-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J/ZILtvzW1/9VmduNXdWN4lS3cEL4rE9BkvqV8z+7NbLjdhJnzt0iWr3FJ+STtVU kL/sL2u3lQOXofFgcTdyOg== 0000930413-04-004556.txt : 20040928 0000930413-04-004556.hdr.sgml : 20040928 20040928160009 ACCESSION NUMBER: 0000930413-04-004556 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040928 DATE AS OF CHANGE: 20040928 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SONOMAWEST HOLDINGS INC CENTRAL INDEX KEY: 0000102588 STANDARD INDUSTRIAL CLASSIFICATION: LESSORS OF REAL PROPERTY, NEC [6519] 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: 041049958 BUSINESS ADDRESS: STREET 1: 2064 HIGHWAY 116 NORTH CITY: SEBASTOPOL STATE: CA ZIP: 95472 BUSINESS PHONE: 707-824-2534 MAIL ADDRESS: STREET 1: 2064 HIGHWAY 116 NORTH CITY: SEBASTOPOL STATE: CA ZIP: 95472 FORMER COMPANY: FORMER CONFORMED NAME: VACU DRY CO DATE OF NAME CHANGE: 19920703 10-K 1 c33808_10-k.txt 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, 2004 [ ] 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. [ ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES ___ NO _X_ Aggregate market value of common stock held by non-affiliates based on the closing price of the registrant's common stock on the Nasdaq SmallCap Market on December 31, 2003: $4,325,429. For the purposes of the foregoing calculations, shares of common stock held by persons who hold more than 5% of the outstanding shares of common stock and shares held by executive officers and directors of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliates is not necessarily conclusive for this or any other purpose. As of September 23, 2004, there were 1,114,257 shares of common stock, no par value, outstanding which is the only class of shares publicly traded. Portions of the following document are incorporated by reference from the Registrant's Proxy Statement for Registrant's 2004 Annual Meeting of Shareholders currently scheduled to be held October 27, 2004 and to be filed with the Securities and Exchange Commission on or before 120 days after the end of the 2004 fiscal year, including portions required under Part III of this report. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS SonomaWest Holdings, Inc. (the "Company" or "Registrant") is including the following cautionary statement in this Annual Report to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward looking statements made by, or on behalf of, the Company. The statements contained in this Report that are not historical facts are "forward-looking statements" (as such term is defined in Section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934), which can be identified by the use of forward-looking terminology such as "estimated," "projects," "anticipated," "expects," "intends," "believes," or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions. Forward-looking statements involve risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, although actual results may differ materially from those described in any such forward looking statements. All written and oral forward-looking statements made in connection with this Report which are attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the "Certain Factors" and other cautionary statements set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations". There can be no assurance that management's expectations, beliefs or projections will be achieved or accomplished, and the Company expressly disclaims any obligation to update any forward looking statements. PART I ITEM 1. BUSINESS SonomaWest Holdings, Inc., formerly Vacu-dry Company, ("SonomaWest" or the "Company") was incorporated in 1946 and currently operates as a real estate management and rental company. The Company also holds an investment in MetroPCS Communications, Inc., a public reporting telecommunications company. The Company's rental operations include industrial/agricultural property, some of which was formerly used in its discontinued businesses. This commercial property is now being rented to third parties. INDUSTRY SEGMENT INFORMATION For the year ended June 30, 2004, the Company operated in one reportable segment, real estate management and rental operations. The Company's primary business revenue is generated from the leasing of its two properties, located in Sebastopol, California. The properties are leased to multiple tenants with leases varying in length from month-to-month to ten years. The Company's business is not seasonal and does not require significant working capital. Revenue from the leasing activities is payable either on the 1st or 15th of the month. As of June 30, 2004, one tenant, Benziger Family Winery, accounted for 18% of the Company's revenue. The Company has completely funded its $3 million minority investment in the Series D Preferred Stock of MetroPCS Communications, Inc., a public reporting telecommunications company (File Number 000-50869). Information regarding all other business income is included in the discussion of discontinued operations. -2- COMPETITION The Company competes with numerous commercial property landlords which offer warehouse, manufacturing and food processing properties in the greater Petaluma/Santa Rosa area, located in central to southern Sonoma County of California. The Company believes that its northern property enjoys a competitive advantage over other similarly situated properties because of the wastewater treatment facility located on the property, which is ideally suited for tenants involved in the food processing industry and more particularly the wine processing industry. The Company believes that both of its northern and southern properties are competitively priced to the market. Some of the Company's competitors enjoy the advantage that their properties are newer than the Company's properties. Currently it is impractical to determine the degree and timing of capital improvements necessary to achieve competitiveness with newer properties owned by the Company's competitors. The Company competes on the basis of location, price, service and tenant improvements, including the northern property's wastewater treatment facility. REVENUE RECOGNITION Revenue is recognized on a monthly basis, based upon the dollar amount specified in the related lease. The Company requires that all tenants be covered by a lease. The Company does not have leases that include provisions that require the lessee to pay the lessor any additional rent based upon the lessee's sales or any other financial performance levels. Reimbursements of certain costs received from tenants are recognized as tenant reimbursement revenues. During the third quarter of fiscal 2004, the Company concluded that tenant reimbursements are more appropriately classified as a separate line item of revenue rather than as a reduction of operating costs. Accordingly, the accompanying statements of operations reflect tenant reimbursements as a separate line item of revenue. Comparative statements of operations have been revised to reflect the current period presentation. The reclassifications have no impact on previously reported operating income (loss), net loss or net loss per share amounts. ENVIRONMENTAL MATTERS The Company believes it has complied with all governmental regulations regarding protection of the environment. In connection with the renewal of its wastewater permit (issued by the State of California), the Company was required to modify its wastewater system to separate domestic waste from its processed wastewater. As a result, the Company has made changes to comply with these regulations and has incurred related capital expenditures of $82,000 during the 2004 fiscal year and $171,600 on the total project. The Company estimates that they will incur an additional $5,000 to complete this project in fiscal 2005. In addition to these capital expenditures, the Company could be held liable for the costs of removal or remediation of any hazardous or toxic substances, if any, that might be located on or in its properties in the future. These laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of the hazardous or toxic substances. The presence of such substances, or the failure to remediate such substances properly, may adversely affect the owner's ability to sell or rent the property or to borrow using the property as collateral. Other federal and state laws require the removal of damaged material containing asbestos in the event of remodeling or renovation. EMPLOYEES The Company currently employs 5 employees in a management or staff capacity, none of whom is covered under a collective bargaining agreement. -3- INSURANCE The Company maintains workers compensation, commercial general liability, property, extended coverage and rental loss insurance. While management feels the limits and coverage are adequate relative to the related risks, there is no assurance that this insurance will be adequate to protect the Company from all unforeseen occurrences. The deductible on the Company's property insurance policy has been reduced from $100,000 to $50,000. INVESTMENT As of December 10, 2003, the Company had completely funded its $3 million minority investment in the Series D Preferred Stock of MetroPCS, Inc., a public reporting telecommunications company (File Number 333-111470). On March 23, 2004 MetroPCS filed a registration statement with the Securities and Exchange Commission for an initial public offering of its common stock. On, July 13, 2004, a wholly-owned subsidiary of MetroPCS Communications, Inc. was merged with MetroPCS, Inc. As a result, MetroPCS, Inc. became a wholly-owned subsidiary of MetroPCS Communications, Inc. and all of the outstanding shares of MetroPCS, Inc. were exchanged for shares of MetroPCS Communications, Inc., including the Company's Series D Preferred Stock. On July 28, 2004 MetroPCS Communications announced that it had determined not to proceed at that time with the planned initial public offering of common stock pending a review of certain accounting issues that had come to its attention relating to its previously disclosed financial statements. On August 12, 2004 MetroPCS Communications, Inc. formally withdrew the registration. The Company accounts for its investment in MetroPCS Communications under the cost method. The Company owns approximately 0.857% of the total outstanding shares of Series D Preferred Stock and approximately 0.33% of the total outstanding capital stock on an as-converted basis. The Series D Preferred Stock is entitled to receive cumulative annual dividends, prior to all other securities except the Series C Preferred Stock, equal to 6% per annum of the liquidation value of the shares (initially equal to $100 per share and subject to adjustment). No dividends have been declared to date, but as of June 30, 2004, $382,702 of unpaid dividends has accrued with respect to the Company's shares of Series D Preferred Stock. The Series D Preferred Stock is convertible at the option of the holders thereof or automatically upon (i) an initial public offering which results in gross proceeds of at least $50 million and yields an adjusted equity valuation of two times the liquidation value of the Series D Preferred Stock; (ii) the trading on a national securities exchange for a 30-day consecutive period at a price which implies a valuation of the Series D Preferred Stock in excess of twice the aggregate initial purchase price; or (iii) a date specified by holders of 66 2/3% of the then outstanding Series D Preferred Stock. There is a weighted average adjustment to the conversion price in the event of certain additional issuances of Common Stock (of any class) or securities convertible into Common Stock (of any class). The Series D Preferred Stock votes together on an as-converted basis with the Class C Common Stock on most matters. Certain matters affecting the Series D Preferred Stock require a separate vote of the Series D Preferred Stock. The holders of Series D Preferred Stock as a class are entitled to nominate one director to the Board of Directors. The Series D Preferred Stock is entitled to payment along with the Series C Preferred Stock of its liquidation preference prior to payment to any other class of securities (other than the Series C Preferred Stock). The per share liquidation price for the Series D Preferred Stock is $100 per share plus the greater of accrued and unpaid dividends and the amount that would have been paid in respect of each share had -4- such share been converted to Common Stock immediately prior to the liquidation event. Upon the occurrence of certain events, the Series D Preferred Stock must be redeemed by MetroPCS Communications at a price equal to the liquidation value plus accrued and unpaid dividends. The Company has no relationships with MetroPCS Communications other than its investment. A director of the Company has a small indirect stock interest in MetroPCS Communications and the Company's largest shareholder is a member of the Board of Directors of MetroPCS Communications. CERTAIN FACTORS In evaluating the Company and its business, the following factors should be given careful consideration, in addition to the information mentioned elsewhere in this Form 10-K. FACTORS RELATED TO REAL ESTATE INDUSTRY SEGMENT. - ----------------------------------------------- WE HAVE A LIMITED OPERATING HISTORY IN THE REAL ESTATE INDUSTRY AND CONSEQUENTLY FACE SIGNIFICANT RISKS AND CHALLENGES IN BUILDING OUR BUSINESS. While we have managed real estate and facilities issues for many years, it is only recently that we have shifted our primary business focus to that business segment and its investment activities. In addition, in an effort to cut costs, we have outsourced all of our executive functions. While we believe we have sufficient experience, resources and personnel to manage our properties effectively, we do not have a long operating history that demonstrates such effective management and there is no assurance that we will be successful. OUR PROPERTIES DEPEND UPON THE NORTHERN CALIFORNIA AND PARTICULARLY THE SONOMA COUNTY ECONOMY. All of our rental revenues come from two properties located in Northern California and more particularly Sonoma County. Events and conditions applicable to owners and operators of real property that are beyond our control may decrease the value of our properties. These events include: local oversupply or reduction in demand for office, industrial or other commercial space; inability to collect rent from tenants; vacancies or inability to rent spaces on favorable terms; inability to finance property development on favorable terms; increased operating costs, including insurance premiums, utilities, and real estate taxes; costs of complying with changes in governmental regulations; the relative illiquidity of real estate investments; changing sub-market demographics and property damage resulting from seismic activity. The geographical concentration of our properties may expose us to greater economic risks than if we owned properties in several geographic regions. Any adverse economic or real estate developments in the Sonoma County region could adversely impact our financial condition, results from operations, cash flows, quoted per share trading price of our common stock and ability to satisfy our debt service obligations. The economic environment in Sonoma County has improved since last year. In a recent report prepared for the Sonoma County Economic Development Board by Economy.com, Inc., dated May 2004, they state "Sonoma County's economy is past its worst point of the business cycle and will begin to improve in coming months." "A clear path to recovery is not evident yet, but the local economy is beginning to get back on its feet." As part of this economic recovery, we anticipate the commercial, industrial and office markets in Sonoma County will also experience positive effects from this recovery. Obtaining new tenants for our properties generally requires taking tenants from competitor properties. There is no assurance that the market will significantly improve in the near future. -5- INCREASING UTILITY COSTS AND POWER OUTAGES IN CALIFORNIA MAY HAVE AN ADVERSE EFFECT ON OUR OPERATING RESULTS AND OCCUPANCY LEVELS. The State of California continues to address issues related to the supply of electricity and natural gas. Since June 2000, shortages of electricity have resulted in increased costs for consumers and certain interruptions in service. Increased consumer costs and consumer perception that the State is not able to effectively manage its energy needs may reduce demand for leased space in California office and industrial properties. A significant reduction in demand for industrial space would adversely affect our future financial position, results of operations, cash flow, quoted per share trading price of our common stock and ability to satisfy our debt service obligations. POTENTIAL LOSSES MAY NOT BE COVERED BY INSURANCE. We carry commercial general liability, property, extended coverage and rental loss insurance covering all of our properties. Management believes the policy specifications and insured limits are appropriate given the relative risk of loss, the cost of the coverage and industry practice. We do not carry earthquake coverage. We do not carry insurance for generally uninsurable losses such as pollution, contamination, asbestos and seepage. Some of our policies are subject to limitations involving large deductibles or co-payments and policy limits. If we experience a loss, which is uninsured or which exceeds policy limits, we could lose the capital invested in the damaged properties as well as the anticipated future cash flows from those properties. In addition, if the damaged properties were subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if the properties were irreparable. DOWNTURNS IN TENANTS' BUSINESSES MAY REDUCE OUR CASH FLOW. For the year ended June 30, 2004, we derived all of our continuing operating revenues from rental income and tenant reimbursements. A tenant may experience a downturn in its business, which may weaken its financial condition and result in its failure to make timely rental payments. In the event of default by a tenant, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment. The bankruptcy or insolvency of a major tenant also may adversely affect the income produced by our properties. If any tenant becomes a debtor in a case under the U.S. Bankruptcy Code, we cannot evict the tenant solely because of the bankruptcy. In addition, the bankruptcy court might authorize the tenant to reject and terminate its lease. Our claim against the tenant for unpaid, future rent would be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease. Even so, our claim for unpaid rent would likely not be paid in full. Any losses resulting from the bankruptcy of any of our tenants could adversely impact our financial condition, results from operations, cash flow, the quoted per share trading price of our common stock and the ability to satisfy any debt service obligations. Although we have not experienced material losses from tenant bankruptcies, tenants could file for bankruptcy protection in the future. WE MAY BE UNABLE TO RENEW LEASES OR RE-LET SPACE AS LEASES EXPIRE. As of June 30, 2004, leases representing approximately 0% and 11% of the square footage of our properties will expire in 2005 and 2006, respectively. If leases expire with above market rental rates we may be forced to renew or re-lease such expiring leases at lower rates. We cannot give any assurance that leases will be renewed or that its properties will be re-leased at rental rates equal to or above the current rental rates. If the rental rates for our properties decrease, existing tenants do not renew their leases, or we do not re-lease a significant portion of our available space, our financial position, results of operations, cash flow, quoted per share trading price of our common stock and ability to satisfy its debt service obligations would be adversely affected. -6- OUR REAL ESTATE HOLDINGS COULD SUBJECT US TO POTENTIAL ENVIRONMENTAL LIABILITY. We could be held liable for the costs of removal or remediation of any hazardous or toxic substances located on or in our properties. These laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of the hazardous or toxic substances. The presence of such substances, or the failure to remediate such substances properly, may adversely affect our ability to sell or rent the property or to borrow using the property as collateral. Other federal and state laws require the removal of damaged material containing asbestos in the event of remodeling or renovation. The Company has recently contracted to remove the asbestos containing materials at its South Sebastopol property. These materials were discovered as a result of a Phase I environmental study. It is anticipated that these materials will be removed by October 31, 2004. WE RELY ON A MAJOR TENANT FOR A SIGNIFICANT PORTION OF OUR RENTAL REVENUES. Benziger Family Winery accounted for 18%, 19% and 21% of our rental revenues for the fiscal years ended June 30, 2004, 2003 and 2002, respectively. In addition, Benziger Family Winery accounted for 23% and 24% of the accounts receivable balance as of the fiscal years ended June 30, 2004 and 2003, respectively. The loss of Benziger Family Winery as a tenant would have a material adverse effect on the operating results of the real estate operations. At June 30, 2004 and 2003, all rental amounts owing by Benziger Family Winery were payable within the normal billing cycle and were not past due. FACTORS RELATED TO INVESTMENT OPERATIONS As of December 10, 2003, the Company has completely funded its $3 million minority investment in the Series D preferred stock of a public reporting telecommunications company, MetroPCS Communications, Inc. The wireless industry is unsettled, highly competitive and is marked by rapidly developing and expanding technologies, which presents some risks. Even though management believes that the investment in MetroPCS Communications represents an attractive opportunity for the Company and will ultimately provide a positive return to the Company, there is no assurance that this will occur. On March 23, 2004 MetroPCS filed a registration statement with the Securities and Exchange Commission for an initial public offering of its common stock. On July 28, 2004 MetroPCS announced that it had determined not to proceed at that time with the planned initial public offering of common stock pending a review of certain accounting issues that had come to its attention relating to its previously disclosed financial statements. On August 12, 2004 MetroPCS formally withdrew the registration. There is no certainty that MetroPCS when or if at all will be able to complete a public offering of its securities or that the Company will be able to achieve liquidity for its investment. OUR INVESTMENT IN METROPCS COMMUNICATIONS, INC. REPRESENTS A SIGNIFICANT PORTION OF OUR ASSETS. As of June 30, 2004, we have invested $3,001,200 the Series D Preferred Stock of MetroPCS Communications, Inc., a public reporting telecommunications company (File Number 000-50869). The Company accounts for its investment in MetroPCS Communications under the cost method. The Company owns approximately 0.857% of the total outstanding shares of Series D Preferred Stock and approximately 0.33% of the total outstanding capital stock on an as-converted basis. Our investment represents 44% of our total assets. Our investment in MetroPCS Communications is our only investment. Shareholders in the Company do not have the benefits that would result from a diversified portfolio of investments. Even though management believes that the investment in MetroPCS Communications will ultimately provide a positive return to the Company, the loss of our investment in MetroPCS Communications could have a material adverse effect on our business, financial condition and results of operations. -7- ITEM 2. PROPERTIES ADMINISTRATIVE OFFICES. The principal administrative offices of the Company are located at 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. REAL PROPERTY. The Company owns two properties together comprising 82 acres in West 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 84,724 square feet of leasable space under roof. The available space is suited for commercial rental. All buildings have fire sprinkler protection. Other features include ample parking, security and a location close to major north-south and east-west traffic arteries. In addition, there is 16,543 square feet of paved parking area that is currently leased. The property is zoned for "limited industrial" use, which means that permitted uses include agricultural/food processing, light industry, related office to support industrial tenant activities, warehousing or storage. Adjacent to these five acres are two additional undeveloped Company owned parcels approximately two acres and eight acres in size zoned "limited industrial" and "low density residential", respectively. As of June 30, 2004, 70% of the leasable space under roof has been leased to seven tenants on a month-to-month or long-term basis. An additional 16,543 square feet of outside space has also been leased. Lease terms range from month-to-month to ten years with options to extend beyond that. The following table sets forth the schedule of future lease expirations and other data related to the South property: Number of Total Percent of 2004 Tenants Whose Square Feet Annual Rent Gross Rent Year ending Leases Covered Represented Represented June 30th Will Expire by Leases by Leases by Leases - ------------- ------------- ----------- ----------- --------------- 2005 -- 73,692 $297,218 83% 2006 1 42,286 $135,774 38% 2007 2 12,669 $ 53,027 15% 2008 1 5,417 $ 8,642 2% 2009 1 -- -- -- 2010 0 -- -- -- The federal tax basis of the property is $323,668. The accumulated book depreciation is $967,869 and the book net carrying value is $297,641. 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, 2004 were $14,312. The Company has a $1.7 million loan secured by this property, which matures in December 2005. 