SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
|X| of the Securities Exchange Act of 1934.
For the quarterly period ended March 31, 2000 or
Transition Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934.
For the transition period from _________ to _________.
Commission File Number 01912
SONOMAWEST HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
------------------------------------------------------
CALIFORNIA 94-1069729
- ---------- ----------
(State of incorporation) (IRS Employer Identification #)
1448 INDUSTRIAL AVENUE, SEBASTOPOL, CA 95472-4848
- -------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 707/824-2548
- --------------------------------------------------
100 Stony Point Road, Suite 200, Santa Rosa, Ca 95401
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES: X NO:
----- -----
As of May 15, 2000, there were 1,521,467 shares of common stock, no par value,
outstanding.
<PAGE>
SONOMAWEST HOLDINGS, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2000 and
June 30, 1999...........................................................3
Condensed Consolidated Statements of Earnings - Three and Nine Months
Ended March 31, 2000 and 1999...........................................4
Condensed Consolidated Statements of Cash Flows - Nine Months Ended
March 31, 2000 and 1999.................................................5
Notes to Condensed Consolidated Financial Statements......................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................11
Item 6. Exhibits and Reports on Form 8-K..................................11
Signature..................................................................11
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SONOMAWEST HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
AMOUNTS IN THOUSANDS
--------------------
3/31/00 6/30/99
------- -------
CURRENT ASSETS:
- ---------------
Cash $ 7,962 $ 548
Accounts receivable, net 99 --
Prepaid income taxes -- 566
Inventories, net -- --
Prepaid expenses 42 165
Current deferred taxes, net 1,439 2,032
Net current assets of
discontinued operations -- 6,473
------- -------
Total current assets 9,542 9,784
------- -------
Property, plant, equipment, net 2,685 3,026
Net assets of discontinued operations -- 3,968
Deferred income taxes, net 171 326
Other assets 25 --
------- -------
Total assets $12,423 $17,104
======= =======
3/31/00 6/30/99
------- -------
CURRENT LIABILITIES:
- --------------------
Borrowings under line of credit $ -- $ 5,745
Current maturities of long term debt 51 1,416
Accounts payable 74 170
Income taxes payable 63 --
Accrued payroll and related liabilities 139 277
Other accrued expenses -- 126
Net current liabilities of
discontinued operations 358 --
------- -------
Total current liabilities 685 7,734
------- -------
Net liabilities of discontinued operations 340 --
Long term debt-net of
current maturities 2,553 2,860
------- -------
Total liabilities 3,578 10,594
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SHAREHOLDERS' EQUITY:
Capital stock 2,901 2,890
Warrants for common stock 456 456
Retained earnings 5,488 3,164
Total shareholders' equity 8,845 6,510
------- -------
Total liabilities and shareholders' equity $12,423 $17,104
======= =======
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
SONOMAWEST HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
Nine Months Three Months
Ended March 31 Ended March 31
-------------------- ------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Rental revenue $ 954 $ 398 $ 289 $ 119
Operating costs 1,543 1,256 709 743
------- ------- ------- -------
Other income (expense), net 132 (375) 77 (147)
------- ------- ------- -------
Loss from continuing operations before income taxes (457) (1,233) (343) (771)
Benefit for income taxes (183) (432) (137) (285)
------- ------- ------- -------
Net loss from continuing operations (274) (801) (206) (486)
------- ------- ------- -------
DISCONTINUED OPERATIONS:
Earnings (loss) from discontinued operations, net of income taxes 32 2,161 (133) 1,653
Gain (loss) on sale of discontinued business, net of income taxes 2,566 -- (334) --
------- ------- ------- -------
NET EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS 2,598 2,161 (467) 1,653
------- ------- ------- -------
NET EARNINGS (LOSS) $2,324 $1,360 $(673) $1,167
======= ======= ======= =======
WEIGHTED AVERAGE COMMON SHARES AND EQUIVALENTS:
Basic 1,520 1,513 1,521 1,516
======= ======= ======= =======
Diluted 1,546 1,548 1,521 1,564
======= ======= ======= =======
EARNINGS (LOSS) PER COMMON SHARE
Continuing operations
Basic $ (0.18) $ (0.53) $ (0.14) $ (0.32)
======= ======= ======= =======
Diluted $ (0.18) $ (0.53) $ (0.14) $ (0.32)
======= ======= ======= =======
Discontinued operations:
Basic $ 1.71 $ 1.43 $ (0.31) $ 1.09
