SCHEDULE 14C INFORMATION INFORMATION STATEMENT PURSUANT TO SECTION 14(C) OF THE SECURITIES EXCHANGE ACT OF 1934 Filed by the Registrant |X| Filed by a Party other than the Registrant [ ] Check the appropriate box: [ ] Preliminary Information Statement [ ] Confidential, for Use of the Commission only (as permitted by Rule 14c-5(d)(2)) |X| Definitive Information Statement SUTTER HOLDING COMPANY, INC. (Name of Registrant as Specified in its Charter) (Name of Person(s) Filing Proxy Statement if other than the Registrant) Payment of Filing Fee (Check the appropriate box): |X| No fee required. [ ] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11. (1) Title of each class of securities to which transaction applies: (2) Aggregate number of securities to which transaction applies: (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): ________________ (4) Proposed maximum aggregate value of transaction: __________________ (5) Total fee paid: ___________________ [ ] Fee paid previously with preliminary materials. [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: ________________________ (2) Form, Schedule or Registration Statement No.: ________________________ (3) Filing Party: ________________________ (4) Date Filed: ________________________ SUTTER HOLDING COMPANY, INC. 220 MONTGOMERY STREET, SUITE 2100 SAN FRANCISCO, CALIFORNIA 94104 (415) 788-1441 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD JUNE 28, 2004 NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders ("Annual Meeting") of Sutter Holding Company, Inc. (the "Company") will be held at the Company's San Francisco headquarters at the above address on June 28, 2004 at 10:00 a.m., Pacific Standard Time, for the following purposes: 1. To elect three Directors of the Company to serve on the Board of Directors until the Annual Meeting of shareholders to be held in 2005 or until their successors are duly elected and qualified; 2. To ratify the appointment of BDO Seidman LLP as independent auditor of the Company for the fiscal year ending December 31, 2004; 3. To approve the adoption of the Sutter Holding Company, Inc. 2004 Stock Option Plan for officers, employees, directors and consultants; and, 4. To consider and act upon any other matters that may properly come before the meeting or any adjournments thereof. The Board of Directors has selected April 30, 2004 as the record date for the Annual Meeting. Only those shareholders of record at the close of business on that date will be entitled to receive notice of and to vote at the Annual Meeting or any adjournment or adjournments thereof. You are cordially invited to attend the Annual Meeting. Proxies are not being solicited. By Order of the Board of Directors Karen La Monte, Secretary /s/ Karen La Monte June 8, 2004 2 WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY INFORMATION STATEMENT INTRODUCTION This Information Statement is being mailed or otherwise furnished to stockholders of Sutter Holding Company, Inc. in connection with the Company's upcoming Annual Meeting to be held on June 28, 2004. This Information Statement is being first sent to stockholders on or about June 9, 2004. Reference is made to the Company's annual report on Form 10-K for the year ended December 31, 2003 (the "2003 10-K"), a copy of which is attached to this Information Statement, and which is delivered to shareholders as the Company's annual report pursuant to SEC Rule 14c-3. The 2003 10-K is hereby incorporated by reference into this Information Statement in its entirety. PROPOSALS The following proposals are being presented at the Annual Meeting: 1. To elect four Directors of the Company to serve on the Board of Directors until the Annual Meeting of shareholders to be held in 2004 or until their successors are duly elected and qualified; 2. To ratify the appointment of BDO Seidman LLP as independent auditor of the Company for the fiscal year ending December 31, 2004; 3. To approve the adoption of the Sutter Holding Company, Inc. 2004 Stock Option Plan for officers, employees, directors and consultants; and, 4. To consider and act upon any other matters that may properly come before the meeting or any adjournments thereof. RECORD DATE; SHAREHOLDERS ENTITLED TO VOTE; QUORUM The Board of Directors of the Company has selected April 30, 2004 as the record date for the determination of shareholders entitled to notice of and to vote at the Annual Meeting. A total of 395,450 shares of the Company's Common Stock were outstanding as of the close of business on that date. Shareholders will be entitled to cast one vote for each share of the Company's Common Stock held by them at the close of business on the record date on any matter that may be presented at the Annual Meeting for consideration and action by the shareholders. A majority of the voting power of the outstanding shares of Common Stock entitled to vote, represented in person or by proxy, will be required to constitute a quorum for the Annual Meeting. Provided a quorum is present at the Annual Meeting, the vote of a majority of the shares of Common Stock entitled to vote and represented in person or by proxy approving each of the proposals described in items 2 and 3 under PROPOSALS above will constitute approval by the outstanding Common Stock of such proposals. Provided a quorum is present at the Annual Meeting, the vote of a majority of the shares of Common Stock entitled to vote and represented in person or by proxy for each of the nominees for Director identified under "DIRECTORS AND EXECUTIVE OFFICERS; ELECTIONS" above will constitute approval by the outstanding Common Stock of the election of each such nominee. VOTING YOUR SHARES All shareholders of record as of April 30, 2004 are entitled to vote at the meeting. In order to vote your shares, you must be present at the meeting. DIRECTORS AND EXECUTIVE OFFICERS; ELECTIONS R. Michael Collins, Robert E. Dixon, William G. Knuff, III, and Peter F. Seidenberg have been proposed for election to the Company's Board of Directors for one-year terms expiring in 2005. Each of the Director nominees listed below has consented to being named in this Proxy Statement and has indicated his willingness to serve if elected. Messrs. Dixon, Knuff and Seidenberg are being proposed for re-election as directors. The following table sets forth the names of and certain information concerning the nominees and continuing members of the Board of Directors of the Company. 3 Positions Currently Held Director Term With the Company and Its Name Age Since Expires Subsidiaries - -------------------------------------------------------------------------------- Director Nominees - ----------------- R. Michael Collins 38 2004 2005 Director and President Robert E. Dixon 33 2002 2005 Co-Chairman of the Board and Co-Chief Executive Officer William G. Knuff, III 37 2002 2005 Co-Chairman of the Board, Co-Chief Executive Officer, and Chief Financial Officer Peter F. Seidenberg 35 2004 2005 Director and Chairman of the Audit Committee The biographies of the nominees are included in Part III, Item 10 of the 2003 10-K which is attached to this filing and is incorporated herein by reference. The Company does not have nominating or compensation committees. The Company has an audit committee comprised of the full Board of Directors. Mr. Seidenberg is the only independent member of the audit committee. The audit committee held at least two meetings with the Company's independent auditor during fiscal 2003. The Board of Directors has not adopted a formal written charter for the Audit Committee; however, a formal written charter is currently under review. The functions performed by the Company's audit committee include, but are not limited to, the following: (1) review of the annual audited and quarterly unaudited financial statements; (2) review of analyses prepared by management and the independent auditor of financial reporting issues and judgments made in connection with the Company's financial statements; (3) review with the independent auditor the Company's auditing and accounting principles and practices; (4) meet periodically with management to review the Company's major financial risk exposures and the steps taken to monitor and control such exposures; (5) recommend to the Board of Directors the appointment of the independent auditor; (6) approve the fees to be paid to the independent auditor; (7) evaluate, together with the Board of Directors, the performance of the independent auditor and, if necessary, recommend that the Board of Directors replace the independent auditor; (8) obtain from the independent auditor assurance that Section 10A of the Secutities Exchange Act of 1934 has not been implicated; (9) review with the independent auditor their final report pertaining to the audit work performed and any difficulties encountered; (10) meet periodically throughout the fiscal year with the Chief Financial Officer to discuss any relevant financial reporting and disclosure matters, and meet with Company counsel to discuss any relevant legal matters that may have a material impact on the financial statements; (11) be available to the independent auditors during the fiscal year for consultation purposes; and (12) review all related party transactions on an ongoing basis for potential conflict of interest situations. During the year ended December 31, 2003, the Board of Directors of the Company held seven regularly scheduled and special meetings. No incumbent director attended fewer than 75% of (1) the total number of meetings of the Board of Directors, and (2) the total number of meetings held by all committees of the Board of Directors on which he served. SECURITY OWNERSHIP OF NOMINATED DIRECTORS Please refer to Part III, Item 12 of the 2003 10-K which is attached to this filing and is incorporated herein by reference. COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS The Directors of the Company to date have not received any compensation for their services. The Company expects to change this policy in the future. Please refer to Part III, Item 11 of the 2003 10-K which is attached to this filing and is incorporated herein by reference. Subsequent to the filing of the Company's 2003 10-K, the Board of Directors approved executive bonus agreements (the "Executive Bonus Agreements") for senior executives of the Company. The purpose of these agreements is to provide compensation, in the form of stock options, to certain executives for finding, structuring and consummating accretive transactions that further the Company's growth strategy, and for overseeing the development of such businesses 4 post-acquisition. Messrs. Collins, Dixon and Knuff are the only executives to receive Executive Bonus Agreements, which provide for the granting of stock options to each executive equal to 5% of aggregate equity value, or two-thirds of the transaction value, whichever is greater, of an acquisition. Any options granted under the terms of the Executive Bonus Agreements shall vest in equal amounts over three years commencing on the anniversary date of the acquisition to which such option grants apply. The Executive Bonus Agreements are co-terminus with each executive's employment agreement. INDEPENDENT PUBLIC ACCOUNTANTS BDO Seidman LLP is being recommended for ratification for the current fiscal year. They performed as independent accountants for the Company in conducting the 2003 annual audit. Representatives of BDO Seidman LLP are not expected to be present at the Annual Meeting and will not have the opportunity to make a statement or otherwise be available to respond to questions. On November 18, 2003, the Company accepted the resignation of Regalia & Associates, Certified Public Accountants, as its independent auditor. Neither the Company nor its management had any disagreements with Regalia & Associates. Regalia & Associates resigned because it claimed it was unable to deliver the level of service required by the Sarbanes-Oxley Act of 2002. As a result, the Company's Board of Directors recommended a change in the Company's independent auditor. For disclosure of audit and related fees, please refer to Part III, Item 14 of the 2003 10-K which is attached to this filing and is incorporated herein by reference. The audit committee has considered whether, and believes that, the provisions of the services covered in paragraphs (e)(2) and (e)(3) of this section are compatible with maintaining the principal auditor's independence. COMPENSATION PLANS The Company's Board of Directors has established a Sutter Holding Company, Inc. 2004 Stock Option Plan (the "Plan") which is being submitted to the shareholders for adoption at the Annual Meeting on June 28, 2004.The purpose of the Plan is to give the Company a competitive advantage in attracting, retaining and motivating officers, employees, directors and/or consultants and to provide the Company and its Subsidiaries and Affiliate with a stock option plan providing incentives directly linked to the success of the Company's businesses and increases in the Company's shareholder value. Classes of persons eligible to participate in the Plan include officers, employees, directors and/or consultants who have accepted offers of employment or consultancy from the Company or any of its Subsidiaries or Affiliates, and who are or will be responsible for or contribute to the management, growth or profitability, as each relates to shareholder value, of the business of the Company or its Subsidiaries or Affiliates. The Plan will be administered by the Compensation Committee of the Board of Directors, or such other committee as the Board of Directors may designate (the "Committee"). Plan administration includes, but is not limited to: (a) selecting who is eligible to participate in the Plan; (b) determining whether, what type and to what extent stock options are to be granted; and (c) determining the number, exercise price and general terms of any such option grant. All option grants are at the discretion of the Committee; therefore, specific amounts of options to be received by any class or any given person within a class are not readily determinable. The following are approximations of the numbers of persons in each class eligible to participate in the Plan: five directors and officers, fifty employees and one consultant. PROPOSALS BY SECURITY HOLDERS Any shareholder wishing to include a proposal in the Company's Proxy Statement for its 2004 Annual Meeting of shareholders must submit such proposal for consideration in writing to the Secretary of the Company at the address indicated on the first page of this Proxy Statement no later than 90 days prior to the Annual Meeting, currently scheduled for June 28, 2004. Any such proposal will be subject to the requirements of the proxy rules adopted under the Securities Exchange Act of 1934. Management may use discretionary authority to vote against any shareholder proposal presented at the Company's 2004 Annual Meeting of Shareholders if: (1) such proposal has been properly omitted from the Company's proxy materials under federal securities law, (2) notice of such proposal was not submitted to the Secretary of the Company at the address indicated on the first page of this Proxy Statement by March 31, 2004 or (3) the proponent has not solicited proxies in compliance with federal securities laws from the holders of at least the percentage of the Company's Common Stock required to carry the proposal. DELIVERY OF DOCUMENTS TO SECURITY HOLDERS SHARING AN ADDRESS The Company has filed with the Securities and Exchange Commission, an Annual Report on Form 10-K for the year ended December 31, 2003, a copy of which 5 is attached to this Information Statement, and which is also incorporated herein by reference. Only one Information Statement is being delivered to multiple security holders sharing an address. HOWEVER, THE COMPANY WILL FURNISH, WITHOUT CHARGE, UPON WRITTEN REQUEST OF ANY SHAREHOLDER WHO REPRESENTS IN HIS OR HER REQUEST THAT HE OR SHE WAS THE BENEFICIAL OWNER OF THE COMPANY'S COMMON STOCK ON APRIL 30, 2003, A SEPARATE COPY OF THE INFORMATION STATEMENT. Any shareholder at a shared address may notify the Company if he wishes to receive a separate copy of the Information Statement in the future. Conversely, any shareholder at a shared address may request delivery of a single copy of the Information Statement where currently he is receiving multiple copies. Such requests should be directed to: Karen LaMonte, Secretary, Sutter Holding Company, Inc., 220 Montgomery Street, Suite 2100, San Francisco, California, 94104; telephone (415) 788-1441. ANNUAL REPORT Accompanying this Information Statement is an annual report to security holders on Form 10-K, portions of which are incorporated by reference into this Information Statement, and which is hereby being provided to each shareholder of record without cost to satisfy the requirement that the Company's annual report to security holders accompany or precede this Information Statement. OTHER MATTERS As of the date of this Information Statement, the Board of Directors is not aware of any matters that will be presented for action at the Annual Meeting other than those described above. By Order of the Board of Directors Karen La Monte, Secretary /s/ Karen La Monte June 8, 2004 6 FORM 10-K ANNUAL REPORT of SUTTER HOLDING COMPANY, INC. For the Fiscal Year Ended December 31, 2003 Filed April 14, 2004 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 Commission file number 001-15733 SUTTER HOLDING COMPANY, INC. (Exact name of Registrant as specified in its charter) Delaware 59-2651232 State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification number) 150 Post Street, Suite 405, San Francisco, California 94108 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code (415) 788-1441 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Title of each class Name of each exchange on which registered Common Stock, $0.0001 par value OTC Bulletin Board 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 the filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] State the aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 30, 2003: $2,406,754* Indicate number of shares outstanding of each of the Registrant's classes of common stock: March 29, 2004 -- Common Stock, $0.0001 par value 357,498 shares DOCUMENTS INCORPORATED BY REFERENCE See Exhibit Index. * This aggregate value is computed at the last sale price of the common stock as of June 30, 2003. It does not include the value of Common Stock held by Directors and Executive Officers of the Registrant and members of their immediate families. TABLE OF CONTENTS Part I Item 1. Business Item 2. Description of Properties Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders Part II Item 5. Market for Registrant's Common Stock and Related Security Holder Matters Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Financial Statements and Supplementary Data Report of Independent Certified Public Accountants CONSOLIDATED BALANCE SHEETS CONSOLIDATED STATEMENTS OF OPERATIONS CONSOLIDATED STATEMENTS OF CASH FLOWS CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Part III Item 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions Item 14. Principal Accountant Fees and Services Part IV Item 15. Exhibits, Financial Statement Schedule, and Reports on Form 8-K SIGNATURES EXHIBIT 3.1(i) EXHIBIT 4.2 EXHIBIT 10.1 EXHIBIT 10.2 EXHIBIT 10.3 EXHIBIT 14 EXHIBIT 21 EXHIBIT 31 EXHIBIT 32 i PART I Item 1. Business Sutter Holding Company, Inc. ("Sutter", "SHC", "Company" or "Registrant") is a holding company owning subsidiaries engaged primarily in residential mortgage banking. Sutter also has minority investments in other businesses engaged in a variety of activities, as identified herein. Sutter's corporate headquarters are located in San Francisco, California. Operating decisions for the two wholly owned mortgage banking businesses are made by managers of the business units. All major investment and capital allocation decisions are made by Sutter's two senior officers, Robert E. Dixon and William G. Knuff, III. Company History under Prior Management The Company was incorporated in Delaware in July 1999 originally under the name Shochet Holdings, Inc. From July 1999 through August 31, 2001, it provided full service, discount brokerage and related non-proprietary financial services and products such as financial planning, insurance and annuities, through its wholly-owned subsidiaries: (1) Shochet Securities, Inc. ("Shochet Securities or "SSI"), (2) Shochet Investment Advisors Corp. and (3) Shochet Mortgage Corporation. SSI previously operated six branch offices in Florida. In March 2000, the Company completed an initial public offering of 1,045,000 shares of its common stock. These securities were listed on the Nasdaq SmallCap Market System under the symbol SHOC from March 2000 until November 2001. Net proceeds raised through this offering amounted to approximately $7,900,000. On August 31, 2001, the Company sold substantially all of its assets comprising its securities brokerage business, including retail and institutional accounts (collectively, the "Brokerage Assets"), to Blue Stone Capital Corp. ("Bluestone") and BlueStone Holding Corp. ("BHC"). On November 7, 2001, the Company, SSI, BlueStone, BHC and Sands Brothers & Co., Ltd. ("Sands") entered into an agreement ("November 2001 Agreement") which served to amend and supplement the August 2001 Agreement, including certain terms of consideration payable to the Company and allowed for the transfer of the Brokerage Assets from BlueStone to Sands. On March 28, 2002, there was a change in control of the Company when its majority shareholder, Firebrand Financial Group, Inc. ("Firebrand") sold 1,213,675 shares or approximately 56.45% of its common stock to Sutter Opportunity Fund 2, LLC ("SOF 2"). The Stock Purchase Agreement provided that executive officers and directors selected by Sutter Fund would serve as the Company's officers and also as members of its Board of Directors. Company History under Current Management On April 9, 2002, to reflect new management and ownership, the Company changed its name from Shochet Holdings Corp. to Sutter Holding Company, Inc., and its new (current) management completely changed the business plan and direction for the Company. On October 7, 2002, the Company entered into a Stock Purchase and Sale Agreement with Third Half Millennium Company, Inc., an Illinois corporation. The agreement provided for the sale of all of the capital stock of SSI Securities, an inactive wholly owned subsidiary of the Company, to Third Half Millennium. On December 20, 2002, the Company changed its fiscal year end from January 31 to December 31. On January 14, 2003 the Company acquired Easton Mortgage Corporation ("Easton") for $3.75 million, consisting of $1 million cash and the balance in seller-financed notes. As a result, Easton became Sutter's first wholly owned operating subsidiary. Easton is a wholesale mortgage bank located in San Francisco, California and is licensed in California. Mr. Craig Bush, the previous Easton Mortgage Corporation majority shareholder and holder of the seller financed notes, was appointed to the Board of Directors. 