-----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, Nw9Cya5A6v8PkeDM4Uv3JMLcNQEtoiYa2yuwHPHsEooyd47fjUx9R0tcvaSNFIPM jKYhoId74yrwomZQvCGXJQ== 0001144204-05-030191.txt : 20050928 0001144204-05-030191.hdr.sgml : 20050928 20050928170616 ACCESSION NUMBER: 0001144204-05-030191 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050928 DATE AS OF CHANGE: 20050928 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: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-01912 FILM NUMBER: 051108876 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 v026236_10k.htm
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, 2005
   
o
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) 824-2534
(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, Par Value $0.0001 Per Share
(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 o
 
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. o
 
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  YES o NO x
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o 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 20, 2005, there were 1,124,257 shares of common stock, par value $0.0001 per share, 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 2005 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before 120 days after the end of the 2005 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 private 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. The Company’s primary business revenue is generated from the leasing of its two properties, located in Sebastopol, California.
 
The properties are leased to multiple tenants with leases varying in length from month-to-month to ten years. Revenue from lease rental is recognized on a monthly basis, based upon the dollar amount specified in the related lease. 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.
 
Properties
 
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. Improvements on the property 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. 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.
 
-2-
As of June 30, 2005, approximately 60% of the leasable space under roof had been leased to ten tenants on a month-to-month or longer-term basis. An additional 620 square feet of outside space has also been leased. Lease terms range from month-to-month to ten years with options to extend the lease term.
 
The following table sets forth information as of June 30, 2005, concerning future lease expirations and other data related to the South property. The table for the South property, and the similar table for the North property appearing below, assume that all current month-to-month leases continue unchanged throughout the periods presented in the table, and that there are no changes to the other leases other than expiration of the leases at the end of their stated terms.
 
                   
 
Year ending June 30th
  
 
Number of Tenants Whose Leases Will Expire
  
 
Total Square Feet Covered by Remaining Long-term Leases
  
 
Annual Rent Represented by Remaining Long-term Leases
  
Percent of Annual Total Long-term and Monthly Gross Rent Represented by Remaining Long-term Leases South Property Only
  
2007
    
2
    
13,509
  
$
55,359
    
50
%
2007
    
2
    
5,417
  
$
8,815
    
14
%
2008
    
1
    
—
    
—
    
—
  
2009
    
—
    
—
    
—
    
—
  
2010
    
—
    
—
    
—
    
—
  
2011    
—
    
—
    
—
    
—
  
                           
 
The federal tax basis of the property is $312,354. The accumulated book depreciation is $1,000,208 and the book net carrying value is $281,228. 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, 2005 were $14,899. The Company has no debt associated with this property.
 
SonomaWest Industrial Park North. This property consists of 66.4 acres of land approximately two miles north of Sebastopol at 2064 Gravenstein Highway North. Improvements on the property consist of 12 buildings located on approximately 27 acres with an aggregate of 306,170 square feet of leasable space under roof. In addition, there is 56,096 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 industrial 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 and having a material adverse effect on the Company’s business, financial condition and results of operations.
 
-3-
As of June 30, 2005, 75% of the leasable space under roof had been leased to twenty-one tenants on a month-to-month or longer-term basis. An additional 56,096 square feet of outside space has also been leased. Leases range from month-to-month to ten years.
 
The following table sets forth information as of June 30, 2005, concerning future lease expirations and other data related to the North property:
 
                   
 
Year ending June 30th
  
 
Number of Tenants Whose Leases Will Expire
  
 
Total Square Feet Covered by Remaining Long-term Leases
  
 
Annual Rent Represented by Remaining Long-term Leases
  
Percent of Annual Total Long-term and Monthly Gross Rent Represented by Remaining Long-term Leases North Property Only
 
2006
    
5
    
113,549
  
$
551,216
    
68
%
2007
    
4
    
69,045
  
$
344,415
    
57
%
2008
    
1
    
56,625
 
$
192,857
    
43
%
2009
    
2
    
34,279
  
$
158,320
    
38
%
2010
    
1
    
29,339
  
$
143,755
    
36
%
2011
     —     29,339  
$
 143,755     36 %
                           
 
The federal tax basis of the property is $1,618,277. The accumulated book depreciation is $4,449,993 and the book net carrying value is $1,178,476. 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, 2005 were $54,365. The Company has a $1.6 million term loan and a $500,000 line of credit from a bank that is secured by 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.
 
-4-
Effective September 1, 2005, the Company entered into a long-term lease with a new tenant. Initially the lease will cover 17,274 square feet at a total monthly income of $11,897 through October 31, 2006. Effective November 1, 2006, the leased space increases by 11,910 square feet and $8,099 of income per month. The lease expires on September 30, 2011. Under the terms of the lease, the Company will reimburse the new tenant for leasehold improvements up to $64,000. The above tables do not give effect to this new lease.
 
Other Assets
 
Investment in MetroPCS Communications, Inc.
 
Background. The Company also holds an investment in MetroPCS Communications, Inc. (“MetroPCS”), a privately held telecommunications company. As of December 10, 2003, the Company had completely funded its $3 million minority investment in the Series D Preferred Stock of MetroPCS. The Company owns less than one percent of the total outstanding shares of Series D Preferred Stock and less than one percent of the total outstanding capital stock of MetroPCS on an as-converted basis. The Company accounts for its investment in MetroPCS under the cost method.
 
On 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 was merged with MetroPCS, Inc. As a result, MetroPCS, Inc. became a wholly-owned subsidiary of MetroPCS and all of the outstanding shares of MetroPCS, Inc. were exchanged for shares of MetroPCS, including the Company's Series D Preferred 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 statement. On June 6, 2005, MetroPCS filed a Form 15 with the Securities and Exchange Commission, terminating its registration as a reporting company under the Securities Exchange Act of 1934. The Board of Directors of SonomaWest Holdings continues to actively monitor this investment in order to maximize shareholder value.  The Company has no relationships with MetroPCS Communications other than its investment. Craig Stapleton, the Company’s largest stockholder and the father of Walker R. Stapleton, the President and Chief Executive Officer of the Company, is a shareholder of MetroPCS. A director of the Company has a small indirect beneficial ownership interest in MetroPCS Communications stock. 
 
Recent Developments. On September 26, 2005, the Company tendered approximately 20% of the shares of MetroPCS Series D Preferred Stock that it holds in response to a tender offer by certain third parties to purchase shares of MetroPCS Series D Preferred Stock and common stock. The Company’s total investment in all of the MetroPCS shares that it holds is approximately $3 million, and the price per share offered in the tender offer is approximately three times the original investment amount per share paid by the Company for its MetroPCS shares, including the cumulative unpaid dividends of $562,529 as of June 30, 2005. If all shares tendered by the Company were accepted, the Company estimates that gross proceeds to the Company from sale of the shares would be approximately $1.8 million. The Company’s net operating losses will offset most of the gain recognized for federal and state tax purposes from the sale of the MetroPCS shares.
 
The tender offer is complex, the completion of the tender offer is subject to a variety of terms, conditions and uncertainties, and the number of shares, if any, that will be purchased from the Company pursuant to the tender offer is subject to possible reduction pursuant to the terms of the tender offer and to the other conditions of the offer. There can be no assurance that the tender offer will be completed or that all shares tendered by the Company will be accepted. The tender offer is scheduled to expire on September 29, 2005, and completion is expected to occur shortly thereafter, subject to the other terms and conditions of the offer, including the offerors’ ability to extend the offer into early November 2005 in certain circumstances.
 
-5-
The Company believes that the MetroPCS shares it has elected not to tender continue to represent an attractive investment opportunity for the Company and its stockholders. However, there can be no assurance that the Company will be able to achieve liquidity for its remaining MetroPCS shares in the future at the price offered in the tender offer or at any other price.
 
Rights of the Series D Preferred Stock. 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, 2005, $562,529 of unpaid dividends has accrued with respect to the shares of Series D Preferred Stock owned by the Company.
 
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 (the original purchase price) plus the greater of accrued and unpaid dividends and the amount that would have been paid in respect of each share had 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 at a price equal to the liquidation value plus accrued and unpaid dividends.
 
Other Information
 
For the year ended June 30, 2005, the Company operated in one reportable segment, real estate management and rental operations. The Company’s business is not seasonal and does not require significant working capital. The Company does not engage in or make any expenditures with respect to research and development activities. Revenue from tenants resulting from the Company’s leasing activities is generally payable either on the 1st or 15th day of the month. For the year ended June 30, 2005, Benziger Family Winery and Manzana Products Company, Inc. accounted for 16% and 11% of the Company’s revenue, respectively.
 
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. Obtaining new tenants for our properties generally requires a tenant to relocate from an existing rental property of a competitor. The Company believes that its northern property enjoys a competitive advantage over other similarly situated properties with respect to certain kinds of potential tenants because of the wastewater treatment facility located on the property, which is well suited for tenants involved in the food processing industry and more particularly the wine processing industry. The Company believes that its rental rates for both of its northern and southern properties are competitively priced relative to comparable property on the market. Some of the Company's competitors enjoy the advantage that their properties are newer than the Company's properties. The Company generally competes on the basis of location, price, service and tenant improvements, including the northern property's wastewater treatment facility.
 
-6-
Environmental Matters
 
The Company believes it has complied in all material respects with all material 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 $2,252 during the 2005 fiscal year and $172,736 on the total project. The Company estimates that it will incur an additional approximately $2,630 to complete this project in fiscal 2006. In addition to the wastewater permit, the Company anticipates spending approximately $13,000 to comply with the requirements of regulatory agencies for the remediation of the remaining contaminates at the location of a former underground storage tank. All of these costs are reimbursable through the State of California. 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.
 
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 Company's property insurance policy has a $50,000 deductible.
 
Employees
 
The Company currently employs five employees in a management or staff capacity, none of whom is covered under a collective bargaining agreement.
 
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 has only been in recent years that we have shifted our primary business focus to that business segment and its activities. In addition, we have outsourced some of our functions relating to managing our properties. While we believe we have sufficient experience, resources and personnel to manage our properties effectively, we do not have a long history that demonstrates such effectiveness and there is no assurance that we will be successful.

 
-7-
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. As part of this improvement, we anticipate the commercial, industrial and office markets in Sonoma County will also experience positive effects from this recovery. There is no assurance, however, that the market will significantly improve in the near future.
 
Increasing utility costs and power outages in California may have an adverse effect on our operating results and occupancy levels.
 
The State of California continues to address issues related to the supply of electricity and natural gas. Since June 2000, shortages of electricity have resulted in increased costs for consumers and certain interruptions in service. Increased consumer costs and consumer perception that the State is not able to effectively manage its energy needs may reduce demand for leased space in California office and industrial properties. A significant reduction in demand for industrial space would adversely affect our future financial position, results of operations, cash flow, quoted per share trading price of our common stock and ability to satisfy our debt service obligations.
 
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 that is uninsured or that 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, 2005, we derived all of our 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.
 
-8-
We may be unable to renew leases or re-let space as leases expire.
 
As of June 30, 2005, not taking into account month-to-month leases, leases representing approximately 49% and 21% of the square footage of our properties will expire in 2006 and 2007, respectively. If leases expire with above market rental rates we may be forced to renew or re-lease such expiring leases at rates below the existing rental rates. We cannot give any assurance that leases will be renewed or that our 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 our debt service obligations would be adversely affected.
 
Our real estate holdings could subject us to potential environmental liability.
 
We could be held liable for the costs of removal or remediation of any hazardous or toxic substances located on or in our properties. These laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of the hazardous or toxic substances. The presence of such substances, or the failure to remediate such substances properly, may adversely affect our ability to sell or rent the property or to borrow using the property as collateral. Other federal and state laws require the removal of damaged material containing asbestos in the event of remodeling or renovation.
 
We rely on two major tenants for a significant portion of our rental revenues.
 
Benziger Family Winery accounted for 16%, 18% and 19% of the Company’s rental revenues for the fiscal years ended June 30, 2005, 2004 and 2003, respectively. In addition, Benziger Family Winery accounted for 28% and 23% of the accounts receivable balance as of the fiscal years ended June 30, 2005 and 2004, respectively.  The lease for this tenant expires in fiscal year 2006 and, unless the term is extended or the lease is re-negotiated, the lease may be terminated. The loss of Benziger Family Winery as a tenant would have a material adverse effect on our operating results. At June 30, 2005 and 2004, all rental amounts owing by Benziger Family Winery were payable within the normal billing cycle and were not past due.
 
Manzana Products Company, Inc. accounted for 11% of the Company’s rental revenues for the fiscal year ended June 30, 2005 and less than 10 % for the fiscal years ended June 30, 2004 and 2003, respectively. In addition, Manzana Products Company, Inc., accounted for less than 1 % and 7 % of the accounts receivable balance as of the fiscal years ended June 30, 2005 and 2004, respectively. The lease for this tenant expires in fiscal year 2006 and, unless the term is extended or the lease is re-negotiated, the lease may be terminated. The loss of Manzana Products Company, Inc. as a tenant would have a material adverse effect on our operating results. At June 30, 2005 and 2004, all rental amounts owing by Manzana Products Company, Inc. were payable within the normal billing cycle and were not past due.

 
-9-
Factors Related to Investments
 
Our investment in MetroPCS Communications, Inc., is subject to several risks, including lack of liquidity.
 
As of December 10, 2003, the Company had completely funded its $3 million minority investment in the Series D Preferred Stock of MetroPCS Communications, Inc., a privately held telecommunications company. The wireless industry is unsettled, highly competitive and is marked by rapidly developing and expanding technologies, which present 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. Similarly, there is no certainty that MetroPCS will ever become a public company or that a market will develop in the future for MetroPCS securities, and the Company may not be able to achieve liquidity for its investment. See “Business - Other Assets -- Recent Developments” and Note 8 to the financial statements appearing elsewhere herein for information concerning certain recent developments relating to our investment in MetroPCS Communications.
 
Our investment in MetroPCS Communications is our only securities investment other than short-term investments pursuant to our cash management policies. 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.
 

Factors Relating to Our Stock
 
Our stock price and trading volume could be volatile.
 