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 -8- buildings located on approximately 27 acres with an aggregate of 305,986 square feet of leasable space under roof. In addition, there is 55,454 square feet of outside area that is currently leased. The balance of the property is dedicated to wastewater treatment and a large pond for fire protection. This property is zoned "diversified agriculture" in its entirety, which means that it can be used for agricultural/food processing, warehousing and related office space to support industrial tenant activities. SonomaWest is currently attempting to broaden the permitted uses of the 2064 Gravenstein Highway North property to allow other types of activities, but there can be no assurance that such efforts will be successful. The existing use permit may restrict the types of tenants that could occupy the property, resulting in prolonged vacancy and/or lower rental rates, having a material adverse effect on the Company's business, financial condition and results of operations. As of June 30, 2004, 64% of the leasable space under roof has been leased to twenty tenants on a month-to-month or long-term basis. An additional 55,454 square feet of outside space has also been leased. Leases range from month-to-month to ten years with options to extend beyond that. The following table sets forth the schedule of the future lease expirations and other data related to the North property: Number of Total Percent of 2004 Tenants Whose Square Feet Annual Rent Gross Rent Year ending Leases Covered Represented Represented June 30th Will Expire by Leases by Leases by Leases - ------------- ------------- ----------- ----------- --------------- 2005 -- 180,538 $1,080,369 81% 2006 1 168,959 $ 997,892 74% 2007 3 106,105 $ 486,029 36% 2008 4 64,469 $ 223,317 17% 2009 2 36,984 $ 168,380 13% 2010 1 34,279 $ 152,611 11% The federal tax basis of the property is $1,694,081. The accumulated book depreciation is $4,281,604 and the book net carrying value is $1,332,214. 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, 2004 were $55,400. The Company has no debt associated with this property. The Company continues to market all of its properties. There can be no assurance that these marketing efforts will be successful, or that suitable tenants will be found on a timely basis. Significant, prolonged vacancies at the properties may have a material adverse impact on the Company's business, financial condition and results of operations. ITEM 3. LEGAL PROCEEDINGS. The Company is not a party to any legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the last quarter of the fiscal year ended June 30, 2004. -9- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is traded on the Nasdaq Small Cap Market (symbol: SWHI). The quarterly high and low prices for the last two fiscal years were as follows: QUARTER ENDING LOW HIGH -------------- ---- ---- 09/30/02 5.37 7.77 12/31/02 5.41 6.78 3/31/03 5.05 6.39 6/30/03 4.21 6.20 9/30/03 4.65 8.20 12/31/03 6.76 13.30 3/31/04 7.78 9.25 6/30/04 9.02 11.05 The above quotations were obtained from the Yahoo Finance Historical Quotes Online website. On September 20, 2004, there were approximately 427 registered holders of common stock. On that date, the average of the high and low price per share of the Company's stock was $9.72. The Company has not paid dividends on its common stock within the last 15 years. Even if its future operations result in profitability, as to which there can be no assurance, there is no present anticipation that dividends will be paid. Rather, the Company expects that any future earnings will be applied toward the further development of the Company's business. The Company's equity plan information required by this Item is incorporated by reference from the information under the heading "Equity Compensation Plan Information" in the Company's proxy statement for its Annual Meeting of Stockholders to be held on October 27, 2004. -10- ITEM 6. SELECTED FINANCIAL DATA. YEAR ENDED JUNE 30 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2004 2003 2002 2001 2000 ---------------- ----------------- ----------------- ------------- -------------- Total revenues (1) $2,050 $1,841 $1,664 $1,371 $1,292 Net earnings (loss) from continuing 62 (202) (511) (355) (473) operations Net earnings (loss) from discontinued operations -- 127 16 161 3,183 Net earnings (loss) 62 (75) (495) (194) 2,710 Earnings (loss) per share from continuing operations Basic 0.06 (0.18) (0.49) (0.27) (0.31) Diluted 0.05 (0.18) (0.49) (0.27) (0.31) Earnings (loss) per share from discontinued operations Basic -- 0.11 0.02 0.12 2.09 Diluted -- 0.11 0.02 0.12 2.06 Earnings (loss) per share Basic 0.06 (0.07) (0.47) (0.15) 1.78 Diluted 0.05 (0.07) (0.47) (0.15) 1.75 Total Assets 7,006 7,126 7,470 7,687 12,969 Long Term Debt 1,620 -- 1,856 1,917 1,974
(1) After the sale of the Company's apple-based industrial ingredient business and the discontinuation of its organic packaged goods business in fiscal 2000, the Selected Financial Data presented above was reformatted to reflect this discontinuation in the ongoing business of the Company. As a result, this chart now reflects the ongoing real estate business as continuing operations and the financial results from the discontinuation of its industrial ingredients and organic packaged goods business as discontinued operations. -11- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. OVERVIEW As of fiscal 2004 the Company's business consists of its real estate management and rental operations and its minority investment in the Series D preferred stock of a public reporting telecommunications company, MetroPCS Communications, Inc. In 2000 and 2001, the Company liquidated its fruit processing operations, but continued to hold its real estate and other assets. Thereafter, an opportunity was made available to the Company to invest in MetroPCS Communications, Inc., a public reporting telecommunications company with operations, in part, in Northern California. The Company believed and continues to believe that such an investment was a good investment, which provided a diversification of its assets. The Company accounts for its investment in MetroPCS Communications under the cost method. The Company's interest in the Series D offering is approximately 0.857% (30,012 shares of 3,500,987) and on an as converted basis is approximately 0.33% (638,576 shares of 193,513,851). During the third quarter of fiscal 2004, the Company concluded that tenant reimbursements are more appropriately classified as a separate line item of revenue rather than as a reduction of operating costs. Accordingly, the accompanying statements of operations for the year ended June 30, 2004 reflect tenant reimbursements as a separate line item of revenue. Comparative statements of operations for the years ended June 30, 2002 and 2003 have been reclassified to reflect the current period presentation. The revenue and operating cost reclassifications below reflect an increase in revenue and a corresponding increase in operating costs in the amounts of $217,000, and $327,000 for the years ended June 30, 2002 and 2003, respectively. There classifications have no impact on previously reported operating income (loss), net loss or net loss per share amounts. The results of the reclassifications are as follows: Statement of Operations Data: Year ended June 30, 2002 As originally reported Reclassifications As Adjusted Tenant Reimbursements $ -- $217,000 $ 217,000 Total Revenues $1,447,000 $217,000 $1,664,000 Operating Costs $2,065,000 $217,000 $2,282,000 Year ended June 30, 2003 As originally reported Reclassifications As Adjusted Tenant Reimbursements $ -- $327,000 $ 327,000 Total Revenues $1,514,000 $327,000 $1,841,000 Operating Costs $1,751,000 $327,000 $2,078,000 The Company has no tenant related reimbursements that are not part of tenant lease agreements. -12- RESULTS OF CONTINUING OPERATIONS The Company's continuing line of business consists of its rental operations, real estate management and an investment in MetroPCS. See Item 2, Properties, above for a further discussion of the Company's real estate operations. FISCAL 2004 COMPARED TO FISCAL 2003 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 leasable area of approximately 477,509 square feet (390,710 under roof and 86,799 outside) on 82 acres of land. As of the end of fiscal year 2004, there were 27 leases covering 326,014 square feet of leasable space (254,017 under roof and 71,997 outside) or 68%. As of the end of fiscal 2003, there were 27 leases that comprised 292,785 square feet of leasable space (227,058 under roof and 65,727 outside) or 64% of the total leasable area of 455,597 (389,870 under roof and 65,727 outside). Fiscal 2004 rental revenue increased $118,000 or 8% from $1,514,000 in fiscal 2003 to $1,637,000 in fiscal 2004. Overall the rental rates for space under roof remained relatively the same. The additional occupancy accounted for the increase in the revenue between fiscal years. Rental revenue does not cover all operating costs and interest expense, yielding deficits of $49,000 and $301,000 in fiscal years 2004 and 2003 respectively. While the Company continues to market 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. TENANT REIMBURSEMENTS. During the third quarter of fiscal 2004, the Company concluded that tenant reimbursements are more appropriately classified as a separate line item of revenue rather than as a reduction of operating costs. The comparative statements of operations for the fiscal years ended 2003 and 2002 have been revised to reflect the current year's presentation. For the fiscal year 2004, tenant reimbursements increased $86,000 or 26% as compared to fiscal year 2003. Such reimbursements related primarily to utility costs. The majority of the increase is a result of additional energy consumption by tenants. The combined impact of electric and gas rate changes were relatively minor. Tenant reimbursements are passed along to the tenants at the Company's cost. OPERATING COSTS. Total operating costs consist of direct costs related to continuing operations and all general corporate costs. Fiscal 2004 total operating costs of $2,060,000, decreased $18,000 or 1% from $2,078,000 in fiscal 2003. This decrease of $18,000 was a result of a decrease of $178,000 due to property damages from winter storms of $100,000 during fiscal 2003 that did not recur in fiscal 2004 and decreased repairs and maintenance of $89,000 offset by an increase of $160,000 in related party legal costs incurred in strategic planning. The Company continues to closely scrutinize all discretionary spending. Efforts to reduce and/or maintain expenses continue to be an important focus of the Company. Interest Income. In fiscal 2004 the Company generated $25,000 of interest income on its cash balances, this compares to $46,000 in fiscal 2003. The lower interest income in fiscal 2004 is a result of a decrease in the available invested cash and slightly lower interest rates. INTEREST EXPENSE. Interest expense consists primarily of interest expense on mortgage debt and the change in the value of the Company's interest rate swap contract. For fiscal year 2004, the Company incurred $97,000 of interest expense and recorded a positive swap contract adjustment upon the termination of the swap of $37,000. This compares to $140,000 of interest expense and a positive swap contract adjustment of $34,000 for the corresponding period in the prior year. As of December 1, 2004, the Company's swap contract with its bank terminated. -13- OTHER INCOME AND EXPENSE. In fiscal 2004 the Company incurred a net loss of $4,000 from other income and expense. This was comprised of a loss on the sale of fixed assets of $24,000, which was partially offset by other income of $20,000. The other income of $20,000 was from multiple sources. In fiscal 2003, the Company incurred $4,000 of other expenses. INCOME TAXES. The effective tax (benefit) rate changed from a provision of 17% in fiscal 2003 to a benefit of 227% in fiscal 2004. The large benefit percentage in fiscal 2004 was a result of the elimination of the valuation allowance on state net operating losses. Though the Company has reported taxable losses in recent years, the pending initial public offering of MetroPCS is expected to result in significant realized investment gains as the Company plans to sell a portion of it's investment upon completion of the aforementioned initial public offering. Consequently, management believes that it is more likely than not that the Company will generate sufficient taxable income in the foreseeable future, allowing the utilization of 100% of its deferred tax assets. As a result, the valuation allowance was reversed. In fiscal 2003 the provision percentage of 17% was lower than the normal combined rate of 40%, as a result of the valuation allowance placed on state deferred tax assets due to the uncertainty of the future realization of such deferred tax assets and future taxable income against which the state net operating losses could be offset. FISCAL 2003 COMPARED TO FISCAL 2002 RENTAL REVENUE. As of the end of fiscal year 2003, there were 27 leases covering 292,785 square feet of leasable space (227,058 under roof and 65,727 outside) or 64%. As of the end of fiscal 2002, there were 26 leases that comprised 297,023 square feet of leasable space (216,136 under roof and 80,887 outside) or 63% of the total leasable area of 471,032 (389,870 under roof and 81,162 outside). Fiscal 2003 rental revenue increased $67,000 or 5% from $1,447,000 in fiscal 2002 to $1,514,000 in fiscal 2003. Although the total leasable space decreased, the area under roof actually increased. The rental revenue per square foot for the area under roof is significantly higher than the outside area and as a result more than offset for the loss of the revenue from the outside area. In addition, the revenue also increased as a result of the normal CPI rate increases. REIMBURSEMENTS. For the fiscal year 2003 tenant reimbursements increased $110,000 or 51% to $327,000 as compared to fiscal year 2002 of $217,000. Such reimbursements related primarily to utility costs. The majority of the increase is a result of additional energy consumption by tenants. The combined impact of the electric and gas rate changes were relatively minor Operating Costs. During fiscal 2003, operating costs increased 10% or $169,000 from $1,668,000 in fiscal 2002 to $1,837,000. Whereas the related party expenses decreased during fiscal 2003 by $373,000 or 61% from $614,000 in fiscal 2002 to $241,000 in fiscal 2003. The increase in fiscal 2002 was primarily a result of the charge of $362,500 against earnings from the separation agreement for Gary Hess, the former President and Chief Executive Officer of the Company. INTEREST INCOME. In fiscal 2003 the Company generated $46,000 of interest income on its cash balances. This compared to $102,000 in fiscal 2002. The decline in income is a result of the lower cash balances and a decline in interest rate. INTEREST EXPENSE. Interest expense consists of interest expense on the Company's mortgage debt and the change in the value of the Company's interest rate swap contract. Interest expense net of the swap contract adjustments increased from $203,000 as of fiscal 2002 ($144,000 of interest on mortgage debt plus $59,000 from a negative swap contract adjustment) to $106,000 in fiscal 2003 ($140,000 of interest on mortgage debt less $34,000 from a positive swap contract adjustment). -14- OTHER INCOME AND EXPENSE. In fiscal 2003 the Company incurred $4,000 of other expenses, which compares to $3,000 of other income in fiscal 2002. INCOME TAXES. The fiscal 2003 effective tax benefit rate decreased to 17% from the fiscal 2002 effective tax benefit rate of 29%. The rate declined primarily because the permanent differences in fiscal 2003 were a larger percentage of the income before taxes than in fiscal 2002. In addition to the effect of the permanent differences, the rates in fiscal 2003 and fiscal 2002 were lower than the normal combined federal and state rate of 40% as a result of an additional valuation allowance placed on state deferred tax assets due to the uncertainty of the future realization of such deferred tax assets and future taxable income against which the state net operating losses could be offset. LIQUIDITY AND CAPITAL RESOURCES The Company had cash of $1.3 million at June 30, 2004 (all of which was unrestricted), and current maturities of long-term debt of $56,000. Although the Company incurred a net loss of $53,000 from continuing operations, it generated positive cash flow from operating activities of $37,000. The decrease in the cash balance of $591,000, from $1,939,000 at June 30, 2003 to $1,348,000 at June 30, 2004, was a result of the final funding of the $3.0 million minority investment in MetroPCS of $305,000, principal payments on long-term debt of $181,000 and capital expenditures of $196,000, offset by slightly positive cash flows. The Company anticipates that its fiscal 2005 cash commitments will consist of $56,000 of principal debt reduction and approximately $360,000 of capital expenditures. The anticipated decline in cash for fiscal 2005 of approximately $100,000 will be funded out of the Company's cash balances. On March 1, 2004, the Company entered into a credit agreement with its bank to refinance $1,690,000 of its long-term debt of $1,813,000. The balance of the refinancing of $123,000 was paid by the Company in cash. The term note bears interest at the bank's prime rate plus .25%, with monthly principal payments of $4,650 beginning April 1, 2004 with a final installment of the remaining principal due on December 1, 2005. The note is secured by a first deed of trust on the Company's property located at 1365 Gravenstein Highway South, Sebastopol, California. As of June 30, 2004, the Company's debt service coverage ratio was 1.43 to 1, which is greater than the required minimum of 1.25 to 1. Effective July 1, 2002, the Company elected to account for all prospective stock options in accordance with SFAS 123, "Accounting for Stock-Based Compensation". As a result, during the first quarter of fiscal 2004 the Company incurred a charge against continuing operations of $34,000 related to the issuance of 24,200 fully vested stock options to the Directors, Officers and specific employees of the Company. In the first quarter of fiscal 2003 the Company incurred a charge against continuing operations of $42,000 related to the issuance of 24,200 fully vested stock options to the Directors, Officers and specific employees of the Company. CRITICAL ACCOUNTING POLICIES The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates and assumptions (see Note 1 to the financial statements). The Company believes that of its significant accounting policies (see Note 1 to the financial statements), the following may involve a higher degree of judgment and complexity. The most critical accounting policies were determined to be those related to: valuation of the Company's investment in MetroPCS Communications and the valuation allowances on deferred tax assets. -15- VALUATION OF INVESTMENT IN METROPCS COMMUNICATIONS The investment in MetroPCS Communications is accounted for using the cost method. The Company continues to monitor the financial condition, cash flow, operational performance and other relevant information about MetroPCS Communications , to evaluate the fair value of this investment. This process is based primarily on information disclosed in MetroPCS periodic filings with the Securities and Exchange Commission. It is impracticable for the Company to determine the fair value of the Company's investment in MetroPCS without incurring excessive costs. The Company accounts for its investment in MetroPCS under the cost method, which amounted to $3,001,200 and $2,696,000 as of June 30, 2004 and June 30, 2003, respectively. The Company owns approximately 0.857% of the total outstanding shares of MetroPCS' Series D Preferred Stock and approximately 0.33% of its total outstanding capital stock on an as-converted basis. In its report on Form 10-K for the year ended December 31, 2003, MetroPCS reported on its consolidated balance sheet total assets of $902,494,000, revenues of $459,482,000, net income of $1,817,000, total stockholder's equity of $84,888,000, and Series D Preferred Stock of $379,401,000. If as a result of its review of information available to the Company regarding MetroPCS, the Company believes its investment should be reduced to a fair value below its cost, the reduction would be charged to "loss on investments" in the consolidated statements of operations. VALUATION ALLOWANCE ON DEFERRED TAXES The Company records deferred tax assets and/or liabilities based upon its estimate of the taxes payable in future years, taking into consideration any change in tax rates and other statutory provisions. The Company continues to post losses from its continuing operations. The losses have generated federal tax net operating losses ("NOLs") which have been carried back to offset prior years' taxable income. As of June 30, 2002 the Company carried back all of its remaining allowable NOLs. After the carryback of the June 30, 2002 federal NOL, the Company cannot carry back any more losses to prior years and as a result any losses incurred subsequent to June 30, 2002 will be carried over to offset future taxable income. California does not allow corporations to carry back their NOLs, and corporations can only carry forward a portion of the NOLs to future years to offset net operating profits. Furthermore, state net operating losses will begin to expire in fiscal 2005. As a result, the Company has established a valuation allowance for state deferred tax assets for which future realization is uncertain. At June 30, 2004 and 2003, the Company had recorded, net deferred tax assets of $379,000 and $383,000, respectively. SUBSEQUENT EVENTS STOCK OPTIONS On July 28, 2004, the Company's Board of Directors granted options under the 2002 Stock Incentive Plan exercisable in the aggregate for 1,700 shares of common stock to the Chief Financial Officer (500), Secretary (500) and two employees (700). All of these common stock options were granted at not less than the fair market value of the common stock on the date of grant, $10.00 per share, and were all fully vested at the time of issuance. CONSULTING AGREEMENTS Effective July 1,2004, the Company and Bugatto Investment Company (of which David Bugatto, a director of the Company, is the President) entered into a consulting agreement that supersedes the agreement dated July 17, 2001, as amended, between the Company and Bugatto Investment Company's principal, David J. Bugatto. Under the new agreement, Bugatto Investment Company is paid an hourly -16- fee of $225.00 for all services provided, instead of the monthly fee of $2,500. In addition, in the event either of the Company's Sonoma County properties is sold during the term of the agreement, Bugatto Investment Company will be paid a fee of 2% of the gross sales price regardless of whether or not a broker is involved. Effective August 1, 2004, the Company entered into a consulting agreement with Thomas Eakin, the Company's Chief Financial Officer. Under this agreement, Thomas Eakin provides financial management and accounting services to the Company at an hourly billing rate of $115.00 per hour, plus expenses. MINIMUM LEASE INCOME The Company has been leasing warehouse space, generating revenues of $1,637,000 in 2004, $1,514,000 in 2003 and $1,447,000 in 2002. The leases have varying terms, which range from month-to-month to expiration dates through 2013. As of June 30, 2004, 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 ------------------------------- 2005 1,378 2006 1,134 2007 539 2008 232 2009 168 Thereafter 580 ------------------ Total $4,031 ================== RELATED PARTY TRANSACTIONS David J. Bugatto, director, entered into a consulting agreement with the Company, whereby David Bugatto provides real estate consulting services to the Company for a monthly fee of $2,500. In addition, in the event that either of the Company's Sonoma County properties are sold during the term of the agreement, David Bugatto will be paid a fee of 2.5% of the sales price if no broker commission is involved and 1.25% of the sales price if a broker is involved in the sale. In the event that either property is refinanced during the term of the agreement, David Bugatto will be paid a fee equal to 1% of the amount of the proceeds received by the Company in excess of its current debt. The agreement is effective until the earlier of its termination by either party or December 31, 2003. During fiscal 2004 and 2003, the Company paid David Bugatto $26,000 and $32,000 for real estate consulting services. As of June 30, 2004, the Company owed David Bugatto $2,500. Effective July 1,2004, the Company and Bugatto Investment Company (of which David Bugatto is the President) entered into a consulting agreement that supersedes the agreement dated July 17, 2001, as amended, between the Company and Bugatto Investment Company's principal, David J. Bugatto. Under the new agreement, Bugatto Investment Company is paid an hourly fee of $225.00 for all services provided, instead of the monthly fee of $2,500. In addition, in the event either of the Company's Sonoma County properties is sold during the term of the agreement, Bugatto Investment Company will be paid a fee of 2% of the gross sales price regardless of whether or not a broker is involved. -17- Thomas R. Eakin, Chief Financial Officer, entered into a consulting agreement with the Company, whereby Thomas Eakin provides financial management and accounting services to the Company. During fiscal 2004 and 2003, the Company incurred $51,000 and $65,000 for financial management and accounting consulting services provided by Thomas Eakin. As of June 30, 2004, there was a payable to Thomas Eakin of $1,200. The independent consulting agreement terminated on July 31, 2004. The Company entered into a new consulting agreement with Thomas Eakin, effective August 1, 2004. Under the agreement, Thomas Eakin provides financial management and accounting services to the Company at an hourly billing rate of $115.00 per hour, plus expenses. Gary L. Hess, director and former President and Chief Executive Officer, entered into an agreement with the Company to sell its remaining Perma-Pak inventory and equipment. During the fiscal year 2004 the Company incurred $1,500 in commissions under this agreement. These expenses are included under Operating Costs - Related Party. As of June 30, 2004, the Company did not owe Gary Hess any commissions under this agreement. On July 17,2001, the Company entered into a separation agreement in principle, which was thereafter executed, with Gary Hess, replacing his existing employment agreement. Pursuant to the separation agreement, Gary Hess continued as President and Chief Executive Officer, first on a full-time basis and then on a part-time basis, through October 31, 2001. Effective September 2001, the Company began paying separation payments to Gary Hess in the amount of $12,500 monthly for 29 months, replacing all payment obligations under his prior employment agreement. The Company's obligation under this agreement of $362,500 was recorded in operating expenses in the first quarter of fiscal 2002. As of June 30, 2004, the Company has paid all of its obligations under this agreement. Pursuant to this separation agreement, the Company also designated Gary Hess for the period beginning July 17, 2001 and ending December 31, 2002, as the Company's exclusive sales representative to sell any and all remaining Perma-Pak finished goods inventory and other Perma-Pak property (inventory and property related to discontinued operations). Under the agreement, Gary Hess was entitled to a commission of 7% on the net purchase price received by the Company up to $250,000 and 50% on the net purchase price above $250,000. As of October 3, 2002, the Company entered into an agreement to sell all of the remaining Perma-Pak finished goods inventory and other Perma-Pak property. As of June 30, 2004, the Company has received $228,000 of the $240,000 total purchase price. The Company has paid commissions to Gary Hess of $60,829 pursuant to this sale and $69,673 in total pursuant to this agreement. Upon receipt of the balance of the total purchase price of $12,000, the Company will owe a commission to Gary Hess of $6,000. As part of the separation agreement, Gary Hess was given until January 29, 2002 to decide whether to extend the period in which he was eligible to exercise the stock options previously granted to him. On January 28, 2002, Gary Hess elected to exercise his option to purchase 80,000 shares of his total outstanding options of 89,474 shares. Gary Hess elected to extend the termination date on his option to purchase the remaining 9,474 shares, through the last date of the severance period (January 31, 2004). On January 23, 2004, Gary Hess elected to exercise his option to purchase the remaining 9,474 shares. As part of the separation agreement the Company agreed to loan Gary Hess up to $447,370 to allow Gary Hess to exercise the aforementioned options. Gary Hess elected to borrow $400,000 to exercise 80,000 stock options at $5 per share. The note dated January 28, 2002 in the amount of $400,000, bears interest at the Applicable Federal Rate (AFR) for loans of three years or less on the date of the note (the AFR at January 28, 2002 was 2.73%), payable quarterly. The note receivable is shown under the Shareholders' Equity section of the balance sheet as Stock Subscription Receivable - Related Party. The interest receivable on this note is included under Interest Receivable - Related Party, on the balance sheet. The Note was payable in full on August 1, 2004. The Note is full recourse and specifically secured by the stock certificates and evidenced in the form of a loan and security agreement. As a result of the extension of the option to purchase the remaining 9,474 shares, the Company incurred a non-cash stock -18- compensation charge in the third quarter ended March 31, 2002 of $22,501. As of August 3, 2004, the Company received payment in full of the note, including accrued interest. Roger S. Mertz, Chairman of the Board, is a partner of the law firm Allen Matkins Leck Gamble & Mallory LLP, which firm serves as the Company's general counsel. During 2004, 2003, and 2002, the Company incurred $323,000, $204,000 and $186,000 respectively, for legal services provided by Allen Matkins. As of June 30, 2004, the Company owed Allen Matkins $19,000. Craig Stapleton, a former director and the Company's largest shareholder is a member of the Board of Directors of MetroPCS Communications. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See Consolidated Financial Statements and Consolidated Financial Statement Schedule Report of Independent Registered Public Accounting Firm.................. F-1 Consolidated Balance Sheets at June 30, 2004 and 2003.................... F-3 Consolidated Statements of Operations for the years ended June 30, 2004, 2003 and 2002............................................................ F-4 Consolidated Statements of Changes in Shareholders' Equity for the years ended June 30, 2004, 2003 and 2002....................................... F-5 Consolidated Statements of Cash Flows for the years ended June 30, 2004, 2003 and 2002............................................................ F-6 Notes to Consolidated Financial Statements............................... F-7 -19- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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, 2004 and 2003, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the three years in the period ended June 30, 2004. These financial statements 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 the standards of the Public Company Accounting Oversight Board (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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of SonomaWest Holdings, Inc. and Subsidiary as of June 30, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2004, in conformity with accounting principles generally accepted in the United States of America. We have also audited Schedule III for each of the three years in the period ended June 30, 2004. In our opinion, this schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information therein. The accompanying consolidated financial statements for the years ended June 30, 2003 and 2002 have been adjusted to reflect the accounting change discussed in Note 2. GRANT THORNTON LLP San Francisco, California, July 25, 2004 F-1 SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2004 AND 2003 (AMOUNTS IN THOUSANDS) ASSETS 2004 2003 ------- ------- CURRENT ASSETS: Cash $ 1,348 $ 1,939 Accounts receivable 131 136 Other receivables 33 12 Interest receivable - Related party 3 3 Prepaid expenses and other assets 135 145 Current deferred income taxes, net 77 124 ------- ------- Total current assets 1,727 2,359 ------- ------- RENTAL PROPERTY, net 1,698 1,731 ------- ------- INVESTMENT, at cost 3,001 2,696 ------- ------- DEFERRED INCOME TAXES 417 259 ------- ------- PREPAID COMMISSIONS AND OTHER ASSETS 163 81 ------- ------- Total assets $ 7,006 $ 7,126 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ 56 $ 1,857 Accounts payable 127 108 Accrued payroll and related liabilities 33 104 Accrued expenses 241 271 Unearned rents and deposits 287 287 ------- ------- Total current liabilities 744 2,627 ------- ------- LONG-TERM DEBT, net of current maturities 1,620 -- ------- ------- OTHER LONG-TERM LIABILITIES 131 131 ------- ------- Total liabilities 2,495 2,758 ------- ------- SHAREHOLDERS' EQUITY: Preferred stock: 2,500 shares authorized; no shares outstanding -- -- Common stock: 5,000 shares authorized, no par value; 1,114 and 1,105 shares outstanding at June 30 2004 and 2003, respectively 2,756 2,675 Stock subscription receivable - Related Party (400) (400) Retained earnings 2,155 2,093 ------- ------- Total shareholders' equity 4,511 4,368 ------- ------- Total liabilities and shareholders' equity $ 7,006 $ 7,126 ======= ======= 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, 2004, 2003, AND 2002 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2004 2003 2002 AS ADJUSTED AS ADJUSTED ------- ----------- ----------- RENTAL REVENUE $ 1,637 $ 1,514 $ 1,447 TENANT REIMBURSEMENTS 413 327 217 ------- ------- ------- TOTAL REVENUE $ 2,050 $ 1,841 $ 1,664 ------- ------- ------- OPERATING COSTS 1,659 1,837 1,668 OPERATING COSTS - RELATED PARTY EXPENSES 401 241 614 ------- ------- ------- TOTAL OPERATING COSTS 2,060 2,078 2,282 ------- ------- ------- OPERATING LOSS (10) (237) (618) INTEREST INCOME 25 46 102 INTEREST EXPENSE (60) (106) (203) OTHER INCOME AND EXPENSE (4) (4) 3 ------- ------- ------- LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (49) (301) (716) INCOME TAX BENEFIT (111) (99) (205) ------- ------- ------- NET INCOME (LOSS) FROM CONTINUING OPERATIONS 62 (202) (511) ------- ------- ------- INCOME FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES -- 177 37 DISCONTINUED OPERATIONS - RELATED PARTY EXPENSES, NET OF INCOME TAXES -- (50) (21) ------- ------- ------- INCOME FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES -- 127 16 ------- ------- ------- NET INCOME (LOSS) $ 62 $ (75) $ (495) ======= ======= ======= WEIGHTED AVERAGE COMMON SHARES AND EQUIVALENTS: Basic 1,109 1,105 1,052 Diluted 1,128 1,105 1,052 EARNINGS (LOSS) PER COMMON SHARE: Continuing operations: Basic $ 0.06 $ (0.18) $ (0.49) Diluted $ 0.05 $ (0.18) $ (0.49) Discontinued operations: Basic $ -- $ 0.11 $ 0.02 Diluted $ -- $ 0.11 $ 0.02 Net income (loss): Basic $ 0.06 $ (0.07) $ (0.47) Diluted $ 0.05 $ (0.07) $ (0.47) 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, 2004, 2003, AND 2002 (AMOUNTS IN THOUSANDS)
COMMON STOCK ------------------------ STOCK TOTAL NUMBER SUBSCRIPTIONS RETAINED SHAREHOLDERS' OF SHARES AMOUNT RECEIVABLE EARNINGS EQUITY ---------- ----------- ------------- ------------ --------------- BALANCE, JUNE 30, 2001 1,024 $ 2,187 $ -- $ 2,661 $ 4,848 Net loss -- -- -- (495) (495) Tender offer reimbursement -- 1 -- 2 3 Exercise of stock options 80 400 (400) -- -- Non-cash stock compensation -- 40 -- -- 40 Issuance of common stock 1 5 -- -- 5 ----- ------- ------- ------- ------- BALANCE, JUNE 30, 2002 1,105 $ 2,633 $ (400) $ 2,168 $ 4,401 Net loss -- -- -- (75) (75) Non-cash stock compensation -- 42 -- -- 42 ----- ------- ------- ------- ------- BALANCE, JUNE 30, 2003 1,105 $ 2,675 $ (400) $ 2,093 $ 4,368 Net income -- -- -- 62 62 Non-cash stock compensation -- 34 -- -- 34 Exercise of stock options 9 47 -- -- 47 ----- ------- ------- ------- ------- BALANCE, JUNE 30, 2004 1,114 $ 2,756 $ (400) $ 2,155 $ 4,511 ===== ======= ======= ======= =======
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, 2004, 2003, AND 2002 (AMOUNTS IN THOUSANDS)
2004 2003 2002 ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 62 $ (75) $ (495) ---------- ---------- ---------- Adjustments to reconcile net loss to net cash provided by operating activities: Loss on the disposition of fixed assets 24 7 -- Income from discontinued operations, net -- (127) (16) Non-cash stock compensation charge 34 42 40 Depreciation and amortization expense 198 293 383 Changes in assets and liabilities: Accounts receivable, net 5 (18) (21) Other receivables (21) 5 101 Interest receivable - Related party -- -- 3 Prepaid income taxes -- 75 212 Prepaid expenses and other assets 10 (24) 8 Deferred income taxes (111) (17) (148) Prepaid commissions and other assets (82) 1 (82) Accounts payable and accrued expenses (11) 73 56 Accrued payroll and related liabilities (71) (149) 201 Unearned rents and deposits -- 5 106 Other long-term liabilities -- -- 31 ---------- ---------- ---------- (25) 166 874 ---------- ---------- ---------- Net cash provided by continuing operations 37 91 379 ---------- ---------- ---------- Net cash (used in) provided by discontinued operations -- (53) 35 ---------- ---------- ---------- Net cash provided by operating activities 37 38 414 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of fixed assets 7 -- -- Capital expenditures (196) (114) (129) Investment in MetroPCS (305) (1,294) (803) ---------- ---------- ---------- Net cash used in investing activities (494) (1,408) (932) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from debt refinancing 1,690 Repayment of debt (1,813) Principal payments of long-term debt (58) (60) (57) Stock repurchase -- -- 3 Exercise of common stock options 47 -- 5 ---------- ---------- ---------- Net cash used for financing activities (134) (60) (49) ---------- ---------- ---------- NET DECREASE IN CASH (591) (1,430) (567) CASH AT BEGINNING OF YEAR (of which $600 was restricted in 2002) 1,939 3,369 3,936 ---------- ---------- ---------- CASH AT END OF YEAR (of which $600 was restricted in 2002) $ 1,348 $ 1,939 $ 3,369 ========== ========== ==========
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, 2004, 2003 AND 2002 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: SonomaWest Holdings, Inc., formerly Vacu-dry Company, ("SonomaWest" or the "Company") was incorporated in 1946 and currently operates as a real estate management and rental company with an investment in MetroPCS Communications, Inc., a public reporting telecommunications company. The Company's rental operations include industrial/agricultural property, some of which was formerly used by the Company in its discontinued businesses. This commercial property is now being rented to third parties. Prior to June 30, 2000 the Company operated in three business segments: organic packaged goods, real estate, and ingredients. In July 1999, the Company consummated an asset purchase agreement to sell the majority of its ingredients business. 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. BASIS OF PRESENTATION The accompanying financial statements include the accounts of SonomaWest and its 85 percent-owned subsidiary, MINCO. As of June 30, 2001, all of the remaining assets of MINCO have been sold and in 2002 MINCO was liquidated. The accompanying consolidated statements of operations reflect the financial results of MINCO as part of discontinued operations. All significant intercompany transactions have been eliminated in consolidation. SUPPLEMENTAL STATEMENTS OF CASH FLOWS INFORMATION 2004 2003 2002 -------- -------- -------- Cash paid for: Interest $ 102 $ 140 $ 145 ======== ======== ======== Income taxes $ 1 $ 1 $ 2 ======== ======== ======== PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is computed using the straight-line method based upon the estimated useful lives of the assets as follows: Buildings and improvements 5 to 45 years Machinery and office equipment 3 to 15 years F-6 Rental property consists of the following as of June 30: 2004 2003 ---------- ---------- Land $ 231 $ 231 Buildings, machinery and improvements 6,907 6,652 Office equipment and autos 90 144 Construction in progress 33 110 ---------- ---------- Total rental property 7,261 7,137 Accumulated depreciation (5,563) (5,406) ---------- ---------- Net rental property $ 1,698 $ 1,731 ========== ========== Improvements that extend the life of the asset are capitalized; other maintenance and repairs are expensed. The cost of maintenance and repairs was $30 in 2004, $89 in 2003, and $63 in 2002. IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews long-lived assets 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. INVESTMENT The investment in MetroPCS Communications is accounted for using the cost method. The Company continues to monitor the financial condition, cash flow, operational performance and other relevant information about MetroPCS Communications, to evaluate the fair value of this investment. This process is based primarily on information disclosed in MetroPCS Communications' periodic filings with the Securities and Exchange Commission. It is impracticable for the Company to determine the fair value of the Company's investment in MetroPCS without incurring excessive costs. The Company accounts for its investment in MetroPCS Communications under the cost method, which amounted to $3,001,200 and $2,696,000 as of June 30, 2004 and June 30, 2003, respectively. The Company owns approximately 0.857% of the total outstanding shares of MetroPCS Communications' Series D Preferred Stock and approximately 0.33% of its total outstanding capital stock on an as-converted basis. In its report on Form 10-K for the year ended December 31, 2003, MetroPCS Communications reported on its consolidated balance sheet total assets of $902,494,000, revenues of $459,482,000, net income of $1,817,000, total stockholder's equity of $84,888,000, and stockholders' equity attributable to the Series D Preferred Stock of $379,401,000. If as a result of its review of information available to the Company regarding MetroPCS Communications , the Company believes its investment should be reduced to a fair value below its cost, the reduction would be charged to "loss on investments" on the consolidated statements of operations. On March 23, 2004 MetroPCS filed a registration statement with the Securities and Exchange Commission for an initial public offering of its common stock. On July 28, 2004 MetroPCS announced that it had determined not to proceed at that time with the planned initial public offering of common stock pending a review of certain accounting issues that had come to its attention relating to its previously F-7 disclosed financial statements. On August 12, 2004 MetroPCS formally withdrew the registration. There is no certainty about when, or if at all MetroPCS will be able to complete a public offering of its securities or that the Company will be able to achieve liquidity for its investment. PREPAID COMMISSIONS The Company capitalizes rental commissions paid to real estate brokers and amortizes these commissions over the term of the lease. EARNINGS PER SHARE CALCULATION Basic net earnings (loss) per share is computed by dividing net earnings (loss) by the weighted average number of shares outstanding. Diluted net earnings (loss) per share is computed by dividing net earnings (loss) by the sum of the weighted average number of shares outstanding plus the dilutive potential common shares. The dilutive effect of stock options is computed using the treasury stock method. Dilutive securities are excluded from the diluted net earnings (loss) per share computation if their effect is anti-dilutive. During 2004, 2003 and 2002, 0, 51 and 2 stock options were excluded from diluted shares used in the computation of diluted earnings per share from discontinued operations as their effect was anti-dilutive. During 2004, 2003 and 2002, 0, 76 and 52 stock options were excluded from the diluted loss per share from continuing operations as their effect was anti-dilutive. INCOME TAXES The Company records income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109 requires the Company to compute deferred taxes based upon the amount of taxes payable in future years after considering changes in tax rates and other statutory provisions that will be in effect in those years. Deferred taxes are recorded based upon differences between the financial statement and tax bases of assets and liabilities and available tax credit carryforwards. A valuation allowance is provided for deferred tax assets, if their realization is uncertain. REVENUE RECOGNITION Revenue is recognized on a monthly basis, based upon the dollar amount specified in the related lease. The Company requires that all tenants be covered by a lease. The Company does not have leases that include provisions that require the lessee to pay the lessor any additional rent based upon the lessee's sales or any other financial performance levels. Reimbursements of certain costs received from tenants are recognized as tenant reimbursement revenues. F-8 MINIMUM LEASE INCOME The Company leases warehouse space that generated revenues of $1,637,000 in 2004, $1,514,000 in 2003 and $1,447,000 in 2002. The leases have varying terms, which range from month-to-month to expiration dates through 2013. As of June 30, 2004, assuming none of the existing leases is renewed or no additional space is leased, the following is the future minimum lease income (in thousands): YEAR ENDING JUNE 30 ------------------------------- 2005 1,378 2006 1,134 2007 539 2008 232 2009 168 Thereafter 580 ------------------ Total $4,031 ================== ALLOWANCES FOR DOUBTFUL ACCOUNTS The Company makes judgments as to its ability to collect outstanding receivables and provide allowances for the portion of receivables when collection becomes doubtful. Provisions are made based upon a specific review of all outstanding invoices. As of June 30, 2004, no allowances for outstanding receivables were considered necessary. The Company performs a credit review process on all prospective tenants. The extent of the credit review is dependant on the dollar value of the lease. CONCENTRATION OF CREDIT RISK Benziger Family Winery accounted for 18%, 19% and 21% of rental revenues for the fiscal years ended June 30, 2004, 2003 and 2002, respectively. In addition, Benziger Family Winery accounted for and 23% and 24% of the accounts receivable balance as of the fiscal years ended June 30, 2004 and 2003, respectively. The loss of Benziger Family Winery as a tenant would have a material adverse effect on the operating results of the real estate operations. GEOGRAPHIC CONCENTRATION The Company's rental revenues come from two properties located in Northern California and more particularly Sonoma County. Events and conditions applicable to owners and operators of real property that are beyond our control may decrease the value of our properties. These events include: local oversupply or reduction in demand for office, industrial or other commercial space; inability to collect rent from tenants; vacancies or inability to rent spaces on favorable terms; inability to finance property development on favorable terms; increased operating costs, including insurance premiums, utilities, and real estate taxes; costs of complying with changes in governmental regulations; the relative illiquidity of real estate investments; changing sub-market demographics and property damage resulting from seismic activity. The geographical concentration of our properties may expose us to greater economic risks than if we owned properties in several geographic regions. Any adverse economic or real estate developments in the Sonoma County region could adversely impact our financial condition, results from operations, cash flows, quoted per share trading price of our common stock and ability to satisfy our debt service obligations. The economic environment in Sonoma County has improved since last year. In a recent report prepared for the Sonoma County Economic Development Board by Economy.com, Inc., dated May 2004, they state "Sonoma County's economy is past its worst point of the business cycle and will begin to F-9 improve in coming months." "A clear path to recovery is not evident yet, but the local economy is beginning to get back on its feet. " As part of this economic recovery, we anticipate the commercial, industrial and office markets in Sonoma County will also experience positive effects from this recovery. Obtaining new tenants for our properties generally requires taking tenants from competitor properties. There is no assurance that the market will significantly improve in the near future. STOCK-BASED COMPENSATION Effective July 1, 2002, the Company has elected to account for all prospective stock options in accordance with SFAS 123, "Accounting for Stock-Based Compensation", and as permitted by SFAS 148. As a result, during fiscal 2004 and 2003, the Company incurred charges included in continuing operations of $34 and $42 related to the issuance of 24 and 24 fully vested stock options to the directors, officers and certain employees of the Company, respectively. No additional stock options had been granted as of June 30, 2004. Prior to July 1, 2002, The Company accounted for stock-based compensation plans in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," under which compensation cost was recorded as the difference between the fair value and the exercise price at the date of grant, and was recorded on a straight-line basis over the vesting period of the underlying options. Prior to July 1, 2002, the Company had adopted the disclosure only provisions of Statement of Financial Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation". The Company continues to account for stock options granted prior to July 1, 2002 in accordance with APB 25; and thus, continues to apply the disclosure only provisions of SFAS 123 to such options. No other compensation expense has been recognized in the accompanying financial statements pursuant to stock options issued prior to July 1, 2002 as the option terms are fixed and the exercise price equals the market price of the underlying stock on the date of grant for all options granted by the Company. Had compensation cost for the stock options granted prior to July 1, 2002 been determined based upon the fair value at grant dates for awards under those plans consistent with the method prescribed by SFAS 123, the net loss would have been increased to the pro forma amounts indicated below: FOR THE YEAR ENDED JUNE 30, 2004 2003 2002 Net Income (Loss), as reported $62 $(75) $(495) Add back: Actual Stock Compensation Expense--Net of taxes $20 $25 $28 Less: Proforma Stock Compensation Change--Net of taxes $(24) $(30) $(73) Pro-forma Net Income (Loss) $58 $(80) $(540) Earnings (Loss) Per Share: Basic and diluted- as reported $0.05 $(0.07) $(0.47) Basic and diluted- pro-forma $0.05 $(0.07) $(0.51) 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 2004, 2003 and 2002 F-10 grants, respectively: weighted average risk-free interest rates of 3.08, 3.54 and 4.78 percent; expected dividend yield of 0 percent; expected life of four years for the Plan options; and expected volatility of 24, 23.8 and 25.8 percent. For options granted during the fiscal years ended June 30,2004, 2003 and 2002, the weighted average fair value as of the grant date was $2.13, $1.95, and 1.39 respectively. USE OF ESTIMATES The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). These accounting principles require management to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management's judgment in its application. There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result. DERIVATIVES The Company had a variable rate borrowing tied to the LIBOR rate. To reduce its exposure to changes in the LIBOR rate, the Company entered into an interest rate swap contract. The swap contract terminated on December 1, 2003. Under the terms of the swap contract, the Company exchanged monthly, the difference between fixed and floating interest amounts calculated on an initial agreed-upon notional amount of $2,100. The notional amount was amortized monthly based on the Company's principal payments. The interest rate contract had a five-year term that coincided with the term of the borrowing, both of which began on December 1, 1998 and end on December 1, 2003. In accordance with Statement of Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") the Company reports all changes in fair value of its swap contract in earnings. The Company did not designate this swap as a formal hedge. As of the termination of this swap contract on December 1, 2003, the Company wrote-off the remaining value of this swap contract of $37. This amount was included as a reduction of interest expense. RECLASSIFICATIONS Certain reclassifications have been made to the 2003 and 2002 consolidated financial statements to conform to the current year presentation adopted for fiscal 2004 and as required with respect to discontinued operations. 