1 On September 15, 2003, the Company adopted a Stock Repurchase Policy and Program (the "Repurchase Program") for the purchase of its shares of common stock on the open market. The Repurchase Program was in effect from the date adopted through February 29, 2004 (the "Program Period"). The Repurchase Program was intended neither to change the reporting status of the Company, nor to constitute any market making in the common stock, but was intended solely to permit the Company to make limited purchases of common stock when market prices warrant. Under this Repurchase Program, the Company acquired 1,775 shares of its common stock. In addition to this Repurchase Program, the Company repurchased and cancelled 77,496 shares at an average price of $11.03 per share. This average price represents the average of market prices of the common stock at the time of repurchase. On October 1, 2003, the Company borrowed $1 million from Knight Fuller, Inc. ("KFI"), an entity controlled by officers of the Company, and executed an unsecured promissory note in that principal amount in favor of KFI. The principal amount of the note bears interest at 8% per annum and matures on May 31, 2005. On November 6, 2003, the Company borrowed an additional $666,000 from KFI on the same terms. Proceeds from these borrowings were used to refinance $1 million of debt that bore interest at 10% per annum, as partial consideration for the acquisition of Progressive Lending, LLC and for working capital purposes. On March 5, 2004, KFI modified the Promissory Note due from SHC to increase the face value of the Note to $1,757,107 and to allow SHC to defer monthly payments for up to one year. In any month in which SHC elects to defer making a cash payment, the interest rate increases to 12% for that month. The entire principal balance of the Note and any deferred interest accrued is due on April 6, 2005. On November 18, 2003, the Company's Board of Directors approved and engaged the firm of BDO Seidman, LLP ("BDO"), San Francisco, California, as independent accountants. On December 11, 2003, the Company acquired Progressive Lending LLC ("Progressive") for $1.5 million, consisting of $500,000 cash, $500,000 in Sutter common stock and the balance in a seller-financed note. Progressive is a retail mortgage bank with offices in Scottsdale, Arizona and Spokane, Washington and is licensed in Arizona, California, Idaho, Illinois, Montana, Oregon and Washington. On January 5, 2004, the Company announced that, as of December 31, 2003, as a result of Easton's weaker than anticipated fourth quarter performance under an earnout agreement, a portion of the total Easton acquisition consideration, the principal amount of the seller-financed notes, was reduced by an aggregate amount of $400,000. The aggregate outstanding principal balance of $2,254,497 prior to the restatement of the notes was reduced to an aggregate of $1,854,497 after the restatement. In conjunction with this note reduction, as of December 10, 2003, Craig Bush submitted his resignation from Sutter's board of directors. On January 9, 2004, the Company appointed Peter F. Seidenberg to its Board of Directors as Audit Committee Chairman. Mr. Seidenberg brings to the board experience as Director of Finance and Corporate Controller of a publicly held enterprise software company which he has helped grow from $2 million to $80 million in revenue. As a Corporate Controller, Peter has overseen and participated in the raising of venture capital, all public filings including an S-1, and the early stages of the Sarbanes-Oxley compliance. On February 4, 2004, Sutter's Progressive subsidiary entered into a revolving loan and security agreement with KFI. Under the agreement, KFI will provide up to $100,000 of revolving credit to Progressive. Progressive will pay a $40 fee per draw, and 10% annual interest on any outstanding balance. Also, on February 29, 2004, Progressive entered into a joint venture agreement (the "Joint Venture") with KFI. KFI agreed to contribute $80,000 to the Joint Venture, and Progressive agreed to contribute furniture, computers, other office equipment, and personnel, to open a mortgage banking office in Las Vegas, Nevada. KFI and Progressive will each participate in 50% of the profits and losses of the Joint Venture. In addition, KFI has an option to acquire 100% of the Joint Venture by issuing 100,000 shares of KFI common stock to Progressive. On March 26, 2004, with an effective date of March 1, 2004, the Company entered into an amended stock purchase agreement by and between the Company and the former owners of Easton. This amendment provides, among other things, the Company with the option to make interest-only payments under the promissory notes to the former owners of Easton for the balance of the 2004 fiscal year in exchange for additional recourse to the Company under the promissory notes. 2 On March 29, 2004, the Company sold its interest in Niman Ranch to SOF-2 for $1,218,750. Payment consisted of $191,049 in cash, the assumption of $300,000 in debt, and the assignment to the Company of 126,118 shares of KFI. Business Description Sutter is a holding company comprised primarily of two operating subsidiaries, Easton and Progressive. Both subsidiaries are mortgage banks that derive a majority of their revenues from originating residential mortgages in the following states: Arizona, California and Washington. At this time, management considers Sutter to be engaged in a single business segment, that of residential mortgage origination. Sutter also has passive minority ("non-core") investments in four private businesses in various other industries, including natural beef, lamb and pork production, real estate, mining and precious metals, and technology. Sutter made these investments initially for diversification purposes and with the expectation that they will generate above-average investment returns in the future. At present, Sutter is contemplating selling one or more of its non-core investments as necessary to facilitate growth in its existing business, expand into other financial services businesses or to provide for additional liquidity. In Sutter's primary business of residential mortgage origination, the Company does not hold loans for investment, service loans or take credit risk except in very limited circumstances from the time of funding to the time of sale, which is normally eight to ten business days. Easton Easton is a wholesale mortgage bank that originates and brokers residential mortgages primarily in California through independent mortgage loan brokers and other intermediaries. Occasionally, Easton acts as a broker for small commercial mortgages. During fiscal 2003, Easton originated over $66 million in conventional and non-conventional mortgages. Easton has a primary warehouse line of credit in the amount of $8 million, from Flagstar Bank, FSB ("Flagstar"), that it uses to fund and warehouse mortgages until such mortgages are bought by investors, which purchases typically occur within eight to ten business days of funding. These loans are pre-sold by the time the Company funds the loan. Easton also has a secondary warehouse line of credit in the amount of $250,000, from Flagstar, that it uses to fund and warehouse second mortgages under substantially similar terms and circumstances as exist with the primary line of credit facility. There are minimum capital and tangible net worth requirements imposed by Flagstar which are checked quarterly and are necessary to maintain the access and use of the warehouse lines. Progressive Progressive is a retail mortgage bank that originates and brokers residential mortgages primarily in Arizona and Washington through its own sales force of loan officers. As of Sutter's acquisition date, Progressive had a mortgage license application submitted and pending in the state of Nevada. During fiscal 2003, Progressive originated or brokered over $200 million in conventional and non-conventional mortgages. During the portion of fiscal 2003 that Progressive was owned by Sutter, from December 11through December 31, it originated or brokered over $7 million in conventional and non-conventional mortgages. Progressive has a primary warehouse line of credit in the amount of $5 million, from Flagstar, that it uses to fund and warehouse mortgages until such mortgages are bought by investors, which purchases typically occur within eight to ten business days of funding. These loans are pre-sold by the time the Company funds the loan. Progressive has an additional primary warehouse line of credit in the amount of $1million, from Provident Funding Services ("Provident"), that it uses as an alternative to its Flagstar warehouse line for certain products. There are minimum capital and tangible net worth requirements imposed separately by each of Flagstar and Provident, which are checked quarterly and are necessary to maintain the access and use of the warehouse lines. 3 Types of Loans Easton and Progressive originate mortgage loans that generally fall into one of the following three categories: o Prime Mortgage Loans -- These are prime credit quality first-lien mortgage loans secured by single-(one-to-four) family residences. o Prime Home Equity Loans -- These are prime credit quality second-lien mortgage loans secured by single-(one-to-four) family residences, including home equity lines of credit. o Sub-prime Mortgage Loans -- These are first-and second-lien mortgage loans secured by single- (one-to-four) family residences, made to individuals with credit profiles that do not qualify for a prime loan. The majority of loan production consists of Prime Mortgage Loans. Prime Mortgage Loans include conventional mortgage loans, Federal Housing Administration-insured mortgage loans and Veterans Administration-guaranteed mortgage loans. The majority of the conventional loans qualify for inclusion in guaranteed mortgage securities backed by Fannie Mae or Freddie Mac. Some of the conventional loans we produce either have an original loan amount in excess of the current $333,700 Fannie Mae and Freddie Mac loan limit or otherwise do not meet Fannie Mae or Freddie Mac guidelines. Competition There are numerous mortgage banks of various sizes that compete, locally and nationally, with Easton and Progressive for business on an ongoing basis. In particular, California is a highly competitive market for mortgage loan business given its population and historical economic significance in the US economy. At any given time, any one of our competitors may be capable of offering similar products or better prices to that offered by either Easton or Progressive, or any other mortgage bank competitor. However, it is unlikely that this could always be the case since all competitors in the mortgage industry generally have access to the same products and prices. Moreover, in a service industry, what differentiates one mortgage bank from another is the quality of service manifested by customer retention. While Easton and Progressive are not household names, their customer retention is high and the quality of their services is believed to be equal to or better than those provided by their competitors. Regulatory Compliance The mortgage banking business is subject to the rules, regulations or guidelines of, and/or examination by, the following entities with respect to the processing, originating, selling and servicing of mortgage loans: o The Department of Housing and Urban Development ("HUD"); o The Federal Housing Administration (the "FHA"); o The Department of Veteran Affairs; o Fannie Mae, Freddie Mac, Ginnie Mae; o The Federal Home Loan Bank ("FHLB"); and o State regulatory authorities. The rules and regulations of these entities, among other things, impose licensing obligations, establish standards for processing, underwriting and servicing mortgage loans, prohibit discrimination, restrict certain loan features in some cases and fix maximum interest rates and fees. To the extent they apply, Easton and Progressive are subject to all of the rules, regulations and regulatory agencies listed above. Progressive is an FHA lender and is required to submit to the FHA Commissioner, on an annual basis, audited financial statements. Fannie Mae, Freddie Mac, Ginnie Mae and HUD require the maintenance of specified tangible net worth levels (which vary among the entities). 4 Mortgage origination activities are subject to the Equal Credit Opportunity Act, Truth-in-Lending Act, Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act and the Home Ownership Equity Protection Act and the regulations promulgated thereunder, as well as to other federal laws. These laws prohibit discrimination, require the disclosure of certain basic information to mortgagors concerning credit and settlement costs, limit payment for settlement services to the reasonable value of the services rendered and require the maintenance and disclosure of information regarding the disposition of mortgage applications based on race, gender, geographical distribution and income level. Currently, there are a number of proposed and recently enacted federal, state and local laws and regulations addressing responsible banking practices with respect to borrowers with blemished credit. In general, these laws and regulations will impose new loan disclosure requirements, restrict or prohibit certain loan terms, fees and charges such as prepayment penalties and will increase penalties for non-compliance. Based on Easton's and Progressive's lending practices, we do not believe that the existence of, or compliance with, these laws and regulations will have a material adverse impact on our business. However, there can be no assurance that more restrictive laws, rules and regulations will not be adopted in the future or that the existing laws, rules and regulations will not be applied in a manner that may adversely impact our business or make compliance more difficult or expensive. Employees Sutter Holding Company, Inc., its subsidiaries and affiliates, employed approximately 44 people at December 31, 2003. Additional Information on Sutter Sutter's periodic reports filed with the SEC, which include Form 10-K, Form 10-Q, Form 8-K and amendments thereto, may be accessed by the public free of charge from the SEC. Electronic copies of these reports can be accessed at the SEC's website (http://www.sec.gov). Copies of these reports may also be obtained, free of charge, upon written request to: Sutter Holding Company, Inc., 150 Post Street, Suite 405, San Francisco, CA 94108, Attn: Corporate Secretary. Also, the public may read or obtain copies of these reports from the SEC at the SEC's Public Reference Room at 450 Fifth Street N.W., Washington, D.C. 20549 (1-800-SEC-0330). Item 2. Description of Properties The physical properties used by the Registrant and its subsidiaries are summarized below:
Approx. Owned/ Square Business Location Type of Property Leased Footage Sutter San Francisco, CA Corporate offices Leased 1,000 Easton San Francisco, CA Offices Leased 1,800 Progressive Scottsdale, AZ and Spokane, WA Offices Leased 7,000
Item 3. Legal Proceedings The Company received two notices of potential claims in the aggregate amount of approximately $415,000. These potential claims are over three years old and involve parties that have no business relationship or contact with present management or the Company. While current management believes that the ultimate outcome of these claims will not have a material adverse effect on the Company's results of operations, litigation is subject to inherent uncertainties and unfavorable rulings, however unlikely, could occur. Depending on the amount and timing, an unfavorable outcome of one or both of these matters could have a material adverse effect on the Company's business, cash flows, results of operations or financial position. An accurate estimate of potential loss from pending claims cannot be made at this time. Item 4. Submission of Matters to a Vote of Security Holders None 5 PART II Item 5. Market for Registrant's Common Stock and Related Security Holder Matters Market Information Sutter's common stock trades on the Over-the-Counter ("OTC") Bulletin Board (symbol: SRHI). The following table sets forth high and low sales prices per share for the Company's common stock during fiscal 2003 and 2002 based on the Company's new December 31 fiscal year end, as reported by NASD-OTC. These quotations have been split-adjusted to reflect the 1:20 reverse stock split which occurred June 14, 2002 and represent prices between dealers and do not reflect retail mark-ups, markdowns or commissions. For the Year Ended December 31, 2003 - ----------------------------------------------------------- Stock Price Period Ended High Low ---- --- March 31, 2003 $11.20 $11.00 June 30, 2003 $12.00 $11.20 September 30, 2003 $12.00 $7.00 December 31, 2003 $10.50 $7.00 For the Year Ended December 31, 2002 - ----------------------------------------------------------- Stock Price Period Ended High Low ---- --- March 31, 2002 $5.00 $4.40 June 30, 2002 $14.00 $2.00 September 30, 2002 $14.00 $10.00 December 31, 2002 $13.00 $10.45 Shareholders Sutter had approximately 307 holders of record of its common stock at March 29, 2004. Dividends Sutter has never paid cash dividends on its common stock and does not intend to do so in the foreseeable future. Payment of dividends will be at the sole discretion of the Company's Board of Directors and will depend upon, among other factors, earnings and future anticipated capital requirements. Securities Authorized for Issuance under Equity Compensation Plans The following is a summary of the Registrant's equity compensation plans under which equity securities are authorized for issuance as of December 31, 2003:
Number of securities remaining available for future issuance under Number of securities to Weighted-average equity compensation be issued upon exercise exercise price of plans (excluding of outstanding options outstanding options and securities reflected in Plan Category and warrants (a) warrants (b) column (a)) (c) Plans not approved by security holders 176,000 $11.37 199,000
The Company's two senior executive officers are entitled to receive annual awards of stock options as provided for in their employment agreements. Forty-thousand options have been awarded to each of the two senior executive officers during each of the past two years. These options vest in equal amounts over three years and expire ten years from their respective dates of issuance. 6 Of the amount in column (a) above, 60,000 represent warrants granted to certain employees of Easton at the time of acquisition, and 16,000 represent options granted to the president of Easton in connection with an employment agreement entered into on December 31, 2003. Issuer Purchases of Equity Securities Maximum Number Number of Shares of Shares that Purchased as May Yet Be Average Part of Publicly Purchased under Number of Price Paid Announced the Date Shares Per Share Plans/Programs Plans/Programs - --------------- ------------- ------------- ------------------ ----------------- 10/1/2003 5,000 $5.00 - - 10/3/2003 6,000 $5.00 - - 10/27/2003 225 $10.56 225 - 11/14/2003 500 $10.56 500 - 11/21/2003 1,050 $10.56 1,050 - 12/19/2003 66,496 $12.03 - - ------------- 79,271 =============
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities Value of Number of Securities Date Shares Sold Description - ----------------- ------------- -------------- ------------------------------------------------------------------- 12/11/2003 49,500 $ 500,000 In conjunction with the acquisition of Progessive Lending, LLC 12/22/2003 25,000 252,500 Shares issued to Progressive Lending, LLC--non-cash transaction 12/31/2003 9,901 100,000 Shares issued upon conversion of debt by an officer of the Company 12/31/2003 2,475 25,000 Shares issued to an officer of the Company for cash 12/31/2003 2,475 25,000 Shares issued to an officer of the Company for cash ------------- -------------- 89,351 $ 902,500 ============= ==============
Item 6. Selected Financial Data Selected Financial Data for the Past Five Years
(US dollars) 2003 2002 2001 2000 1999 Revenues: Total revenues(1) $1,844,910 $799 $25,000 N/A N/A Earnings: Net loss from continuing operations ($686,373) ($772,634) ($660,000) N/A N/A Net loss from discontinued operations(2) N/A N/A (5,287,000) (3,075,000) (538,000) Net loss per share -- basic and diluted(3) ($2.39) ($4.86) ($52.98) ($27.77) ($8.97) Year-end data: Total assets $9,257,516 $1,965,646 $1,178,000 $9,469,000 $4,575,000 Debt and obligations 5,037,338 1,008,376 816,000 751,000 573,000 Shareholders' equity 1,401,516 996,639 366,000 6,281,000 1,718,000 - ------------------------------------------------------ Notes: In 2002, the Company changed its fiscal year end from January 31 to December 31. Therefore, the data presented for fiscal 2002 is for the eleven months ended December 31, 2002. (1) Prior to fiscal 2003, the Company was not engaged in the mortgage business. In 2002, the Company was not engaged in any operating business. Prior to 2002, the Company operated primarily as a broker-dealer under different and unaffiliated management. (2) In 2001 and 1999, the Company, under a different name and under prior management, took write-downs on certain assets of discontinued businesses. (3) All numbers are split-adjusted to reflect a 1:20 reverse stock split which occurred on June 13, 2002.