======= ======= ======= =======
Diluted $ 1.68 $ 1.40 $ (0.31) $ 1.06
======= ======= ======= =======
Net earnings (loss):
Basic $ 1.53 $ 0.90 $ (0.44) $ 0.77
======= ======= ======= =======
Diluted $ 1.50 $ 0.88 $ (0.44) $ 0.75
======= ======= ======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
SONOMAWEST HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
AMOUNTS IN THOUSANDS
FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES: 2000 1999
---- ----
<S> <C> <C>
Net earnings $2,324 $1,360
Adjustments to reconcile net earnings (loss)
to net cash used for operating activities:
Earnings from discontinued operations, net (32) (2,161)
Gain on sale of discontinued business, net (2,566) --
Depreciation and amortization expense 265 333
Changes in assets & liabilities:
Accounts receivable, net (99) --
Prepaid income taxes 566 (735)
Prepaid and other assets 98 --
Accounts payable (96) --
Income taxes payable 63
Accrued payroll & related liabilities (138) --
Other accrued expenses (126) --
------ ------
Net cash provided by
(used for) continuing operating activities 259 (1,203)
------ ------
Net cash provided by (used for) discontinued operations 13,275 (2,743)
------ ------
Net cash provided by (used for) operating activities 13,534 (3,946)
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (63) (219)
------ ------
Net cash provided by (used for) discontinued operations 1,349 (503)
------ ------
Net cash provided by (used for) investing activities 1,286 (722)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under the line of credit 3,727 20,540
Payments on the line of credit (9,472) (17,837)
Principal payments of current debt (1,672) (388)
MINCO financing proceeds -- 2,100
Issuance of common stock 11 40
------ ------
Net cash provided by (used for) financing activities (7,406) 4,455
------ ------
NET INCREASE (DECREASE) IN CASH 7,414 (213)
CASH AT THE BEGINNING OF THE YEAR 548 385
------ ------
TOTAL CASH AT THE END OF THE PERIOD $7,962 $172
====== ====
</TABLE>
See notes to Condensed Consolidated Financial Statements
5
<PAGE>
SONOMAWEST HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 2000
--------------------------------
Note 1-
The accompanying fiscal 2000 and 1999 unaudited interim statements have been
prepared pursuant to the rules of the Securities and Exchange Commission.
Certain information and disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
the Company believes these disclosures are adequate to make the information not
misleading. In the opinion of management, all adjustments necessary for a fair
presentation for the periods presented have been reflected and are of a normal
recurring nature except as discussed below. These interim financial statements
should be read in conjunction with the financial statements and notes thereto
for each of the three years in the period ended June 30, 1999. The results of
operations for the three- and nine-month periods ended March 31, 2000 are not
indicative of the results that will be achieved for the entire year ending June
30, 2000.
Reclassifications - Certain previously-reported amounts were reclassified to
conform to the current presentation with respect to discontinued operations.
Note 2-
In July 1999, the Company consummated an asset purchase agreement (the Purchase
Agreement) with Tree Top, Inc. The Purchase Agreement governs the sale of all
intangible assets (primarily trademarks, know how and customer lists) and
certain of the equipment relating to the Company's processed apple products
line. Although the Purchase Agreement excludes other product lines within the
Company's ingredient segment, the Company is actively seeking 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
condensed consolidated financial statements. The purchase price for the sale of
the processed apple product line of $12,000,000 was paid in cash at the closing
date of the sale on July 30, 1999. In addition, apple products inventories with
a net book value of $1.7 million were purchased by Tree Top, Inc. at a price of
$1.9 million. Tree Top, Inc. did not assume any of the Company's liabilities. In
connection with the Purchase Agreement, the Company and certain shareholders,
directors, and management have agreed not to compete with Tree Top, Inc. in
processed apple product lines for a period of three to ten years. In February
2000 certain local apple growers filed suit against the Company and Tree Top,
Inc. alleging that this sale and related activities created a monopoly in the
dried apple business in violation of federal and California law. The growers are
seeking treble damages, punitive damages, interest, and attorney fees, all in
unnamed amounts. The Company feels that this suit is without merit and intends
to vigorously defend itself in this matter.
