0000930413-01-501263.txt : 20011009 0000930413-01-501263.hdr.sgml : 20011009 ACCESSION NUMBER: 0000930413-01-501263 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010928 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SONOMAWEST HOLDINGS INC CENTRAL INDEX KEY: 0000102588 STANDARD INDUSTRIAL CLASSIFICATION: CANNED, FROZEN & PRESERVED FRUIT, VEG & FOOD SPECIALTIES [2030] IRS NUMBER: 941069729 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-01912 FILM NUMBER: 1748156 BUSINESS ADDRESS: STREET 1: 1448 INDUSTRIAL AVE CITY: SEBASTOPOL STATE: CA ZIP: 95472-4848 BUSINESS PHONE: 7078242548 MAIL ADDRESS: STREET 1: 1448 INDUSTRIAL AVE CITY: SEBASTOPOL STATE: CA ZIP: 95472 FORMER COMPANY: FORMER CONFORMED NAME: VACU DRY CO DATE OF NAME CHANGE: 19920703 10-K 1 c21958-10k.txt ANNUAL REPORT 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, 2001 [ ] 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 4, 2001 non-affiliates of the Registrant held voting stock with an aggregate market value of $5,451,424 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 4, 2001, there were 1,023,506 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: Proxy Statement for Registrant's 2001 Annual Meeting of Shareholders currently scheduled to be held October 31, 2001 and to be filed with the Securities and Exchange Commission on or before 120 days after the end of the 2001 fiscal year is incorporated by reference into 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. Forward looking statements include statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions, and other statements which are other than statements of historical facts. Certain statements contained herein are forward looking statements and, accordingly, involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward looking statements. The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, although actual results may differ materially from those described in any such forward looking statements. Risks inherent in Registrant's business and factors that could cause or contribute to such differences include, without limitation, the considerations 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 The Company was incorporated in California on December 27, 1946 as Vacu-dry Company, and until July 30, 1999 was engaged in the development, production and marketing of fruit products. Thereafter, and as part of a strategic reorientation, the Company sold a major portion of it assets related to its product lines of processed apple products and products containing processed apple products to Tree Top, Inc. (Tree Top) for $13.9 million. Certain product lines used in or related to the apple product lines were not included in the sale. These included vacuum dried apple products, certain mixed fruit products, apple products packaged for the Company by others, and organic apple products. Thereafter in August 1999, the Company determined that these product lines, as well as the food storage product line, would be discontinued and held for sale. In the third quarter of fiscal 2000, the Company decided to discontinue and hold for sale the assets and operations of its organic packaged goods subsidiary Made In Nature Company, Inc. The intellectual property and most dried fruit inventories related to the organic packaged goods operation were sold in May 2000 for $1.1 million to Premier Valley Foods, Inc. Therefore, as of June 2001, the Company's remaining line of business is its real estate management and rental operations, consisting of two industrial parks north and south of Sebastopol, California, totaling almost 458,000 square feet of rentable space on 82 acres of land. (See Item 2, Properties.) Sebastopol is approximately 56 miles north of San Francisco in Sonoma County. The Company has also committed itself to a $3 million investment in the preferred stock of a privately held telecommunications company, MetroPCS, Inc. As of June 30, 2001, the Company had invested $599,000 on its $3 million commitment. INDUSTRY SEGMENT INFORMATION For the year ended June 30, 2001, 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 industrial properties, located in Sebastopol, California. The properties are leased out to multiple tenants with leases varying in length from month-to-month to eight years. The Company's business is not seasonal and does not require significant working capital. Revenue from the leasing activities is recorded on a monthly basis and terms of payment are either net the 1st or 15th of the month. As of June 30, 2001, no single tenant accounted for more than 10% of the Company's revenue. -1- In addition, while not part of its general operations, the Company has made a financial commitment to a $3 million investment in the preferred stock of MetroPCS, Inc., a privately held telecommunications company. The Company is not involved in the daily operations nor the management of MetroPCS, Inc. Information regarding all other business income is included in the discussion of discontinued operations. 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 will incur capital expenditures of approximately $100,000 to $150,000 to implement these changes during the 2002 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 which might be located on or in our 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 6 employees, each in a management or staff capacity, and 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 to Tree Top in 1999, after which time none of its employees has been covered under a collective bargaining agreement. INSURANCE The Company maintains product, property, and general liability insurance plus umbrella liability coverage. While management feels the limits and coverage are adequate relative to the related risks, there is no assurance that this insurance will be adequate to protect the Company from 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. RISKS ASSOCIATED WITH INVESTMENTS IN REAL ESTATE Income from the properties may be adversely affected by, among other things, increasing unemployment rates, oversupply of competing properties, reduction in demand for properties in the area, inflation, and adverse real estate, zoning and tax laws. Certain significant expenditures associated with an 2 investment in real estate (such as mortgage payments, real estate taxes, and maintenance costs) constitute fixed costs and do not decrease when circumstances cause a reduction in income from the investment. SHORT OPERATING HISTORY IN THIS REAL ESTATE INDUSTRY SEGMENT AND INVESTMENT ACTIVITIES While the Company has managed real estate and facilities issues for many years, it is only recently that it has shifted its primary business focus to that business segment and its investment activities. While the Company believes that it has sufficient experience, resources and personnel to manage its properties and investments effectively, it does not have a long operating history that demonstrates such effective management and there is no assurance that it will be successful. POTENTIAL ENVIRONMENTAL LIABILITY The Company could be held liable for the costs of removal or remediation of any hazardous or toxic substances located on or in its properties. These laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of the hazardous or toxic substances. The presence of such substances, or the failure to remediate such substances properly, may adversely affect the owner's ability to sell or rent the property or to borrow using the property as collateral. Other Federal and state laws require the removal of damaged material containing asbestos in the event of remodeling or renovation. UNINSURED LOSS The Company carries several types of insurance. There are, however, certain types of extraordinary losses (such as losses from earthquakes) that may be either uninsurable or not economically insurable. Should an uninsured loss occur, the Company could lose its investment in and anticipated profits and cash flow from a property and would continue to be obligated on any mortgage indebtedness on the property. INVESTMENT RISKS The Company has committed to a $3 million minority investment in a telecommunications company. As of June 30, 2001, the Company had invested $599,000 on its $3.0 million commitment. Even though the Company's management believes that the investment in Metro PCS will ultimately provide a positive return to the Company, there is no assurance that this will occur. NO DIVIDENDS ON COMMON STOCK 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. 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. These offices consist of approximately 9,200 square feet of office space and are leased through December 2003. This space has been sublet through May 2002 at approximately the Company's lease rate, with an option to renew 3 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 81.5 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 influence. The improvements consist of five connected buildings on a parcel approximately five acres in size with an aggregate of 91,300 square feet of rentable space. The available space is quite suitable 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 19,000 square feet of paved parking area that can be leased. The property is zoned for "limited industrial" use which means that permitted uses include agricultural/food processing, light industry, office, 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. Currently 88% of the space available has been leased to nine tenants. Lease terms range from month-to-month to eight years with options to extend beyond that. The following table sets forth the schedule of the lease expirations for each of the ten years commencing with the fiscal year ending June 30, 2002: Number of Percent of Tenants Whose Total Square Annual Rent Gross Rent Year ending Leases Will Feet Covered Represented Represented June 30th Expire by Leases by Leases by Leases -------------------------------------------------------------------------------- 2002 2 75,018 $ 304,854 84% 2003 - 63,671 265,242 73% 2004 - 63,671 265,242 73% 2005 1 63,671 232,988 64% 2006 1 32,265 89,441 25% 2007 1 5,417 8,075 2% The federal tax basis of the property is $357,612. The accumulated book depreciation is $844,233 and the book net carrying value is $353,781. 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, 2001 were $13,323. The Company has a $ 2.0 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 366,484 square feet of leasable space. 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, processing and office space. SonomaWest is 4 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. Currently 43% of the space available has been leased to sixteen tenants. An additional 62,778 square feet of outside space has also been leased. Leases range from month-to-month to eight years with options to extend beyond that. 5 Number of Percent of Tenants Whose Total Square Annual Rent Gross Rent Year ending Leases Will Feet Covered Represented Represented June 30th Expire by Leases by Leases by Leases -------------------------------------------------------------------------------- 2002 7 104,678 $ 450,057 49% 2003 - 57,678 319,881 35% 2004 1 57,678 311,223 34% 2005 - 55,273 302,565 33% 2006 1 55,273 256,885 28% 2007 1 4,295 11,447 1% The federal tax basis of the property is $1,648,498. The accumulated book depreciation is $3,625,117 and the book net carrying value is $1,702,490. 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, 2001 were $49,998. The Company has no debt associated with this facility. The Company is also 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 material 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 year ended June 30, 2001. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is traded on the Nasdaq National Market System (symbol: SWHI). The quarterly high and low prices for the last two fiscal years were as follows: QUARTER ENDING LOW HIGH -------------- ---- ---- 09/30/99 6.75 10.50 12/31/99 5.38 7.00 03/31/00 4.88 6.13 06/30/00 4.25 6.50 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 6 The above quotations were obtained from the Yahoo Finance Historical Quotes Online website. On September 4, 2001, there were approximately 473 registered holders of common stock and 478 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 $8.00. This price reflects interdealer prices, does not include dealer mark-ups, mark-downs or commissions, and may not necessarily represent actual transactions. 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. ITEM 6. SELECTED FINANCIAL DATA. YEAR ENDED JUNE 30 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2001 2000 1999 1998 1997 ------ ------ ------ ------ ------ Total revenues (1) $1,192 $1,197 $ 665 $ 518 $ 537 Net loss from continuing operations (355) (473) (759) (573) (509) Net earnings (loss) from discontinued operations 161 3,183 (2,170) 1,472 1,026 Net earnings (loss) (194) 2,710 (2,929) 899 517 Loss per share from continuing operations Basic (0.27) (0.31) (0.50) (0.36) (0.31) Diluted (0.27) (0.31) (0.50) (0.36) (0.31) Earnings (loss) per share from discontinued operations Basic 0.12 2.09 (1.43) 0.93 0.62 Diluted 0.12 2.06 (1.43) 0.92 0.62 Earnings (loss) per share Basic (0.15) 1.78 (1.93) 0.57 0.31 Diluted (0.15) 1.75 (1.93) 0.56 0.31 Total Assets 7,687 12,969 17,023 17,008 14,576 Long Term Debt 1,917 1,974 2,860 1,703 1,808 (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. 