<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
----------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
Commission file number 0-18756
WESTERN WATER COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 33-0085833
(State of Incorporation) (I.R.S. Employer Identification No.)
4660 LA JOLLA VILLAGE DRIVE, SUITE 825, SAN DIEGO, CA 92122
(Address of principal executive offices) (Zip code)
(619) 535-9282
(Registrant's telephone number, including area code)
<TABLE>
<CAPTION> NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
<S> <C> <C>
Securities registered pursuant to Section 12(b) of the Act: None None
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.001 PAR VALUE
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--------------- ---------------
As of October 23, 1997, there were 8,235,949 shares of registrant's common stock
issued and outstanding.
<PAGE> 2
WESTERN WATER COMPANY AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item Page
<S> <C>
1 Financial statements:
Consolidated balance sheets-
September 30, 1997 and March 31, 1997 3
Consolidated statements of operations-
Three months ended September 30, 1997 and 1996 4
Consolidated statements of operations-
Six months ended September 30, 1997 and 1996 5
Consolidated statements of cash flows-
Six months ended September 30, 1997 and 1996 6
Notes to consolidated financial statements 7
2 Management's discussion and analysis of financial
condition and results of operations 11
PART II - OTHER INFORMATION
6 Exhibits and Reports on Form 8-K 19
Signatures 20
</TABLE>
2
<PAGE> 3
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
September 30 and March 31, 1997
ASSETS
<TABLE>
<CAPTION>
1997
----------------------------
September 30, March 31,
------------- ------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 11,366,052 $ 3,022,008
Short-term investment in available-for-sale securities 6,311,821 1,034,096
Current portion of notes receivables 314,159 563,629
Other current assets 482,118 214,170
------------ ------------
Total Current Assets 18,474,150 4,833,903
Notes receivable, less current portion 1,509,291 1,799,094
Land held for sale 5,001,527 5,078,521
Water rights (Note 2) 14,231,667 12,400,686
Other water assets, net of accumulated amortization 3,201,824 3,212,996
Investment in limited liability company (Note 3) - 11,068,188
Debt issue costs, net of accumulated amortization 654,726 695,670
Discontinued operation, net - 120,000
Property and equipment, net of accumulated depreciation 104,959 108,994
Investment in available-for-sale security 1,703,597 -
Other assets 65,344 157,306
------------ ------------
$ 44,947,085 $ 39,475,358
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 84,820 $ 127,883
Accrued expenses 476,740 682,518
Accrued interest 37,595 119,104
Current maturities of long-term debt 243,997 117,315
------------ ------------
Total Current Liabilities 843,152 1,046,820
Deposit - 100,000
Deferred gain on sale (Note 3) 103,333 -
Long-term debt, less current maturities 2,331,113 2,840,860
9% Convertible subordinated debentures 15,000,000 15,000,000
------------ ------------
Total Liabilities 18,277,598 18,987,680
------------ ------------
Series C convertible redeemable preferred stock, $1,000 stated value, 1,000,000
shares authorized; 9,135 and zero shares issued and outstanding at
September 30 and March 31, 1997, respectively 8,702,295 -
------------ ------------
Stockholders' Equity:
Series B convertible preferred stock, $1,000 stated value, 1,000,000
shares authorized; zero and 4,000 shares issued and outstanding at
September 30 and March 31, 1997, respectively - 3,807,517
Common stock, $0.001 par value, 20,000,000 shares
authorized; 8,235,949 and 8,134,796 shares issued and outstanding at
September 30 and March 31, 1997, respectively 8,236 8,135
Additional paid-in capital 23,934,837 22,705,957
Unrealized gain (loss) on investment securities 344,757 (28,040)
Accumulated deficit ($14,405,252 of accumulated deficit eliminated in
quasi-reorganization of October 1, 1994) (6,320,638) (6,005,891)
------------ ------------
Total Stockholders' Equity 17,967,192 20,487,678
------------ ------------
$ 44,947,085 $ 39,475,358
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations
Three months ended September 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Revenue:
