UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 001-15733
SUTTER HOLDING COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-3111137
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
220 Montgomery Street, Suite 2100, San Francisco, California 94104
(Address of principal executive office)
(Zip Code)
(415) 788-1441
(Registrant's telephone number, including area code)
(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 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/
Number of shares of common stock outstanding as of November 1, 2004:
618,007
TABLE OF CONTENTS
SUTTER HOLDING COMPANY, INC.
FORM 10-Q
Page No.
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -- September 30, 2004
(unaudited) and December 31, 2003 3
Condensed Consolidated Statements of Operations -- Third Quarter
and First Nine Months of 2004 and 2003 (unaudited) 4
Condensed Consolidated Statements of Cash Flows -- Third Quarter
and First Nine Months of 2004 and 2003 (unaudited) 5
Notes to Interim Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
Item 4. Controls and Procedures 13
Part II - Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 14
Item 5. Other Information 14
Item 6. Exhibits 14
Signature 14
Exhibits 14
31. Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32. Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
2
Part I - Financial Information
Item 1. Financial Statements
SUTTER HOLDING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in US dollars) As of As of
September 30, 2004 December 31, 2003
------------------- ------------------
ASSETS (unaudited)
Cash and cash equivalents $ 159,605 $ 96,971
Accounts receivable 40,043 37,212
Prepaid expenses 39,877 44,290
Mortgages held for sale 2,948,711 3,020,753
Investments, at cost 200,000 985,053
Property and equipment, net 221,109 258,706
Identifiable intangible and other assets 280,400 330,785
Goodwill 4,534,193 4,483,746
------------------- ------------------
TOTAL ASSETS $ 8,423,938 $ 9,257,516
=================== ==================
LIABILITIES & STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 403,450 $ 318,344
Mortgage warehouse line of credit 2,968,687 2,986,485
Interest payable 37,059 8,885
Debt to unrelated parties 1,984,167 588,551
Debt to related parties 500,000 3,953,735
Commitments and contingencies (See Note 7)
Stockholders' Equity
Common Stock, $0.0001 par value 62 35
1,875,000 authorized; 618,007 and 351,942
issued and outstanding at September 30, 2004
and December 31, 2003, respectively
Additional Paid-In Capital 7,240,161 4,669,164
Subscriptions 225,000 -
Treasury Stock (1,672,785) (604,665)
Accumulated deficit (3,261,863) (2,663,018)
------------------- ------------------
Total Stockholders' Equity 2,530,575 1,401,516
------------------- ------------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 8,423,938 $ 9,257,516
=================== ==================
See accompanying Notes to Interim Condensed Consolidated Financial Statements
3
SUTTER HOLDING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
For the three months For the nine months
(in US dollars) ended September 30, ended September 30,
---------------------------- -----------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Revenues:
Net gain on sales of mortgages $ 330,132 $ 103,174 $ 1,046,626 $ 641,084
Mortgage commissions on brokered loans 268,341 324,154 956,790 933,172
Miscellaneous income 13,852 39,038 23,852 95,516
Interest and dividend income 315 128 415 1,519
Realized gains (losses), net 518,922 - 578,843 699
------------- ------------- ------------- -------------
Total revenues 1,131,562 466,494 2,606,526 1,671,990
------------- ------------- ------------- -------------
Expenses:
General and administrative 689,985 296,544 2,071,483 885,350
Depreciation and amortization 95,917 12,468 159,875 37,321
Interest expense 130,614 86,831 527,193 284,425
Professional fees and other expenses 134,876 43,964 396,887 141,734
Other than temporary impairment loss - - 32,043 -
Other expenses - 19,633
Miscellaneous expenses (1,774) - (1,744) -
------------- ------------- ------------- -------------
Total expenses 1,049,618 439,807 3,205,371 1,348,830
------------- ------------- ------------- -------------
Loss before income taxes 81,944 26,687 (598,845) 323,160
Provision for income taxes - - - -
------------- ------------- ------------- -------------
Net income (loss) 81,944 26,687 (598,845) 323,160
============= ============= ============= =============
Net income (loss) per share -- basic and diluted $ 0.17 $ 0.10 $ (1.57) $ 1.29
Weighted Average Shares Outstanding 484,220 273,341 380,914 250,836
See accompanying Notes to Interim Condensed Consolidated Financial Statements
4
SUTTER HOLDING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the nine months ended September 30,
------------------- -------------------
(in US dollars) 2004 2003
------------------- -------------------
OPERATING ACTIVITIES
Net (loss) income $ (598,845) $ 323,160
Gain on sale of investments (578,843) -
Depreciation and amortization 159,875 37,320
Other than temporary impairment loss 32,043 -