7 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 ingredient 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 2001, the Company's business consists of its real estate management and rental operations and its investment in the preferred stock of a private telecommunications company, MetroPCS, Inc. Prior to the sale of its other business segments, SonomaWest operated in three business segments: industrial dried fruit ingredients, organic packaged goods and real estate. The Company commenced a strategic reorientation upon the announcement of the proposed sale of its apple-based industrial ingredients product line in June 1999. In August 1999 the decision was made to sell or discontinue all product lines in the Company's industrial dried fruit ingredients business. In January 2000, the Company decided to sell or discontinue its organic packaged goods business. As a result of these decisions, both of these business segments are considered discontinued operations and their operating results, results of cash flows and net assets are reflected outside of the Company's continuing operations. During fiscal 2001, the Company committed to a $3 million minority investment in a telecommunications company. As of June 30, 2001, the Company had invested $599,000 on its $3.0 million commitment. DISCONTINUED OPERATIONS In July 1999, the Company sold the bulk of its apple-based industrial ingredients product line to Tree Top, Inc., of Selah, Washington. This product line represented 55% and 81% of the Company's sales for the years ended June 30, 1999 and 1998, respectively. This sale, which was recorded in the first quarter of fiscal 2000, is an important element of the Company's strategic plan to increase the return on its investments and increase shareholder value by exiting businesses with low returns and high capital requirements. The transaction provided financial resources to support the Company's real estate and other business opportunities. Following completion of the sale, the Company determined in August 1999 that the remaining product lines in the Company's vacuum ingredients segment of its business would be discontinued and held for sale. These product lines included the Company's dried ingredients, Perma-Pak long-term food storage, and drink mix businesses. In January 2000, the Company decided to sell or discontinue its organic packaged goods business. As a result of these decisions, the Company has classified these business segments as discontinued operations. Accordingly, the Company has segregated the net assets of the discontinued operations in the consolidated balance sheets at June 30, 2001 and 2000, the operating results of the discontinued operations in the consolidated statements of operations for fiscal 2001, 2000, and 1999 and the cash flows from discontinued operations in the consolidated statements of cash flows for fiscal 2001, 2000, and 1999. For fiscal 2001, the Company recorded an after-tax gain from discontinued operations of $161,000. This compares to an after-tax gain from discontinued operations of $3,151,000 for 2000. The small gain in 2001 relates to sales of remaining inventories at higher than anticipated prices as the wind-down of the vacuum ingredients and organic packaged goods segments is completed. In fiscal 2000, the Company recorded after-tax earnings from discontinued operations of $32,000 on sales of $9.5 million for the ingredients business and $2.2 million for the organic packaged goods business. This compares to an after-tax loss of $2.2 million on sales of $35.2 million for the ingredients business and $2.7 million for the organic packaged goods business in fiscal 1999. The decline in sales in 8 the ingredients business is due to the sale of the apple ingredients business during the first quarter of fiscal 2000 and a significant decline in the sales of Perma-Pak food storage products. The decline in sales in the organic packaged goods business is due to the sale of the dried fruit business in the fourth quarter of fiscal 2000. After the allocation of selling, general and administrative expenses between continuing and discontinued operations, the discontinued businesses generated $53,000 of operating income in fiscal 2000 versus an operating loss of $4.1 million in fiscal 1999. Included in cost of sales, however, in fiscal 1999 is the write-down of food storage inventories by $3.5 million to reflect estimated net realizable value. While the Company experienced exceptionally strong food storage sales through the third quarter of fiscal 1999, sales have declined substantially since that time. The 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. RESULTS OF CONTINUING OPERATIONS The Company's continuing line of business is its real estate management and rental operations. See Item 2, Properties, above for a further discussion of the Company's real estate operations. Additionally, the Company has committed to a $3 million investment in a telecommunications company, MetroPCS, Inc. As of June 30, 2001, the Company had invested $599,000 on its $3.0 million commitment. In August 2001, an additional investment of $446,300 was paid to MetroPCS. FISCAL 2001 COMPARED TO FISCAL 2000 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 458,000 square feet on 82 acres of land. As of the end of fiscal year 2001, there were 25 leases covering 275,941 square feet of space or 59% leased compared to 57% leased in fiscal 2000. The leases contain varying original terms ranging from month-to-month to eight years. Fiscal 2001 rental revenue remained relatively constant at $ 1,192,000 decreasing $5,200 from fiscal 2000. Nonetheless, rental revenue does not cover all operating costs, yielding deficits of $532,000 and $789,000 in fiscal years 2001 and 2000 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 2000 and 2001. As of the end of fiscal 2001, the Company's total operating costs exceeded the tenant rental revenue. Cost reduction efforts to minimize any avoidable spending have been undertaken to minimize these negative operating results while the Company actively searches for additional tenant revenue. For fiscal 2001, operating costs decreased 11% or $216,000 to $1,974,000 compared to $2,190,000 in the prior year. Operating costs have begun to normalize for the continuing operations, with the reduction of temporary labor costs contributing partially to the decrease in these costs. The Company continues to focus on the reduction of these costs where possible. The Company's continuing operating results will be negatively impacted as long as the tenant rental revenue stream fails to cover existing operating costs. INTEREST AND OTHER INCOME (EXPENSE), NET. Interest and other income (expense) consists primarily of interest income on the Company's cash balances and interest expense on mortgage debt. Proceeds from the sale of the ingredients business received in July 1999 were used to pay off the Company's revolving bank line of credit and substantially reduce long-term debt. As a result of this 9 elimination of debt, the Company was a net investor of cash in fiscal 2001 and 2000. In fiscal 2001 the Company generated $418,000 of interest income and incurred $156,000 of interest expense, compared to $409,000 of interest income and $218,000 of interest expense in fiscal 2000. INCOME TAXES. The fiscal 2001 effective tax rate decreased to 33% from the fiscal 2000 effective tax 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 future 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 2000 taxable income. FISCAL 2000 COMPARED TO FISCAL 1999 RENTAL REVENUE. Rental revenue in fiscal 2000 increased 80% or $532,000 from fiscal 1999. This increase was primarily a result of leasing activities at the Company's former production facility. OPERATING COSTS. In fiscal 2000, operating costs increased 15% or $282,000. This change was primarily due to increased temporary labor costs incurred during the first two quarters of fiscal 2000. INTEREST AND OTHER INCOME (EXPENSE), NET. In fiscal 2000, the proceeds from the sale of the Company's ingredient business were used to significantly reduce its debt. As a result, in fiscal 2000 the Company become a net investor of cash, generating $409,000 of interest income and incurring $218,000 of interest expense. In the prior year it was a net borrower, generating interest income of $2,000 and incurring interest expense of $179,000. INCOME TAXES. The fiscal 2000 effective tax rate changed from a benefit of 43% to a charge of 40%, due primarily to lower tax credits in fiscal 2000. LIQUIDITY AND CAPITAL RESOURCES The Company had cash of $ 3.9 million at June 30, 2001, and current maturities of long-term debt of $57,000. Although the Company generated a pre-tax loss of $532,000 from operating activities, the cash balances decreased $4.4 million from $8.3 million at June 30, 2000 to $3.9 million at June 30, 2001. Cash generated from operations was $1,011,000 after adding back non-cash changes and the changes in other current operating assets and liabilities. The decrease in the Company's cash balance was primarily a result of the repurchase of 500,000 shares of the Company's stock at $8.00 per share ($4,087,000 including costs) (see below), an investment in Metro PCS of $599,000 (see below), a shareholder note payoff of $564,000, the repurchase of warrants of $112,000 and principal payments on the remaining long-term debt. During December 2000, the Company entered into an agreement with its sole lender in order to modify the terms of the 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 June 30, 2001, the Company's debt service ratio was .97 to 1. Consequently, $600,000 is classified as restricted cash on the accompanying balance sheet. The Company received a waiver from the Bank of this non-compliance with the debt service coverage ratio as of June 30, 2001. As of August 15, 2001, the Company and the Bank agreed to a Restated and Amended Addendum to this Agreement. This addendum amends and restates the provisions of the agreement stated 10 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 in a Money Market account established by the Company after the fiscal 2001 year end, 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 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 a swap contract. The Company is a party to an interest rate swap under which it 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 $1,974,000 as of June 30, 2001. 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. The Company will report all changes in fair value of its swap contract in earnings. During the year ended June 30, 2001, the Company recorded a decrease in the value of this swap of $12,262. This amount is included in interest expense. The cumulative effect of adopting this standard effective July 1, 2000 was not significant. The Company has committed itself to a $3 million investment in the preferred stock of a privately held telecommunications company, MetroPCS, Inc. As of June 30, 2001, the Company had invested $599,000 of its $3 million commitment. The Company has accounted for the investment using the cost method. In August, 2001 an additional investment of $446,300 was paid to MetroPCS. It is expected that the remaining $1,954,700 will be funded in several installments throughout the fiscal year ending June 30, 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. SUBSEQUENT EVENTS On July 17, 2001 the Company approved the granting of 25,000 common stock options to Board Members: David Bugatto - 10,000, Roger Mertz - 5,000, Fred Selinger - 5,000 and Craig Stapleton - 5,000, each at a price of $7.48 per share. On July 17, 2001 the Board of Directors entered into an agreement in principle, which was thereafter executed, with Gary L. Hess, its President and Chief Executive Officer, replacing Mr. Hess's existing employment agreement. Pursuant to the separation agreement, Mr. Hess will continue as the President and Chief Executive Officer, first on a full-time basis and then on a parttime basis, through October 31, 2001. Effective September 2001, the Company will pay separation payments to Mr. Hess in the amount of $12,500 monthly for 29 months, replacing all payment obligations under his prior employment agreement. Mr. Hess has also been designated as the Company's exclusive sales representative in its efforts to sell any and all remaining Perma-Pak finished good inventory and other 11 Perma-Pak property. Mr. Hess also has the option of extending the period within which he is eligible to exercise options previously granted to him. On July 17, 2001 the Company entered into a Consulting Agreement with David J. Bugatto, a director. Pursuant to the agreement Mr. Bugatto will provide consulting services to the Company in connection with its real estate business for a monthly fee of $2,500. The agreement is retroactive to April 1, 2001. MINIMUM LEASE PAYMENTS The Company has been leasing warehouse space, generating revenues of $1,192,000 in 2001, $1,197,000 in 2000 and $665,000 in 1999. The leases have varying terms, which range from month-to-month to expiration dates through 2007. As of June 30, 2001, 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): YEAR ENDING JUNE 30 ---------- 2002 $755 2003 585 2004 576 2005 536 2006 346 Thereafter 59 ---------- Total $2,857 ========== 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, 2001 and 2000 ..................... F-2 Consolidated Statements of Operations for the years ended June 30, 2001, 2000 and 1999 .............................................. F-3 Consolidated Statements of Changes in Shareholders' Equity for the years ended June 30, 2001, 2000 and 1999 .............................. F-4 Consolidated Statements of Cash Flows for the years ended June 30, 2001, 2000 and 1999 .............................................. F-5 Notes to Consolidated Financial Statements ................................ F-6 12 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of SonomaWest Holdings, Inc.: We have audited the accompanying consolidated balance sheets of SonomaWest Holdings, Inc. (a California corporation) and Subsidiary as of June 30, 2001 and 2000, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for the three years 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 audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SonomaWest Holdings, Inc. and Subsidiary as of June 30, 2001 and 2000, and the results of its operations and its cash flows for the three years then ended, in conformity with accounting principles generally accepted in the United States. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The Schedule listed in the index to the financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This Schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP San Francisco, California, August 6, 2001 F-1 SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2001 AND 2000 (AMOUNTS IN THOUSANDS) ASSETS 2001 2000 ------------------ CURRENT ASSETS: Cash $3,336 $ 8,359 Restricted cash (see note 4) 600 Accounts receivable, less allowances for uncollectible accounts of $10 and $47 in fiscal 2001 and 2000, respectively 97 110 Other receivables 124 -- Prepaid income taxes 287 816 Prepaid expenses and other assets 129 87 Current deferred income taxes, net 263 621 ------------------ Total current assets 4,836 9,993 ------------------ RENTAL PROPERTY, net 2,252 2,854 ------------------ NET ASSETS OF DISCONTINUED OPERATIONS -- 122 ------------------ INVESTMENT, at cost 599 -- ------------------ Total assets $7,687 $12,969 ================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ 57 $ 617 Accounts payable 70 24 Unearned rents and deposits 176 143 Accrued payroll and related liabilities 52 78 Accrued expenses 241 123 Net liabilities of discontinued operations 281 628 ------------------ Total current liabilities 877 1,613 ------------------ LONG-TERM DEBT, net of current maturities 1,917 1,974 ------------------ DEFERRED INCOME TAXES, net 45 147 ------------------ Total liabilities 2,839 3,734 ------------------ SHAREHOLDERS' EQUITY: Preferred stock: 2,500 shares authorized; no shares outstanding -- -- Common stock: 5,000 shares authorized, no par value; 1,024 and 1,522 shares outstanding in fiscal 2001 and 2000, respectively 2,187 2,905 Warrants for common stock -- 456 Retained earnings 2,661 5,874 ------------------ Total shareholders' equity 4,848 9,235 ------------------ Total liabilities and shareholders' equity $7,687 $12,969 ================== 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, 2001, 2000, AND 1999 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2001 2000 1999 --------------------------- RENTAL REVENUE $1,192 $1,197 $ 665 --------------------------- OPERATING COSTS 1,974 2,190 1,908 --------------------------- INTEREST AND OTHER INCOME (EXPENSE), NET 250 204 (179) --------------------------- LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX (532) (789) (1,422) BENEFIT FOR INCOME TAXES (177) (316) (663) --------------------------- NET LOSS FROM CONTINUING OPERATIONS (355) (473) (759) --------------------------- DISCONTINUED OPERATIONS: Earnings (loss) from discontinued operations, net of income taxes -- 32 (2,170) Gain on sale of discontinued operations, net of income taxes 161 3,151 -- --------------------------- NET EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS 161 3,183 (2,170) --------------------------- NET EARNINGS (LOSS) $ (194) $2,710 $(2,929) =========================== WEIGHTED AVERAGE COMMON SHARES AND EQUIVALENTS: Basic 1,291 1,520 1,514 Diluted 1,319 1,548 1,549 EARNINGS (LOSS) PER COMMON SHARE: Continuing operations: Basic $(0.27) $(0.31) $ (0.50) Diluted (0.27) (0.31) (0.50) Discontinued operations: Basic 0.12 2.09 (1.43) Diluted 0.12 2.06 (1.43) Net earnings (loss): Basic (0.15) 1.78 (1.93) Diluted (0.15) 1.75 (1.93) 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, 2001, 2000, AND 1999 (AMOUNTS IN THOUSANDS) COMMON STOCK ---------------- WARRANTS TOTAL NUMBER FOR SHARE- OF COMMON RETAINED HOLDERS' SHARES AMOUNT STOCK EARNINGS EQUITY -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- BALANCE, JUNE 30, 1998 1,511 $ 2,837 $ 456 $ 6,093 $ 9,386 Net loss -- -- -- (2,929) (2,929) Issuance of common stock 8 53 -- -- 53 -------------------------------------------- BALANCE, JUNE 30, 1999 1,519 2,890 456 3,164 6,510 Net earnings -- -- -- 2,710 2,710 Issuance of common stock 3 15 -- -- 15 -------------------------------------------- BALANCE, JUNE 30, 2000 1,522 2,905 456 5,874 9,235 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 ============================================ 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, 2001, 2000, AND 1999 (AMOUNTS IN THOUSANDS) 2001 2000 1999 ----------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) $ (194) $ 2,710 $(2,929) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: (Income) loss from discontinued operations, net -- (32) 2,170 Gain on sale of discontinued operations, net (161) (3,151) -- Depreciation and amortization expense 419 414 468 Changes in assets and liabilities: Accounts receivable, net 13 (110) -- Other receivables (124) -- -- Deferred income tax provision (benefit) 256 1,884 (2,863) Prepaid income taxes 529 (250) (439) Prepaid expenses (42) 78 5 Accounts payable and accrued expenses 164 (65) (2,006) Accrued payroll and related liabilities (26) (199) 277 Unearned rents and deposits 33 140 (30) ----------------------------- 1,061 (1,291) (2,418) ----------------------------- Net cash provided by (used in) continuing operations 867 1,419 (5,347) ----------------------------- Net cash provided by discontinued operations 144 11,887 1,573 ----------------------------- Net cash provided by (used in) operating activities 1,011 13,306 (3,774) ----------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (25) (179) (379) Investment in Metro PCS (599) -- -- Investing activities of discontinued operations -- 2,099 (820) ----------------------------- Net cash provided by (used in) investing activities (624) 1,920 (1,199) ----------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under the line of credit -- 3,727 26,924 Payments on the line of credit -- (9,472) (23,476) Principal payments of long-term debt 53 1,414 465 Principal payments of shareholder debt 564 271 -- Stock repurchase (4,087) -- -- Warrant repurchase (112) -- -- Issuance of common stock 6 15 53 Financing activities of discontinued operations -- -- 2,100 ----------------------------- Net cash provided by (used for) financing activities (4,810) (7,415) 5,136 ----------------------------- NET INCREASE (DECREASE) IN CASH (4,423) 7,811 163 CASH AT BEGINNING OF YEAR 8,359 548 385 ----------------------------- CASH AT END OF YEAR $ 3,936 $ 8,359 $ 548 ============================= 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, 2001 (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 Metro PCS, Inc., a private 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. As of June 30, 1999, the Company discontinued its ingredients business and was in the process of selling the assets related to this segment (see Note 2). The business included low-moisture fruits, bulk apple juice, apple juice concentrate, private label drink mixes, and low-moisture food products, which were sold to manufacturers principally in the United States and Canada. In the third quarter of fiscal 2000, the Company discontinued its organic packaged goods business, operated through a subsidiary, Made In Nature Company, Inc. (MINCO), and has sold the assets related to this segment (see Note 2). This subsidiary was formed on June 11, 1998 upon the acquisition of certain assets and liabilities of Made In Nature, Inc. (see Note 3). The business included the marketing of organic packaged foods and chilled pasteurized beverages, which were sold to distributors and retailers principally in the United States and Canada. 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. 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 this segment. In January 2000, the Company decided to discontinue its entire organic packaged goods business and sold a significant portion of MINCO's assets to Premier Valley Foods, Inc. (see Note 2). The Company's continuing operations consist of its real estate management , rental operations and an investment in Metro PCS. 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, 2001 and 2000. As of June 30, 2001, 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 $281 which consists of reserves of $74 for potential sublease shortfalls related to its lease at Stony Point Circle in Santa Rosa, $190 for repairs to the North Property and $17 for legal expenses. All corporate overhead costs are presented as a component of continuing operations. F-6 SUPPLEMENTAL STATEMENTS OF CASH FLOWS INFORMATION 2001 2000 1999 ---------------------------------------- Cash paid for: Interest $ 159 $ 326 $ 528 ======================================== Income taxes $ 2 $ 420 $ 783 ======================================== INVENTORIES As of June 30, 2001 the Company's remaining inventories of $2,234 consisting solely of Perma-Pak food storage items, are priced using the first-in, first-out (FIFO) method and are fully reserved. PROPERTY, PLANT, AND EQUIPMENT Property and equipment acquired in connection with the acquisition of Made In Nature were recorded at estimated fair value on the acquisition date. All other property, plant, and equipment are stated at cost. The remaining machinery and equipment of the ingredients segment are fully reserved. Depreciation is computed using the straight-line method based upon the estimated useful lives of the assets as follows: Buildings and improvements 5 to 40 years Machinery and equipment 3 to 15 years No depreciation is charged on property, plant, and equipment classified in discontinued operations. F-7 Rental property consist of the following as of June 30: 2001 2000 --------------------------- Land $ 231 $ 231 Buildings and improvements 6,670 7,192 Office equipment 349 354 Construction in Progress 12 -- --------------------------- Total rental property 7,262 7,777 Accumulated depreciation (5,010) (4,923) --------------------------- Net rental property $ 2,252 $ 2,854 =========================== Improvements that extend the life of the asset are capitalized; other maintenance and repairs are expensed. The cost of maintenance and repairs was $139 in 2001, $113 in 2000, and $1,041 in 1999. IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews long-lived assets and identifiable intangibles whenever events or circumstances indicate that the carrying amount of such assets may not be fully recoverable. The Company evaluates the recoverability of long-lived assets by measuring the carrying amount of the assets against the estimated undiscounted cash flows associated with these assets. At the time such evaluations indicate that the future undiscounted cash flows of certain long-lived assets are not sufficient to recover the assets' carrying value, the assets are adjusted to their fair values (based upon discounted cash flows). During fiscal 1998, the Company acquired certain assets and liabilities of MINCO (Note 3). This acquisition was accounted for under the purchase method, with the excess of cost over management's estimated fair value of the net assets acquired of $3,103 allocated to goodwill. During 1999, management reviewed the estimated future cash flows related to this operation and deemed them to be insufficient to fully recover the carrying value of the assets acquired. Accordingly, the Company recognized a $2,935 impairment expense during the fourth quarter of fiscal 1999 to write-off all unamortized goodwill as of that date. The expense is included in the net loss from discontinued operations. INCOME TAXES The Company records income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109 requires the Company to compute deferred taxes based upon the amount of taxes payable in future years after considering changes in tax rates and other statutory provisions that will be in effect in those years. Deferred taxes are recorded based upon differences between the financial statement and tax bases of assets and liabilities and available tax credit carryforwards. REVENUE The Company recognizes rental income on a straight-line basis over the term of occupancy in accordance with the provisions of the leases. F-8 STOCK-BASED COMPENSATION The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recorded. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock Based Compensation." EARNINGS PER COMMON SHARE Basic earnings per common share are computed by dividing net earnings by the weighted average number of shares of stock outstanding during the period. Diluted earnings per common share include the impact of stock options using the treasury stock method, if dilutive. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. In June 1999, the FASB issued SFAS No. 137, Accounting for Derivatives and Hedging Activities - Deferral of the Effective Date of SFAS No. 133. In June 2000, the FASB issued SFAS No. 138, Accounting for Certain Derivatives and Certain Hedging Activities, an amendment of FASB Statement No. 133. Statement 133, as amended, establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative instrument's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The Company has adopted Statement 133 effective July 1, 2000. 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 a swap contract. The Company is a party to an interest rate swap under which it 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 $1,974 as of June 30, 2001. 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. The Company will report all changes in fair value of its swap contract in earnings. During the year ended June 30, 2001, the Company recorded a decrease in the value of this swap of $12. This amount is included in interest expense. The cumulative effect of adopting this standard effective July 1, 2000 was not significant. RECLASSIFICATIONS Certain reclassifications have been made to the 2000 and 1999 consolidated financial statements to conform to the current year presentation adopted for fiscal 2001 and as required with respect to discontinued operations. F-9 2. DISCONTINUED OPERATIONS: In July 1999, the Company consummated an asset purchase agreement (the Purchase Agreement) with Tree Top, Inc. The Purchase Agreement governed the sale of all intangible assets (primarily trademarks, know-how, and customer lists) and certain of the equipment relating to the Company's processed apple products line. Although the Purchase Agreement excludes other product lines within the Company's ingredient segment, the Company decided to actively seek buyers for the remaining product lines of the ingredients segment and has discontinued production of all ingredients segment products. Consequently, the ingredients segment has been presented as a discontinued operation in the accompanying consolidated financial statements for all periods presented. The purchase price for the sale of the processed apple products line of $12 million was paid in cash at the closing date of the sale on July 30, 1999. In addition, equipment with a net book value of $1,478 was sold for $500, and apple product inventories with a cost of $1.7 million were purchased for $1.9 million. Tree Top, Inc. did not assume any of the Company's liabilities. In connection with the Purchase Agreement, the Company and certain shareholders, directors, and management have agreed not to compete with Tree Top, Inc. in processed apple product lines for a period of three to ten years. In addition, as part of the transaction, the Company sold the Vacu-dry trademark. Thus, the Company changed its name to SonomaWest Holdings, Inc. in December 1999. In February 2000, certain local apple growers filed suit against the Company and Tree Top, Inc. alleging that this sale and related activities created a monopoly in the dried apple business in violation of federal and California law. The growers are seeking treble damages, punitive damages, interest, and attorney fees, all in unnamed amounts. On August 4, 2000, the Company's motion to dismiss the complaint was granted with leave to amend. The Company feels the suit is without merit and intends to continue to defend itself vigorously should an amended complaint be filed. In the third quarter of fiscal 2000, the Company decided to dispose of its organic packaged foods operations. Accordingly, the organic packaged foods segment is included in discontinued operations in the accompanying consolidated financial statements for all