 Our stock price has from time to time experienced significant price and volume fluctuations. For example, during fiscal 2005, the high and low sales prices for our common stock were $15.00 and $7.52, respectively. Since becoming a public company, our stock price has fluctuated in conjunction with the stock markets generally and sometimes on matters more specific to the Company. Our stock price may continue to experience significant price and volume fluctuations.
 
During fiscal 2005, our common stock was listed on the Nasdaq SmallCap Market. The common stock stopped trading on the Nasdaq SmallCap Market in August 2005, and is currently trading in the over-the-counter “pink sheets.” Continued trading on the pink sheets could reduce the liquidity of our common stock, cause certain investors not to trade in our common stock and result in a lower stock price. The daily trading volume in the common stock is typically low. Sales of a significant number of shares into the public markets, particularly in light of our relatively small trading volume, may negatively affect our stock price.

Item 2. Properties
 
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. The Company believes its office space is adequate for its current needs.
 
Item 3. Legal Proceedings.
 
The Company is not a party to any legal proceedings.
 
-10-
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, 2005.
 
PART II
 
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters.
 
The Company’s Common Stock was traded on the Nasdaq SmallCap Market (symbol: SWHI) until August 10, 2005, when the common stock was delisted from the Nasdaq SmallCap Market and began trading on the over-the-counter “pink sheets” under the symbol “SWHI.PK.”
 
The quarterly high and low sales prices for the last two fiscal years were as follows:
 
Quarter Ending
  
 
Low
 
 
High
  
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
  
9/30/04
    
8.34
    
11.68
  
12/31/04
    
9.50
    
11.73
  
3/31/05
    
10.51
    
12.98
  
6/30/05
    
7.52
    
15.00
  
 
The above quotations were obtained from the Yahoo Finance Historical Quotes Online website.
 
On September 20, 2005, there were approximately 637 registered holders of common stock. On that date, the average of the high and low sales price per share of the Company’s stock was $8.50.
 
The Company has not paid dividends on its common stock within the last 16 years. Even if its future operations result in increased profitability, as to which there can be no assurance, there is no present anticipation that dividends will be paid. The Company expects that any future earnings will be applied toward the further development of the Company's business, although the Company may in the future consider distribution of future earnings or gains from sale of assets in whole or in part to the shareholders.
 
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 26, 2005.
 
-11-
Item 6. Selected Financial Data.
 
The following is a table of selected financial data of the Company for the last five years:
 
YEAR ENDED JUNE 30 (in thousands, except per share amounts)
                       
   
2005
  
2004
  
2003
  
2002
  
2001
  
Total revenues (1)
 
$
2,289
  
$
2,050
  
$
1,841
  
$
1,664
  
$
1,371
  
                                 
Net earnings (loss) from continuing operations
    
4
    
62
    
(202
)
  
(511
)
  
(355
)
Net earnings from discontinued operations
    
—
    
—
    
127
    
16
    
161
  
Net earnings (loss)
    
4
    
62
    
(75
)
  
(495
)
  
(194
)
Earnings (loss) per share from continuing operations
                                
Basic
    
0.00
    
0.06
    
(0.18
)
  
(0.49
)
  
(0.27
)
Diluted
    
0.00
    
0.05
    
(0.18
)
  
(0.49
)
  
(0.27
)
Earnings per share from discontinued operations
                                
Basic
    
—
    
—
    
0.11
    
0.02
    
0.12
  
Diluted
    
—
    
—
    
0.11
    
0.02
    
0.12
  
Earnings (loss) per share
                                
Basic
    
0.00
    
0.06
    
(0.07
)
  
(0.47
)
  
(0.15
)
Diluted
    
0.00
    
0.05
    
(0.07
)
  
(0.47
)
  
(0.15
)
Total Assets
    
7,272
    
7,006
    
7,126
    
7,470
    
7,687
  
Long Term Debt
    
1,546
    
1,620
    
—
    
1,856
    
1,917
  
 
(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 table 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.
 
-12-
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
 
OVERVIEW
 
The Company’s business consists of its real estate management and rental operations. The Company also owns a minority investment in the Series D Preferred Stock of a private telecommunications company, MetroPCS 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., which has operations, in part, in Northern California. The Company believed and continues to believe that acquiring the Series D Preferred Stock was a good investment, which provided a diversification of its assets.
 
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. The Company’s primary business revenue is generated from the leasing of its two properties, located in Sebastopol, California.
 
The properties are leased to multiple tenants with leases varying in length from month-to-month to ten years. Revenue from lease rental is recognized on a monthly basis, based upon the dollar amount specified in the related lease. 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. The Company has no tenant related reimbursements that are not part of tenant lease agreements.
 
The Company accounts for its investment in MetroPCS Communications under the cost method. The Company’s interest in the Series D Preferred Stock is less than one percent of the outstanding MetroPCS Series D Preferred Stock and less than one percent of the outstanding MetroPCS common stock on an as-converted basis.
 
RESULTS OF OPERATIONS
 
The Company’s business operations consist 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 2005 COMPARED TO FISCAL 2004
 
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 447,610 square feet (390,894 under roof and 56,716 outside) on 82 acres of land. As of the end of fiscal year 2005, there were 31 tenants with leases covering 338,214 square feet of leasable space (281,498 under roof and 56,716 outside) or 76% of the total leasable area. As of the end of fiscal 2004, there were 27 tenants with leases that comprised 326,014 square feet of leasable space (254,017 under roof and 71,997 outside) or 70% of the total leasable area of 462,707 square feet (390,710 under roof and 71,997 outside).
 
Fiscal 2005 rental revenue increased $193,000 or 12% from $1,637,000 in fiscal 2004 to $1,830,000 in fiscal 2005. 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. 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. The Company’s operating results can be negatively impacted when the tenant rental revenue stream fails to cover existing operating costs.
 
-13-
Tenant Reimbursements. Reimbursements received from tenants of certain costs are recognized as tenant reimbursement revenues. For the fiscal year 2005, tenant reimbursements increased $46,000 or 11% as compared to fiscal year 2004. Such reimbursements related primarily to utility costs. The Company’s costs for such items are passed along to the tenants at the Company’s cost. 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.
 
Operating Costs. Total operating costs consist of direct costs related to continuing operations and all general corporate costs. Fiscal 2005 total operating costs of $2,223,000, increased $163,000 or 8% from $2,060,000 in fiscal 2004. Of this increase, operating costs increased $203,000 and operating costs-related party decreased $40,000. The increase of $203,000 in operating costs was a result of higher expenses in 2005 for repairs and maintenance of $115,000, utilities of $41,000, board of director fees of $26,000, development of property of $28,000, salaries and related costs of 21,000, depreciation of $19,000, amortization expense of $11,000 and other of $23,000. These increases were offset by decreases in non-cash stock compensation of $20,000, insurance of $10,000 and a decrease in repairs of maintenance of $51,000 as a result of payment by a tenant of expenses accrued in a prior period. The large increase in repairs and maintenance was a result of additional painting ($60,000), roofing ($24,000), flooring ($16,000) and other miscellaneous expenditures ($15,000). The Company anticipates a comparable level of repairs and maintenance in 2006. The increase in utilities was primarily a result of an increase in usage. The Company does not anticipate a reduction in usage in 2006. The increase in board of director fees was due to an increase in the fees paid to board members per meeting in 2005, and the number of meetings held during the 2005 fiscal year. The increase in the expenses for the development of the property was a result of the filing of our application with the County of Sonoma to broaden the permitted industrial/agricultural uses of the property. We do not anticipate these expenses increasing in 2006. Salaries and related costs will increase in fiscal year 2006 as a result of, among other factors, compensation arrangements relating to the appointment on June 16, 2005 of Walker R. Stapleton as the President and Chief Executive Officer of the Company.
 
Effective July 1, 2002, the Company elected to account for all prospective stock options in accordance with SFAS 123, “Accounting for Stock-Based Compensation.” During the first quarter of fiscal 2005 the Company incurred a charge against continuing operations of $9,600 related to the issuance of 1,700 fully vested stock options to officers and specific employees of the Company. 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.
 
The decrease of $40,000 in operating costs—related party, was primarily a result of decreases in related party legal costs incurred in legal and 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 2005 the Company generated $41,000 of interest income on its cash balances, compared to $25,000 in fiscal 2004. The increase in interest income in fiscal 2005 was a result of an increase in the available invested cash and slightly higher interest rates.
 
Interest Expense. Interest expense consists primarily of interest expense on mortgage debt. For fiscal 2005, the Company incurred $90,000 of interest expense. This compares to $60,000 in fiscal 2004, which was a combination of $97,000 of interest expense and reduction of expense of $37,000 from a positive swap contract adjustment of $37,000. As of December 1, 2003, the Company’s swap contract with its bank terminated.
 
-14-
Other Income and Expense. In fiscal 2005 the Company incurred a net profit of $24,000 from other income and expense. This was comprised of a gain related to the final payment on the sale of discontinued inventory and assets of $12,000 and other income from the sale of bins, boxes and a metal bridge of $12,000. 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.
 
Income Taxes. The effective tax rate changed from a benefit of 227% in fiscal 2004 to a provision of 82% in fiscal 2005. The 2005 provision is larger than the combined federal and state tax rate of 40% as a result of the impact of permanent book tax differences on a small amount of pre-tax income. 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 until 2005, as of the end of fiscal 2004 management believed that the pending initial public offering of MetroPCS was expected to result in significant realized investment gains as the Company planned to sell a portion of its investment upon completion of the aforementioned initial public offering. Consequently, management believed that it was more likely than not that the Company would 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 2004. Although the initial public offering was later withdrawn, management still believes that a future realizable gain on the investment in MetroPCS is probable.
 
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% of the total leasable area. 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 square feet (389,870 under roof and 65,727 outside). Fiscal 2004 rental revenue increased $123,000 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 did not cover all operating costs and interest expense, yielding deficits of $49,000 and $301,000 in fiscal years 2004 and 2003, respectively.
 
Tenant Reimbursements. 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 Company’s costs for such items are passed along to the tenants at the Company’s cost. The majority of the increase was a result of additional energy consumption by tenants. The combined impact of electric and gas rate changes were relatively minor.
 
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.
 
-15-
Interest Income. In fiscal 2004 the Company generated $25,000 of interest income on its cash balances, compared to $46,000 in fiscal 2003. The lower interest income in fiscal 2004 was 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.
 
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 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. 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 at that time 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 $1.9 million at June 30, 2005, and current maturities of long-term debt of $74,000. The Company has refinanced its long-term debt of $1.6 million, in addition to securing a $500,00 line of credit from a bank. The increase in the cash balance of $531,000, from $1,348,000 at June 30, 2004 to $1,879,000 at June 30, 2005, was a result of the receipt of the stock subscription receivable of $400,000 and cash provided by continuing operations of $258,000. This increase was partially offset by a decrease of $71,000 of capital expenditures and $56,000 for principal payments on long-term debt.
 
The Company has a credit agreement with a bank providing for a term loan of approximately $1.6 million. The term note relating to the long-term debt bears interest at the bank’s prime rate plus .25% with monthly principal payments of approximately $4,600 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, 2005 the Company’s debt service coverage ratio was 1.57 to 1, which is greater than the required minimum of 1.25 to 1 under the then-existing credit agreement as of June 30, 2005. The Company is in discussions with the bank concerning reviewing its credit facility and refinancing the long-term debt under the facility, and expects to execute definitive documents with its bank in the near future.
 
-16-
The Company anticipates that material fiscal 2006 cash commitments will include $74,000 of principal debt reduction and approximately $239,000 of capital expenditures. The Company anticipates funding these payments out of operating activities and its existing cash balance. The Company believes that its existing resources, together with anticipated cash from operating activities, will be sufficient to satisfy its current and projected cash requirements for at least the next 12 months. The Company holds certain cash and cash equivalents for non-trading purposes that are sensitive to changes in the interest rate market. The Company does not believe that changes in the interest rate market affecting these financial instruments will have a material impact, either favorable or unfavorable, on its financial position or results of operations. Except as described in Note 1 to the financial statements included in this Report, under the heading “Derivatives,” the Company has not in the past engaged in transactions requiring the use of derivative financial instruments either for hedging or speculative purposes, and has no plans to do so in the future.
 
The Company does not have any off-balance sheet arrangements.
 
CRITICAL ACCOUNTING POLICIES
 
The financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates and assumptions (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.
 
Valuation of investment in MetroPCS Communications
 
The Company accounts for its investment in MetroPCS under the cost method, which amounted to $3,001,200 as of June 30, 2005 and June 30, 2004. 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 that we request from MetroPCS. The Company also tracks MetroPCS information available to the general public. Since MetroPCS is no longer subject to public disclosure requirements, the basis for our evaluation is subject to the timing, accuracy and disclosure of the data received. It is impracticable for the Company to determine the fair value of the Company’s investment in MetroPCS without incurring excessive costs. However, the price per share offered in the tender offer recently received by the Company relating to its MetroPCS shares is approximately three times the original $3 million investment amount paid by the Company for its MetroPCS shares, including the cumulative unpaid dividends of $562,529 as of June 30, 2005. See “Business—Other Assets—Recent Developments” for recent information concerning the MetroPCS shares owned by the Company.
 
The Company owns less than one percent of the total outstanding shares of MetroPCS’ Series D Preferred Stock and less than one percent of its total outstanding capital stock on an as-converted basis. In its annual 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. On June 6, 2005, MetroPCS filed a Form 15 with the Securities and Exchange Commission, terminating its registration as a reporting company under the Securities Exchange Act of 1934. 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’s previous 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 state income tax law 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 2012. At June 30, 2005 and 2004, the Company had recorded, net deferred tax assets of $457,000 and $494,000, respectively.
 
-17-
MINIMUM LEASE INCOME
 
The Company has been leasing warehouse space, generating revenues of $1,830,000 in 2005, $1,637,000 in 2004 and $1,514,000 in 2003. The leases have varying terms, which range from month-to-month to expiration dates through 2013. As of June 30, 2005, 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
      
2006
  
$
1,312
  
2007
    
607
  
2008
    
353
  
2009
    
193
  
2010
    
158
  
Thereafter
    
449
  
Total
  
$
3,072
  
 
-18-
Item 8. Financial Statements and Supplementary Data.
 
