-----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, FuARITGloq+5ZZu2MPHY1vJ/edOYtzu4fKzTQCTSuD9MzsxWKVVEprnMl8ol8LXr TeF7AwWA4eYmVMs9oy0Pzg== 0001144204-06-005819.txt : 20060214 0001144204-06-005819.hdr.sgml : 20060214 20060214130002 ACCESSION NUMBER: 0001144204-06-005819 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060214 DATE AS OF CHANGE: 20060214 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-01912 FILM NUMBER: 06610839 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-Q 1 v033639_10q.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q |X| Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934. For the quarterly period ended December 31, 2005 or |_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from _________ to _________. Commission File Number 01912 SONOMAWEST HOLDINGS, INC. (Exact name of registrant as specified in its charter) DELAWARE 94-1069729 (State of incorporation) (IRS Employer Identification #) 2064 HIGHWAY 116 NORTH, SEBASTOPOL, CA 95472-2662 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 707-824-2534 -------------------------------------------------- - -------------------------------------------------------------------------------- (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES: |X| NO: |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act. YES: |_| NO: |X| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES: |_| NO: |X| As of February 13, 2006, there were 1,124,257 shares of common stock, no par value, outstanding. SONOMA.WEST HOLDINGS, INC. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements Balance Sheets at December 31, 2005 and June 30, 2005 (unaudited)........................................3 Statements of Operations - Three and six months ended December 31, 2005 and 2004 (unaudited).....................4 Statement of Changes in Shareholders' Equity - Six months ended December 31, 2005 (unaudited)...................5 Statements of Cash Flows - Six months ended December 31, 2005 and 2004(unaudited)............................6 Notes to Financial Statements (unaudited)........................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................12 Item 3. Quantitative and Qualitative Disclosures About Market Risk......16 Item 4. Controls and Procedures.........................................16 PART II. OTHER INFORMATION Item 1. Legal Proceedings...............................................17 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.....17 Item 3. Defaults Upon Senior Securities ................................17 Item 4. Submission of Matters to a Vote of Security Holders.............17 Item 5. Other Information...............................................17 Item 6. Exhibits........................................................17 Signature.................................................................18 EXHIBIT INDEX.................................................................20 EXHIBITS......................................................................20 -2- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
SONOMAWEST HOLDINGS, INC. BALANCE SHEETS (AMOUNTS IN THOUSANDS) (UNAUDITED) ASSETS 12/31/05 6/30/05 ------ ------ CURRENT ASSETS: Cash $3,840 $1,879 Accounts receivable 172 123 Other receivables 14 13 Prepaid expenses and other assets 63 129 Current deferred income taxes, net -- 298 ------ ------ Total current assets 4,089 2,442 ------ ------ RENTAL PROPERTY, net 1,479 1,553 ------ ------ INVESTMENT, at cost 2,401 3,001 ------ ------ DEFERRED INCOME TAXES 175 159 ------ ------ PREPAID COMMISSIONS AND OTHER ASSETS 176 117 ------ ------ Total assets $8,320 $7,272 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ 80 $1,620 Accounts payable 107 121 Accrued payroll and related liabilities 15 31 Accrued expenses and other current liabilities 146 76 Income taxes payable 190 -- Unearned rents and deposits 419 364 Current deferred tax liability 8 -- ------ ------ Total current liabilities 965 2,212 ------ ------ LONG-TERM DEBT, net of current maturities 1,513 -- ------ ------ OTHER LONG-TERM LIABILITIES -- 131 ------ ------ Total liabilities 2,478 2,343 ------ ------ SHAREHOLDERS' EQUITY: Preferred stock: 2,500 shares authorized; no shares outstanding -- -- Common stock: 5,000 shares authorized, no par value; 1,124 and 1,114 shares outstanding on December 31, 2005 and June 30, 2005, respectively 2,913 2,770 Retained earnings 2,929 2,159 ------ ------ Total shareholders' equity 5,842 4,929 ------ ------ Total liabilities and shareholders' equity $8,320 $7,272 ====== ====== The accompanying notes are an integral part of these statements.
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SONOMAWEST HOLDINGS, INC. STATEMENTS OF OPERATIONS FOR THE SIX AND THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 (UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Six Months Three Months Ended December 31 Ended December 31 ------------------ ------------------ 2005 2004 2005 2004 ------- ------- ------- ------- RENTAL REVENUE -NET $ 996 $ 908 $ 520 $ 476 TENANT REIMBURSEMENTS 274 254 137 106 ------- ------- ------- ------- TOTAL REVENUE $ 1,270 $ 1,162 $ 657 $ 582 ------- ------- ------- ------- OPERATING COSTS 1,188 1,013 635 529 OPERATING COSTS -- RELATED PARTY EXPENSES 39 230 9 96 ------- ------- ------- ------- TOTAL OPERATING COSTS 1,227 1,243 644 625 ------- ------- ------- ------- OPERATING INCOME (LOSS) 43 (81) 13 (43) INTEREST EXPENSE (57) (41) (30) (21) INTEREST INCOME 47 14 31 8 DIVIDEND INCOME 122 -- 122 -- GAIN ON SALE OF INVESTMENTS 1,090 -- 1,090 -- OTHER INCOME 6 19 -- 18 ------- ------- ------- ------- INCOME (LOSS) BEFORE INCOME TAXES 1,251 (89) 1,226 (38) INCOME TAX (PROVISION) BENEFIT (481) 33 (471) 14 ------- ------- ------- ------- NET INCOME (LOSS ) $ 770 $ (56) $ 755 $ (24) ======= ======= ======= ======= WEIGHTED AVERAGE COMMON SHARES AND EQUIVALENTS: Basic 1,122 1,114 1,124 1,114 Diluted 1,150 1,114 1,155 1,114 INCOME (LOSS) PER COMMON SHARE: Basic $ 0.69 $ (0.05) $ 0.67 $ (0.02) Diluted $ 0.67 $ (0.05) $ 0.65 $ (0.02) The accompanying notes are an integral part of these financial statements.