Amortization of discount on debt 116,339 -
Adjustments to reconcile net (loss) income
to net cash (used in) provided by operating activities:
Accounts receivable (2,831) 520
Prepaid expenses 4,413 10,526
Mortgages held for sale 72,042 2,220,600
Accounts payable and accrued expenses 85,106 102,037
Income taxes payable - (10,476)
Interest payable 28,174 44,677
Other assets (11,115) -
------------------- -------------------
Net cash (used in) provided by operating activities (693,642) 2,728,363
------------------- -------------------
INVESTING ACTIVITIES
Capital expenditures (60,778) (4,655)
Proceeds from sales of investments 215,092 -
Purchases of securities, subsidiaries and other investments (50,447) (4,905,065)
Purchases of other investments - (40,000)
------------------- -------------------
Net cash provided by (used in) investing activities 103,867 (4,949,720)
------------------- -------------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 486,244 1,070,007
Proceeds from subscriptions 225,000 -
Proceeds from issuance of notes payable 66,394 3,205,000
Decrease in mortgage warehouse line of credit (17,798) (2,189,709)
Repayment of notes payable (107,431) (399,456)
------------------- -------------------
Net cash provided by financing activities 652,409 1,685,842
------------------- -------------------
Net change in cash and cash equivalents for the period 62,634 (535,515)
Cash and cash equivalents, beginning of period 96,971 625,491
------------------- -------------------
Cash and cash equivalents, end of period $ 159,605 $ 89,976
=================== ===================
Additional cash flow information:
Cash interest paid $ 135,271 $ 168,151
Supplemental disclosure of non-cash investing and financing activities:
Beneficial conversion of unrelated party note to equity $ 107,500 $ -
Issuance of shares to wholly owned subsidiary 311,280 252,500
Forgiveness of unrelated party debt 59,921 -
Reclass of related party note to unrelated party note 1,787,735 -
Conversion of related party debt to equity 1,666,000 -
Assumption of unrelated party note by independent third party 300,000 -
in conjunction with the sale of an investment
Acquisition of shares for treasury 756,840 18,738
See accompanying Notes to Interim Condensed Consolidated Financial Statements
5
SUTTER HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
1. General
The accompanying unaudited condensed consolidated financial statements
include the accounts of Sutter Holding Company, Inc. ("Sutter" or "Company")
consolidated with the accounts of all subsidiaries and affiliates that Sutter
controls as of the financial statement date, and should be read in conjunction
with Sutter's 2003 annual report on Form 10-K filed with the Securities and
Exchange Commission. These statements have been prepared in accordance with the
instructions of the Securities and Exchange Commission Form 10-Q and do not
include all the information and footnotes required by generally accepted
accounting principles in the United States of America ("US GAAP") for complete
consolidated financial statements. In particular, Sutter's significant
accounting policies and practices were presented in Note 1 to the Consolidated
Financial Statements included in Sutter's 2003 annual report, and there have
been no changes for the quarter and for the nine months ended September 30,
2004. Certain amounts in 2003 have been reclassified to conform to the current
period presentation.
Sutter's results, as well as those of its subsidiaries, for interim
periods are not necessarily indicative of results to be expected for the year.
At present, the Company has limited cash resources with which to
conduct its operations, particularly in relation to its short-term obligations.
The Company has approximately $199,648 in cash and receivables against
approximately $403,450 in payables and other short-term obligations. While cash
and receivables, in the aggregate, increased during the period since December
31, 2003, payables and other short-term obligations also increased slightly
during the same period. In the short-term, the Company has increased liquidity
risk. Management is aware of the Company's limited cash resources and is in the
process of raising capital for working capital and other general operating
purposes. During the current fiscal quarter, management anticipates being able
to raise cash sufficient to provide for additional liquidity and operating
needs. The Company's ability to continue as a going concern is dependent upon
its ability to raise additional capital and increase cash flows from operations.
Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements in conformity with US GAAP requires
management to make certain estimates and assumptions, such as those for
depreciable lives of assets, goodwill and non-marketable securities, that affect
the reported amounts of assets and liabilities and disclosure of contingent
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
2. Significant Business Acquisitions
Sutter made no business acquisitions during the third quarter of 2004.