See Financial Statements and Financial Statement Schedule
 
Report of Independent Registered Public Accounting Firm
F-1
Balance Sheets at June 30, 2005 and 2004
F-3
Statements of Operations for the years ended June 30, 2005, 2004 and 2003
F-4
Statements of Changes in Shareholders’ Equity for the years ended June 30, 2005, 2004 and 2003
F-5
Statements of Cash Flows for the years ended June 30, 2005, 2004 and 2003
F-6
Notes to Consolidated Financial Statements
F-7
 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Shareholders of
SonomaWest Holdings, Inc.:
 
We have audited the accompanying balance sheets of SonomaWest Holdings, Inc. (a Delaware corporation) as of June 30, 2005, 2004 and 2003, and the related statements of operations, changes in shareholders’ equity, and cash flows for each of the three years in the period ended June 30, 2005. 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) generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements 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 provides a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SonomaWest Holdings, Inc. as of June 30, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2005, 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, 2005.  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.
 
 
 
GRANT THORNTON LLP
 
San Francisco, California,
July 21, 2005
 
 
F-1
SONOMAWEST HOLDINGS, INC.
BALANCE SHEETS
AS OF JUNE 30, 2005 AND 2004
(AMOUNTS IN THOUSANDS)
           
ASSETS
  
2005
  
2004
  
CURRENT ASSETS:
          
Cash
  
$
1,879
  
$
1,348
  
Accounts receivable
    
123
    
131
  
Other receivables
    
13
    
33
  
Interest receivable - Related party
    
—
    
3
  
Prepaid expenses and other assets
    
129
    
135
  
Current deferred income taxes, net
    
298
    
77
  
Total current assets
    
2,442
    
1,727
  
RENTAL PROPERTY, net
    
1,553
    
1,698
  
INVESTMENT, at cost
    
3,001
    
3,001
  
DEFERRED INCOME TAXES
    
159
    
417
  
PREPAID COMMISSIONS AND OTHER ASSETS
    
117
    
163
  
Total assets
  
$
7,272
  
$
7,006
  
LIABILITIES AND SHAREHOLDERS’ EQUITY
              
CURRENT LIABILITIES:
              
Current maturities of long-term debt
  
$
1,620
  
$
56
  
Accounts payable
    
121
    
127
  
Accrued payroll and related liabilities
    
31
    
33
  
Accrued expenses
    
76
    
241
  
Unearned rents and deposits
    
364
    
287
  
Total current liabilities
    
2,212
    
744
  
LONG-TERM DEBT, net of current maturities
    
—
    
1,620
  
OTHER LONG-TERM LIABILITIES
    
131
    
131
  
Total liabilities
    
2,343
    
2,495
  
SHAREHOLDERS’ EQUITY:
              
Preferred stock: 2,500 shares authorized; no shares outstanding
    
—
    
—
  
Common stock: 5,000 shares authorized, no par value; 1,114 and 1,114 shares  
              
outstanding at June 30 2005 and 2004, respectively
    
2,770
    
2,756
  
Stock subscription receivable - Related Party
    
—
    
(400
)
Retained earnings
    
2,159
    
2,155
  
Total shareholders’ equity
    
4,929
    
4,511
  
Total liabilities and shareholders’ equity
  
$
7,272
  
$
7,006
  
               
The accompanying notes are an integral part of these statements.
 
 
F-2
 
SONOMAWEST HOLDINGS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2005, 2004, AND 2003
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
               
   
2005
  
2004
  
2003
  
RENTAL REVENUE
  
$
1,830
  
$
1,637
  
$
1,514
  
TENANT REIMBURSEMENTS
    
459
    
413
    
327
  
TOTAL REVENUE
 
$
2,289
  
$
2,050
  
$
1,841
  
                     
OPERATING COSTS
    
1,862
    
1,659
    
1,837
  
OPERATING COSTS - RELATED PARTY
   
361
    
401
    
241
  
TOTAL OPERATING COSTS
    
2,223
    
2,060
    
2,078
  
OPERATING INCOME (LOSS)
    
66
    
(10
)
  
(237
)
INTEREST INCOME
   
41
    
25
    
46
  
INTEREST EXPENSE
    
(90
)
  
(60
)
  
(106
)
OTHER INCOME AND EXPENSE
    
24
    
(4
)
  
(4
)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
    
41
    
(49
)
  
(301
)
INCOME TAX PROVISION (BENEFIT)
    
37
    
(111
)
  
( 99
)
NET INCOME (LOSS) FROM CONTINUING OPERATIONS
    
4
    
62
    
(202
)
                     
INCOME FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES
    
—
    
—
    
177
  
DISCONTINUED OPERATIONS - RELATED PARTY EXPENSES, NET OF INCOME TAXES
    
—
    
—
    
(50
)
INCOME FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES
    
—
    
—
    
127
  
NET INCOME (LOSS)
  
$
4
  
$
62
  
$
(75
)
WEIGHTED AVERAGE COMMON SHARES AND EQUIVALENTS:
                    
Basic
    
1,114
    
1,109
    
1,105
  
Diluted
    
1,151
    
1,128
    
1,105
  
EARNINGS (LOSS) PER COMMON SHARE:
                    
Continuing operations:
                    
Basic
  
$
0.00
  
$
0.06
  
$
(0.18
)
Diluted
  
$
0.00
  
$
0.05
  
$
(0.18
)
Discontinued operations:
                    
Basic 
  
$
—
  
$
—
  
$
0.11
  
Diluted
 
$
—
  
$
—
  
$
0.11
  
Net income (loss):
                    
Basic
  
$
0.00
  
$
0.06
  
$
(0.07
)
Diluted
 
$
0.00
  
$
0.05
  
$
(0.07
)
                     
The accompanying notes are an integral part of these statements.
 
F-3
SONOMAWEST HOLDINGS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED JUNE 30, 2005, 2004, AND 2003
(AMOUNTS IN THOUSANDS) 
                           
     
Common Stock
                    
                                 
     
Number
of Shares
    
Amount
    
Stock
Subscriptions
Receivable
    
Retained
Earnings
    
Total
Shareholders’
Equity
  
                                 
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
  
                                 
Net income
    
—
    
—
    
—
    
4
    
4
  
Repayment of stock subscription receivable
    
—
    
—
    
400
    
—
    
400
  
Non-cash stock compensation
    
—
    
14
    
—
    
—
    
14
  
                                 
BALANCE, JUNE 30, 2005
    
1,114
  
$
2,770
    
—
  
$
2,159
  
$
4,929
  
                                 
The accompanying notes are an integral part of these statements.
 
F-4
SONOMAWEST HOLDINGS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2005, 2004, AND 2003
(AMOUNTS IN THOUSANDS)
               
   
2005
  
2004
  
2003
  
               
CASH FLOWS FROM OPERATING ACTIVITIES:
              
Net income (loss)
  
$
4
  
$
62
  
$
(75
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                    
Loss on the disposition of fixed assets
   
—
    
24
    
7
  
Income from discontinued operations, net
    
—
    
—
    
(127
)
Non-cash stock compensation charge
    
14
    
34
    
42
  
Depreciation and amortization expense
    
216
    
198
    
293
  
Changes in assets and liabilities:
                    
Accounts receivable, net
    
8
    
5
    
(18
)
Other receivables
    
20
    
(21
)
  
5
  
Interest receivable - Related party
    
3
    
—
    
—
  
Prepaid income taxes
    
—
    
—
    
75
  
Prepaid expenses and other assets
    
6
    
10
   
(24
)
Deferred income tax provision (benefit)
    
37
    
(111
)
  
(17
)
Prepaid commissions and other assets
    
46
    
(82
)
  
1
  
Accounts payable and accrued expenses
    
(171
)
  
(11
)
  
73
  
Accrued payroll and related liabilities
    
(2
)
  
(71
)
  
(149
)
Unearned rents and deposits
   
77
    
—
    
5
  
     
254
    
(25
)
  
166
  
Net cash provided by continuing operations
   
258
    
37
    
91
  
Net cash used in discontinued operations
   
—
    
—
    
(53
)
Net cash provided by operating activities
    
258
    
37
    
38
  
CASH FLOWS FROM INVESTING ACTIVITIES:
                    
Proceeds from sale of fixed assets
    
—
    
7
    
—
  
Capital expenditures
    
(71
)
  
(196
)
  
(114
)
Investment in MetroPCS
    
—
    
(305
)
  
(1,294
)
Net cash used in investing activities
    
(71
)
  
(494
)
  
(1,408
)
CASH FLOWS FROM FINANCING ACTIVITIES: 
                    
Proceeds from debt refinancing
    
—
    
1,690
    
—
  
Repayment of debt
    
—
    
(1,813
)
  
—
  
Principal payments of long-term debt
    
(56
)
  
(58
)
  
(60
)
Proceeds from repayment of stock subscription receivable - Related Party
    
400
    
—
    
—
  
Exercise of common stock options
    
—
    
47
    
—
  
Net cash provided by (used in) financing activities
    
344
    
(134
)
  
(60
)
NET INCREASE (DECREASE) IN CASH
    
531
    
(591
)
  
(1,430
)
CASH AT BEGINNING OF YEAR (of which $600 was restricted in 2002)
   
1,348
    
1,939
    
3,369
  
CASH AT END OF YEAR
 
$
1,879
  
$
1,348
  
$
1,939
  
                     
The accompanying notes are an integral part of these statements.
 
F-5
SONOMAWEST HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2005, 2004 and 2003
 
(AMOUNTS AND SHARES 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 privately held 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.
 
Supplemental Statements of Cash Flows Information
               
   
2005
  
2004
  
2003
  
Cash paid for:
              
Interest
  
$
88
  
$
102
  
$
140
  
Income taxes
  
$
1
  
$
1
  
$
1
  
 
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:
   
2005
  
2004
  
Land
  
$
231
  
$
231
  
Buildings, machinery and improvements
    
7,009
    
6,927
  
Office equipment, manuals and autos
    
89
    
70
  
Construction in progress
   
3
    
33
  
Total rental property
    
7,332
    
7,261
  
Accumulated depreciation
    
(5,779
)
  
(5,563
)
Net rental property
  
$
1,553
  
$
1,698
  
 
Improvements that extend the life of the asset are capitalized; other maintenance and repairs are expensed. The cost of maintenance and repairs was $94 in 2005, $30 in 2004, and $89 in 2003.
 
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 that we request from MetroPCS. The Company also tracks MetroPCS information available to the general public. Since MetroPCS is a privately held company, it is not subject to the same disclosure requirements of public companies and as such, the basis for our evaluation is subject to the timing, accuracy and disclosure of the data received.
 
The Company accounts for its investment in MetroPCS Communications under the cost method, which amounted to $3,001,200 as of June 30, 2005 and June 30, 2004. The Company owns less than 1% of the total outstanding shares of MetroPCS Communications Series D Preferred Stock and less than 1% 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 disclosed financial statements. On August 12, 2004 MetroPCS formally withdrew the registration statement. On June 6, 2005, MetroPCS filed a Form 15 with the Securities and Exchange Commission, terminating its registration as a reporting company under the Securities Exchange Act of 1934. 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.

F-7
See Note 8, Subsequent Events, for additional information relating to this investment. As disclosed in Note 8, the total value of the investment in MetroPCS (not giving effect to any tender of shares as described in Note 8) would be approximately $9 million, which includes the value of cumulative unpaid dividends of $562,529 as of June 30, 2005, based upon the price per share offered in the tender offer described in Note 8. However, there can be no assurance that the Company will be able to achieve liquidity for its remaining MetroPCS shares in the future at the price offered in the tender offer or at any other price.
 
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 2005, 2004 and 2003, 0, 0 and 51 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 2005, 2004 and 2003, 0, 0 and 76 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 $1,830,000 in 2005, $1,637,000 in 2004 and $1,514,000 in 2003. The leases have varying terms, which range from month-to-month to expiration dates through 2013. As of June 30, 2005, 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
      
2006
  
$
1,312
  
2007
    
607
  
2008
    
353
  
2009
    
193
  
2010
    
158
  
Thereafter
    
449
  
Total
  
$
3,072
  
 
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, 2005, 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 16%, 18% and 19% of rental revenues for the fiscal years ended June 30, 2005, 2004 and 2003, respectively. In addition, Benziger Family Winery accounted for 28% and 23% of the accounts receivable balance as of the fiscal years ended June 30, 2005 and 2004. The loss of Benziger Family Winery as a tenant would have a material adverse effect on the Company’s operating results.

Manzana Products Company, Inc. accounted for 11% of the Company’s rental revenues for the fiscal year ended June 30, 2005 and less than 10 % for the fiscal years ended June 30, 2004 and 2003, respectively. In addition, Manzana Products Company, Inc., accounted for less than 1 % and 7 % of the accounts receivable balance as of the fiscal years ended June 30, 2005 and 2004, respectively. The loss of Manzana Products Company, Inc. as a tenant would have a material adverse effect on the operating results of the real estate operations. At June 30, 2005 and 2004, all rental amounts owing by Manzana Products Company, Inc. were payable within the normal billing cycle and were not past due.
 
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 the Company’s properties may expose the Company to greater economic risks than if we owned properties in several geographic regions. Obtaining new tenants for the Company’s properties generally requires a tenant to relocate from an existing rental property of a competitor. Any adverse economic or real estate developments in the Sonoma County region could adversely impact the Company’s financial condition, results from operations, cash flows, quoted per share trading price of the common stock and ability to satisfy the Company’s debt service obligations. The economic environment in Sonoma County has improved since last year. As part of this economic recovery, the Company’s anticipates that the commercial, industrial and office markets in Sonoma County will also experience positive effects from this recovery. There is no assurance, however, that the market will significantly improve in the near future.
 
F-9
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 2005 and 2004, the Company incurred charges included in continuing operations of $9 and $34 related to the issuance of 2 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, 2005.
 