In the current quarter the Company decided to dispose of its organic packaged
foods operations by the end of calendar year 2000. Accordingly, the organic
packaged foods segment is included in discontinued operations in the
accompanying condensed consolidated financial statements. The Company has
received a preliminary asset purchase offer for the intellectual property and
dried fruit inventory of the organic packaged goods segment. A loss on this sale
is not anticipated. The Company believes that final negotiations will be
successful and that the sale will close before June 30, 2000. Upon the disposal
of the Company's organic packaged foods operations, the sole remaining line of
business will be its real estate management and rental operations.
During the first nine months of fiscal 2000, the Company recorded a net
after-tax gain of $2.6 million from the sale of the processed apple product line
and the disposal of the remaining product lines of the ingredients segment. The
net after-tax gain included $15.8 million of proceeds from the sales offset by:
a) the write-down of assets related to the ingredients segment to their
estimated net realizable value (assets which were impaired as a direct result of
the decision to discontinue the segment and sell the apple product lines); b)
costs to be incurred in closing the discontinued ingredients segment (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) estimated loss on sale of equipment at auction.
6
<PAGE>
Summarized historical information of the discontinued operations is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
---------------------------
2000 1999
---- ----
<S> <C> <C>
Income statement data:
Revenues $9,264,000 $29,929,000
Costs and expenses ($9,211,000) (26,604,000)
----------- -----------
Operating income 53,000 3,325,000
Income tax expense (21,000) (1,164,000)
----------- -----------
Income from discontinued operations, net of income taxes $ 32,000 $2,161,000
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
March 31, 2000 June 30,1999
-------------- ------------
<S> <C> <C>
Balance sheet data:
Accounts receivable, net of reserves of $106,000 and $463,000 $149,000 $2,614,000
Inventories, net of reserves of $4,605,000 and $4,346,000 786,000 8,715,000
Prepaid expenses 31,000 323,000
---------- -----------
Total current assets of discontinued operations 966,000 11,652,000
Property, plant and equipment, net 33,000 4,557,000
---------- -----------
Total assets of discontinued operations 999,000 16,209,000
Accounts payable 383,000 3,760,000
Accrued payroll and related liabilities 58,000 972,000
Other accrued expenses 6,000 237,000
Capital lease liability for computer system 624,000 799,000
Provision for severance, transaction costs, wind-down costs and other
liabilities related to the decision to discontinue the segments 626,000 --
--------- -----------
Total liabilities of discontinued operations 1,697,000 5,768,000
Net assets (liabilities) of discontinued operations $(698,000) $10,441,000
========= ===========
The inventories included above have been adjusted to net realizable value.
Note 3 -
STATEMENT OF CASH FLOWS - Interest and income tax payments reflected in the
Consolidated Statement of Cash Flows were as follows:
</TABLE>
2000 1999
---- ----
Interest paid $285,000 $ 338,000
Income taxes paid $420,000 $ 108,000
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
SonomaWest Holdings, Inc. (the "Company") is including the following cautionary
statement in this Form 10-Q to make applicable and take advantage of the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995 for
any forward looking statements made by, or on behalf of, the Company. Forward
looking statements include statements concerning plans, objectives, goals,
strategies, future events or performance and underlying assumptions, and other
statements which are other than statements of historical facts. Certain
statements contained herein are forward looking statements and, accordingly,
involve risks and uncertainties which could cause actual results or outcomes to
differ materially from those expressed in the forward looking statements. In
addition to other factors and matters discussed elsewhere herein, these risks
and uncertainties include, but are not limited to, uncertainties affecting the
food processing industry, risks associated with fluctuations in the price and
availability of raw materials, management of growth, adverse publicity affecting
organic foods or the Company's products, and product recalls. The Company's
expectations, beliefs and projections are expressed in good faith and are
believed by the Company to have a reasonable basis, including without
limitation, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's expectations, beliefs or
projections will result or be achieved or accomplished. The Company disclaims
any obligation to update any forward-looking statements to reflect events or
circumstances after the date hereof.