As has been previously disclosed in public Company reports on Form 10-K and Form
8-K, Sutter acquired Easton Mortgage Corporation ("Easton") at the beginning of
the first quarter of 2003 and acquired Progressive Lending LLC in December 2003.
Accordingly, the first nine months of 2004 includes the operations of Sutter's
two subsidiaries, Easton and Progressive Lending, LLC, while the first nine
months of 2003 includes only the operations of Sutter's Easton subsidiary.
3. Receivables
Trade accounts receivable consist primarily of revenues and fees
receivable from mortgage origination activities. Receivables were $40,043 and
$37,212 at September 30, 2004 and December 31, 2003, respectively.
4. Investments
Investments are comprised of the following at September 30, 2004 and
December 31, 2003:
September 30, December 31,
2004 2003
------------------- -------------------
Niman Ranch Inc. $0 $753,010
Tesoro Gold Co. 200,000 200,000
Other investments 0 32,043
------------------- -------------------
Total $200,000 $985,053
=================== ===================
6
Gross Unrealized Gross Unrealized
Cost Gains Losses Reported Value
------------------- ------------------- ------------------- -----------------
September 30, 2004
Non-marketable securities held for investment $696,459 $0 $496,459 $200,000
December 31, 2003
Non-marketable securities held for investment $1,481,512 $0 $496,459 $985,053
On July 30, 2004, Knight Fuller, Inc. ("KFI"), formerly a related
party, was acquired in a sale transaction by an independent third party (the
"KFI Change of Control"). In conjunction with the KFI Change of Control, the
Company elected to pay in full its debt obligation of $1,992,348 to KFI by
issuing approximately 332,058 shares of its common stock to KFI at a value of
$6.00 per share. Concurrent with those transactions, the Company also settled,
in full, the entirety of its Progressive subsidiary's obligations to KFI of
$43,717 in debt, including accrued and unpaid interest, and KFI's option to
acquire 100% of Progressive's Nevada office (using a Black Scholes methodology,
the option was valued at approximately $43,600), by issuing 14,553 shares of
Sutter common stock. In addition thereto, the Company issued to KFI
approximately 762 additional shares of common stock for approximately $4,570 in
cash. In total, the Company issued 347,373 shares of common stock to KFI of
aggregate consideration totaling $2,084,238. Simultaneous with these
transactions, KFI declared a stock dividend on its common stock in which
shareholders of KFI immediately prior to the KFI Change of Control received one
share of the Company's common stock for every share of KFI common stock held by
such shareholder. Effective July 30, 2004, Sutter held 126,140 shares or an 18%
equity interest in KFI and, due to the resignation of its officers from KFI's
board of directors, Sutter no longer had any representation on KFI's board.
On March 29, 2004, the Company sold its interest in Niman Ranch with a
cost of $753,010 to Sutter Opportunity Fund 2, LLC ("SOF2"), a related party,
for $1,001,827 (the "Niman Ranch Transaction"). Consideration received by the
Company consisted of $191,049 in cash, the assumption of $300,000 in the
Company's debt by SOF2, and the assignment by SOF2 to the Company of 126,140
common shares of KFI, another related party, valued at $510,778. At the time of
this transaction, the net gain of $248,817 was deferred as this sale was to a
related party that controlled the Company. Subsequently, as a result of the KFI
Change of Control transaction above, the Company received a pro rata share of
its own shares at $6 per share for each share of KFI it held, and therefore
recorded $756,840 as treasury shares. A further gain on the sale of investment
(in addition to the deferred gain previously recorded of $248,817) was recorded
as a result of the KFI Change of Control event in the amount of $246,062, for a
total gain on sale of investment of $494,879.
During the third quarter, Sutter's equity interest in KFI was reduced
to approximately 1.2%, although the number of KFI shares that Sutter owns
remained unchanged at September 30, 2004. Furthermore, the Company received no
equity in earnings from KFI for the quarter because losses at KFI exceeded the
initial value of Sutter's equity investment. While the Company still recognizes
an investment in KFI, it now carries this investment at cost, which is zero,
since the equity method of accounting for this investment is no longer
applicable. The KFI investment does not appear separately in the tables above
because the current carrying value is zero.