periods presented. The Company received $1.1 million for all intellectual property, consisting of the Made In Nature brand name and all related trademarks, and certain dried fruit inventory of the organic packaged goods segment from Premier Valley Foods, Inc. in May 2000. All of the remaining assets of this segment have been disposed of as of June 30, 2001. During fiscal 2001, the Company recorded an additional after tax gain of $161 related to the wind-down of the ingredients and organic packaged foods segment as product was sold at higher than anticipated prices. During fiscal 2000, the Company recorded a net after-tax gain of $3.2 million from the sale of the processed apple product line and the disposal of the remaining product lines of the ingredients segment and the organic packaged foods segment. The net after-tax gain included $16.1 million of proceeds from the sales offset by: a) the write-down of assets related to the discontinued segments to their estimated net realizable value (assets which were impaired as a direct result of the decision to discontinue the segments); b) costs incurred in closing the discontinued segments (consisting primarily of severance costs, professional fees, relocation costs and lease buy-outs); c) estimated operating losses to be incurred during the wind-down period; and d) losses on sale of equipment. The Company's remaining line of business is its real estate management, rental operations and an investment in MetroPCS, Inc. F-10 Summarized historical information of the discontinued operations is as follows: FISCAL YEAR ENDED JUNE 30 ------------------------------ 2001 2000 1999 ------------------------------ Income statement data: Revenues $ -- $ 9,264 $ 37,879 Costs and expenses -- (9,211) (41,943) ------------------------------ Operating income (loss) -- 53 (4,064) Income tax (provision) benefit -- (21) 1,894 ------------------------------ Income (loss) from discontinued operations, net of income taxes $ -- $ 32 $ (2,170) ============================== June 30, June 30, BALANCE SHEET DATA: 2001 2000 --------------------- Accounts receivable, net of reserves of $0 and $57 $ -- $ -- Inventories, net of reserves of $2,234 and $4,801 -- -- --------------------- Total current assets of discontinued operations -- -- Property, plant, and equipment, net -- 122 --------------------- Total assets of discontinued operations -- 122 --------------------- Accounts payable -- 234 Provision for severance, transaction costs, wind-down costs and other liabilities related to the decision to discontinue the segments 281 394 --------------------- Total liabilities of discontinued operations 281 628 --------------------- Net assets (liabilities) of discontinued operations $(281) $ (506) ===================== F-11 Summarized historical information of the discontinued operations reserves is as follows: June 30, June 30, June 30, 2001 2000 1999 ------------------------------ Beginning Balance $ 394 -- -- ------------------------------ Additions to Reserve 48 3,551 -- ============================== Reserves Utilized 161 3,157 -- ============================== Provision for severance, transaction costs, wind-down costs and other liabilities related to the decision to discontinue the segments $ 281 $ 394 $ -- ============================== 3. ACQUISITION OF MADE IN NATURE: On April 22, 1998, Made In Nature Company, Inc. (MINCO) was formed for the purpose of acquiring certain assets and liabilities of Made In Nature, Inc. On June 11, 1998, SonomaWest acquired the assets and certain liabilities of Made In Nature, Inc. In addition to the assumption of certain liabilities, SonomaWest paid $336 in cash and issued to Made In Nature, Inc. and its primary shareholder a total of 112 warrants to purchase SonomaWest's common stock at $8.00 per share, expiring through June 2003. The warrant price was equal to the market price of the Company's stock on June 11, 1998. The value assigned to the warrants at acquisition date was $456. In December 2000, the Company repurchased and retired the 112 of warrants for $112. Common stock was increased by the difference between the repurchase price and the originally assigned value. Subsequent to the purchase, the Company entered into an agreement with a creditor of Made In Nature, Inc. whereby this creditor converted its debt into a 15 percent equity interest in MINCO. The acquisition was accounted for using the purchase method of accounting. The excess of purchase price over the estimated fair values of assets acquired and liabilities assumed of $3,103 was recorded as goodwill and was being amortized on a straight-line basis over 20 years during fiscal 1999. During the fourth quarter of fiscal 1999, the Company's analysis showed that cash flow projections did not support the recorded value of MINCO goodwill. Consequently, a charge of $2,935 was recorded to write-off the unamortized balance of MINCO goodwill. 4. LONG-TERM DEBT: Long-term debt consists of the following: 2001 2000 ------------------------ Notes payable: unsecured five-year notes resulting from repurchase of stock, interest at 8.5 percent, interest due monthly, principal due in January 2003, paid in full in January and August 2000 -- 564 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 1,974 2,027 ------------------------ Total 1,974 2,591 Less: Current maturities (57) (617) ------------------------ Long-term debt $ 1,917 $ 1,974 ======================== The Company retired two shareholder notes totaling $271 in the third quarter of fiscal 2000 and retired the remaining shareholder note of $564 in August 2000. Interest expense related to the real property note is included in continuing operations. Interest expense of $45 and $386, attributed to the ingredients and F-12 organic packaged foods segments, is included in earnings from discontinued operations for fiscal 2000 and 1999, respectively. 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 a swap contract. The Company is a party to an interest rate swap under which it 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 $1,974 as of June 30, 2001. 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. The Company will report all changes in fair value of its swap contract in earnings. During the year ended June 30, 2001, the Company recorded a decrease in the value of this swap of $12. This amount is included in interest expense. The cumulative effect of adopting this standard effective July 1, 2000 was not significant. During December 2000, the Company entered into an agreement with its sole lender in order to modify the terms of the 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 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 June 30, 2001, the Company's debt service ratio was .97 to 1. Consequently, $600 is classified as restricted cash on the accompanying balance sheet. The Company received a waiver from the Bank of this non-compliance with the debt service coverage ratio as of June 30, 2001. As of August 15, 2001, the Company and the Bank agreed to a Restated and Amended Addendum to this Agreement. This addendum amends and restates 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 in a Money Market account established by the Company after the fiscal 2001 year end, in the amount of $90. Management is confident that in the future it can remain in compliance with this new debt service coverage ratio. Maturities of long-term debt are as follows: YEAR ENDING JUNE 30 ----------- 2002 $ 57 2003 61 2004 1,856 -------- Total $ 1,974 ======== 5. INCOME TAXES: The following is a summary of the Company's provision for income taxes: F-13 2001 2000 1999 ---------------------------------------- Current: Federal $ (288) $ (60) $ 238 State -- (18) 15 Deferred: Federal 194 1,448 (2,168) State -- 436 (695) ---------------------------------------- Provision (benefit) $ (94) $ 1,806 $ (2,610) ======================================== The components of the provision (benefit) related to continuing operations and discontinued operations are as follows: 2001 2000 1999 ---------------------------------------- Continuing operations $ (177) $ (316) $ (663) Discontinued operations 83 2,122 (1,947) ---------------------------------------- Provision (benefit) $ (94) $ 1,806 $ (2,610) ======================================== A reconciliation of the income tax provision to the expected provision at the federal statutory income tax rate is as follows:
2001 % 2000 % 1999 % ----------- --------- ----------- ------------ ----------- ----------- Provision (benefit) at federal statutory rate $ (98) 34% $ 1,535 34% $ (2,056) 34% State taxes, less federal tax benefit (--) -- 260 6 (370) 6 Tax credits and other 4 (1) 11 -- (184) 3 ----------- --------- ----------- ------------ ----------- ----------- Total provision (benefit) $ (94) 33% $ 1,806 40% $ (2,610) 43% =========== ========= =========== ============ =========== ===========
Temporary differences that gave rise to deferred tax assets and liabilities for 2001 and 2000 were as follows: 2001 2000 ----------------------------- Deferred tax assets: Employee benefit accruals $ 13 $ 15 Bad debt reserves 4 28 Discontinued operations reserves 246 558 Other -- 20 ----------------------------- Total deferred tax assets 263 621 ----------------------------- Deferred tax liabilities: Depreciation (45) (147) ----------------------------- Total deferred tax liabilities (45) (147) ----------------------------- $ 218 $ 474 ============================= 6. 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 $8 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. F-14 In October 2000, the Company's Board of Directors authorized the repurchase of up to 500 shares of the Company's stock at $8.00 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. There were no repurchases during fiscal 2000. 7. STOCK APPRECIATION RIGHTS PLAN: The Company has a stock appreciation rights (SAR) plan as an incentive for key employees. Under the SAR plan, key employees are granted rights entitling them to market price increases in the Company's stock. At June 30, 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. All rights are granted at fair market value at the date of grant. Rights generally vest ratably over a period from the second to the sixth anniversary date of the grant. The SAR liability and expense or credit recorded quarterly is based on the market price of the Company's stock as of the balance sheet date. In 2001, 2000, and 1999, the Company decreased operating costs by $0, $0, and $41, respectively, in order to reflect the current SAR liability. 8. EMPLOYEE STOCK PURCHASE PLAN: The Employee Stock Purchase Plan enables substantially all employees to purchase a specified number of shares of the Company's common stock at 85 percent of the market value on the first or last business day of the quarterly offering period, whichever is lower. A maximum of 100 shares is authorized for issuance over the ten-year term of the plan that began on January 1, 1994. At June 30, 2001, 37 shares remain available for purchase under the plan. The following shares were issued under the terms of the plan during the three fiscal years ending June 30: SHARES AVERAGE PRICE PER ISSUED SHARE ------------------ ------------------- 2001 1 $ 5.58 2000 3 5.19 1999 8 6.34 1998 7 4.98 9. EMPLOYEE STOCK OPTION PLAN: During 1996, the Board of Directors (the Board) approved a stock option plan (the Plan) for employees and nonemployee consultants authorizing issuance of options for up to 90 shares of common stock. In 1998, the Plan limit was increased to 150 shares of common stock. In 1999, the Plan limit was increased to 275 shares of common stock. The Plan includes incentive stock options (ISOs) and nonqualified stock options (NSOs). Some of the terms and conditions of the Plan are different for ISOs and NSOs. The purchase price of each ISO granted will not be less than the fair market value of the Company's common shares at the date of grant. The purchase price of each NSO granted shall be determined by the Board in its absolute discretion, but in no event shall such price be less than 85 percent of the fair market value at the time of grant. NSO and ISO options granted have a ten-year life from the date of grant. Vested options can be exercised until the earlier of: 1) their expiration; or 2) 90 days from the termination of the employment or consulting relationship. Options normally vest in 25% annual increments from the date of hire. F-15 The number of shares available for granting future options was 167 as of June 30, 2001, 128 as of June 30, 2000 and 64 as of June 30, 1999. 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, 2001, and changes during the year ended are presented in the table below: WEIGHTED AVERAGE OPTIONS EXERCISE PRICE ---------------------------------------- Balance, June 30, 2000 148 $ 5.68 Granted -- -- Cancelled (40) 7.35 Exercised -- -- ---------------------------------------- Balance, June 30, 2001 108 $ 5.06 ======================================== Options outstanding, exercisable, and vested by price range at June 30, 2001, are as follows: OPTIONS WEIGHTED WEIGHTED OPTIONS VESTED AND AVERAGE AVERAGE FAIR OUTSTANDING EXERCISABLE REMAINING VALUE OF EXERCISE AT JUNE 30, AT JUNE 30, CONTRACTUAL OPTIONS GRANTED, PRICE 2001 2001 LIFE (YEARS) AT GRANT DATE -------------------------------------------------------------------------------- $ 5.00 104 104 5.4 $ 1.94 5.28 2 -- 8.7 2.10 8.00 2 1 7.8 4.24 ----------------------------------- ------------------ 108 105 $ 1.99 =================================== ================== The Company accounts for the Plan under APB Opinion No. 25, under which no compensation cost has been recognized for employee grants of options under the plan. Had compensation cost for the Plan been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts: 2001 2000 1999 ------------------------------------------ Net income (loss): As reported $ (194) $ 2,710 $ (2,929) Pro forma (201) 2,550 (2,995) Basic earnings per share: As reported (0.15) 1.78 (1.93) Pro forma (0.15) 1.68 (1.98) Diluted earnings per share: As reported (0.15) 1.75 (1.93) Pro forma (0.15) 1.65 (1.98) The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model, with the following weighted-average assumptions used for the 2000, 1999 and 1996 grants, respectively: weighted average risk-free interest rate of 6.19, 5.13 and 6.61 percent; expected dividend yield of 0 percent; expected life of four years for the Plan options; and expected volatility of 39.54, 63.85 and 37.44 percent. F-16 10. EARNINGS PER SHARE CALCULATION: The Company computes earnings per share in accordance with SFAS No. 128, "Earnings per Share." In 2001, 2000 and 1999, 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. 