apple-based industrial ingredients
product line in June 1999. In August 1999 the decision was made to sell or
discontinue all product lines in the Company's industrial dried fruit
ingredients business. In January 2000, the Company decided to sell or
discontinue its organic packaged goods business. As a result of these decisions,
both of these business segments are considered discontinued operations and their
operating results, results of cash flows and net assets are reflected outside of
the Company's continuing operations.
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During fiscal 2001, the Company committed to a $3 million minority
investment in the Series D preferred stock of a telecommunications company,
MetroPCS, Inc. As of June 30, 2002, the Company had funded $1,402,000 of its
$3.0 million commitment. Subsequent to year-end an additional $522,200 was
funded on August 12, 2002.
RESULTS OF CONTINUING OPERATIONS
The Company's continuing line of business consists of its rental
operations, real estate management and an investment in MetroPCS. See Item 2,
Properties, above for a further discussion of the Company's real estate
operations.
FISCAL 2002 COMPARED TO FISCAL 2001
RENTAL REVENUE. The Company leases warehouse, production, and office space
as well as outside storage space at both of its properties. The two properties
have a combined leaseable area of approximately 472,433 square feet on 82 acres
of land. As of the end of fiscal year 2002, there were 26 leases covering
297,023 square feet of leasable space or 63% compared to 58% in fiscal 2001. The
leases contain varying original terms ranging from month-to-month to six years.
Fiscal 2002 rental revenue increased $255,000 from $1,192,000 in fiscal 2001 to
$1,447,000 in fiscal 2002. This increase was primarily the result of increased
occupancy. Nonetheless, rental revenue does not cover all operating costs,
yielding deficits of $716,000 and $532,000 in fiscal years 2002 and 2001
respectively. 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.
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 charged to discontinued operations in the consolidated
statements of operations in 2002 and 2001. As of the end of fiscal 2002 and
2001, the Company's total operating costs exceeded the tenant rental revenue by
$618,000 and $782,000, respectively. Operating expenses increased 5% or $91,000,
from $1,974,000 in fiscal 2001 to $2,065,000 in fiscal 2002. Of the $2,065,000
of operating expenses in fiscal 2002, $40,101 was due to non-cash compensation
charges related to the extension of stock options and $362,500 was a result of
accrued separation costs related to the resignation of the Company's CEO
pursuant to the terms of a separation agreement. These nonrecurring expenses
were substantially offset by reductions in other operating expenses in the areas
of repairs and maintenance, energy, payroll, telephone and accounting. Efforts
to reduce and/or maintain expenses continue to be an important focus of the
Company.
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 fair value of the
Company's interest rate swap contract. 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. After this reduction of
the Company's total debt, the Company had substantial unrestricted cash balances
of $2.8 million and $3.3 million in fiscal 2002 and 2001, respectively. In
fiscal 2002 the Company generated $102,000 of interest income, incurred $144,000
of interest expense, and recorded a decrease in the fair value of the interest
rate swap contract of $59,000. This compared to $418,000 of interest income,
$145,000 of interest expense and a decrease in the fair value of the interest
rate swap contract of $11,000, in fiscal 2001.
INCOME TAXES. The fiscal 2002 effective tax benefit rate decreased to 29%
from the fiscal 2001 effective tax benefit rate of 33%. The decrease is due to
an additional valuation allowance placed on state deferred tax assets due to the
uncertainty of the future realization of such deferred tax assets and future
11
taxable income against which the state net operating losses could be offset. The
Company has continued to benefit from federal losses due to the ability to carry
such losses back and offset against prior years' taxable income.
FISCAL 2001 COMPARED TO FISCAL 2000
RENTAL REVENUE. Fiscal 2001 rental revenue remained relatively constant at
$1,192,000 decreasing $5,000 from fiscal 2000.
OPERATING COSTS. For fiscal 2001, operating costs decreased 10% or $216,000
from $2,190,000 in fiscal 2000 to $1,974,000. In fiscal 2001, the operating
costs of the continuing operations began to normalize and as a result the
Company experienced a reduction in the ongoing expenses. Part of this decrease
was the reduction of temporary labor costs.
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 fair value of the
Company's interest rate swap contract. 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. After this reduction of
the Company's total debt, the Company had substantial unrestricted cash balances
of $3.3 million and $8.3 million in fiscal 2001 and 2000, respectively. In
fiscal 2001 the Company generated $418,000 of interest income, incurred $145,000
of interest expense, and recorded a decrease in the fair value of the interest
rate swap contract of $11,000, compared to $409,000 of interest income and
$218,000 of interest expense in fiscal 2000.
INCOME TAXES. The fiscal 2001 effective tax benefit rate decreased to 33%
from the fiscal 2000 effective tax benefit rate of 40%. The decrease is due to a
valuation allowance placed on state net operating losses generated in fiscal
2001 due to the uncertainty of the future realization of such deferred tax
assets and future taxable income against which the state net operating losses
could be offset.
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. 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 as of June 30, 2002 and 2001, the operating results of the
discontinued operations in the consolidated statements of operations for fiscal
2002, 2001, and 2000 and the cash flows from discontinued operations in the
consolidated statements of cash flows for fiscal 2002, 2001, and 2000.
For fiscal 2002, the Company recorded an after-tax gain from discontinued
operations of $16,000. This compares to an after-tax gain from discontinued
operations of $161,000 for 2001 and $3,151,000 for 2000. The decreases in 2001
and 2002 are a result of the decrease in available discontinued assets to sell
and the completion of the wind-down of discontinued operations.
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.
12
The Company is actively marketing all remaining assets of its discontinued
businesses (primarily food storage inventory), but there can be no assurances
that there will be a sale of all or any of the remaining assets. All of these
assets have been fully reserved.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash of $ 3.4 million at June 30, 2002 (of which $600,000
is restricted), and current maturities of long-term debt of $61,000. Although
the Company generated a pre-tax loss of $716,000 from operating activities, the
Company generated positive cash flow from operating activities of $414,000. The
decrease in the cash balance of $567,000, from $3.9 million at June 30, 2001 to
$3.4 million at June 30, 2002, was primarily a result of the investment of
$803,000 in MetroPCS, Inc. and capital expenditures of $129,000 offset by cash
flows of $414,000 generated from operating activities.
During December 2000, the Company entered into an agreement with its sole
lender to modify the terms of its lending agreement. As a result, the financial
based debt covenant was amended. The new covenant required the Company, at the
end of each fiscal year, to maintain a debt service coverage ratio at least 1.15
to 1. Until such time as this ratio reaches 1.25 to 1, the Company was required
to maintain restricted, unencumbered cash or marketable securities of at least
$600,000. Furthermore, the terms of the loan restrict the Company from incurring
any additional indebtedness during the term of the loan. As of August 15, 2001,
the Company and the bank agreed to a Restated and Amended Addendum ("Addendum")
to this agreement. This Addendum amended and restated the provisions of the
agreement stated above. The new Addendum requires that the Company, at the end
of each fiscal year, maintain a debt service coverage ratio of at least 1.05 to
1. It still requires that until such time as this ratio reaches 1.25 to 1, the
Company is required to maintain restricted, unencumbered cash or marketable
securities of at least $600,000. In addition to the lien on the Real Property
(South Property only) it grants the bank a lien on a money market account, in
the amount of $90,000. Management is confident 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.
