10-Q 1 v070212_10q.htm QUARTERLY REPORT [SECTIONS 13 OR 15(D)] Quarterly report [Sections 13 or 15(d)]

 
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
FORM 10-Q
 
   X   
Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934. For the quarterly period ended December 31, 2006 or
 
          
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from _________ to _________.
 
Commission File Number 01912
 
SONOMAWEST HOLDINGS, INC.
 
(Exact name of registrant as specified in its charter)
 
Delaware
 
94-1069729
(State of incorporation)
(IRS Employer Identification #)
 
2064 Highway 116 North, Sebastopol, CA
 
95472-2662
(Address of principal executive offices)
(Zip Code)
 
 
Registrant's telephone number, including area code:     707-824-2534

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
YES:    X       NO:           

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):   

 Large accelerated filer  ___             Accelerated filer  ____                Non-accelerated filer   X  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  
 
YES:              NO:     X   
 
As of February 20, 2007, there were 1,179,967 shares of common stock, no par value, outstanding.
 



SONOMAWEST HOLDINGS, INC.
 
 
 


PART I. FINANCIAL INFORMATION
Page
     
Item 1.
Condensed Financial Statements
 
     
   
 
    June 30, 2006(unaudited)
3 
     
   
 
    December 31, 2006 and 2005 (unaudited)
 4
     
   
 
    Six months ended December 31, 2006 (unaudited)
 5
     
   
 
    December 31, 2006 and 2005 (unaudited)
 6
     
 
7
     
Item 2.
 
 
    and Results of Operations
12
     
Item 3.
 16
     
Item 4.
16
   
17
     
Item 1.
17
     
Item 2.
17
     
Item 3.
17
     
Item 4.
17
     
Item 5.
17
     
Item 6.
17
     
 
18
     
 
19
     
 
EXHIBITS
  


 
2
 
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

SONOMAWEST HOLDINGS, INC.
DECEMBER 31, 2006 AND JUNE 30, 2006
(AMOUNTS IN THOUSANDS)
(UNAUDITED)


 
ASSETS
 
 
12/31/06
 
 
6/30/06
 
CURRENT ASSETS:
 
 
 
 
 
Cash
 
$
2,798
 
$
3,851
 
Accounts receivable
 
 
180
 
 
160
 
Other receivables
 
 
1
 
 
16
 
Prepaid income taxes
 
 
48
 
 
73
 
Prepaid expenses and other assets
 
 
64
 
 
134
 
Deferred income taxes, net
 
 
36
 
 
55
 
Total current assets
 
 
3,127
 
 
4,289
 
RENTAL PROPERTY, net
 
 
1,306
 
 
1,412
 
INVESTMENT, at cost
 
 
2,401
 
 
2,401
 
DEFERRED INCOME TAXES, net
 
 
207
 
 
190
 
PREPAID COMMISSIONS AND OTHER ASSETS
 
 
153
 
 
181
 
Total assets
 
$
7,194
 
$
8,473
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
CURRENT LIABILITIES:
 
 
 
 
 
 
 
Current maturities of long-term debt
 
$
-
 
$
80
 
Accounts payable
 
 
131
 
 
248
 
Accrued payroll and related liabilities
 
 
17
 
 
77
 
Accrued expenses
 
 
22
 
 
176
 
Unearned rents
 
 
204
 
 
193
 
Tenant deposits
 
 
369
 
 
310
 
Total current liabilities
 
 
743
 
 
1,084
 
LONG-TERM DEBT, net of current maturities
 
 
-
 
 
1,472
 
Total liabilities
 
 
 743
 
 
2,556
 
SHAREHOLDERS’ EQUITY:
 
 
 
 
 
 
 
Preferred stock: 2,500 shares authorized; no shares issued and outstanding
 
 
-
 
 
-
 
Common stock: 5,000 shares authorized, no par value; 1,157 and 1,124 shares issued and outstanding at December 31, 2006 and June 30, 2006, respectively
 
 
3,256
 
 
2,912
 
Retained earnings
 
 
3,195
 
 
3,005
 
Total shareholders’ equity
 
 
6,451
 
 
5,917
 
Total liabilities and shareholders’ equity
 
$
7,194
 
$
8,473
 
 
The accompanying unaudited notes are an integral part of these statements.