11. COMMITMENT AND CONTINGENCIES: The Company leases office space under an operating lease that expires in 2004. At June 30, 2000, future minimum rental payments for the operating lease are as follows: OPERATING LEASE ------------------- 2002 $188 2003 188 2004 86 ------------------- $462 =================== Rental expense under operating leases was $178 in 2001, $176 in 2000 and $403 in 1999. The Company has committed itself to a $3 million investment in the preferred stock of a privately held telecommunications company, MetroPCS, Inc. As of June 30, 2001, the Company had invested $599 on its $3 million commitment. The Company has accounted for the investment using the cost method. It is expected that the remaining $2,401 is to be funded in several installments throughout the fiscal year ending June 30, 2002. LITIGATION The Company is a party to lawsuits and claims arising out of the normal course of business. Management believes that the outcome of these claims and lawsuits will not have a material adverse effect on the financial position and results of the Company. 12. RETIREMENT PLANS: The Company has a contributory retirement savings and profit sharing plan covering nonunion employees. The Company contributes one and one-half times the first 3 percent of employee contributions to the retirement savings plan. Profit-sharing contributions are derived using a specific formula based upon the Company's earnings. Company contributions to the retirement savings and profit sharing plan are funded currently and were approximately $20 in 2001, $58 in 2000 and $160 in 1999. The employer's contributions for any fiscal year may not exceed the amount lawfully deductible by the Company under the provisions of the Internal Revenue Code. As of fiscal 2001, there are no employees covered by a collective bargaining agreement. Prior to fiscal 2001, the Company contributed to a defined contribution plan for employees covered by collective bargaining agreement. These contributions, funded currently, were $0 in 2001, $144 in 2000, and $628 in 1999, and were included in discontinued operations. 13. RELATED-PARTY TRANSACTIONS: A member of the Company's Board is a member of the law firm that serves as the Company's general counsel. During 2001, 2000, and 1999, the Company incurred $214, $271 and $124 respectively, for F-17 legal services from this firm and from another firm of which the director was a member prior to October 16, 1999. There were no amounts payable to this law firm as of June 30, 2001. A member of the Company's Board has entered into an independent consulting agreement with the Company, whereby the Board member will provide real estate consulting services to the Company. During fiscal 2001, the Company incurred $8, for real estate consulting services. As of June 30, 2001, $8 was payable to the Board member. During fiscal 1999, the Company incurred $150 for consulting services from a current shareholder of the Company. 14. SUBSEQUENT EVENTS On July 17, 2001 the Company approved the granting of 25 common stock options to Board Members: David Bugatto - 10 options, Roger Mertz - 5 options, Fred Selinger - 5 options and Craig Stapleton - 5 options, each at a price of $7.48 per share. On July 17, 2001 the Company entered into an agreement in principle, which was thereafter executed, with its President and Chief Executive Officer replacing the executive's existing employment agreement. Pursuant to the separation agreement, the executive will continue 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 will pay separation payments to Mr. Hess in the amount of $13 monthly for 29 months, replacing all payment obligations under his prior employment agreement. Mr. Hess has also been designated as the Company's exclusive sales representative in its efforts to sell any and all remaining Perma-Pak finished good inventory and other Perma-Pak property. Mr. Hess also has the option of extending the period within which he is eligible to exercise options previously granted to him. On July 17, 2001 the Company entered into a Consulting Agreement with David J. Bugatto, a director. Pursuant to the agreement Mr. Bugatto will provide consulting services to the Company in connection with its real estate business for a monthly fee of $3. The agreement is retroactive to April 1, 2001. F-18 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEMS 10, 11, 12 AND 13. The information required in Items 10, 11, 12 and 13 will be included in the definitive Proxy Statement for Registrant's 2001 Annual Meeting of Shareholders or in an amendment to the Form 10-K. The information required in this Part III will be filed with the Securities and Exchange Commission no later than 120 days after the end of the Company's fiscal year. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K. I. Documents filed as part of this Report: (a)(1) Financial Statements The information required by this Item appears in Item 8 of this Annual Report on Form 10-K. (a)(2) Financial Statement Schedules Financial statement schedules not included herein have been omitted because of the absence of conditions under which they are required or because the required information, where material, is shown in the financial statements or notes thereto. Schedule III.* Real Estate and Accumulated Depreciation *Schedule included after signature page. (a)(3) EXHIBITS EXHIBIT NO. DOCUMENT DESCRIPTION ----------- -------------------- 3.1(7) Articles of Incorporation, as amended to date 3.2(1) ByLaws, as amended to date 10.1(2) Employment Agreement between Vacu-dry Company and Gary L. Hess, dated March 14, 1996 10.2(1) Stock Appreciation Rights Plan 10.3(3) 1996 Stock Option Plan, as amended 10.4(4) 1993 Employee Stock Purchase Plan 10.5(5) Agreement dated June 11, 1998 between MIN Acquisition Corp., Vacu-dry Company and Global Walk, Inc. 10.6(5) Co-Sale Agreement dated June 11, 1998 between Vacu-dry Company and Global Walk, Inc. 10.7(5) Asset Purchase Agreement dated June 11, 1998 between Vacu-dry Company, MIN Acquisition Corp., Made In Nature, Inc. and Gerald E. Prolman 10.8(5) Warrant to Purchase Common Stock dated June 11, 1998 issued by Vacu-dry Company to Made In Nature, Inc. 10.9(5) Warrant to Purchase Common Stock dated June 11, 1998 issued by Vacu-dry Company to Gerald E. Prolman 10.10(6) Asset Purchase Agreement dated June 21, 1999 between Vacu-dry Company and Tree Top, Inc. 10.11(7) June 20, 1999 Amendment to Employment Agreement between Vacu-dry Company and Gary L. Hess, dated March 14, 1996. 10.12(7) Asset Purchase Agreement dated May 25, 2000 between Premier Valley Foods, Inc., Made In Nature Company, Inc., and SonomaWest Holdings, Inc. 10.13 Independent Consultant Agreement dated July 17, 2001 between SonomaWest Holdings, Inc. and David J. Bugatto. 10.14 Severance Agreement dated July 17, 2001 between SonomaWest Holdings, Inc. and Gary L. Hess 10.15 Restated and Amended Addendum to Promissory Note, dated August 15, 2001 between Sonoma West Holdings, Inc. and Wells Fargo Bank, NA. 11 Computation of Per Share Earnings 21 Subsidiaries of the registrant 23 Consent of Independent Public Accountants 27 Financial Data Schedule (EDGAR Filing Only) ---------- (1) Incorporated by reference to the registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1992 (2) Incorporated by reference to the registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (3) Incorporated by reference to the registrant's Registration Statement on Form S-8 (No. 333-84295) filed on August 2, 1999 (4) Incorporated by reference to the registrant's Registration Statement on Form S-8 (No. 033-70870) filed on October 27, 1993 (5) Incorporated by reference to the registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1998 (6) Incorporated by reference to Annex A to the registrant's Consent Statement on Schedule 14A filed on July 14, 1999 (7) Incorporated by reference to the registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2000. (b) REPORTS ON FORM 8-K During the quarter ended June 30, 2001, the Company did not file any reports on Form 8-K. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: September 27, 2001 SONOMAWEST HOLDINGS, INC. By: /s/ GARY L. HESS ---------------- Gary L. Hess Chief Executive Officer President Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURES TITLE DATE ---------- ----- ---- /s/ GARY L. HESS Chief Executive Officer, -------------------------- Chief Financial Officer, Gary L. Hess President, and Director September 27, 2001 /s/ ROGER S. MERTZ -------------------------- Roger S. Mertz Director September 27, 2001 /s/ FREDRIC SELINGER -------------------------- Fredric Selinger Director September 27, 2001 /s/ DAVID J. BUGATTO -------------------------- David J.Bugatto Director September 27, 2001 SCHEDULE III SonomaWest Holdings, Inc. REAL ESTATE AND ACCUMULATED DEPRECIATION June 30, 2001 (DOLLARS IN THOUSANDS)
Column A Column B Column C Column D | Column E | Column F Costs | Gross Amount | Initial Cost Subsequently | at which Carried | to Company Capitalized | at Close of Year | ---------------------------------------------------------------------------- Buildings | Buildings | and | and Total | Accumulated Description Encumbrances Land Improvements Improvements | Land Improvements (Note 1) | Depreciation ------------------------------------------------------------------------------------------------------------------------------------ 1365 Gravenstein Hwy. So., | | Sebastopol, CA 1,974 72 308 875 | 72 1,183 1,255 | 899 2064 Gravenstein Hwy. No., | | Sebastopol, CA -- 159 2,312 3,154 | 159 5,466 5,625 | 3,914 -------------------------------------------------------------------------------------------------------- | | 1,974 231 2,620 4,029 | 231 6,649 6,880 | 4,813 ======================================================================================================== Column G Column H Column I Life on which Year of Year Depreciation Construction Acquired is Computed ---------------------------------------------- N/A 1964 5-40 N/A 1983 5-20
Note 1. The changes in the total cost of land, buildings, and improvements for the three years ended June 30, are as follows: 2001 2000 1999 ---- ---- ---- Balance at beginning of period 7,423 7,391 7,019 Additions 12 32 372 Assets of discontinued operations (537) Cost of disposed property (18) ------------------------------------------ Balance at end of period 6,880 7,423 7,391 ========================================== Note 2. The changes in accumulated depreciation for the three years ended June 30, are as follows: 2001 2000 1999 ---- ---- ---- Balance at beginning of period 4,826 4,465 4,143 Depreciation expense 336 361 322 Assets of discontinued operations (331) Relief of accumulated balances related to disposed property (18) -------------------------------------------- Balance at end of period 4,813 4,826 4,465 ============================================ EX-10.13 3 c21958_ex10-13.txt INDEPENDENT CONSULTANT CONTRACT Exhibit 10.13 INDEPENDENT CONSULTANT CONTRACT FOR SERVICES This Agreement is made and effective this 17th day of July, 2001 ("Effective Date") by and between SONOMAWEST HOLDINGS, INC. a California corporation ("Client") and DAVID J. BUGATTO, ("Consultant"). 1. SERVICES AND DELIVERABLES. Consultant will perform the services described on Exhibit A ("Services"), and will determine the method, details and means of performing the Services. The parties intend for this agreement to govern all services provided and to be provided by Consultant to Client after April 1, 2001. 2. FEES AND PAYMENT. In consideration for the Services to be performed by Consultant, Client will pay to Consultant a monthly fee of $2,500. In addition, in the event either of the Company's Sonoma County properties are sold during the term hereof, Consultant will be paid a fee of 2-1/2% of the sales price if no broker commission is involved and 1-1/4 % of the sales price if a broker is involved. In the event either property is refinanced during the term hereof Consultant will be paid a fee equal to 1% of the amount of proceeds received by the Company in excess of its current debt. 3. INDEPENDENT CONSULTANT STATUS. It is the express intention of the parties that Consultant is an independent consultant and not an employee, agent, joint venturer or partner of Client. Nothing in this Agreement will be interpreted or construed as creating or establishing the relationship of employer and employee between Client and Consultant, or any employee or agent of Consultant. 4. ADDITIONAL OBLIGATIONS OF CONSULTANT. a. Consultant will supply all tools and instrumentalities required to perform the services under this Agreement. Consultant is not required to purchase or rent any tools, equipment or services from Client. b. Consultant is responsible for all costs and expenses incident to performing services hereunder, including but not limited to costs of equipment provided by Consultant, fees, fines, licenses, bonds, or taxes required of or imposed against Consultant and its assistants, if any, as costs of doing business. Client is not responsible for any expenses incurred by Consultant in performing services for Client, except for those reasonable out-of-pocket travel expenses incurred by Consultant in performing the services under this Agreement. c. Consultant may, at its option and at its own expense, employ such assistants as Consultant deems necessary to perform the Services. Consultant assumes full and sole responsibility for the payment of all compensation and expenses of these assistants and for any state and federal income tax, unemployment insurance, Social Security, disability insurance and other applicable withholdings of such assistants. Consultant will provide workers' compensation insurance coverage for its employees and agents, and agrees to hold harmless and indemnify Client for any and all claims arising out of any injury, disability, or death of any of Consultant's employees or agents. Consultant will indemnify and hold Client harmless against any and all liability imposed or claimed, including attorneys' fees and other legal expenses, arising directly or indirectly from any act or failure to act of Consultant or Consultant's assistants, employees or agents, including all claims relating to injury or death of any person or damage to property. d. Consultant specifically agrees to abide by Client's standards and rules of conduct and general operating procedures while on Client's premises or otherwise while performing services pursuant to this Agreement. e. Consultant may not assign any duties or obligations under this Agreement without Client's express written consent. f. Consultant acknowledges that, as he is an independent Consultant and not an employee, he is responsible for paying all required state and federal taxes. In particular, Client will not: (i) withhold FICA (Social Security) from Consultant's payments; (ii) make state or federal unemployment insurance contributions on Consultant's behalf; (iii) withhold state or federal income tax from payment to Consultant; (iv) make disability insurance contributions on behalf of Consultant; (v) obtain workers' compensation insurance on behalf of Consultant. g. Consultant further acknowledges that he is not eligible for participation in any benefit plan or program available to Consultant's employees, and that the fee for services has been established in recognition of Consultant being responsible for maintaining such benefit coverage as it deems appropriate. 