2. REVISION OF PREVIOUSLY REPORTED AMOUNTS During the third quarter of fiscal 2004, the Company concluded that tenant reimbursements are more appropriately classified as a separate line item of revenue rather than as a reduction of operating costs. Accordingly, the accompanying statements of operations for the year ended June 30, 2004 reflect tenant reimbursements as a separate line item of revenue. Comparative statements of operations for the years ended June 30, 2002 and 2003 have been reclassified to reflect the current period presentation. The revenue and operating cost reclassifications below reflect an increase in revenue and a corresponding increase in operating costs in the amounts of $217, and $327 for the years ended June 30, 2002 and 2003, F-11 respectively. The reclassifications have no impact on previously reported operating income (loss), net loss or net loss per share amounts. The results of the reclassifications are as follows: Statement of Operations Data: Year ended June 30, 2002 As originally reported Reclassifications As Adjusted Tenant Reimbursements $ -- $217 $217 Total Revenues $1,447 $217 $1,664 Operating Costs $2,065 $217 $2,282 Year ended June 30, 2003 As originally reported Reclassifications As Adjusted Tenant Reimbursements $ -- $327 $327 Total Revenues $1,514 $327 $1,841 Operating Costs $1,751 $327 $2,078 The Company has no tenant related reimbursements that are not part of tenant lease agreements. 3. LONG-TERM DEBT: Long-term debt consists of the following: 2004 2003 ---------- ---------- Note payable: term loan due December 1, 2005, fluctuating interest rate equal to the banks prime rate plus .25%, principal payments of $5 due monthly, secured by real property 1,676 -- Note payable: five-year note, interest effectively fixed at 7.35 percent, interest and principal due monthly, maturing in December 2003, secured by real property 1,857 ---------- ---------- Less: Current maturities (56) (1,857) ---------- ---------- Long-term debt $ 1,620 $ 0 ========== ========== On March 1, 2004, the Company entered into a credit agreement with its bank to loan the Company $1,690, the proceeds of which were used to refinance the balance outstanding to the bank as of February 28, 2004 of $1,813, on the $2.1 million promissory note dated November 17, 1988. The balance of the refinancing of $123, was paid by the Company in cash. The term note bears interest at the bank's prime rate plus .25%, with monthly principal payments of $4.6 beginning April 1, 2004 with a final installment of the remaining principal due on December 1, 2005. The note is secured by a first deed of trust on the Company's property located at 1365 Gravenstein Highway South, Sebastopol, CA. As of June 30, 2004, the Company's debt service coverage ratio was 1.43 to 1, which is greater than the required minimum of 1.25 to 1. Prior to entering into the new credit agreement with the Company's bank on March 1, 2004, the Company had a lending agreement with its bank that contained certain covenants and conditions. This agreement had been amended over time, the last of which was on August 15, 2001, whereby the bank agreed to modify the financial covenant to provide that the Company, at the end of each fiscal year, F-12 maintain a debt service coverage ratio of at least 1.05 to 1. It required that until such time as this ratio reaches 1.25 to 1, the Company was required to maintain restricted, unencumbered cash or marketable securities of at least $600. Furthermore, the terms of the loan restrict the Company from incurring any additional indebtedness during the term of the loan. The new addendum required that in addition to the lien on the Real Property (South Property only) it granted the bank a lien on a Money Market account, in the amount of $90. As of June 30, 2003, the Company achieved the debt service coverage ratio of 1.25 to 1 and as a result the $600 of cash or marketable securities and the lien on the Money Market account were no longer required. 4. PROVISION FOR INCOME TAXES AND DEFERRED INCOME TAXES: At June 30, 2004 the Company reversed the 100% valuation allowance that had been maintained against its deferred tax assets since the fiscal year ended June 30, 2001. As a result, the Company recorded a reversal of valuation allowance in the amount of $115, resulting in a total income tax benefit of $111 for year ended June 30, 2004. For the years ended June 30, 2004, 2003, and 2002, the provision or benefit from income taxes consisted of the following: 2004 2003 2002 -------- -------- -------- Current: Federal $ -- $ -- $ (75) State -- -- -- Deferred: Federal 5 (17) (153) State (116) 2 29 -------- -------- -------- Provision (Benefit) $ (111) $ (15) $ (199) ======== ======== ======== The components of the provision (benefit) related to continuing operations and discontinued operations are as follows: 2004 2003 2002 -------- -------- -------- Continuing operations $ (111) $ (99) $ (205) -------- -------- -------- Discontinued operations -- 84 6 -------- -------- -------- Provision (Benefit) $ (111) $ (15) $ (199) ======== ======== ======== A reconciliation of the federal statutory rate to the tax provision for the years ended June 30 follows: 2004 2003 2002 % % % -------- -------- -------- Benefit at federal statutory rate 34% 34% 34% State taxes, less federal tax benefit 2% 2% 6% Valuation allowance on deferred state tax (236%) (18%) (9%) Tax credits and other (27)% (1%) (2%) -------- -------- -------- Total Provision (Benefit) (227)% 17% 29% ======== ======== ======== F-13 Deferred tax assets and liabilities consisted of the following: 2004 2003 -------- -------- Deferred tax assets: Employee benefit accruals $ 6 $ 34 Accrued liabilities and reserves 10 16 Depreciation 140 130 Interest rate swap -- 15 Net operating losses 276 211 Other 95 94 -------- -------- Total deferred tax assets 527 500 -------- -------- Deferred tax liabilities: Property taxes (34) (34) -------- -------- Total deferred tax liabilities (34) (34) -------- -------- Valuation allowance -- (83) -------- -------- $ 493 $ 383 ======== ======== As of June 30,2004 the Company had federal net operating loss carry forwards ("NOLs") totaling approximately $666 that expire at various times through 2024. For state purposes, the Company had net operating loss carry forwards totaling approximately $858, which expire at various times through 2009. The majority of the NOLs originated primarily from taxable losses incurred subsequent to the Company's sale of its apple processing business. Though the Company has reported taxable losses in recent years, the pending initial public offering of MetroPCS is expected to result in significant realized investment gains as the Company plans to sell a portion of it's investment upon completion of the MetroPCS initial public offering. Consequently, management believes that it is more likely than not that the Company will generate sufficient taxable income in the foreseeable future, to utilize all of its deferred tax assets. 5. STOCK APPRECIATION RIGHTS PLAN: In fiscal 2002, the Company terminated its stock appreciation rights (SAR) plan. In prior years, key employees were granted rights entitling them to market price increases in the Company's stock. As of June 30, 2001, 100 SARs were authorized. The Company has not granted SARs since 1995, and all employees holding SARs were among those terminated during fiscal 2000 in connection with the discontinuation of the ingredients segment. As a result, all remaining SARs were canceled during fiscal 2000. In 2002 there was no charge against earnings as a result of the SAR plan. 6. EMPLOYEE STOCK PURCHASE PLAN: In fiscal 2002, the Company terminated its Employee Stock Purchase Plan. Prior to termination, the Plan enabled substantially all employees to purchase a specified number of shares of the Company's common stock at 85 percent of the market value on the first or last business day of the quarterly offering period, whichever is lower. A maximum of 100 shares were authorized for issuance over the ten-year term of the plan that began on January 1, 1994. The following shares were issued under the terms of the plan during the five fiscal years ending June 30: Shares Issued Average Price Per Share ------------- ----------------------- 2004 -0- $-0- 2003 -0- $-0- 2002 1 $6.00 F-14 7. EMPLOYEE STOCK OPTION PLAN: On July 31, 2002, the Company's Board of Directors approved the SonomaWest Holdings, Inc. 2002 Stock Incentive Plan (the "2002 Plan"). The 2002 Plan is designed to benefit the Company and its shareholders by providing incentive based compensation to encourage officers, directors, consultants and other key employees of the Company and its affiliates to attain high performance and encourage stock ownership in the Company. The 2002 Plan serves as the successor program to the Company's previously adopted 1996 Stock Option Plan. No further options will be granted under the 1996 Stock Option Plan. The maximum number of shares of Common Stock issuable over the term of the 2002 Plan will initially be limited to 75 shares. On July 30, 2003, the Company's Board of Directors granted options under the 2002 Plan exercisable in the aggregate for 22.5 shares of common stock to the following Directors: Roger S. Mertz - 7.5, David J. Bugatto - 5.0, Gary L. Hess - 5.0, Fredric Selinger - 5.0. In addition to the Directors, the Board of Directors also granted options under the 2002 Plan exercisable in the aggregate for 1.7 shares of common stock to other officers and employees. All of these common stock options were granted at the market price on the date of grant of $5.05 per share. Prior to adoption of the 2002 Stock Incentive Plan, the Company administered the 1996 Stock Option Plan (the "1996 Plan"). As amended, the 1996 Plan provided for the issuance of options to employees and non-employee consultants exercisable for an aggregate of 275 shares of common stock. During May 1999, the Company modified its 1996 Plan to include all non-bargaining 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. In connection with adoption of the 2002 Plan, no future options will be granted under the 1996 Plan. F-15 A summary of the status of the Company's stock option plan at June 30, 2004, 2003 and 2002 with changes during the years ended are presented in the table below: OPTIONS WEIGHTED AVERAGE EXERCISE PRICE Balance, June 30, 2001 108 $5.06 Granted 25 7.48 Cancelled (1) (5.28) Exercised (80) (5.00) Balance, June 30, 2002 52 $6.31 Granted 24 7.20 Cancelled 0 - Exercised 0 - Balance, June 30, 2003 76 $ 6.59 Granted 24 5.05 Cancelled 0 - Exercised (9) ($ 5.00) -------------------------------------------- Balance, June 30, 2004 91 $ 6.35 ============================================ Options outstanding, exercisable, and vested by price range at June 30, 2004, are as follows:
WEIGHTED AVERAGE WEIGHTED AVERAGE OPTIONS VESTED AND REMAINING FAIR VALUE OF OPTIONS OUTSTANDING EXERCISABLE AT CONTRACTUAL LIFE OPTIONS GRANTED, AT EXERCISE PRICE AT JUNE 30, 2004 JUNE 30, 2004 (YEARS) GRANT DATE - ------------------------- ---------------------- ----------------------- ---------------------- ---------------------- $ 5.00 15 15 5.8 $ 1.98 $ 5.05 24 24 9.1 1.39 $ 5.28 1 1 5.7 2.10 $ 7.20 24 24 8.1 1.95 $ 7.48 25 25 7.0 2.13 $ 8.00 2 2 4.8 4.24 ---------------------------------------------- ---------------------- 91 91 $ 1.91 ============================================== ======================
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 2004, 2003 and 2002 grants, respectively: weighted average risk-free interest rates of 3.08, 3.60 and 4.78 percent; expected dividend yield of 0 percent; expected life of five years for the Plan options; and expected volatility of 24, 22 and 25.83 percent. Pursuant to his separation agreement (see Note 10), the Company's former President and Chief Executive Officer, Gary L. Hess, was given until January 29, 2002 to decide whether to extend the period in which he was eligible to exercise the stock options previously granted to him. On January 28, 2002, Gary Hess elected to exercise his option to purchase 80 shares of his total outstanding options of 89 shares. Gary Hess elected to extend the termination date on his option to purchase the remaining 9 shares, through the last date of the severance period (January 31, 2004). As part of the separation agreement the Company agreed to loan Gary Hess up to $447 to allow Gary Hess to exercise the aforementioned options. Gary Hess elected to borrow $400 to exercise 80 stock options at $.005 per share. The note dated January 28, 2002 in the amount of $400 bears interest at the Applicable Federal Rate (AFR) for loans of three years or less on the date of the note (the AFR at January 28, 2002 was 2.73%), payable quarterly. The Note was payable in full on August 1, 2004. The Note is full recourse and specifically secured by the stock certificates and evidenced in the form of a loan and security agreement. As a result F-16 of the extension of the option to purchase the remaining 9 shares, the Company incurred a non-cash stock compensation charge in the third quarter ended March 31, 2002 of $22. As of August 3, 2004 the Company received payment in full of the note, including accrued interest. 8. COMMITMENT AND CONTINGENCIES: The Company leased office space under an operating lease that expired in December 2003. The space had been sublet through the term of the lease at approximately the Company's lease rate. For the year ended June 30, 2004, minimum rental payments exceeded sublease receipts by $(3). Rental expense under operating leases was $68 in 2004, $85 in 2003 and $183 in 2002. Related sub-lease income was $71, $189, and $184 in 2004, 2003 and 2002 respectively. As of June 30, 2004, the Company has completely funded its $3 million minority investment in the Series D Preferred Stock of MetroPCS Communications, Inc., a public reporting telecommunications company. The Company accounts for its investment in MetroPCS Communications under the cost method. The Company owns approximately 0.857% of the total outstanding shares of Series D Preferred Stock and approximately 0.33% of the total outstanding capital stock on an as-converted basis. LITIGATION From time to time, the Company is a party to lawsuits and claims arising out of the normal course of business. As of June 30, 2004, the Company was not a party to any legal proceedings. 9. RETIREMENT PLANS: In fiscal 2002, the Company terminated its contributory retirement savings and profit sharing plan. The Plan called for Company contributions of one and one-half times the first 3 percent of employee contributions to the retirement savings plan. Profit-sharing contributions were derived using a specific formula based upon the Company's earnings. The Company did not make contributions to the retirement savings and profit sharing plan in 2002. 10. RELATED-PARTY TRANSACTIONS: David J. Bugatto, director, entered into a consulting agreement with the Company, whereby David Bugatto provides real estate consulting services to the Company for a monthly fee of $2.5. In addition, in the event that either of the Company's Sonoma County properties are sold during the term of the agreement, David Bugatto will be paid a fee of 2.5% of the sales price if no broker commission is involved and 1.25% of the sales price if a broker is involved in the sale. In the event that either property is refinanced during the term of the agreement, David Bugatto will be paid a fee equal to 1% of the amount of the proceeds received by the Company in excess of its current debt. The agreement is effective until the earlier of its termination by either party or December 31, 2003. During fiscal 2004 and 2003, the Company paid David Bugatto $26 and $32, for real estate consulting services. As of June 30, 2004, the Company owed David Bugatto $3. Effective July 1,2004, the Company and Bugatto Investment Company (of which David Bugatto is the President) entered into a consulting agreement that supercedes the agreement dated July 17, 2001, as amended, between the Company and Bugatto Investment Company's principal, David J. Bugatto. Under the new agreement, Bugatto Investment Company is paid an hourly fee of $225.00 for all services provided, instead of the monthly fee of $2.5. In addition, in the event either of the Company's Sonoma County properties is sold during the term of the agreement, Bugatto Investment Company will be paid a fee of 2% of the gross sales price regardless of whether or not a broker is involved. F-17 Thomas R. Eakin, CFO, entered into a consulting agreement with the Company, whereby Thomas Eakin provides financial management and accounting services to the Company. During fiscal 2004 and 2003, the Company incurred $51 and $65, for financial management and accounting consulting services provided by Thomas Eakin. As of June 30, 2004, there was a payable to Thomas Eakin of $1. The independent consulting agreement terminated on July 31, 2004. The Company entered into a new consulting agreement with Thomas Eakin, effective August 1, 2004. Under the agreement, Thomas Eakin provides financial management and accounting services to the Company at an hourly billing rate of $115.00 per hour, plus expenses. Gary L. Hess, director, entered into an agreement with the Company to sell its Perma-Pak inventory and equipment. During fiscal 2004, the Company incurred $2 in commissions under this agreement. As of June 30, 2004, there was $0 payable to Gary Hess. On July 17,2001, the Company entered into a separation agreement in principle, which was thereafter executed, with its President and Chief Executive Officer, a current board member, Gary L. Hess, replacing Gary Hess' existing employment agreement. Pursuant to the separation agreement, Gary Hess continued as President and Chief Executive Officer, first on a full-time basis and then on a part-time basis, through October 31, 2001. Effective September 2001, the Company began paying separation payments to Gary Hess in the amount of $12.5 monthly for 29 months, replacing all payment obligations under his prior employment agreement. The Company's obligation under this agreement of $362.5 was recorded in operating expenses in the first quarter of fiscal 2002. As part of the separation agreement, Gary Hess was given until January 29, 2002 to decide whether to extend the period in which he was eligible to exercise the stock options previously granted to him. On January 28, 2002, Gary Hess elected to exercise his option to purchase 80 shares of his total outstanding options of 89 shares. Gary Hess elected to extend the termination date on his option to purchase the remaining 9 shares, through the last date of the severance period (January 31, 2004). As part of the separation agreement the Company agreed to loan Gary Hess up to $447 to allow Gary Hess to exercise the aforementioned options. Gary Hess elected to borrow $400 to exercise 80 stock options at $5.00 per share. The note dated January 28, 2002 in the amount of $400 bears interest at the Applicable Federal Rate (AFR) for loans of three years or less on the date of the note (the AFR at January 28, 2002 was 2.73%), payable quarterly. The Note was payable in full on August 1, 2004. The Note is full recourse and specifically secured by the stock certificates and evidenced in the form of a loan and security agreement. As a result of the extension of the option to purchase the remaining 9 shares, the Company incurred a non-cash stock compensation charge in the third quarter ended March 31, 2003 of $43. As of August 3, 2004 the Company received payment in full of the note, including accrued interest. Roger S. Mertz, Chairman of the Board, is a partner of the law firm Allen Matkins Leck Gamble & Mallory LLP, which firm serves as the Company's general counsel. During 2004, 2003, and 2002, the Company incurred $323, $204 and $186 respectively, for legal services provided by Allen Matkins. As of June 30, 2004, the Company owed Allen Matkins $19. Craig Stapleton, a former director and the Company's largest shareholder is a member of the Board of Directors of MetroPCS Communications. F-18 11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Quarter Ended 9/30/02 12/31/02 3/31/03 6/30/03 9/30/03 12/31/03 3/31/04 6/30/04 As As As As As As Adjusted Adjusted Adjusted Adjusted Adjusted Adjusted -------------------------------------------------------------------------------------------- Total revenue $469 $454 $450 $468 $542 $500 $447 $561 Operating profit (loss) $(82) $(222) $22 $45 $(46) $4 $(76) $108 Net income (loss) from continuing $(96) $(163) $7 $50 $(47) $(16) $(48) $173 operations Income (loss) from discontinued $43 $77 $(4) $11 -- -- -- -- operations, Net of income taxes Net income (loss) $(53) $(86) $3 $61 $(47) $(16) $(48) $173 Earnings (loss) per share: Continuing operations $(.09) $(.15) $.01 $.05 $(.04) $(.01) $(.04) $.16 Discontinued operations $.04 $.07 $.00 $.01 -- -- -- -- Net income (loss) $(.05) $(.08) $.00 $.06 $(.04) $(.01) $(.04) $.15
F-19 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. ITEM 9A. CONTROLS AND PROCEDURES As of June 30, 2004, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chairman of the Board and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e)). Based upon that evaluation, the Company's Chairman of the Board and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective at a reasonable level in timely alerting them to material information relating to the Company that is required to be included in the Company's periodic filings with the Securities and Exchange Commission. There has been no change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected or is reasonably likely to materially affect, the Company's internal control over financial reporting. The Company's management, including the Chairman of the Board and Chief Financial Officer, do not expect that the Company's disclosure controls or internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met due to numerous factors, ranging from errors to conscious acts of an individual, or individuals acting together. In addition, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of inherent limitations in a cost-effective control system, misstatements due to error and/or fraud may occur and not be detected. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The information regarding directors and executive officers appearing under the heading "Proposal 1: Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" of our proxy statement relating to our 2004 Annual Meeting of Stockholders to be held on October 27, 2004 (the "2004 Proxy Statement") is incorporated into this item by reference. The Company has adopted a code of ethics that applies to all employees, including its principal executive officer, principal financial officer, principal accounting officer and its Board of Directors. A copy of the code of ethics attached as an exhibit to this Report. The names of the executive officers and directors of the Company and their ages, titles, and biographies as of the date hereof are set forth below: ROGER S. MERTZ; AGE 60; CHAIRMAN OF THE BOARD. Mr. Mertz was appointed Chairman of the Board on October 31, 2001. Mr. Mertz is an attorney-at-law. He is a partner of the California law firm of Allen Matkins Leck Gamble & Mallory LLP. Prior to October 1999, Mr. Mertz was a partner of the San Francisco, California law firm of Severson & Werson. -21- THOMAS R. EAKIN; AGE 50; CHIEF FINANCIAL OFFICER. Mr. Eakin has served as the Company's Chief Financial Officer since October 31, 2001 and also served in such capacity from March 1987 to April 1999. Mr. Eakin served as the Company's Controller from December 1983 to February 1987. Since July 2000, Mr. Eakin has also owned, managed and served as a consultant for Eakin Consulting. From April 1999 to June 2000, Mr. Eakin served as Chief Financial Officer for Associated Vintage Group, a custom wine producer in Graton, California. DAVID J. BUGATTO; 40; DIRECTOR. Mr. Bugatto is President and Chief Executive Officer of Alleghany Properties, Inc. ("API") and Sacramento Properties Holdings Inc. ("SPHI") (real estate investments), which are subsidiaries of Alleghany Corporation, a publicly traded corporation on the NYSE. Mr. Bugatto is also a Director of both API and SPHI. GARY L. HESS; 52; DIRECTOR. Mr. Hess served as President and Chief Executive Officer of the Company from May 1, 1996 until October 31, 2001, and Chief Financial Officer from June 14, 1999 until October 31, 2001. Prior thereto he was a Senior Vice President of Dole Food Company, Inc. (fresh and processed fruit) (1993-1996); President of Cadace Enterprises, Inc. (water conservation products) and The Marketing Partnership 1992-1993; and Director of Marketing, E. & J. Gallo Winery (wine and distilled spirits) (1987-1992). FREDRIC SELINGER; 65; DIRECTOR. Mr. Selinger is Senior Managing Director of Corporate Finance of Sutter Securities, Incorporated (investment banking and consulting). Prior to March 1995, Mr. Selinger was Managing Director of Jackson Square Capital Corp. (private investment banking and consulting). ITEM 11. EXECUTIVE COMPENSATION The information appearing under the headings "Compensation of Directors," "Compensation Committee Report," "Executive Compensation", "Compensation Committee Interlocks and Insider Participation", and "Performance Graph" of our 2004 Proxy Statement is incorporated into this item by reference (except to the extent allowed by Item 402(a)(8) of Regulation S-K). ITEM 12. SECURITY OWNERSHIP OF DIRECTORS, OFFICERS AND CERTAIN BENEFICIAL OWNERS The information appearing under the heading "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Directors and Executive Officers" of our 2004 Proxy Statement is incorporated into this item by reference. In addition, the information regarding equity compensation plans appearing under the heading "Equity Compensation Plan Information" of our 2004 Proxy Statement is incorporated into this item by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information appearing under the heading "Certain Relationships and Related Transactions" of our 2004 Proxy Statement is incorporated into this item by reference. ITEM 14. Principal Accountant Fees and Services The information appearing under the heading "Fees to Independent Auditors for Fiscal 2004 and 2003" of our 2004 Proxy Statement is incorporated into this item by reference. -22- PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K. I. Documents filed as part of this Report: (a)(1) Financial Statements The information required by this Item appears in Item 8 of this Annual Report on Form 10-K. (a)(2) Financial Statement Schedules Financial statement schedules not included herein have been omitted because of the absence of conditions under which they are required or because the required information, where material, is shown in the financial statements or notes thereto. Schedule III.* Real Estate and Accumulated Depreciation *Schedule included after signature page. (a)(3) EXHIBITS Exhibit No. Document Description 3.1(1) Restated Articles of Incorporation 3.2 Bylaws 10.1(2) 1996 Stock Option Plan, as amended 10.2(3) Severance Agreement dated July 17, 2001 between SonomaWest Holdings, Inc. and Gary L. Hess 10.3(4) SonomaWest Holdings, Inc. 2002 Stock Incentive Plan 10.4 Consulting Agreement dated August 1, 2004 between SonomaWest Holdings, Inc. and Thomas R. Eakin, d.b.a. Eakin Consulting. 10.5 Consulting Agreement dated July 1, 2004 between SonomaWest Holdings, Inc. and Bugatto Investment Company. 11.1 Computation of Per Share Earnings 14.1 Code of Business Conduct and Ethics 23.1 Consent of Independent Registered Public Accounting Firm 31.1+ Chairman of the Board Certification of Periodic Financial Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2+ Chief Financial Officer Certification of Periodic Financial Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. -23- 32.1* Chairman of the Board Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 32.2* Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 99.1 Complaint Procedure and Nonretaliation Policy for Accounting, Securities and Shareholder Matters - --------------------- (1) Incorporated by reference to the registrant's Current Report on Form 8-K(File No. 000-01912) filed on January 2, 2001. (2) Incorporated by reference to the registrant's Registration Statement on Form S-8 (File No. 333-84295) filed on August 2, 1999. (3) Incorporated by reference to the registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2001, filed on September 28, 2001 (File No. 000-01912). (4) Incorporated by reference to the registrant's Annual Report on Form 10-K for the fiscal year ended June 30,2002, filed on September 20, 2002 (File No. 000-01912). + Filed herewith. * Furnished herewith. (b) REPORTS ON FORM 8-K The Company did not file any reports on Form 8-K during the quarter ended June 30, 2004. -24- 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 28, 2004 SONOMAWEST HOLDINGS, INC. By: /S/ ROGER S. MERTZ ----------------------------------------- Roger S. Mertz, Chairman of the Board By: /S/ THOMAS R. EAKIN ----------------------------------------- Thomas R. Eakin, Chief Financial Officer POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints Roger S. Mertz and Thomas R. Eakin, and each of them, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting to said attorneys-in-fact, or his substitute or substitutes, the power and authority to perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURES TITLE DATE /S/ ROGER S. MERTZ Roger S. Mertz Chairman of the Board September 28, 2004 /S/ GARY L. HESS Gary L. Hess Director September 28, 2004 /S/ FREDERIC SELINGER Fredric Selinger Director September 28, 2004 /S/ DAVID J. BUGATTO David J. Bugatto Director September 28, 2004 -25- SCHEDULE III SonomaWest Holdings, Inc. REAL ESTATE AND ACCUMULATED DEPRECIATION June 30, 2004 (DOLLARS IN THOUSANDS)