5. Property and Equipment, Net
Property and equipment consist of the following at September 30, 2004
and December 31, 2003:
September 30, December 31,
2004 2003
------------------- --------------------
Furniture, equipment & leasehold
improvements $323,426 $274,981
Accumulated depreciation (102,317) (16,275)
------------------- --------------------
Furniture, equipment & leasehold
improvements, net $221,109 $258,706
=================== ====================
7
6. Identifiable Intangible and Other Assets, Net
Identifiable intangible and other assets consist of the following at
September 30, 2004 and December 31, 2003:
September 30, December 31,
2004 2003
------------------- --------------------
Customer list, net of
accumulated amortization
of $41,796 and $2,796 at
September 30, 2004 and
December 31, 2003 $218,204 $257,204
Non-compete agreement, net
of accumulated amortization
of $24,113 and $1,613 at
September 30, 2004 and
December 31, 2003 35,887 58,387
Other assets 26,309 15,194
------------------- --------------------
Total identifiable intangible
and other assets, net $280,400 $330,785
=================== ====================
7. Commitments and Contingencies
Net Worth Requirements - The Company's subsidiaries, Easton and
Progressive, are required to maintain certain specified levels of minimum net
worth to maintain their approved status with the US Federal Department of
Housing and Urban Development ("HUD") and with other investors. At September 30,
2004, the highest minimum net worth requirement applicable to the Company was
$400,000. As of September 30, 2004, the Company's subsidiaries met their
respective net worth requirements.
8. Debt to Unrelated and Related Parties
Debt to unrelated and related parties of Sutter and its subsidiaries
consisted of the following as of September 30, 2004 and December 31, 2003:
September 30, December 31,
2004 2003
---------------- -------------------
Debt to unrelated parties:
10.00% notes due 2007 (1) $1,747,066 $66,762
8.00% note due 2006, net
of unamortized discount
of $23,407 and beneficial
conversion of $39,492 at
September 30, 2004, and
net of unamortized discount
of $78,211 at December 31, 2003 237,101 521,789
---------------- -------------------
Total $1,984,167 $588,551
================ ===================
Debt to related parties:
8.00% convertible note due 2005 $0 $1,666,000
6.00% note due 2007 500,000 500,000
4.00% note due 2007 0 1,787,735
---------------- -------------------
Total $500,000 $3,953,735
================ ===================
(1) These notes bear interest at the rate of 4.00% if the Company
elects to make payments of principal and interest, and bear interest at the rate
of 10.00% if the Company elects to pay interest only. For the quarter and for
the nine months ended September 30, 2004, the Company has elected to pay
interest only.
(2) Payments of principal and interest on this note are subject to an
earnout based on the achievement of a certain level of established operating
performance at one of our mortgage subsidiaries. To date, this established level
of operating performance has not been met and no portion of the earnout has been
earned. Therefore to date, the Company has not had to make payments of any kind
on this note.
On July 30, 2004, as a result of the KFI Change of Control event, the
Company's related party debt was reduced by $2,010,000.
On November 8, 2004, the Company entered into an agreement with the
holders of the 10.00% notes due 2007 which grants the Company the option to
retire the entire outstanding balance of these notes, including principal and
interest totaling approximately $1.8 million, for $1 million. This option
expires December 17, 2004.
8
9. Common Stock
Changes in issued and outstanding Sutter common stock for the nine
months ended September 30, 2004 are shown in the table below.
Common Stock, $0.0001 Par Value
(1,875,000 shares authorized)
Shares issued and outstanding
-------------------------------
Balance at December 31, 2003 351,942
Issuances year-to-date 266,065
-----------
Balance at September 30, 2004 618,007
===========
The above issuances year-to-date were made to investors for cash in the
amount of $68,006, to the Company's Easton subsidiary in the amount of $311,280
to supplement Easton's tangible net worth, and to KFI in the amount of
$1,327,398 in exchange for conversion of the Company's debt obligation to KFI.
During the third quarter, the Company raised $225,000 in cash from
outside investors. The Company has accounted for these investments as
subscriptions in shareholders' equity because the equity securities to be
received by these investors have yet to be issued. The shares to be issued,
which are represented by the investments totaling $225,000, are not included in
the issuances of shares for the third quarter.