The Company has a variable rate borrowing tied to the LIBOR rate. To reduce
its exposure to changes in the LIBOR rate, the Company entered into an interest
rate swap contract. Under the terms of the interest rate swap, the Company
exchanges - monthly, the difference between fixed and floating interest amounts
calculated on an initial agreed-upon notional amount of $2,100,000. The notional
amount is amortized monthly based on the Company's principal payments and was
$1,917,000 as of June 30, 2002. The interest rate contract 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. In accordance with Statement of Accounting Standards No.
133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
the Company reports all changes in the fair value of its swap contract in
earnings. During the year ended June 30, 2002, the Company recorded a decrease
in the fair value of this swap contract of $59,000. This amount is included in
interest expense.
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 June 30, 2002, the
13
Company had invested $1,402,000 of its $3 million commitment. The Company has
accounted for the investment using the cost method. It is expected that the
remaining $1,598,000 will be funded in several installments throughout the
fiscal year ending June 30, 2003. Subsequent to year-end, an additional $522,200
was funded on August 12, 2002.
In December 2000, the Company repurchased and retired 112,000 warrants for
$112,000. The warrants represented a right to purchase 112,000 shares of common
stock and had an exercise price of $8 per share. The warrants were originally
assigned a valued of $456,000. Common stock was increased by the difference
between the repurchase price and the originally assigned value.
During fiscal 2001, the Company repurchased 500,000 shares of the Company's
stock at $8.00 per share in a tender offer. The tender offer was oversubscribed,
as 777,000 shares were tendered resulting in the pro rated repurchase of 64%
(500,000 shares) of the tendered shares. In July 2002 the transfer company
handling this tender offer reimbursed the Company $3,120 for 390 shares at $8.00
per share. These shares could not be processed due to improper paper work
submitted during the tender offer and as a result the funds were ultimately
reimbursed to the Company.
On July 17, 2001 the Company entered into a separation agreement in
principle, which was thereafter executed, with its President and Chief Executive
Officer, Mr. Gary L. Hess ("Mr. Hess") replacing Mr. Hess existing employment
agreement. Pursuant to the separation agreement, Mr. Hess continued as President
and Chief Executive Officer, first on a full-time basis and then on a part-time
basis, through October 31, 2001. Effective September 2001, the Company began
paying separation payments to Mr. Hess in the amount of $12,500 monthly for 29
months, replacing all payment obligations under his prior employment agreement.
The Company's obligation under this agreement of $362,500 was recorded in
operating expenses in the first quarter of fiscal 2002. Mr. Hess has been
designated as the Company's exclusive sales representative in its efforts to
sell any and all remaining Perma-Pak finished goods inventory and other
Perma-Pak property (inventory and property related to discontinued operations)
and will receive commissions as such sales occur. As part of the separation
agreement, Mr. Hess was given until January 29, 2002 to decide whether to extend
the period in which he was eligible to exercise the stock options previously
granted to him. On January 28, 2002, Mr. Hess elected to exercise his option to
purchase 80,000 shares of his total outstanding options of 89,474 shares. Mr.
Hess elected to extend the termination date on his option to purchase the
remaining 9,474 shares, through the last date of the severance period (January
31, 2004). As part of the separation agreement the Company agreed to loan Mr.
Hess up to $447,370 to allow Mr. Hess to exercise the aforementioned options.
Mr. Hess elected to borrow $400,000 to exercise 80,000 stock options at $5 per
share. The note dated January 28, 2002 in the amount of $400,000, bears interest
at the Applicable Federal Rate (AFR) for loans of three years or less on the
date of the note (the AFR at January 28, 2002 was 2.73%), payable quarterly. The
Note is payable in full on August 1, 2004. The Note is full recourse and
specifically secured by the stock certificates and evidenced in the form of a
loan and security agreement. As a result of the extension of the option to
purchase the remaining 9,474 shares, the Company incurred a non-cash stock
compensation charge in the third quarter ended March 31, 2002 of $22,501.
On September 4, 2001, the Company authorized the waiver of the provision of
Mr. Craig R. Stapleton's (a shareholder and former director) stock options,
providing for the termination of the options 90 days following service.
Consequently, Mr. Stapleton's option to purchase 10,000 shares was extended, and
a one-time non-cash compensation charge of $18,000 was recorded in September
2001.
14
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, which require the
Company to make estimates and assumptions (see Note 1 to the financial
statements). The Company believes that of its significant accounting policies
(see Note 1 to the financial statements), the following may involve a higher
degree of judgment and complexity.
The most critical accounting policies were determined to be those related
to: valuation of the Company's investment in MetroPCS, discontinued operations
reserves and the valuation allowances on deferred tax assets.
VALUATION OF INVESTMENT IN METROPCS
The investment in MetroPCS is accounted for using the cost method. The
Company continues to monitor the financial condition, cash flow, operational
performance and other relevant information about MetroPCS, to evaluate the fair
value of this investment. This process is based primarily on information that we
request from MetroPCS and conversations with MetroPCS management. The Company
also tracks MetroPCS information available to the general public. Since MetroPCS
is a privately held company, it is not subject to the same disclosure
requirements of public companies and as such, the basis for our evaluation is
subject to the timing, accuracy and disclosure of the data received. If as a
result of the review of this information, the Company believes its investment
should be reduced to a fair value below its cost, the reduction would be charged
to "loss on investments" on the consolidated statements of operations.
DISCONTINUED OPERATIONS RESERVES
As a result of the discontinuance of the Company's industrial ingredients
and organic packaged goods businesses, the Company established reserves to
account for potential charges that are expected to arise in future periods
related to discontinued operations. Remaining reserves as of June 30, 2002 are
as follows: (1) A reserve of $74,000 related to a potential shortfall in the
sublease of the Company's former corporate headquarters. This reserve may be
more than adequate if the current sublessee chooses to exercise its option
through the term of the original lease. If they do not, then the reserve may not
be adequate if the Company cannot find another sublessee to take over the lease
at the same rate for the remainder of the term of the original lease. (2) A
reserve of $132,000 for repairs to the North Property related to the expenses
necessary to modify the facility from a food processing operation to a
multi-tenant property. Once this reserve is depleted if there are any additional
repairs needed to complete this modification of the facility, these expenses
will be charged directly against "operating expenses" on the consolidated
statement of operations to the extent they are not capitalizable. Additionally
all remaining assets of discontinued operations (primarily inventory) are fully
reserved.
VALUATION ALLOWANCE ON DEFERRED TAXES
The Company records deferred tax assets and/or liabilities based upon its
estimate of the taxes payable in future years, taking into consideration any
change in tax rates and other statutory provisions. The Company continues to
post losses from its continuing operations. The losses have generated federal
tax net operating losses ("NOLs") which have been carried back to offset prior
years' taxable income. As a result the Company expects to receive a tax refund
from the Internal Revenue Service of $75,000 related to fiscal 2002, and
received refunds of $250,442 in fiscal 2001 and $763,768 in fiscal 2000. After
the carryback of the June 30, 2002 Federal NOL there are no remaining federal
NOLs as of June 30, 2002. For state tax purposes, California does not allow
corporations to carryback their NOLs, corporations can
15
only carry forward 55% of the NOLs to future years to offset net operating
profits. Furthermore, state net operating losses will begin to expire in fiscal
2005. As a result, the Company has established a valuation allowance for state
deferred tax assets for which future realization is uncertain. At June 30, 2002,
the Company had recorded, net deferred tax assets of $366,000.