Water $ 650,057 $ 57,771
Real estate 490,000 150,000
----------- -----------
1,140,057 207,771
----------- -----------
Cost of Revenue:
Water 697,671 14,631
Real estate 107,152 97,185
----------- -----------
804,823 111,816
----------- -----------
Gross Profit 335,234 95,955
General and Administrative Expenses 1,322,095 482,475
----------- -----------
Operating Income (Loss) (986,861) (386,520)
----------- -----------
Other Income (Expenses):
Interest income 321,957 88,127
Interest expense (337,500) (359,803)
Loss from investment in limited liability company (Note 3) - (321,721)
Gain on sale of investment in limited liability company, net (Note 3) 10,000 -
Other 16,513 (30,960)
----------- -----------
10,970 (624,357)
----------- -----------
Income (Loss) from Continuing Operations
Before Income Taxes (975,891) (1,010,877)
Income Taxes (Note 5) - -
----------- -----------
Income (Loss) from Continuing Operations (975,891) (1,010,877)
Discontinued Operations - (14,633)
----------- -----------
Net Income (Loss) (975,891) (1,025,510)
Accretion of preferred stock to redemption value 14,991 -
Preferred stock dividend 194,856 -
----------- -----------
Net income (loss) applicable to common stock $(1,185,738) $(1,025,510)
=========== ===========
Income (Loss) Per Common Share including effects of accretion and
preferred stock dividend:
Continuing operations $ (0.14) $ (0.13)
Discontinued operations - -
----------- -----------
Net Income (Loss) Per Common Share $ (0.14) $ (0.13)
=========== ===========
Average Common Shares Outstanding 8,235,969 8,070,961
=========== ===========
</TABLE>
See accompanying notes to consolidated finnancial statements.
4
<PAGE> 5
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations
Six months ended September 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Revenue:
Water $ 695,649 $ 123,144
Real estate 490,000 150,000
----------- -----------
1,185,649 273,144
----------- -----------
Cost of Revenue:
Water 712,252 29,212
Real estate 107,152 97,184
----------- -----------
819,404 126,396
----------- -----------
Gross Profit 366,245 146,748
General and Administrative Expenses 2,533,283 1,060,269
----------- -----------
Operating Income (Loss) (2,167,038) (913,521)
----------- -----------
Other Income (Expenses):
Interest income 602,728 173,586
Interest expense (675,000) (720,486)
Loss from investment in limited liability company (Note 3) (307,623) (498,112)
Gain on sale of investment in limited liability company, net (Note 3) 2,435,860 -
Other 8,573 (27,399)
----------- -----------
2,064,538 (1,072,411)
----------- -----------
Income (Loss) from Continuting Operations
Before Income Taxes (102,500) (1,985,932)
Income Taxes (Note 5) 2,400 2,400
----------- -----------
Income (Loss) from Continuing Operations (104,900) (1,988,332)
Discontinued Operations - (31,092)
----------- -----------
Net Income (Loss) (104,900) (2,019,424)
Accretion of preferred stock to redemption value 14,991 -
Preferred stock dividend 194,856 -
----------- -----------
Net income (loss) applicable to common stock $ (314,747) $(2,019,424)
=========== ===========
Income (Loss) Per Common Share including effects of accretion and preferred
stock dividend:
Continuing operations $ (0.04) $ (0.25)
Discontinued operations - -
----------- -----------
Net Income (Loss) Per Common Share $ (0.04) $ (0.25)
=========== ===========
Average Common Shares Outstanding 8,191,606 8,069,730
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six months ended September 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (104,900) $ (2,019,424)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 81,830 67,218
Compensation expense on unexercised stock options 69,428 -
Gain on sale of investment in limited liability company (2,435,860) -
Loss from investment in limited liability company 307,623 498,112
Gain on disposition of available-for-sale securities (12,711) -
Changes in assets and liabilities:
(Increase) decrease in:
Other current assets (267,948) (120,253)
Land held for sale 76,994 (229,720)
Other assets 91,962 -
Increase (decrease) in:
Accounts payable (103,305) (95,271)
Accrued expenses (205,778) (97,220)
Accrued interest (81,509) 33,543
Deposit (100,000) -
------------ ------------