-4- SONOMAWEST HOLDINGS, INC. STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) FOR THE SIX MONTHS ENDED DECEMBER 31, 2005 (AMOUNTS IN THOUSANDS)
Common Stock -------------------------- Total Number Retained Shareholders' of Shares Amount Earnings Equity ------------- ----------- ---------- ------------- BALANCE, JUNE 30, 2005 1,114 $ 2,770 $ 2,159 $ 4,929 Net income 770 770 Non-cash stock compensation charge 81 81 Exercise of stock options 10 62 62 ------------- ----------- ---------- ------------- BALANCE, DECEMBER 31, 2005 1,124 $ 2,913 $ 2,929 $ 5,842 ============= =========== ========== ============= The accompanying notes are an integral part of these financial statements.
-5- SONOMAWEST HOLDINGS, INC. STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED DECEMBER 31, 2005 AND 2004 (AMOUNTS IN THOUSANDS)
2005 2004 ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 770 $ (56) ------- ------- Adjustments to reconcile net income (loss) to net cash provided by operating activities: Gain on sale of investments (1,090) -- Dividends received from investments (122) -- Non-cash stock compensation charge 81 10 Depreciation and amortization expense 108 107 Changes in assets and liabilities: Accounts receivable, net (49) 8 Other receivables (1) 26 Related party interest receivable -- 3 Prepaid expenses and other assets 66 72 Deferred income tax provision (benefit) 290 (33) Prepaid commissions and other assets (59) 23 Accounts payable (14) (130) Accrued Expenses and other current liabilities 70 -- Income taxes payable 190 -- Accrued payroll and related liabilities (16) (20) Unearned rents and deposits 55 55 Other long-term liabilities (131) -- ------- ------- (622) 121 ------- ------- Net cash provided by operating activities 148 65 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (34) (59) Proceeds from sale of investments 1,690 -- Dividends received from investments 122 -- ------- ------- Net cash provided by, (used in) investing activities 1,778 (59) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from debt refinancing 1,606 Principal payments of long term debt (1,633) (28) Exercise of stock options 62 400 ------- ------- Net cash provided by financing activities 35 372 ------- ------- NET INCREASE IN CASH 1,961 378 CASH AT BEGINNING OF PERIOD 1,879 1,348 ------- ------- CASH AT END OF PERIOD $ 3,840 $ 1,726 ======= ======= Supplemental Cash Flow Information 2005 2004 ------- ------- Interest paid $ 55 $ 40 Taxes paid $ 1 $ 1 The accompanying notes are an integral part of these financial statements.
-6- SONOMAWEST HOLDINGS, INC. AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, 2005 NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited interim statements have been prepared pursuant to the rules of the Securities and Exchange Commission. Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes these disclosures are adequate to make the information not misleading. In the opinion of management, all adjustments necessary for a fair presentation for the periods presented have been reflected and are of a normal recurring nature. These interim financial statements should be read in conjunction with the financial statements and notes thereto for each of the three years in the period ended June 30, 2005. The results of operations for the six-month period ended December 31, 2005 are not necessarily indicative of the results that will be achieved for the entire year ending June 30, 2006. 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. Lease incentives and construction allowances provided by the Company to certain of its tenants are amortized as an offset to revenue on a straight-line basis over the term of the respective lease. The Company does not have leases that include provisions that require the lessee to pay the lessor any additional rent based upon the lessee's sales or any other financial performance levels. Reimbursements of certain costs received from tenants are recognized as tenant reimbursement revenues. NOTE 2 - INVESTMENT Background. The Company holds an investment in MetroPCS Communications, Inc. ("METROPCS"), a privately held telecommunications company. As of December 31, 2005, the Company had a $2.4 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. 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 other than its investment. However, Craig Stapleton, the Company's largest stockholder and the father of Walker R. Stapleton, the President, Chief Executive Officer and Chief Financial Officer of the Company, is a shareholder of MetroPCS. Additionally, a director of the Company has a small indirect beneficial ownership interest in MetroPCS Communications stock. On September 26, 2005, the Company tendered approximately 20% of the shares of MetroPCS Series D Preferred Stock that it held in response to a tender offer by certain third parties to purchase shares of MetroPCS Series D Preferred Stock and common stock. The price per share offered in the tender offer was approximately three times the original investment amount per share paid by the Company for its MetroPCS shares, including the cumulative unpaid dividends as of December 31, 2005. All shares tendered by the Company were accepted. The gross proceeds to the Company from the tender offer of $1.8 million were received November 1, 2005, resulting in a net gain of $1,090,000 on sale of investments, and dividend income of $122,000. The Company's existing net operating loss carryforwards will offset much of the gain recognized for federal and state tax purposes from the sale of the MetroPCS shares. -7- The Company accounts for its investment in MetroPCS under the cost method, which amounted to $2,401,000 as of December 31, 2005. 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 such information that we may request and that MetroPCS may provide to us. 