7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 four minority stake, non-core investments in private companies involved in various industries from natural beef, lamb and pork production to 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, and Sutter is currently contemplating selling one or more of its non-core investments as necessary to facilitate growth in its existing business, expand into other financial services businesses or to provide for additional liquidity. 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. Mortgage banking is a cyclical business. Operating performance is subject to fluctuate from quarter to quarter and from year to year based upon numerous market factors, the most significant of which are trends and future anticipated changes in interest rates, and the likely impact such changes could have on borrowers' decisions. For example, the mortgage banking sector underperformed in the fourth quarter of 2003 relative to its performance over the past three years largely due to the precipitous decline in mortgage refinancings over the course of the preceding two fiscal quarters. The decline in mortgage refinancings specifically and mortgage activity in general can be attributed to the fact that many borrowers have already refinanced their properties multiple times in the past few years in response to historically low interest rates. Management believes that borrowers generally expect interest rates to rise in the future, or at least not decline enough for them to consider another refinancing or a new purchase. Moreover, with this fundamental change in the mortgage market, competition for purchase money mortgages is likely to intensify in the near term as mortgage banks re-think their strategies and adjust their product offerings to accommodate anticipated market and interest rate trends. Therefore, management believes the Company's operating performance is likely to continue to fluctuate in concert with that of the overall industry. Sutter acquired the mortgage banks of Easton and Progressive in fiscal 2003. The Company had no operating business in fiscal 2002 which makes a direct comparison of operating performance for these fiscal years difficult, if not meaningless. Moreover, Sutter changed its fiscal year end to December 31 from January 31 in 2002 resulting an eleven month fiscal year for 2002 which further complicates any direct period to period comparisons. A thorough review and analysis of each of Sutter's two mortgage business acquisitions, Easton and 8 Progressive, and related pro forma financial information is likely to be more meaningful and indicative of future operating performance. (See Item 13 - "Certain Relationships and Related Transactions.") 2003 2002 2001 Total revenues $1,844,910 $779 $25,000 Total expenses $2,530,400 $773,433 $685,000 Earnings: Net loss from continuing operations(2) ($686,373) ($772,634) ($660,000) Net loss from discontinued operations(3) N/A N/A (5,287,000) Net loss per share - basic and diluted(4) ($2.39) ($4.86) ($52.98) - ----------------------------------------------------------------------- Notes: In 2002, the Company changed its fiscal year end from January 31 to December 31. Therefore, the data presented for fiscal 2002 is for the eleven months ended December 31, 2002. (1) Prior to fiscal 2003, the Company was not engaged in the mortgage business. In 2002, the Company was not engaged in any operating business. Prior to 2002, the Company operated primarily as a broker-dealer under different and unaffiliated management. (2) Includes provisions for impairment of $461,607 in 2003 and realized investment losses of $224,024 in 2002. (3) In 2001 and 1999, the Company, under a different name and under prior management, took write-downs on certain assets of discontinued businesses. (4) All numbers are split-adjusted to reflect a 1:20 reverse stock split which occurred on June 13, 2002. Operating results for the twelve months ended December 31, 2003 as compared with the eleven months ended December 31, 2002 Revenues Total revenues for the twelve months ended December 31, 2003 was $1,844,910 versus $799 for the eleven months ended December 31, 2002. The increase in revenues is the result of the Company's acquisitions of Easton and Progressive in January and December, respectively, of 2003. The Company existed essentially as a public shell for the 2002 fiscal year. Sutter's Progressive subsidiary recently obtained a license to conduct mortgage business in Nevada. Progressive is in the process of opening a new office in downtown Las Vegas. Sutter anticipates that this new office will begin producing revenue sometime in the second fiscal quarter of 2004. Progressive is also currently pursuing business development opportunities in California. Expenses Total expenses were $2,530,400 for the twelve months ended December 31, 2003 as compared to $773,433 for the eleven months ended December 31, 2002. The increase in total expenses is the result of the Company's acquisitions of Easton and Progressive in January and December, respectively, of 2003. Total expenses are comprised primarily of general and administrative expenses, interest expense and professional fees. Sutter expects general and administrative expenses to increase in the coming year due to anticipated increases in employee headcount. Management believes that total expenses at its Progressive subsidiary are reasonably likely to increase in the short term as Progressive opens a new office and commences business in Las Vegas, Nevada. Effective May 1, 2004, Sutter is relocating its corporate headquarters within San Francisco to new leased office space located at 220 Montgomery Street, Suite 2100, San Francisco, California 94104. Sutter's Easton subsidiary will be moving to the same location where Progressive will also base its California operations. The consolidation of Sutter's corporate headquarters with Easton's operations and Progressive's California operations under a single seven year lease is expected to reduce that portion of total expenses related to office rent. 9 Bad Debt Expense The Company recorded a bad debt expense of $100,000 for the twelve months ended December 31, 2003 as compared to $0 (zero) for the eleven months ended December 31, 2002. The Company has a note receivable that was originally a $175,000 judgment receivable from Grupo Bufete, secured by an investment interest. In 2002, the Company recorded a $75,000 provision for uncollectibles which resulted in a $100,000 net carrying value for the note receivable during 2003. In 2003, the Company elected to write off the remaining $100,000 net carrying value for the note receivable and record a $100,000 bad debt expense for the year due to the uncertainty of collection. Interest Expense The Company had interest expense of $392,906 for the twelve months ended December 31, 2003 as compared to interest expense of $53,190 for the eleven months ended December 31, 2002. The increase in interest expense is primarily due to debt obligations incurred in connection with the acquisition of Easton. A significant portion of interest expense ($133,235) in 2003 is related to the Company's mortgage warehouse lines of credit. Income Tax Expense The Company had income tax expense of $883 for the twelve months ended December 31, 2003 as compared to income tax expense of $800 for the eleven months ended December 31, 2002. The Company has federal net operating loss carry-forwards in the amount of $711,000, which may be applied to offset future taxable income. The deferred tax asset from these net operating loss carry-forwards was fully reserved at December 31, 2003. Net Earnings and Losses The Company reported a net loss of ($686,373) for the twelve months ended December 31, 2003 as compared to a net loss of ($773,434) for the eleven months ended December 31, 2002. The reduction in net loss is the result of the positive effect on earnings of the acquisitions of Easton and Progressive in January and December of 2003, respectively. Operating results for the eleven months ended December 31, 2002 as compared with the twelve months ended January 31, 2002 Revenues Total revenues for the eleven months ended December 31, 2002 was $799 versus $25,000 for the twelve months ended January 31, 2002. The decrease in total revenues was due to the fact that the Company existed essentially as a public shell for the 2002 fiscal year. In 2001, the Company operated largely as a broker-dealer under a different name and different management. Expenses Total expenses were $773,433 for the eleven months ended December 31, 2002 as compared to $685,000 for the twelve months ended January 31, 2002. The increase in total expenses is the result of operations that were discontinued, the business assets of which were sold in August 2001 by prior management, approximately seven months into the fiscal year. Interest Expense The Company had interest expense of $53,190 for the eleven months ended December 31, 2002 as compared to $0 (zero) for the twelve months ended January 31, 2002. The increase in interest expense is primarily due to debt obligations incurred in connection with and prior to the acquisition of Easton. 10 Income Tax Expense The Company had income tax expense of $800 for the eleven months ended December 31, 2002 as compared to $0 (zero) for the twelve months ended January 31, 2002. The increase in income tax expense is due to the fact that the Company had a small amount of taxable income for the eleven months ended December 31, 2002. Under prior management, the Company was never profitable and never incurred any income tax expense. The deferred tax asset from these net operating loss carry-forwards was fully reserved at December 31, 2002. Net Earnings and Losses The Company reported a net loss of ($773,434) for the eleven months ended December 31, 2002 as compared to a net loss of ($5,947,000) for the twelve months ended January 31, 2002. The decrease in operating expenses is the result of operations that were discontinued, the business assets of which were sold in August 2001 by prior management, approximately seven months into the fiscal year. The net loss for the twelve months ended January 31, 2002 includes a loss from discontinued operations in the amount of ($5,287,000). Share Repurchases On September 15, 2003, the Board of Directors of Sutter adopted the Sutter Holding Company, Inc. Stock Repurchase Policy and Program (the "Repurchase Program") for the purchase of its shares of common stock ("Shares") on the open market. This Repurchase Program was in effect from the adoption date through February 29, 2004 (the "Program Period"). The Repurchase Program was intended neither to change the reporting status of the Company, nor to constitute any market making in the Shares, but was intended solely to permit the Company to make limited purchases of Shares when market prices warrant. During the time this Repurchase Program was in effect, the Company repurchased for treasury a total of 1,775 shares of common stock. In addition to this Repurchase Program, the Company repurchased and cancelled 77,496 shares at an average price of $11.03 per share. This average price represents the average of market prices of the common stock at the time of repurchase. Impact of Inflation Sutter's management believes that the impact of inflation, although indirect, could be material to its revenue or income from continuing operations in the short term. Historical economic data suggests that interest rates and inflation are highly correlated. Given our disclosure in the Executive Summary section above on the potential impact of changes in interest rates on Sutter's mortgage business, it makes sense that if inflation were to increase significantly in the short term, more likely than not the result will be a significant increase interest rates in the short term which could materially adversely effect Sutter's mortgage business. However, in the long term, inflation and interest rate changes are likely to have little or no direct effect on revenue or income from continuing operations of Sutter's mortgage business since borrowers' decisions tend to be less influenced by long term changes to inflation and interest rates. Liquidity and Capital Resources Sutter had cash and cash equivalents of $96,971 and $625,491 as of December 31, 2003 and 2002, respectively, and $1,164,000 as of January 31, 2002. Cash provided by operating activities was $1,269,452 for the period ended December 31, 2003 as compared to cash used in operating activities of $1,301,653 and $730,000 for the periods ended December 31, 2002 and January 31, 2002, respectively. The improvement in operating cash flow is the result of the acquisitions of two operating businesses, Easton and Progressive, in 2003. In 2002, the Company had no operating businesses from which to generate cash flow from operations. In 2001, the Company's operating business at the time did not generate positive cash flow from operations. Cash used in investing activities was $1,532,939 and $1,645,805 for the periods ended December 31, 2003 and 2002, respectively, and $0 (zero) for the period ended January 31, 2002. Cash used in financing activities was $265,033 for the period ended December 31, 2003 as compared to cash provided by financing activies of $2,408,949 and $0 (zero) for 11 the periods ended December 31, 2002 and January 31, 2002, respectively. Under current management, the Company has made investments in operating and non-operating assets that, depending upon the type of investment, were categorized as investing activities. Management believes there is sufficient cash flow from existing operations to fund any capital expenditures that may arise during the coming year necessary to achieve the Company's plans for existing operations. As of December 31, 2003, Sutter had borrowings of $4,620,497 at an average annual interest rate of approximately 8%. These long-term borrowings were incurred predominantly as a result of Sutter's two acquisitions during 2003. Management believes that the Company's cost of borrowing is favorable given the Company's small size and current market capitalization. Sutter's two mortgage subsidiaries each have their own warehouse lines of credit provided to them by financial institutions. Easton has a primary warehouse line for $8 million and a secondary warehouse line for $250,000. Progressive has two primary warehouse lines: one for $5 million and another for $1 million. These warehouse lines of credit are used for the temporary funding of mortgage loans until they are purchased by investors. These warehouse lines of credit may be cancelled by their issuing financial institution at any time upon thirty days notice to the Company or its subsidiaries. The Company's subsidiaries have certain debt covenants in connection with the warehouse lines of credit they use to originate mortgages. In each case, those covenants include a requirement that the subsidiary maintain a minimum tangible net worth of $250,000, and a current ratio greater than one. The Company and its subsidiaries were in compliance with all covenants at December 31, 2003. Management believes operating cash flow is reasonably likely to be negative in the short-term given temporary timing differences between certain short-term accruals like accounts receivable and accounts payable, and the variability of mortgage revenue from month to month. Overall liquidity could be adversely affected if there is a short-term decrease in demand for either of Easton's or Progressive's mortgage products. Management believes the Company has short-term resources available to sufficiently cover such events typical of the mortgage business as well as current commitments, including but not limited to direct cash investments by Sutter's senior officers. Moreover, management expects to raise additional cash in the short-term from the sale of certain non-core investments. Concurrently, management expects a favorable, significant decrease in liabilities on the balance sheet as of December 31, 2003 pending the resolution of an agreement with the RCH noteholders that will change the Company's note payments to interest-only payments from fully-amortizing payments for the balance of 2004. Management expects to grow the Company through further acquisitions of complementary financial service businesses in the future where the consideration given will be predominantly common stock of Sutter. However, management anticipates that the Company will have to raise capital for working capital purposes and acquisitions in the next twelve months. In the event cash is necessary to consummate a future acquisition, the Company has sufficient external cash resources available to it from wealthy private investors. Provided Sutter can achieve the necessary growth in revenue, cash flow and operations in the short term, management anticipates being able to raise additional long-term capital in the public markets. The Company's overall capital and funding needs are continually reviewed to ensure that its capital base can support current business needs and future estimated business needs. Based upon these reviews, the Company believes that its capital structure is adequate for current operations and any reasonably foreseeable future needs. Management anticipates having to acquire some office furniture and equipment to facilitate expanding operations for the foreseeable future, and believes that the Company currently maintains sufficient liquidity to cover its existing requirements and provide for contingent liquidity. Off-Balance Sheet Arrangements In the normal course of business, the commitment, funding and closing of mortgage loans occurs on the same day. Therefore, the Company has no such related off-balance sheet arrangements, risks or guarantees. 12 Contractual Obligations Sutter and its subsidiaries have contractual obligations associated with ongoing business and financing activities, which will result in cash payments in future periods. Certain of those obligations, such as notes payable and other borrowings and related interest payments, are reflected in the Consolidated Financial Statements. A summary of contractual obligations follows.