SUBSEQUENT EVENTS
STOCK OPTIONS
On July 31, 2002, the Company's Board of Directors approved the SonomaWest
Holdings, Inc. 2002 Stock Incentive Plan (the "2002 Plan"). The 2002 Plan is
designed to benefit the Company and its shareholders by providing incentive
based compensation and will encourage officers, directors, consultants and other
key employees of the Company and its affiliates to attain high performance and
encourage stock ownership in the Company. The 2002 Plan is intended to serve as
the successor program to the Company's previously adopted 1996 Stock Option
Plan. The 2002 Plan will be presented to the Company's shareholders for adoption
at the Company's 2002 Annual Meeting of Shareholders to be held on October 30,
2002. Following its adoption by the shareholders, no further options will be
granted under the 1996 Stock Option Plan. Currently, 142,026 shares are
available for issuance under the 1996 Stock Option Plan. A total of 75,000
shares of common stock will be reserved for issuance under the 2002 Plan. the
adoption of the 2002 Plan reduces the number of shares available for stock
option grants from 142,026 to 75,000 shares.
On July 31, 2002, the Company's Board of Directors granted options under
the 2002 Plan exercisable in the aggregate for 22,500 shares of common stock to
the following Directors: Roger S. Mertz - 7,500, David J. Bugatto - 5,000, Gary
L. Hess - 5,000, Fredric Selinger - 5,000. In addition to the Directors, the
Board of Directors also granted options under the 2002 Plan exercisable in the
aggregate for 1,700 shares of common stock to other officers and employees. All
of these common stock options were granted at the market price on the date of
grant of $7.20 per share.
METROPCS INVESTMENT
On August 12, 2002, the Company made an additional investment of $522,200 in
MetroPCS, Inc., as part of its total $3.0 million commitment. After this payment
the Company is committed to make an additional investment of $1,076,000. The
Company anticipates this investment will be made by the end of the 2003 fiscal
year.
MINIMUM LEASE INCOME
The Company has been leasing warehouse space, generating revenues of
$1,447,000 in 2002, $1,192,000 in 2001 and $1,197,000 in 2000. The leases have
varying terms, which range from month-to-month to expiration dates through 2008.
As of June 30, 2002, assuming none of the existing leases is renewed or no
additional space is leased, the following will be the future minimum lease
income (in thousands):
16
YEAR ENDING
JUNE 30
--------------
2003 1,106
2004 1,040
2005 998
2006 791
2007 241
Thereafter 29
------
Total $4,205
======
RELATED PARTY TRANSACTIONS
David J. Bugatto, director, has entered into an independent consulting agreement
with the Company, whereby Mr. Bugatto will provide real estate consulting
services to the Company for a monthly fee of $2,500. In addition, in the event
that either of the Company's Sonoma County properties are sold during the term
of the agreement, Mr. Bugatto would be paid a fee of 2.5% of the sales price if
no broker commission is involved and 1.25% of the sales price if a broker is
involved in the sale. In the event that either property is refinanced during the
term of the agreement, Mr. Bugatto will be paid a fee equal to 1% of the amount
of the proceeds received by the Company in excess of its current debt. The
agreement is effective until the earlier of its termination by either party or
December 31, 2003. During fiscal 2002, the Company paid Mr. Bugatto $36,000, for
real estate consulting services. As of June 30, 2002, there were no amounts
payable to Mr. Bugatto.
Gary L. Hess, director and former President and Chief Executive Officer, has
entered into an independent agreement with the Company to sell its remaining
Perma-Pak inventory and equipment. During fiscal 2002, the Company incurred
$9,000 in commissions under this agreement. As of June 30, 2002, there was
$2,000 payable to Mr. Hess. On July 17, 2001 the Company entered into a
separation agreement in principle, which was thereafter executed, with Mr. Hess,
replacing his existing employment agreement. Pursuant to the separation
agreement, Mr. Hess continued as President and Chief Executive Officer, first on
a full-time basis and then on a part-time basis, through October 31, 2001.
Effective September 2001, the Company began paying separation payments to Mr.
Hess in the amount of $12,500 monthly for 29 months, replacing all payment
obligations under his prior employment agreement. The Company's obligation under
this agreement of $362,500 was recorded in operating expenses in the first
quarter of fiscal 2002. As 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.
17
Roger S. Mertz, Chairman of the Board, is a partner of the law firm Allen
Matkins Leck Gamble & Mallory LLP, which firm serves as the Company's general
counsel. During 2002, 2001, and 2000, the Company incurred $186,000, $214,000
and $271,000 respectively, for legal services from this firm and from another
firm of which Mr. Mertz was a partner prior to October 16, 1999. There were no
amounts payable to this law firm as of June 30, 2002.
On September 4, 2001, the Company authorized the waiver of the provision of Mr.
Craig R. Stapleton's (a shareholder and former director) stock options,
providing for the termination of the options 90 days following service.
Consequently Mr. Stapleton's option to purchase 10,000 shares was extended, and
a one-time non-cash compensation charge of $18,000 was recorded in September
2001.
Thomas R. Eakin, CFO, entered into an independent consulting agreement with the
Company, whereby Mr. Eakin will provide financial management and accounting
services to the Company. During fiscal 2002, the Company incurred $51,000 for
financial management and accounting consulting services. As of June 30, 2002,
there were no amounts payable to Mr. Eakin. The independent consulting agreement
terminated on June 30, 2002. Subsequent to year-end, the Company entered into a
new Consulting Agreement with Mr. Eakin. Under the agreement, Mr. Eakin will
provide financial management and accounting services to the Company. Mr. Eakin
is compensated at an hourly billing rate of $110 per hour, plus expenses.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Consolidated Financial Statements and Consolidated Financial Statement
Schedule
Independent Auditor's Report............................................... F-1
Consolidated Balance Sheets at June 30, 2002 and 2001...................... F-2
Consolidated Statements of Operations for the years ended
June 30, 2002, 2001 and 2000............................................... F-3
Consolidated Statements of Changes in Shareholders' Equity
for the years ended June 30, 2002, 2001 and 2000........................... F-4
Consolidated Statements of Cash Flows for the years ended
June 30, 2002, 2001 and 2000............................................... F-5
Notes to Consolidated Financial Statements................................. F-6
19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
SonomaWest Holdings, Inc.:
We have audited the accompanying consolidated balance sheet of SonomaWest
Holdings, Inc. (a California corporation) and Subsidiary as of June 30, 2002 and
the related consolidated statements of operations, changes in shareholders'
equity, and cash flows for the year then ended. These financial statements and
the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements of SonomaWest Holdings,
Inc. and Subsidiary as of June 30, 2001 and for the years ended June 30, 2001
and 2000, were audited by other auditors whose report dated August 6, 2001,
expressed an unqualified opinion on those statements.
We conducted our audit 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 audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SonomaWest Holdings,
Inc. and Subsidiary as of June 30, 2002 and the results of its operations and
its cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
Our audit was 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.