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. Based on the price per share offered in the tender offer, the MetroPCS shares held by the Company would have a value, as of December 31, 2005, of approximately $7.2 million. There can be no assurance, however, that the Company will be able to achieve liquidity for its remaining MetroPCS shares in the future at the price offered in the tender offer or at any other price. NOTE 3 - LONG-TERM DEBT As of December 31, 2005, long-term debt consists of the following: Amounts in Thousands Credit Agreement, bank, secured by a first deed of trust on the Company's property located at 2064 Gravenstein Highway North, Sebastopol, California, payable in monthly installments of $7,000 plus interest at the bank's prime rate plus .25% per annum, final maturity October 1, 2010 $ 1,593 --------- 1,593 Less current portion 80 --------- $ 1,513 ========= The credit agreement replaces the Company's previous credit agreement with the bank and, in part, refinances approximately $1.6 million of indebtedness under the previous agreement. The term note bears interest at the bank's prime rate plus .25% (or, at the Company's election, the LIBOR rate, as defined, plus 3.25%), with monthly principal payments of approximately $7,000 beginning November 1, 2005. Unpaid principal and interest is due on the maturity date of October 1, 2010. The note is secured by a first deed of trust on the Company's property (the "North Property") located at 2064 Gravenstein Highway North, Sebastopol, California. Under this credit agreement the Company is required to meet certain financial covenants. As of December 31, 2005 the Company was in compliance with such covenants. In addition, the Company entered into a line of credit agreement with its bank which is available through September 1, 2010 and provides for advances not to exceed at any time an aggregate principal amount of $500,000. Advances under the line of credit may be used to provide funds for tenant improvements. As of December 31, 2005 no amounts were outstanding under the line of credit. -8- Principal payments for the years succeeding December 31, 2005, are as follows: Amounts in Year Ending June 30, Thousands -------------------- ------------ Balance of 2006 $ 40 2007 80 2008 80 2009 80 2010 80 Thereafter 1,233 ------------ $ 1,593 ============ Note 4 - Stock-Based Compensation Effective July 1, 2005, the Company adopted Statement of Financial Accounting Standard ("SFAS") No. 123(R), Share-Based Payment, using the modified prospective application transition method. Because the fair value recognition provisions of SFAS No. 123, Stock-Based Compensation, and SFAS No. 123(R) were materially consistent under our equity plans, and because all of the Company's stock options were fully vested as of July 1, 2005, the adoption of SFAS No. 123(R) did not have an impact on our financial position or our results of operations. Prior to our adoption of SFAS No. 123(R), benefits of tax deductions in excess of recognized compensation costs were reported as operating cash flows. SFAS No. 123(R) requires excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid. Our net income for the six months ended December 31, 2005 includes $81,000 in costs, $48,000 of this cost is due to non-qualified stock options with $(19,000) of income tax benefits related to our stock-based compensation arrangements. The remaining $33,000 in costs reflect incentive stock options with no tax benefit. Our net income for the six months ended December 31, 2004 included $10,000 of compensation related to our stock-based compensation arrangements and $(4,000) of income tax benefit related to our stock-based compensation arrangements. On July 31, 2002, the Company's Board of Directors approved the SonomaWest Holdings, Inc. 2002 Stock Incentive Plan (the "2002 Plan"). The 2002 Plan is designed to benefit the Company and its shareholders by providing incentive based compensation to encourage officers, directors, consultants and other key employees of the Company and its affiliates to attain high performance and encourage stock ownership in the Company. The maximum number of shares of common stock issuable over the term of the 2002 Stock Option Plan is 150,000 shares. No participant in the 2002 Plan may be granted stock options, direct stock issuances and share right awards for more than 15,000 shares of common stock in total in any calendar year. The exercise price of all incentive stock options granted under the 2002 Plan must be at least equal to the fair market value of the Common Stock on the date of grant. The exercise price of non-statutory stock options must at least be equal to 85% of the fair market value of the Common Stock on the date of grant. The contractual life of the options is ten years. To date, all options issued under this plan have been issued fully vested. 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 275,000 shares of common stock. In connection with adoption of the 2002 Plan, no future options will be granted under the 1996 Plan. -9- A summary of the status of the Company's stock option plans at December 31, 2005 with changes during the six months ended December 31, 2005 are presented in the table below: Simple Weighted Average Aggregate Average Remaining Intrinsic Options Exercise Contractual Value (in thousands) Price Term (years) (in thousands) ----------- ----------- ----------- ----------- Balance, June 30, 2005 93 $ 6.41 Granted 15 $ 10.95 Cancelled (2) $ 7.42 Exercised (10) $ 6.24 ----------- ----------- Balance, December 31, 2005 96 $ 7.12 6.26 $ 686 ----------- ----------- Exercisable, December 31, 2005 96 $ 7.12 6.26 $ 686 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model, with the following simple-average assumptions used for the fiscal 2006 grants: weighted average risk-free interest rate of 4.37 percent; expected dividend yield of 0 percent; expected life of two years for the Plan options; and expected volatility of 49 percent. All outstanding options were fully vested as of December 31, 2005; and thus, there was no unrecognized compensation cost related to stock options. Cash received from stock option exercises during the six months ended December 31, 2005 was $62,000. We issue new shares to satisfy stock option exercises. During the six months ended December 31, 2005, outstanding options held by former directors of the Company and by the Company's former chief financial officer, which in the aggregate are exercisable to purchase a total of 36,500 shares of common stock, were amended to extend the term of such options to a period of twelve months from the date of termination of service to the Company. The Company recorded non-cash compensation expense of $32,000 for the quarter ended December 31, 2005, relating to these amendments. NOTE 5 - RELATED PARTIES 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 are 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 the six months ended December 31, 2005, the Company incurred $13,000 for real estate consulting services from Bugatto Investment Company. These expenses are included in Operating Costs - Related Party. As of December 31, 2005, the Company had a payable to Bugatto Investment Company of $2,700. -10- Effective August 1, 2005, the Company entered into a consulting agreement with Thomas Eakin, the Company's former Chief Financial Officer. Under the agreement, Mr. Eakin provided financial management and accounting services to the Company at an hourly billing rate of $115 per hour, plus expenses. The term of the agreement was initially through July 31, 2006; however, in September 2005, Mr. Eakin delivered a notice of termination of the consulting agreement, effective October 12, 2005. During the six months ended December 31, 2005, the Company incurred $18,000 for services from Thomas R. Eakin. As of December 31, 2005, the Company did not have a payable to Mr. Eakin. These expenses are included in Operating Costs - Related Party. Gary L. Hess, former 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 ended June 30, 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 $8,000 in commissions to Mr. Hess as a result of this payment. These expenses were included under Operating Costs - Related Party. As of December 31, 2005, the Company did not owe Mr. Hess any commissions under this agreement. As of the 2005 annual meeting of stockholders, Mr. Hess is no longer a board member. Roger S. Mertz, former Chairman of the Board and former director, 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 the six months ended December 31, 2005, the Company incurred $9,000 for legal services provided by Allen Matkins. As of December 31, 2005, the Company had no payable to Allen Matkins. As of the 2005 annual meeting of stockholders, Mr. Mertz is no longer a board member. Walker Stapleton, a director was elected President and Chief Executive Officer on June 16, 2005. On December 23, 2005, the Compensation Committee of the Board of Directors ("Board") the Company approved compensation arrangements for directors of the Company for the 2006 fiscal year (the year ending June 30, 2006). Outside directors will receive the following compensation: $3,000 per quarter, plus reimbursement for reasonable out-of-pocket expenses incurred in connection with attendance at meetings; $1,500 for each Board and shareholder meeting attended; for service on the Audit Committee or the Compensation Committee, $1,000 per quarter for each such committee; and for service on special or other committees authorized by the Board, $1,000 per meeting of such committee. The committee also awarded options to purchase 2,500 shares of the Company's common stock to each director who is not also an employee of the Company, and awarded options to purchase 10,000 shares of the Company's common stock to Walker R. Stapleton, the Company's Chief Executive Officer. The exercise price of all options is equal to the fair market value of the common stock on the date of grant. Note 6 - Minimum Lease Income The Company leases warehouse space, generating rental revenues for the six months ended December 31, 2005 and December 31, 2004 of $996,000 and $908,000, respectively. The leases have varying terms, which range from month-to-month to expiration dates through 2013. As of December 31, 2005, assuming that all current month-to-month leases continue unchanged throughout the periods presented in the table, and that there are no changes to the other leases other than expiration of the leases at the end of their stated terms and no additional space is leased, the following will be the future minimum lease income (in thousands): Year Ending Amounts in June 30 Thousands - ------------------------------- ------------------ Balance of 2006 701 2007 856 2008 521 2009 356 2010 321 Thereafter 632 ------------------ Total $3,387 ================== -11- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations SonomaWest Holdings, Inc. (the "Company" or "Registrant") is including the following cautionary statement in this Quarterly Report to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by, or on behalf of, the Company. The statements contained in this Report that are not historical facts are "forward-looking statements" (as such term is defined in Section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934), which can be identified by the use of forward-looking terminology such as "estimated," "projects," "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" as set forth in our Annual Report for the fiscal year ended June 30, 2005 and other cautionary statements set forth therein and in this Report under "Management's Discussion and Analysis of Financial Condition and Results of Operations." There can be no assurance that management's expectations, beliefs or projections will be achieved or accomplished, and the Company expressly disclaims any obligation to update any forward-looking statements. The financial statements included herein are presented as of, and for the three and six months ending December 31, 2005 and 2004 and reflect all the adjustments that in the opinion of management are necessary for the fair presentation of the financial position and results of operations for the periods then ended. All adjustments during the periods presented are of a normal and recurring nature. Recent Developments On February 8, 2006, the Company issued a press release announcing that it had received from Walker R. Stapleton, the Company's President and Chief Executive Officer, a letter expressing an interest in initiating a management-led buyout transaction of the Company by an investment group including Mr. Stapleton and members of his family, including Craig Stapleton, who is the company's largest stockholder. Based on the most recent Schedule 13D filed by Craig Stapleton and certain other persons, Craig Stapleton beneficially owns approximately 48% of the outstanding shares of the Company's common stock. The letter indicates an interest in acquiring all of the company's outstanding shares not held by the investment group at a price of $11.03 per share. The letter does not propose a form of transaction. The letter indicates that the investment group is very confident in its ability to secure appropriate financing for the transaction. The board of directors has appointed a special committee composed of David Bugatto and Fredric Selinger, both independent directors of the Company, to consider the expression of interest and, if the committee deems appropriate, enter into negotiations with the investment group or take other actions regarding the expression of interest. The committee has the authority to retain independent financial advisors and independent legal counsel. -12- There can be no assurance that any definitive offer will be made, that any agreement will be executed or that any transaction will be initiated or consummated. CRITICAL ACCOUNTING POLICIES The financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates and assumptions. The Company believes that of its significant accounting policies, the following may involve a higher degree of judgment and complexity. Valuation of investment in MetroPCS Communications, Inc. The Company accounts for its investment in MetroPCS under the cost method, which amounted to $2,401,000 as of December 31, 2005. 