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SONOMAWEST HOLDINGS, INC.
FOR THE SIX AND THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

 






   
Six Months
Ended December 31
 
Three Months
Ended December 31
  
   
2006
  
2005
  
2006
  
2005
  
RENTAL REVENUE -NET   
  
$
1,247
 
$
996
 
$
626
 
$
520
  
TENANT REIMBURSEMENTS
  
 
361
 
 
274
 
 
154
 
 
137
  
TOTAL REVENUE
    
1,608
 
  
1,270
    
780
 
  
657
  
                           
OPERATING COSTS
 
 
1,343
 
 
1,188
 
 
774
 
 
635
 
OPERATING COSTS - RELATED PARTY EXPENSES
 
 
8
 
 
39
 
 
4
 
 
9
 
TOTAL OPERATING COSTS
 
 
1,351
 
 
1,227
 
 
778
 
 
644
 
OPERATING INCOME
 
 
257
 
 
43
 
 
2
 
 
13
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
INTEREST EXPENSE
 
 
(7
)
 
(57
)
 
-
 
 
(30
)
INTEREST INCOME
 
 
69
 
 
47
 
 
35
 
 
31
 
DIVIDEND INCOME
 
 
-
 
 
122
 
 
-
 
 
122
 
GAIN ON SALE OF INVESTMENTS
 
 
-
 
 
1,090
 
 
-
 
 
1,090
 
OTHER INCOME
 
 
3
 
 
6
 
 
1
 
 
-
 
INCOME BEFORE INCOME TAXES
 
 
322
 
 
1,251
 
 
38
 
 
1,226
 
INCOME TAX PROVISION
 
 
132
 
 
481
 
 
19
 
 
471
 
NET INCOME
 
$
190
 
$
770
 
$
19
 
$
755
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
WEIGHTED AVERAGE COMMON SHARES AND EQUIVALENTS:
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
 
1,137
 
 
1,122
 
 
1,150
 
 
1,124
 
Diluted
 
 
1,160
 
 
1,150
 
 
1,175
 
 
1,155
 
 
INCOME PER COMMON SHARE:
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.17
 
$
0.69
 
$
0.02
 
$
0.67
 
Diluted
 
$
0.16
 
$
0.67
 
$
0.02
 
$
0.65
 



The accompanying unaudited notes are an integral part of these financial statements.


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SONOMAWEST HOLDINGS, INC.
FOR THE SIX MONTHS ENDED DECEMBER 31, 2006
(AMOUNTS IN THOUSANDS)
(UNAUDITED)

 
 


 
 
Common Stock
 
 
 
Total
 
 
Number
 
 
 
Retained
 
Shareholders’
 
 
Of Shares
 
Amount
 
Earnings
 
Equity
BALANCE, JUNE 30, 2006
 
 
1,124
 
$
2,912
 
$
3,005
 
$
5,917
Net income
 
 
 
 
 
 
 
 
190
 
 
190
Issuance of common stock
    
33
    
185
          
185
Stock compensation expense
 
 
 
 
 
96
 
 
 
 
 
96
Tax benefit on exercise of options
 
 
 
 
 
63
 
 
 
 
 
63
BALANCE, DECEMBER 31, 2006
 
 
1,157
 
$
3,256
 
$
3,195
 
$
6,451


The accompanying unaudited notes are an integral part of these financial statements.



5

SONOMAWEST HOLDINGS, INC.
FOR THE SIX MONTHS ENDED DECEMBER 31, 2006 AND 2005
(AMOUNTS IN THOUSANDS)
(UNAUDITED)


 
 
2006
 
2005
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
Net income
 
$
190
 
$
770
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Gain on sale of investments
 
 
-
 
 
(1,090
)
Dividends received from investments
 
 
-
 
 
(122
)
Stock compensation expense
 
 
96
 
 
81
 
Depreciation and amortization expense
 
 
108
 
 
108
 
            Deferred income tax provision
 
 
2
 
 
290
 
            Changes in assets and liabilities:              
Accounts receivable
 
 
(20
)
 
(49
)
Other receivables
 
 
15
 
 
(1
)
Prepaid income taxes
 
 
25
  
 
190
 
Prepaid expenses and other assets
 
 
70
 
 
66
 
Prepaid commissions and other assets
 
 
28
 
 
(59
)
Accounts payable
 
 
(117
)
 
(14
)
Accrued expenses 
 
 
(154
)
 
70
 
Accrued payroll and related liabilities
 
 
(60
)
 
(16
)
Unearned rents
 
 
11
 
 
55
 
Tenant deposits
    
59
    
-
  
Other long-term liabilities
 
 
-
 
 
(131
)
 
 
 
63
 
 
(622
)
      Net cash provided by operating activities
 
 
253
 
 
148
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
            Capital expenditures
 
 
(2
)
 
(34
)
            Proceeds from sale of investments
 
 
-
 
 
1,690
 
            Dividends received from investments
 
 
-
 
 
122
 
                      Net cash provided by (used in) investing activities
 
 
(2
)
 
1,778
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
            Proceeds from debt refinancing
 
 
-
 
 
1,606
 
            Principal payments on debt
 
 
(1,552
)
 
(1,633
)
            Tax benefit from exercise of stock options
 
 
63
 
 
-
 
            Exercise of stock options
 
 
185
 
 
62
 
                      Net cash provided by (used in) financing activities
 
 
(1,304
)
 
35
 
NET INCREASE (DECREASE) IN CASH
 
 
(1,053
)
 
1,961
 
 
 
 
 
 
 
 
 
CASH AT BEGINNING OF PERIOD
 
 
3,851
 
 
1,879
 
CASH AT END OF PERIOD
 
$
2,798
 
$
3,840
 
Supplemental Cash Flow Information
 
2006
2005
Interest paid
$                         18
$                       55
Taxes paid
$                         43
$                         1
Cashless exercise of options
$                         36
$                          -
The accompanying unaudited notes are an integral part of these financial statements.
 