10. Certain Relationships and Related Party Transactions
On July 30, 2004, Knight Fuller, Inc. ("KFI"), formerly a related
party, was acquired in a sale transaction by an independent third party (the
"KFI Change of Control"). In conjunction with the KFI Change of Control, the
Company elected to pay in full its debt obligation of $1,992,348 to KFI by
issuing approximately 332,058 shares of its common stock to KFI at a value of
$6.00 per share. Concurrent with those transactions, the Company also settled,
in full, the entirety of its Progressive subsidiary's obligations to KFI of
$43,717 in debt, including accrued and unpaid interest, and KFI's option to
acquire 100% of Progressive's Nevada office (using a Black Scholes methodology,
the option was valued at approximately $43,600), by issuing 14,553 shares of
Sutter common stock. In addition thereto, the Company issued to KFI
approximately 762 additional shares of common stock for approximately $4,570 in
cash. In total, the Company issued 347,373 shares of common stock to KFI of
aggregate consideration totaling $2,084,285. Simultaneous with these
transactions, KFI declared a stock dividend on its common stock in which
shareholders of KFI immediately prior to the KFI Change of Control received one
share of the Company's common stock for every share of KFI common stock held by
such shareholder. Effective July 30, 2004, Sutter held 126,140 shares or an 18%
equity interest in KFI and, due to the resignation of its officers from KFI's
board of directors, Sutter no longer had any representation on KFI's board.
During the third quarter, Sutter's equity interest in KFI was reduced to
approximately 1.2%, although the number of KFI shares that Sutter owns remained
unchanged at September 30, 2004.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
Investors are cautioned that certain statements contained in this
document, as well as some statements by the Company in periodic press releases
and some oral statements of Company officials during presentations about the
Company, are "forward-looking" statements within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Act"). Forward-looking statements
include statements which are predictive in nature, which depend upon or refer to
future events or conditions, which include words such as "expects,"
"anticipates," "intends," "plans," "believes," "estimates," or similar
expressions. In addition, any statements concerning future financial performance
(including future revenues, earnings or growth rates), ongoing business
strategies or prospects, and possible future Company actions, which may be
provided by management, are also forward-looking statements as defined by the
Act. Forward-looking statements are based on current expectations and
projections about future events and are subject to risks, uncertainties, and
assumptions about the Company, economic and market factors and the industries in
which the Company does business, among other things. These statements are not
guaranties of future performance and the Company has no specific intention to
update these statements.
Actual events and results may differ materially from those expressed or
forecasted in forward-looking statements due to a number of factors. The
principal important risk factors that could cause the Company's actual
performance and future events and actions to differ materially from such
forward-looking statements, include, but are not limited to, changes in
applicable Federal or State laws or regulations, changes in Federal income tax
laws, and changes in general economic and market factors that affect the prices
of securities or the industries in which Sutter and its affiliates do business,
especially those affecting the mortgage banking industry.
9
Results of Operations
Executive Summary
Sutter is a holding company that owns two operating businesses in the
mortgage banking industry. Sutter's mortgage subsidiaries, Easton and
Progressive, earn revenue by originating, processing, funding and brokering
primarily residential mortgages. Sutter also has minority, non-core investments
in private companies involved in various industries from real estate to precious
metal mining claims. These private investments are not considered by management
to be an integral part of the future operations or plans of the Company.
Presently, management desires and intends to grow Sutter through continued
acquisitions in the financial services industry that are most likely to
complement its current financial service businesses.
Operating results for the quarter ended September 30, 2004 as compared with the
quarter ended September 30, 2003
For period comparison purposes, it is important to note that the Company
benefited from the ownership of Easton and Progressive during the quarter ended
September 30, 2004, while the Company benefited only from the ownership of
Easton during the quarter ended September 30, 2003.
Revenues
Total revenues for the quarter ended September 30, 2004 were $1,131,562
versus $466,494 for the quarter ended September 30, 2003. The increase in
revenues is due to the addition of Progressive's revenues for the quarter,
including revenues generated by its Las Vegas and San Francisco offices which
were opened in May of this year, and a realized gain on the sale of investments
during the quarter for $518,922.
Expenses
Total expenses were $1,049,618 for the quarter ended September 30, 2004
as compared to $439,807 for the quarter ended September 30, 2003. The increase
in total expenses is primarily the result of the Company's acquisition of
Progressive in December 2003, as well as increases in general and administrative
expenses and professional fees. The additional operating expenses of
Progressive, Sutter's newest subsidiary, were the most significant contributing
factor to the increase in total expenses for the quarter ended September 30,
2004 as compared to the quarter ended September 30, 2003. As the Company
mentioned in its 2003 annual report on Form 10-K, general and administrative
expenses are expected to increase in the coming year due to growth at Sutter and
its subsidiaries.