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 such information that we may request and that MetroPCS may provide to us. 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. Based on the price per share offered in the tender offer, the MetroPCS shares held by the Company would have a value, as of December 31, 2005, of approximately $7.2 million. There can be no assurance, however, that the Company will be able to achieve liquidity for its remaining MetroPCS shares in the future at the price offered in the tender offer or at any other price. See Note 2 above for further information. The Company owns less than one percent of the total outstanding shares of MetroPCS' Series D Preferred Stock and less than one percent of its total outstanding capital stock on an as-converted basis. If as a result of its review of information available to the Company regarding MetroPCS, the Company believes its investment should be reduced to a fair value below its cost, the reduction would be charged to "loss on investments" in the statements of operations. 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") some of which have been previously carried back to offset prior years' taxable income. During fiscal 2006, the Company expects to utilize all of its remaining NOLs as a result of a significant tax gain generated by the Company's partial tender offer of its MetroPCS investment. 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. -13- The properties are leased to multiple tenants with leases varying in length from month-to-month to ten years. Revenue from lease rental is recognized on a monthly basis, based upon the dollar amount specified in the related lease. Lease incentives and construction allowances provided by the Company to certain of its tenants are amortized as an offset to revenue on a straight-line basis over the term of the respective lease. The Company requires that all tenants be covered by a lease. The Company does not have leases that include provisions that require the lessee to pay the lessor any additional rent based upon the lessee's sales or any other financial performance levels. The Company has no tenant related reimbursements that are not part of tenant lease agreements. RESULTS OF OPERATIONS Results of Operations The Company leases warehouse, production, and office space as well as outside storage space at both of its properties. The two properties are located on 82 acres of land and have a combined leaseable area under roof of 391,000 square feet. As of December 31, 2005 and 2004 the Company had a total of 32 and 28 tenants respectively. The tenants have varying original lease terms ranging from month-to-month to ten years with options to extend the leases. As of December 31, 2005, the tenants occupied approximately 307,000 square feet under roof, or 79% of the leasable area under roof. This compares to 295,000 square feet under roof, or 75% of the leasable area under roof as of December 31, 2004. In addition to the area under roof, the Company had 64,000 square feet of outside area under lease as of December 10, 2005 and 76,000 as of December 31, 2004. Rental Revenue. For the six months ended December 31, 2005 rental revenue increased $88,000 or 10% as compared to the corresponding period in the prior year. The increase in rental revenue was attributable to the increase in leased square footage. This increase is primarily a result of expansion by the existing tenants under short-term leases for $60,000 and one new larger tenant for $100,000, these were offset by vacating tenants and CPI increases for a credit of $72,000. This increase in demand was not anticipated and was primarily a result of an increase in a tenant's business volume. For the three months ended December 31, 2005 rental revenue increased $44,000 or 9% as compared to the three months ended December 31, 2004. The increase in rental revenue is attributable to an increase in leased square footage. This increase is primarily a result of expansion by existing tenants referred to above. Tenant Reimbursements. For the six months ended December 31, 2005 tenant reimbursements increased $20,000 or 8% as compared to the six months ended December 31, 2004. Such reimbursements typically fluctuate based upon the increase or decrease in utilities rates and the amount of space occupied by tenants. Of the $20,000 increase, a reduction of $6,000 resulted from non-utility related reimbursements and the balance resulted from increased utility rates and usage by the tenants. For the three months ended December 31, 2005 tenant reimbursements increased $31,000 or 29% as compared to the three months ended December 31, 2004. The increase in utilities during the quarter is primarily a result of increased activity by three manufacturing tenants. Operating Costs. For the six months ended December 31, 2005 total operating costs decreased $16,000 or 1% compared to the six months ended December 31, 2004. Of this decrease, operating costs--related party decreased $191,000 and operating costs increased $175,000. The decrease in related party expenses was the result of reduced legal expenses related to the firm of which a former director of the Company is a partner of $172,000, due primarily to the use of another firm for services, along with a combined reduction of $14,000 in accounting and real estate consulting fees and $5,000 reduction in related party commission. -14- The increase of $175,000 in operating costs was a result of non-related party legal expenses of $81,000 due to the engagement of a new legal firm, increased non-cash stock compensation of $71,000 for stock option extensions and new options, salary and compensation arrangements of $59,000 for the quarter for Walker R. Stapleton who became the President and Chief Executive Officer of the Company in June 2005, utility cost increases of $22,000 due primarily to the increase in utility rates, audit and accounting fees of approximately $8,000, property