Column A Column B Column C Column D Costs Subsequently Initial Cost to Company Capitalized --------------------------------------------------------------------------- Buildings and Description Encumbrances Land Improvements Improvements - ------------------------------------------------------------------------------------------------------------------------------------ 1365 Gravenstein Hwy. So., Sebastopol, CA 1,850 72 308 908 2064 Gravenstein Hwy. No., Sebastopol, CA -- 159 2,312 3,382 ---------------------------------------------------------------------------------------------- 1,850 231 2,620 4,290 ====================================================================================================================================
Column E Column F Column G Column H Gross Amount at which Carried at Close of Year - ------------------------------------------------------------ Buildings and Total Accumulated Year of Year Land Improvements (Note 1) Depreciation Construction Acquired - ---------------------------------------------------------------------------------------------------------------------- 72 1,216 1,288 989 N/A 1964 159 5,691 5,850 4,500 N/A 1983 - ---------------------------------------------------------------------------------------------------------------------- 231 6,907 7,138 5,489 ======================================================================================================================
Note 1. The changes in the total cost of land, buildings, and improvements for the three years ended June 30, are as follows:
2004 2003 2002 ---- ---- ---- Balance at beginning of period 6,880 6,877 6,877 Additions 258 81 60 Assets of discontinued operations (0) (0) (2) Cost of disposed property ( 0) (78) (58) -------------------------------------------------------------------- Balance at end of period 7,138 6,880 6,877 ====================================================================
Note 2. The changes in accumulated depreciation for the three years ended June 30, are as follows:
2004 2003 2002 ---- ---- ---- Balance at beginning of period 5,297 5,083 4,813 Depreciation expense 292 286 317 Assets of discontinued operations (0) (0) (2) Relief of accumulated balances related to disposed property ( 0) (71) (45) -------------------------------------------------------------------- Balance at end of period 5,489 5,297 5,083 ====================================================================
-26- EXHIBIT INDEX EXHIBIT NO. DOCUMENT DESCRIPTION 3.2 Bylaws 10.4 Consulting Agreement dated August 1, 2004 between SonomaWest Holdings, Inc. and Thomas R. Eakin, d.b.a. Eakin Consulting. 10.5 Consulting Agreement dated July 1, 2004 between SonomaWest Holdings, Inc. and Bugatto Investment Company. 11.1 Computation of Per Share Earnings 14.1 Code of Business Conduct and Ethics 23.1 Consent of Independent Registered Public Accounting Firm 31.1+ Chairman of the Board Certification of Periodic Financial Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2+ Chief Financial Officer Certification of Periodic Financial Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1* Chairman of the Board Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 32.2* Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 99.1 Complaint Procedure and Nonretaliation Policy for Accounting, Securities and Shareholder Matters + Filed herewith. * Furnished herewith. -27- EX-3.2 2 c33808_ex3-2.txt Exhibit 3.2 BY-LAWS OF SONOMAWEST HOLDINGS, INC. TABLE OF CONTENTS
Page ---- ARTICLE I CORPORATE OFFICES....................................................................1 ARTICLE II BOARD OF DIRECTORS...................................................................1 Section 2.1 Board to Exercise Corporate Powers...................................................1 Section 2.2 Number of Directors..................................................................1 Section 2.3 Directors Need Not Be Shareholders...................................................1 Section 2.4 Compensation of Directors............................................................1 Section 2.5 Election and Term of Office..........................................................2 Section 2.6 Filling Vacancies on the Board.......................................................2 Section 2.7 Removal of Directors Without Cause...................................................2 ARTICLE III MEETINGS OF THE BOARD OF DIRECTORS...................................................2 Section 3.1 Place of Board Meeting...............................................................2 Section 3.2 Regular Board Meetings...............................................................2 Section 3.3 Special Board Meetings...............................................................2 Section 3.4 Notice of Board Meetings.............................................................2 Section 3.5 Quorum at Board Meetings.............................................................2 Section 3.6 Adjourned Board Meetings.............................................................2 Section 3.7 Directors' Waiver of Notice and Consent..............................................2 Section 3.8 Action by Directors Without a Meeting................................................2 Section 3.9 Conference Telephone Board Meetings..................................................2 Section 3.10 Meetings of Board Committees.........................................................2 ARTICLE IV OFFICERS.............................................................................2 Section 4.1 Election and Qualifications..........................................................2 Section 4.2 Term of Office and Compensation......................................................2 Section 4.3 Removal and Vacancies................................................................2 Section 4.4 Chairman of the Board................................................................2 Section 4.5 President............................................................................2 Section 4.6 President Pro Tem....................................................................2 Section 4.7 Vice President.......................................................................2 Section 4.8 Secretary............................................................................2 Section 4.9 Chief Financial Officer..............................................................2 ARTICLE V COMMITTEES OF THE BOARD..............................................................2 Section 5.1 Creation and Appointment of Members..................................................2 Section 5.2 Powers of Board Committees...........................................................2 Section 5.3 Executive Committee..................................................................2 Section 5.4 Committees Not Exercising Board Powers...............................................2 ARTICLE VI MEETINGS OF SHAREHOLDERS.............................................................2 Section 6.1 Place of Shareholders' Meetings......................................................2 Section 6.2 Time of Annual Shareholders' Meetings................................................2
(i)
Page ---- Section 6.3 Special Shareholders' Meetings......................................................2 Section 6.4 Notice of Shareholders' Meetings....................................................2 Section 6.5 Delivery of Notice to Shareholders..................................................2 Section 6.6 Adjourned Shareholders' Meetings....................................................2 Section 6.7 Consent to Shareholders' Meeting....................................................2 Section 6.8 Shareholders Meeting Quorum.........................................................2 Section 6.9 Shareholder Actions Without Meeting.................................................2 Section 6.10 Revocation Of Shareholder Consent...................................................2 Section 6.11 Shareholder Voting Rights...........................................................2 Section 6.12 Determination of Shareholders of Record.............................................2 Section 6.13 Elections of Directors; Cumulative Voting...........................................2 Section 6.14 Proxies.............................................................................2 Section 6.15 Inspectors of Election..............................................................2 ARTICLE VII MISCELLANEOUS PROVISIONS............................................................2 Section 7.1 Instruments in Writing..............................................................2 Section 7.2 Fiscal Year.........................................................................2 Section 7.3 Shares Held by the Corporation......................................................2 Section 7.4 Share Certificates..................................................................2 Section 7.5 Lost Share Certificates.............................................................2 Section 7.6 Shareholder Inspection of By-Laws...................................................2 Section 7.7 Effectiveness of Notices............................................................2 Section 7.8 Annual Reports to Shareholders......................................................2 ARTICLE VIII INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS..................2 Section 8.1 Scope of Indemnification............................................................2 Section 8.2 Non-Exclusivity of Rights...........................................................2 Section 8.3 Term and Heirs......................................................................2 Section 8.4 Severability........................................................................2 Section 8.5 Amendments..........................................................................2 ARTICLE IX INTERPRETATION OF BY-LAWS...........................................................2 Section 9.1 Definitions.........................................................................2 Section 9.2 By-Laws which Supplement Laws.......................................................2 Section 9.3 By-Laws which Conflict with Laws....................................................2 ARTICLE X ADOPTION, AMENDMENT OR REPEAL OF BY-LAWS............................................2 Section 10.1 Amendment by Shareholders...........................................................2 Section 10.2 Amendment by Board..................................................................2
(ii) BY-LAWS OF SONOMAWEST HOLDINGS, INC. (a California corporation) ARTICLE I CORPORATE OFFICES The principal office of the corporation shall be located at 2064 Highway 116 North, Sebastopol, California 95472. The Board of Directors ("Board") may at any time relocate the principal office, and may establish one or more subordinate offices, at any place within or outside California. ARTICLE II BOARD OF DIRECTORS SECTION 2.1 BOARD TO EXERCISE CORPORATE POWERS. Except where the corporation's articles of incorporation ("ARTICLES"), these By-Laws or applicable law requires approval by the shareholders and/or by others for specified corporate actions, the Board shall exercise all corporate powers. The Board may delegate the management of day-to-day operations as permitted by law, under the ultimate direction of the Board. The Board may also delegate its powers to a Board committee under Article V. SECTION 2.2 NUMBER OF DIRECTORS. The authorized number of Directors of the corporation shall be not less than four (4) nor more than (7) until changed by an amendment of the Articles of this section duly adopted by the Shareholders. The exact number of Directors shall be fixed, within the limits specified, by the Board of the Shareholders in the same manner provided for in these By-Laws. The exact number of Directors shall be fixed at four (4) until changed by the Board as provided for in these By-Laws. No reduction of the authorized number of Directors shall have the effect of removing any Director before that Director's term of office expires. SECTION 2.3 DIRECTORS NEED NOT BE SHAREHOLDERS. The directors need not be shareholders of the corporation. SECTION 2.4 COMPENSATION OF DIRECTORS. Directors shall receive such compensation (if any) for their services as directors, and such reimbursement for their expenses of attendance at meetings, as the Board may determine from time to time. Nothing contained in these By-Laws shall preclude any director from serving the corporation in any other capacity and receiving compensation for such service. SECTION 2.5 ELECTION AND TERM OF OFFICE. Directors shall be elected at each annual shareholders' meeting (see Article VI) to hold office until the next annual meeting. If, for any reason, the annual meeting is not held or the directors are not then elected, a special shareholders' meeting may be called and held to elect directors. A director's term of office shall begin immediately after the election and shall continue until the expiration of the term for which elected and until the director's successor has been elected and qualified. SECTION 2.6 FILLING VACANCIES ON THE BOARD. A Board vacancy shall exist when any authorized position of director is not then filled by a duly elected director, whether such vacancy is caused by death, resignation, removal (by the Board or the shareholders), change in the authorized number of directors or otherwise. The Board may declare vacant the office of a director who has been declared of unsound mind by a court order or who has been convicted of a felony. Except for a vacancy created by the removal of a director, vacancies on the Board may be filled by a majority of the directors then in office, whether or not less than a quorum, or by a sole remaining director. A vacancy created by the removal of a director may be filled only by the approval of the shareholders. The shareholders may elect a director at any time to fill any vacancy not filled by the directors, but any such election by written consent (other than to fill a vacancy created by removal) shall require the consent of a majority of the outstanding shares entitled to vote. Any director may resign by giving written notice to the Chairman of the Board, the President, the Secretary or the Board. Such a notice will be effective on delivery unless it specifies a later effective date. In the latter event, a successor may be elected to take office when the resignation becomes effective. SECTION 2.7 REMOVAL OF DIRECTORS WITHOUT CAUSE. Any or all directors may be removed without cause upon the affirmative vote of a majority of the outstanding shares which would be entitled to vote at an election of directors, subject to the following: (a) No director can be removed (unless the entire Board is removed) when the votes cast against removal, or not consenting in writing to such removal, would be sufficient to elect such director if voted cumulatively at an election (see section 6.13) at which the same total number of votes were cast (or, if such action is taken by written consent, all shares entitled to vote were voted) and the entire number of directors authorized at the time of the director's most recent election were then being elected; and (b) If the Articles should then provide that the shareholders of any class or series, voting as a class or series, are entitled to elect one or more directors, any director so elected may be removed only by the applicable vote of the shareholders of that class or series. ARTICLE III MEETINGS OF THE BOARD OF DIRECTORS SECTION 3.1 PLACE OF BOARD MEETING. Unless otherwise specified in the notice thereof, Board meetings (whether regular, special or adjourned) shall be held at the corporation's principal office, or at any other place within or outside California which has been most recently designated by the Board or by written consent of all directors. -2- SECTION 3.2 REGULAR BOARD MEETINGS. Regular Board meetings, of which no notice need be given except as may be required by the Articles, these By-Laws or California law for particular matters, shall be held after the adjournment of each annual shareholders' meeting and at such other times as the Board may designate. SECTION 3.3 SPECIAL BOARD MEETINGS. Special Board meetings may be called at any time by the Chairman of the Board, the President, any Vice President, the Secretary or two or more directors. SECTION 3.4 NOTICE OF BOARD MEETINGS. Except for regular Board meetings (see section 3.2), Board meetings shall be held upon four (4) days' notice by mail or upon forty-eight (48) hours' notice delivered personally or by telephone, telegraph or other electronic means. If a director's address is not shown on the corporation's records and is not readily ascertainable, notice shall be addressed to that director at the city or place in which the Board meetings are regularly held. Except as set forth in section 3.6, notice of the time and place of holding an adjourned meeting need not be given to absent directors if such time and place were fixed at the adjournment of the previous meeting. SECTION 3.5 QUORUM AT BOARD MEETINGS. A majority of the authorized number of directors (see section 2.2) shall constitute a quorum of the Board for the transaction of corporate business. Every decision made by a majority of the directors is present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board, except as otherwise provided by law. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting. SECTION 3.6 ADJOURNED BOARD MEETINGS. A majority of the directors present at a Board meeting, whether or not a quorum is present, may adjourn the meeting to another time and place. If the meeting is adjourned for more than 24 hours, notice of any adjournment to another time and place shall be given prior to the time of the newly scheduled meeting to the directors who were not present at the time of adjournment. SECTION 3.7 DIRECTORS' WAIVER OF NOTICE AND CONSENT. Notice of a directors' meeting need not be given to any director who signs a waiver of notice, a consent to holding the meeting or an approval of the minutes thereof, either before or after the meeting, or who attends the meeting without protesting, prior the meeting or at its commencement, the lack of notice to such director. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the Board meeting minutes. SECTION 3.8 ACTION BY DIRECTORS WITHOUT A MEETING. Any action required or permitted to be taken by the Board at a meeting may be taken without a meeting, if all directors shall individually or collectively consent in writing to such action. Such written consent(s) shall be filed with the minutes of Board meetings. Board action by written consent shall have the same force and effect as a unanimous vote of such directors at a meeting. SECTION 3.9 CONFERENCE TELEPHONE BOARD MEETINGS. Directors may participate in a Board meeting through conference telephone or similar communications equipment, so long as all -3- directors participating in such meeting can hear one another. Participation in a Board meeting pursuant to this section constitutes presence in person at such meeting. SECTION 3.10 MEETINGS OF BOARD COMMITTEES. The Board meeting procedures set forth in this Article shall apply fully to meeting of Board committees established under Article V. ARTICLE IV OFFICERS SECTION 4.1 ELECTION AND QUALIFICATIONS. The officers o(pound) this corporation shall consist of a President, a Secretary, a Chief Financial Officer (who may also, or instead, be called the "Treasurer") and may also include such other officers, including a Chairman of the Board and one or more Vice Presidents, as the Board shall deem expedient. Officers shall be chosen by the Board and shall hold their offices for such terms as the Board may prescribe. Any number of offices may be held by the same person. Any Vice President, Assistant Chief Financial Officer (or Assistant Treasurer) or Assistant Secretary, respectively, may exercise any of the powers of the President, the Chief Financial Officer or the Secretary, respectively, as directed by the Board and shall perform such other duties as are imposed upon such officer by these By-Laws or the Board. SECTION 4.2 TERM OF OFFICE AND COMPENSATION. The term of office and salary of each officer, and the manner and time of payment of such salary, shall be determined by the Board and may be altered by the Board from time to time, subject to the rights, if any, of such officer under any employment contract. SECTION 4.3 REMOVAL AND VACANCIES. Any officer may be removed (1) by the Board at any Board meeting, (2) by the vote of shareholders entitled to exercise the majority of voting power at any shareholders' meeting, or (3) by any officer who has been granted such power by the Board. Any officer may resign upon written notice to the corporation without prejudice to the corporation's rights, if any, under any contract to which the officer is a party. SECTION 4.4 CHAIRMAN OF THE BOARD. The Chairman of the Board, if there be one, shall have the power to preside at all Board meetings, and to call shareholders' meetings and Board meetings to be held, within the limitations prescribed by law or by these By-Laws, at such times and places as the Chairman of the Board shall deem proper. The Chairman of the Board shall have such other powers and duties as the Board may prescribe. SECTION 4.5 PRESIDENT. The powers and duties of the President are: (a) To act as the corporation's chief executive officer and, subject to the Board's control, to have general supervision, direction and control of the corporation's business and affairs. (b) To preside at all shareholders' meetings and, in the absence of the Chairman of the Board or if there be none, at all Board meetings. -4- (c) To call meetings of the shareholders and of the Board to be held, subject to the limitations prescribed by law or by these By-Laws, at such times and places as the President shall deem proper. (d) To affix the corporation's signature to all documents which have been authorized by the Board or which, in the judgment of the President, should be executed on behalf of the corporation; to sign certificates for shares of stock of the corporation and, subject to the direction of the Board, to have general charge o(pound) the corporation's property and to supervise and control all officers, agents and employees of the corporation. SECTION 4.6 PRESIDENT PRO TEM. If neither the Chairman of the Board, the President nor any Vice President is present at any Board meeting, a President pro tem may be chosen to preside at that