6
 
SONOMAWEST HOLDINGS, INC.
SIX MONTHS ENDED DECEMBER 31, 2006
(UNAUDITED)

 
Note 1 - Basis of Presentation
 
The accompanying unaudited interim condensed financial statements have been prepared pursuant to the rules of the Securities and Exchange Commission. Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes these disclosures are adequate to make the information not misleading.  In the opinion of management, all adjustments necessary for a fair presentation for the periods presented have been reflected and are of a normal recurring nature.  Because all of the disclosures required by accounting principles generally accepted in the United States of America are not included in the accompanying financial statements and related notes, they should be read in conjunction with the audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2006. The results of operations for the six-month period ended December 31, 2006 are not necessarily indicative of the results that will be achieved for the entire year ending June 30, 2007.
 
The preparation of financial statements in conformity with generally accepted accounting principles requires the Company 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.
 
Revenue Recognition
 
Revenue is recognized on a monthly basis, based upon the dollar amount specified in the related lease. The Company requires that all tenants be covered by a lease. The tenants have original lease terms ranging from month-to-month to ten years, with options to extend the longer-term leases. Lease incentives and construction allowances provided by the Company to certain of its tenants are amortized as an offset to revenue on a straight-line basis over the term of the respective lease. The Company does not have leases that include provisions that require the lessee to pay the lessor any additional rent based upon the lessee’s sales or any other financial performance levels, or that otherwise vary the amount of minimum rent payable over the lease term. Reimbursements of certain costs received from tenants are recognized as tenant reimbursement revenues.
 
Note 2 - New Accounting Pronouncements
 
In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation Number 48, “Accounting for Uncertainty in Income Taxes,” (“FIN48”) an Interpretation of SFAS No. 109, “Accounting for Income Taxes”.  FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. The Company must determine whether it is “more-likely-than-not” that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position.  Once it is determined that a position meets the more-likely-than-not recognition threshold, the position is measured to determine the amount of benefit to recognize in the financial statements. FIN 48 applies to all tax positions related to income taxes subject to SFAS No. 109.  The Company will adopt the provisions of this statement beginning in the first quarter of fiscal 2008.   The Company is currently evaluating the effect the adoption of this statement will have on its financial condition and results of operations.
 
7
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” (“SAB No. 108”).  SAB No. 108 provides guidance regarding the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of materiality assessments. The method established by SAB No. 108 requires each of the Company’s financial statements and the related financial statement disclosures to be considered when quantifying and assessing the materiality of the misstatement.  SAB No. 108 is effective for financial statements for periods ending on or after November 15, 2006. 
 
Note 3 - Investment
 
The Company holds an investment in MetroPCS Communications, Inc. (“MetroPCS”), a privately held telecommunications company. The Company owns less than one percent of the total outstanding shares of Series D Preferred Stock and less than one percent of the total outstanding capital stock of MetroPCS on an as-converted basis. The Company accounts for its investment in MetroPCS under the cost method.
 
On September 26, 2005, the Company tendered approximately 20% of the shares of MetroPCS Series D Preferred Stock that it held in response to a tender offer by certain third parties to purchase shares of MetroPCS Series D Preferred Stock and common stock. The price per share offered in the tender offer was approximately three times the original investment amount per share paid by the Company for its MetroPCS shares, including the cumulative unpaid dividends as of December 31, 2005. All shares tendered by the Company were accepted. The gross proceeds to the Company from the tender offer of $1,812,000 were received November 1, 2005, resulting in a net gain of $1,090,000 on sale of investments, and dividend income of $122,000. The Company’s existing net operating loss carryforwards offset much of the gain recognized for federal and state tax purposes from the sale of the MetroPCS shares.
 
The Company accounts for its investment in MetroPCS under the cost method, which amounted to $2,401,000 as of December 31, 2006. The Company continues to monitor the financial condition, cash flow, operational performance and other relevant information about MetroPCS, for purposes of reflecting the investment on the Company’s financial statements. This process is based primarily on such information as the Company may request and that MetroPCS may provide to the Company. The Company also tracks MetroPCS information available to the general public. The Company is aware that on January 4, 2007, MetroPCS filed a Form S-1 Registration Statement under the Securities Act of 1933 and a Form 10 under the Securities Exchange Act of 1934 with the Securities and Exchange Commission.  If the Company had, in September 2005, tendered the remaining MetroPCS shares that it currently holds, the Company would have received gross proceeds of approximately $7,200,000 from the tender of such shares (in addition to the proceeds from the shares actually tendered). There can be no assurance that the Company will be able to achieve liquidity for its remaining MetroPCS shares in the future at the price offered in the tender offer or at any other price.
 