Interest Expense
The Company incurred interest expense of $130,614 for the quarter ended
September 30, 2004 as compared to $86,831 for the quarter ended September 30,
2003. The increase in interest expense is due to a greater amount of debt that
was outstanding during the third quarter of this year as compared to the amount
of debt that was outstanding during the third quarter of last year. The above
figures include interest expense related to the Company's mortgage warehouse
lines.
Interest expense related to the Company's mortgage warehouse lines of
credit amounted to $32,678 for the quarter ended September 30, 2004 as compared
to $33,340 for the quarter ended September 30, 2003.
Net Earnings
The Company reported net earnings of $81,944 for the quarter ended
September 30, 2004 as compared to $26,687 for the quarter ended September 30,
2003. The increase in earnings is primarily attributable to a gain on the sale
of investments realized during the quarter in the amount of $518,922.
Operating results for the first nine months of 2004 as compared with the first
nine months of 2003
Revenues
Total revenues for the first nine months of 2004 were $2,606,526 versus
$1,671,990 for the first nine months of 2003. The increase in revenues is
primarily the result of the addition of Progressive's revenues for the first
nine months of the year. While the Company did not own Progressive during the
first nine months of fiscal 2003, Progressive's revenues for the first nine
months of 2004 show little change and compare favorably to Progressive's
revenues for the first nine months of 2003.
10
Expenses
Total expenses were $3,205,371 for the first nine months of 2004 as
compared to $1,348,830 for the first nine months of 2003. The increase in total
expenses is primarily the result of the Company's acquisition of Progressive in
December 2003, as well as increases in general and administrative expenses and
professional fees. The additional operating expenses of Progressive, Sutter's
newest subsidiary, were the most significant contributing factor to the increase
in total expenses for the first nine months of 2004 as compared to the first
nine months of 2003. As the Company mentioned in its 2003 annual report on Form
10-K, general and administrative expenses are expected to increase in the coming
year due to growth at Sutter and its subsidiaries.
Interest Expense
The Company incurred interest expense of $527,193 for the first nine
months of 2004 as compared to $284,425 for the first nine months of 2003. Most
of the increase is associated with non-cash interest expense. The increase in
interest expense is due primarily to increased indebtedness incurred in early
2004. Approximately $133,000 of interest expense for the first nine months of
2004 was non-cash interest expense. However, cash and non-cash interest expense
was reduced by approximately $200,000, on an annualized basis, during the third
quarter as a result of the exchange of debt for equity which occurred under the
KFI Change of Control event mentioned above in Footnote 10 titled Certain
Relationships and Related Party Transactions.
Interest expense related to the Company's mortgage warehouse lines of
credit amounted to $99,011 for the first nine months of 2004 as compared to
$116,275 for the first nine months of 2003.
Net Earnings and Losses
The Company reported a net loss of $598,845 for the first nine months
of 2004 as compared to net earnings of $323,160 for the first nine months of
2003. The decrease in earnings is the result of increased expenses, a
significant portion of which was non-cash interest expense, for the first nine
months of 2004, as well as weaker than anticipated performance from the
Company's mortgage banking subsidiaries.
Liquidity and Capital Resources
Sutter had cash and cash equivalents of $159,605 and $96,971 as of
September 30, 2004 and December 31, 2003, respectively.
Cash used in operating activities was $693,642 as compared to cash
provided by operating activities of $2,728,364 for the periods ended September
30, 2004 and 2003, respectively. This decrease in operating cash flow is
primarily the result of a 55% decline in mortgage loan volume at our Easton
subsidiary. Cash provided by investing activities was $103,867 as compared to
cash used in investing activities of $4,949,720 for the periods ended September
30, 2004 and 2003, respectively. Cash provided by financing activities was
$652,409 as compared to $1,685,842 for the periods ended September 30, 2004 and
2003, respectively. The Company did not make any acquisitions of businesses
during the first nine months of 2004 which is the primary cause for significant
changes in cash associated with investing and financing activities during the
comparable nine month periods. Management believes there is sufficient cash flow
from existing operations to fund any capital expenditures that may arise during
the remainder of the fiscal year.
As of September 30, 2004, Sutter and its subsidiaries had borrowings of
$2,484,167 at a weighted average annual cash-basis interest rate of 7.8%. On
July 30, 2004, KFI, formerly a related party, was acquired in a sale transaction
by an independent third party (the "KFI Change of Control"). In conjunction with
the KFI Change of Control, the Company elected to pay in full its debt
obligation of $1,992,348 to KFI by issuing approximately 332,058 shares of its
common stock to KFI at a value of $6.00 per share. Concurrent with those
transactions, the Company also settled, in full, the entirety of its Progressive
subsidiary's obligations to KFI of $43,717 in debt, including accrued and unpaid
interest, and KFI's option to acquire 100% of Progressive's Nevada office (using
a Black Scholes methodology, the option was valued at approximately $43,600), by
issuing 14,553 shares of Sutter common stock.