meeting. If neither the President nor any Vice President is present at any shareholders' meeting, a President pro tem may be chosen to preside at that meeting. SECTION 4.7 VICE PRESIDENT. In case of the absence, disability or death of the President, the Vice President, if there be one, or one of the Vice Presidents, shall exercise all powers and perform all duties of the President. If there be more than one Vice President, the order in which the Vice Presidents shall succeed to the powers and duties of the President shall be as fixed by the Board. If no order has been fixed, the Vice President who has served the longest as Vice President shall first succeed the President. The Vice President(s) shall have such other powers and duties as the Board may prescribe. SECTION 4.8 SECRETARY. The powers and duties of the Secretary are: (a) To keep a minute book at the corporation's principal office, or at such other place as the Board may order, of all Board meetings and shareholders' meetings, recording the time and place of the meeting, whether it was regular or special and, if special, how authorized, the notice given of such meeting, the names of those present at Board meetings, the number of shares present or represented at shareholders' meetings, and the proceedings at the meeting. (b) To keep the corporation's seal (if it has a seal) and to affix the seal to instruments as directed by the Board or by the President. (c) To keep or cause to be kept at the corporation's principal office, a share register, or duplicate share registers, showing the shareholders' names and addresses, the number and classes of shares held by each shareholder, the number and date of certificates issued for shares, and the number and date of cancellation of every cancelled share certificate. (d) To keep a supply of share certificates, to fill in required information in all share certificates issued and to make a proper record of each issuance of shares. (e) To transfer the corporation's shares on its shareholder records. No share certificate shall be issued or delivered or, if issued or delivered, shall have any validity whatsoever, unless it has been signed or authenticated as provided in section 7.4. -5- (f) To serve and publish all notices that may be necessary or proper, without command or direction from anyone. In case of the absence, disability, refusal or neglect of the Secretary to serve or publish any notices, such notices may be served and/or published by the President or a Vice President, or by any person authorized to do so by either of them or by the Board or by the holders of a majority of the outstanding shares. (g) Generally to perform all duties which pertain to the office of Secretary and as may be required by the Board. At any time when the corporation has a transfer agent and/or registrar, the Board may assign to such person(s) the duties of the Secretary described above to the extent permitted by law. SECTION 4.9 CHIEF FINANCIAL OFFICER. The powers and duties of the Chief Financial Officer (who may also, or instead, be called the "Treasurer") are: (a) To supervise the maintaining of adequate and correct accounts of the corporation's properties and business transactions, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares. The books of account shall at all reasonable times be open to inspection by any director. (b) To have custody of all funds, securities, evidence of indebtedness and other valuable financial documents of the corporation and, at the Chief Financial Officer's discretion, to cause any or all such documents thereof to be deposited for the corporation's account with such depository as may be designated by the Board. (c) To receive, or cause to be received, money paid to the corporation and to give, or cause to be given, receipts for such money. (d) To disburse, or cause to be disbursed, all corporate funds as may be directed by the Board, taking proper vouchers for such disbursements. (e) To render to the President and to the Board, whenever they may require, accounts of all transactions and of the financial condition of the corporation. (f) Generally to perform all duties which pertain to the office of Chief Financial Officer and as may be required by the Board. ARTICLE V COMMITTEES OF THE BOARD SECTION 5.1 CREATION AND APPOINTMENT OF MEMBERS. A majority of the authorized number of directors (see section 2.2) may designate one or more Board committees, each consisting of two or more directors, to serve at the pleasure of the Board. The Board may designate one or more directors as alternate members of any Board committee meeting, who may replace any absent member at any Board committee. The appointment of members or alternate members of a committee shall require the vote of a majority of the authorized number of directors. -6- SECTION 5.2 POWERS OF BOARD COMMITTEES. Any Board committee established under section 5.1 shall, to the extent provided in the enabling Board resolution, have all the Board's authority except with respect to: (a) The approval of any action which requires shareholder approval; (b) The filling of vacancies on the Board or on any Board committee; (c) The fixing of directors' compensation for serving on the Board or on any Board committee; (d) The amendment or repeal of By-laws or the adoption of new By-laws; (e) The amendment or repeal of any Board resolution which states expressly that it is not so amendable or repealable; (f) A distribution to the shareholders, except at a rate or in a periodic amount or within a price range previously determined by the Board; or (g) The appointment of other Board committees or the members thereof. SECTION 5.3 EXECUTIVE COMMITTEE. If the Board appoints an Executive Committee, the Executive Committee, in all cases in which specific direction to the contrary has not been given by the Board, shall have and may exercise, during the intervals between Board meetings, all authority of the Board to manage the business and affairs of the corporation (except as otherwise provided in section 5.2 or in the enabling Board resolution). SECTION 5.4 COMMITTEES NOT EXERCISING BOARD POWERS. This Article shall not apply to any committees which do not exercise any power of the Board. The Board may create any such committee and grant it such powers as it deems appropriate, so long as such committee does not exercise any powers of the Board. ARTICLE VI MEETINGS OF SHAREHOLDERS SECTION 6.1 PLACE OF SHAREHOLDERS' MEETINGS. Shareholders' meetings (whether regular, special or adjourned) shall be held at the corporation's principal office, or at any other place within or outside California as may be designated by the Board or by written consent of all the shareholders entitled to vote thereat. SECTION 6.2 TIME OF ANNUAL SHAREHOLDERS' MEETINGS. The annual shareholders' meeting shall be held at the principal executive office of the corporation, or at such other place as may be designated in the notice of such meeting, on a date and at a time fixed by the Board or the Executive Committee (if any), which date shall be within the five-month period following the preceding fiscal year-end of the corporation and not more than fifteen months after the preceding annual meeting. -7- SECTION 6.3 SPECIAL SHAREHOLDERS' MEETINGS. Special shareholders' meetings may be called by the Board, the Chairman of the Board, the President or the holders of shares entitled to cast not less than 10% of the vote at such meeting. SECTION 6.4 NOTICE OF SHAREHOLDERS' MEETINGS. (a) Whenever shareholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given not less than 10 days (or 30 days, if sent by third class mail) nor more than 60 days before the meeting day to each shareholder entitled to vote thereat. Such notice shall state the place, date and time of the meeting and (1) in the case of a special meeting, the general nature of the business to be transacted, and that no other business may be transacted, or (2) in the case of the annual meeting, those matters which the Board, at the time of the mailing of the notice, intends to present for action by the shareholders but, subject to the provisions of subsection (b), any proper matter may be presented at the annual meeting for such action. The notice of any meeting at which directors are to be elected shall include the names of nominees intended, at the time of the notice, to be presented by management for election. (b) Any shareholder approval at a meeting, other than unanimous approval by those entitled to vote, on any of the matters listed below shall be valid only if the general nature of the proposal so approved was stated in the meeting notice or in any written waiver of notice: (1) a proposal to approve a transaction between the corporation and one or more of its directors, or between the corporation and any corporation, firm or association in which one or more directors has a material financial interest; (2) a proposal to amend the Articles; (3) a proposal regarding a reorganization, merger or consolidation involving the corporation; (4) a proposal to wind up and dissolve the corporation; or (5) a proposal to adopt a plan of distribution of the shares, obligations or securities of any other corporation, domestic or foreign, or of assets other than money, except in accordance with the liquidation rights of any preferred shares as may be specified in the Articles. SECTION 6.5 DELIVERY OF NOTICE TO SHAREHOLDERS. Notice of a shareholders' meeting or any report to shareholders shall be given either personally, by first class mail, by telex or telegram or by other means of written communication addressed to the shareholder at the address of such shareholder appearing on the corporation's records or given by the shareholder to the corporation for the purpose of receiving notice. If no such address appears or has been given, such notice may be given to the shareholder at the corporation's principal executive office or by publication at least once in a newspaper of general circulation in the county in which the principal executive office is located. The notice or report shall be deemed to have been given at the time it is delivered personally or deposited in the mail or sent by other means of written -8- communication. An affidavit of mailing of any notice or report in accordance with the provisions of this section, executed by the Secretary, Assistant Secretary or any transfer agent, shall be prima facie evidence of the giving of the notice or report. If any notice or report addressed to a shareholder at the address of such shareholder appearing on the corporation's records is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service was unable to deliver the notice or report to the shareholder at such address, all future notices or reports shall be deemed to have been duly given without further mailing if they are made available for that shareholder upon written demand at the corporation's principal executive office for a period of one year from the date such future notice or report is given to all other shareholders. SECTION 6.6 ADJOURNED SHAREHOLDERS' MEETINGS. When a shareholders' meeting is adjourned to another time or place, notice need not be given of the newly scheduled meeting if the time and place thereof are announced at the meeting at which the adjournment is taken, except as provided below in this section. Any business may be transacted at the newly scheduled meeting which might have been transacted at the original meeting. If the adjournment is for more than 45 days or if, after the adjournment, a new record date is fixed for the newly scheduled meeting, a notice of the newly scheduled adjourned meeting shall be given to each shareholder of record entitled to vote at the original meeting. SECTION 6.7 CONSENT TO SHAREHOLDERS' MEETING. (a) WRITTEN CONSENT. The transactions at any shareholders' meeting, however, called and noticed and wherever held, are as valid as if they had occurred at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy and if, either before or after the meeting, each person who was entitled to vote but who was not present in person or by proxy signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. All such waivers, consents and approvals shall be filed with the minutes of that meeting. Neither the business to be transacted at, nor the purpose of, any regular or special shareholders' meeting need be specified in any such written waiver of notice, consent or approval, except as required under section 6.4(b). (b) CONSENT BY ATTENDANCE AT MEETING. A person's attendance at a shareholders' meeting shall constitute a waiver of notice of and presence at such meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting has not been lawfully called or convened and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters required by section 6.4 or the California Corporations Code to be included in the notice but no so included, if such objection is expressly made at the meeting. SECTION 6.8 SHAREHOLDERS MEETING QUORUM. (a) The presence in person or by proxy of the persons entitled to vote the majority of the voting shares at any shareholders' meeting shall constitute a quorum for the transaction of business. Except as provided in subsection (b) below, the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present -9- (which shares voted affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number or voting by classes is now or hereafter required by law or the Articles or these By-Laws. (b) The shareholders present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. (c) In the absence of a quorum, any meeting of shareholders may be adjourned by the vote of a majority of the shares represented either in person or by proxy, but no other business may be transacted, except as provided in subsection (b) above. SECTION 6.9 SHAREHOLDER ACTIONS WITHOUT MEETING. (a) Any action which may be taken at any annual or special shareholders' meeting may be taken without a meeting and without prior notice if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having at least the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted; provided that, subject to the provisions of section 2.6, directors may not be elected by written consent except by unanimous written consent of all shares entitled to vote for election of directors. (b) Unless the consents of all shareholders entitled to vote have been solicited in writing. (1) notice of any shareholder approval on matters described in subparagraphs (1), (3) and (5) of section 6.4(b), or respecting indemnification of the corporation's agents, without a shareholders' meeting by less than unanimous written consent, shall be given at least ten (10) days before the consummation of the action authorized by such approval; and (2) prompt notice shall be given of any other corporate action approved by shareholders without a meeting by less than unanimous written consent, to those shareholders entitled to vote who have not consented in writing. Section 6.5 shall apply to such notice. SECTION 6.10 REVOCATION OF SHAREHOLDER CONSENT. Any shareholder who has given a written consent, or the shareholder's proxyholders, or a transferee of the shares or a personal representative of the shareholder or their respective proxyholders, may revoke the consent by a writing received by the corporation before written consents of the number of shares required to authorize the proposed action have been filed with the Secretary, but may not do so thereafter. Such a revocation shall be effective upon its receipt by the Secretary. -10- SECTION 6.11 SHAREHOLDER VOTING RIGHTS. Except as provided in section 6.13, in the Articles or in any law relating to the election of directors or to other particular matters, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote of shareholders. Any holder of shares entitled to vote on any matter may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, other than elections of directors, but, if the shareholder fails to specify the number of shares such shareholder is voting affirmatively, it will be conclusively presumed that the shareholder is voting all shares which such shareholder is entitled to vote. SECTION 6.12 DETERMINATION OF SHAREHOLDERS OF RECORD. (a) So that the corporation may determine which shareholders are entitled to receive notice of a shareholders' meeting, to vote, to receive payment of any dividend or other distribution or allotment of any rights, or to exercise any rights in connection with any other lawful action, the Board may fix a record date in advance, which date shall not be more than 60 days nor less than 10 days prior to the date of such meeting nor more than 60 days prior to any other action. (b) In the absence of any record date set by the Board under subsection (a) above, then: (1) The record date for determining shareholders entitled to receive notice of, or to vote at, a shareholders' meeting shall be the close of business on the business day before the day on which notice is given or, if notice is waived, at the close of business on the business day before the meeting day. (2) The record date for determining shareholders entitled to consent to corporate action in writing without a meeting, when no prior action by the-Board has been taken, shall be the day on which the first written consent is given. (3) The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto, or the 60th day prior to the date of such other action, whichever is later. (c) A determination of shareholders of record entitled to notice of, or to vote at, a meeting of shareholders shall apply to any newly scheduled meeting following adjournment of the original meeting unless the Board fixes a new record date for the newly scheduled meeting, but the Board shall fix a new record date if the original meeting is adjourned for more than 45 days. (d) Shareholders at the close of business on the record date are entitled to notice and to vote or to receive the dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Articles, by agreement or applicable law. -11- SECTION 6.13 ELECTIONS OF DIRECTORS; CUMULATIVE VOTING. (a) Every shareholder who complies with subsection (b) and is entitled to vote at any election of directors may cumulate such shareholder's votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which the shareholder's shares are entitled, or may distribute the shareholder's votes on the same principle among as many candidates as the shareholder deems fit. (b) No shareholder may cumulate votes (i.e., cast for any candidate a number of votes greater than the number of votes which such a shareholder normally is entitled to cast) unless such candidate or candidates' names have been placed in nomination before the voting and the shareholder has given written notice to the meeting chairman, at the meeting prior to the voting, of the shareholder's intention to cumulate the shareholder's votes. If any one shareholder has given such notice, all shareholders may cumulate their votes for candidates in nomination. (c) In any election of directors, the candidates receiving the highest number of votes of the shares entitled to be voted for them, up to the number of directors to be elected by such shares, are elected. (d) Elections for directors need not be by ballot unless a shareholder demands election by ballot at the meeting and before the voting begins. SECTION 6.14 PROXIES. (a) Every person entitled to vote shares may authorize another person or persons to act by proxy with respect to such shares. Any proxy purporting to be executed in accordance with the applicable provisions of the California Corporations Code shall be presumptively valid. (b) No proxy shall be valid after 11 months from its date unless otherwise provided in the proxy. Every proxy shall otherwise remain effective until revoked by the person executing it prior to the vote pursuant thereto, except as otherwise provided by law or applicable agreement. Such revocation may be effected by a writing delivered to the corporation stating that the proxy is revoked, by a subsequent proxy executed by the same person and presented to the meeting or, as to any meeting, by attendance at such meeting and voting in person by the person executing the proxy. The dates contained on the proxy forms shall presumptively determine the order of execution, regardless of the postmark dates on the envelopes in which they are mailed. (c) A proxy is not revoked by the death or incapacity of the maker unless the corporation receives the written notice of such death or incapacity before the vote is counted. SECTION 6.15 INSPECTORS OF ELECTION. At the Board's direction given before or at any shareholders' meeting at which directors are to be elected, or at the request of any shareholder or shareholder's proxy made at such a meeting, the meeting chairman shall appoint either one or three inspector(s) of election. The duties of the inspector(s) shall be (1) to determine the number of shares outstanding, the number of shares represented at the meeting, the voting rights of shares, the existence of a quorum and the validity of proxies, written consents and written -12- ballots; (2) to receive and count the votes and/or consents, determine when the polls shall close, and conclusively determine all challenges and questions which may arise in the course of the voting; and (3) to announce the results of the election and, if requested by the Board or by any shareholder or shareholder's proxy, to execute a certificate setting forth such results. If three inspectors are named, they shall act by majority vote. ARTICLE VII MISCELLANEOUS PROVISIONS SECTION 7.1 INSTRUMENTS IN WRITING. All checks, drafts, demands for money and notes of the corporation, and all written contracts of the corporation, shall be signed by such officer(s) or agent(s) as the Board may designate. No officer, agent or employee of the corporation shall have authority to bind the corporation by contract or otherwise unless authorized to do so by these By-Laws or by the Board. SECTION 7.2 FISCAL YEAR. The corporation's fiscal year shall end on the last day of June. SECTION 7.3 SHARES HELD BY THE CORPORATION. Shares or other ownership interests held by the corporation in other corporations or other entities may be voted or represented, and all rights incident thereto may be exercised, on behalf of the corporation by the President or by any other officer authorized to do so by the Board. SECTION 7.4 SHARE CERTIFICATES. A share certificate or certificates shall be issued to each holder or fully paid shares of the corporation's capital stock. Every shareholder shall be entitled to have a certificate signed in the name of the corporation by the Chairman of the Board or the President or a Vice President, and by the Chief Financial Officer or any Assistant Chief Financial Officer, or the Secretary or any Assistant Secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all signatures on the share certificate may be facsimile. If any officer, transfer agent or registrar who has signed, or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. SECTION 7.5 LOST SHARE CERTIFICATES. The corporation may issue a new certificate for shares or for any other security in the place of any certificate theretofore issued by it, which is alleged to have been lost, stolen or destroyed. The corporation may require the owner of the lost, stolen or destroyed certificate, or the owner's legal representative, to give the corporation a bond (or other adequate security) sufficient to indemnify it against any claim that may be made against it (including any expense or liability) on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. The Board may adopt such other resolutions with reference to lost certificates, not inconsistent with applicable law, as it may deem appropriate. SECTION 7.6 SHAREHOLDER INSPECTION OF BY-LAWS. The corporation shall keep at its principal office in California the original or a copy of these By-Laws as amended to date, which -13- shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation should be outside of California and the corporation has no principal business office in California, the corporation shall, upon the written request of any shareholder, furnish to such shareholder a copy of the By-Laws as amended to date. SECTION 7.7 EFFECTIVENESS OF NOTICES. Any reference in these By-Laws to the time a notice is given or sent means, unless otherwise expressly provided, (1) the time a mailed notice is deposited in the United States mails, postage prepaid; (2) the time any other written notice is personally delivered to the recipient or is delivered to a common carrier for transmission, or is actually transmitted by the person giving the notice by electronic means, to the recipient; or (3) the time any oral notice is communicated, in person or by telephone or radio, to the recipient or to a person at the recipient's office who the person giving the notice has reason to believe will promptly communicate it to the recipient. SECTION 7.8 ANNUAL REPORTS TO SHAREHOLDERS. Except as may otherwise be required by law for certain matters, no annual report need be furnished to the shareholders so long as there are fewer than 100 shareholders of record (determined under section 605 of the California Corporations Code). Whenever the corporation has 100 or more shareholders of record, the Board shall cause an annual report to be sent to the shareholders not later than 120 days after the close of the corporation's fiscal year or within such shorter time period as may be required by applicable law, and such annual report shall contain such information and be accompanied by such other documents as may be required by applicable law. ARTICLE VIII INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS SECTION 8.1 SCOPE OF INDEMNIFICATION. (a) The corporation shall, to the broadest and maximum extent permitted by law, indemnify each person who was or is a party, or is threatened to be made a party, to any proceeding by reason of the fact that such person was or is a director of the corporation, or was or is serving at the request of the corporation as a director of another corporation or other enterprise, against expenses (including attorneys' fees), judgment, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding. In addition, the corporation shall, to the broadest and maximum extent permitted by law, promptly upon demand pay to such person any and all expenses (including attorneys' fees) incurred in defending or settling any such proceeding in advance of the final disposition of such proceeding upon receipt of an undertaking by or on behalf of the director to repay such amount if it shall ultimately be determined by a final judgment or other final adjudication that such person is not entitled to be indemnified by the corporation as authorized in this Section 1. (b) If a claim under paragraph (a) of this Section 1 is not paid in full by the corporation within 45 days after a written claim has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall also be entitled to be -14- paid the expenses of prosecuting such claim, including attorneys' fees. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking has been tendered to the corporation) that the claimant has not met the standards of conduct which make it permissible under the California Corporations Code for the corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense by clear and convincing evidence shall be on the corporation. (c) The Board of Directors may, in its discretion, provide by resolution for such indemnification of, or advance of expenses to, officers, employees or agents of the corporation, and likewise may refuse to provide for such indemnification or advance of expenses except to the extent such indemnification is mandatory under the California General Corporation law. SECTION 8.2 NON-EXCLUSIVITY OF RIGHTS. The rights to indemnification and to the advancement of expenses conferred in this Article VIII shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the Articles or any By-Law, agreement, vote of shareholders or disinterested directors or otherwise. SECTION 8.3 TERM AND HEIRS. The rights to indemnification and advancement of expenses conferred in this Article VIII shall continue as to any person who has ceased to be a director with respect to any act or omissions that occurred during the time such person was a director and shall inure to the benefit of the heirs, executors and administrators of each such person. SECTION 8.4 SEVERABILITY. If any provision of this Article VIII shall be found, in any proceeding or appeal therefrom or in any other circumstances or as to any person entitled to indemnification hereunder to be unenforceable, ineffective or invalid for any reason, the enforceability, effect and validity of the remaining parts or of such parts in other circumstances shall not be affected, except as otherwise required by applicable law. SECTION 8.5 AMENDMENTS. The provisions of this Article VIII shall be deemed to constitute an agreement between the corporation and each of the persons entitled to indemnification hereunder, for as long as such provisions remain in effect. Any amendment to the provisions of this Article VIII which limits or otherwise adversely affects the scope of indemnification or rights of any such persons hereunder shall, as to such persons, apply only to claims or causes of action based on actions or events occurring after such amendment and delivery of notice of such amendment is given to the person or persons so affected. Until notice of such amendment is given to the person or persons whose rights hereunder are affected, such amendment shall have no effect on such rights of such persons hereunder. Any person entitled to indemnification under the provisions of this Article VIII shall as to any act or omission occurring prior to the date of receipt of this notice, be entitled to indemnification to the same extent as had such provisions continued as By-Laws of the corporation without such amendment. -15- ARTICLE IX INTERPRETATION OF BY-LAWS SECTION 9.1 DEFINITIONS. Unless defined otherwise in these By-Laws or the context otherwise requires, terms used in these By-Laws shall have the same meaning, if any, as they have been given in the applicable sections of the California Corporations Code. SECTION 9.2 BY-LAWS WHICH SUPPLEMENT LAWS. All provisions of these By-Laws shall be construed, insofar as possible, as being supplemental to all laws applicable to their subject matter and shall be fully complied with in addition to such laws unless such compliance is illegal. SECTION 9.3 BY-LAWS WHICH CONFLICT WITH LAWS. Any provision of these By-laws which, upon being construed as provided in section 9.2, conflicts with any applicable law or regulation shall not apply so long as such law or regulation shall remain in effect, but such result shall not affect the validity of any other portion of these By-Laws. It is hereby declared that these By-Laws would have been adopted irrespective of the fact that any one or more of their provisions is or are illegal. ARTICLE X ADOPTION, AMENDMENT OR REPEAL OF BY-LAWS SECTION 10.1 AMENDMENT BY SHAREHOLDERS. Any provision of these By-Laws may be amended or repealed, and new By-Law provisions may be adopted, by the approval of a majority of the outstanding shares entitled to vote. SECTION 10.2 AMENDMENT BY BOARD. Subject to the right of shareholders to adopt, amend or repeal By-Laws (see section 10.1), By-Laws other than one changing the authorized number of directors (see section 2.2) may be adopted, amended or repealed by the Board. A By-Law adopted by the shareholders may restrict or eliminate the Board's power to adopt, amend or repeal any or all By-Laws. -16- EX-10.4 3 c33808_ex10-4.txt Exhibit 10.4 CONSULTING AGREEMENT This Consulting Agreement ("Agreement") is made effective as of August 1, 2004, by and between SonomaWest Holdings, Inc. of 2064 Highway 116 North, Sebastopol, CA 95472-2662, and Thomas R. Eakin d.b.a. Eakin Consulting, of 4612 Morris Court E, Santa Rosa, California 95405. In this Agreement, the party who is contracting to receive services shall be referred to as "SWH", and the party who will be providing the services shall be referred to as "Eakin". Eakin has a background in Financial Management and is willing to provide consulting services to SWH based on this background. SWH desires to have services provided by Eakin. Now therefore, the parties agree as follows: 1. DESCRIPTION OF SERVICES. Beginning on August 1, 2004, Eakin will provide consulting services (collectively, the "Services") in the area of financial management and related management matters, specifically Eakin will perform the duties generally undertaken by a chief financial officer treasurer of a corporation; provided however, that Eakin shall report directly to Roger S. Mertz, Chairman of the Board of Directors of SWH. The Board of Directors of SWH shall elect Eakin Chief Financial Officer and Eakin shall have the authority to act for or on behalf of the corporation, which is usually held by a person holding the office of Chief Financial Officer. Should Eakin reasonably determine that any project or projects Eakin is requested to work on fall outside the scope of the duties generally undertaken by a chief financial officer of a corporation, Eakin shall notify Mr. Mertz of such determination and Eakin may reject that project or projects without breaching this Agreement. Mr. Mertz and Eakin shall use their respective commercially reasonable best efforts to resolve any disagreement with respect to whether or not the specific project or projects fall within the scope of the services to be performed by Eakin. 2. PERFORMANCE OF SERVICES. The manner in which the Services are to be performed and the specific hours to be worked by Eakin shall be determined by Eakin. SWH will rely on Eakin to work as many hours as may be reasonably necessary to fulfill Eakin's obligations under this Agreement. 3. PAYMENT. SWH will pay a fee to Eakin for the Services as set forth in Schedule A, which is attached hereto and incorporated herein by this reference. SWH will reimburse Eakin for any out of pocket expenses incurred in the provision of Services hereunder. Eakin will invoice SWH approximately every two weeks for consulting and expenses performed and/or incurred in the fourteen (14) day period prior to or through the date of invoice, or for such longer period as may have passed since the date of the last invoice. Each invoice shall be due upon receipt: provided however, that payment shall be considered timely if paid within five (5) days of the date of invoice. 4. SUPPORT SERVICES. SWH will provide sufficient office space at its executive offices in 2064 Highway 116 North, Sebastopol, CA (or at such future Sonoma County, California executive offices as SWH may occupy) for use by Eakin in performing the Services hereunder. SWH shall direct its employees to cooperate with and render assistance to Eakin in furtherance of the completion of the Services. 5. TERM/TERMINATION. This Agreement shall continue in effect until July 31, 2005 unless terminated sooner pursuant to the following provision of this Paragraph 5. This Agreement may be terminated by either party upon thirty (30) days prior written notice to the other party. A termination of this agreement shall automatically terminate Eakin as Chief Financial Officer of SWH. 6. RELATIONSHIP OF PARTIES. It is understood by the parties that Eakin is an independent contractor with respect to SWH, and not an employee of SWH. SWH will not provide fringe benefits, including health insurance benefits, paid vacation, or any other employee benefit, for the benefit of Eakin; provided however that Eakin shall be entitled to receive such grants of options as the Board of Directors may from time to time determine. Notwithstanding the foregoing, SWH agrees to provide Eakin with a certified copy of the minutes of the Board of Directors meeting at which Eakin is elected Chief Financial Officer and of any subsequent meeting in which he is again so elected. In addition, as material consideration to Eakin for his performance of the Services hereunder SWH agrees that at all times during the term of this Agreement, SWH will have and maintain a policy of Directors & Officers insurance which provides coverage for Eakin in an amount reasonably satisfactory to Eakin. Upon request SWH shall provide Eakin with proof of such coverage. 7. LIMITATION OF LIABILITY AND INDEMNIFICATION. Eakin will not be liable to SWH, or to anyone who may claim any right due to a relationship with SWH, for any injuries due to any act(s) or omission(s) arising from or related to this Agreement and/or the performance of the Services hereunder or on the part of the employees or agents of Eakin unless the act(s) and/or omission(s) are due to Eakin's gross negligence or willful misconduct. SWH will indemnify and hold Eakin harmless from any obligations, costs, claims, judgments, attorneys' fees, and attachments arising from, growing out of, or in any way connected with the Services rendered to SWH under the terms of this Agreement, unless Eakin is judged by a court of competent jurisdiction to have committed or be guilty of gross negligence or willful misconduct. 8. INDEMNIFICATION. Eakin agrees to indemnify, defend and hold SWH free and harmless from any obligations, costs, claims, judgments, attorneys' fees, and attachments arising from, growing out of, or in any way connected with the Services rendered to SWH the terms of this Agreement, in any and all cases in which Eakin has been judged by a court of competent jurisdiction to have committed or be guilty of gross negligence or willful misconduct. 9. ASSIGNMENT. Eakin's obligations under this Agreement may not be assigned or transferred to any other person, firm, or corporation without the prior written consent of SWH. SWH obligations under this Agreement may not be assigned or transferred to any other person, firm, or corporation without the prior written consent of Eakin. -2- 10. CONFIDENTIALITY. SWH recognizes that Eakin will have the following information: future plans, business affairs, financial data and projections and other proprietary information (collectively, "Information") which are valuable, special and unique assets of SWH and need to be protected from improper disclosure. In consideration for the disclosure of the Information, Eakin agrees that Eakin will not at any time or in any manner, either directly or indirectly, use any Information for Eakin's own benefit, or divulge, disclose, or communicate in any manner any Information to any third party without the prior written consent of SWH. The confidentiality and limited use obligations set forth above shall not apply to information, which Eakin can demonstrate: (a) Was already in Eakin's possession prior to receipt of the same from the SWH without an obligation to maintain its confidentiality; or (b) Is now or becomes public information or otherwise generally known to the public without violation of this Agreement; or (c) Was received by Eakin without restriction from a third party which was lawfully in possession of such information and was not in breach of any agreement or any confidential relationship with SWH. Disclosure of SWH Information is not prohibited if such disclosure is compelled pursuant to legal proceeding or otherwise required by law and prior written notice is given to SWH. Eakin will protect the Information and treat it as strictly confidential. A violation of this paragraph shall be a material breach of this Agreement. 11. UNAUTHORIZED DISCLOSURE OF INFORMATION. If it appears that Eakin has disclosed (or has threatened to disclose) Information in violation of this Agreement, SWH shall be entitled to an injunction to restrain Eakin from disclosing, in whole or in part, such Information, or from providing any services to any party to whom such Information has been disclosed or may be disclosed. SWH shall not be prohibited by this provision from pursuing other remedies, including a claim for losses and damages except as is otherwise provided in this Agreement. 12. CONFIDENTIALITY AFTER TERMINATION. The confidentiality provisions of this Agreement shall remain in full force and effect after the termination of this Agreement for a period of five (5) years from the date of such termination 13. RETURN OF RECORDS. Upon termination of this Agreement, Eakin shall deliver all records, notes, data, memoranda, models, and equipment of any nature that are in Eakin's possession or under Eakin's control and that are SWH property or relate to SWH business. 14. NOTICES. All notices required or permitted under this Agreement shall be in writing and shall be deemed delivered when delivered in person or deposited in the United States mail, postage prepaid, addressed as follows: -3- If for SWH: Roger S. Mertz Chairman of the Board SonomaWest Holdings, Inc. 2064 Highway 116 North Sebastopol, CA 95472-2662 If for Eakin: Thomas R. Eakin Eakin Consulting PO Box 2725 4612 Morris Court, E Santa Rosa, California 95405-0725 Such address may be changed from time to time by either party by providing written notice to the other in the manner set forth above. 15. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the parties and there are no other promises or conditions in any other agreement whether oral or written. This Agreement supersedes any prior written or oral agreements between the parties. 16. AMENDMENT. This Agreement may be modified or amended only by an amendment in writing signed by both parties. 17. SEVERABILITY. If any provision of this Agreement shall be held to be invalid or unenforceable for any reason, the remaining provisions shall continue to be valid and enforceable. If a court finds that any provision of this Agreement is invalid or unenforceable, but that by limiting such provision it would become valid and enforceable, then such provision shall be deemed to be written, construed, and enforced as so limited. 18. WAIVER. The failure of either party to enforce any provision of this Agreement shall not be construed as a waiver or limitation of that party's right to subsequently enforce and compel strict compliance with every provision of this Agreement. 19. APPLICABLE LAW. This Agreement shall be governed by the laws of the State of California. 20. ATTORNEYS' FEES. If any legal action is brought to enforce or interpret the provisions of this Agreement, the prevailing party will be entitled to reasonable attorneys' fees, in addition to any other relief to which that party may be entitled. Executed at Santa Rosa, California, on July 28, 2004. "SWH": SonomaWest Holdings, Inc. By: /s/ ROGER S. MERTZ ---------------------------------------- Roger S. Mertz Chairman of the Board of Directors -4- "Eakin" Thomas R. Eakin, d.b.a. Eakin Consulting By: /s/ THOMAS R. EAKIN --------------------------------------- Thomas R. Eakin -5- SCHEDULE A TO CONSULTING AGREEMENT DATED AUGUST 1, 2004 EAKIN CONSULTING FINANCIAL & MANAGEMENT CONSULTING P.O. Box 2725 SANTA ROSA, CA 95405-0725 PHONE AND FAX: (707) 539-5627 CELL: (707) 483-1672 E-MAIL: tom@eakinconsulting.com CONSULTING FEE SCHEDULE August 1, 2004 HOURLY FEES o Financial or management consulting $115.00/hour. o Use of outside consultants billed at cost plus 10%, provided that any use of an outside consultant must first be approved by SWH. o Legal proceedings (testimony in deposition, trials and arbitration/mediation hearings) are billable at 1.5 times the standard rate per hour. TRAVEL o Travel inside Sonoma County - Non-chargeable. o Travel outside Sonoma County - Travel time billed at one-half the consulting rate. Over-night travel - Daily rate to be mutually agreed upon in advance. o Mileage outside Sonoma County is billed at the mileage rate established by the Internal Revenue Service. o Out of pocket expenses billed at cost. BILLINGS o Invoices will be issued every two weeks. o Minimum billing of four hours (in addition to travel time) for all required on-site visits or meetings outside Sonoma County. o Terms - Net five days from receipt. Schedule A -1- EX-10.5 4 c33808_ex10-5.txt Exhibit 10.5 CONSULTING AGREEMENT This Agreement ("Agreement") is made and effective as of July 1, 2004 ("Effective Date") by and between SONOMAWEST HOLDINGS, INC. a California corporation ("Client") and BUGATTO INVESTMENT COMPANY ("Consultant"). 1. SERVICES AND DELIVERABLES. Consultant will perform the services described in Consultant's proposal to Client dated June 28, 2004 and such other services as Client and Consultant shall agree upon ("Services"). Consultant will determine the method, details and means of performing the Services. This Agreement supercedes the agreement dated July 17, 2001, as amended, between Client and Consultant's principal, David J. Bugatto, and is intended by the parties to govern all services provided and to be provided by Consultant to Client on and after July 1, 2004. 2. FEES AND PAYMENT. In consideration for the Services to be performed by Consultant, Client will pay to Consultant an hourly fee of $225.00 per hour for all hours rendered on behalf of Client. In addition, in the event either of the Company's Sonoma County properties are sold during the term hereof, upon closing Consultant will be paid a fee of 2% of the gross sales price regardless of whether or not a broker is involved. Client will pay Consultant for its services within fifteen (15) days of receiving a monthly invoice. 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 and miscellaneous 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) June 30, 2005. 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. d. If Client fails to pay Consultant fees or payment as provided herein, Consultant at its option may terminate the Agreement. 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. 2064 Highway 116, North Sebastopol, CA 95472-2662 Attn: Roger S. Mertz, Chairman If to Consultant: Bugatto Investment Company c/o David J. Bugatto 3904 El Ricon Way Sacramento, CA 95864 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 in 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 laws of the state of California. IN WITNESS WHEREOF, this Agreement has been entered into as of the date and year first above written. Consultant: BUGATTO INVESTMENT COMPANY By: /s/ David J. Bugatto --------------------------- David J. Bugatto, President Client: SONOMAWEST HOLDINGS, INC. By: /s/ Roger S. Mertz --------------------------- Roger S. Mertz, Chairman EX-11.1 5 c33808_ex11-1.txt EXHIBIT 11.1 COMPUTATION OF EARNINGS (LOSS) PER SHARE (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JUNE 30, 2004 2003 2002 ------------------------------------------------------- AVERAGE COMMON SHARES OUTSTANDING 1,107 1,105 1,052 AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 1,127 1,109 1,061 NET INCOME (LOSS) FROM CONTINUING OPERATIONS APPLICABLE TO $ 62 $ (202) $ (511) COMMON STOCK INCOME (LOSS) PER COMMON SHARE FROM CONTINUING OPERATIONS: Basic $ 0.06 $ (0.18) $ (0.49) Diluted (1) $ 0.05 $ (0.18) $ (0.49) NET EARNINGS FROM DISCONTINUED OPERATIONS APPLICABLE TO $ - $ 127 $ 16 COMMON STOCK EARNING PER COMMON SHARE FROM DISCONTINUED OPERATIONS: Basic $ - $ 0.11 $ 0.02 Diluted $ - $ 0.11 $ 0.02 NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ 62 $ (75) $ (495) TOTAL INCOME (LOSS) PER COMMON SHARE: Basic $ 0.06 $ (0.07) $ (0.47) Diluted (1) $ 0.05 $ (0.07) $ (0.47)
(1) For total loss per common share and loss per common share from continuing operations, the effect of potentially dilutive stock options and warrants has not been computed for any period presented because the effect would be anti-dilutive. Diluted common equivalent shares outstanding have been disclosed solely for purposes of calculating diluted earnings per share from discontinued operations EX-14.1 6 c33808_ex14-1.txt Exhibit 14.1 September 21, 2004 SONOMAWEST HOLDINGS INC CODE OF BUSINESS CONDUCT AND ETHICS I. OVERVIEW This Code of Business Conduct and Ethics sets forth the guiding principles by which we operate our company and conduct our daily business with our customers, vendors, shareholders and with each other. It does not cover every issue that may arise, but it sets out basic principles to guide all directors, officers and employees of SonomaWest Holdings, Inc. (referred to in this Code as the "Company" or "SWHI"). This Code applies to all of our directors, officers and employees (together "Covered Persons"). We expect each Covered Person to conduct him/herself accordingly and seek to avoid even the appearance of improper behavior. We have tried to write this policy so that it is consistent with and supportive of all applicable laws. If it turns out that a policy in this Code conflicts with a law, you must comply with the law. If you have any questions about these conflicts or potential conflicts, please consult with your manager about how to handle the situation. Those who violate the policies contained in this Code will be subject to disciplinary action, up to and including termination of employment. II. COMPLIANCE WITH LAWS, RULES AND REGULATIONS Obeying the law, both in letter and in spirit, is the foundation on which this Company's ethical standards are built. Although we do not expect each Covered Person to know the details of each of these laws, it is important to know enough to determine when to seek advice from managers or other appropriate personnel. You are responsible for discussing with your manager which laws, regulations and SWHI policies apply to your position and what training you might need to understand and comply with them. III. CONFLICTS OF INTEREST We expect each Covered Person to be scrupulous in avoiding any action or interest that conflicts or gives the appearance of a conflict with the Company's interests. A "conflict of interest" exists when a person's private interest interferes or is inconsistent in any way with the interests of the Company. Therefore, a conflict can arise when a Covered Person takes actions or has interests that may make it difficult to perform his or her Company work objectively and effectively. For example, having a financial or investment interest in a vendor, supplier or competitor of the Company may constitute a conflict of interest to the extent such relationship interferes with a Covered Person's ability to act unconditionally on behalf of the Company. Conflicts of interest may also arise when a Covered Person, or members of his or her family, receive improper personal benefits as a result of the Covered Person's position in the Company. It is almost always a conflict of interest for a Company employee to serve simultaneously as an employee, consultant or director for a competitor, customer or supplier. The best policy is to avoid any direct or indirect business connection with our customers, suppliers or competitors, except on our behalf. Conflicts of interest may not always be clear-cut, so if you have a question, you should consult your manager and, if necessary, higher levels of management. Any employee who becomes aware of a conflict or potential conflict should bring it to the attention of his or her manager. IV. CONFIDENTIAL INFORMATION AND INSIDER TRADING Covered Persons who have access to confidential information or other material non-public information concerning the Company are not permitted to use or share that information for stock trading purposes or for any other purpose except the conduct of our business. (See Section X below regarding confidentiality generally). All non-public information about the Company should be considered confidential information. In addition, it not only violates our policies but is illegal for any Covered Person to use non-public information for his/her personal financial benefit or to "tip" others who might make an investment decision on the basis of such information. In order to assist with compliance with laws against insider trading, the Company has adopted an INSIDER TRADING POLICY AND GUIDELINES WITH RESPECT TO CERTAIN TRANSACTIONS IN COMPANY SECURITIES. This policy is to be distributed to every director, officer and employee as well as anyone else deemed to be an insider under the policy. If you have any questions about the INSIDER TRADING POLICY, please consult the Chief Financial Officer. V. CORPORATE OPPORTUNITIES In addition to our policy against conflicts of interest generally, Covered Persons are prohibited from taking for themselves personally opportunities that are discovered through the use of corporate property, information or position without the consent of the Board of Directors. No Covered Person may use corporate property, information, or position for improper personal gain, and no Covered Person may compete with the Company directly or indirectly. Covered Persons owe a duty to the Company to advance its legitimate interests when the opportunity to do so arises. VI. COMPETITION AND FAIR DEALING We seek to outperform our competition fairly and honestly. Stealing proprietary information (whether belonging to us or to a third party), possessing trade secret information that was obtained without the owner's consent, or inducing