GRANT THORNTON LLP
San Francisco, California,
August 2, 2002
F-1
SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2002 AND 2001
(AMOUNTS IN THOUSANDS)
2002 2001
------------------
ASSETS
CURRENT ASSETS:
Cash $ 2,769 $ 3,336
Restricted cash (see note 3) 600 600
Accounts receivable, less allowances for uncollectible accounts of $6
and $10 in fiscal 2002 and 2001, respectively 118 97
Other receivables 20 124
Prepaid income taxes 75 287
Prepaid expenses and other assets 121 129
Current deferred income taxes, net 335 263
------------------
Total current assets 4,038 4,836
------------------
RENTAL PROPERTY, net 1,917 2,252
------------------
INVESTMENT, at cost 1,402 599
------------------
DEFERRED TAXES 31 --
------------------
PREPAID COMMISSIONS AND OTHER ASSETS 82 --
------------------
Total assets $ 7,470 $ 7,687
==================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 61 $ 57
Accounts payable 108 70
Unearned rents and deposits 282 176
Accrued payroll and related liabilities 253 52
Accrued expenses 290 241
Net liabilities of discontinued operations 219 281
------------------
Total current liabilities 1,213 877
------------------
LONG-TERM DEBT, net of current maturities 1,856 1,917
------------------
DEFERRED INCOME TAXES, net -- 45
------------------
Total liabilities 3,069 2,839
------------------
SHAREHOLDERS' EQUITY:
Preferred stock: 2,500 shares authorized; no shares outstanding -- --
Common stock: 5,000 shares authorized, no par value; 1,105 and 1,024
shares outstanding in fiscal 2002 and 2001, respectively 2,633 2,187
Stock subscription receivable (400) --
Retained earnings 2,168 2,661
------------------
Total shareholders' equity 4,401 4,848
------------------
Total liabilities and shareholders' equity $ 7,470 $ 7,687
==================
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, 2002, 2001, AND 2000
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2002 2001 2000
---------- ---------- -----------
RENTAL REVENUE $ 1,447 $ 1,192 $ 1,197
-----------------------------
OPERATING COSTS 2,065 1,974 2,190
-----------------------------
INTEREST AND OTHER INCOME (EXPENSE), NET (98) 250 204
-----------------------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX (716) (532) (789)
BENEFIT FOR INCOME TAXES (205) (177) (316)
-----------------------------
NET LOSS FROM CONTINUING OPERATIONS (511) (355) (473)
-----------------------------
DISCONTINUED OPERATIONS:
Earnings from discontinued operations, net of income taxes -- -- 32
Gain on sale of discontinued operations, net of income
taxes 16 161 3,151
-----------------------------
NET EARNINGS FROM DISCONTINUED OPERATIONS 16 161 3,183
-----------------------------
NET EARNINGS (LOSS) $ (495) $ (194) $ 2,710
=============================
WEIGHTED AVERAGE COMMON SHARES AND EQUIVALENTS:
Basic 1,052 1,291 1,520
Diluted 1,061 1,319 1,548
EARNINGS (LOSS) PER COMMON SHARE:
Continuing operations:
Basic $ (0.49) $ (0.27) $ (0.31)
Diluted $ (0.49) $ (0.27) $ (0.31)
Discontinued operations:
Basic $ 0.02 $ 0.12 $ 2.09
Diluted $ 0.02 $ 0.12 $ 2.06
Net earnings (loss):
Basic $ (0.47) $ (0.15) $ 1.78
Diluted $ (0.47) $ (0.15) $ 1.75
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, 2002, 2001, AND 2000
(AMOUNTS IN THOUSANDS)
WARRANTS
FOR STOCK TOTAL
COMMON SUBSCRIPTIONS RETAINED SHAREHOLDERS
COMMON STOCK STOCK RECEIVABLE EARNINGS EQUITY
----------------------
NUMBER
OF SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------
Net loss -- -- -- -- (194) (194)
Repurchase of Common Stock (500) (1,068) -- -- (3,019) (4,087)
Repurchase and Retire Warrants 344 (456) -- (112)
Issuance of common stock 2 6 -- -- -- 6
----------------------------------------------------------------------------------
BALANCE, JUNE 30, 2001 1,024 $ 2,187 $ -- $ -- $ 2,661 $ 4,848
----------------------------------------------------------------------------------
Net loss -- -- -- -- (495) (495)
Tender offer reimbursement -- 1 -- -- 2 3
Exercise of stock options 80 400 -- (400) -- --
Non-cash stock compensation -- 40 -- -- -- 40
Issuance of common stock 1 5 -- -- -- 5
----------------------------------------------------------------------------------
BALANCE, JUNE 30, 2002 1,105 $ 2,633 $ -- $ (400) $ 2,168 $ 4,401
==================================================================================
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, 2002, 2001, AND 2000
(AMOUNTS IN THOUSANDS)
2002 2001 2000
-------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (495) $ (194) $ 2,710
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Earnings from discontinued operations, net -- -- (32)
Gain on sale of discontinued operations, net (16) (161) (3,151)
Non-cash stock compensation charge 40 -- --
Depreciation and amortization expense 383 419 414
Changes in assets and liabilities:
Accounts receivable, net (21) 13 (110)
Other receivables 104 (124) --
Deferred income tax provision (benefit) (148) 256 1,884
Prepaid commissions and other assets (82) -- --
Prepaid income taxes 212 529 (250)
Prepaid expenses and other assets 8 (42) 78
Accounts payable and accrued expenses 87 164 (65)
Accrued payroll and related liabilities 201 (26) (199)
Unearned rents and deposits 106 33 140
-------------------------------------------
874 1,061 (1,291)
-------------------------------------------
Net cash provided by continuing operations 379 867 1,419
-------------------------------------------
Net cash provided by discontinued operations 35 144 11,887
-------------------------------------------
Net cash provided by operating activities 414 1,011 13,306
-------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (129) (25) (179)
Investment in MetroPCS (803) (599) --
Investing activities of discontinued operations -- -- 2,099
-------------------------------------------
Net cash provided by (used in) investing
activities (932) (624) 1,920
-------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under the line of credit -- -- 3,727
Payments on the line of credit -- -- (9,472)
Principal payments of long-term debt (57) (53) (1,414)
Principal payments of shareholder debt -- (564) (271)
Stock repurchase 3 (4,087) --
Warrant repurchase -- (112) --
Issuance of common stock 5 6 15
-------------------------------------------
Net cash used for financing activities (49) (4,810) (7,415)
-------------------------------------------
NET INCREASE (DECREASE) IN CASH (567) (4,423) 7,811
CASH AT BEGINNING OF YEAR (of which $600 is restricted as
of July 1, 2001) 3,936 8,359 548
-------------------------------------------
CASH AT END OF YEAR (of which $600 is restricted as of
June 30, 2002 and 2001) $ 3,369 $ 3,936 $ 8,359
===========================================
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, 2002
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 currently operates as a real estate
management and rental company with an investment in MetroPCS, Inc., a privately
held telecommunications company. Its 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. Prior to June 30, 2000 the Company operated in three business
segments: organic packaged goods, real estate, and ingredients. In July 1999,
the Company consummated an asset purchase agreement to sell the majority of its
ingredients business (see Note 2). 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).
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of SonomaWest and its
85 percent-owned subsidiary, MINCO. As of June 30, 2001, all of the remaining
assets of MINCO have been sold and in 2002 MINCO was liquidated. The
accompanying consolidated statements of operations reflect the financial results
of MINCO as part of 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 that 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 of its real estate
management, rental operations and an investment in MetroPCS. 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, 2002, 2001 and
2000.
As of June 30, 2002 the Company has disposed of all discontinued assets with the
exception of certain inventories and fixed assets related to the Perma-Pak
product line, which have been fully reserved.