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,
  
     
2005
    
2004
    
2003
  
                     
Net Income (Loss), as reported
  
$
4
  
$
62
  
$
(75
)
Add back: Actual Stock Compensation Expense - Net of taxes
    
2
    
20
    
25
  
Less: Proforma Stock Compensation Charge - Net of taxes
    
( 2
)
  
(24
)
  
(30
)
Pro-forma Net Income (Loss)
  
$
4
  
$
58
  
$
(80
)
Earnings (Loss) Per Share:
                    
Basic and diluted- as reported
  
$
.00
  
$
.05
  
$
(0.07
)
Basic and diluted- pro-forma
  
$
.00
  
$
.05
  
$
(0.07
)

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 2005, 2004 and 2003 grants, respectively: weighted average risk-free interest rates of 3.67, 3.08 and 3.54 percent; expected dividend yield of 0 percent; expected life of four years for the Plan options; and expected volatility of 33, 24.0 and 23.8 percent.

In December 2004, the FASB issued SFAS No. 123R,  “Share-Based Payment”, which replaces SFAS No. 123. The Company voluntarily adopted SFAS No. 123 in 2002. SFAS No. 123R requires public companies to recognize an expense for share-based payment arrangements including stock options and employee stock purchase plans. The statement eliminates a company’s ability to account for share-based compensation transactions using APB 25, and generally requires instead that such transactions be accounted for using a fair value based method. SFAS No. 123R requires an entity to measure the cost of employee services received in exchanged for an award of equity instruments based on the fair value of the award on the date of the grant, and to recognize the cost over the period during which the employee is to provide service in exchange for the award. SFAS No. 123R is effective for the first interim period beginning after December 15, 2005 (the Company’s third fiscal quarter of fiscal 2006). Due to the Company’s 2002 adoption of SFAS 123, the Company does not expect the adoption of SFAS No. 123R to have a material financial impact on the Company’s financial results.
 
For options granted during the fiscal years ended June 30, 2005, 2004 and 2003, the weighted average fair value as of the grant date was $4.44, $1.39, and 1.95 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. The Company believes that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to the Company 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. The 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 ended 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 during fiscal 2004.
 
F-10
 
2.
LONG-TERM DEBT:
 
Long-term debt consists of the following:
   
2005
  
2004
  
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
    
1,620
    
1,676
  
Less: Current maturities
    
(1,620
)
  
(56
)
Long-term debt
  
$
—
  
$
1,620
  
 
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, 2005, the Company’s debt service coverage ratio was 1.57 to 1, which is greater than the required minimum of 1.25 to 1.
 
The Company’s lending agreement with its bank contains certain covenants and conditions. This agreement has 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, 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 restricted the Company from incurring any additional indebtedness during the term of the loan. An addendum required that in addition to the lien on the Company’s South Property, the Company would grant 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.
 
The Company is in discussions with its bank concerning renewing its lending agreement and refinancing the term note, and expects to execute definitive documents in the near future.
 
3.
PROVISION FOR INCOME TAXES AND DEFERRED INCOME TAXES:

For the years ended June 30, 2005, 2004, and 2003, the provision or benefit from income taxes consisted of the following:
 
F-11
 
   
2005
  
2004
  
2003
  
Current:
              
Federal
  
$
—
  
$
—
  
$
—
  
State
    
1
    
—
    
—
  
Deferred:
                    
Federal
    
34
    
5
    
(17
)
State
    
2
    
(116
)
  
2
  
Provision (Benefit)
  
$
37
  
$
(111
)
$
( 15
)
 
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.
 
The components of the provision (benefit) related to continuing operations and discontinued operations are as follows:
               
   
2005
  
2004
  
2003
  
Continuing operations
  
$
37
  
$
(111
)
$
(99
)
Discontinued operations
                
84
  
Provision (Benefit)
  
$
37
  
$
(111
)
$
(15
)

A reconciliation of the federal statutory rate to the tax provision for the years ended June 30 follows:

   
2005 
  
2004 
  
2003 
  
 
%
  
%
  
%
  
Benefit at federal statutory rate
    
34
%
  
34
%
  
34
%
State taxes, less federal tax benefit
    
2
%
  
2
%
  
2
%
Valuation allowance on deferred state tax
    
—
%
  
(236
%)
  
(18
%)
Tax credits and other
    
54
%
  
(27
%)
  
(1
%)
Total Provision (Benefit)
    
90
%
  
(227
%)
  
17
%
 
 
F-12
Deferred tax assets and liabilities consisted of the following:
           
   
2005
  
2004
  
Deferred tax assets:
          
Employee benefit accruals
  
$
5
  
$
6
  
Accrued liabilities and reserves
    
—
    
10
  
Depreciation
    
159
    
140
 
Net operating losses
    
274
    
277
  
Other
    
53
    
95
  
Total deferred tax assets
    
491
    
528
  
Deferred tax liabilities:
              
Property taxes
    
(34
)
  
(34
)
Total deferred tax liabilities
    
(34
)
  
(34
)
Valuation allowance
    
—
    
—
  
   
$
457
  
$
494
  
 
As of June 30, 2005 the Company had federal net operating loss carry forwards ("NOLs") totaling approximately $634 that expire at various times through 2024. For state purposes, the Company had net operating loss carry forwards totaling approximately $996, 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 had reported taxable losses until 2005, as of the end of fiscal 2004 management believed that the pending initial public offering of MetroPCS was expected to result in significant realized investment gains as the Company planned to sell a portion of its investment upon completion of the aforementioned initial public offering. Consequently, management believed that it was more likely than not that the Company would 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 2004. Although the initial public offering was later withdrawn, management continues to believe that future realizable gains on the investment in MetroPCS are probable. The NOLs have been reclassified as current assets due to the expected utilization upon completion of the pending tender offer. See Note 8, Subsequent Events, for additional information relating to the tender offer by certain third parties to purchase shares of MetroPCS Series D Preferred Stock and common stock.
 
4.
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.
 
F-13
On July 27, 2004, the Company’s Board of Directors 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 $10.00 per share.
 
On June 16, 2005, the Company authorized the waiver of the provision of Matt Ertman's (the former Secretary of the Company) stock options, providing for termination of the options in 90 days following service. Consequently, Mr. Ertman's option to purchase 1,500 shares was extended, and a one-time non-cash compensation charge of $3,640 was recorded in June 2005.
 
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 employees not subject to a collective bargaining agreement with the Company. 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-14
A summary of the status of the Company’s stock option plan at June 30, 2005, 2004, 2003 and 2002 with changes during the years ended are presented in the table below:
 
   
Options
  
Weighted Average Exercise Price
  
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
  
Granted
    
2
    
10.00
  
Cancelled
    
—
    
—
  
Exercised
    
—
    
—
  
Balance, June 30, 2005
    
93
  
$
6.41
  
 
Options outstanding, exercisable, and vested by price range at June 30, 2005, are as follows:
                   
 
Exercise Price
  
 
Options
Outstanding at June 30, 2005
  
 
Options Vested and Exercisable at June 30, 2005
  
Weighted Average Remaining Contractual Life (Years)
  
Weighted Average Fair Value of Options Granted, at Grant Date
  
$ 5.00
    
15
    
15
    
4.8
  
$
1.98
  
$ 5.05
    
24
    
24
    
3.8
    
1.39
  
$ 5.28
    
1
    
1
    
4.7
    
2.10
  
$ 7.20
    
24
    
24
    
7.0
    
1.95
  
$ 7.48
    
25
    
25
    
6.0
    
2.13
  
$ 8.00
    
2
    
2
    
4.8
    
4.24
  
$ 10.00
    
2
    
2
    
9.1
    
5.67
  
     
93
    
93
        
$
6.41
  

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 2005, 2004 and 2003 grants, respectively: weighted average risk-free interest rates of 3.67, 3.08 and 3.60 percent; expected dividend yield of 0 percent; expected life of five years for the Plan options; and expected volatility of 53, 24 and 22 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, Mr. Hess elected to exercise his option to purchase 80 shares of his total outstanding options of 89 shares. Mr. Hess elected to extend the termination date on his option to purchase the remaining 9 shares, through the last date of the severance period (January 31, 2004). As part of the separation agreement the Company agreed to loan Mr. Hess up to $447 to allow him to exercise the aforementioned options. Mr. Hess elected to borrow $400 to exercise 80 stock options at $.005 per share. The note dated January 28, 2002 in the amount of $400 bears interest at the Applicable Federal Rate (AFR) for loans of three years or less on the date of the note (the AFR at January 28, 2002 was 2.73%), payable quarterly. The Note was paid in full on August 3, 2004.

F-15
5. 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, 2005 there was no related lease expense or sublease income. Rental expense under operating leases was $68 in 2004 and $85 in 2003. Related sub-lease income was $71 and $189 in 2004 and 2003 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 telecommunications company. The Company accounts for its investment in MetroPCS Communications under the cost method. The Company owns less than one percent of the total outstanding shares of Series D Preferred Stock and less than one percent of the total outstanding capital stock 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, 2005, the Company was not a party to any legal proceedings.
 
7.  
RELATED-PARTY TRANSACTIONS:
 
On July 1, 2005, Bugatto Investment Company (of which David J. Bugatto, a director of the Company, is the president) entered into a consulting agreement pursuant to which Bugatto Investment Company provides real estate consulting services to the Company for an hourly fee of $225. The agreement replaces a similar agreement entered into on July 1, 2004. Under the agreement, if either of the Company’s Sonoma County properties is sold during the term of the agreement, Bugatto Investment Company is entitled to receive a fee equal to 1.5% of the sales prices regardless of whether or not a broker is involved, and Bugatto Investment Company is entitled to receive a fee equal to the greater of 1.5% of the gross value of the real estate or $150,000 upon any transaction that would result in the Company becoming a private company.  The term of the agreement is through July 30, 2006, but the agreement can be terminated earlier upon the occurrence of certain events, including notice of termination by either party. During fiscal 2005 and 2004, the Company paid David Bugatto $32,943 and $26,000 for real estate consulting services. As of June 30, 2005, the Company owed David Bugatto $3,260.  These expenses are included in Operating Costs - Related Party. 
 
Effective August 1, 2005, the Company entered into a consulting agreement with Thomas Eakin, the Company’s Chief Financial Officer. Under the agreement, Mr. Eakin provides financial management and accounting services to the Company at an hourly billing rate of $115.00 per hour, plus expenses. The term of the agreement is through July 31, 2006, but the agreement can be terminated earlier upon the occurrence of certain events, including notice of termination by either party. During fiscal 2005 and 2004, the Company paid Thomas R. Eakin $51,350 and $51,000 for services. As of June 30, 2005, the Company owed Thomas R. Eakin $1,449.  These expenses are included in Operating Costs - Related Party. In September 2005, Mr. Eakin delivered a notice of termination of the consulting agreement, effective October 12, 2005.
 
Gary L. Hess, director and former President and Chief Executive Officer, entered into an agreement with the Company to sell its remaining PermaPak inventory and equipment. During the fiscal year 2005 the Company received the final payment on the sale of the PermaPak inventory and equipment. Pursuant to the terms of the agreement with Mr. Hess, the Company paid $7,769 in commissions to Mr. Hess as a result of this payment. These expenses are included under Operating Costs - Related Party. As of June 30, 2005, the Company did not owe Mr. Hess any commissions under this agreement. On July 17, 2001, the Company entered into a separation agreement in principle, which was thereafter executed, with Mr. Hess, replacing his existing employment agreement.
 
F-16
Pursuant to the separation agreement, Mr. Hess continued as President and Chief Executive Officer, first on a full-time basis and then on a part-time basis, through October 31, 2001. Effective September 2001, the Company began paying separation payments to Mr. Hess in the amount of $12,500 monthly for 29 months, replacing all payment obligations under his prior employment agreement. The Company’s obligation under this agreement of $362,500 was recorded in operating expenses in the first quarter of fiscal 2002. As of June 30, 2004, the Company has paid all of its obligations under this agreement. Pursuant to this separation agreement, the Company also designated Mr. 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 PermaPak finished goods inventory and other PermaPak property (inventory and property related to discontinued operations). Under the agreement, Mr. 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 PermaPak finished goods inventory and other PermaPak property. As of June 30, 2005, the Company has received $240,000 of the $240,000 total purchase price. The Company has paid commissions to Mr. Hess of $66,829 pursuant to this sale and $69,673 in total pursuant to this agreement. Mr. Hess received an additional commission of $1,769 equal to 50% on the interest earned from the note receivable on the sale of the PermaPak assets..
 
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 paid in full on August 3, 2004.
 
Roger S. Mertz, former Chairman of the Board, is a partner of the law firm Allen Matkins Leck Gamble & Mallory LLP, which firm served as the Company’s general counsel during fiscal 2005. During fiscal 2005, 2004, and 2003, the Company incurred $272,966, $323,000 and $204,000 respectively, for legal services provided by Allen Matkins. As of June 30, 2005, the Company owed Allen Matkins $14,210. As of June 16, 2005, Roger S. Mertz resigned as Chairman of the Board, but is still a member of the board of directors.
 
Walker Stapleton, a director and the son of the Company’s largest shareholder, was elected President and Chief Executive Officer on June 16, 2005.
 
8.  
SUBSEQUENT EVENTS:
 
Mr. Stapleton's base salary for his service as Chief Executive Officer of the Company will be $8,000 per month. The compensation arrangements do not provide for any specific bonus payments, although the Board retains the discretion to pay bonuses to officers of the Company from time to time. The Company has agreed to reimburse Mr. Stapleton for up to $30,000 annually for office and travel expenses he incurs in connection with the Company's business.
 
F-17
MetroPCS Communications. On September 26, 2005, the Company tendered approximately 20% of the shares of MetroPCS Series D Preferred Stock that it holds in response to a tender offer by certain third parties to purchase shares of MetroPCS Series D Preferred Stock and common stock. The Company’s total investment in all of the MetroPCS shares that it holds is approximately $3 million, and the price per share offered in the tender offer is approximately three times the original investment amount per share paid by the Company for its MetroPCS shares, which includes the value of the cumulative unpaid dividends of $562,529 as of June 30, 2005. If all shares tendered by the Company were accepted, the Company estimates that gross proceeds to the Company from sale of the shares would be approximately $1.8 million. The Company’s net operating losses will offset most of the gain recognized for federal and state tax purposes from the sale of the MetroPCS shares.
 