The financial statements herein presented for the quarters and nine-month
periods ended March 31, 2000 and 1999 reflect all the adjustments that in the
opinion of management are necessary for the fair presentation of the financial
position and results of operations for the periods then ended. All adjustments
during the periods presented are of a normal recurring nature unless otherwise
stated.
OVERVIEW
Since the Company acquired certain of the assets and liabilities of Made in
Nature, Inc. in June 1998, the Company has operated in three business segments:
industrial dried fruit ingredients, organic packaged foods and real estate. The
Company commenced a strategic reorganization upon the announcement of the
proposed sale of the bulk 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
segment. In January 2000, the Company decided to sell or discontinue its organic
packaged foods business. As a result of these decisions, both business segments
are considered discontinued operations and their operating results, results of
cash flows and net assets are reflected outside of the Company's continuing
operations. The Company's sole remaining line of business will be its real
estate management and rental operations.
DISCONTINUED OPERATIONS
In July 1999 the Company sold the bulk of its apple-based industrial ingredients
product line to Tree Top, Inc., of Selah, Washington. This product line
represented 55% and 81% of the Company's sales for the years ended June 30, 1999
and 1998, respectively. At the same time, the Company also decided to close its
only apple processing plant in Sebastopol, California. This sale, which was
recorded in the first quarter of fiscal 2000, is an important element of the
Company's strategic plan to increase the return on its investments and increase
shareholder value by exiting businesses with low returns and high capital
requirements. The transaction provided financial resources to support the
Company's real estate and other business opportunities.
The terms of the sale included the payment of $12 million cash to the Company in
July 1999. Tree Top also purchased related product line inventories for $1.9
million in September and October 1999. The after-tax gain on the sale was $2.6
million. The net gain is based upon the cash proceeds and the disposal value of
assets not acquired by Tree Top, offset by severance and relocation costs,
wind-down costs, transaction costs and identified liabilities directly related
to the decision to discontinue the business segments. These costs may be
adjusted in the future depending upon the final wind-down of the businesses
which is expected to run through June 30, 2000.
As discussed further in Note 2 to the Condensed Consolidated Financial
Statements, certain local apple growers filed suit against the Company and Tree
Top, Inc. in February 2000 alleging that this sale and related activities
unlawfully monopolized the dried apple business. Unspecified treble and punitive
damages, interest and attorney fees are sought by the growers. The Company feels
that the suit is without merit and intends to vigorously defend itself in this
matter.
8
<PAGE>
In the first nine months of fiscal 2000, the Company recorded after-tax earnings
from discontinued operations of $32,000, as compared with $2,161,000 for the
corresponding period in fiscal 1999. The after-tax earnings resulted from
ingredients and organic packaged foods business sales of $9.3 million in fiscal
2000 versus $29.9 million in fiscal 1999. The decline in sales was due to the
liquidation of the apple ingredients business during the first quarter of fiscal
2000 and a significant decline in the sales of Perma Pak products. The Company
is actively marketing all of its discontinued businesses and has received a
preliminary offer for a portion of the organic packaged foods business as
discussed more fully in Note 2 to the Condensed Consolidated Financial
Statements. There can be no assurances that there will be a sale of all or any
of the remaining businesses. However, the Company plans to exit the organic
packaged foods business by seeking additional buyers should the proposed sale
not be completed. The anticipated pick up in demand for low moisture, shelf
stable foods in late 1999 and early 2000 surrounding Y2K fears did not
materialize. As a result, the Company recorded additional reserves of $557,000
in March 2000 to reflect the estimated impairment of its Perma Pak inventories.
These reserves are included in the gain (loss) on sale of discontinued business,
net of income taxes, in the accompanying Condensed Consolidated Statements of
Earnings.