Sutter's mortgage subsidiaries have revolving warehouse lines of credit
from banks of up to approximately $14 million to facilitate the temporary
funding of mortgage loans. These warehouse credit facilities are made available
to Sutter's mortgage subsidiaries on an annual basis. The interest rate charged
on borrowings under these warehouse lines of credit is, in most cases, the prime
rate. Given that interest rates on mortgage loans held for sale typically exceed
the prime rate, interest income from mortgage loans held for sale typically
exceeds interest expense incurred from use of the warehouse lines of credit.
Sutter anticipates that its mortgage banking subsidiaries will continue to have
access to warehouse lines of credit as necessary to conduct ongoing mortgage
banking activities.
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At present, the Company has limited cash resources with which to
conduct its operations, particularly in relation to its short-term obligations.
The Company has approximately $199,648 in cash and receivables against
approximately $403,450 in payables and other short-term obligations. While cash
and receivables, in the aggregate, increased during the period since December
31, 2003, payables and other short-term obligations also increased somewhat
during the same period. In the short-term, the Company has increased liquidity
risk. Management is aware of the Company's limited cash resources and is in the
process of raising capital for working capital and other general operating
purposes. During the current fiscal quarter, management anticipates being able
to raise cash sufficient to provide for additional liquidity and operating
needs.
In addition to its needs for capital to fund its current business
operations, the Company may in the future require capital for the purpose of
completing strategic acquisitions it may identify in pursuit of its business
plan. As the Company has disclosed elsewhere, its business plan involves
identifying, evaluating and making business acquisitions. The Company is
currently involved in, and intends to continue, this process. Depending upon the
nature and structure of any potential future acquisitions, the Company may
exchange newly issued securities for the acquisition of strategic assets or
entire businesses, and/or the Company may issue securities to raise cash for
such acquisitions. Any such acquisition activities would therefore likely have
significant effects on the Company's capital structure and liquidity. Until the
terms of any potential acquisitions are determined, however, the Company cannot
quantify or estimate the impact they will have on its capital resources.
The Company's ability to continue as a going concern is dependent upon
its ability to raise additional capital and increase cash flows from operations.
However, as in the past, Messrs. Collins, Dixon and Knuff are prepared to
continue to support the Company in its liquidity and capital needs as may be
necessary from time to time.
Critical Accounting Policies
As presented in detail in the Company's annual report on Form 10-K
filed with the SEC, the most critical accounting policies for the Company are
those involving revenue recognition, investments, and goodwill and intangible
assets.
Revenue Recognition
When the Company funds a loan to a borrower through its warehouse line
of credit but prior to selling the loan, it records the loan at cost (sometimes
referred to as "payoff amount"), which is comprised of the principal amount of
the loan net of deferred direct origination costs and fees, under current assets
as mortgages held for sale. The Company simultaneously records a current
liability, equal to the amount advanced to the borrower (the "advanced amount"),
on its warehouse line of credit. Once a loan is purchased by an investor (e.g.
Flagstar Bank), usually within ten business days of funding, total proceeds are
recorded and the amount advanced by the Company to the borrower on the loan is
deducted from the Company's outstanding balance on its warehouse line of credit.
At this time, the Company recognizes any remaining proceeds as part of net gain
on sales of mortgages. The costs and fees associated with originating and
processing mortgage loans are netted against the net gain on sale of mortgages.
Investments
Investments consist of non-marketable equity securities. Non-marketable
equity securities include securities that are not publicly traded. We review
these assets at least quarterly for possible other-than-temporary impairment.
Our review typically includes an analysis of the facts and circumstances of each
investment, the expectations for the investment's cash flows and capital needs,
the viability of its business model and our exit strategy. Generally, these
securities are accounted for at cost. We reduce the asset value when we consider
declines in value to be other-than-temporary. We recognize the estimated loss
from equity investments in provision for impairment.
During the third quarter, the Company's equity interest in KFI was
reduced to approximately 1.2%, although the number of KFI shares that the
Company owns remains unchanged. While the Company still recognizes an investment
in KFI, it now carries this investment at cost, which is zero, since the equity
method of accounting for this investment is no longer applicable.