Note 4 - Long-term debt
 
As of December 31, 2006, the Company had no long-term debt. On July 21, 2006 the Company paid all of the outstanding amounts owed under its Credit Agreement with Wells Fargo in the amount of $1,552,000, thus terminating both the term loan and a related line of credit.
 
8

Note 5 - Earnings Per Share
 
Basic earnings per share (“EPS”) is computed as net income divided by the weighted average number of shares of common stock outstanding for the period. Diluted EPS is computed as net income divided by the weighted average number of shares outstanding of common stock and common stock equivalents for the period, including the dilutive effects of stock options and other potentially dilutive securities. Common stock equivalents result from dilutive stock options computed using the treasury stock method and the average share price for the reported period. The effect of dilutive options on the weighted average number of shares for the six months ended December 31, 2005 and December 31, 2006 was 28,000 and 23,000, respectively. The calculation of diluted earnings per share for the six months ended December 31, 2005 and December 31, 2006 excluded stock options to purchase 16,200 and 26,500 shares, respectively because the effect would have been anti-dilutive.
 
The effect of dilutive options on the weighted average number of shares for the three months ended December 31, 2005 and December 31, 2006 was 31,000 and 23,000, respectively. The calculation of diluted earnings per share for the three months ended December 31, 2005 and December 31, 2006 excluded stock options to purchase 15,000 and 26,500 shares, respectively, because the effect would have been anti-dilutive.
 
Note 6 - Stock-Based Compensation
 
Effective July 1, 2005, the Company adopted Statement of Financial Accounting Standard (“SFAS”) No. 123(R), “Share-Based Payment”, using the modified prospective transition method. Because the fair value recognition provisions of SFAS No. 123, Stock-Based Compensation (which was previously followed by the Company), and SFAS No. 123(R) were materially consistent under our equity plans, and because all of the Company’s stock options were fully vested as of July 1, 2005, the adoption of SFAS No. 123(R) did not have an impact on our financial position or our results of operations. Prior to our adoption of SFAS No. 123(R), benefits of tax deductions in excess of recognized compensation costs were reported as operating cash flows. SFAS No. 123(R) requires excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid.
 
Our net income for the six months ended December 31, 2006 includes $96,000 in stock compensation costs; $90,000 of this cost is related to non-qualified stock options and the balance of $6,000 in costs reflects incentive stock options with no tax benefit. The non-qualified stock options generated a tax credit of $36,000 related to our stock-based compensation arrangement. Our net income for the six months ended December 31, 2005 includes $81,000 in stock compensation costs, $48,000 of this cost is to non-qualified stock options and the balance of $33,000 in costs reflects incentive stock options with no tax benefit. The non-qualified stock options generated a tax credit of $19,000 related to our stock-based compensation arrangement.
 
On July 31, 2002, the Company's Board of Directors approved the SonomaWest Holdings, Inc. 2002 Stock Incentive Plan (the "2002 Plan"). The 2002 Plan is designed to benefit the Company and its shareholders by providing incentive based compensation to encourage officers, directors, consultants and other key employees of the Company and its affiliates to attain high performance and encourage stock ownership in the Company. The maximum number of shares of common stock issuable over the term of the 2002 Stock Option Plan is 150,000 shares. No participant in the 2002 Plan may be granted stock options, direct stock issuances and share right awards for more than 15,000 shares of common stock in total in any calendar year. The exercise price of all incentive stock options granted under the 2002 Plan must be at least equal to the fair market value of the common stock on the date of grant. The exercise price of non-statutory stock options must at least be equal to 85% of the fair market value of the common stock on the date of grant. The contractual life of the options is ten years. Options issued under this plan may be fully vested and exercisable on the date of grant, or may be subject to term-based or performance-based vesting. Prior to adoption of the 2002 Plan, the Company administered the 1996 Stock Option Plan (the "1996 Plan"). As amended, the 1996 Plan provided for the issuance of options to employees and non-employee consultants exercisable for an aggregate of 275,000 shares of common stock. In connection with adoption of the 2002 Plan, no future options will be granted under the 1996 Plan.
 
A summary of the status of the Company’s stock option plans at December 31, 2006, with changes during the six months ended December 31, 2006, is presented in the table below:
 
 
 
 
Options
 
Weighted Average Exercise Price
 
Weighted Average
Remaining
Contractual
Term (years)
  
Aggregate
Intrinsic
Value
(in thousands)
 
Balance, June 30, 2006
 
 
96,000
 
$
8.40
 
 
 
 
 
 
 
Granted
 
 
27,000
 
$
13.05
 
 
 
 
 
 
 
Cancelled
 
 
1,000
 
$
10.00
 
 
 
 
 
 
 
Exercised
 
 
36,000
 
$
6.16
 
 
 
 
 
 
 
Balance, December 31, 2006
 
 
86,000
 
$
9.32
 
 
5.78
 
$
806
 
Exercisable, December 31, 2006
 
 
77,000
 
$
8.86
 
 
5.78
 
$
681
 

The following table summarizes the ranges of the exercise prices of outstanding and exercisable options as of December 31, 2006:

 
 
Options outstanding
 
Options exercisable
 
 
 
 
 
Weighted
 
 
 
 
 
 
 
 
 
 
 
average
 
Weighted
 
 
 
Weighted
 
 
 
 
 
remaining
 
average
 
 
 
average
 
 
 
Number of
 
contractual
 
exercise
 
Number of
 
exercise
 
Range of exercise prices
 
shares
 
life (years)
 
price
 
shares
 
price
 
$ 5.00-7.00
 
 
16,000
 
 
4.37
 
$
5.05
 
 
16,000
 
$
5.05
 
$ 7.00-10.00
 
 
28,000
 
 
4.14
 
$
7.41
 
 
28,000
 
$
7.41
 
$ over 10.00
 
 
42,000
 
 
5.30
 
$
12.25
 
 
33,000
 
$
12.02
 
Total
 
 
86,000
 
 
5.78
 
$
9.32
 
 
77,000
 
$
8.86
 
 
As of December 31, 2006, the weighted average remaining contractual life of stock options exercisable was 5.78 years and their aggregate intrinsic value was $681,000. The total intrinsic value of stock options exercised during the three and six months ended December 31, 2006 was $411,000 and $411,000, respectively. The total intrinsic value of stock options exercised during the three and six months ended December 31, 2005 was $4,900 and $4,900, respectively.
 
The summary of non-vested options outstanding under the Company’s 2002 Plan during the six months ended December 31, 2006 is presented below:

 
Six Months Ended
December 31, 2006
 
 
 
Number of Shares
 
Weighted Average Grant Date Fair Value
 
Unvested balance at beginning of period
 
 
-
 
$
-
 
Granted
 
 
27,000
 
$
13.05
 
Forfeited
 
 
-
 
$
-
 
Vested
 
 
(17,000
)
$
13.05
 
Unvested balance at end of period
 
 
10,000
 
$
13.05
 
 
10

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model, with the following assumptions used for the fiscal 2007 grants: risk-free interest rate of 4.57 percent; expected dividend yield of 0 percent; expected life of two years for the plan options; and expected volatility of 50 percent. Not all outstanding options were fully vested as of December 31, 2006; and thus, there was unrecognized compensation cost related to stock options.

Cash received from stock option exercises during the six months ended December 31, 2006 was $185,000 plus 2,790 shares were repurchased by the Company at $12.90 per share for the exercise of 5,000 stock options with an option price of $36,000 in a cashless exchange. We issue new shares to satisfy stock option exercises.
 
During the six months ended December 31, 2006, outstanding options held by former directors of the Company, which in the aggregate are exercisable to purchase a total of 22,500 shares of common stock, were amended to extend the term of such options to a period of twelve months from the date of termination of service to the Company. The Company recorded non-cash compensation expense of $28,000 for the quarter ended December 31, 2006, relating to these amendments.
 
Note 7 - Related Parties  

On June 29, 2006, following approval by the Board of Directors of the Company, with David J. Bugatto (a current board member) not participating or voting, the Company entered into a new consulting agreement with Bugatto Investment Company (the “New Agreement”). The New Agreement became effective July 1, 2006, immediately after expiration of the term of the existing 2005 Agreement described below. Under the New Agreement, Bugatto Investment Company has agreed to provide real estate consulting services, as reasonably requested by the Company, for a one-year term, at the same hourly rate of $225 per hour as is contained in the 2005 Agreement. The New Agreement modifies the 2005 Agreement to provide that Bugatto Investment Company will not receive any additional payments or compensation upon the occurrence of a sale of either of the Company’s Sonoma County properties.

In consideration for Bugatto Investment Company’s willingness to enter into the New Agreement and in light of Mr. Bugatto’s contributions over the past years to increasing the tenant occupancy rate of the Company’s properties and achieving certain land use entitlement modification approvals, the Company paid Bugatto Investment Company the sum of $100,000 upon execution of the New Agreement. In addition, the Company will pay Bugatto Investment Company an additional $50,000 upon the satisfaction, during the term of the agreement (or within one year thereafter) of certain conditions and actions specified by Sonoma County in connection with approval of certain land use entitlement changes. If the Company’s business is sold in a merger, consolidation, tender offer or similar transaction, or if the Company’s north property is sold, and the acquiring person or entity does not agree to assume the New Agreement, then the $50,000 payment becomes payable in connection with the transaction.
 
On July 1, 2005, Bugatto Investment Company (of which David J. Bugatto, a director of the Company, is the president) entered into a consulting agreement pursuant to which Bugatto Investment Company provided real estate consulting services to the Company for an hourly fee of $225. The agreement replaced a similar agreement entered into on July 1, 2004. Under the agreement, if either of the Company’s Sonoma County properties were sold during the term of the agreement, Bugatto Investment Company would have been entitled to receive a fee equal to 1.5% of the sales prices regardless of whether or not a broker is involved, and Bugatto Investment Company would have been entitled to receive a fee equal to the greater of 1.5% of the gross value of the real estate or $150,000 upon any transaction that would have resulted in the Company becoming a private company.  The agreement was through July 30, 2006, and was replaced by the June 29, 2006 agreement referred to above.
 