(US dollars) Payments due by period ---------------------------------------------------------------------------------------- Contractual Obligations Total 2004 2005 2006 2007 2008 2009 or later ---------------------------------------------------------------------------------------- Debt obligations $4,620,497 $550,245 $2,241,050 $1,201,013 $628,189 $0 $0 Lease obligations 416,841 229,926 116,024 70,891 0 0 0 Total $5,037,338 $780,171 $2,357,074 $1,271,904 $628,189 $0 $0
The data above does not reflect reductions in long-term debt or changes in future lease obligations, each of which are the result of separate agreements entered into by the Company and/or its subsidiaries subsequent to the fiscal year end. Also, see Item 11. Executive Compensation. Critical Accounting Policies 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 principal amount of the loan as mortgages held for sale. Once the loan is purchased by an investor (e.g. Flagstar), usually within ten business days of funding, the principal amount of the loan is deducted from the Company's outstanding balance on its warehouse line of credit. It then recognizes mortgage sales along with origination and related fees. The costs and fees associated with originating, processing and, where appropriate, brokering the mortgage loans, are netted against the gain on sales of mortgages at the time the loan is sold. The Company does not record an allowance for loan losses because the loans are typically sold to investors within ten business days of funding. This short-term risk is mitigated by the fact that any losses that may occur due to the loss of a loan are simply adjustments to revenue for the period since all revenues are related to the successful origination, processing and funding of a loan. In other words, if the origination, processing and funding of a loan is ultimately unwound, then all of the Company's revenues associated with the origination, processing and funding of that loan are not recognized. Investments Marketable equity securities are classified as securities available for sale and reported at estimated fair value. Unrealized gains and losses, after applicable taxes, are reported in cumulative other comprehensive income. We use current quotations, where available, to estimate the fair value of these securities. Where current quotations are not available, we estimate fair value based on the present value of future cash flows, adjusted for the quality rating of the securities, prepayment assumptions and other factors. We reduce the asset value when we consider the declines in the value of marketable equity securities to be other-than-temporary and record the estimated loss in "realized gains or losses" in the statement of operations. The initial indicator of impairment for equity securities is a sustained decline in market price below the amount recorded for that investment. We consider the length of time and the extent to which market value has been less than cost and any recent events specific to the issuer and economic conditions of its industry. At December 31, 2003, Sutter does not have any marketable equity securities. 13 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. These securities generally are accounted for at cost and are included in other assets. 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. 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 had realized investment losses of ($61,801) in 2003 and ($224,024) in 2002, and no realized investment gains or losses in 2001. The Company had a provision for impairment of ($462,306), exclusive of $100,000 in bad debt expense, in 2003 and no provision for impairment in 2002 or 2001. The impairment charge for 2003 was related to certain assets held for investment that management wrote-down to their estimated fair value, which in most instances was zero. These assets are non-core assets that were acquired prior to the acquisitions of our operating businesses, and therefore are not likely to have any impact on future operations. Purchase Price Allocation and Intangible Assets As a result of the acquisition of Progressive in 2003, Sutter acquired identifiable intangible assets such as a customer list and a non-compete agreement with a certain key employee in the aggregate amount of $320,000. The customer list is being amortized over a period of five years and the non-compete agreement is being amortized over a period of two years. These intangible assets were valued by an independent valuation firm, Willamette Management Associates, in accordance with SFAS 142 regarding Goodwill and Other Intangible Assets. Sutter also acquired Easton in 2003. However, neither management nor the independent valuation firm of Willamette Management Associates could identify, and therefore meaningfully quantify, any intangible assets associated with this acquisition. Unlike Progressive, Easton is a wholesale mortgage bank which means that Easton has no retail customers - only non-contractual mortgage broker and realtor relationships. Since there is no contractual obligation between Easton and any California mortgage broker or realtor, and there are thousands of mortgage bankers to which any given mortgage broker or realtor could potentially submit business, it is too difficult and subjective to estimate, based on any acceptable methodology for such purpose (e.g. income approach, expense approach, or comparability analysis), that portion of the purchase price of Easton that could be assigned to a customer list or similarly classified identifiable intangible asset. Thus, no identifiable intangible assets were recorded at the date of acquisition, and the majority of the purchase price was allocated to goodwill. A significant amount of judgment is required in performing goodwill and identifiable intangible asset impairment tests. Such tests include periodically determining or reviewing the estimated fair value of Sutter's reporting units. Under SFAS No. 142, 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. 14 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 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. Recent Accounting Pronouncements In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51", which addresses consolidation by business enterprises of variable interest entities (VIEs) either: (1) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) in which the equity investors lack an essential characteristic of a controlling financial interest. In December 2003, the FASB completed deliberations of proposed modifications to FIN 46 (Revised Interpretations) resulting in multiple effective dates based on the nature as well as the creation date of the VIE. VIEs created after January 31, 2003, but prior to January 1, 2004, may be accounted for either based on the original interpretation or the Revised Interpretations. However, the Revised Interpretations must be applied no later than the first quarter of fiscal year 2004. VIEs created after January 1, 2004 must be accounted for under the Revised Interpretations. There has been no material impact to our consolidated financial statements from potential VIEs entered into after January 31, 2003 and there is no expected impact from the adoption of the deferred provisions in the first quarter of fiscal year 2004. In May 2003, the FASB issued Statement No. 150 ("SFAS 150"), "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity in its statement of financial position. On November 7, 2003, the FASB issued FASB Staff Position 150-3 ("FSP 150-3") deferring the effective date of SFAS 150 for certain mandatorily redeemable non-controlling interests. The adoption of the SFAS 150 did not have a material effect on the Company's financial condition or 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. 15 Item 7A. Quantitative and Qualitative Disclosures About Market Risk In addition to other risks described in sections of this report (see "Competition", "Inflation", and "Liquidity and Capital Resources"), the Company is generally subject to the following risk factors. The Company is subject to potential interest rate risk in primarily three ways. First, there is interest rate risk arising from the timing difference between the time a loan is funded and the time it is purchased by an investor off of the Company's warehouse line of credit. This type of interest rate risk is mitigated by the fact that a funded loan spends between eight and ten business days on the Company's warehouse line prior to purchase, and that the Company will not fund a loan until the borrower has locked in a borrowing rate at which the Company knows it can sell a loan to an investor. Second, the Company is subject to general fluctuations in market interest rates for debt instruments, particularly rising interest rates. To the extent that changes in such rates influence borrowers' decisions to postpone entering into mortgage loans today in favor of doing so in the future or not at all, the Company's business and profitability may be adversely affected in the short-term. Third, to the extent market interest rates for corporate debt increase in the future, the Company's cost of debt capital may increase which will result in increased interest payments. This increase in interest payments may adversely affect the Company's cash flow and profitability. Currently, the interest rates charged on all of the Company's debt are fixed, and so an increase in market interest rates will not have any effect on the Company's existing interest payments. Occasionally, circumstances arise whereby a loan funded on one of our warehouse lines of credit takes longer than eight to ten business days to be purchased by an investor and subsequently removed from our warehouse line. Such occurrences are infrequent, but may be considered to give rise to potential interest rate risk as long as the funded loan remains on our balance sheet. This potential risk is mitigated by the fact that the rate we are charged for funded loans on our warehouse line is tied to the Prime Rate, and adjusts to changes in the Prime Rate. Therefore, the Company is not subject to additional risk due to short-term changes in interest rates that may occur while a loan remains outstanding on one of its warehouse lines of credit. The Company's mortgage businesses are potentially subject to regulatory risks given the various regulatory requirements (previously disclosed in this report) with which Sutter's subsidiaries must comply. Currently, there are a number of proposed and recently enacted federal, state and local laws and regulations addressing responsible banking practices with respect to borrowers with blemished credit. In general, these laws and regulations will impose new loan disclosure requirements, restrict or prohibit certain loan terms, fees and charges such as prepayment penalties and will increase penalties for non-compliance. Based on Easton's and Progressive's lending practices, we do not believe that the existence of, or compliance with, these laws and regulations will have a material adverse impact on our business. However, there can be no assurance that more restrictive laws, rules and regulations will not be adopted in the future or that the existing laws, rules and regulations will not be applied in a manner that may adversely impact our business or make compliance more difficult or expensive. The Company is subject to potential investment risk arising from approximately $1 million of non-core investments as of December 31, 2003. Such investments are non-public and are carried at the lower of cost or fair value on the balance sheet. A few of these investments have been impaired and, in some cases, have had their values written down to zero. Management periodically reviews all such investments to assess if future impairments or write-downs are required. The Company relies on certain key personnel to manage the business and generate revenue on an ongoing basis. If one or more of these key personnel were to quit, leave or retire, the Company's revenues, profitability and short-term future growth prospects may be adversely affected. The Company has employment agreements with most of its key personnel and intends to implement an employee stock option plan in the near future. 16 Item 8. Financial Statements and Supplementary Data INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Sutter Holding Company, Inc. and Subsidiaries San Francisco, California We have audited the accompanying consolidated balance sheet of Sutter Holding Company, Inc. and Subsidiaries as of December 31, 2003 and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sutter Holding Company, Inc. and Subsidiaries at December 31, 2003, and the results of its operations and its cash flows for each of the year then ended in conformity with accounting principles generally accepted in the United States of America. /s/ BDO Seidman, LLP March 26, 2004 17 INDEPENDENT AUDITORS' REPORT The Board of Directors Sutter Holding Company, Inc. We have audited the accompanying balance sheet of Sutter Holding Company, Inc. as of December 31, 2002 and the related statements of income and comprehensive income, stockholders' equity, and cash flows for the period of February 1, 2002 through December 31, 2002. These financial statements are the responsibility of Sutter Holding Company, Inc. management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sutter Holding Company, Inc. as of December 31, 2002 and the results of its operations and its cash flows for the period February 1, 2002 through December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. /s/ REGALIA & ASSOCIATES Danville, California March 6, 2003 18 Item 8. Financial Statements and Supplementary Data SUTTER HOLDING COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of As of (in US dollars) December 31, December 31, -------------------------------------- 2003 2002 -------------------------------------- ASSETS Cash and cash equivalents $96,971 $625,491 Accounts receivable 37,212 8,528 Note receivable, net - 100,000 Prepaid expenses 44,290 5,836 Loans held for sale 3,020,753 - Investments in marketable securities - 32,000 Investments in non-marketable securities 985,053 1,192,545 Property and equipment, net 258,706 1,246 Other Assets 10,785 - Identifiable intangible assets 320,000 - Goodwill 4,483,746 - -------------- ------------- TOTAL ASSETS $9,257,516 $1,965,646 ============== ============= LIABILITIES & STOCKHOLDERS' EQUITY Accounts payable & accrued expenses $318,344 $30,141 Mortgage warehouse line of credit 2,986,485 - Interest payable 8,885 28,232 Income taxes payable - 800 Debt to unrelated parties 588,551 501,458 Debt to related parties 3,953,735 408,376 Commitments & contingencies Stockholders' Equity Preferred stock, $0.0001 par value; 125,000 shares authorized; no shares issued and outstanding - - Common stock, $0.0001 par value; 1,875,000 shares authorized; 351,942 and 244,036 issued and outstanding at December 31, 2003 and 2002, respectively 35 24 Additional Paid-In Capital 4,669,164 3,369,187 Treasury Stock (604,665) (333,427) Unrealized loss on investments - (62,500) Accumulated deficit (2,663,018) (1,976,645) -------------- ------------- Total Stockholders' Equity 1,401,516 996,639 -------------- ------------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $9,257,516 $1,965,646 ============== ============= (1) Includes intangible assets in the purchase of Progressive Lending LLC. See accompanying Notes to Consolidated Financial Statements 19 Item 8. Financial Statements and Supplementary Data SUTTER HOLDING COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
For the Twelve For the Eleven For the Twelve Months ended Months ended Months ended (in US dollars) December 31, December 31, January 31, =================================================== 2003 2002 2002 =================================================== Revenues: Gains on sales of mortgages $ 661,938 $ - $ - Mortgage commissions 1,243,045 - - Interest & dividend income 1,728 799 25,000 Realized gains (losses), net (61,801) - - -------------------------------------------- Total Revenues 1,844,910 799 25,000 Expenses: General & administrative 1,294,868 433,955 416,000 Bad debt expense 100,000 - - Depreciation & amortization 46,758 748 - Interest expense 392,906 53,190 - Miscellaneous (income) expenses (70,567) (31,680) - Professional fees and other expenses 304,129 93,196 269,000 Provision for impairment 462,306 224,024 - -------------------------------------------- Total expenses 2,530,400 773,433 685,000 -------------------------------------------- Loss from continuing operations (685,490) (772,634) (660,000) Loss from discontinued operations - - (5,287,000) -------------------------------------------- Loss before taxes (685,490) (772,634) (5,947,000) Provision for income taxes 883 800 - -------------------------------------------- Net loss $(686,373) $(773,434) $(5,947,000) ============================================ Net loss per share -- basic and diluted ($2.39) ($4.86) ($52.98) Other comprehensive income: Unrealized losses (3,347) (62,500) - Less: reclassification adjustments 65,847 - - -------------------------------------------- Other comprehensive income (loss) 62,500 (62,500) - -------------------------------------------- Total comprehensive loss $(623,873) $(835,934) $(5,947,000) ============================================ Weighted Average Shares Outstanding 287,584 158,996 112,250 (1) Included in general and administrative expenses for the first quarter of fiscal 2002. (2) Basic and diluted.
See accompanying Notes to Consolidated Financial Statements 20 Item 8. Financial Statements and Supplementary Data SUTTER HOLDING COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the twelve For the eleven For the twelve months ended months ended months ended (in US dollars) December 31, December 31, January 31, -------------------------------------------------------------- 2003 2002 2002 -------------------------------------------------------------- OPERATING ACTIVITIES Net income / (loss) ($686,373) ($773,434) ($5,947,000) Net increase in assets from discontinued operations - - 1,436,000 Realized losses on sales of investments, net 61,801 320,724 - Provision for impairment of investments and note receivable 562,306 (90,000) - Depreciation & amortization 46,758 748 - Amortization of discount on debt 33,507 - - Unrealized loss on investment - (62,500) - Adjustments to reconcile net income / (loss) to net cash provided by (used in) operating activities: Accounts receivable 34,080 (8,528) - Prepaid expenses (15,204) (1,836) - Mortgages held for sale 1,175,747 - - Accounts payable & accrued expenses 83,793 (715,859) 643,000 Income taxes payable (6,367) 800 - Interest payable (19,347) 28,232 - Securities purchased under agreement to resell - - 3,043,000 Loans to officers - - 22,000 Other assets (1,249) - 73,000 ------------------------------------------------------------- Net cash provided by (used in) operating activities 1,269,452 (1,301,653) (730,000) INVESTING ACTIVITIES Capital expenditures ( 6,126) ( 1,994) - Proceeds from sales of investments 70,944 - - Purchases of Easton and Progressive, net of cash acquired (1,507,469) (1,545,269) - Purchases of other investments (90,288) (98,542) - ------------------------------------------------------------- Net cash used in investing activities (1,532,939) (1,645,805) - FINANCING ACTIVITIES Proceeds from issuance of common stock 50,000 1,458,970 - Proceeds from issuance of debt 2,121,000 1,008,376 - Proceeds from issuance of warrants - 103,030 - Repayment of debt (1,207,222) (66,000) - Mortgage warehouse line of credit (1,155,073) - - Purchases of stock for treasury (73,738) (95,427) - ------------------------------------------------------------- Net cash provided by financing activities (265,033) 2,408,949 - Net change in cash for the period (528,520) (538,509) (730,000) Cash, beginning of period 625,491 1,164,000 1,894,000 ------------------------------------------------------------- Cash, end of period $96,971 $625,491 $1,164,000 ================== ==================== ============== Supplemental disclosure of cash flow information: Cash paid during the year for: Income taxes $883 $800 - Interest paid 279,018 53,910 - Supplemental schedule of non-cash investing and financing activities: (1) 49,500 shares of common stock at fair value of $500,000 was issued in conjunction with the acquisition of Progressive. (2) 92,051 shares of common stock was issued to acquire other equity securities at a cost of $1,030,000. (3) 4,000 shares of common stock at fair value of $40,000 was issued to related parties as additional consideration for granting loans to the Company. (4) 9,901 shares of common stock was issued upon the conversion of $100,000 or related party debt. (5) 25,000 shares of common stock was issued to a wholly owned subsidiary at fair value of $252,500; the stock was treated as treasuty stock at a group level. (6) 66,496 shares of common stock at fair value of $800,000 were returned and retired upon disposal of an investment.