The Company has a net liability for discontinued operations of $219, which
consists of reserves of $74 for potential sublease shortfalls related to its
lease at Stony Point Circle in Santa Rosa (the Company's former corporate
headquarters) and $132 for repairs to the North Property. Both reserves were
recorded in fiscal 2000, when the related operations were discontinued. The
rental repairs reserve is reduced as the Company readies existing property for
rental. Also included in liabilities for discontinued operations is $13 related
to a prepaid deposit for the purchase of Perma-Pak inventory.
All corporate overhead costs are presented as a component of continuing
operations.
F-6
SUPPLEMENTAL STATEMENTS OF CASH FLOWS INFORMATION
2001 2001 2000
-------------------------------------------
Cash paid for:
Interest $145 $159 $326
===========================================
Income taxes $ 2 $ 2 $420
===========================================
INVENTORIES
As of June 30, 2002 the Company's remaining inventories of $1,563 consist solely
of Perma-Pak food storage items, priced using the first-in, first-out (FIFO)
method and are fully reserved.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method based upon the estimated useful lives of the assets as
follows:
Buildings and improvements 5 to 45 years
Machinery and office equipment 3 to 15 years
The remaining machinery and equipment of the discontinued operations is fully
reserved.
Rental property consists of the following as of June 30:
2002 2001
----------------------
Land $ 231 $ 231
Buildings, machinery and improvements 6,649 6,649
Office equipment and autos 143 370
Construction in progress 80 12
----------------------
Total rental property 7,103 7,262
Accumulated depreciation (5,186) (5,010)
----------------------
Net rental property $ 1,917 $ 2,252
======================
Improvements that extend the life of the asset are capitalized; other
maintenance and repairs are expensed. The cost of maintenance and repairs was
$63 in 2002, $139 in 2001, and $113 in 2000.
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.
F-7
PREPAID COMMISSIONS
The Company capitalizes rental commissions paid to real estate brokers and
amortizes these commission over the term of the lease.
EARNINGS PER SHARE CALCULATION
The Company computes earnings per share in accordance with SFAS No. 128,
"Earnings per Share." In 2002, 2001 and 2000, 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.
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. A valuation allowance is provided for deferred tax assets, if
their realization is uncertain.
REVENUE
The Company recognizes rental income on a straight-line basis over the term of
occupancy in accordance with the provisions of the leases.
CONCENTRATION OF CREDIT RISK
The Company has one major tenant, Benziger Family Winery, the loss of which
would have a material adverse effect on the operating results of the real estate
operations. Benziger Family Winery accounted for 21%, 26% and 21% of the rental
revenues for the fiscal years ended June 30, 2002, 2001 and 2000, respectively.
In addition, Benziger Family Winery accounted for and 26% and 33% of the
accounts receivable balance as of the fiscal years ended June 30, 2002 and 2001,
respectively.
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."
Pursuant to the terms of his separation agreement (see Note 11), Gary L. Hess
(the Company's former President and Chief Executive Officer) was granted an
extension of his option to purchase 9 shares of the Company's common stock. As a
result, the Company incurred a non-cash stock compensation charge in the third
quarter ended March 31, 2002 of $22.
On September 4, 2001 the Company authorized the waiver of the provision of Mr.
Craig R. Stapleton's (a shareholder and former director) stock options,
providing for the termination of his options 90 days following service.
Consequently Mr. Stapleton's option to purchase 10,000 shares was extended and a
one-time non-cash compensation charge of $18 was recorded in September 2001.
F-8
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.
DERIVATIVES
The Company has a variable rate borrowing tied to the LIBOR rate. To reduce its
exposure to changes in the LIBOR rate, the Company has entered into an interest
rate swap contract. Under the terms of the swap contract, the Company exchanges
monthly, the difference between fixed and floating interest amounts calculated
on an initial agreed-upon notional amount of $2,100. The notional amount is
amortized monthly based on the Company's principal payments and was $1,917 as of
June 30, 2002. The interest rate contract 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.
In accordance with Statement of Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") the Company reports
all changes in fair value of its swap contract in earnings. During the year
ended June 30, 2002, the Company recorded a decrease in the value of this swap
of $59. This amount is included in interest expense.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2001 and 2000 consolidated
financial statements to conform to the current year presentation adopted for
fiscal 2002 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 included 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 excluded 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 $12,000 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 $1,700 were sold for $1,900.
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
F-9
$1,100 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. All
of the remaining assets of this segment had been disposed of as of June 30,
2001.
During fiscal 2000, the Company recorded a net after-tax gain of $3,200 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 $16,100 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.
During fiscal 2001, the Company recorded an after tax gain of $161 related to
the wind-down of the ingredients and organic packaged foods segment. This gain
was a result of product sold at higher than anticipated prices and residual
equipment sales.
During fiscal 2002, the Company recorded an additional after tax gain of $16
related to the wind-down of the ingredients and organic packaged foods segment.
The Company's remaining line of business is its real estate management, rental
operations and an investment in MetroPCS, Inc.
Summarized historical information of the discontinued operations is as follows:
FISCAL YEAR ENDED JUNE 30
---------------------------------
2002 2001 2000
---------------------------------
Income statement data:
Revenues $ -- $ -- $ 9,264
Costs and expenses -- -- (9,211)
---------------------------------
Operating income -- -- 53
Income tax provision -- -- (21)
---------------------------------
Income from discontinued operations, net
of income taxes $ -- $ -- $ 32
=================================
BALANCE SHEET DATA: June 30, 2002 June 30, 2001
---------------------------------
Liability related to the decision to discontinue 219 281
the segments (primarily rental repairs and lease
obligations)
---------------------------------
Net liabilities of discontinued operations $ 219 $ 281
=================================
F-10
Summarized historical information of the discontinued operations reserves is as
follows:
JUNE 30, 2002 JUNE 30, 2000 JUNE 30, 2000
------------- ------------- -------------
Beginning Balance $ 281 $ 394 --
Additions to Reserve -- 48 3,551
Reserves Utilized (62) (161) (3,157)
----------------------------------------------
Liability for severance, transaction
costs, wind-down costs and other
liabilities related to the decision to
discontinue the segments $ 219 $ 281 $ 394
=============================================
3. LONG-TERM DEBT:
Long-term debt consists of the following:
2002 2001
--------------------------
Note payable: five-year note, interest synthetically fixed at 7.35
percent, interest and principal due monthly, maturing in
December 2003, secured by real property 1,917 1,974
Less: Current maturities (61) (57)
--------------------------
Long-term debt $ 1,856 $ 1,917
==========================
During December 2000, the Company entered into an agreement with its sole lender
to modify the terms of its lending agreement. As a result, the financial based
debt covenant was amended. The new covenant required the Company, at the end of
each fiscal year, to maintain a debt service coverage ratio at least 1.15 to 1.
Until such time as this ratio reaches 1.25 to 1, the Company was required to
maintain restricted, unencumbered cash or marketable securities of at least
$600. Furthermore, the terms of the loan restrict the Company from incurring any
additional indebtedness during the term of the loan. As of August 15, 2001, the
Company and the Bank agreed to a Restated and Amended Addendum 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. In addition to the lien on the Real Property (South Property
only) it grants the bank a lien on a Money Market account, in the amount of $90.