The tender offer is complex, the completion of the tender offer is subject to a variety of terms, conditions and uncertainties, and the number of shares, if any, that will be purchased from the Company pursuant to the tender offer is subject to possible reduction pursuant to the terms of the tender offer and to the other conditions of the offer. There can be no assurance that the tender offer will be completed or that all shares tendered by the Company will be accepted. The tender offer is scheduled to expire on September 29, 2005, and completion is expected to occur shortly thereafter, subject to the other terms and conditions of the offer, including the offerors’ ability to extend the offer into early November 2005 in certain circumstances.
 
 
F-18
 
8.  Selected Quarterly Financial Data (Unaudited ) 
 
(Amounts in thousands, except per share amounts)
                                   
Quarter Ended
  
9/30/03
  
12/31/03
  
3/31/04
  
6/30/04
  
9/30/04
  
12/31/04
  
3/31/05
  
6/30/05
  
Total revenue
 
$
542
  
$
500
  
$
447
  
$
561
  
$
580
  
$
582
  
$
542
  
$
585
  
Operating profit (loss)
  
$
(46
)
$
4
  
$
(76
)
$
108
  
$
(38
)
$
(43
)
$
51
  
$
96
  
Net income (loss)
  
$
(47
)
$
(16
)
$
(48
)
$
173
  
$
(32
)
$
(24
)
$
21
  
$
39
  
Earnings (loss) per share:
                                                  
Net income (loss) 
  
$
(.04
)
$
(.01
)
$
(.04
)
$
.15
  
$
(.03
)
$
(.02
)
$
.02
  
$
.04
  
 
 
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, 2005, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e)). Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective at a reasonable level in timely alerting them to material information relating to the Company that is required to be included in the Company's periodic filings with the Securities and Exchange Commission. There has been no change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected or is reasonably likely to materially affect, the Company's internal control over financial reporting.
 
The Company's management, including the Chief Executive Officer 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 required by Item 10 regarding directors and executive officers is incorporated by reference to the information appearing under the heading "Proposal 1: Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" of our proxy statement to be filed with the United States Securities and Exchange Commission within 120 days after the end of the fiscal year ended June 30, 2005 (the "2005 Proxy Statement").
 
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 the Company's Annual Report on Form 10-K for the year ended June 30, 2004.
 
 
-19-
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 2005 Proxy Statement is incorporated into this item by reference (except to the extent allowed by Item 402(a)(8) of Regulation S-K).
 
 
The information appearing under the heading "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Directors and Executive Officers" of our 2005 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 2005 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 2005 Proxy Statement is incorporated into this item by reference.
 
-20-
Item 14. Principal Accountant Fees and Services
 
The information appearing under the heading "Principal Accountant Fees and Services”of our 2005 Proxy Statement is incorporated into this item by reference.
 
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)
Certificate of Incorporation
   
3.2(2)
Bylaws
   
10.1(3)
1996 Stock Option Plan, as amended
   
10.2(4)
Severance Agreement dated July 17, 2001 between SonomaWest Holdings, Inc. and Gary L. Hess
   
10.3(5)
SonomaWest Holdings, Inc. 2002 Stock Incentive Plan
   
10.4(6) Restated and Amended Addendum to Promissory Note dated August 15, 2001.
 
10.5+ Term Note dated March 1, 2004.
 
10.6+ Credit Agreement dated as of March 1, 2004.
   
10.7+
Consulting Agreement dated August 1, 2005 between SonomaWest Holdings, Inc. and Thomas R. Eakin, d.b.a. Eakin Consulting.
   
10.8+
Consulting Agreement effective as of July 1, 2005 between SonomaWest Holdings, Inc. and Bugatto Investment Company.
   
11.1+
Computation of Per Share Earnings
   
23.1+
Consent of Independent Registered Public Accounting Firm
   
31.1+
Chief Executive Officer 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*
Chief Executive Officer 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
   
 
-21-
 
(1)
Incorporated by reference to the registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2004, filed on February 14, 2005 (File No. 000-01912).
 
(2)
Incorporated by reference to the registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2004, filed on February 14, 2005 (File No. 000-01912).
 
(3)
Incorporated by reference to the registrant’s Registration Statement on Form S-8 (File No. 333-84295) filed on August 2, 1999.
 
(4)
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).
 
(5)
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).
 
(6)
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).
 
+ 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, 2005, other than a Report on Form 8-K filed on June 17, 2005, reporting the resignation of Roger Mertz as Chairman and the appointment of Walker Stapleton as Chief Executive Officer and President of the Company.
 

-22-
SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
     
  SONOMAWEST HOLDINGS, INC.
 
 		  
 		  
 
Date: September 28, 2005 By:   /s/ Walker R. Stapleton
 
Walker R. Stapleton, President and Chief
  Executive Officer
   
   
POWER OF ATTORNEY
 
Each person whose signature appears below hereby constitutes and appoints Walker R. Stapleton and David J. Bugatto, 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
     
Principal Executive Officer:
    
     
/s/ Walker R. Stapleton
President and Chief Executive 
September 28, 2005
Walker R. Stapleton
Officer, Director
 
     
Principal Financial Officer and
Principal Accounting Officer:
 
 
 
     
/s/ Thomas R. Eakin 
Chief Financial Officer  
September 28, 2005 
Thomas R. Eakin 		    
     
Directors: 
    
     
/s/ Gary L. Hess 
Director 
September 28, 2005 
Gary L. Hess
    
 
    
/s/ Frederic Selinger
 
 
Frederic Selinger
Director
September 28, 2005
     
/s/ David J. Bugatto     
David J. Bugatto  
Director
 
September 28, 2005
 
     
/s/ Roger S. Mertz
 
 
Roger S. Mertz
Director
September 28, 2005
 
 
-23
 
SCHEDULE III
    
SonomaWest Holdings, Inc.
    
REAL ESTATE AND ACCUMULATED DEPRECIATION
    
June 30, 2005
    
(DOLLARS IN THOUSANDS)
    
Column A
  
Column B
  
Column C
  
Column D
  
Column E
  
Column F
  
Column G
  
Column H
  
               
Costs
  
 
      
 
              
               
Subsequently
  
Gross Amount at which Carried
              
       
Initial Cost to Company
  
Capitalized
  
at Close of Year
              
           
Buildings
      
 
  
Buildings
  
 
              
           
and
      
 
  
And
  
Total
  
Accumulated
  
Year of
 
Year
  
Description
  
Encumbrances
  
Land
  
Improvements
  
Improvements
  
Land
  
Improvements
  
(Note 1)
  
Depreciation
  
Construction
  
Acquired
  
1365 Gravenstein Hwy. So., Sebastopol, CA
    
1,625
   
72
   
308
   
924
   
72
   
1,232
   
1,304
   
1,022
    
N/A
   
1964
 
2064 Gravenstein Hwy. No., Sebastopol, CA
    
—
    
159
   
2,312
   
3,450
   
159
   
5,762
    
5,919
    
4,678
    
N/A
   
1983
 
     
1,625
   
231
   
2,620
   
4,374
   
231
   
6,994
   
7,223
   
5,700
              
                               
Note 1. The changes in the total cost of land, buildings, and improvements for the three years ended June 30, are as follows:
                              
     
2005
    
2004
    
2003
                                            
Balance at beginning of period
    
7,140
    
6,882
    
6,881
                                            
Additions
    
83
    
258
    
81
                                            
Cost of disposed property
    
( 0
)
  
( 0
)
  
(80
)
                                          
Balance at end of period
    
7,223
    
7,140
    
6,882
                                            
                                     
Note 2. The changes in accumulated depreciation for the three years ended June 30, are as follows:
                                    
     
2005
    
2003
    
2002
                                            
Balance at beginning of period
    
5,490
    
5,298
    
5,084
                                            
Depreciation expense
    
210
    
192
    
285
                                            
Relief of accumulated balances related to disposed property
    
( 0
)
  
( 0
)
  
(71
)
                                          
Balance at end of period
    
5,700
    
5,490
    
5,298
                                            
 
-24-
 
 
(a)(3)      Exhibits 
   
Exhibit No.
Document Description
   
10.5+ Term Note dated March 1, 2004.
   
10.6+
Credit Agreement dated as of March 1, 2004.
   
10.7+
Consulting Agreement dated August 1, 2005 between SonomaWest Holdings, Inc. and Thomas R. Eakin, d.b.a. Eakin Consulting.
   
10.8+
Consulting Agreement effective as of July 1, 2005 between SonomaWest Holdings, Inc. and Bugatto Investment Company.
   
11.1+
Computation of Per Share Earnings
   
23.1+
Consent of Independent Registered Public Accounting Firm
   
31.1+
Chief Executive Officer 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*
Chief Executive Officer 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
   
 
 
+ Filed herewith.
 
* Furnished herewith.
 
-25-
 EX-10.5 2 v026236_ex10-5.htm

   
Exhibit 10.5
     
 
TERM NOTE
  
$1,690,000.00
  
Santa Rosa, California
   
March 1, 2004
 
FOR VALUE RECEIVED, the undersigned SONOMAWEST HOLDINGS, INC. (“Borrower”) promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION (“Bank”) at its office at it’s North Coast Regional Commercial Banking Office at 200 B Street, 3rd Floor, Santa Rosa, California, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of One Million Six Hundred Ninety Thousand Dollars ($1,690,000.00), with interest thereon as set forth herein.

DEFINITIONS:

As used herein, the following terms shall have the meanings set forth after each, and any other term defined in this Note shall have the meaning set forth at the place defined:

(a) “Business Day” means any day except a Saturday, Sunday or any other day on which commercial banks in California are authorized or required by law to close.

(b) “Fixed Rate Term” means a period commencing on a Business Day and continuing for 1, 2 or 3 months, as designated by Borrower, during which all or a portion of the outstanding principal balance of this Note bears interest determined in relation to LIBOR; provided however, that no Fixed Rate Term may be selected for a principal amount less than Five Hundred Thousand Dollars ($500,000.00); and provided further, that no Fixed Rate Term shall extend beyond the scheduled maturity date hereof. If any Fixed Rate Term would end on a day which is not a Business Day, then such Fixed Rate Term shall be extended to the next succeeding Business Day.

(c) “LIBOR” means the rate per annum (rounded upward, if necessary, to the nearest whole 1/8 of 1%) and determined pursuant to the following formula:

LIBOR =  Base LIBOR     
100% - LIBOR Reserve Percentage

(i) “Base LIBOR” means the rate per annum for United States dollar deposits quoted by Bank as the Inter-Bank Market Offered Rate, with the understanding that such rate is quoted by Bank for the purpose of calculating effective rates of interest for loans making reference thereto, on the first day of a Fixed Rate Term for delivery of funds on said date for a period of time approximately equal to the number of days in such Fixed Rate Term and in an amount approximately equal to the principal amount to which such Fixed Rate Term applies. Borrower understands and agrees that Bank may base its quotation of the Inter-Bank Market Offered Rate upon such offers or other market indicators of the Inter-Bank Market as Bank in its discretion deems appropriate including, but not limited to, the rate offered for U.S. dollar deposits on the London Inter-Bank Market.
 
 
(ii) “LIBOR Reserve Percentage” means the reserve percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor) for “Eurocurrency Liabilities” (as defined in Regulation D of the Federal Reserve Board, as amended), adjusted by Bank for expected changes in such reserve percentage during the applicable Fixed Rate Term.

(d) “Prime Rate” means at any time the rate of interest most recently announced within Bank at its principal office as its Prime Rate, with the understanding that the Prime Rate is one of Bank’s base rates and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto, and is evidenced by the recording thereof after its announcement in such internal publication or publications as Bank may designate.

INTEREST:

(a) Interest. The outstanding principal balance of this Note shall bear interest (computed on the basis of a 360-day year, actual days elapsed) either (i) at a fluctuating rate per annum one-quarter percent (0.25%) above the Prime Rate in effect from time to time, or (ii) at a fixed rate per annum determined by Bank to be three and one quarter percent (3.25%) above LIBOR in effect on the first day of the applicable Fixed Rate Term. When interest is determined in relation to the Prime Rate, each change in the rate of interest hereunder shall become effective on the date each Prime Rate change is announced within Bank. With respect to each LIBOR selection hereunder, Bank is hereby authorized to note the date, principal amount, interest rate and Fixed Rate Term applicable thereto and any payments made thereon on Bank’s books and records (either manually or by electronic entry) and/or on any schedule attached to this Note, which notations shall be prima facie evidence of the accuracy of the information noted.

(b) Selection of Interest Rate Options. At any time any portion of this Note bears interest determined in relation to LIBOR, it may be continued by Borrower at the end the Fixed Rate Term applicable thereto so that all or a portion thereof bears interest determined in relation to the Prime Rate or to LIBOR for a new Fixed Rate Term designated by Borrower. At any time any portion of this Note bears interest determined in relation to the Prime Rate, Borrower may convert all or a portion thereof so that it bears interest determined in relation to LIBOR for a Fixed Rate Term designated by Borrower. At the time this Note is disbursed or Borrower wishes to select a LIBOR option for all or a portion of the outstanding principal balance hereof, and at the end of each Fixed Rate Term, Borrower shall give Bank notice specifying: (i) the interest rate option selected by Borrower; (ii) the principal amount subject thereto; and (iii) for each LIBOR selection, the length of the applicable Fixed Rate Term. Any such notice may be given by telephone (or such other electronic method as Bank may permit) so long as, with respect to each LIBOR selection, (A) if requested by Bank, Borrower provides to Bank written confirmation thereof not later than three (3) Business Days after such notice is given, and (B) such notice is given to Bank prior to 10:00 a.m. on the first day of the Fixed Rate Term or at a later time during any Business Day if Bank, at its sole option but without obligation to do so, accepts Borrower's notice and quotes a fixed rate of Borrower. If Borrower does not immediately accept a fixed rate when quoted by Bank, the quoted rate shall expire and any subsequent LIBOR request from Borrower shall be subject to a redermination by Bank of the applicable fixed rate. If no specific designation of interest is made at the time this Note is disbursed or at the end of any Fixed Rate Term, Borrower shall be deemed to have made a Prime Rate interest selection for this Note or the principal amount to which such Fixed Rate Term applied.