See accompanying Notes to Consolidated Financial Statements 21 Item 8. Financial Statements and Supplementary Data SUTTER HOLDING COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Common Stock
---------------------------------------------------------------------------------------------------- Additional Other Total (in dollars, except Paid-In Treasury Accumulated Subscriptions Comprehensive Stockholders' for common shares Shares Amount Capital Stock Deficit Receivable Income Equity ---------------------------------------------------------------------------------------------------- Balances, January 31, 2001(1) 2,245,000 $ - $ 10,196,000 $ (122,000) $(3,627,000) $ (166,000) $ - $ 6,281,000 Repayment of loans to officers(2) - - - - - 148,000 - 148,000 Repurchase of shares(2) - - - (116,000) - - - (116,000) Net loss - - - - (5,947,000) - - (5,947,000) ---------------------------------------------------------------------------------------------------- Balances, January 31, 2002(1) 2,245,000 $ - 10,196,000 (238,000) $(9,574,000 $ (18,000) $ - $ 366,000 Repayment of loans to officers(2) - - - - - 18,000 - 18,000 Repurchase of shares(2) (95,000) - - (95,427) - - - (95,427) Reverse stock split (1:20) (2,042,500) - - - - - - - Issuance of common stock 136,536 - 904,869 - - - - 904,869 Reclass par value of common stock - 24 (24) - - - - - Issuance of options/warrants - - 166,422 - (103,030) - - 63,392 Sale of subsidiary - - (7,898,080) - 8,473,819 - - 575,739 Net loss - - - - (773,434) - - (773,434) Unrealized losses on investments - - - - - - (62,500) (62,500) ---------------------------------------------------------------------------------------------------- Balances, December 31, 2002 244,036 $24 $ 3,369,187 $ (333,427) $(1,976,645) $ - $ (62,500) $ 996,639 Issuance of common stock 185,402 19 1,972,481 - - - 1,972,500 Repurchase of shares (77,496) (8) (854,992) (271,238) - - (1,126,238) Issuance of options/warrants - - 182,488 - - - - 182,488 Net loss - - - - (686,373) - - (686,373) Reclassification of realized gain (loss) - - - - - - 62,500 62,500 ---------------------------------------------------------------------------------------------------- Balances, December 31, 2003 351,942 $35 $ 4,669,164 $ (604,665) $(2,663,018) $ - $ - $ 1,401,516 Notes: (1) Prior fiscal year end changed to December 31 fiscal year end effective March 28, 2002. (2) Former (not current) officers effected this transaction prior to executing the Stock Purchase Agreement dated March 28, 2002 which resulted in the sale of a controlling interest in the Company.
See accompanying Notes to Consolidated Financial Statements 22 Item 8. Financial Statements and Supplementary Data SUTTER HOLDING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 1. Significant Accounting Policies and Practices (a) Organization and Basis of Consolidation Sutter Holding Company, Inc. ("Sutter" or "Company") is a holding company owning subsidiaries engaged primarily in residential mortgage banking. Sutter also has minority investments in other businesses engaged in a variety of activities, as identified herein. The Company has determined that it operates under one segment, that of residential mortgage banking. The accompanying Consolidated Financial Statements include the accounts of Sutter consolidated with the accounts of all of its subsidiaries and affiliates in which Sutter holds a controlling financial interest as of the financial statement date. Subsidiaries' operations are included from the respective dates of acquisition (see Note 2). Normally, control reflects ownership of a majority of the voting interests. Other factors considered in determining whether control is held include whether Sutter provides significant financial support as a result of its authority to purchase or sell assets or make other operating decisions that significantly affect the entity's results of operations, and whether Sutter bears a majority of the financial risks. Intercompany accounts and transactions have been eliminated. Certain amounts in 2002 and 2001 have been reclassified to conform with the current year presentation. While the Company has had losses in the past three fiscal years, the Company expects to reduce overall cash outflow through the amendment of notes payable to RCH and the sale of certain non-core investments. Overall liquidity could be adversely affected if there is a short-term decrease in demand for either of Easton's or Progressive's mortgage products. Management believes the Company has short-term resources available to sufficiently cover such events typical of the mortgage business as well as current commitments, including but not limited to direct cash investments by Sutter's senior officers. (b) Use of Estimates in Preparation of Financial Statements The preparation of the Consolidated Financial Statements in conformity with generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period. In addition, estimates and assumptions associated with the determination of fair value of invested assets and related impairments, and the determination of goodwill impairments require considerable judgment by management. Actual results may differ from the estimates and assumptions used in preparing the Consolidated Financial Statements. (c) Cash Equivalents Cash equivalents consist of funds invested in money market funds, and in other investments with a maturity of three months or less when purchased. (d) Mortgages Held for Sale Loans held for sale represent originated mortgage loans held for sale to permanent investors. The loans are initially recorded at cost based on the principal amount outstanding net of deferred direct origination costs and fees. The loans are subsequently carried at the lower of cost or market value. Market value is determined by examining outstanding commitments from investors or current investor yield requirements calculated on the aggregate loan basis. The Company had no significant commitments classified as derivatives under Statement of Financial Accounting Standards No. 133 ("SFAS 133") at December 31 ,2003 and 2002. Specifically, the Company does not enter into fixed interest rate lock commitments and the Company's forward sales commitments under its bank warehouse lines of credit are for only very short periods of time and result in no valuable derivatives contracts. (e) Investments Marketable equity securities are classified as securities available for sale and reported at estimated fair value. Unrealized gains and losses, after applicable taxes, are reported in cumulative other comprehensive income..We reduce the asset value when we consider the declines in the value of marketable equity securities to be other-than-temporary and record the estimated loss in "realized gains or losses" in the statement of operations. The initial indicator 23 Item 8. Financial Statements and Supplementary Data SUTTER HOLDING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 (continued) of impairment for equity securities is a sustained decline in market price below the amount recorded for that investment. We consider the length of time and the extent to which market value has been less than cost and any recent events specific to the issuer and economic conditions of its industry. At December 31, 2003, the Company had no marketable securities. Nonmarketable 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. These securities generally are accounted for at cost and are included in other assets. We reduce the asset value when we consider declines in value to be other-than-temporary. We recognize the estimated loss as a loss from equity investments in realized gains or losses. 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 had realized investment losses of ($61,801) in 2003 and ($224,024) in 2002, and no realized investment gains or losses in 2001. The Company had a provision for impairment of ($462,306) in 2003 and no provision for impairment in 2002 or 2001. The impairment charge for 2003 was related to certain assets held for investment that management wrote-down to their estimated fair value, which in most instances was zero. These assets are non-core assets that were acquired prior to the acquisitions of our operating businesses, and therefore are not likely to have any impact on future operations. (f) Property, Plant and Equipment Property, plant and equipment are recorded at cost. Depreciation is provided principally on the straight-line method over estimated useful lives as follows: equipment, furniture and fixtures, 3 to 10 years. Leasehold improvements are amortized over the life of the lease or the life of the improvement, whichever is shorter. (g) Intangible Assets As a result of the acquisition of Progressive in 2003, Sutter acquired identifiable intangible assets such as a customer list ($260,000) and a non-compete agreement with a certain key employee ($60,000) in the aggregate amount of $320,000. The customer list is being amortized over a period of five years and the non-compete agreement is being amortized over a period of two years. These intangible assets were valued by an independent valuation firm in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." Sutter also acquired Easton in 2003. However, neither management nor the independent valuation firm identified, and therefore meaningfully quantified, any intangible assets associated with this acquisition. Unlike Progressive, Easton is a wholesale mortgage bank which means that Easton has no retail customers - only non-contractual mortgage broker and realtor relationships. Since there is no contractual obligation between Easton and any California mortgage broker or realtor, and there are thousands of mortgage bankers to which any given mortgage broker or realtor could potentially submit business, it is too difficult and subjective to estimate, based on any acceptable methodology for such purpose (e.g. income approach, expense approach, or comparability analysis), that portion of the purchase price of Easton that could be assigned to a customer list or similarly classified identifiable intangible asset. Thus, no identifiable intangible assets were recorded at the date of acquisition, and the majority of the purchase price was allocated to goodwill. Intangible assets are subject to annual impairment tests whereby an impairment is deemed to exist if the carrying value of a reporting unit exceeds its estimated fair value. 24 Item 8. Financial Statements and Supplementary Data SUTTER HOLDING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 (continued) (h) Long-Lived Assets The Company adopted Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets," on January 1, 2002. Long lived assets, other than goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. The Company does not perform a periodic assessment of assets for impairment in the absence of such information or indicators. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and fair value. Long-lived assets held for sale are reported at the lower of cost or fair value less costs to sell, if any. (i) Revenue Recognition Gains on Sales of Mortgages: When the Company funds a loan to a borrower through its warehouse line of credit but prior to selling the loan, it records the principal amount of the loan as mortgages held for sale. Once the loan is purchased by an investor (e.g. Flagstar), usually within ten business days of funding, the principal amount of the loan is deducted from the Company's outstanding balance on its warehouse line of credit. The Company recognizes gains on sales of loans for the difference between the sales price and the adjusted cost basis of the loans when the title transfers. The adjusted cost basis of the loans includes the original principal amount adjusted for deferrals of origination and commitment fees received, net of direct loan origination costs paid. Loans held for sale represent originated mortgage loans held for sale to permanent investors. The loans are initially recorded at cost based on the principal amount outstanding net of deferred direct origination costs and fees. The loans are subsequently carried at the lower of cost or market value. Market value is determined by examining outstanding commitments from investors or current investor yield requirements calculated on the aggregate loan basis. Loan Origination Fees and Direct Origination Costs: The Company records loan fees, discount points and certain incremental direct origination costs as an adjustment of the cost of the loan and such amounts are included in gain on sales of loans when the loan is sold. During the current year, no salaries, compensation and benefits and commission costs have been charged to incremental direct loan origination costs. (j) Income Taxes Sutter files consolidated federal and California combined income tax returns with its subsidiaries. The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." SFAS 109 requires that deferred income taxes reflect the tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts. (k) Accounting for Stock-Based Compensation At December 31, 2003, as discussed more fully in Note 12, the Company does not have a formal stock based compensation plan. The Company accounts for its grants of options under the recognition and measurement principles of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. No stock-based employee compensation cost related to stock options is reflected in net income for the three years ended December 31, 2003, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings (loss) per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation", to stock-based employee compensation. 25 Item 8. Financial Statements and Supplementary Data SUTTER HOLDING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 (continued)
Year Ended December 31, 2003 2002 2001 Net loss applicable to common stockholders, as reported $ (686,373) $ (773,434) $ (5,947,000) Total stock-based employee compensation expense included in the net loss, net of related tax effects - - - Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects $ (195,312) $ (55,665) $ 0 Pro forma net loss applicable to common stockholders $ (881,685) $ (829,099) $ (5,947,000) As reported loss per share $ (2.39) $ (4.86) $ (52.98) Pro forma loss per share $ (3.07) $ (5.21) $ (52.98)
The fair value for these options was estimated using the Black-Scholes option pricing model. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option pricing models require the input of highly subjective assumptions, including the expected stock price volatility. Accordingly, option pricing models may not necessarily provide a reliable single measure of the fair value of options. The fair value of options at the date of grant was estimated on the date of grant based on the method prescribed by SFAS No. 123. The following table summarizes the estimated fair value of options and assumptions used in the SFAS No. 123 calculations for stock option plans: 2003 2002 2001 Weighted averages of assumptions: Market price of common stock $11.50 $11.00 N/A Annual discount rate 4.24% 4.06% N/A Annual dividend rate 0.00% 0.00% N/A Expected volatility 25.00% 25.00% N/A Expected term (years) 8.8 8.6 N/A (l) Comprehensive Income Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," establishes standards for reporting and displaying comprehensive income and its components in a full set of general-purposes financial statements. The Company's "other comprehensive income" is comprised of only investments in marketable securities available for sale. During the year, the company sold all of its investments in marketable securities resulting in accumulated other comprehensive income of $0 (zero) at December 31, 2003. (m) Fair Value of Financial Instruments Carrying amounts of certain of the Company's financial instruments, including cash and cash equivalents, accounts receivable, mortgages held for sale, and accounts payable approximate their fair values due to their relative short maturities and based upon comparable market information available at the respective balance sheet dates. The investments at year end represent entirely private equity securities; current book value of these investments represents the best estimate of market value. The Company does not hold or issue financial instruments for trading purposes. The debt to unrelated and related parties has substantially fixed interest rates and remains substantially unchanged at year end. The warehouse lines of credit carry interest rates that are indexed or float with market rates such as the "Prime Rate" and remain substantially unchanged at year end. As a 26 Item 8. Financial Statements and Supplementary Data SUTTER HOLDING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 (continued) result, the Company estimates that the book value of its debt approximates fair value. (n) Net Loss Per Share Basic net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of common stock outstanding during the period. Diluted net loss per share is computed based on the weighted average number of common stock and dilutive potential common stock outstanding. The calculation of diluted net loss per share excludes potential common stock if the effect is anti-dilutive. Potential common stock consists of incremental common stock issuable upon the exercise of stock options, shares issuable upon conversion of convertible preferred stock and common stock issuable upon the exercise of common stock warrants. The following table sets forth the computation of basic and diluted net loss per share for the periods presented: Year Ended December 31, -------------------------------- 2003 2002 2001 Numerator: Net loss applicable to common stockholders $ (686,373) $ (773,434) $ (5,947,000) Denominator: Weighted average common stock 287,584 158,996 112,250 Net loss per share: Basic and diluted $ (2.39) $ (4.86) $ (52.98) The following table sets forth potential shares of common stock that are not included in the diluted net loss per share calculation above because to do so would be anti-dilutive for the periods presented: December 31, -------------------------------------------- 2003 2002 2001 Common stock options 96,000 80,000 0 Common stock warrants 60,000 0 0 In December 2003, the Company issued 25,000 shares to Progressive to help it meet certain capital requirements. These shares are issued and outstanding, and are reflected as treasury stock in the balance sheet. They do not affect earnings per share. (o) Advertising Costs The Company expenses advertising costs as they are incurred (aired or printed). For the year ended December 31, 2003, the Company expensed $52,861 of advertising costs. There were no advertising costs incurred during the eleven month period ended December 31, 2002 and twelve month period ended January 31, 2002. 27 Item 8. Financial Statements and Supplementary Data SUTTER HOLDING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 (continued) (p) Recent Accounting Pronouncements In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51", which addresses consolidation by business enterprises of variable interest entities (VIEs) either: (1) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) in which the equity investors lack an essential characteristic of a controlling financial interest. In December 2003, the FASB completed deliberations of proposed modifications to FIN 46 (Revised Interpretations) resulting in multiple effective dates based on the nature as well as the creation date of the VIE. VIEs created after January 31, 2003, but prior to January 1, 2004, may be accounted for either based on the original interpretation or the Revised Interpretations. However, the Revised Interpretations must be applied no later than the first quarter of fiscal year 2004. VIEs created after January 1, 2004 must be accounted for under the Revised Interpretations. There has been no material impact to our consolidated financial statements from potential VIEs entered into after January 31, 2003 and there is no expected impact from the adoption of the deferred provisions in the first quarter of fiscal year 2004. In May 2003, the FASB issued Statement No. 150 ("SFAS 150"), "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity in its statement of financial position. On November 7, 2003, the FASB issued FASB Staff Position 150-3 ("FSP 150-3") deferring the effective date of SFAS 150 for certain mandatorily redeemable non-controlling interests. The adoption of the SFAS 150 did not have a material effect on the Company's financial condition or results of operations. 