Net cash used in operating activities (2,684,174) (1,963,015)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposition of discontinued operation 120,000 -
Proceeds from sale of investment in limited liability company 12,024,000 -
Purchase of property and equipment (7,688) (13,387)
Purchase of available-for-sale securities (7,105,411) -
Sales of available-for-sale securities 1,868,436 978,250
Sales of water rights 683,089 -
Additions to water rights (391,076) -
Purchase of water rights (960,850) (121,327)
Additions to other water assets (17,991) (13,835)
------------ ------------
Net cash provided by investing activities 6,212,509 829,701
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible
preferred stock 5,000,000 -
Payment of private placement costs (255,212) -
Preferred dividend paid (59,856) -
Proceeds from options - 92,437
Payments to acquire treasury stock (2,591) (471)
Principal payments received on notes receivable 516,433 612,023
Principal payments on notes payable (383,065) (79,060)
------------ ------------
Net cash provided by financing activities 4,815,709 624,929
------------ ------------
Net increase (decrease) in cash and cash equivalents 8,344,044 (508,385)
Cash and Cash Equivalents, beginning of period 3,022,008 540,883
------------ ------------
Cash and Cash Equivalents, end of period $ 11,366,052 $ 32,498
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (which include only normal recurring
adjustments) necessary to present fairly the balance sheet of Western
Water Company and Subsidiaries as of September 30, 1997, the statements
of operations for the three and six months ended September 30, 1997 and
1996, and the statements of cash flows for the six months ended
September 30, 1997 and 1996. The financial statements are consolidated
to include the accounts of Western Water Company and its subsidiary
companies ("the Company").
The accounting policies followed by the Company are set forth in Note 1
to the Company's financial statements as stated in its report on Form
10-K for the fiscal year ended March 31, 1997.
Income (Loss) Per Common Share
Income (loss) per common share is computed by dividing net income (loss)
by the weighted average number of common shares outstanding during each
period. The dilutive effect of the securities for the calculation of
primary and fully diluted income per share are not materially different
for the three and six months ended September 30, 1997. Securities for
the calculation of primary and fully diluted loss per share for the
three and six months ended September 30, 1996 are excluded as their
effect is anti-dilutive.
The income (loss) per common share computations for the three and six
months ended September 30, 1997 were adjusted to include the Series C
Convertible Redeemable Preferred Stock dividend. Accordingly, net income
(loss) was decreased by $194,856 for the income (loss) per common share
computation.
Reclassifications
Certain reclassifications of prior period amounts have been made in
order to conform to the current period presentation.
NOTE 2. WATER RIGHTS:
In June 1997, the Company issued 88,238 shares of its common stock
("Common Stock") to acquire 400 acre feet of water rights located in the
Central Water Basin, Los Angeles County, California, for a purchase
price of $1,280,000. The Company guaranteed the price of its stock,
within a range, and had accrued liabilities of $117,856 related thereto.
The Common Stock issued has been recorded at the purchase price less the
amount of the accrued guarantee payment.
7
<PAGE> 8
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 3. INVESTMENT IN LIMITED LIABILITY COMPANY:
In October 1995, the Company and a joint venture comprised of The Morgan
Stanley Real Estate Fund II, L.P ("Morgan Stanley"), an affiliate of
Morgan Stanley Group, and two affiliates of Morgan Stanley
(collectively, "Western Land Joint Venture") formed Nevada Land and
Resource Company, LLC, a Delaware limited liability company ("NLRC")
which was owned 35.3% by the Company and 64.7% by Western Land Joint
Venture. NLRC acquired approximately 1,400,000 acres of land and related
water rights in the state of Nevada. The Company's $12,000,000
investment in NLRC was funded with the proceeds from the sale of 9%
Convertible Subordinated Debentures.