-2-
 
(c) Taxes and Regulatory Costs. Borrower shall pay to Bank immediately upon demand, in addition to any other amounts due or to become due hereunder, any and all (i) withholdings, interest equalization taxes, stamp taxes or other taxes (except income and franchise taxes) imposed by any domestic or foreign governmental authority and related in any manner to LIBOR, and (ii) future, supplemental, emergency or other charges in the LIBOR Reserve Percentage, assessment rates imposed by the Federal Deposit Insurance Corporation, or similar requirements or costs imposed by any domestic or foreign govermental authority or resulting from compliance by Bank with any request or directive (whether or not having the force of law) from any central bank or other governmental authority and related in any manner to LIBOR to the extent they are not included in the calculation of LIBOR. In determining which of the foregoing are attributable to any LIBOR option available to Borrower hereunder, any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower.
-3-
(d) Payment of Interest. Interest accrued on this Note shall be payable on the first day of each month, commencing April 1, 2004.

(e) Default Interest. From and after the maturity date of this Note, or such earlier date as all principal owing hereunder becomes due and payable by acceleration or otherwise, the outstanding principal balance of this Note shall bear interest until paid in full at an increased rate per annum (computed on the basis of a 360-day year, actual days elapsed) equal to four percent (4%) above the rate of interest from time to time applicable to this Note.

REPAYMENT AND PREPAYMENT:

(a) Repayment. Principal shall be payable on the first day of each month in installments of Four Thousand Six Hundred Fifty and no/100 dollars ($4,650.00) each, commencing April 1, 2004, and continuing up to and including November 1, 2005, with a final installment consisting of all remaining unpaid pricipal due and payable in full on December 1, 2005.
 
-4-
 
(b) Application of Payments. Each payment made on this Note shall be credited first, to any interest then due and second, to the outstanding principal balance hereof. All payments credited to principal shall be applied first, to the outstanding principal balance of this Note which bears interest determined in relation to the Prime Rate, if any, and second, to the outstanding principal balance of this Note which bears interest determined in relation to LIBOR, with such payments applied to the oldest Fixed Rate Term first.

(c) Prepayment.

Prime Rate. Borrower may prepay principal on any portion of this Note which bears interest determined in relation to the Prime Rate at any time, in any amount and without penalty.

LIBOR. Borrower may prepay principal on any portion of this Note which bears interest determined in relation to LIBOR at any time and in the minimum amount of Five Hundred Thousand Dollars ($500,000.00); provided however, that if the outstanding principal balance of such portion of this Note is less than said amount, the minimum prepayment amount shall be the entire outstanding principal balance thereof. In consideration of Bank providing this prepayment option to Borrower, or if any such portion of this Note shall become due and payable at any time prior to the last day of the Fixed Rate Term applicable thereto by acceleration or otherwise, Borrower shall pay to Bank immediately upon demand a fee which is the sum of the discounted monthly differences for each month from the month of prepayment through the month in which such fixed Rate Term matures, calculated as follows for each such month:

 
(i)
Determine the amount of interest which would have accrued each month on the amount prepaid at the interest rate applicable to such amount had it remained outstanding until the last day of the Fixed Rate Term applicable thereto.

 
(ii)
Subtract from the amount determined in (i) above the amount of interest which would have accrued for the same month on the amount prepaid for the remaining term of such Fixed Rate Term at LIBOR in effect on the date of prepayment for new loans made for such term and in a principal amount equal to the amount prepaid.

 
(iii)
If the result obtained in (ii) for any month is greater than zero, discount that difference by LIBOR used in (ii) above.

Each Borrower acknowledges that prepayment of such amount may result in Bank incurring additional costs, expenses and/or liabilities, and that it is difficult to a certain the full extent of such costs, expenses and/or liabilities. Each Borrower, therefore, agrees to pay the above-described prepayment fee and agrees that said amount represents a reasonable estimate of the prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to pay any prepayment fee when due, the amount of such prepayment fee shall thereafter bear interest until paid at a rate per annum two percent (2%) above the Prime Rate in effect from time to time (computed on the basis of a 360-day year, actual days elapsed).

-5-
 
All prepayments of principal shall be applied on the most remote principal installment or installments then unpaid.

EVENTS OF DEFAULT:

This Note is made pursuant to and is subject to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of March 1, 2004, as amended form time to time (the “Credit Agreement”). Any default in the payment or performance of any obligation under this Note, or any defined event of default under the Credit Agreement, shall constitute an “Event of Default” under this Note.

MISCELLANEOUS:

(a) Remedies. Upon the sale, transfer, hypothecation, assignment or other encumbrance, whether voluntary, involuntary or by operation of law, of all or any interest in any real property securing this Note, or upon] the occurrence of any Event of Default, the holder of this Note, at the holder’s option, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, notice of nonperformance, notice of protest, protest or notice of dishonor, all of which are expressly waived by each Borrower. Each Borrowers shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys’ fees (to include outside counsel fees and all allocated costs of the holder’s in-house counsel), expended or incurred by the holder in connection with the enforcement of the holder’s rights and/or the collection of any amounts which become due to the holder under this Note, and the prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceedings, contested matter or motion brought by Bank or any other person) relating to any Borrower or any other person or entity.

(b) Obligations Joint and Several. Should more than one person or entity sign this Note as a Borrower, the obligations of each such Borrower shall be joint and several.

(c) Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of California.

This Note is secured by a Deed of Trust dated November 17, 1998.
 
-6-

IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above.

SONOMAWEST HOLDINGS, INC.
 
By:        /s/ Roger Mertz                              
Roger Mertz
Chairman of the Board

-7-
 EX-10.6 3 v026236_ex10-6.htm

Exhibit 10.6
CREDIT AGREEMENT


THIS AGREEMENT is entered into as of March 1, 2004, by and between SONOMAWEST HOLDINGS, INC., a California corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank").

RECITALS

Borrower has requested that Bank extend or continue credit to Borrower as described below, and Bank has agreed to provide such credit to Borrower on the terms and conditions contained herein.

NOW THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Bank and Borrower hereby agree as follows:

ARTICLE I
CREDIT TERMS

SECTION 1.1. TERM LOAN.

(a) Term Loan. Subject to the terms and conditions of this Agreement, Bank hereby agrees to make a loan to Borrower in the principal amount of One Million Six Hundred Ninety Thousand Dollars ($1,690,000.00) ("Term Loan"), the proceeds of which shall be used to refinance Borrower's outstanding credit accommodations from Bank. Borrower's obligation to repay the Term Loan shall be evidenced by a promissory note dated as of March 1, 2004 ("Term Note"), all terms of which are incorporated herein by this reference. Bank's commitment to grant the Term Loan shall terminate on April 1, 2004.

(b) Repayment. The principal amount of the Term Loan shall be repaid in accordance with the provisions of the Term Note.

(c) Prepayment. Borrower may prepay principal on the Term Loan solely in accordance with the provisions of the Term Note.

SECTION 1.2. INTEREST/FEES.

(a) Interest. The outstanding principal balance of the Term Loan shall bear interest at the rate of interest set forth in the Term Note.

(b) Computation and Payment. Interest shall be computed on the basis of a 360-day year, actual days elapsed. Interest shall be payable at the times and place set forth in each promissory note or other instrument or document required hereby.

-1-

(c) Commitment Fee. Borrower shall pay to Bank a non-refundable commitment fee for the Term Loan equal to $5,000.00, which fee shall be due and payable in full upon execution this Agreement.

SECTION 1.3. COLLECTION OF PAYMENTS. Borrower authorizes Bank to collect all principal, interest and fees due under the Term Loan by charging Borrower's deposit account number 4001175900 with Bank, or any other deposit account maintained by Borrower with Bank, for The full amount thereof. Should there be insufficient funds in any such deposit account to pay all such sums when due, the full amount of such deficiency shall be immediately due and payable by Borrower.

SECTION 1.4. COLLATERAL.

As security for all indebtedness of Borrower to Bank subject hereto, Borrower hereby grants to Bank a lien of not less than first priority on that certain real property located at 1365 Gravenstein Highway South, Sebastopol, CA 95472 ("Real Property").

All of the foregoing shall be evidenced by and subject to the terms of such security agreements, financing statements, deeds of trust and other documents as Bank shall reasonably require, all in form and substance satisfactory to Bank. Borrower shall reimburse Bank immediately upon demand for all costs and expenses incurred by Bank in connection with any of the foregoing security, including without limitation, filing and recording fees and costs of appraisals, audits and title insurance.

ARTICLE II
REPRESENTATIONS AND WARRANTIES,

Borrower makes the following representations and warranties to Bank, which representations and warranties shall survive the execution of this Agreement and shall continue in full force and effect until the full and final payment, and satisfaction and discharge, of all obligations of Borrower to Bank subject to this Agreement.

SECTION 2.1. LEGAL STATUS. Borrower is a corporation, duly organized and existing and in good standing under the laws of the State of California, and is qualified or licensed to do business (and is in good standing as a foreign corporation, if applicable) in all jurisdictions in which such qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a material adverse effect on Borrower.

SECTION 2.2. AUTHORIZATION AND VALIDITY. This Agreement and each promissory note, contract, instrument and other document required hereby or at any time hereafter delivered to Bank in connection herewith (collectively, the "Loan Documents") have been duly authorized, and upon their execution and delivery in accordance with the provisions hereof will constitute legal, valid and binding agreements and obligations of Borrower or the party which executes the same, enforceable in accordance with their respective terms.

-2-
SECTION 2.3. NO VIOLATION. The execution, delivery and performance by Borrower of each of the Loan Documents do not violate any provision of any law or regulation, or contravene any provision of the Articles of Incorporation or By-Laws of Borrower, or result in any breach of or default under any contract, obligation, indenture or other instrument to which Borrower is a party or by which Borrower may be bound.

SECTION 2.4. LITIGATION. There are no pending, or to the best of Borrower's knowledge threatened, actions, claims, investigations, suits or proceedings by or before any governmental authority, arbitrator, court or administrative agency which could have a material adverse effect on the financial condition or operation of Borrower other than those disclosed by Borrower to Bank in writing prior to the date hereof.

SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENT. The financial statement of Borrower dated June 30, 2003, a true copy of which has been delivered by Borrower to Bank prior to the date hereof, (a) is complete and correct and presents fairly the financial condition of Borrower, (b) discloses all liabilities of Borrower that are required to be reflected or reserved against under generally accepted accounting principles, whether liquidated or unliquidated, fixed or contingent, and (c) has been prepared in accordance with generally accepted accounting principles consistently applied. Since the date of such financial statement there has been no material adverse change in the financial condition of Borrower, nor has Borrower mortgaged, pledged, granted a security interest in or otherwise encumbered any of its assets or properties except in favor of Bank or as otherwise permitted by Bank in writing.

SECTION 2.6. INCOME TAX RETURNS. Borrower has no knowledge of any pending assessments or adjustments of its income tax payable with respect to any year.

SECTION 2.7. NO SUBORDINATION. There is no agreement, indenture, contract or instrument to which Borrower is a party or by which Borrower may be bound that requires the subordination in right of payment of any of Borrower's obligations subject to this Agreement to any other obligation of Borrower.

SECTION 2.8. PERMITS, FRANCHISES. Borrower possesses, and will hereafter possess, all permits, consents, approvals, franchises and licenses required and rights to all trademarks, trade names, patents, and fictitious names, if any, necessary to enable it to conduct the business in which it is now engaged in compliance with applicable law.

SECTION 2.9. ERISA. Borrower is in compliance in all material respects with all applicable provisions of the Employee Retirement Income Security Act of 1974, as amended or recodified from time to time ("ERISA"); Borrower has not violated any provision of any defined employee pension benefit plan (as defined in ERISA) maintained or contributed to by Borrower (each, a "Plan"); no Reportable Event as defined in ERISA has occurred and is continuing with respect to any Plan initiated by Borrower; Borrower has met its minimum funding requirements under ERISA with respect to each Plan; and each Plan will be able to fulfill its benefit obligations as they come due in accordance with the Plan documents and under generally accepted accounting principles.

-3-
SECTION 2.10. OTHER OBLIGATIONS. Borrower is not in default on any obligation for borrowed money, any purchase money obligation or any other material lease, commitment, contract, instrument or obligation.

SECTION 2.11. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to Bank in writing prior to the date hereof, Borrower is in compliance in all material respects with all applicable federal or state environmental, hazardous waste, health and safety statutes, and any rules or regulations adopted pursuant thereto, which govern or affect any of Borrower's operations and/or properties, including without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act of 1976, and the Federal Toxic Substances Control Act, as any of the same may be amended, modified or supplemented from time to time. None of the operations of Borrower is the subject of any federal or state investigation evaluating whether any remedial action involving a material expenditure is needed to respond to a release of any toxic or hazardous waste or substance into the environment. Borrower has no material contingent liability in connection with any release of any toxic or hazardous waste or substance into the environment.

SECTION 2.12. REAL PROPERTY COLLATERAL. Except as disclosed by Borrower to Bank in writing prior to the date hereof, with respect to any real property collateral required hereby:

(a) All taxes, governmental assessments, insurance premiums, and water, sewer and municipal charges, and rents (if any) which previously became due and owing in respect thereof have been paid as of the date hereof.

(b) There are no mechanics' or similar liens or claims which have been filed for work, labor or material (and no rights are outstanding that under law could give rise to any such lien) which affect all or any interest in any such real property and which are or may be prior to or equal to the lien thereon in favor of Bank.

(c) None of the improvements which were included for purpose of determining the appraised value of any such real property lies outside of the boundaries and/or building restriction lines thereof, and no improvements on adjoining properties materially encroach upon any such real property.

(d) There is no pending, or to the best of Borrower's knowledge threatened, proceeding for the total or partial condemnation of all or any portion of any such real property, and all such real property is in good repair and free and clear of any damage that would materially and adversely affect the value thereof as security and/or the intended use, thereof.

-4-

ARTICLE III
CONDITIONS

SECTION 3.1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation of Bank to extend any credit contemplated by this Agreement is subject to the fulfillment to Bank's satisfaction of all of the following conditions:

(a) Approval of Bank Counsel. All legal matters incidental to the extension of credit by Bank shall be satisfactory to Bank's counsel.