During the six months ended December 31, 2006 and December 31, 2005, the Company incurred $8,000 and $4,000 respectively, for real estate consulting services provided by Bugatto Investment Company.  These expenses are included in Operating Costs - Related Party.  As of December 31, 2006, the Company had a payable to Bugatto Investment Company of $1,900.
 
11
 
Note 8 - Minimum Lease Income
 
The Company leases warehouse space, generating rental revenues for the six months ended December 31, 2006 and December 31, 2005 of $1,247,000 and $996,000, respectively. The leases have terms, which range from month-to-month to expiration dates through 2013. As of December 31, 2006, assuming that all current month-to-month leases continue unchanged throughout the periods presented in the table, and that there are no changes to the other leases other than expiration of the leases at the end of their stated terms and no additional space is leased, the following will be the future minimum lease income (in thousands):
 
Year Ending
June 30
 
Amounts in Thousands
Balance of 2007
$ 792
2008
1,551
2009
617
2010
505
2011
449
Thereafter through 2013
432
Total
$ 4,346
 
 
FORWARD LOOKING STATEMENTS
 
SonomaWest Holdings, Inc. (the "Company" or "Registrant") is including the following cautionary statement in this Quarterly Report to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by, or on behalf of, the Company. The statements contained in this Report that are not historical facts are "forward-looking statements" (as such term is defined in Section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934), which can be identified by the use of forward-looking terminology such as "estimated," "projects," "anticipates," "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. All written and oral forward-looking statements made in connection with this Report which are attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the "Certain Factors" as set forth in our Annual Report on Form 10-K for the fiscal year ended June 30, 2006 and other cautionary statements set forth therein and in this Report under "Management's Discussion and Analysis of Financial Condition and Results of Operations.” There can be no assurance that management’s expectations, beliefs or projections will be achieved or accomplished, and the Company expressly disclaims any obligation to update any forward-looking statements.
 
The financial statements included herein are presented as of, and for the six months ended December 31, 2006 and 2005 and reflect all the adjustments that in the opinion of management are necessary for the fair presentation of the financial position and results of operations for the periods then ended. All adjustments during the periods presented are of a normal and recurring nature.

Recent Developments

The Company is aware that on January 4, 2007, MetroPCS filed a Form S-1 Registration Statement under the Securities Act of 1933 and a Form 10 under the Securities Exchange Act of 1934 with the Securities and Exchange Commission.
 
12
 
OVERVIEW
 
The Company’s business consists of its real estate management and rental operations. The Company also owns a minority investment in the Series D Preferred Stock of a private telecommunications company, MetroPCS. In 2000 and 2001, the Company liquidated its fruit processing operations, but continued to hold its real estate and other assets. Thereafter, an opportunity was made available to the Company to invest in MetroPCS, which has operations, in part, in Northern California.
 
The Company's rental operations include industrial/agricultural property, some of which was formerly used in its discontinued fruit processing businesses. This commercial property is now being rented to third parties. The Company’s primary business revenue is generated from the leasing of its two properties, located in Sebastopol, California.
 
The properties are leased to multiple tenants with leases varying in length from month-to-month to ten years. Revenue from lease rental is recognized on a monthly basis, based upon the dollar amount specified in the related lease. Lease incentives and construction allowances provided by the Company to certain of its tenants are amortized as an offset to revenue on a straight-line basis over the term of the respective lease. The Company requires that all tenants be covered by a lease. The Company does not have leases that include provisions that require the lessee to pay the lessor any additional rent based upon the lessee’s sales or any other financial performance levels, or that otherwise vary the amount of minimum rent payable over the lease term. The Company has no tenant related reimbursements that are not part of the tenant lease agreements.
 
 
RESULTS OF OPERATIONS
 

The Company leases warehouse, production, and office space as well as outside storage space at both of its properties. The two properties are located on a total of 82 acres of land and have a combined leaseable area under roof of 440,000 square feet (375,000 under roof and 65,000 outside). The tenants have original lease terms ranging from month-to-month to ten years, with options to extend the longer-term leases. As of December 31, 2006, there were 32 tenants with leases comprising 413,000 square feet of leasable space (348,000 under roof and 65,000 outside) or 94% of the total leasable area. As of the end of December 31, 2005 there were 32 tenants with leases that comprised 371,000 square feet of leasable space (307,000 under roof and 64,000 outside) or 84% of the total leasable area.

Rental Revenue. For the six months ended December 31, 2006 rental revenue increased $251,000 or 25% as compared to the corresponding period in the prior year. This increase was primarily a result of increased revenues from expansion by six existing tenants under term leases of $191,000 and the addition of four new tenants generating revenues of $78,000. This increase in tenant demand was not anticipated and was primarily a result of an increase in tenants’ business volume. The increase was partially offset by vacating tenants and decreases in rented space by certain tenants.
 