2. Significant Business Acquisitions On January 14, 2003, Sutter completed the acquisition of all of the outstanding capital stock of Easton Mortgage Corporation ("Easton") pursuant to a stock purchase agreement by and among Sutter, Easton Mortgage Corporation ( "Easton"), RCH LLC ("RCH"), Timothy A. Birch, Stone Williams, L.L.C., Craig R. Bush, Lawrence Anspach, and Diana Mead. This acquisition, which was effective as of January 1, 2003, provides Sutter its first operating business with which Sutter intends facilitate future growth. Operations of Easton from January 1, 2003 are included in the consolidated financial statements for 2003. The purchase price consisted of $1,000,000 in cash, secured promissory notes issued by Sutter in the aggregate original principal amount of $2,750,000 and warrants to acquire up to 60,000 shares of Sutter's common stock at an exercise price of $11.00 per share. None of the other parties to the stock purchase agreement is an affiliate of Sutter, or one of its executive officers, directors or principal shareholders. A summary of the assets acquired and the consideration paid is as follows: Tangible assets acquired $157,514 Goodwill 3,545,119 --------------- Total assets 3,702,633 Liabilities assumed (120,356) --------------- Net assets acquired $3,582,277 =============== Cash consideration $1,049,789 Debt issued 2,350,000 Fair value of warrants issued 182,488 --------------- Total consideration $3,582,277 =============== The unaudited pro forma results are provided for comparative purposes only and are not necessarily indicative of what actual results would have been had the acquisition been consummated on such dates, nor do they give effect to the synergies, cost savings and other changes expected to result from the acquisitions. Accordingly, the pro forma financial results do not purport to be indicative of results of operations as of the date hereof or for any period 28 Item 8. Financial Statements and Supplementary Data SUTTER HOLDING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 (continued) ended on the date hereof or for any other future date or period. Had we acquired Easton at the beginning of the prior period; for the eleven months ended, December 31, 2002 our results of operations would have been as follows: For the eleven months ended December 31, 2002 ------------- Total revenues $2,356,388 Net income 128,238 Net income per basic and diluted common share $ 0.81 The amount of consideration paid in connection with the acquisition was determined by extensive "arms-length" negotiation among the parties. Sutter funded the acquisition of the assets in cash from our working capital plus proceeds from borrowings as described in Note 8. There was no material relationship between Easton and Sutter or any of our affiliates, any of our directors or officers, or any associate of any such director or officer. Sutter recorded no amortization expense related to intangible assets acquired since no intangible assets separate from goodwill were identified in the Easton acquisition. Goodwill from the acquisition of Easton is not amortizable for tax purposes. On December 11, 2003, Sutter completed the acquisition of all of the outstanding membership interests of Progressive Lending, LLC ("Progressive") pursuant to a stock purchase agreement by and among Sutter and William S. (`Steve") Howard, Jr. Operations of Progressive from December 11, 2003 are included in the consolidated financial statements for 2003. This acquisition significantly increases Sutter's mortgage banking operations and is expected to contribute to its growth and geographic presence. The purchase price amounted to $1.5 million, consisting of $500,000 cash, a promissory note for $500,000, and 49,500 shares of Sutter common stock. The purchase price is subject to reduction if Progressive does not earn at least $500,000 in each of the two years following closing. Progressive's senior management has agreed to stay with the company and intends to grow its operations significantly. A summary of the assets acquired and the consideration paid is as follows: Tangible assets acquired $326,882 Identifiable intangible assets acquired 320,000 Goodwill 938,627 --------------- Total assets 1,585,509 Liabilities assumed (37,964) --------------- Net assets acquired $1,547,545 =============== Cash consideration $547,545 Debt issued 500,000 Fair value of stock provided 500,000 --------------- Total consideration $1,547,545 =============== The unaudited pro forma results are provided for comparative purposes only and are not necessarily indicative of what actual results would have been had the acquisition been consummated on such dates, nor do they give effect to the synergies, cost savings and other changes expected to result from the acquisitions. Accordingly, the pro forma financial results do not purport to be indicative of results of operations as of the date hereof or for any period 29 Item 8. Financial Statements and Supplementary Data SUTTER HOLDING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 (continued) ended on the date hereof or for any other future date or period. Had we acquired Progressive at the beginning of the prior period, our results of operations would have been as follows: For the year For the eleven ended months ended December 31, December 31, 2003 2002 ---- ---- Total revenues $4,116,018 $1,290,980 Net income (loss) 279,426 (500,571) Net income (loss) per basic and diluted common share $ 0.97 $ (3.15) The amount of consideration paid in connection with the acquisition was determined by extensive "arms-length" negotiation among the parties. Sutter funded the acquisition of the assets in cash from our working capital plus proceeds from borrowings as described in Note 7. There was no material relationship between Progressive and Sutter or any of our affiliates, any of our directors or officers, or any associate of any such director or officer. Sutter amortizes the intangible assets, separate from goodwill, acquired in the Progressive acquisition to expense over periods ranging from two to five years, which are the estimated useful lives of such assets. We recorded approximately $4,409 of amortization expense in fiscal 2003. Goodwill from the acquisition of Progressive is amortizable for tax purposes. 3. Receivables Trade accounts receivable consist primarily of revenues and fees receivable from mortgage origination activities. Receivables are comprised of the following at December 31, 2003 and 2002: December 31, ------------------------------- 2003 2002 ---- ---- Trade receivables $37,212 $ 8,528 Note receivable, net - 100,000 ------------------------------- Total $37,212 $108,528 =============================== The note receivable is a $175,000 judgment receivable from Grupo Bufete, secured by an investment interest. In 2002, the Company recorded a $75,000 provision for uncollectibles which resulted in a $100,000 net carrying value for the note receivable. In 2003, the Company wrote-off the remaining $100,000 net carrying value of the note receivable and recorded a $100,000 bad debt expense for the year. 4. Investments Investments are comprised of the following at December 31, 2003 and 2002: December 31, ------------------------------- 2003 2002 ---- ---- Niman Ranch Inc. $753,010 $503,010 Tesoro Gold Co. 200,000 400,510 HFD Investors, LLC 0 260,347 Other investments 32,043 60,678 ------------------------------- Total $985,053 $1,224,545 =============================== 30 Item 8. Financial Statements and Supplementary Data SUTTER HOLDING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 (continued)
Gross Gross Unrealized Unrealized Reported Cost Gains Losses Value --------------- --------------- ---------------- --------------- December 31, 2003 Non-marketable securities held for investment $1,481,512 $0 $496,459 $985,053 December 31, 2002 Securities available for sale $ 94,500 $0 $ 62,500 $32,000 Non-marketable securities held for investment $1,192,545 $0 $ 0 $1,192,545
5. Property and Equipment Property and equipment consist of the following at December 31, 2003 and 2002: December 31, 2003 2002 ---- ---- Furniture, equipment & leasehold improvements $274,981 $1,994 Accumulated depreciation (16,275) (748) ------------------------------ Furniture, equipment & leasehold improvements, net $258,706 $1,246 ============================== 6. Commitments and Contingencies Sutter rents office space from Sutter Capital Management (a related party) under an operating lease. Sutter's subsidiaries, Easton and Progressive, rent office space from independent third party lessors under operating leases in three separate locations: San Francisco, CA, Scottsdale, AZ, and Spokane, WA. Rent expense was $115,954 and $17,256 for 2003 and 2002, respectively. Minimum future lease payments under all existing leases consist of the following at December 31, 2003: Future Lease Year ending December 31, Payments --------------- 2004 $229,926 2005 116,024 2006 70,891 2007 - 2008 - thereafter - --------------- Total $416,841 =============== The data above does not reflect a reduction in future lease obligations which is the result of a new lease agreement entered into by the Company and its subsidiaries subsequent to the fiscal year end. The new lease is for approximately 6,000 square feet of office space in downtown San Francisco and will allow Sutter to consolidate its headquarters office and the office of its 31 Item 8. Financial Statements and Supplementary Data SUTTER HOLDING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 (continued) Easton subsidiary into one central office. This new location also allows space for Sutter's Progressive subsidiary to have a retail office presence in northern California. The new lease agreement is for seven years, commences on May 1, 2004 and is expected to meaningfully reduce total office rental costs for the foreseeable future. Sutter's new office address will be: 220 Montgomery Street, Suite 2100, San Francisco, CA 94104. The Company currently is a party to two legal claims relating to some of the Company's former businesses under prior management. While current management believes that the ultimate outcome of these claims will not have a material adverse effect on the Company's results of operations, litigation is subject to inherent uncertainties and unfavorable rulings, however unlikely, could occur. Depending on the amount and timing, an unfavorable outcome of one or both of these matters could have a material adverse effect on the Company's business, cash flows, results of operations or financial position. An accurate estimate of potential loss from pending claims cannot be made at this time. Easton has a primary warehouse line of credit in the amount of $8 million, from Flagstar Bank, FSB ("Flagstar"), that it uses to fund and warehouse mortgages until such mortgages are bought by investors, which purchases typically occur within eight to ten business days of funding. Easton also has a secondary warehouse line of credit in the amount of $250,000, from Flagstar, that it uses to fund and warehouse second mortgages under substantially similar terms and circumstances as exist with the primary line of credit. There are minimum capital and tangible net worth requirements imposed by Flagstar which are checked quarterly and are necessary to maintain the access and use of the warehouse lines. Progressive has a primary warehouse line of credit in the amount of $5 million, from Flagstar, that it uses to fund and warehouse mortgages until such mortgages are bought by investors, which purchases typically occur within eight to ten business days of funding. Progressive has an additional primary warehouse line of credit in the amount of $1 million, from Provident Funding Services ("Provident"), that it uses as an alternative to its Flagstar warehouse line for certain products. There are minimum capital and tangible net worth requirements imposed separately by each of Flagstar and Provident, which are checked quarterly and are necessary to maintain the access and use of the warehouse lines. The above facilities are made available to Easton/Progressive on an annual basis. The interest rate charged on borrowings under the above warehouse lines of credit is the prime rate. For the year ended December 31, 2003, the weighted-average interest rate for borrowings under all of the above warehouse lines of credit was approximately 4.125%. Loans Sold to Investors - Generally, the Company is not exposed to significant credit risk on its loans sold to investors. In the normal course of business, the Company is obligated to repurchase loans which are subsequently unable to be sold through its contractual investor channels. Historically, the Company has not had to repurchase any loans sold. If repurchases are required, the loans will then be repackaged and sold to non-traditional investors. 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 Fannie Mae, Freddie Mac, HUD and other investors. At December 31, 2003, the highest minimum net worth requirement applicable to the Company was $250,000. As discussed earlier, the Company issued shares to its subsidiaries to help them meet their net worth requirements. As of December 31 ,2003, the Company's subsidiaries met their respective net worth requirements. 32 Item 8. Financial Statements and Supplementary Data SUTTER HOLDING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 (continued) 7. Debt to Unrelated and Related Parties Debt to unrelated and related parties of Sutter and its subsidiaries consisted of the following as of December 31, 2003 and 2002: December 31, ------------------------------- 2003 2002 ---- ---- Debt to unrelated parties: 8.00% note due 2006, net of unamortized discount of $78,211 at 2003 and $98,542 at 2002 $521,789 $501,458 4.00% notes due 2007 66,762 0 ---------------- -------------- Total $588,551 $501,458 ================ ============== Debt to related parties: 10.00% note repaid in 2003 $0 $408,376 8.00% note due 2005 1,666,000 0 6.00% note due 2007 500,000 0 4.00% notes due 2007 1,787,735 0 ---------------- -------------- Total $3,953,735 $408,376 ================ ============== The 8.00% note due 2006 in the principal amount of $600,000 is convertible, at the holder's option, into shares of Sutter common stock at $15.00 per share or the prevailing market price of the common stock at the time of conversion. Included in the convertible debt item is $78,211 of unamortized discount which will be amortized using the effective interest method over the life of the loan. The total beneficial interest conversion feature is approximately $107,500 and is being amortized to interest expense over the life of the loan. Total interest on debt to related parties was $125,777 and $28,232 in 2003 and 2002, respectively. Maturities of the above debt at December 31, 2003 are as follows: Related Non-Related Party Party Year ending December 31, Principal Principal -------------- -------------- 2004 $534,541 $15,704 2005 2,224,706 16,344 2006 584,002 617,010 2007 610,486 17,704 2008 0 0 thereafter 0 0 -------------- -------------- $3,953,735 $666,762 ============== ============== On October 1, 2003, the Company borrowed $1 million from Knight Fuller, Inc. ("KFI"), an entity controlled by officers of the Company, and executed an unsecured promissory note in that principal amount in favor of KFI. The principal amount of the note bears interest at 8% per annum with and matures on May 31, 2005. On November 6, the Company borrowed an additional $666,000 from KFI on the same terms. Proceeds from these borrowings were used to refinance $1 million of debt that was bearing interest at 10% per annum, as partial consideration for the acquisition of Progressive Lending, LLC and for working capital purposes. The 4.00% and 6.00% notes issued by subsidiaries and not guaranteed by Sutter were issued in connection with the acquisitions of Easton and Progressive, respectively. All of these notes are fully amortizing. Interest on these notes is payable monthly with the principal balances due December 31, 2007. 33 Item 8. Financial Statements and Supplementary Data SUTTER HOLDING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 (continued) 8. Goodwill and Other Intangible Assets of Acquired Businesses Sutter accounts for goodwill in accordance with Statement of Financial Accounting Standards No. 142 ("SFAS 142") "Goodwill and Other Intangible Assets." SFAS 142 changed the accounting for goodwill from a model that required amortization of goodwill, supplemented by impairment tests, to an accounting model that is based solely upon impairment tests. Goodwill of acquired businesses consisted of the following in 2003 and 2002: 2003 2002 ---- ---- Balance at beginning of year $0 $0 Acquisitions of businesses 4,483,746 0 ---------------- --------------- Balance at end of year $4,483,746 $0 ================ =============== 9. Income Taxes The Company files consolidated federal and combined state tax returns with its subsidiaries. A rate reconciliation of income taxes at the statutory federal income tax rate to net income taxes included in the accompanying statements of operations is as follows: 2003 2002 2001 ---- ---- ---- Tax at statutory rate 34.0% 34.0% 34.0% State Income Taxes, net of federal benefit 5.8% 5.8% 5.8% Meals and Entertainment -0.5% -0.1% 0.0% Change in Valuation Allowance -39.3% -35.7% -35.8% Other -0.1% -4.1% -4.0% ------------- ------------- ------------ Tax provision recorded -0.1% -0.1% 0.0% ============= ============= ============ As of December 31, 2003, the Company had federal and state net operating loss carry forwards of approximately $711,000 and $708,000, respectively. The net operating loss carry forwards will expire at various dates through 2017, if not utilized. Due to the change of control which occurred on March 28, 2002, when present management took over, utilization of the net operating losses may be subject to a substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses before utilization. Significant components of the Company's deferred tax assets for federal and state income taxes are as follows: December 31, ---------------------------------- 2003 2002 --------------- --------------- Deferred tax assets: Net operating loss carry forwards $283,000 $278,000 Capital loss carryforwards 128,000 128,000 Impairment reserve for investments and note receivable 239,000 0 Depreciation and amortization 10,000 0 Accrued compensation 25,000 0 Other, net 1,000 0 --------------- --------------- Total deferred tax assets 686,000 406,000 Valuation allowance (686,000) (406,000) --------------- --------------- Net deferred tax assets $0 $0 =============== =============== 34 Item 8. Financial Statements and Supplementary Data SUTTER HOLDING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 (continued) As of December 31, 2003 and 2002, the Company had deferred tax assets of approximately $686,000 and $406,000, respectively. Realization of the deferred tax assets is dependent upon future taxable income, if any, the amount and timing of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The net valuation allowance increased by approximately $280,000, and $276,000 and $2,130,000 during the year ended December 31, 2003, eleven months ended December 31, 2002 and year ended January 31, 2002, respectively. 10. Common Stock Changes in issued and outstanding Sutter common stock during the three years ended December 31, 2003, December 31, 2002 and January 31, 2002 are shown in the table below. Common Stock, $0.0001 Par Value (1,875,000 shares authorized) Shares issued and outstanding Balance at January 31, 2002 2,250,000 ------------ Reverse split 1:20 112,500 Issuances during the year 131,536 ------------ Balance at December 31, 2002 244,036 Issuances during the year 185,402 Repurchases during the year (77,496) ------------ Balance at December 31, 2003 351,942 ============ 11. Stock Options As of December 31, 2003, the Company does not have a formal stock option plan. Certain members of current management have received non-qualified stock options during the past two years. Stock options activity for 2003 and 2002 is presented in the following table.