Management is confident that in the future it can remain in compliance with this
new debt service coverage ratio. The $90 Money Market account balance is part
of, not an addition to, the restricted unencumbered cash balance of $600. As of
June 30, 2002, the Company's debt service ratio was 1.18 to 1. Consequently,
$600 is classified as restricted cash on the accompanying balance sheet.
Maturities of long-term debt are as follows:
YEAR ENDING
JUNE 30
----------------
2003 61
2004 1,856
----------
Total $ 1,917
==========
F-11
4. INCOME TAXES:
The following is a summary of the Company's provision (benefit) for income
taxes:
2002 2001 2000
-------------------------------------
Current:
Federal $ (75) $ (288) $ (60)
State - - (18)
Deferred:
Federal (153) 194 1,448
State 29 - 436
-------------------------------------
Provision (benefit) $ (199) $ (94) $ 1,806
=====================================
The components of the provision (benefit) related to continuing operations and
discontinued operations are as follows:
2002 2001 2000
-------------------------------------
Continuing operations $ (205) $ (177) $ (316)
Discontinued operations 6 83 2,122
-------------------------------------
Provision (benefit) $ (199) $ (94) $ 1,806
=====================================
A reconciliation of the income tax provision (benefit) to the expected provision
(benefit) at the federal statutory income tax rate is as follows:
2002 % 2001 % 2000 %
---------------------------------------------------------
Provision (benefit) at federal $ (236) 34% $ (98) 34% $ 1,535 34%
statutory rate
State taxes, less federal tax benefit (40) 6% (17) 6% 260 6
Valuation allowance on state tax 60 (9%) 17 (6%)
deferreds
Tax credits and other 17 (2%) 4 (1%) 11 -
---------------------------------------------------------
Total provision (benefit) $ (199) 29% $ (94) 33% $ 1,806 40%
=========================================================
Temporary differences that gave rise to deferred tax assets and liabilities for
2002 and 2001 were as follows:
2002 2001
----------------------------------
Deferred tax assets:
Employee benefit accruals $ 93 $ 13
Bad debt reserves 2 4
Discontinued operations
reserves 217 241
Depreciation 32 -
Interest rate swap 28 -
Net operating losses 68 32
Other 52 39
----------------------------------
Total deferred tax assets 492 329
----------------------------------
Deferred tax liabilities:
Depreciation - (45)
Property taxes (34) (34)
----------------------------------
Total deferred tax
liabilities (34) (79)
----------------------------------
Valuation allowance (92) (32)
----------------------------------
$ 366 $ 218
==================================
F-12
As of June 30, 2002, the Company had state net operating loss carryforwards of
approximately $1,200, which are fully reserved for. The company has no federal
net operating loss carryforwards as of June 30, 2002.
5. STOCK REPURCHASE:
In December 2000, the Company repurchased and retired 112 warrants for $112. The
warrants represented a right to purchase 112 shares of common stock and had an
exercise price of $.008 per share. The warrants were originally assigned a value
of $456. Common stock was increased by the difference between the repurchase
price and the originally assigned value.
In October 2000, the Company's Board of Directors authorized the repurchase of
up to 500 shares of the Company's stock at $.008 per share in a tender offer. In
the fourth quarter of fiscal 2001, 777 shares were tendered resulting in the pro
rated repurchase of 64% (500 shares) of the tendered shares. In July 2002, the
transfer company handling this tender offer, reimbursed the Company $3 for 0.4
shares. These shares could not be processed due to improper paper work submitted
during the tender offer and as a result $3 was ultimately reimbursed to the
Company.
6. STOCK APPRECIATION RIGHTS PLAN:
In fiscal 2002, the Company terminated its stock appreciation rights (SAR) plan.
In prior years, key employees were granted rights entitling them to market price
increases in the Company's stock. As of June 30, 2001 and 2000, 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. In 2002, 2001, and 2000, there was no charge
against earnings as a result of the SAR plan.
7. EMPLOYEE STOCK PURCHASE PLAN:
In fiscal 2002, the Company terminated its Employee Stock Purchase Plan. Prior
to termination, the Plan enabled 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 was authorized for issuance over the
ten-year term of the plan that began on January 1, 1994. The following shares
were issued under the terms of the plan during the five fiscal years ending June
30:
SHARES AVERAGE PRICE
ISSUED PER SHARE
-------------------------------
2002 1 $ 6.00
2001 1 $ 5.58
2000 3 $ 5.19
1999 8 $ 6.34
1998 7 $ 4.98
8. 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, and 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
F-13
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; however, the 25
stock options granted in fiscal 2002 were granted fully vested.
The number of shares available for granting future options was 142 as of June
30, 2002, 167 as of June 30, 2001, and 128 as of June 30, 2000.
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.
A summary of the status of the Company's stock option plan at June 30, 2002, and
changes during the year ended are presented in the table below:
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
---------------------------------------
Balance, June 30, 2001 108 $ 5.06
Granted 25 7.48
Cancelled (1) 5.28
Exercised (80) 5.00
---------------------------------------
Balance, June 30, 2002 52 $ 6.31
=======================================
Options outstanding, exercisable, and vested by price range at June 30, 2002,
are as follows:
WEIGHTED AVERAGE WEIGHTED AVERAGE
OPTIONS OPTIONS VESTED REMAINING FAIR VALUE OF
OUTSTANDING AT AND EXERCISABLE CONTRACTUAL LIFE OPTIONS GRANTED,
EXERCISE PRICE JUNE 30, 2002 AT JUNE 30, 2002 (YEARS) AT GRANT DATE
- --------------------- ------------------ ------------------ ------------------ ------------------
$ 5.00 24 17 6.3 $ 1.96
$ 5.28 1 - 7.7 2.10
$ 7.48 25 25 9.1 2.13
$ 8.00 2 2 6.8 4.24
------------------------------------- ------------------
52 44 $ 2.13
===================================== ==================
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 earnings (loss) per share would have been reduced to
the following pro forma amounts:
2002 2001 2000
-------------------------------------
Net earnings (loss):
As reported $ (495) $ (194) $ 2,710
Pro forma (540) (201) 2,550
Basic earnings per share:
As reported (0.47) (0.15) 1.78
Pro forma (0.51) (0.15) 1.68
Diluted earnings per share:
As reported (0.47) (0.15) 1.75
Pro forma (0.51) (0.15) 1.65
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 rate of 4.78, 6.19, 5.13 and 6.61 percent;
expected
F-14
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.
Pursuant to his separation agreement (see Note 11), the Company's former
President and Chief Executive Officer, Gary L. 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 shares of his total outstanding
options of 89 shares. Mr. Hess elected to extend the termination date on his
option to purchase the remaining 9 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 to allow Mr. Hess to exercise the
aforementioned options. Mr. Hess elected to borrow $400 to exercise 80 stock
options at $.005 per share. The note dated January 28, 2002 in the amount of
$400 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 shares, the Company incurred a non-cash
stock compensation charge in the third quarter ended March 31, 2002 of $22.
On September 4, 2001, the Company authorized the waiver of the provision of Mr.
Craig R. Stapleton's (a shareholder and former director) stock options,
providing for the termination of his options 90 days following service.
Consequently Mr. Stapleton's option to purchase 10,000 shares was extended, and
a one-time non-cash compensation charge of $18 was recorded in September 2001.