5. TERM AND TERMINATION. a. This Agreement begins on the Effective Date and continues until the earlier of (i) written notice of termination by either party; (ii) termination in accordance with the provisions set forth below; or (iii) December 31, 2003. b. This Agreement will terminate automatically on any of the following events: (i) bankruptcy or insolvency of either party; (ii) sale or discontinuance of the business of either party; (iii) death of either party. c. If Consultant defaults in the performance of the Agreement or materially breaches any of the provisions, Client at its sole option may terminate the Agreement at any time on written notice to Consultant. For purposes of this section, material breach includes, but is not limited to: (i) failure or refusal to perform the Services when and as contemplated; (ii) failure to provide timely invoices with appropriate descriptions and approved expenses as provided herein; (iii) negligence, misconduct, an act of dishonesty, or taking an action or conducting itself in a manner contrary or inimical to Client's best business interests or reputation. -2- d. If Client fails to pay Consultant fees or payment as provided herein, Consultant at its sole option may terminate the Agreement, provided Client does not remedy the failure within 30 days from the date payment is due. 6. CONFIDENTIALITY, TRADE SECRETS, WORK FOR HIRE AND NON-COMPETITION. a. Consultant recognizes that during the term of this Agreement, and in preparation therefore, he will be privy to many of Client's trade secrets or proprietary or other confidential or privileged information. Consultant agrees to keep all such information in strictest confidence and not to disclose it except for legitimate purposes of Client and with Client's express written consent, either during the term of this Agreement or at any time thereafter. b. On termination of this Agreement, Consultant will promptly deliver to Client all equipment belonging to Client, all code and computer programs of whatever nature, as well as all manuals, letters, reports, price lists, customer lists, sales information, analyses, recommendations, and all copies thereof, and all other materials of a confidential nature regarding Client's business that are in its possession or control. Consultant agrees that the remedy at law for any breach of the foregoing will be inadequate, and that Client is entitled to seek appropriate injunctive relief in addition to any remedy at law in case of any such breach. c. Consultant agrees that all work he performs pursuant to this Agreement, and all work which relates at the time of conception or reduction to Client's business, and all work which results from work he performs for Client, whenever performed during the term of this Agreement, and whether or not utilizing Client's equipment, supplies, facilities or trade secret information, is considered work made for hire for Client as such term is defined in section 101 of the Copyright Act of 1976 and belongs to Client. Consultant further agrees that in the event that this Agreement is determined not to be a work for hire agreement, Consultant will assign to Client any and all rights retained by Consultant. 7. GENERAL PROVISIONS. a. Any notices given by either party may be effected by personal delivery in writing or by mail, registered or certified, postage prepaid, or by facsimile transmission or by electronic submission, if receipt is confirmed in a commercially acceptable manner. Mailed notices are to be addressed to the parties at the addresses below: If to Client: SonomaWest Holdings, Inc. 1448 Industrial Avenue Sebastopol, CA 95472 Attn: Gary Hess, President Phone: 707.824.2541 Fax: 707.824.2543 If to Consultant: David J. Bugatto 3904 El Ricon Way Sacramento, CA 95864 -3- Notices delivered personally are deemed communicated as of actual receipt; mailed notices are deemed communicated as of two days after mailing. b. This agreement supersedes any and all agreements, oral or written, between the parties with respect to rendering services by Consultant for Client, and contains all agreements between the parties. Any modification of this Agreement is effective only if I n writing signed by the party to be charged. c. If any provisions in this Agreement are held by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions will continue in full force provided that the essential purposes of the Agreement can be achieved without the invalid provision. d. This Agreement is governed by and construed in accordance with the law of the state of California. IN WITNESS WHEREOF, this Agreement has been entered into as of the date and year first above written. Consultant: /s/ David J. Bugatto -------------------- David J. Bugatto Client: SONOMAWEST HOLDINGS, INC. By: /s/ Gary L. Hess -------------------------------- Gary L. Hess, President -4- EXHIBIT A DESCRIPTION OF SERVICES Management of the development, leasing and sale of Client's real property located in the Sonoma County, California. EX-10.14 4 c21958_ex10-14.txt HESS SEPARATION LETTER EXHIBIT 10.14 SONOMAWEST HOLDINGS, INC. 1448 Industrial Avenue Sebastopol, California 95472-4848 July 17, 2001 Mr. Gary L. Hess President SonomaWest Holdings, Inc. 1448 Industrial Avenue Sebastopol, CA 95472-4848 Re: Separation Arrangement Dear Gary: This confirms our agreement regarding the terms of your separation from active employment with SonomaWest Holdings, Inc. ("Company"). This supercedes any and all prior agreements between you and the Company regarding your employment and separation therefrom. 1. EMPLOYMENT. You will remain actively employed in your current capacity, on a full-time basis, and at your current base salary through August 31, 2001. Effective September 1, 2001 through October 31, 2001 ("Termination Date"), you will continue to be employed on a part-time (20%) basis as the Company's President and Chief Financial Officer at compensation calculated at the equivalent of $3053.33 per month (which includes car allowance) and you will accrue paid vacation time during that period at the equivalent of $2,933.33 base salary per month(1) You are not eligible for bonus consideration during either of these periods. All accrued salary and unpaid vacation time will be paid to you on the Termination Date. You will remain eligible to participate in the Company's group health plan and other Company employee benefit plans pursuant to their terms through the Termination Date. Thereafter, eligibility for all plans will cease, except that you will be eligible to continue participation in the health plan at your option and expense pursuant to the provisions of COBRA. 2. SEPARATION PAYMENTS. Effective September 1, 2001 and for each month thereafter through and including January 2004 (consisting of twenty-nine (29) months and constituting the "Severance Period"), the Company will pay you $12,500 per month, less required withholdings and authorized deductions. Such payments will be made by mailing a Company check to you at your home address as currently reflected in the Company's records, or such other address as you request, within the first seven (7) calendar days of each calendar month during the Severance -------- (1) Please appreciate that during any continued employment or other service to the Company, you remain subject to general principles of law and to the Company's personnel and financial policies for executives, directors and/or other service providers as applicable and as then in effect. Continued compliance with these principles and policies is a condition of this Agreement. Period. The foregoing notwithstanding, in the event that, at any time during the Severance Period, the Company is no longer covered by or otherwise elects not to operate pursuant to the registration and filing requirements of either Section 12(b) or 12(g) of the Securities Exchange Act of 1934 and the applicable rules and regulations, then the Company will notify you within thirty (30) calendar days of such date ("Section 12 Date" and "Notification Date" respectively) and, within fifteen (15) business days following the Notification Date, pay to you in one lump sum the remainder of the monthly payments that otherwise would have been paid during the Severance Period. 3. PERMA-PAK BUSINESS. The Company hereby grants you the following options ("Option A" and "Option B" respectively) regarding the business property and operations of Perma-Pak: (A) From now through December 31, 2002, the Company will designate you as its exclusive representative to sell any and all remaining Perma-Pak finished goods inventory, production equipment and intellectual property ("Perma-Pak Property"); or (B) between now and December 31, 2002 you may purchase from the Company the Perma-Pak business, including all then existing Perma-Pak Property, for a purchase price of $250,000. Sales commissions earnable under Option A equal 7% of the net price the Company actually receives on the first $250,000 of Property sold, and 50% of the net price the Company actually receives on all Property sold above $250,000 in the aggregate. Under Option A, all sales proceeds are payable to the Company and you agree to maintain and provide to the Company appropriate and accurate business records of all sales or other transactions regarding Perma-Pak Property so that the Company is in a position to accurately account for all revenue and all commissions payable to you as well as all sold and unsold Perma-Pak Property. Under Option B, the Option is exercisable at any time between now and December 31, 2002, and the purchase price remains at $250,000 ("Purchase Price") whenever it is exercised. In the event you purchase the Perma-Pak property no commission will be due. For mutual convenience, you will be deemed to have selected Option A until such time as you notify the Company in writing that you elect Option B, which Option will become effective within fifteen (15) business days thereafter, at which time the Purchase Price is due in full. 4. EXTENSION OF STOCK OPTIONS. Our records indicate that the Company previously has granted you options to purchase 89,474 shares of its common stock at an exercise price of $5.00 per share, all of which options have vested. These options were intended to be incentive stock options, to the extent permissible under law.(2) Each of these options will terminate by their current terms within three months of termination of your full-time employment if not exercised. The foregoing notwithstanding, the Board has extended the termination date of these options to January 29, 2002. To the extent that you elect to exercise some or all of those options on or before January 29, 2002, the Company will loan you up to $447,370 pursuant to an appropriate Note and Security Agreement. Forms of a Note and of a Security Agreement are attached hereto as Exhibits A and B respectively. The note is specifically and solely for the purpose of enabling ---------- (2) As you may know, under the Internal Revenue Code, the value of shares as to which all incentive stock options held by an optionee may first become exercisable (i.e. become vested) in any calendar year may not exceed $100,000, based on the fair market value of such stock on the date such incentive stock options were granted. IRCss. 422(d). To determine if any grant meets the test, you multiply the number of shares that become exercisable in any calendar year times the fair market value on the grant date. -2- you to exercise the options on or before January 29, 2002, in order to retain their classification as incentive stock options, to the extent permissible. The Note will be fully recourse to you, and will be secured by the stock purchased on exercise of the options. The Note is payable on the earlier of August 1, 2004 or within fifteen (15) business days of the Notification Date, and will accrue interest at the Applicable Federal Rate for loans of three years or less on the date of the note, which interest is payable quarterly. You agree that you are solely responsible for any taxes which may be due upon exercise of any of these options and/or upon any sale of the underlying stock. Alternatively, and at your option, the Board will further extend the termination date of some or all of your options as you so indicate through the last day of the Severance Period, provided only that you so notify the Board in writing on or before January 29, 2002. You recognize and acknowledge that if you elect this option and exercise some or all of the options at any time after three months following termination of your employment, the Company will not loan you the money to exercise that portion of the options and those options will automatically convert to non-statutory options pursuant to the Internal Revenue Code. 5. BOARD MEMBERSHIP. The Company will use its best efforts to assure that you are included as a nominee for election to its Board of Directors through the Annual Meeting held in 2003 for service until the Annual Meeting held in 2004. For any and all periods of service as a director following termination of your employment, you will be entitled to receive whatever fees are payable to other non-employee directors. Gary, I am pleased that the Company is able to look forward to your continued participation under these terms. Please sign and date this letter in the space indicated below and return the fully executed letter. A duplicate executed copy is enclosed for your records. Very truly yours, SonomaWest Holdings, Inc. By: /s/ Roger S. Mertz Its: Secretary Agreed to: /s/ Gary L. Hess ------------------------------------------------------- Gary L. Hess -3- EXHIBIT A PROMISSORY NOTE --------------- $447,370.00 _______________, 200__ Sebastopol, California FOR VALUE RECEIVED, the undersigned, GARY L. HESS, hereby promises to pay to the order of SONOMAWEST HOLDINGS, INC. at