2003 2002 ----------------------------- ----------------------------- Weighted Weighted Average Average Number of Exercise Number of Exercise Shares Price Shares Price ---------------- ------------ --------------- ------------- Options outstanding at beginning of year 80,000 $11.00 - - Options granted 96,000 $11.68 80,000 $11.00 Options exercised - - - - Options expired or cancelled - - - - ---------------- ------------ --------------- ------------- Options outstanding at end of year 176,000 $11.37 80,000 $11.00 ================ ============ =============== ============= Options exercisable at end of year 26,666 $11.00 - - Options available for future grant 199,000 - 295,000 -
The weighted average fair value of options granted during 2003 and 2002 is $5.02 and $4.98 per option share, respectively. The status of outstanding options as of December 31, 2003 is presented in the following table. 35 Item 8. Financial Statements and Supplementary Data SUTTER HOLDING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 (continued) Four thousand options held by certain former employees of the Company, that were incorrectly disclosed as obligations of the Company in its report on Form 10-K for 2002, were never obligations of the Company and, therefore, they have been removed entirely from the preceding information in this footnote. They are currently and always have been obligations of an unaffiliated third party. 12. Warrants In March 2000, Sutter (f/k/a Shochet Holdings), under prior management, issued warrants to an outside management company assisting with the Company's initial public offering of common stock. These warrants gave the management company the right to purchase up to 25,000 shares of common stock at an exercise price of $11.07 per share. As a result of the 1:20 reverse stock split, the warrants now give the management company the right to purchase up to 1,250 shares at an exercise price of $221.40 per share. The warrants expire in March 2005. The estimated fair value of these warrants at the time of issuance was computed at $103,030 using the Black-Scholes pricing model with the following assumptions: a risk free interest rate of 6.5%, expected dividend yield of zero percent (0%), term equal to five years, expected volatility of 50%, and a common stock market value of $9.00. The fair value of the warrants was reflected as compensation expense in the Consolidated Statement of Operations for 2002 fiscal year. In January 2003, the Company issued 60,000 warrants to purchase common stock to certain former owners of Easton, one of the Company's mortgage subsidiaries, in conjunction with the acquisition of Easton. These warrants have an exercise price of $11.00 per share and expire in January 2008. The estimated fair value of these warrants at the time of issuance was computed at $182,488 using the Black-Scholes option pricing model with the following assumptions: a risk free interest rate of 2.8%, expected dividend yield of zero percent (0%), term equal to five years, expected volatility of 25%, and a common stock market value of $11.00. 13. Employee Benefits In 2004, the Company began offering a 401(k) plan managed by Salomon-Smith Barney, a division of Citigroup. The plan covers all of Sutter's and its subsidiaries' employees meeting certain minimum eligibility requirements. Sutter makes matching contributions annually to the plan and matches the first two percent (2%) contributed by each employee. Company contributions to the plan vest in equal percentages over a period of three years. 14. Certain Relationships and Related Party Transactions On January 9, 2003, Mr. Robert E. Dixon, Co-Chief Executive Officer and President, and Mr. William G. Knuff, III, Co-Chief Executive Officer and Chief Financial Officer, each loaned $100,000 to the Company to provide it with sufficient cash to close the acquisition of Easton Mortgage Corporation. The promissory notes bore interest at 8%. Mr. Dixon and Mr. Knuff each received 2,000 shares of stock in connection with the loans. The loan from Mr. Dixon was repaid in October, 2003, and the loan from Mr. Knuff was converted into 9,901 shares of common stock of the Company at December 31, 2003. On January 13, 2003, Sutter Opportunity Fund 2, LLC loaned $175,000 to the Company. The principal amount of this loan was added to the outstanding principal amount of the previous loan made by Sutter Opportunity Fund 2, LLC in the amount of $408,376 on the same terms and conditions. The note was repaid in its entirety in October, 2003. On January 14, 2003, simultaneous with the closing of the acquisition of Easton, Mr. Dixon and Mr. Knuff each personally guaranteed two warehouse lines of credit on behalf of Easton, in the aggregate amount of $8,250,000. Neither Mr. Dixon nor Mr. Knuff received any compensation for these guarantees. On October 1, 2003, Knight Fuller, Inc. ("KFI"), an entity controlled by Mr. Dixon and Mr. Knuff, loaned $1 million in the form of an unsecured promissory note (the "Note") to the Company. The Note bears interest at 8% per annum. Interest is payable monthly commencing on December 6, 2003. The Note is payable on demand and therefore has no maturity date. On November 6, 2003, the Note was amended to increase the principal amount of the loan to $1,666,000. Proceeds from these borrowings were used to refinance $1,000,000 of debt that 36 Item 8. Financial Statements and Supplementary Data SUTTER HOLDING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 (continued) was bearing interest at 10% per annum, and the balance of the borrowed principal was used for the acquisition of Progressive. On December 31, 2003 Mr. Dixon and Mr. Knuff each invested $25,000 into the Company by purchasing 2,475 shares of newly issued common stock from the Company. On February 4, 2004, KFI entered into a revolving loan and security agreement with Progressive. Under the agreement, KFI will provide up to $100,000 of revolving credit to Progressive. Progressive will pay a $40 fee per draw, and 10% annual interest on any outstanding balance. On February 29, 2004, Progressive Lending, LLC ("Progressive"), a mortgage bank wholly owned by the Company entered into a joint venture agreement (the "Joint Venture") with KFI. KFI agreed to contribute $80,000 to the Joint Venture, and Progressive agreed to contribute furniture, computers, other office equipment, and personnel, to open a mortgage banking office in Las Vegas, Nevada. KFI and Progressive will each participate in 50% of the profits and losses of the Joint Venture. In addition, KFI has an option to acquire 100% of the Joint Venture by issuing 100,000 shares of KFI common stock to Progressive. On March 5, 2004, KFI modified the Promissory Note due from SHC to increase the face value of the Note to $1,757,106.67 and to allow SHC to defer monthly payments for up to one year. In any month in which SHC elects to defer making a cash payment, the interest rate increases to 12% for that month. The entire principal balance of the Note and any deferred interest accrued is due on April 6, 2005. On March 29, 2003, the Company sold its interest in Niman Ranch to SOF-2 for $1,218,750. Payment consisted of $191,049 in cash, the assumption of $300,000 in debt, and the assignment to the Company of 126,118 shares of KFI. The Company leases approximately 1,000 square feet of office space under a sub-lease from Sutter Capital Management, LLC, an entity owned 100% by Robert E. Dixon, our co-Chief Executive Officer. The rent is $2,600 per month and the lease expires May 31, 2005. The lease is on the same terms and conditions as are paid by other unaffiliated sub-tenants of the space which is under a master lease by Sutter Capital Management. The other leases were entered into through arms-length negotiations. 15. Other Commitments and Contingencies In November 2002, the FASB issued FIN No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others" -- an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FIN 34." The following is a summary of our agreements that management has determined are within the scope of FIN 45. The Company has agreed to indemnify each of our executive officers and directors for certain events or occurrences arising as a result of the officer or director serving in such capacity. The term of the indemnification period is for the officer's or director's lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. However, we have a directors' and officers' liability insurance policy that should enable us to recover a portion of future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal and have no liabilities recorded for these agreements as of December 31, 2003 and 2002, respectively. The Company enters into indemnification provisions under our agreements with other companies in the ordinary course of business, typically with business partners, contractors, customers and landlords. Under these provisions we generally indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of our activities or, in some cases, as a result of the indemnified party's activities under the agreement. These indemnification provisions often include indemnifications relating to representations made by us with regard to intellectual property rights. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited. We have not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the estimated fair value of these agreements is minimal. Accordingly, we have no liabilities recorded for these agreements as of December 31, 2003 and 2002, respectively. 37 Item 8. Financial Statements and Supplementary Data SUTTER HOLDING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 (continued) 16. Quarterly Data A summary of revenues and earnings by quarter for each of the last two years is presented in the following table. This information is unaudited. First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 2003 - ---- Total revenues $696,655 $478,840 $466,494 $202,921 Net income (loss) $271,092 $24,369 $26,687 ($1,008,521) Net income (loss) per share -- basic and diluted $1.09 $0.10 $0.10 ($3.68) 2002 - ---- Total revenues $275 $3,839 $11,035 ($206,694) Net loss ($5,496) ($45,338) ($66,348) ($656,252) Net loss per share -- basic and diluted ($0.05) ($0.41) ($0.48) ($3.92) 17. Subsequent Events On January 5, 2004, the Company announced that, as of December 31, 2003, a portion of the total Easton acquisition consideration, the principal amount of the seller-financed notes, was reduced by an aggregate amount of $400,000. The aggregate outstanding principal balance of $2,254,497 prior to the restatement of the notes was reduced to an aggregate of $1,854,497 after the restatement. In conjunction with this note reduction, as of December 10, 2003, Craig Bush submitted his resignation from Sutter's board of directors. On February 4, 2004, Sutter's Progressive subsidiary entered into a revolving loan and security agreement with Knight Fuller, Inc. ("KFI"). Under the agreement, KFI will provide up to $100,000 of revolving credit to Progressive. Progressive will pay a $40 fee per draw, and 10% annual interest on any outstanding balance. On February 29, 2004, Progressive Lending, LLC ("Progressive"), a mortgage bank wholly owned by the Company entered into a joint venture agreement (the "Joint Venture") with KFI. KFI agreed to contribute $80,000 to the Joint Venture, and Progressive agreed to contribute furniture, computers, other office equipment, and personnel, to open a mortgage banking office in Las Vegas, Nevada. KFI and Progressive will each participate in 50% of the profits and losses of the Joint Venture. In addition, KFI has an option to acquire 100% of the Joint Venture by issuing 100,000 shares of KFI common stock to Progressive. On March 5, 2004, KFI modified the Promissory Note due from SHC to increase the face value of the Note to $1,757,107 and to allow SHC to defer monthly payments for up to one year. In any month in which SHC elects to defer making a cash payment, the interest rate increases to 12% for that month. The entire principal balance of the Note and any deferred interest accrued is due on April 6, 2005. On March 26, 2004, with an effective date of March 1, 2004, the Company entered into an amended stock purchase agreement by and between the Company and the former owners of Easton. This amendment provides, among other things, the Company with the option to make interest-only payments under the promissory notes to the former owners of Easton for the balance of the 2004 fiscal year in exchange for additional recourse to the Company under the promissory notes. On March 29, 2004, the Company sold its interest in Niman Ranch to SOF-2 for $1,218,750. Payment consisted of $191,049 in cash, the assumption of $300,000 in debt, and the assignment to the Company of 126,118 shares of KFI. 38 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure On November 18, 2003, the Registrant's Board of Directors accepted the resignation of Regalia & Associates ("R&A"), as its principal independent accountants. R&A had approached members of the Board of Directors shortly after R&A had completed performing its annual audit for fiscal 2002 and, at that time, had expressed its desire to cease providing auditing services to the Registrant because R&A claims it is unable to deliver the level of services required by the Sarbanes-Oxley Act of 2002. However, R&A had agreed to remain as Registrant's independent accountant through the satisfactory review of all of the Registrant's reports on Form 10-Q for the 2003 fiscal year. As a result of R&A's notification and decision, the Registrant's Board of Directors undertook a search for a new independent accountant. R&A's report on the Registrant's financial statements for the eleven month period ended December 31, 2002 and the year ended January 31, 2002 did not contain an adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles. During Registrant's fiscal year ended December 31, 2002, and the subsequent interim periods through September 30, 2003, there were no disagreements with R&A on any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which, if not resolved to the satisfaction of R&A would have caused it to make reference to the subject matter of the disagreement in connection with its report on the financial statements for that period, nor have there been any reportable events as defined under Item 304(a)(1)(v) of Regulation S-K during such period. Effective as of November 18, 2003, the Registrant's Board of Directors approved and engaged the firm of BDO Seidman, LLP ("BDO"), San Francisco, California, as independent accountants for its fiscal year ending December 31, 2003 and beyond. Item 9 A. Controls and Procedures At the end of the period covered by this Annual Report on Form 10-K, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company'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 Company's disclosure controls and procedures are effective and timely in alerting them to material information relating to the Company (including its consolidated subsidiaries) which is required to be included in the Company's periodic SEC filings. There has been no change in the Company's internal controls over financial reporting during the quarter ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting. 39 Part III Item 10. Directors and Executive Officers of the Registrant As of March 29, 2004, the Company's directors, executive officers and significant employees together with their ages and a brief description of their backgrounds, are as follows: Name Age Position with Registrant Since - ---- --- ------------------------ ----- Robert E. Dixon 33 Co-Chairman of the Board and Co-Chief 2002 Executive Officer William G. Knuff, III 36 Co-Chairman of the Board, Co-Chief 2002 Executive Officer and Chief Financial Officer R. Michael Collins 38 President and Director 2004 Peter F. Seidenberg 32 Director, Audit Committee Chairman 2004 Karen M. La Monte 48 Secretary 2002 Each director serves, in accordance with the by-laws of the Registrant, until the first meeting of the Board of Directors following the next annual meeting of shareholders and until his respective successor is chosen and qualified or until he sooner dies, resigns, is removed or becomes disqualified. Officers serve at the discretion of the Board of Directors. Each executive officer serves in accordance with his employment agreement, which in the case of each of Messrs. Dixon and Knuff is for a period of five years from the commencement of their employment agreements. (See Item 11. Executive Compensation) ROBERT E. DIXON was elected to serve as a director effective as of March 28, 2002. He also currently serves as co-chief executive officer and president. Since June 1998, Mr. Dixon has served as the managing member of the investment firm of Sutter Capital Management, LLC ("Sutter"). Sutter is the manager of Sutter Opportunity Fund 2, LLC. Mr. Dixon holds an MBA from Cornell University and a BA from the University of California at Los Angeles. Mr. Dixon is also a Chartered Financial Analyst. WILLIAM G. KNUFF, III was elected to serve as a director effective as of March 28, 2002. He also currently serves as co-chief executive officer and chief financial officer. Since August 2001, Mr. Knuff has served as a principal of Sutter Capital Management, LLC. From August 1998 until joining Sutter, he worked as a senior associate in investment banking and mergers and acquisitions ("M&A") at Robertson Stephens, Inc. where he advised companies on acquisitions in the biotechnology, telecommunications and financial services industries. Mr. Knuff holds an MBA from Cornell University and a BA from the University of Texas at Austin. R. MICHAEL COLLINS joined the Company on March 22, 2004 as president. Mr. Collins will oversee all new business development, including mergers, acquisitions and capital markets efforts. In addition, it is anticipated that he will be approved as a director of the Company at the next meeting of the Board of Directors. Prior to joining Sutter, Michael spent the last 10 years advising companies and private equity investors on mergers, acquisitions ("M&A") and related transactions. Most recently, he was a director at SG Cowen Securities Corporation, where he served as the head of Consumer M&A. Before SG Cowen, Michael was an M&A specialist at Robertson Stephens and practiced law for several years at the firm of Kirkland & Ellis, where he represented leading private equity funds in all aspects of their business. Mr. Collins holds a JD from the Columbia University School of Law and a BA from Stanford University. PETER F. SEIDENBERG was elected to serve as a director and as Audit Committee Chairman effective as of January 9, 2004. Since 1998, he has served as director of finance and corporate controller for a publicly held enterprise software company which he has helped grow from $2 million to over $80 million in revenue. Mr. Seidenberg holds a BS in Applied Economics and an MBA from Cornell University. KAREN M. LA MONTE has served as secretary of the Company since March 28, 2002. Ms. La Monte also serves in various administrative capacities for Sutter Capital Management, LLC and has done so since June 1998. 40 Audit Committee Financial Expert The Company does not have an independent audit committee and the full Board of Directors therefore serves as the Audit Committee for all purposes relating to communications with the Company's auditors and responsibility for oversight of the Company's audit and disclosure process. Peter Seidenberg is the Company's audit committee financial expert serving on the Company's audit committee. Mr. Seidenberg is "independent" as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934. Code of Ethics A Code of Ethics was adopted by the Board of Directors at a special meeting held on March 26, 2004. Please see Exhibit 14 in the Exhibits section of this report for a complete description. Item 11. Executive Compensation The following table sets forth the aggregate compensation paid to the Company's current and former executive officers for services rendered during the past three years: Summary Compensation Table - -------------------------------------------------------------------------------- Annual Long Term Compensation Compensation ------------ ------------ Securities Underlying Salary Options Name Principal Position(s) Year ($) (#) - -------------------------------------------------------------------------------- Robert E. Dixon Co-Chief Executive Officer & President 2003 $71,552 40,000 2002 $8,753 40,000 William G. Knuff, III Co-Chief Executive Officer & Chief Financial Officer 2003 $71,552 40,000 2002 $8,753 40,000 Roger N. Gladstone Former Chairman & Chief Executive Officer 2002 (1) $120,000 - 2001 $120,000 - David F. Greenberg Former President & Chief Operating Officer 2002 (1) $150,000 - 2001 $150,000 - (1) For the period February 1, 2002 thru March 28, 2002. In each case the person resigned his positions as a result of and as a condition to the change of control that occurred on March 28, 2002. 41 Options Option grants in the last fiscal year to Named Executive Officers are as follows:
Option Grants in Last Fiscal Year - ---------------------------------------------------------------------------------------------------------------------- Number of Securities Percent of Exercise Underlying Total Options Price Grant Date Options Granted to Per Share Expiration Value(1) Name Granted Employees ($) Date ($) - ---------------------------------------------------------------------------------------------------------------------- Robert E. Dixon 40,000 41.67% $12.00 8/1/2013 $223,600 William G. Knuff, III 40,000 41.67% $12.00 8/1/2013 $223,600 (1) Calculated using the Black-Scholes options pricing model. An approximation of the three-year historical average of the S&P Volatility Index ("VIX") was assumed as a proxy for expected volatility. The rate, as of the grant date, on the 10-year US Treasury bond was assumed for the discount rate. The stock price on the date of grant was $12.00. As of March 28, 2004, none of the above options have vested.