For the three months ended December 31, 2006 rental revenue increased $106,000 or 20% as compared to the three months ended December 31, 2005. The increase in rental revenue is attributable to an increase in leased square footage. This increase is primarily a result of the expansion by existing tenants referred to above.
Tenant Reimbursements. For the six months ended December 31, 2006 tenant reimbursements increased $87,000 or 32% as compared to the six months ended December 31, 2005. Such reimbursements typically fluctuate based upon the increase or decrease in utilities rates and the amount of space occupied by tenants. The increase was primarily a result of increased utility rates and usage by existing and new tenants.
 
For the three months ended December 31, 2006, tenant reimbursements increased $17,000, or 12%, as compared to the three months ended December 31, 2005. The increase in utilities during the quarter is primarily a result of increased activity by three manufacturing tenants.
 
Operating Costs. For the six months ended December 31, 2006, total operating costs increased $124,000, or 10%, compared to the six months ended December 31, 2005. Of this increase, operating costs—related party decreased $31,000 and other operating costs increased $155,000. The decrease in related party expenses was primarily the result of reduced legal expenses related to the firm of which a former director of the Company is a partner ($9,000), to the use of another firm for services, reduced accounting fees ($18,000) related to the former CFO and real estate consulting fees ($5,000) from the current director David Bugatto. The increase of $155,000 in operating costs is primarily related to repairs and maintenance for roof recoating at both properties ($81,000), an increase in utility costs ($82,000) which was offset by tenant reimbursements of ($73,000), an increase in fees paid to the Board of Directors ($26,000), an increase in non-cash stock compensation of ($15,000) along with an increase in Delaware Corporation tax of ($13,000) and an increase in amortization of loan fees from the payoff of the Wells Fargo loan ($12,000). The Company continues to closely scrutinize all discretionary spending. Efforts to reduce and/or maintain expenses continue to be an important focus of the Company. Total operating expenses are expected to remain relatively consistent over the remainder of fiscal 2007.
 
For the three months ended December 31, 2006, total operating costs increased $134,000 or 21%. Of this increase, operating costs—related party decreased $5,000 and operating costs increased $139,000, which was primarily a result of roof recoating ($81,000), increases in non-cash stock compensation ($15,000) and utilities ($20,000).
 
Interest Income. For the six months ended December 31, 2006, the Company generated $69,000 of interest income on its cash balances as compared to $47,000 in the six months ended December 31, 2005. The sale of a portion of the Company’s MetroPCS stock in November 2005 has increased the invested cash accounts which were reduced in July 2006 by the paying of all the outstanding amounts owed under its term loan with Wells Fargo Bank, National Association (“Wells Fargo”).
 
For the three months ended December 31, 2006, the Company generated $35,000 of interest income on its cash balances as compared to $31,000 in the three months ended December 31, 2005.
 
Interest Expense. Interest expense consists solely of interest expense on mortgage debt. Interest expense decreased to $7,000 for the six months ended December 31, 2006, compared to $57,000 for the corresponding period in the prior year, due primarily to paying all of the outstanding amounts owed under its term loan with Wells Fargo in July 2006.
 
For the three months ended December 31, 2006, the Company had no interest expense as compared to $30,000 in the three months ended December 31, 2005 due to paying all of the outstanding amounts owed under its term loan with Wells Fargo.
 
14

Gain on Sale of Investment and Dividends. For the six months ended December 31, 2006, the Company had no investment gains or dividends. For the six months ended December 31, 2005, the Company received $1,812,000 for the tender of 20% of its shares in MetroPCS, resulting in a gain on sale of investments of $1,090,000 and dividend income of $122,000.
 
Other Income and Expense. For the six months ended December 31, 2006, the Company realized other income of $3,000, compared to the $6,000 realized for the six months ended December 31, 2005, which included $5,000 from the sale of a dust collection system and other equipment.
 
Income Taxes. The effective tax rate for the six months ended December 31, 2006 increased to a provision of 41% from a provision of 38% for the six months ended December 31, 2005. The increase in the effective tax rate is primarily due to the impact of permanent differences on taxable income.
 
Liquidity and Capital Resources
 
The Company had cash of $2,798,000 and $3,851,000 at December 31, 2006, and June 30, 2006, respectively. The decrease in cash and cash equivalents of $1,053,000 since June 30, 2006 was primarily a result of the principal payment on long-term debt of $1,552,000 and capital expenditures of $2,000. This was offset by cash provided by operating activities of $253,000.
 