such disclosures by past or present employees of other companies is prohibited. We expect and demand that each Covered Person respect the rights of and deal fairly with our customers, suppliers, competitors and fellow employees. No Covered Person may take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other intentional unfair-dealing practice. We expect each Covered Person to exercise due care and professionalism to avoid undue influence from current or potential customers, vendors, lenders or other business partners of the Company ("Business Partners"). The purpose of business entertainment and gifts in a commercial setting is to create goodwill and sound working relationships, not to gain unfair advantage with customers. Covered Persons should therefore take care not to accept gifts or benefits from Business Partners that might influence their activities on behalf of the Company. -2- VII. DISCRIMINATION AND HARASSMENT We are firmly committed to providing equal opportunity in all aspects of employment and application for employment and to providing a workplace free from harassment of any kind. Harassment includes verbal, physical or visual conduct that creates an intimidating, offensive or hostile working environment or that interferes with work performance. Some examples of harassment include derogatory comments based on racial or ethnic characteristics, unwelcome sexual advances, or other conduct of a sexual nature which creates a hostile work environment or interferes with work performance. We encourage you to promptly report any incident of harassment to your manager or to any other member of management with whom you are comfortable. We will investigate every reported complaint promptly, thoroughly and confidentially, to the extent practicable, consistent with our obligation to investigate thoroughly. VIII. HEALTH AND SAFETY The Company strives to provide each employee with a safe and healthy work environment. Each Covered Person is responsible for assisting us to maintain a safe and healthy workplace for all persons by following safety and health rules and practices and reporting accidents, injuries and unsafe equipment, practices or conditions. Violence and threatening behavior are strictly prohibited. Covered Persons may not report to work in any condition other than in a manner ready to perform their duties, free from the influence of illegal drugs or alcohol. IX. RECORD-KEEPING The Company requires honest and accurate recording and reporting of information in order to make responsible business decisions and in order to properly report its activities. All of the Company's books, records, timesheets, accounts and financial statements must be maintained in reasonable detail, must appropriately reflect the Company's transactions and must conform both to applicable legal requirements and to the Company's system of internal controls and procedures. Unrecorded or "off the books" funds or assets should not be maintained unless permitted by applicable law or regulation. Business records and communications often become public, and we should avoid exaggeration, derogatory remarks, guesswork, or inappropriate characterizations of people and companies that can be misunderstood. This applies equally to e-mail, internal memos, and formal reports. Records should always be retained or destroyed according to the Company's record retention policies. In accordance with those policies, in the event you become aware of any litigation or governmental investigation please consult the Company's outside legal counsel. Any correspondence from any state or federal regulator or the Better Business Bureau, or any legal process (including without limitation subpoenas, discovery requests or deposition notices) that you receive must be immediately forwarded to the Company's outside legal counsel. X. CONFIDENTIALITY OF COMPANY AND CUSTOMER INFORMATION In carrying out the Company's business, Covered Persons often learn confidential or proprietary information about the Company, its customers, prospective customers or other third parties. Each Covered Person must maintain the confidentiality of confidential or proprietary information obtained or entrusted to him/her by the Company, except when disclosure is authorized by the Company's outside legal counsel or required by laws, regulations or legal proceedings. Confidential or proprietary information includes, among other things, any non-public information concerning the Company, including its business, financial performance, results or prospects, customer lists, employee information, -3- terms or fees offered to particular customers, marketing or strategic plans. The obligation to preserve confidential or proprietary information continues even after employment ends. Each Covered Person must take precautionary measures to prevent unauthorized disclosure of confidential or proprietary information. Accordingly, such persons should take steps to ensure that business-related paperwork and documents are produced, copied, faxed, filed, stored and discarded by means designed to minimize the risk that unauthorized persons might obtain access to confidential or proprietary information. XI. PROTECTION AND PROPER USE OF COMPANY ASSETS All Covered Persons should endeavor to protect the Company's assets and ensure their efficient use. Theft, carelessness, and waste have a direct impact on the Company's profitability. Any suspected incident of fraud or theft should be immediately reported for investigation. We expect that you will use our technology and resources in a manner that enhances productivity, enhances our public image, and is respectful of others, including other employees. Personal use of these items and resources should be kept to a minimum, and limited to non-work time, except in emergencies. XII. WAIVERS OF THE CODE Any waiver of this Code for executive officers or directors may be made only by the Board or a Board committee and will be promptly disclosed as required by law or NASDAQ regulations. Other waivers for Covered Persons must be approved by the Company's Chairman of the Board in accordance with any applicable Company policy and must be promptly reported to the Company's outside legal counsel. XIII. REPORTING ILLEGAL OR UNETHICAL BEHAVIOR All of the policies we describe in this Code sound relatively straight-forward and even self-evident when recited, but can be much more difficult to recognize or apply in real time and real life. We encourage you to talk to your manager or other appropriate personnel whenever you see something that you think may be either illegal or unethical, and particularly if you are not certain about the best course of action in a particular situation. Our policy prohibits retaliation for reports of misconduct by others made in good faith by Covered Persons, and we expect all Covered Persons to cooperate in internal investigations of misconduct. In support of these policies, we require Covered Persons to read the Company's COMPLAINT PROCEDURE AND NONRETALIATION POLICY, which describes the Company's procedures for receiving, retaining, and handling complaints regarding accounting, internal accounting controls, or auditing matters. Any Covered Person may submit a good faith concern regarding questionable accounting or auditing matters without fear of dismissal or retaliation of any kind. XIV. CODE HISTORY September 21, 2004 Board of Directors adopts the Code. -4- September 21, 2004 SONOMAWEST HOLDINGS INC CODE OF ETHICS FOR CHIEF EXECUTIVE OFFICER AND SENIOR FINANCIAL OFFICERS SonomaWest Holdings, Inc. (the "Company") has a Code of Business Conduct and Ethics applicable to all directors and employees of the Company. The Chairman of the Board ("COB") and all senior financial officers, including the Chief Financial Officer ("CFO") are bound by the provisions set forth therein relating to ethical conduct, conflicts of interest and compliance with law. In addition to the Code of Business Conduct and Ethics, the COB and senior financial officers are subject to the following additional specific policies: l. The COB and all senior financial officers are responsible for full, fair, accurate, timely and understandable disclosure in the periodic reports required to be filed by the Company with the Securities and Exchange Commission. Accordingly, it is the responsibility of the COB and each senior financial officer to promptly bring to the attention of the Disclosure Committee any material information of which he or she may become aware that affects the disclosures made by the Company in its public filings or otherwise assist the Disclosure Committee in fulfilling its responsibilities as specified in the Company's Disclosure Guidelines and Disclosure Policy. 2. The COB and each senior financial officer shall promptly bring to the attention of the Disclosure Committee and the Audit Committee any information he or she may have concerning (a) significant deficiencies or material weaknesses in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial data or (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's financial reporting, disclosures or internal controls. 3. The COB and each senior financial officer shall promptly bring to the attention of the COB and to the Audit Committee any information he or she may have concerning any violation of the Company's Code of Business Conduct and Ethics, including any actual or apparent conflicts of interest between personal and professional relationships, involving any management or other employees who have a significant role in the Company's financial reporting, disclosures or internal controls. 4. The COB and each senior financial officer shall promptly bring to the attention of the COB and to the Audit Committee any information he or she may have concerning evidence of a material violation of the securities or other laws, rules or regulations applicable to the Company and the operation of its business, by the Company or any agent thereof, or of violation of the Code of Business Conduct and Ethics or of these additional procedures. 5. The Board of Directors shall determine, or designate appropriate persons to determine, appropriate actions to be taken in the event of violations of the Code of Business Conduct and Ethics or of these additional procedures by the COB and the Company's senior financial officers. Such actions shall be reasonably designed to deter wrongdoing and to promote accountability for adherence to the Code of Business Conduct and Ethics and to these additional procedures, and shall include written notices to the individual involved that the Board has determined that there has been a violation, censure by the Board, demotion or re-assignment of the individual involved, suspension with or without pay or benefits (as determined by the Board) and termination of the individual's employment. In determining what action is appropriate in a particular case, the Board of Directors or such designee shall take into account all relevant information, including the nature and severity of the violation, whether the violation was a single occurrence or repeated occurrences, whether the violation appears to have been intentional or inadvertent, whether the individual in question had been advised prior to the violation as to the proper course of action and whether or not the individual in question had committed other violations in the past. -2- EX-23.1 7 c33808_ex23-1.txt EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We have issued our report dated July 25, 2004, accompanying the consolidated financial statements and schedule included in the Annual Report of SonomaWest Holdings, Inc. and Subsidiary on Form 10-K for the fiscal year ended June 30, 2004. We hereby consent to the incorporation by reference of said report in the Registration Statements of SonomaWest Holdings, Inc. on Forms S-8 (File No. 033-70870, File No. 333-84295, and File No. 333-101755. GRANT THORNTON LLP San Francisco, California September 24, 2004 EX-31.1 8 c33808_ex31-1.txt EXHIBIT 31.1 I, Roger S. Mertz, certify that: 1. I have reviewed this annual report on Form 10-K of SonomaWest Holdings, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 28, 2004 /s/ ROGER S. MERTZ - ------------------------------------- Roger S. Mertz, Chairman of the Board EX-31.2 9 c33808_ex31-2.txt EXHIBIT 31.2 I, Thomas R. Eakin, certify that: 1. I have reviewed this annual report on Form 10-K of SonomaWest Holdings, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 28, 2004 /s/ THOMAS R. EAKIN - ---------------------------------------- Thomas R. Eakin, Chief Financial Officer EX-32.1 10 c33808_ex32-1.txt EXHIBIT 32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350), the undersigned officer of SonomaWest Holdings, Inc., a California corporation (the "Company"), does hereby certify that: The Annual Report on Form 10-K for the fiscal year ended June 30, 2004 (the "Form 10-K") of the Company fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ ROGER S. MERTZ - ------------------------------------- Roger S. Mertz, Chairman of the Board September 28, 2004 A signed original of this written statement required by Section 906 has been provided to SonomaWest Holdings, Inc. and will be retained by SonomaWest Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 11 c33808_ex32-2.txt EXHIBIT 32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350), the undersigned officer of SonomaWest Holdings, Inc., a California corporation (the "Company"), does hereby certify that: The Annual Report on Form 10-K for the fiscal year ended June 30, 2004 (the "Form 10-K") of the Company fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ THOMAS R. EAKIN - ---------------------------------------- Thomas R. Eakin, Chief Financial Officer September 28, 2004 A signed original of this written statement required by Section 906 has been provided to SonomaWest Holdings, Inc. and will be retained by SonomaWest Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-99.1 12 c33808_ex99-1.txt Exhibit 99.1 SONOMAWEST HOLDINGS INC September 21, 2004 COMPLAINT PROCEDURE AND NONRETALIATION POLICY FOR ACCOUNTING, SECURITIES AND SHAREHOLDER MATTERS I. PURPOSE SonomaWest Holdings, Inc. (the "Company") is committed to (i) complying with all applicable securities laws and regulations, accounting standards, accounting controls and audit practices, and (ii) providing a workplace conducive to open discussion of its business practices. Accordingly, the Company has adopted this Complaint Procedure and Nonretaliation Policy (the "Policy") to (A) promote the efficient review and resolution of concerns and complaints regarding potential violations of securities laws or other provisions of federal or state law relating to fraud against shareholders by the Company or its directors, officer or employees, and (B) assure that employees raising any such concerns are protected. II. SCOPE OF MATTERS COVERED BY PROCEDURES AND POLICY The procedures and nonretaliation policy set forth below relate to concerns and complaints involving the following matters: o accounting, internal accounting controls, auditing matters or disclosure practices; o violations or possible violations of: >> federal criminal law relating to securities fraud, mail fraud, bank fraud, or wire, radio and television fraud; >> any rule or regulation of the Securities and Exchange Commission; or >> any provision of federal or state law relating to fraud against shareholders. III. PROCEDURES FOR SUBMISSION OF REPORTS In order to facilitate the reporting of concerns and complaints by employees and others, the Company's Audit Committee has established the following procedures for receiving, retaining and properly handling concerns and complaints regarding the matters set forth in Section II above ("Reports"). The Audit Committee has designated a Compliance Officer who is responsible for administering this Policy and for receiving, collecting, reviewing, processing and resolving Reports by employees and others. A. SUBMISSION OF REPORTS Employees are encouraged to discuss any Report with their supervisor, who is in turn responsible for informing the Compliance Officer of any Reports submitted. If the employee prefers not to discuss these sensitive matters with his or her own supervisor, we encourage the employee to discuss any Report with the Compliance Officer. This can be done on a confidential basis. The Compliance Officer will review the Report and, if (s)he determines it appropriate or is otherwise required by Board directive, (s)he will submit the Report to the Board or an appropriate Committee of the Board. The Company's Compliance Officer for purposes of the Company's Complaint Procedure and Nonretaliation Policy is Mathew Ertman, who may be reached at (213) 955-5579 or mertman@allenmatkins.com. B. SUBMISSION OF REPORTS ON AN ANONYMOUS BASIS The Company's Audit Committee has also established a procedure by which employees may submit Reports involving the Company's accounting, auditing, and internal auditing controls and disclosure practices anonymously within the Company. Attached as EXHIBIT A to this Policy is a description of this anonymous Report submittal procedure. Reports submitted through this procedure will be evaluated and presented to the Audit Committee, which will oversee the investigation and response to the Reports submitted, independent of Company management. Any employee may utilize this confidential process either to submit new Reports, or if (s)he feels that a Report previously submitted to a supervisor or the Compliance Officer has not been appropriately handled. C. RETENTION OF REPORTS The Compliance Officer will maintain a log of all Reports, tracking their receipt, investigation and resolution and will prepare a periodic summary report thereof for the Audit Committee. Copies of Reports and the log will be maintained in accordance with the Company's document retention policy. The Audit Committee will maintain a log of all Reports that are submitted on an anonymous basis directly to the Audit Committee using the submittal procedure set forth on EXHIBIT A. IV. NONRETALIATION POLICY AGAINST EMPLOYEES It is Company policy to comply with all applicable laws that protect employees against unlawful discrimination or retaliation by their employer as a result of their lawfully reporting information regarding, or their participating in, investigations involving corporate fraud or, for that matter, any other violations by the Company or its agents of federal or state law. Specifically, this Policy prevents any employee from being subject to disciplinary or retaliatory action by the Company or any of its employees or agents as a result of the employee: o disclosing information to, filing a Report with, or participating in an investigation conducted by, the employee's supervisor or the Company's Compliance Officer regarding accounting, internal accounting controls, auditing matters or disclosure practices; o disclosing information to a government or law enforcement agency, where the employee has reasonable cause to believe that the information discloses a violation or possible violation of federal or state law or regulation; o providing information, causing information to be provided, filing, causing to be filed, testifying, participating in a proceeding filed or about to be filed (with the knowledge of the Company), or otherwise assisting in an investigation or proceeding regarding any conduct that the employee reasonably believes involves a violation of: >> federal criminal law relating to securities fraud, mail fraud, bank fraud, or wire, radio and television fraud; -2- >> any rule or regulation of the Securities and Exchange Commission; or >> any provision of federal law relating to fraud against shareholders; where, with respect to investigations, such information or assistance is provided to or the investigation is being conducted by a federal regulatory agency, a member of Congress, or a person at the Company with supervisory or similar authority over the employee. V. LIMITATIONS Employees who file reports or provide evidence which they know to be false or without a reasonable belief in the truth and accuracy of such information will not be protected by this Policy and may be subject to disciplinary action, including termination of their employment. In addition, except to the extent required by law, the Company does not intend this Policy to protect employees who violate any applicable attorney-client privilege to which the Company or its agents may be entitled under statute or common law principles, or to protect employees who violate their confidentiality obligations with regard to the Company's confidentiality or proprietary information, the confidentiality or proprietary information of an employee's former employer or other third party to the extent such information is subject to an enforceable confidentiality or nondisclosure agreement between the employee and such third party, or otherwise violate the provisions of applicable law regarding the protection of customer third party confidential or proprietary information. Employees considering providing information that may violate these privileges, policies or statutes or reveal Company trade secrets are advised to consult an attorney before doing so. Employees should also review the Company's CODE OF BUSINESS CONDUCT AND ETHICS regarding disclosure of confidential and proprietary information. V. NONRETALIATION POLICY ENFORCEMENT Employees found to have engaged in retaliatory behavior against any person who submits a Report in accordance with this policy or participates in any subsequent related investigation may be subject to discipline up to and including termination. VI. CORRECTIVE ACTIONS The Compliance Officer and/or the Audit Committee will investigate promptly all Reports received and will take prompt corrective action as deemed appropriate. They will maintain confidentiality to the fullest extent possible, consistent with the need to conduct an adequate review. If you believe you have been subjected to any action that violates this Policy, you may submit a Report with your supervisor or the Compliance Officer. If it is determined that you have been subject to any action or conduct that violates the letter or spirit of this Policy, we will correct the situation. VII. CODE OF ETHICS The Company has also adopted a CODE OF BUSINESS CONDUCT AND ETHICS which provides more general guidelines and principles for the way in which directors, officers and employees of the Company are expected to conduct daily business with the Company's customers, vendors, shareholders and with each other. Employees with complaints or concerns regarding issues not related to those of the type set forth in Section II above should review the Code for the Company's policy and procedures for resolution of such complaints or concerns. -3- EXHIBIT A ANONYMOUS REPORT PROCEDURES Employees who prefer not to discuss complaints regarding accounting, auditing, disclosure and securities fraud issues with his or her own supervisor or with the Compliance Officer are encouraged to submit a Report or Reports on an anonymous, confidential basis ("Anonymous Reports") using the following Anonymous Report Procedures. A. PREPARATION AND SUBMISSION OF ANONYMOUS REPORTS Anonymous Reports must be in writing, and must contain a detailed description of the nature of the complaint. Anonymous Reports must describe the activity which is the subject of the complaint, and must identify the party or parties involved. Anonymous Reports must contain enough specificity to allow the Company to research and investigate the complaint. The Company has developed an Anonymous Report Form that employees may use when submitting Anonymous Reports; however, employees are not required to use the Anonymous Report Form, and may submit an Anonymous Report an any form or in any format, so long as the complaint is in sufficient detail. A copy of the Anonymous Report Form is attached as Exhibit A-1. Anonymous Reports must be placed in a sealed envelope marked "To Audit Committee - CONFIDENTIAL," and placed in the Company's interoffice mail or placed in U.S. mail addressed as follows: SonomaWest Holdings, Inc. 2064 Highway 116 North Sebastopol, CA 95472 Attention: Audit Committee - CONFIDENTIAL Anonymous Reports must not be signed, and no name or return address must appear on the envelope used to submit the Anonymous Report. All Anonymous Reports received by the Company, shall be delivered, unopened, directly to the Chairman of the Audit Committee of the Company's Board of Directors. The Company shall adopt mail handling procedures sufficient to ensure that all envelopes addressed directly to the Company's Audit Committee - whether received through interoffice mail, U.S. mail or courier service - are not opened, and are delivered promptly to the Chairman of the Audit Committee. The Company's Audit Committee will review, research and investigate promptly every Anonymous Report it receives that involves the Company's accounting, auditing or disclosure practices, securities fraud issues or the Company's internal auditing controls, and will take prompt corrective action as deemed appropriate. If the Audit Committee determines it appropriate or is otherwise required by Board directive, the Audit Committee shall submit the Anonymous Report and the Audit Committee's findings to the Company's Board of Directors. Anonymous Reports received by the Chairman of the Audit Committee that do not involve the Company's accounting, auditing or disclosure practices, securities fraud issues or the Company's internal auditing controls shall be referred to the appropriate Company officer or manager for handling. -1- EXHIBIT A-1 ANONYMOUS REPORT FORM (FOR USE BY SONOMAWEST HOLDINGS, INC. EMPLOYEES WHO WISH TO SUBMIT A COMPLAINT ON AN ANONYMOUS, CONFIDENTIAL BASIS, RELATING TO THE COMPANY'S ACCOUNTING, AUDITING OR DISCLOSURE PRACTICES, SECURITIES FRAUD ISSUES OR THE COMPANY'S INTERNAL AUDITING CONTROLS.) Describe nature of the complaint in detail (include specifics; identify the party or parties involved, dates events occurred, etc.): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- o DO NOT SIGN THIS FORM. o PLACE THIS FORM IN A SEALED INTEROFFICE ENVELOPE MARKED "TO AUDIT COMMITTEE - CONFIDENTIAL" OR o PLACE THIS FORM IN A SEALED ENVELOPE AND MAIL IT VIA U.S. MAIL TO: SonomaWest Holdings, Inc. 2064 Highway 116 North Sebastopol, CA 95472 Attention: Audit Committee - CONFIDENTIAL o THIS COMPLAINT WILL BE KEPT STRICTLY CONFIDENTIAL -2- -----END PRIVACY-ENHANCED MESSAGE-----