The following table sets forth aggregate option exercises in 2003, the number of securities underlying unexercised outstanding options held as of December 31, 2003, and the dollar value of unexercised, in-the-money options for the Named Executive Officers. There were no stock options exercised by any of the Named Executive Officers during 2003.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values - ---------------------------------------------------------------------------------------------------------- Number of Securities Underlying Value of Unexercised Unexercised Options at In-the-Money Options at Fiscal Year-End 2003 Fiscal Year-End 2003(1) ------------------------------------ ------------------------------------ Exercisable Unexercisable Exercisable Unexercisable Name (#) (#) ($) ($) - ---------------------------------------------------------------------------------------------------------- Robert E. Dixon 0 80,000 $0.00 $0.00 William G. Knuff, III 0 80,000 $0.00 $0.00 (1) The value of unexercised in-the-money options is calculated by multiplying the number of securities underlying such options by the difference between (i) the closing price of the common stock on the OTC Bulletin Board on the last trading day of the 2003 fiscal year ($9.00) and (ii) the option exercise price.
42 Compensation of Directors Directors who are also officers of the Company do not receive any compensation for their services provided as directors or otherwise in their capacities as directors. Non-officer or independent directors receive $10,000 per year in cash compensation and a certain number of options issued at the discretion of the Board of Directors. Employment Agreements On August 1, 2002, the Company entered into employment agreements with Messrs. Dixon and Knuff pursuant to which each executive is entitled to an annual base salary of $500,000 or 1.0% annually of the Company's GAAP reported gross asset value, whichever is less. The compensation is calculated quarterly, payable monthly and is based on the Company's ending GAAP-reported gross asset value for the previous quarter. The initial term of the agreements is two years. The salaries posted above in the Summary Compensation Table for Messrs. Dixon and Knuff reflect the implementation of these agreements. On February 12, 2003, the Company and each of Messrs. Dixon and Knuff amended the original employment agreements to pay an annual base salary of $500,000, not to exceed the lesser of (i) 1.0% annually of the Company's GAAP reported gross asset value, or (ii) 5.0% annually of the Company's GAAP reported total shareholders' equity. On February 20, 2004, the Company and each of Messrs. Dixon and Knuff further amended the original employment agreements (now titled the "Second Amended Employment Agreements") to provide for certain change of control provisions and termination rights. The change in control provision provides certain benefits to the employees such as granting of additional options, immediate vesting of options and, potentially, additional compensation. (See Exhibit Index) Additional Information with Respect to Compensation Committee Interlocks and Insider Participation in Compensation Decisions The Company currently does not have a compensation committee. Messrs. Dixon, Knuff and Seidenberg participated in deliberations of the Company's Board of Directors concerning executive officer compensation. Sutter's Board of Directors and current management generally believe that executive compensation should be tied to the long term performance of the Company. Evidence of this belief can be seen in the total amount of compensation awarded to the Company's senior executive officers, and in the fact that the majority of Sutter's employees at Easton and Progressive received greater compensation than each of Sutter's senior executive officers over the past two years. Performance Graph Comparison of Cumulative Total Return Since Inception The following table reflects the value of $100 invested on March 15, 2000: 3/15/2000 12/31/2000 12/31/2001 12/31/2002 12/31/2003 --------- ---------- ---------- ---------- ---------- SRHI 100 17 2 6 5 Russell 2000 100 87 90 71 105 S&P Small Cap Financial Index 100 166 172 173 231 43 Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information, as of March 29, 2004, with respect to the number of shares of common stock beneficially owned by (i) each director of the Company, (ii) all directors and officers of the Company as a group and (iii) each shareholder known by us to be a beneficial owner of more than 5% of any class of our voting securities (the "Principal Stockholders"). This table is based on information provided to the Company or filed with the Securities and Exchange Commission (the "SEC") by the Company's directors, officers and Principal Stockholders. Except as otherwise indicated below, the Company believes that the beneficial owners of the common stock, based upon information furnished by such owners, have sole investment and voting power with respect to such shares. Applicable percentages below are based upon 384,164 diluted shares outstanding as of March 29, 2004, assuming 26,666 vested option shares are exercised by the option holders.
Security Ownership of Certain Beneficial Owners & Management - ---------------------------------------------------------------------------------------------------------------------- Amount and Nature of Percent Beneficial of Name and Address of Beneficial Owner(1) Ownership Class - ---------------------------------------------------------------------------------------------------------------------- Sutter Opportunity Fund 2, LLC(2), 150 Post Street, Suite 405, San Francisco, CA 94108 127,645 33.2% William S. Howard, Jr.(3), 4150 N. Drinkwater, Suite 105, Scottsdale, AZ 85251 49,500 12.9% William G. Knuff, III(4) 46,764 12.2% Robert E. Dixon(4) 17,808 4.6% R. Michael Collins 5,556 1.4% Peter F. Seidenberg 0 0.0% Karen La Monte 0 0.0% All Officers and Directors as a Group (4 persons)(5) 192,217 50.0% - ------------------------------------------------------------------------------------------ (1) Information for each institutional stockholder listed was derived from statements filed with the Commission pursuant to Section 13(d) or 13(g) of the Securities Exchange Act, or, in the case of Lion Mountain Properties, was estimated based on information available to management; the business address of each director or management stockholder listed is c/o the Company at 150 Post Street, Suite 405, San Francisco, CA 94108. (2) Mr. Dixon is the primcipal owner and manager of Sutter Capital Management, LLC, the manager of Sutter Opportunity Fund 2, LLC. (3) Equity issued to Mr. Howard in connection with the Company's acquisition of Progressive Lending LLC. (4) Includes 13,333 options owned by each of Mr. Knuff and Mr. Dixon that are currently vested and exercisable within 90 days of the date of this report on Form 10-K. (5) Includes 127,645 shares owned by Sutter Opportunity Fund 2, LLC which is managed by Sutter Capital Management, LLC of which Mr. Dixon is the principal owner and manager, and therefore may be deemed to be a beneficial owner of these shares by virtue of his position. The directors and officers disclaim beneficial ownership of all such shares expressly identified in this footnote.
Item 13. Certain Relationships and Related Transactions On January 9, 2003, Mr. Dixon and Mr. Knuff each loaned $100,000 to the Company to provide it with sufficient cash to close the acquisition of Easton Mortgage Corporation. The promissory notes bore interest at 8%. Mr. Dixon and Mr. Knuff each received 2,000 shares of stock in connection with the loans. The loan from Mr. Dixon was repaid in October, 2003, and the loan from Mr. Knuff was converted into 9,901 shares of common stock of the Company at December 31, 2003. On January 13, 2003, Sutter Opportunity Fund 2, LLC loaned $175,000 to the Company. The principal amount of this loan was added to the outstanding principal amount of the previous loan made by Sutter Opportunity Fund 2, LLC in the amount of $408,376 on the same terms and conditions. The note was repaid in its entirety in October, 2003. 44 On January 14, 2003, simultaneous with the closing of the acquisition of Easton Mortgage Corporation ("Easton"), Mr. Dixon and Mr. Knuff each personally guaranteed two warehouse lines of credit on behalf of Easton, in the aggregate amount of $8,250,000. Neither Mr. Dixon nor Mr. Knuff received any compensation for these guarantees. On October 1, 2003, Knight Fuller, Inc. ("KFI"), an entity controlled by Mr. Dixon and Mr. Knuff, loaned $1 million in the form of an unsecured promissory note (the "Note") to the Company. The Note bears interest at 8% per annum. Interest is payable monthly commencing on December 6, 2003. The Note is payable on demand and therefore has no maturity date. On November 6, 2003, the Note was amended to increase the principal amount of the loan to $1,666,000. Proceeds from these borrowings were used to refinance $1,000,000 of debt that was bearing interest at 10% per annum, and the balance of the borrowed principal was used for the acquisition of Progressive. On December 31, 2003 Mr. Dixon and Mr. Knuff each invested $25,000 into the Company by purchasing 2,475 shares of newly issued common stock from the Company. On February 4, 2004, KFI entered into a revolving loan and security agreement with Progressive. Under the agreement, KFI will provide up to $100,000 of revolving credit to Progressive. Progressive will pay a $40 fee per draw, and 10% annual interest on any outstanding balance. On February 29, 2004, Progressive Lending, LLC ("Progressive"), a mortgage bank wholly owned by the Company entered into a joint venture agreement (the "Joint Venture") with KFI. KFI agreed to contribute $80,000 to the Joint Venture, and Progressive agreed to contribute furniture, computers, other office equipment, and personnel, to open a mortgage banking office in Las Vegas, Nevada. KFI and Progressive will each participate in 50% of the profits and losses of the Joint Venture. In addition, KFI has an option to acquire 100% of the Joint Venture by issuing 100,000 shares of KFI common stock to Progressive. On March 5, 2004, KFI modified the Promissory Note due from SHC to increase the face value of the Note to $1,757,106.67 and to allow SHC to defer monthly payments for up to one year. In any month in which SHC elects to defer making a cash payment, the interest rate increases to 12% for that month. The entire principal balance of the Note and any deferred interest accrued is due on April 6, 2005. On March 29, 2003, the Company sold its interest in Niman Ranch to SOF-2 for $1,218,750. Payment consisted of $191,049 in cash, the assumption of $300,000 in debt, and the assignment to the Company of 126,118 shares of KFI. The Company leases approximately 1,000 square feet of office space under a sub-lease from Sutter Capital Management, LLC, an entity owned 100% by Robert E. Dixon, our co-Chief Executive Officer. The rent is $2,600 per month and the lease expires May 31, 2005. The lease is on the same terms and conditions as are paid by other unaffiliated sub-tenants of the space which is under a master lease by Sutter Capital Management. The other leases were entered into through arms-length negotiations. Item 14. Principal Accountant Fees and Services Sutter accrues 100% of its budgeted expenses associated with principal accountant fees and services in the year being audited or serviced. The following table presents the expenses ccrued by Sutter for such fees and services in 2003 and 2002. Principal Accountant Fees and Services - ------------------------------------------------------------------- 2003 2002 Audit fees $80,000 $15,200 Audit-related fees $0 $0 Tax fees $20,000 $1,185 All other fees $0 $0 Total $100,000 $16,385 45 Tax fees are comprised of fees related to the preparation and filing of the Company's federal and applicable state tax returns. The Company does not have an independent audit committee, and the full board of directors therefore serves as the audit committee for all purposes relating to communication with the Company's auditors and responsibility for the Company audit. All engagements for audit services, audit related services and tax services are approved in advance by the full board of directors of the Company. The Company's Board of Directors has considered whether the provision of the services described above for the fiscal years ended December 31, 2003 and 2002, is compatible with maintaining the auditor's independence. All audit and non-audit services that may be provided by our principal accountant to the Company shall require pre-approval by the Board. Further, our auditor shall not provide those services to the Company specifically prohibited by the Securities and Exchange Commission, including bookkeeping or other services related to the accounting records or financial statements of the audit client; financial information systems design and implementation; appraisal or valuation services, fairness opinion, or contribution-in-kind reports; actuarial services; internal audit outsourcing services; management functions; human resources; broker-dealer, investment adviser, or investment banking services; legal services and expert services unrelated to the audit; and any other service that the Public Company Oversight Board determines, by regulation, is impermissible. Part IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1. Financial Statements The following consolidated financial statements, as well as the Independent Auditors' Report, are included in Part II of this report: Page Independent Auditors' Report 17 Consolidated Balance Sheets at December 31, 2003, and 2002 19 Consolidated Statements of Operations for the years ended 2003, 2002 and 2001 20 Consolidated Statements of Cash Flows for the years ended 2003, 2002 and 2001 21 Consolidated Statements of Changes in Shareholders' Equity for the years ended 2003, 2002 and 2001 22 Notes to Consolidated Financial Statements 23 2. Financial Statement Schedules Other schedules are omitted because they are not required, information therein is not applicable, or is reflected in the Consolidated Financial Statements or notes thereto. 3. Exhibits See Exhibit Index on page 49. 3(b). Reports on Form 8-K On October 2, 2003, the Company filed a report on Form 8-K announcing the acquisition of Progressive Lending, LLC. On November 20, 2003, the Company filed a report on Form 8-K disclosing the execution of an unsecured promissory note by and between Knight Fuller, Inc. and the Company. On November 21, 2003, the Company filed a report on Form 8-K disclosing a change in the Company's certifying accountant. 46 On December 15, 2003, the Company filed an amended report on Form 8-K announcing the closing of the acquisition of Progressive Lending, LLC. On December 30, 2003, the Company filed an amended report on Form 8-K disclosing the mutual rescission of the Securities Exchange Agreement by and between Anza Capital, Inc., American Residential Funding, Inc., and the Company. On January 5, 2004, the Company filed a report on Form 8-K disclosing a purchase price adjustment in the form of a reduction in the outstanding principal balance of promissory notes relating to the acquisition of Easton Mortgage Corporation, and the resignation of Craig Bush as an independent director. On January 9, 2004, the Company filed a report on Form 8-K announcing the appointment of Peter F. Seidenberg as an independent director and audit committee chairman on the Company's Board of Directors. 47 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SUTTER HOLDING COMPANY, INC. Date: April 13, 2004 /s/ William G. Knuff, III ---------------------------------- William G. Knuff, III Co-Chief Executive Officer and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Robert E. Dixon Co-Chairman of the Board and April 13, 2004 - ------------------------- Co-Chief Executive Officer Robert E. Dixon /s/ William G. Knuff, III Co-Chairman of the Board, April 13, 2004 - ------------------------- Co-Chief Executive Officer and William G. Knuff, III Chief Financial Officer /s/ R. Michael Collins President and Director April 13, 2004 - ------------------------- R. Michael Collins /s/ Peter F. Seidenberg Director April 13, 2004 - ------------------------- Peter F. Seidenberg 48 EXHIBIT INDEX PAGE EXHIBIT NUMBER - ------- ------ 2.1 Stock Purchase Agreement dated December 31, 2002 by and between Sutter and Easton Mortgage Corporation. Incorporated by reference to Form 8-K filed January 17, 2003. 2.2 Stock Purchase Agreement dated December 11, 2003 by and between Sutter and Progressive Lending, LLC. Incorporated by reference to Form 8-K filed December 15, 2003. 3(i) Articles of Incorporation. Incorporated by reference to Form SB-2 filed December 8, 1999. 3.1(i) Corrected Amendment to Articles of Incorporation 3(ii) By-laws. Incorporated by reference to Form SB-2 filed December 8, 1999. 4.1 Loan and Security Agreement dated December 10, 2003 by and between Sutter and William S. (Steve) Howard, Jr. Incorporated by reference to Form 8-K filed December 15, 2003. 4.2 Amended Loan Agreement dated October 1, 2003 by and between Sutter and Knight Fuller, Inc. 4.3 Loan and Security Agreement dated September 2, 2002 by and between Sutter and Ira Gaines. Incorporated by reference to Form 10-KSB filed April 7, 2003. 10.1 Employment Agreement dated March 22, 2004 by and between Sutter and R. Michael Collins. 10.2 Second Amended Employment Agreement dated February 20, 2004 by and between Sutter and Robert E. Dixon. 10.3 Second Amended Employment Agreement dated February 20, 2004 by and between Sutter and William G. Knuff, III. 10.4 Amended and Restated Employee Stock Option Agreement dated December 18, 2002 by and between Sutter and Robert E. Dixon.Incorporated by reference to Form 10-KSB filed April 7, 2003. 10.5 Amended and Restated Employee Stock Option Agreement dated December 18, 2002 by and between Sutter and William G. Knuff, III. Incorporated by reference to Form 10-KSB filed April 7, 2003. 14 Code of Ethics 16 Letter regarding change in Certifying Accountant Incorporated by reference to Report on Form 8-K filed December 10, 2003. 21 Subsidiaries of the Registrant 31.1 Rule 13a-14(a)/15d-14(a) Certification 31.2 Rule 13a-14(a)/15d-14(a) Certification 32.1 Section 1350 Certification 32.2 Section 1350 Certification Copies of any of the foregoing exhibits will be provided to any shareholder upon prior written request and payment, by the shareholder making the request, for such copies. The cost of such copies, including printing and mailing costs, is $0.15 per page. There is a limit of one copy per exhibit per shareholder. 49