insurance deductible of $11,000, facility water system of $10,000, marketing expense of $7,000, non-related accounting of $6,000 due to the hiring of a consultant firm, and other of $31,000. These increases were offset by decreases in repairs and maintenance of $104,000 due to the significant painting, roof repairs and storm damage maintenance in 2004 and development costs of $27,000. The Company continues to closely scrutinize all discretionary spending. Efforts to reduce and/or maintain expenses continue to be an important focus of the Company. Total operating expenses are expected to remain relatively consistent over the remainder of fiscal 2006. For the three months ended December 31, 2005 total operating costs increased $19,000 or 3%. Of this increase, operating costs--related party decreased $87,000 and operating costs increased $106,000 which was primarily a result of increases in non-cash stock compensation of $81,000 and repairs and maintenance. Interest Income. For the six months ended December 31, 2005, the Company generated $47,000 of interest income on its cash balances as compared to $14,000 in the six months ended December 31, 2004. The sale of a portion of the Company's MetroPCS stock in October 2005 in response to a tender offer has increased the invested cash accounts. For the three months ended December 31, 2005, the Company generated $31,000 of interest income on its cash balances as compared to $8,000 in the three months ended December 31, 2004. Again, the increase was primarily due to increased cash generated by the sale of Metro PCS shares in October 2005. Interest Expense. Interest expense consists solely of interest expense on mortgage debt. Interest expense increased to $57,000 for the six months ended December 31, 2005, compared to $41,000 for the corresponding period in the prior year due primarily to increased interest rates on the Company's outstanding debt. For the three months ended December 31, 2005, the Company had $30,000 of interest expense as compared to $21,000 in the three months ended December 31, 2004 primarly due to interest rate increases on the outstanding debt. Gain on Sale of Investment and Dividends. For the six months ended December 31, 2005, the Company received $1,813,000 for the tender of 20% of its shares in MetroPCS, resulting in a gain on sale of investments of $1,090,000 and dividend income of $122,000. Other Income and Expense. For the six months ended December 31, 2005, the Company incurred a net increase in other income of $6,000 which includes $5,000 from the sale of a dust collection system and other discontinued equipment. Income Taxes. The effective tax rate for the six months ended December 31, 2005 increased to a provision of 38.45% from a benefit of 37% for the six months ended December 31, 2004. As of December 31, 2005, the Company had no operating loss carryforwards. Though the Company had reported taxable losses until 2005, as of the end of fiscal 2005 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 for the expected utilization of 100% of its deferred tax assets. As a result, the valuation allowance was reversed in the fourth quarter of fiscal 2005. Although the initial public offering was later withdrawn, the Company completed a tender offer with Metro PCS in October 2005 that will allow for utilization of all of the Company's remaining net operating loss carryforwards during fiscal 2006. -15- Liquidity and Capital Resources The Company had cash of $3.8 million at December 31, 2005, and current maturities of long-term debt of $80,000. The increase in cash and cash equivalents of $1,961,000 since June 30, 2005 was primarily a result of the cash proceeds from the sale of 20% of the Company's MetroPCS holdings, of $1,813,000 cash received from the exercise of stock options of $62,000 and cash provided by operating activities of $147,000, which were partially offset by principal payment on long-term debt of $27,000 and capital expenditures of $34,000. In October 2005, the Company, entered into a credit agreement with Wells Fargo Bank, National Association. The credit agreement replaces the Company's previous credit agreement with the bank and, in part, refinances approximately $1.6 million of indebtedness under the previous agreement. The credit agreement provides for a line of credit, which is available through September 1, 2010. The line of credit provides for advances not to exceed at any time an aggregate principal amount of $500,000, and advances under the line of credit may be used to provide funds for tenant improvements. The term note bears interest at the bank's prime rate plus .25% (or, at the Company's election, the LIBOR rate, as defined, plus 3.25%), with monthly principal payments of approximately $7,000 beginning November 1, 2005. Unpaid principal and interest is due on the maturity date of October 1, 2010. The note is secured by a first deed of trust on the Company's property (the "North Property") located at 2064 Gravenstein Highway North, Sebastopol, California. Under this credit agreement the company is required to meet certain financial covenants; as of December 31, 2005 the company was in compliance with such covenants. The Company anticipates that material cash commitments during the third and fourth quarters of fiscal 2006 will include $40,000 of principal debt reduction and approximately $160,000 of capital expenditures. Cash flows from operating activities are expected to remain positive and relatively consistent given current tenant occupancy and rental agreements in place. The Company believes that its existing resources, together with anticipated cash from operating activities, will be sufficient to satisfy its current and projected cash requirements for the foreseeable future. The Company holds certain cash and cash equivalents for non-trading purposes that are sensitive to changes in the interest rate market. The Company does not believe that changes in the interest rate market affecting these financial instruments will have a material impact, either favorable or unfavorable, on its financial position or results of operations. The Company does not have any off-balance sheet arrangements. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company currently has no derivative financial instruments that expose the Company to market risk. The Company is exposed to cash flow and fair value risk due to changes in interest rates with respect to its notes payable and in changes in the fair value of its investment in MetroPCS Communications, Inc. As of December 31, 2005, the Company believes that the carrying amounts for cash, accounts receivable and accounts payable approximate their fair value. The Company believes the note payable approximates fair market value as the term to maturity is short (October 1, 2010) and as a result of this short term maturity, the Company believes its exposure to market risk for significant changes in the variable interest rate (prime + .25%) will be immaterial. Based on the price per share offered in the October 2005 tender offer, the Company believes that the investment in MetroPCS Communications exceeds its carrying amount. The Company accounts for its investment in MetroPCS Communications under the cost method, which was $2,401,000 as of December 31, 2005. The Company owned approximately 0.857% of the total outstanding shares of MetroPCS Communications' Series D Preferred Stock and approximately 0.33% of its total outstanding capital stock on an as-converted basis as of December 31, 2005. -16- Item 4. Controls and Procedures As of December 31, 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 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 II. OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders. Results of the registrant's annual meeting of stockholders held on November 17, 2005, were previously reported on a Form 8-K filed with the Securities and Exchange Commission on November 23, 2005. Item 5. Other Information None -17- Item 6. Exhibits 10.9 Credit Agreement dated October 1, 2005 between SonomaWest Holdings and Wells Fargo Bank.* 31.1 Chief Executive Officer and Chief Financial Officer Certification of Periodic Financial Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* 32.1 Chief Executive Officer and Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. + ----------- * Filed herewith. + Furnished herewith. -18- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: February 13, 2006 /s/ Walker R. Stapleton - -------------------------------------------- Walker R. Stapleton, Chief Financial Officer -19- EXHIBIT INDEX Exhibit No. Document Description - ---------- ------------------------------------------------------------------ 10.9 Credit Agreement dated October 1, 2005 between SonomaWest Holdings and Wells Fargo Bank.* 31.1 Chief Executive Officer and Chief Financial Officer Certification of Periodic Financial Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* 32.1 Chief Executive Officer and Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. + - ---------- * Filed herewith + Furnished herewith -20- EX-10.09 2 v033639_ex10-09.txt CREDIT AGREEMENT THIS CREDIT AGREEMENT (this "Agreement") is entered into as of October 1, 2005, by and between SONOMAWEST HOLDINGS, INC., a Delaware 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. LINE OF CREDIT. (a) Line of Credit. Subject to the terms and conditions of this Agreement, Bank hereby agrees to make advances to Borrower from time to time up to and including September 1, 2010, not to exceed at any time the aggregate principal amount of Five Hundred Thousand Dollars ($500,000.00) ("Line of Credit"), the proceeds of which shall be used to provide funds for tenant improvements. Borrower's obligation to repay advances under the Line of Credit shall be evidenced by a promissory note dated as of October 1, 2005 ("Line of Credit Note"), all terms of which are incorporated herein by this reference. (b) Limitation on Borrowings. Each advance under the Line of Credit shall be available in the minimum amount of Twenty-five Thousand Dollars ($25,000.00). Each request for an advance under the Line of Credit shall not exceed one hundred percent (100%) of cost, as evidenced by the seller's invoice. (c) Borrowing and Repayment. Borrower may from time to time during the term of the Line of Credit borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions contained herein or in the Line of Credit Note; provided however, that the total outstanding borrowings under the Line of Credit shall not at any time exceed the maximum principal amount available thereunder, as set forth above. SECTION 1.2. 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 Six Thousand Three Hundred Dollars ($1,606,300.00) ("Term Loan"), the proceeds of which shall be used to refinance Borrower's outstanding credit accommodation with Bank. Borrower's obligation to repay the Term Loan shall be evidenced by a promissory note dated as of October 1, 2005 ('Term Note"), all terms of which are incorporated herein by this reference. Bank's commitment to grant the Term Loan shall terminate on November 15, 2005. 1 (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 1.3. INTEREST/FEES. (a) Interest. The outstanding principal balance of each credit subject hereto shall bear interest at the rate of interest set forth in each promissory note or other instrument or document executed in connection therewith. (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. (c) Line of Credit Commitment Fee. Borrower shall pay to Bank a non-refundable commitment fee for the Line of Credit equal to Two Thousand Five Hundred Dollars ($2,500.00), which fee shall be due and payable in full on the date of this Agreement. (d) Term Loan Commitment Fee. Borrower shall pay to Bank a non-refundable commitment fee for the Term Loan equal to Eight Thousand Thirty-two Dollars ($8,032.00), which fee shall be due and payable in full on the date of this Agreement. SECTION 1.4. COLLECTION OF PAYMENTS. Borrower authorizes Bank to collect all principal, interest and fees due under each credit subject hereto by charging Borrower's deposit account 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 1.5. 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 2064 Gravenstein Highway North, Sebastopol, CA 95472 (the "Real Property"). All of the foregoing shall be evidenced by and subject to the tens of such security agreements, financing statements, deeds or mortgages, 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. 2 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 Delaware, 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. 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 30,2005, 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. 3 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. 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 2.1 1. 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: 4 (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. 