On July 31, 2002, the Company's Board of Directors approved the SonomaWest
Holdings, Inc. 2002 Stock Incentive Plan (the "2002 Plan"). The 2002 Plan is
designed to benefit the Company and its shareholders by providing incentive
based compensation and will encourage officers, directors, consultants and other
key employees of the Company and its affiliates to attain high performance and
encourage stock ownership in the Company. The 2002 Plan is intended to serve as
the successor program to the Company's previously adopted 1996 Stock Option
Plan. The 2002 Plan will be presented to the Company's shareholders for adoption
at the Company's 2002 Annual Meeting of Shareholders to be held on October 30,
2002. Following its adoption by the shareholders, no further options will be
granted under the 1996 Stock Option Plan. A total of 75 shares of common stock
will be reserved for issuance under the 2002 Plan.
On July 31, 2002, the Company's Board of Directors granted options under the
2002 Plan exercisable in the aggregate for 22.5 shares of common stock to the
following Directors: Roger S. Mertz - 7.5, David J. Bugatto - 5.0, Gary L. Hess
- - 5.0, Fredric Selinger - 5.0. In addition to the Directors, the Board of
Directors also granted options under the 2002 Plan exercisable in the aggregate
for 1.7 shares of common stock to other officers and employees. All of these
common stock options were granted at the market price on the date of grant of
$7.20 per share.
F-15
9. COMMITMENT AND CONTINGENCIES:
The Company leases office space under an operating lease that expires in 2004.
At June 30, 2002, future minimum rental payments for the operating lease (net of
sublease) are as follows:
OPERATING LEASE (NET
OF SUBLEASE)
-----------------------
2003 61
2004 86
-----------------------
$147
=======================
Rental expense under operating leases was $183 in 2002, $178 in 2001 and $176 in
2000. Related sub-lease income was $184, $178, and $37 in 2002, 2001 and 2000
respectively.
The Company has committed itself to a $3,000 minority investment in the Series D
preferred stock of a privately held telecommunications company, MetroPCS, Inc.
As of June 30, 2002, the Company had invested $1,402 of its $3,000 commitment.
The Company has accounted for the investment using the cost method. It is
expected that the remaining $1,598 will be funded in several installments
throughout the fiscal year ending June 30, 2003. Subsequent to year-end $522 was
funded on August 12, 2002.
LITIGATION
From time to time, the Company is a party to lawsuits and claims arising out of
the normal course of business.
10. RETIREMENT PLANS:
In fiscal 2002, the Company terminated its contributory retirement savings and
profit sharing plan. The Plan called for Company contributions of one and
one-half times the first 3 percent of employee contributions to the retirement
savings plan. Profit-sharing contributions were derived using a specific formula
based upon the Company's earnings. Company contributions to the retirement
savings and profit sharing plan were $0 in 2002, $20 in 2001 and $58 in 2000.
As of fiscal 2002, there are no employees covered by a collective bargaining
agreement. Prior to fiscal 2002, the Company contributed to a defined
contribution plan for employees covered by a collective bargaining agreement.
These contributions, funded currently, were $0 in 2002, $0 in 2001, and $144 in
2000, and were included in discontinued operations.
11. RELATED-PARTY TRANSACTIONS:
Roger S. Mertz, Chairman of the Board, is a partner of the law firm Allen
Matkins Leck Gamble & Mallory LLP, which firm serves as the Company's general
counsel. During 2002, 2001, and 2000, the Company incurred $186, $214 and $271
respectively, for legal services from this firm and from another firm of which
Mr. Mertz was a partner prior to October 16, 1999. There were no amounts payable
to this law firm as of June 30, 2002.
David J. Bugatto, director, has entered into an independent consulting agreement
with the Company, whereby Mr. Bugatto will provide real estate consulting
services to the Company for a monthly fee of $2.5. In addition, in the event
that either of the Company's Sonoma County properties are sold during the term
of the agreement, Mr. Bugatto would be paid a fee of 2.5% of the sales price if
no broker commission is involved and 1.25% of the sales price if a broker is
involved in the sale. In the event that either property is refinanced during the
term of the agreement, Mr. Bugatto will be paid a fee equal to 1%
F-16
of the amount of the proceeds received by the Company in excess of its current
debt. The agreement is effective until the earlier of its termination by either
party or December 31, 2003. During fiscal 2002, the Company paid Mr. Bugatto
$36, for real estate consulting services. As of June 30, 2002, there were no
amounts payable to Mr. Bugatto.
Gary L. Hess, director, has entered into an independent agreement with the
Company to sell its Perma-Pak inventory and equipment. During fiscal 2002, the
Company incurred $9 in commissions under this agreement. As of June 30, 2002,
there was $2 payable to Mr. Hess. On July 17, 2001 the Company entered into a
separation agreement in principle, which was thereafter executed, with its
President and Chief Executive Officer, Mr. Gary L. Hess. ("Mr. Hess") replacing
the Mr. Hess' existing employment agreement. Pursuant to the separation
agreement, Mr. Hess continued as President and Chief Executive Officer, first on
a full-time basis and then on a part-time basis, through October 31, 2001.
Effective September 2001, the Company began paying separation payments to Mr.
Hess in the amount of $12.5 monthly for 29 months, replacing all payment
obligations under his prior employment agreement. The Company's obligation under
this agreement of $362.5 was recorded in operating expenses in the first quarter
of fiscal 2002. 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 shares of his total
outstanding options of 89 shares. Mr. Hess elected to extend the termination
date on his option to purchase the remaining 9 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 to allow Mr. Hess to exercise the
aforementioned options. Mr. Hess elected to borrow $400 to exercise 80 stock
options at $.005 per share. The note dated January 28, 2002 in the amount of
$400 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 shares, the Company incurred a non-cash
stock compensation charge in the third quarter ended March 31, 2002 of $22.
On September 4, 2001 the Company authorized the waiver of the provision of Mr.
Craig R. Stapleton's (a shareholder and former director) stock options,
providing for the termination of his options 90 days following service.
Consequently Mr. Stapleton's option to purchase 10,000 shares was extended, and
a one-time non-cash compensation charge of $18 was recorded in September 2001.
Thomas R. Eakin, CFO, entered into an independent consulting agreement with the
Company, whereby Mr. Eakin will provide financial management and accounting
services to the Company. During fiscal 2002, the Company incurred $51, for
financial management and accounting consulting services. As of June 30, 2002,
there were no amounts payable to Mr. Eakin. The independent consulting agreement
terminated on June 30, 2002. On July 1, 2002, the Company entered into a new
Consulting Agreement with Mr. Eakin. Under the agreement, Mr. Eakin will provide
financial management and accounting services to the Company. Mr. Eakin is
compensated at an hourly billing rate of $.11 per hour, plus expenses.
F-17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Arthur Andersen LLP served as the Company's independent auditor for the
fiscal year ended June 30, 2001. On July 10, 2002, upon the recommendation of
the Audit Committee, the Board of Directors formally dismissed Arthur Andersen
LLP as the Company's independent auditor for the fiscal year ended June 30,
2002, and retained Grant Thornton LLP. On July 10, 2002, the Company filed a
Form 8-K reporting Arthur Andersen LLP's dismissal and the engagement of Grant
Thornton LLP.
Arthur Andersen LLP's reports on the Company's consolidated financial
statements for each of the fiscal years ended June 30, 2001 and 2000 did not
contain an adverse opinion or a disclaimer of opinion, nor were they qualified
or modified as to uncertainty, audit scope or accounting principles.