such place as the holder of this note (the "Note") may direct in writing, the principal sum of Four Hundred and Forty-Seven Thousand and Three Hundred and Seventy Dollars ($447,370). This Note shall bear interest, payable on the first day of each calendar quarter, at a rate of interest equal to [the Applicable Federal Rate for loans of three years or less] per annum. The principal shall be due and payable on the earlier of August 1, 2004 or within fifteen (15) business days of the Notification Date as defined in that certain Separation Agreement by and between Borrower and SonomaWest Holdings, Inc. dated July 17, 2001. This Note may be prepaid at any time without premium or penalty. This Note shall be deemed to be a contract entered into and made pursuant to the laws of the State of California and shall in all respects be governed, construed, and enforced in accordance with the laws of said State. The undersigned agrees, if this Note is placed in the hands of an attorney for collection, to pay reasonable legal costs as permitted by law. The undersigned waives demand, presentment for payment, notice of non-payment or dishonor, notice of protest, and protest of this Note. No delay on the part of the holder in exercising any right, power or privilege pursuant to this Note shall operate as a waiver of the same, and no single or partial exercise of any right, power or privilege shall constitute an exhaustion or waiver of any of them, all of which shall continue for the benefit of holder. Dated: _____________, 200__ ---------------------------- Gary L. Hess EXHIBIT B LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT (this "Agreement"), entered into as of _________, 200__ by and between SONOMAWEST HOLDINGS, INC. a California corporation ("Lender"), and GARY L. HESS ("Borrower"). RECITALS: WHEREAS, Lender desires to lend to Borrower and Borrower desires to borrow from Lender the sum of Four Hundred and Forty-Seven Thousand and Three Hundred and Seventy Dollars ($ 447,370.00) (the "Loan") on the terms and conditions provided for herein; and WHEREAS, Borrower intends hereby to pledge 89,474 shares of Lender's common stock (the "Common Stock") and other proceeds and interests as defined herein, as secured collateral for payment of the Loan and performance of all of Borrower's obligations under this Agreement. NOW, THEREFORE, in consideration of the mutual promises made herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be legally bound, agree as follows: SECTION 1. LOAN. Lender agrees to lend to Borrower the sum of $ 447,430 to be evidenced by an interest-bearing Promissory Note of even date herewith in the form of Exhibit A to that certain Separation Agreement by and between Borrower and SonomaWest Holdings, Inc. dated July 17, 2001. (the "Note"). As provided in the Note, the Note may be repaid at any time without premium or penalty. SECTION 2. PLEDGE OF SECURITY INTEREST; COLLATERAL Borrower hereby pledges and grants to the Lender a first priority lien on and security interest in the Collateral, as hereinafter defined. The term Collateral means, collectively: (i) the Common Stock; and (ii) all products, proceeds and revenues of and from the Common Stock, together with all substitutions therefor and additions thereto including without limitation stock rights, rights to subscribe, liquidating dividends, stock dividends, cash dividends, interest, new securities and other property to which Borrower is or may hereafter become entitled to receive on account of such Common Stock. SECTION 3. SECURITY FOR OBLIGATIONS. This Agreement secures the payment and/or performance of all obligations of Borrower to the Lender, now or hereafter existing under the Note, whether for principal, interest, fees, expenses or otherwise, and all obligations of Borrower now or hereafter existing under this Agreement (all such obligations of Borrower to the Lender hereinafter referred to as the "Obligations"). SECTION 4. DELIVERY OF COLLATERAL. All certificates or instruments representing the Collateral shall be delivered to and held by Lender and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to the Lender. The Lender shall have the right, in the event of a default under the Note or this Agreement, in its sole discretion and without notice to Borrower, to transfer to or to register in the name of the Lender or any of its nominees any or all of the Collateral. In addition, the Lender shall have the right at any time to exchange certificates or instruments representing or evidencing the Collateral for certificates or instruments of smaller or larger denominations. SECTION 5. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants as follows: (a) Borrower is the legal and beneficial owner of the Collateral free and clear of any lien, security interest, option or other charges or encumbrance except for the security interest created by this Agreement between Borrower and Lender of even date herewith; and (b) The pledge of the Collateral pursuant to this Agreement creates a valid and perfected first priority security interest in the Collateral, securing the payment and/or performance of the Obligations. SECTION 6. FURTHER ASSURANCES. Borrower agrees that at any time, and from time to time, Borrower will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that the Lender may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable the Lender to exercise and enforce its rights and remedies hereunder with respect to any Collateral. SECTION 7. VOTING RIGHTS; DIVIDENDS; ETC. (a) So long as no Event of Default (as hereinafter defined) or event which, with the giving of notice or the lapse of time, or both, would become an Event of Default, shall have occurred and be continuing: (i) Borrower shall have the right to exercise all voting and other corporate rights with respect to the Collateral; and (ii) Borrower shall be entitled to receive and retain any and all dividends paid in respect of the Collateral; provided, however, that any and all (A) dividends paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Collateral, (B) dividends and other distributions paid or payable in cash in respect of any Collateral in connection with a partial or total liquidation or dissolution of Lender or in connection with a reduction of capital, capital surplus or paid-in-surplus of Lender, and -2- (C) cash paid, payable or otherwise distributed in respect of principal of, or in redemption of, or in exchange for, any Collateral, shall forthwith be delivered to the Lender to hold as Collateral, or as may otherwise be agreed between Borrower and the Lender, and shall, if received by Borrower, be received in trust for the benefit of the Lender, be segregated from the other property or funds of Borrower, and be forthwith delivered to the Lender as Collateral in the same form as so received (with any necessary endorsement). (b) Upon the occurrence and during the continuance of an Event of Default under the Note or hereunder: (i) All rights of Borrower to exercise the voting and other consensual rights which the Borrower would otherwise be entitled to exercise pursuant to Section 7(a)(i) of this Agreement and to receive the dividend payments which the Borrower would otherwise be authorized to receive and retain pursuant to Section 7(a)(ii) of this Agreement shall cease, and Lender shall thereupon have the sole right to exercise such voting and other consensual rights and to receive and hold as Collateral such dividend payments. (ii) All dividend payments which are received by Borrower contrary to the provisions of Section 7(b)(i) shall be received in trust for the benefit of the Lender, shall be segregated from other funds of Borrower and shall be forthwith paid over to the Lender as Collateral in the same form as so received (with any necessary endorsement). (c) The term "Event of Default" shall mean (1) failure of Borrower to pay the unpaid principal due under the Note within fifteen (15) days after the date when due; or (2) the insolvency, bankruptcy (which is not stayed within 60 days after its commencement), or dissolution of Borrower, or (3) any material default by Borrower in the performance of any covenant or agreement pursuant to this Agreement which default is not cured within ten (10) days following written notice by Lender. SECTION 8. TRANSFERS AND OTHER LIENS; ADDITIONAL SHARES. Borrower agrees that it will not (i) sell or otherwise dispose of, or grant any option with respect to, any of the Collateral, or (ii) create or permit to exist any lien, security interest, or other charge or encumbrance upon or with respect to any of the Collateral, except for the security interest under this Agreement. SECTION 9. LENDER MAY PERFORM. If Borrower fails to perform any agreement contained herein, the Lender may itself perform, or cause the performance of, such agreement, and the expenses the Lender incurs in connection therewith shall be payable by Borrower under Section 12. SECTION 10. REASONABLE CARE. The Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which the Lender accords its own property, it being understood that the Lender shall not have responsibility for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Collateral, whether or not the Lender has or is deemed to have knowledge of such matters, -3- or (b) taking any necessary steps to preserve rights against any parties with respect to any Collateral. SECTION 11. REMEDIES UPON DEFAULT. If any Event of Default shall have occurred and continues uncured for five (5) consecutive days, upon written notice to Borrower, the Lender may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to them, all the rights and remedies of a secured party on default under the Uniform Commercial Code (the "Code") in effect in the State of California at that time. SECTION 12. EXPENSES. Borrower will, upon demand, pay, to the Lender, the amount of any and all reasonable expenses, including the reasonable fees and expenses of Lender's counsel and of any experts and agents, which the Lender may reasonably incur in connection with the exercise of enforcement of any of the rights of the Lender hereunder, or the failure by Borrower to perform or observe any of the provisions hereof. SECTION 13. SECURITY INTEREST ABSOLUTE. All rights of the Lender and security interests hereunder, and all obligations of Borrower hereunder, shall be absolute and unconditional irrespective of: (a) any lack of validity or enforceability of the Note or any other agreement or instrument relating thereto; (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to any departure from the Note; (c) any exchange, release or non-perfection of any other collateral, or any release or amendment or waiver of or consent to departure from any guaranty, for all or any of the Obligations; or (d) any other circumstance which might otherwise constitute a defense available to, or a discharge of, Borrower in respect of the Obligations or Borrower in respect of this Agreement, other than the payment in full of the Obligations. SECTION 14. AMENDMENTS, ETC. No amendment or waiver of any provision of this Agreement nor consent to any departure by Borrower herefrom shall in any event be effective unless the same shall be in writing and signed by the Lender, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. -4- SECTION 15. Notices. All notices, requests, demands, claims, and other communications hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given if (and then two business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: IF TO BORROWER: -------------- Gary L. Hess 34 La Cresta Drive Petaluma, California 94952 IF TO LENDER: ------------ SonomaWest Holdings, Inc. 1448 Industrial Avenue Sebastopol, California 95472 Attention: Chief Financial Officer Any party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are sent. SECTION 16. CONTINUING SECURITY INTEREST; TRANSFER OF NOTE. This Agreement shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until payment in full of the Obligations, (b) be binding upon Borrower, and its successors, and (c) inure , together with the rights and remedies of the Lender hereunder, to the benefit of the Lender, its legal representatives, successors and assigns. Without limiting the generality of the foregoing clause (c), Lender may assign or otherwise transfer the Note held by it to any other person or entity, and such other person or entity shall thereupon become vested with all the benefits in respect thereof granted to the Lender herein or otherwise. Upon the payment in full of the Obligations, Borrower shall be entitled to the return, upon his request and at his expense, of such of the Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof. SECTION 17. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California, excluding conflict of laws provisions. Unless otherwise defined herein or in the Note, terms defined in Article 9 of the Code in the State of California are used herein as therein defined. SECTION 18. COUNTERPARTS. This Agreement may be executed in counterparts. SECTION 19. Definitions. Any defined term not defined herein shall have the meaning ascribed to such term in the Note. -5- IN WITNESS WHEREOF, Borrower has caused this Agreement to be duly executed and delivered as of date first above written. SonomaWest Holdings, Inc.. By_____________________________ Its: __________________________ Borrower: _______________________________ Gary L. Hess -6- EX-10.15 5 c21958_ex10-15.txt RESTATED & AMENDED ADDENDUM TO PROMISSORY NOTE EXHIBIT 10.15 RESTATED AND AMENDED ADDENDUM TO PROMISSORY NOTE THIS RESTATED AND AMENDED ADDENDUM is entered into as of August 15, 2001 by SonomaWest Holdings, Inc., ("Borrower") and payable to WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") and is added to and made part or the Note, as defined below. WHEREAS, Borrower executed that certain promissory note and Addendum to and Modification of Promissory Note (the "Original Addendum") dated November 17, 1988, payable to the order of Bank in the principal amount of Two Million One Hundred Thousand Dollars ($2,100,000.00) (the "Vote"); and WHEREAS, Borrower and Bank have agreed to certain changes in the terms of the Original Addendum and accordingly wish to amend and restate the Original Addendum pursuant to the terms of this Amended and Restated Addendum; Therefore, the Original Addendum is hereby amended and restated to read as follows: 1. The Credit Agreement dated as of April 20, 1999 executed in connection with the Note and other credit accommodations are hereby cancelled and terminated. 