(b) Documentation. Bank shall have received, in form and substance satisfactory to Bank, each of the following, duly executed:

(i) This Agreement and each promissory note or other instrument or document required hereby.
(ii) Corporate Resolution: Borrowing.
(iii) Certificate of Incumbency.
(iv) Deed of Trust and Assignment of Rents and Leases and any modifications.
(v) Such other documents as Bank may require under any other Section of this Agreement.

(c) Financial Condition. There shall have been no material adverse change, as determined by Bank, in the financial condition or business of Borrower, nor any material decline, as determined by Bank, in the market value of any collateral required hereunder or a substantial or material portion of the assets of Borrower.

(d) Insurance. Borrower shall have delivered to Bank evidence of insurance coverage on all Borrower's property, in form, substance, amounts, covering risks and issued by companies satisfactory to Bank, and where required by Bank, with loss payable endorsements in favor of Bank, including without limitation, policies of fire and extended coverage insurance covering all real property collateral required hereby, with replacement cost and mortgagee loss payable endorsements, and such policies of insurance against specific hazards affecting any such real property as may be required by governmental regulation or Bank.
 
(e) Appraisals. Bank shall have obtained, at Borrower's cost, an appraisal of all real property collateral required hereby, and all improvements thereon, issued by an appraiser acceptable to Bank and in form, substance and reflecting values satisfactory to Bank, in its discretion.
 
(f) Title Insurance. Bank shall have received an ALTA Policy of Title Insurance, with such endorsements as Bank may require, issued by a company and in form and substance satisfactory to Bank, in such amount as Bank shall require, insuring Bank's lien on the real property collateral required hereby to be of first priority, subject only to such exceptions as Bank shall approve in its discretion, with all costs thereof to be paid by Borrower.

-5-
(g) Tax Service Contract. Borrower shall have procured and delivered to Bank, at Borrower's cost, such tax service contract as Bank shall require for any real property collateral required hereby, to remain in effect as long as such real property secures any obligations of Borrower to Bank as required hereby.

SECTION 3.2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of Bank to make each extension of credit requested by Borrower hereunder shall be subject to the fulfillment to Bank's satisfaction of each of the following conditions:

(a) Compliance. The representations and warranties contained herein and in each of the other Loan Documents shall be true on and as of the date of the signing of this Agreement and on the date of each extension of credit by Bank pursuant hereto, with the same effect as though such representations and warranties had been made on and as of each such date, and on each such date, no Event of Default as defined herein, and no condition, event or act which with the giving of notice or the passage of time or both would constitute such an Event of Default, shall have occurred and be continuing or shall exist.

(b) Documentation. Bank shall have received all additional documents which may be required in connection with such extension of credit.

ARTICLE IV
AFFIRMATIVE COVENANTS

Borrower covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower shall, unless Bank otherwise consents in writing:

SECTION 4.1. PUNCTUAL PAYMENTS. Punctually pay all principal, interest, fees or other liabilities due under any of the Loan Documents at the times and place and in the manner specified therein.

SECTION 4.2. ACCOUNTING RECORDS. Maintain adequate books and records in accordance with generally accepted accounting principles consistently applied, and permit any representative of Bank, at any reasonable time, to inspect, audit and examine such books and records, to make copies of the same, and to inspect the properties of Borrower.

SECTION 4.3. FINANCIAL STATEMENTS. Provide to Bank all of the following, in form and detail satisfactory to Bank:

(a) not later than 120 days after and as of the end of each fiscal year, an audited financial statement of Borrower, prepared by a certified public accountant acceptable to Bank, to include balance sheet and income statement;

-6-

(b) not later than 45 days after and as of each June 30 and December 31, an operating statement and rent roll for the Real Property;

(c) not later than September 1, 2004, an Operations and Maintenance Plan which addresses the implementation plan for the "in place" management of asbestos containing materials with respect to the Real Property, with such implementation plan to be acceptable to Bank;

(d) not later than September 1, 2004, copy of the official closure notice from the State of California with respect to soil and groundwater contamination issues in connection with the underground storage tank previously at the Real Property; and

(e) from time to time such other information as Bank may reasonably request.

SECTION 4.4. COMPLIANCE. Preserve and maintain all licenses, permits, governmental approvals, rights, privileges and franchises necessary for the conduct of its business; and comply with the provisions of all documents pursuant to which Borrower is organized and/or which govern Borrower's continued existence and with the requirements of all laws, rules, regulations and orders of any governmental authority applicable to Borrower and/or its business.

SECTION 4.5. INSURANCE. Maintain and keep in force insurance of the types and in amounts customarily carried in lines of business similar to that of Borrower, including but not limited to fire, extended coverage, public liability, flood, property damage and workers' compensation, with all such insurance carried with companies and in amounts satisfactory to Bank, and deliver to Bank from time to time at Bank's request schedules setting forth all insurance then in effect.

SECTION 4.6. FACILITIES. Keep all properties useful or necessary to Borrower's business in good repair and condition, and from time to time make necessary repairs, renewals and replacements thereto so that such properties shall be fully and efficiently preserved and maintained.

SECTION 4.7. TAXES AND OTHER LIABILITIES. Pay and discharge when due any and all indebtedness, obligations, assessments and taxes, both real or personal, including without limitation federal and state income taxes and state and local property taxes and assessments, except such (a) as Borrower may in good faith contest or as to which a bona fide dispute may arise, and (b) for which Borrower has made provision, to Bank's satisfaction, for eventual payment thereof in the event Borrower is obligated to make such payment.

SECTION 4.8. LITIGATION. Promptly give notice in writing to Bank of any litigation pending or threatened against Borrower.

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SECTION 4.9. FINANCIAL CONDITION. Maintain Borrower's financial condition as follows using generally accepted accounting principles consistently applied and used consistently with prior practices (except to the extent modified by the definitions herein):

(a) Debt Service Coverage Ratio not less than 1.25 to 1.0 on an annual basis, determined as of each fiscal year end, with "Debt Service Coverage Ratio" defined as the aggregate of gross income received by Borrower from the Real Property in each fiscal year less all expenses (excluding depreciation and interest expense) paid by Borrower in connection with the Real Property in such fiscal year divided by principal and interest payments on debt secured by the Real Property during such fiscal year.

SECTION 4.10. NOTICE TO BANK. Promptly (but in no event more than five (5) days after the occurrence of each such event or matter) give written notice to Bank in reasonable detail of: (a) the occurrence of any Event of Default, or any condition, event or act which with the giving of notice or the passage of time or both would constitute an Event of Default; (b) any change in the name or the organizational structure of Borrower; (c) the occurrence and nature of any Reportable Event or Prohibited Transaction, each as defined in ERISA, or any funding deficiency with respect to any Plan; or (d) any termination or cancellation of any insurance policy which Borrower is required to maintain, or any uninsured or partially uninsured loss through liability or property damage, or through fire, theft or any other cause affecting Borrower's property.

ARTICLE V
NEGATIVE COVENANTS

Borrower further covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower will not without Bank's prior written consent:

SECTION 5.1. USE OF FUNDS. Use any of the proceeds of any credit extended hereunder except for the purposes stated in Article I hereof.

SECTION 5.2. OTHER INDEBTEDNESS. Create, incur, assume or permit to exist any indebtedness or liabilities resulting from borrowings, loans or advances, whether secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several, except (a) the liabilities of Borrower to Bank, and (b) any other liabilities of Borrower existing as of, and disclosed to Bank prior to, the date hereof.

SECTION 5.3. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge into or consolidate with any other entity; make any substantial change in the nature of Borrower's business as conducted as of the date hereof; acquire all or substantially all of the assets of any other entity; nor sell, lease, transfer or otherwise dispose of all or a substantial or material portion of Borrower's assets except in the ordinary course of its business.

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SECTION 5.4. PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to exist a security interest in, or lien upon, all or any portion of Borrower's assets now owned or hereafter acquired, except any of the foregoing in favor of Bank or which is existing as of, and disclosed to Bank in writing prior to, the date hereof.

ARTICLE VI
EVENTS OF DEFAULT

SECTION 6.1. The occurrence of any of the following shall constitute an "Event of Default" under this Agreement:

(a) Borrower shall fail to pay when due any principal, interest, fees or other amounts payable under any of the Loan Documents.

(b) Any financial statement or certificate furnished to Bank in connection with, or any representation or warranty made by Borrower or any other party under this Agreement or any other Loan Document shall prove to be incorrect, false or misleading in any material respect when furnished or made.

(c) Any default in the performance of or compliance with any obligation, agreement or other provision contained herein or in any other Loan Document (other than those referred to in subsections (a) and (b) above), and with respect to any such default which by its nature can be cured, such default shall continue for a period of twenty (20) days from its occurrence.

(d) Any default in the payment or performance of any obligation, or any defined event of default, under the terms of any contract or instrument (other than any of the Loan Documents) pursuant to which Borrower, any guarantor hereunder or any general partner or joint venturer in any Borrower which is a partnership or joint venture (with each such guarantor, general partner and/or joint venturer referred to herein as a "Third Party Obligor") has incurred any debt or other liability to any person or entity, including Bank.

(e) The filing of a notice of judgment lien against Borrower or any Third Party Obligor; or the recording of any abstract of judgment against Borrower or any Third Party Obligor in any county in which Borrower or such Third Party Obligor has an interest in real property; or the service of a notice of levy and/or of a writ of attachment or execution, or other like process, against the assets of Borrower or any Third Party Obligor; or the entry of a judgment against Borrower or any Third Party Obligor.

(f) Borrower or any Third Party Obligor shall become insolvent, or shall suffer or consent to or apply for the appointment of a receiver, trustee, custodian or liquidator of itself or any of its property, or shall generally fail to pay its debts as they become due, or shall make a general assignment for the benefit of creditors; Borrower or any Third Party Obligor shall file a voluntary petition in bankruptcy, or seeking reorganization, in order to effect a plan or other arrangement with creditors or any other relief under the Bankruptcy Reform Act,.Title 11 of the United States Code, as amended or recodified from time to time ("Bankruptcy Code"), or under any state or federal law granting relief to debtors, whether now or hereafter in effect; or any involuntary petition or proceeding pursuant to the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors is filed or commenced against Borrower or any Third Party Obligor, or Borrower or any Third Party Obligor shall file an answer admitting the jurisdiction of the court and the material allegations of any involuntary petition; or Borrower or any Third Party Obligor shall be adjudicated a bankrupt, or an order for relief shall be entered against Borrower or any Third Party Obligor by any court of competent jurisdiction under the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors.

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(g) There shall exist or occur any event or condition which Bank in good faith believes impairs, or is substantially likely to impair, the prospect of payment or performance by Borrower of its obligations under any of the Loan Documents.

(h) The death or incapacity of any individual Borrower or Third Party Obligor. The dissolution or liquidation of any Borrower or Third Party Obligor which is a corporation, partnership, joint venture or other type of entity; or Borrower or any such Third Party Obligor, or any of its directors, stockholders or members, shall take action seeking to effect the dissolution or liquidation of such Borrower or Third Party Obligor.

(i) The sale, transfer, hypothecation, assignment or encumbrance, whether voluntary, involuntary or by operation of law, without Bank's prior written consent, of all or any part of or interest in any real property collateral required hereby.

SECTION 6.2. REMEDIES. Upon the occurrence of any Event of Default: (a) all indebtedness of Borrower under each of the Loan Documents, any term thereof to the contrary notwithstanding, shall at Bank's option and without notice become immediately due and payable without presentment, demand, protest or notice of dishonor, all of which are hereby expressly waived by each Borrower; (b) the obligation, if any, of Bank to extend any further credit under any of the Loan Documents shall immediately cease and terminate; and (c) Bank shall have all rights, powers and remedies available under each of the Loan Documents, or accorded by law, including without limitation the right to resort to any or all security for any credit subject hereto and to exercise any or all of the rights of a beneficiary or secured party pursuant to applicable law. All rights, powers and remedies of Bank may be exercised at any time by Bank and from time to time after the occurrence of an Event of Default, are cumulative and not exclusive, and shall be in addition to any other rights, powers or remedies provided by law or equity.

ARTICLE VII
MISCELLANEOUS

SECTION 7.1. NO WAIVER. No delay, failure or discontinuance of Bank in exercising any right, power or remedy under any of the Loan Documents shall affect or operate as a waiver of such right, power or remedy; nor shall any single or partial exercise of any such right, power or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power or remedy. Any wavier, permit, consent or approval of any kind by Bank of any breach of or default under any of the Loan Documents must be in writing and shall be effective only to the extent set forth in such writing.

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SECTION 7.2. NOTICES. All notices, requests and demands which any party is required or may desire to give to any other party under any provision of this Agreement must be in writing delivered to each party at the following address:

  BORROWER:
SONOMAWEST HOLDINGS, INC.
2064 Highway 116 N.
Sebastopol, CA 95472

  BANK:
WELLS FARGO BANK, NATIONAL ASSOCIATION
North Coast Regional Commercial Banking Office
200 B Street, 3rd Floor
Santa Rosa, CA 95403

or to such other address as any party may designate by written notice to all other parties. Each such notice, request and demand shall be deemed given or made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or three (3) days after deposit in the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt.

SECTION 7.3. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel), expended or incurred by Bank in connection with (a) the negotiation and preparation of this Agreement and the other Loan Documents, Bank's continued administration hereof and thereof, and the preparation of any amendments and waivers hereto and thereto, (b) the enforcement of Bank's rights and/pr the collection of any amounts which become due to Bank under any of the Loan Documents, and (c) the prosecution or defense of any action in any way related to any of the Loan Documents, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to any Borrower or any other person or entity.

SECTION 7.4. SUCCESSORS, ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties; provided however, that Borrower may not assign or transfer its interest hereunder without Bank's prior written consent Bank reserves the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in, Bank's rights and benefits under each of the Loan Documents. In connection therewith, Bank may disclose all documents and information which Bank now has or may hereafter acquire relating to any credit subject hereto, Borrower or its business, or any collateral required hereunder.