RESULTS OF CONTINUING OPERATIONS
The Company's continuing line of business consists of the leasing and
development of the Company's real estate. The Company intends to develop its
real estate largely for industrial rental. The current use permit for the
Company's former production site requires that the facility be used in part for
diversified agricultural purposes. The Company is attempting to broaden the use
permit to allow other types of activities, but there can be no assurance that
such efforts will be successful.
RESULTS OF OPERATIONS
Rental revenue represents the Company's leasing of warehouse space in several
buildings and a yard, as well as its former production facility. There are
leases with approximately twenty tenants that have varying terms ranging from
month-to-month to eight years with options to extend. Several of the larger
tenants did not exercise their options and vacated the premises at the
expiration of their leases during the current quarter. Replacement tenants have
not yet been obtained, resulting in an increase in overall vacancy at March 31,
2000. While the Company and its retained broker are actively marketing the
properties to prospective tenants, there can be no assurance that tenants will
be found in the near term. As a result, the Company's operating results will be
negatively impacted as long as the tenant rental revenue stream is not
sufficient to cover existing overhead costs. Cost reduction efforts to minimize
any avoidable spending have been undertaken to minimize negative operating
results and cash flows while the tenant search progresses. Fiscal 2000 rental
revenues have increased $556,000 and $170,000, or 140% and 143% for the nine and
three months ended March 31, respectively, as compared with the corresponding
periods in the prior year. The increased revenues are primarily due to the
short-term rental of warehouse and cold storage facilities during fiscal 2000
that had been used in the Company's apple ingredients business during fiscal
1999. Higher market rental rates, CPI increases, and the leasing of some
previously vacant space also contributed to the revenue increase in the current
fiscal year.
Operating costs include only direct costs related to real estate operations and
all general corporate overhead costs. Only direct operating costs related to the
ingredients and organic packaged foods businesses were allocated to discontinued
operations in the Condensed Consolidated Statements of Operations. For the three
months ended March 31, 2000, operating costs related to continuing operations
decreased 5% from the corresponding period of the prior year to $709,000. For
the nine months ended March 31, 2000, operating costs related to continuing
operations increased 23% from the corresponding period of the prior year to
$1,543,000. The decline for the three months ended March 31, 2000 was primarily
due to reduced corporate costs due to the downsizing of the operation in the
third quarter and the cost reduction efforts in the real estate business
discussed above. The increase for the nine months ended March 31, 2000 was
primarily due to increased temporary labor costs incurred during the first two
quarters of fiscal year 2000.
The effective tax rate for the three and nine months ended March 31, 2000 was
40%, or approximately the statutory rate after the federal benefit for state
income taxes.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company utilized the $15.8 million net proceeds from its discontinued
operations (including $12 million from the sale of its apple product lines) to
reduce borrowings under the bank line of credit and to retire a significant
portion of its debt. Cash balances increased from $548,000 at June 30, 1999 to
$7,962,000 at March 31, 2000. The Company retired two share repurchase notes in
January 2000 to reduce long-term debt another $271,000. It is anticipated that
existing cash balances will be adequate to meet the Company's needs for the
coming year.
10
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
A complaint was filed February 23, 2000 by several local apple growers naming
the Company and Tree Top, Inc. as defendants. The complaint alleges that the
July 1999 sale of the Company's apple ingredients business to Tree Top, Inc. was
an unlawful combination in restraint of trade in the dried apple business under
federal and California law; that the Company conspired with Tree Top, Inc. to
monopolize the dried apple business; and that such acts also constitute unlawful
business practices under the California Business and Professions Code. The suit
seeks treble damages, punitive damages, interest and attorney fees, all in
unnamed amounts. The Company feels this suit is without merit and intends to
defend itself vigorously.
Item 6. Exhibits & Reports on Form 8-K
a. Exhibits
(27) Financial Data Schedule (by electronic filing only)
b. Reports on Form 8-K -
On March 23, 2000 the Company filed a Form 8-K relating to the relocation of its
corporate offices to Company-owned facilities in Sebastopol, CA.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 2000
/s/ Gary L. Hess
- --------------------------------------------------------------
Gary L. Hess,
Chief Executive Officer, President and Chief Financial Officer
11
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