In October 2005, the Company entered into a credit agreement with Wells Fargo. The credit agreement replaced the Company’s previous credit agreement with the bank and, in part, refinanced approximately $1,600,000 of indebtedness under the previous agreement. The credit agreement provided for a line of credit, which was available through September 1, 2010. The line of credit provided for advances not to exceed at any time an aggregate principal amount of $500,000. The term note bore interest at the bank’s prime rate plus .25% (or, at the Company’s election, the LIBOR rate, as defined, plus 3.25%), with monthly principal payments of approximately $7,000 beginning November 1, 2005. Unpaid principal and interest was due on the maturity date of October 1, 2010. The note was secured by a first deed of trust on the Company’s property located at 2064 Gravenstein Highway North, Sebastopol, California. On July 21, 2006 the Company paid all of the outstanding amounts owed under its term loan with Wells Fargo in the amount of $1,552,000 thus terminating both the term loan and line of credit.
 
Cash flows from operating activities are expected to remain positive and relatively consistent given current tenant occupancy and rental agreements in place.
 
The Company believes that its existing resources, together with anticipated cash from operating activities, will be sufficient to satisfy its current and projected cash requirements for at least the next six months. The Company holds certain cash and cash equivalents for non-trading purposes that are sensitive to changes in the interest rate market. The Company does not believe that changes in the interest rate market affecting these financial instruments will have a material impact, either favorable or unfavorable, on its financial position or results of operations.
 
The Company does not have any off-balance sheet arrangements.
 
CRITICAL ACCOUNTING POLICIES

The financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates and assumptions. The Company believes that of its significant accounting policies, the following may involve a higher degree of judgment and complexity.
 
15

Valuation of investment in MetroPCS Communications, Inc.
 
The Company accounts for its investment in MetroPCS under the cost method, which amounted to $2,401,000 as of December 31, 2006. The Company continues to monitor the financial condition, cash flow, operational performance and other relevant information about MetroPCS, for purposes of reflecting the investment on the Company’s financial statements. This process is based primarily on such information as we may request and that MetroPCS may provide to us. The Company also tracks MetroPCS information available to the general public.  If the Company had, in September 2005, tendered the remaining MetroPCS shares that it currently holds, the Company would have received gross proceeds of approximately $7,200,000 from the tender of such shares (in addition to the proceeds from the shares actually tendered). There can be no assurance, however, that the Company will be able to achieve liquidity for its remaining MetroPCS shares in the future at the price offered in the tender offer or at any other price. See Note 3 to the financial statements above for further information.
 
The Company owns less than one percent of the total outstanding shares of MetroPCS’ Series D Preferred Stock and less than one percent of its total outstanding capital stock on an as-converted basis. If as a result of its review of information available to the Company regarding MetroPCS the Company believes its investment should be reduced to a fair value below its cost, the reduction would be charged to “loss on investments” in the statements of operations.
 

The Company currently has no derivative financial instruments that expose the Company to market risk. The Company is exposed to cash flow and fair value risk due to changes in the fair value of its investment in MetroPCS Communications, Inc. As of December 31, 2006, the Company believes that the carrying amounts for cash, accounts receivable and accounts payable approximate their fair value. Based on the price per share offered in the October 2005 tender offer, the Company believes that the investment in MetroPCS Communications exceeds its carrying amount.
 
 
As of December 31, 2006, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e)). Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective at a reasonable level in timely alerting them to material information relating to the Company that is required to be included in the Company's periodic filings with the Securities and Exchange Commission. There has been no change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
 
The Company's management, including the Chief Executive and Chief Financial Officer, do not expect that the Company's disclosure controls or internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met due to numerous factors, ranging from errors to conscious acts of an individual, or individuals acting together. In addition, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of inherent limitations in a cost-effective control system, misstatements due to error and/or fraud may occur and not be detected.
 
 
None
 
 
None

 
None
 
At the Registrant's Annual Meeting of Stockholders held on November 17, 2006 the following proposals were adopted by the margins indicated:
 
         
Number of Shares
 
Voted For
Voted Against
 
Withheld
1. To elect four Directors to hold office until the Annual Meeting of Stockholders to be held in 2007 or until their respective successors have been elected or appointed
 
 
 
            Walker R. Stapleton
899,603
 
123,050
            David J. Bugatto
897,803
 
124,850
            Robert W. C. Davies
897,253
 
125,400
            David Janke
897,253
 
125,400
 2. To ratify the appointment of the accounting firm of Grant Thornton LLP as independent auditors for the fiscal year ending June 30, 2007.
964,621
43,518
        0
3. For transaction of such other business as may come before the meeting
886,053
135,533
 1,047

 
None

Item 6.  Exhibits

 
31.1
Chief Executive Officer and Chief Financial Officer Certification of Periodic Financial Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
     
 
32.1
Chief Executive Officer and Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 +
_________________________
 
*  Filed herewith.
 
+  Furnished herewith.
 
17
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 

 
Date: February 20, 2007
 

  /s/ Walker R. Stapleton      
Walker R. Stapleton, Chief Financial Officer


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Exhibit No.
Document Description
31.1
 
Chief Executive Officer and Chief Financial Officer Certification of Periodic Financial Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1
Chief Executive Officer and Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 +
 
*   Filed herewith
 
+   Furnished herewith
 
 
 
 
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