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SECTION 7.5. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other Loan Documents constitute the entire agreement between Borrower and Bank with respect to each credit subject hereto and supersede all prior negotiations, communications, discussions and correspondence concerning the subject matter hereof. This Agreement may be amended or modified only in writing signed by each party hereto.

SECTION 7.6. NO THIRD PARTY BENEFICIARIES. This Agreement is made and entered into for the sole protection and benefit of the parties hereto and their respective permitted successors and assigns, and no other person or entity shall be a third party beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any other of the Loan Documents to which it is not a party.

SECTION 7.7. TIME. Time is of the essence of each and every provision of this Agreement and each other of the Loan Documents.

SECTION 7.8. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or any remaining provisions of this Agreement.

SECTION 7.9. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when executed and delivered shall be deemed to be an original, and all of which when taken together shall constitute one and the same Agreement.

SECTION 7.10. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California.

SECTION 7.11. ARBITRATION.

(a) Arbitration. The parties hereto agree, upon demand by any party, to submit to binding arbitration all claims, disputes and controversies between or among them (and their respective employees, officers, directors, attorneys, and other agents), whether in tort, contract or otherwise arising out of or relating to in any way (i) the loan and related Loan Documents which are the subject of this Agreement and its negotiation, execution, collateralization, administration, repayment, modification, extension, substitution, formation, inducement, enforcement, default or termination; or (ii) requests for additional credit.

(b) Governing Rules. Any arbitration proceeding will (i) proceed in a location in California selected by the American Arbitration Association ("AAA"); (ii) be governed by the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the documents between the parties; and (iii) be conducted by the AAA, or such other administrator as the parties shall mutually agree upon, in accordance with the AAA's commercial dispute resolution procedures, unless the claim or counterclaim is at least $1,000,000.00 exclusive of claimed interest, arbitration fees and costs in which case the arbitration shall be conducted in accordance with the AAA's optional procedures for large, complex commercial disputes (the commercial dispute resolution procedures or the optional procedures for large, complex commercial disputes to be referred to, as applicable, as the "Rules"). If there is any inconsistency between the terms hereof and the Rules, the terms and procedures set forth herein shall control. Any party who fails or refuses to submit to arbitration following a demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any dispute. Nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. §91 or any similar applicable state law.

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(c) No Waiver of Provisional Remedies, Self-Help and Foreclosure. The arbitration requirement does not limit the right of any party to (i) foreclose against real or personal property collateral; (ii) exercise self-help remedies relating to collateral or proceeds of collateral such as setoff or repossession; or (iii) obtain provisional or ancillary remedies such as replevin, injunctive relief, attachment or the appointment of a receiver, before during or after the pendency of any arbitration proceeding. This exclusion does not constitute a waiver of the right or obligation of any party to submit any dispute to arbitration or reference hereunder, including those arising from the exercise of the actions detailed in sections (i), (ii) and (iii) of this paragraph.

(d) Arbitrator Qualifications and Powers. Any arbitration proceeding in which the amount in controversy is $5,000,000.00 or less will be decided by a single arbitrator selected according to the Rules, and who shall not render an award of greater than $5,000,000.00. Any dispute in which the amount in controversy exceeds $5,000,000.00 shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations. The arbitrator will be a neutral attorney licensed in the State of California or a neutral retired judge of the state or federal judiciary of California, in either case with a minimum of ten years experience in the substantive law applicable to the subject matter of the dispute to be arbitrated. The arbitrator will determine whether or not an issue is arbitratable and will give effect to the statutes of limitation in determining any claim. In any arbitration proceeding the arbitrator will decide (by documents only or with a hearing at the arbitrator's discretion) any pre-hearing motions which are similar to motions to dismiss for failure to state a claim or motions for summary adjudication. The arbitrator shall resolve all disputes in accordance with the substantive law of California and may grant any remedy or relief that a court of such state could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award. The arbitrator shall also have the power to award recovery of all costs and fees, to impose sanctions and to take such other action as the arbitrator deems necessary to the same extent 8 judge could pursuant to the Federal Rules of Civil Procedure, the California Rules of Civil Procedure or other applicable law. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction. The institution and maintenance of an action for judicial relief or pursuit provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief.

(e) Discovery. In any arbitration proceeding discovery will be permitted in accordance with the Rules. All discovery shall be expressly limited to matters directly relevant to the dispute being arbitrated and must be completed no later than 20 days before the hearing date and within 180 days of the filing of the dispute with the AAA. Any requests for an extension of the discovery periods, or any discovery disputes, will be subject to final determination by the arbitrator upon a showing that the request for discovery is essential for the party's presentation and that no alternative means for obtaining information is available.

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(f) Class Proceedings and Consolidations. The resolution of any dispute arising pursuant to the terms of this Agreement shall be determined by a separate arbitration proceeding and such dispute shall not be consolidated with other disputes or included in any class proceeding.

(g) Payment Of Arbitration Costs And Fees. The arbitrator shall award all costs and expenses of the arbitration proceeding.

(h) Real Property Collateral; Judicial Reference. Notwithstanding anything herein to the contrary, no dispute shall be submitted to arbitration if the dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of California, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable. If any such dispute is not submitted to arbitration, the dispute shall be referred to a referee in accordance with California Code of Civil Procedure Section 638 et seq., and this general reference agreement is intended to be specifically enforceable in accordance with said Section 638. A referee with the qualifications required herein for arbitrators shall be selected pursuant to the AAA's selection procedures. Judgment upon the decision rendered by a referee shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645.

(i) Miscellaneous. To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the dispute with the AAA. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business or by applicable law or regulation. If more than one agreement for arbitration by or between the parties potentially applies to a dispute, the arbitration provision most directly related to the Loan Documents or the subject matter of the dispute shall control. This arbitration provision shall survive termination, amendment or expiration of any of the Loan Documents or any relationship between the parties.

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written above.
 

 
 
SONOMAWEST HOLDINGS, INC.
 
 
 
By:      /s/ Roger Mertz                                                         
Roger Mertz
Chairman of the Board
WELLS FARGO BANK,
NATIONAL ASSOCIATION
 
 
 
By:      /s/ Ruth Peckham                                                        
Ruth Peckham
Relationship Manager
 
 
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 EX-10.7 4 v026236_ex10-7.htm
Exhibit 10.7
 
CONSULTING AGREEMENT
 
This Consulting Agreement (“Agreement”) is made effective as of August 1, 2005, 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, 2005, 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 or treasurer of a corporation; provided however, that Eakin shall report directly to the Chief Executive Officer of the Company (“CEO”) of SWH. Eakin shall serve as Chief Financial Officer until the earlier to occur of his termination or resignation. Eakin shall have the authority and responsibility 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 the CEO of such determination and Eakin may reject that project or projects without breaching this Agreement. The CEO 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.

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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, 2006, unless terminated sooner pursuant to the following provision of this Paragraph 5. This Agreement may be terminated by either party, for any reason or no reason, upon prior written notice to the other party. A termination of this Agreement shall automatically terminate Eakin as Chief Financial Officer of SWH. Upon termination, Eakin shall not be entitled to any severance or similar compensation payments.

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, other than due to Eakin’s 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 due to Eakin’s 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; provided, however, that no prior consent shall be required in connection with assignment of the Agreement in connection with a merger or sale of the business of SWH.

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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. WORK FOR HIRE. Eakin agrees that all work he performs pursuant to this Agreement, and all work which relates at the time of conception or reduction to Company's business, and all work which results from work he performs for Company, whenever performed during the term of this Agreement, and whether or not utilizing Company's equipment, supplies, facilities, Information or other trade secret information, is considered work made for hire for Company as such term is defined in section 101 of the Copyright Act of 1976 and belongs to Company. Eakin further agrees that in the event that this Agreement is determined not to be a work for hire agreement, Eakin will assign to Company any and all rights retained by Eakin.

12. 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.

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13. 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.

14. 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.

15. 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:
     
  If for SWH : Walker Stapleton 
    Chief Executive Officer  
    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.

16. 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.

17. AMENDMENT. This Agreement may be modified or amended only by an amendment in writing signed by both parties.

18. 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.

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19. 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.

20. APPLICABLE LAW. This Agreement shall be governed by the laws of the State of California.

21. 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.

“SWH”:       
       
SonomaWest Holdings, Inc.       
       
       
By:  /s/ Walker Stapleton      
Walker Stapleton, Chief Executive Officer		    
       
       
“Eakin”       
       
Thomas R. Eakin, d.b.a. Eakin Consulting        
       
       
By: /s/ Thomas R. Eakin      
Thomas R. Eakin  		      

 
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Schedule A to Consulting Agreement dated as of August 1, 2005


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, 2005

HOURLY FEES

§  
Financial or management consulting $115.00/hour.
§  
Use of outside consultants billed at cost plus 10%, provided that any use of an outside consultant must first be approved by SWH.
§  
Legal proceedings (testimony in deposition, trials and arbitration/mediation hearings) are billable at 1.5 times the standard rate per hour.


TRAVEL

§  
Travel inside Sonoma County - Non-chargeable.
§  
Travel outside Sonoma County - Travel time billed at regular hourly consulting rate.
§  
Over-night travel - Daily rate to be mutually agreed upon in advance.
§  
Mileage outside Sonoma County is billed at the mileage rate established by the Internal Revenue Service.
§  
Out of pocket expenses billed at cost.


BILLINGS

§  
Invoices will be issued every two weeks.
§  
Minimum billing of four hours for all required on-site visits or meetings outside Sonoma County.
§  
Terms - Net five days from receipt.






EX-10.8 5 v026236_ex10-8.htm
Exhibit 10.8
 
CONSULTING AGREEMENT
 
This Agreement ("Agreement") is made and effective as of August 10, 2005 ("Effective Date") by and between SONOMAWEST HOLDINGS, INC. a Delaware 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, 2005.
 
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 1.5% of the gross sales price regardless of whether or not a broker is involved. Consultant shall receive a bonus of 1.5% of the gross value of the real estate or $150,000 whichever is greater upon any transaction that would result in SonomaWest Holdings becoming a private company. 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.
 
-1-
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, 2006.
 
b.  This Agreement will terminate automatically on any of the following events: (i) bankruptcy or insolvency of either party; (ii) sale or discontinuance of the business of either party; (iii) death of either party.
 
c.  If Consultant defaults in the performance of the Agreement or materially breaches any of the provisions, Client at its sole option may terminate the Agreement at any time on written notice to Consultant. For purposes of this section, material breach includes, but is not limited to: (i) failure or refusal to perform the Services when and as contemplated; (ii) failure to provide timely invoices with appropriate descriptions and approved expenses as provided herein; (iii) negligence, misconduct, an act of dishonesty, or taking an action or conducting itself in a manner contrary or inimical to Client's best business interests or reputation.
 
-2-
d.  If Client fails to pay Consultant fees or payment as provided herein, Consultant at its 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: Walker R. Stapleton, CEO
     
  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.
 
-3-
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/ Walker R Stapleton
 
Walker R Stapleton, CEO
   
 
-4-
 
 EX-11.1 6 v026236_ex11-1.htm
Exhibit 11.1
 
COMPUTATION OF EARNINGS (LOSS) PER SHARE
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
   
YEAR ENDED JUNE 30,
  
   
2005
  
2004
  
2003
  
AVERAGE COMMON SHARES OUTSTANDING
    
1,114
    
1,107
    
1,105
  
                     
AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
    
1,151
    
1,127
    
1,109
  
                     
NET INCOME (LOSS) FROM CONTINUING
OPERATIONS APPLICABLE TO COMMON STOCK
  
$
4
  
$
62
  
$
(202
)
                     
INCOME (LOSS) PER COMMON SHARE FROM
CONTINUING OPERATIONS:
                    
Basic
  
$
0.00
  
$
0.06
  
$
(0.18
)
Diluted (1)
  
$
0.00
  
$
0.05
  
$
(0.18
)
                     
NET EARNINGS FROM DISCONTINUED
OPERATIONS APPLICABLE TO COMMON STOCK
  
$
-
  
$
-
  
$
127
  
                     
EARNING PER COMMON SHARE FROM
DISCONTINUED OPERATIONS:
                    
Basic
  
$
-
  
$
-
  
$
0.11
  
Diluted
 
$
-
  
$
-
  
$
0.11
  
                     
NET INCOME (LOSS) APPLICABLE TO COMMON
STOCK
  
$
4
  
$
62
  
$
(75
)
                     
TOTAL INCOME (LOSS) PER COMMON SHARE:
                    
Basic
  
$
0.00
  
$
0.06
  
$
(0.07
)
Diluted (1)
  
$
0.00
  
$
0.05
  
$
(0.07
)
 
(1) For total loss per common share and loss per common share from continuing operations, the effect of potentially dilutive stock options 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.
 
 
 
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 EX-23.1 7 v026236_ex23-1.htm
Exhibit 23.1
 
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
We have issued our report dated July 21, 2005, accompanying the financial statements and schedule included in the Annual Report of SonomaWest Holdings, Inc. on Form 10-K for the fiscal year ended June 30, 2005.  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, effective October 27, 1993; File No. 333-84295, effective August 2, 1999; File No. 333-101755, effective December 10, 2002; and File No. 333-122507, effective February 3, 2005).
 

 
GRANT THORNTON LLP
 
San Francisco, California
September 26, 2005
 
 EX-31.1 8 v026236_ex31-1.htm
Exhibit 31.1
 
I, Walker R. Stapleton, 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, 2005
 
/s/ Walker R. Stapleton 
Walker R. Stapleton, President and Chief Executive Officer
 
 
 EX-31.2 9 v026236_ex31-2.htm
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, 2005
 
/s/ Thomas R. Eakin 
Thomas R. Eakin, Chief Financial Officer
 
 EX-32.1 10 v026236_ex32-1.htm
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 Delaware corporation (the "Company"), does hereby certify that:
 
The Annual Report on Form 10-K for the fiscal year ended June 30, 2005 (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/ Walker R. Stapleton 
Walker R. Stapleton,
President and Chief Executive Officer
September 28, 2005
 EX-32.2 11 v026236_ex32-2.htm
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 Delaware corporation (the "Company"), does hereby certify that:
 
The Annual Report on Form 10-K for the fiscal year ended June 30, 2005 (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, 2005
 
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