2. Since the execution of the Note, Borrower has changed its name to "SonomaWest Holdings, Inc." All references in the Note and other Loan Documents to Vacu-Dry Company are hereby deemed references to SonomaWest Holdings, Inc. 3. The Note is hereby modified by deleting the paragraph under the heading "EVENTS OF DEFAULT" and replacing it with the following: "The occurrence of any of the following shall constitute an "Event of Default" under this Note: (a) The failure to pay any principal, interest, fees or other charges when due hereunder or under any contract, instrument or document executed in connection with this Note. (b) The filing of a petition by or against any Borrower, any guarantor of this Note or any general partner or joint venturer in any Borrower which is a partnership or a joint venture (with each such guarantor, general partner and/or joint venturer referred to herein as a "Third Party Obligor") under any provisions of the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time, or under any similar or other law relating to bankruptcy, insolvency, reorganization or other relief for debtors; the appointment of a receiver, trustee, custodian or liquidator of or for any part of the assets or property of any Borrower or Third Party Obligor; any Borrower or Third Party Obligor becomes insolvent, makes a general assignment for the benefit of creditors or is generally not paying its debts as they become due; or any attachment or like levy on any property of any Borrower or Third Party Obligor. (c) The death or incapacity of any individual Borrower or Third Party Obligor, or the dissolution or liquidation of any Borrower or Third Party Obligor which is a corporation, partnership, joint venture or other type of entity. (d) Any default in the payment or performance of any obligation, or any dined event of default under any provisions of any contract, instrument or document pursuant to which any Borrower or Third Party Obligor has incurred any obligation for borrowed money, any purchase obligation, or any other liability of any kind to any person or entity, including the holder, (e) Any financial Statement provided by any Borrower or Third Party Obligor to Bank proves to be incorrect, false or misleading in any material respect. (f) My sale or transfer of all or a substantial or material part of the assets of any Borrower or Third Party Obligor other than in the ordinary course of its business. (g) Any violation or breach of any provision of, or any defined event of default under, any addendum to this Note or any loan agreement, guaranty, security agreement, deed of trust mortgage or other document executed in connection with or securing this Note." 4. The following provisions are hereby deemed incorporated into the Note: "(a) So long as Bank remains committed to extend credit to Borrower under this Note and until payment in full of all obligations of Borrower hereunder, Borrower shall: (i) provide to Bank all of the following, in form and detail satisfactory to Bank: (x) not later than 120 days after and as of the end of each fiscal year, an audited financial statement of Borrower, prepared by a certified public accountant acceptable to Bank, to include balance sheet and income statement; -2- (y) not later than 45 days after and as of each June 30th and December 31st, an operating statement and rent roll covering property located at 1365 Gravenstein Highway South, Sebastopol, CA 95472("Real Property"); (z) from time to time such other information as Bank may reasonably request. (ii) maintain Borrower's financial condition as follows using generally accepted accounting principles consistently applied and used consistently with prior practices (except to the extent modified by the definitions herein): (y) Debt Service Coverage Ratio not less than 1.05 to 1.00 (or, subject to the terms of the next paragraph, 1.25 to 1.00), determined as of each fiscal year end, with "Debt Service Coverage Ratio" calculated with respect to the real property which secures the "Note" (the "Real Property") and defined as (A) actual rents received on the Real Property less the operating expenses directly chargeable to the Real Property, not including depreciation, and the proportionate share of joint operating expenses not chargeable to a specific property but chargeable to the rental operations generally, divided by (B) scheduled debt service on the Note during the applicable period; (z) Liquid assets (defined as the aggregate of unrestricted and unencumbered cash and readily marketable securities acceptable to Bank) with an aggregate fair market value not at any time less than Six Hundred Thousand Dollars $600,000.00, provided however, that this covenant shall become inoperative and Bank shall release the cash collateral obtained under Section 5 of this Addendum if and when the Debt Service Coverage Ratio described in the preceding paragraph is first equal to or greater than 1.25 to 1.00, following which time the Debt Service Coverage Ratio shall at all times be equal to or greater than 1.25 to 1.00. (iii) not create, incur, assume or permit to exist any indebtedness or liabilities resulting from borrowings, loans or advances, whether secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several, except (a) the liabilities of Borrower to Bank, and (b) any other liabilities of Borrower existing as of, and disclosed to Bank prior to, the date hereof; -3- (iv) not merge into or consolidate with any other entity; make any substantial change in the nature of Borrowers business as conducted as of the date hereof; acquire all or substantially all of the assets of any other entity; nor sell, lease, transfer or otherwise dispose of all or a substantial or material portion of Borrower's assets except in the ordinary course of its business; (v) not mortgage, pledge, grant or permit to exist a security interest in, or lien upon, all or any portion of Borrower's assets now owned or hereafter acquired, except any of the foregoing in favor of Bank or which is existing as of, and disclosed to Bank in writing prior to, the date hereof. (b) ARBITRATION: (i) ARBITRATION. Upon the demand of any party, any Dispute shall be resolved by binding arbitration in accordance with the terms of this Note. A "Dispute" shall mean any action, dispute, claim or controversy of any kind, whether in contract or ton, statutory or common law, legal or equitable, now existing or hereafter arising under or in connection with, or in any way pertaining to, this Note and each other document, contract and instrument required hereby or now or hereafter delivered to Bank in connection herewith (collectively, the "Documents"), or any past, present or future extensions of credit and other activities, transactions or obligations of any kind related directly or indirectly to any of the Documents, including without limitation, any of the foregoing arising in connection with the exercise of any self-help, ancillary or other remedies pursuant to any of the Documents. Any party may by summary proceedings bring an action in court to compel arbitration of a Dispute. Any part who fails or refuses to submit to arbitration following a lawful demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any Dispute. (ii) GOVERNING RULES. Arbitration proceedings shall be administered by the American Arbitration Association ("AAA") or such otter administrator as the parties shall mutually agree upon in accordance with the AAA Commercial Arbitration Rules. All Disputes submitted to arbitration shall be resolved in accordance with the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the Documents. The arbitration shall be conducted at a location in California selected by the AAA or other administrator. If there is any inconsistency between the terms hereof and any such rules, the terms and procedures set forth herein shall control. All statutes of limitation applicable to any Dispute shall apply to -4- any arbitration proceeding. All discovery activities shall be expressly limited to matters directly relevant to the Dispute being arbitrated. Judgment upon any award rendered in an arbitration may be entered in any court having jurisdiction; provided however, that nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. SS. 91 or any similar applicable state law. (iii) NO WAIVER; PROVISIONAL REMEDIES; SELF-HELP AND FORECLOSURE. No provision hereof shall limit the right of any party to exercise self-help remedies such as setoff, foreclosure against or sale of any real or personal property collateral or security, or to obtain provisional or ancillary remedies, including without limitation injunctive relief, sequestration, attachment, garnishment or the appointment of a receiver, from a court of competent jurisdiction before, after or during the pendency of any arbitration or other proceeding. The exercise of any such remedy shall not waive the right of any party to compel arbitration or reference hereunder. (iv) ARBITRATOR QUALIFICATIONS AND POWERS; AWARDS. Arbitrators must be active members of the California State Bar or retired judges of the state or federal judiciary of California, with expertise in the substantive law applicable to the subject matter of the Dispute. Arbitrators are empowered to resolve Disputes by summary rulings in response to motions filed prior to the final arbitration hearing. Arbitrators (i) shall resolve all Disputes in accordance with Me substantive law of the State of California, (ii) may grant any remedy or relief that a court of the State of California could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award, and (iii) shall have the power to award recovery of all costs and fees, to impose sanctions and to take such other actions as they deem necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the California Rules of Civil Procedure or other applicable law. Any Dispute in which the amount in controversy is $5,000,000 or less shall be decided by a single arbitrator who shall not render an award of greater than $5,000,000 (including damages, costs, fees and expenses). By submission to a single arbitrator, each party expressly waives any right or claim to recover more than $8,000.000. Any Dispute in which the amount in controversy exceeds $5,000,000 shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations. -5- (v) REAL PROPERTY COLLATERAL; JUDICIAL REFERENCE. Notwithstanding anything herein to the contrary, no Dispute shall be submitted to arbitration if the Dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage, lion or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of California, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable. If any such Dispute is not submitted to arbitration, the Dispute shall be referred to a referee in accordance with California Code of Civil Procedure Section 638 ET SEQ., and this general reference agreement is intended to be specifically enforceable in accordance with said Section 63a. A referee with the qualifications required herein for arbitrators shall be selected pursuant to the AAA's selection procedures. Judgment upon the decision rendered by a referee shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645. (vi) MISCELLANEOUS. To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the firing of the Dispute with the AAA. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business, by applicable law or regulation, or to the extent necessary to exercise any judicial review rights set forth herein. If more than one agreement for arbitration by or between the parties potentially applies to a Dispute, the arbitration provision most directly related to the Documents or the subject matter of the Dispute shall control. This Note may be amended or modified only in writing signed by Bank and Borrower. If any provision of this Note shall be held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or any remaining provisions of this Note. This arbitration provision shall survive termination, amendment or expiration of any of the Documents or any relationship between the parties. 5. In addition to the Real Property (in which Bank has been granted a lien of first priority), as security for all indebtedness of Borrower to Bank under this Note, Borrower hereby grants to Bank security interest of first priority in Borrower's Well's Fargo Bank Business Premium Market rate Account # 1596905800 in the amount of $90,000.00. -6- All of the foregoing shall be evidenced by and subject to the terms of such security agreements, financing statements, deeds of trust and other documents as Bank shall reasonably require, all in form and substance satisfactory to Bank. Borrower shall reimburse Bank immediately upon demand for all costs and expenses incurred by Bank in connection with any of the foregoing security, including without limitation, filing and recording fees and costs of appraisals, audits and title insurance. THIS ADDENDUM shall cancel and supersede that certain Addendum dated November 17, 1998. IN WITNESS WHEREOF, the parties thereto have executed this Addendum as of the day and year first written above. SONOMAWEST HOLDINGS, INC. By: /s/ GARY L. HESS ------------ Gary L. Hess President -7- EX-11 6 c21958_ex11.txt COMPUTATION OF EARNINGS (LOSS) PER SHARE Exhibit 11 COMPUTATION OF EARNINGS (LOSS) PER SHARE (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED JUNE 30, 2001 2000 1999 -------- -------- -------- AVERAGE COMMON SHARES OUTSTANDING 1,291 1,520 1,514 AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 1,319 1,548 1,549 NET LOSS FROM CONTINUING OPERATIONS APPLICABLE TO COMMON STOCK $ (355) $ (473) $ (759) EARNING PER COMMON SHARE FROM CONTINUING OPERATIONS: Basic $ (0.27) $ (0.31) $ (0.50) Diluted (1) $ (0.27) $ (0.31) $ (0.50) NET EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS APPLICABLE TO COMMON STOCK $ 161 $ 3,183 $ (2,170) EARNING PER COMMON SHARE FROM DISCONTINUED OPERATIONS: Basic $ 0.12 $ 2.09 $ (1.43) Diluted (2) $ 0.12 $ 2.06 $ (1.43) NET EARNINGS (LOSS) APPLICABLE TO COMMON STOCK $ (194) $ 2,710 $ (2,929) TOTAL EARNING PER COMMON SHARE: Basic $ (0.15) $ 1.78 $ (1.93) Diluted (2) $ (0.15) $ 1.75 $ (1.93) (1) The effect of potentially dilutive stock options and warrants has not been computed for any period presented because the effect would be anti-dilutive. (2) The effect of potentially dilutive stock options and warrants has not been computed for 1999 because the effect would be anti-dilutive. Exhibit 11 -1- EX-21 7 c21958_ex21.txt SUBSIDIARIES OF THE REGISTRANT Exhibit 21 SUBSIDIARIES OF THE REGISTRANT ENTITY STATE OF INCORPORATION Made In Nature Company, Inc. California Exhibit 21 -1- EX-23 8 c21958_ex23.txt CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 (File nos. 033-70870 and 333-84295). ARTHUR ANDERSEN LLP San Francisco, California September 26, 2001 Exhibit 23 -1-