Realized investment gains and losses are also recognized when
investments are sold or disposed. Realized investment gains may fluctuate
significantly from period to period, resulting in a meaningful effect on
reported net earnings. The Company realized an investment gain in the amount of
$518,922 for the quarter ended September 30, 2004, but it had no realized
investment gains or losses for the quarter ended September 30, 2003.
Sutter's consolidated financial position reflects material amounts of
investments in private businesses. These investments are carried at the lower of
cost or fair value. In the case of investments carried at fair value,
considerable judgment is required in determining the assumptions used in
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arriving at fair value and to what extent, if any, such investments are
impaired. Significant changes in these assumptions can have a significant effect
on carrying values.
Goodwill and Intangible Assets
A significant amount of judgment is required in performing goodwill and
identifiable intangible asset impairment tests. Sutter reviews and subjects
these assets to periodic impairment tests. Such tests include periodically
determining or reviewing the estimated fair value of Sutter's reporting units.
Under Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and
Other Intangible Assets," fair value refers to the amount for which the entire
reporting unit may be bought or sold. There are several methods of estimating
reporting unit values, including market quotations, asset and liability fair
values and other valuation techniques, such as discounted cash flows and
multiples of earnings or revenues. If the carrying amount of a reporting unit,
including goodwill, exceeds the estimated fair value, then individual assets,
including identifiable intangible assets and liabilities of the reporting unit
are estimated at fair value. The excess of the estimated fair value of the
reporting unit over the estimated fair value of net assets would establish the
implied value of goodwill. The excess of the recorded amount of goodwill over
the implied value is then charged to earnings as an impairment loss.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Reference is made to Sutter's 2003 report on Form 10-K filed with the
SEC and in particular the "Market Risk Disclosures" included in "Management's
Discussion and Analysis of Financial Condition and Results of Operations." As of
September 30, 2004, there have been no material changes in the market risks as
described in Sutter's 2003 report on Form 10-K.
Item 4. Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form
10-Q, the Corporation carried out an evaluation, under the supervision and with
the participation of the Corporation's management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Corporation's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that the Corporation's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Corporation (including its consolidated
subsidiaries) required to be included in the Corporation's periodic SEC filings.
Subsequent to the date of that evaluation, there have been no significant
changes in the Corporation's internal controls over financial reporting or in
other factors that could significantly affect internal controls over financial
reporting, nor were any corrective actions required with regard to significant
deficiencies and material weaknesses.
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Part II Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On July 30, 2004, the Company issued 221,233 shares of its common stock
to Knight Fuller, Inc. ("KFI") in conjunction with the acquisition of KFI by an
independent third party. For additional information, please see the Company's
quarterly report on Form 10-Q filed with the Securities and Exchange Commission
on August 16, 2004 and incorporated herein by reference.
All of the shares issued above are unregistered and restricted shares
as defined by the Securities Act of 1933, as amended, promulgated by the
Securities and Exchange Commission.
Item 5. Other Information
On November 22, 2004, the Company entered into a definitive agreement
with FLF, Inc. (d/b/a Diversified Risk Insurance Brokers or "Diversified"), a
privately held California corporation, pursuant to which Diversified's
shareholders will sell 100% of their capital stock to the Company in exchange
for a combination of cash and the Company's common stock. The deal is valued at
approximately $8.9 million. The Diversified selling shareholders will receive
approximately 1,184,463 shares of Sutter common stock and $1,776,694 in cash,
and the right to designate two members of Sutter's board of directors.
Diversified, a 27 year old insurance brokerage, is one of the largest commercial
property and casualty insurance brokers in northern California with clients
throughout the United States. Diversified maintains relationships with a number
of major insurance carriers and brokers policies in a broad range of industries,
including transportation, construction, medical, technology, real estate,
education/municipal, agriculture and manufacturing. Subject to the satisfaction
of closing conditions, this transaction is anticipated to close sometime during
the Company's fourth quarter of 2004.
Item 6. Exhibits
a. Exhibits
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(Chief Executive Officer)
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(Chief Financial Officer)
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Executive Officer)
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Financial Officer)
SIGNATURE
Pursuant to the requirement 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.
SUTTER HOLDING COMPANY, INC.
(Registrant)
Date: November 22, 2004 /s/ William G. Knuff, III
---------------------------------
(Signature)
William G. Knuff, III
Chief Financial Officer
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