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 Rider to Deed of Trust (Promissory Notes). (v) Subordination, Non-Disturbance, Attornment and Estoppel Agreements. (vi) Disbursement Order. (vii) Such other documents as Bank may require under any other Section of this Agreement. 5 (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. (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 properly 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. 6 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; (b) not later than 45 days after and as of each June 30 and December 31, an operating statement and rent rolls for the Real Property; (c) within 15 days of receipt the review of official closure notice from the county of Sonoma regarding the resolved soil and ground water contamination for the Real Property; (d) not later than March 1, 2006, an Operations and Maintenance Plan which addresses the appropriate handling of identified and suspect Asbestos-Containing Materials (ACMs) in compliance with applicable regulations, with such plan to be acceptable to Bank. (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. 7 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. 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) EBITDA Coverage Ratio not less than 1.10 to 1.0 on an annual basis, determined as of each fiscal year end, with "EBITDA defined as net profit before tax plus interest expense (net of capitalized interest expense), depreciation expense and amortization expense, and with "EBITDA Coverage Ratio" defined as EBITOA plus non-cash stock compensation expense, divided by the aggregate of total interest expense plus the prior period current maturity of long-term debt and the prior period current maturity of subordinated debt. (b) Debt Service Coverage Ratio of not less than 2.0 to 1.0 on a semi-annual basis, determined as of each June 30 and December 31, with "Debt Service Coverage Ratio" defined as (i) actual rents generated by the Real Property less operating expenses (other than depreciation) directly attributable to the Real Property, and less the proportionate share of joint operating expenses not attributable to a specific property(ies) but attributable to Borrower's rental operations generally, divided by (ii) scheduled debt service on the Line of Credit Note and Term Note. (c) Liquidity of not less than $1,000,000 at all times, with "Liquidity" defined as unencumbered cash and cash equivalents. 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 Borrowers property. 8 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 the Borrowers business as conducted as of the date hereof; acquire all or substantially all of the assets of any other entity; nor sell, lease, transfer or otherwise dispose of all or a substantial or material portion of Borrowers assets except in the ordinary course of its business, except that Borrower shall be permitted to sell up to one hundred percent (100%) of its (a) holdings in MetroPCS stock and (b) interest in the real property owned by it and located at 1365 Gravenstein Highway, So., Sebastopol, CA. 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 EVENTSOFDEFAULT SECTION 6.1. The occurrence of any of the following shall constitute an "Event of Default" under this Agreement: 9 (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; provided however, that notwithstanding anything to the contrary contained in this Agreement or any other Loan Document, Borrower shall be permitted to effect a change in the zoning of the Real Property from diverse agricultural to light industrial zoning, so long as Borrower complies at all times with all applicable laws. (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. 10 (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) Any change in ownership of an aggregate of twenty-five percent (25%) or more of the common stock of Borrower. (j) 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 waiver, 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. 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: 11 BORROWER: SONOMAWEST HOLDINGS, INC. 2064 Highway 116 N. Sebastopol, CA 95472 BANK: WELLS FARGO BANK, NATIONAL ASSOCIATION North Coast RCBO 200 B Street, Suite # 300 Santa Rosa, CA 95901 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/or 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. 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. 12 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 7.1 1. 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 administrators 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. 591 or any similar applicable state law. 13 (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 a 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 of a 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 paws presentation and that no alternative means for obtaining information is available. 14 (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. [SIGNATURE PAGE FOLLOWS THIS PAGE] 15 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written above. WELLS FARGO BANK, SONOMAWEST HOLDINGS, INC. NATIONAL ASSOCIATION By: /S/ Walker Stapleton By: /S/ Ruth Edwards President and CEO Relationship Manager Relationship Manager 16 EX-31.1 3 v033639_ex31-1.txt EXHIBIT 31.1 I, Walker R. Stapleton, certify that: 1. I have reviewed this report on Form 10-Q 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 officers 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; (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent 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 officers 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: February 13, 2006 /s/ Walker R. Stapleton - -------------------------------------------------- Walker R. Stapleton, President, Chief Executive Officer and Chief Financial Officer EX-32.1 4 v033639_ex32-1.txt EXHIBIT 32.1 CERTIFICATION Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350), the undersigned officer of SonomaWest Holdings, Inc., a Delaware corporation (the "Company"), does hereby certify that: The Quarterly Report on Form 10-Q for the quarter ended December 31, 2005 (the "Form 10-Q") 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-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: February 13, 2006 /s/ Walker R. Stapleton --------------------------------------------------- Walker R. Stapleton, President, Chief Executive Officer and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to SonomaWest Holdings, Inc. and will be retained by SonomaWest Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----