During the fiscal years ended June 30, 2001 and 2000 and through July 10,
2002, there were no disagreements between the Company and Arthur Andersen LLP on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved
to Arthur Andersen LLP's satisfaction, would have caused Arthur Andersen LLP to
make reference to the subject matter in connection with its reports on the
Company's consolidated financial statements for such years; and there were no
reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
The Company provided Arthur Andersen LLP with a copy of the foregoing
disclosures. In accordance with Item 304T of Regulation S-K, no letter from
Arthur Andersen LLP acknowledging agreement with the foregoing disclosures was
filed with the Securities and Exchange Commission.
During the fiscal years ended June 30, 2001 and 2000 and through the date
hereof, the Company did not consult with Grant Thornton LLP with respect to the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the Company's consolidated financial statements, or any other matters or
reportable events as set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.
Please see Exhibit 23.2 for an explanation regarding obtaining a written
consent from Arthur Andersen for incorporating previously filed financial
statements into registration statements filed by the Company.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information regarding directors and executive officers appearing under the
heading "Proposal 1: Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" of our proxy statement relating to our 2002
Annual Meeting of Stockholders to be held on October 30, 2002 (the "2002 Proxy
Statement") is incorporated into this item by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the headings "Compensation of Directors,"
"Compensation Committee Report," "Executive Compensation" and "Performance
Graph" of our 2002 Proxy Statement is incorporated into this item by reference
(except to the extent allowed by Item 402(a)(8) of Regulation S-K).
20
ITEM 12. SECURITY OWNERSHIP OF DIRECTORS, OFFICERS AND CERTAIN BENEFICIAL OWNERS
The information appearing under the heading "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Directors and Executive Officers"
of our 2002 Proxy Statement is incorporated into this item by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing under the heading "Certain Relationships and Related
Transactions" of our 2002 Proxy Statement is incorporated into this item by
reference.
ITEM 14. CONTROLS AND PROCEDURES
There have been no significant changes in the Company's internal controls or
other factors that could significantly affect those controls since the date of
the Company's last evaluation of its internal controls, and there have been no
corrective actions with regard to significant deficiencies and material
weaknesses in such controls.
PART IV
ITEM 15. 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 III.*Real Estate and Accumulated Depreciation
*Schedule included after signature page.
(a)(3) EXHIBITS
EXHIBIT NO. DOCUMENT DESCRIPTION
- ---------- --------------------
3.1(5) 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
21
10.4(4) 1993 Employee Stock Purchase Plan
10.5(5) June 20, 1999 Amendment to Employment Agreement between
Vacu-dry Company and Gary L. Hess, dated March 14, 1996.
10.6(6) Independent Consultant Agreement dated July 17, 2001
between SonomaWest Holdings, Inc. and David J. Bugatto.
10.7(6) Severance Agreement dated July 17, 2001 between
SonomaWest Holdings, Inc. and Gary L. Hess
10.8(6) Restated and Amended Addendum to Promissory Note, dated
August 15, 2001 between Sonoma West Holdings, Inc. and
Wells Fargo Bank, NA.
10.9 Consulting Agreement dated July 1, 2002 between
SonomaWest Holdings, Inc. and Thomas R. Eakin, d.b.a.
Eakin Consulting.
10.10 Sonoma West Holdings, Inc. 2002 Stock Incentive Plan
11 Computation of Per Share Earnings
23 Consent of Independent Public Accountants
23.2 Notice Regarding Consent of Arthur Andersen LLP
- ---------------------
(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, 2000.
(6) Incorporated by reference to the registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 2001.
(b) REPORTS ON FORM 8-K
During the quarter ended June 30, 2002, the Company did not file any
reports on Form 8-K.
22
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 20, 2002 SONOMAWEST HOLDINGS, INC.
By: /s/ ROGER S. MERTZ
------------------
Roger S. Mertz, Chairman of the Board
By: /s/ THOMAS R. EAKIN
-------------------
Thomas R. Eakin, 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/ ROGER S. MERTZ
- --------------------
Roger S. Mertz Chairman of the Board September 20, 2002
/s/ GARY L. HESS
- --------------------
Gary L. Hess Director September 20, 2002
/s/ FREDRIC SELINGER
- --------------------
Fredric Selinger Director September 20, 2002
/s/ DAVID J. BUGATTO
- --------------------
David J.Bugatto Director September 20, 2002
23
I, Roger S. Mertz, certify that:
1. I have reviewed this annual report on Form 10-K of SonomaWest Holdings, Inc.;
2. Based on my knowledge, this annual 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 annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report.
Date: September 20, 2002
/s/ ROGER S. MERTZ
-------------------------------------
Roger S. Mertz, Chairman of the Board
24
I, Thomas R. Eakin, certify that:
1. I have reviewed this annual report on Form 10-K of SonomaWest Holdings, Inc.;
2. Based on my knowledge, this annual 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 annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report.
Date: September 20, 2002
/s/ THOMAS R. EAKIN
-----------------------------------------
Thomas R. Eakin, Chief Financial Officer
25
SCHEDULE III
SonomaWest Holdings, Inc.
REAL ESTATE AND ACCUMULATED DEPRECIATION
June 30, 2002
(DOLLARS IN THOUSANDS)
Column A Column B Column C Column D Column E
Costs
Initial Cost to Subsequently Gross Amount at which Carried
Company Capitalized at Close of Year
-------------------------------------------------------------------------------------------------------
Buildings Buildings
and and Total
Description Encumbrances Land Improvements Improvements Land Improvements (Note 1)
- ---------------------------------------------------------------------------------------------------------------------------------
1365 Gravenstein Hwy So.
Sebastopol, CA 1,974 72 308 880 72 1,188 1,255
2064 Gravenstein Hwy. No.,
Sebastopol, CA - 159 2,312 3,149 159 5,461 5,625
-------------------------------------------------------------------------------------------------------
1,974 231 2,620 4,029 231 6,649 6,880
=======================================================================================================
Column F Column G Column H
Accumulated Year of Year
Depreciation Construction Acquired
- --------------------------------------------------------------------------------------
927 N/A 1964
4,156 N/A 1983
- ----------------------------------
5,083
==================================
Note 1. The changes in the total cost of land, buildings, and improvements for
the three years ended June 30, are as follows:
2002 2001 2000
---------------------------------
Balance at beginning of
period 6,880 7,423 7,391
Additions 60 12 32
Assets of discontinued
operations (2) (537)
Cost of disposed property (58) (18)
---------------------------------
Balance at end
of period 6,880 6,880 7,423
=================================
Note 2. The changes in accumulated depreciation for the three years ended June
30, are as follows:
2002 2001 2000
---------------------------------
Balance at beginning of
period 4,813 4,826 4,465
Depreciation expense 317 336 361
Assets of discontinued
operations (2) (331)
Relief of accumulated
balances related to disposed
property (45) (18)
---------------------------------
Balance at end of period 5,083 4,813 4,826
=================================
EXHIBIT INDEX
EXHIBIT NO. DOCUMENT DESCRIPTION
- ----------- --------------------
10.9 Consulting Agreement dated July 1, 2002 between SonomaWest
Holdings, Inc. and Thomas R. Eakin, d.b.a. Eakin Consulting.
10.10 SonomaWest Holdings, Inc. 2002 Stock Incentive Plan
11 Computation of Per Share Earnings
23 Consent of Independent Public Accountants
23.2 Notice Regarding Consent of Arthur Andersen LLP