On April 23, 1997, the Company sold its interest in NLRC for
$13,360,000, of which $12,024,000 was paid in cash and $1,336,000 was in
the form of a note. During August 1997, the note plus the accrued unpaid
interest was converted into 723,911 shares of the Global Equity
Corporation. As of September 30, 1997, the Global Equity Corporation
shares were valued at $1,703,597 and classified as "Investment in
available-for-sale security" on the balance sheet. In connection with
the sale, NLRC entered into a consulting agreement with Western Agua,
L.P. (the "Consulting Agreement"). Western Agua, L.P. is a Delaware
limited partnership formed by the Company and an affiliate of Morgan
Stanley. The Company owns a 70% interest in Western Agua, L.P. and is
the sole general partner of the partnership. The consolidated financial
statements of the Company include the accounts of Western Agua, L.P. In
exchange for providing consulting services to NLRC, Western Agua, L.P.
is to receive 50% of all the net proceeds, if any, derived from the
subsequent sale, leasing or other disposition of all or any portion of
NLRC or refinancing of NLRC, or other revenues derived from the
disposition of NLRC by the new owners after they both recoup their
investment in NLRC and earn a 20% cumulative return, as defined,
compounded annually on their investment, provided such net proceeds have
begun to be earned within five years from the date of sale.
The following information reflects operations of NLRC for the period
from January 1, 1997 through April 23, 1997 (date of sale) and for the
three months ended March 31, 1996:
<TABLE>
<CAPTION>
For the three For the period For the period For the three
months ended April 1 through January 1 through months ended
March 31, 1997 April 23, 1997 April 23, 1997 March 31, 1996
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net operating revenues $ 535,085 $ (2,515) $ 532,570 $ 312,135
General and administrative
Expenses 1,250,076 153,947 1,404,023 856,826
----------- --------- ----------- ---------
Net loss $ (714,991) $(156,462) $ (871,453) $(544,690)
=========== ========= =========== =========
Company's share of net loss $ (252,392) $( 55,231) $ (307,623) $(176,391)
=========== ========= =========== =========
</TABLE>
8
<PAGE> 9
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 3. INVESTMENT IN LIMITED LIABILITY COMPANY: (CONTINUED)
As a result of the sale of the Company's interest in NLRC, the Company
realized a gain of $2,419,193, net of legal and other closing costs
totaling $60,242. In addition, the Company deferred $120,000 of the gain
relating to estimated future consulting services that will be provided
in accordance with the Consulting Agreement. For the three and six
months ended September 30, 1997, $10,000 and $16,667, respectively, of
the deferred gain has been realized.
NOTE 4. PREFERRED STOCK:
In April 1997, the Company privately placed $9,000,000 of a new series
of its convertible redeemable preferred stock. As a result of the
private placement, the Company received $4,744,788 in cash, net of
$255,212 of costs, and exchanged all 4,000 outstanding shares of its
Series B Convertible Preferred Stock for the new Series C Convertible
Redeemable Preferred Stock ("Series C Preferred Stock"). The Series C
Preferred Stock was recorded at fair value on the date of issuance less
issue costs. The excess of the preference value over the carrying value
of $447,695 is being accreted by periodic charges to accumulated deficit
until the redemption date in April 2007. Each share of Series C
Preferred Stock has a stated value of $1,000, a par value of $.001, and
is convertible at any time at the option of the holder into shares of
common stock at a conversion price of $16.62 per share. The conversion
price, and therefore the number of shares of common stock issuable upon
the conversion of the Series C Preferred Stock, is subject to adjustment
in certain events to prevent dilution.
Commencing on April 1, 2006 and continuing until March 31, 2007, each
holder of the Series C Preferred Stock may, from time to time during
such period, at such holder's option, cause the Company to redeem for
cash, out of funds legally available therefore, up to an aggregate of
one-half of all shares of Series C Preferred Stock owned by such holder
on April 1, 2006. Commencing on April 1, 2007, each holder of shares of
Series C Preferred Stock may, from time to time, thereafter, at such
holder's option, cause the Company to redeem for cash, out of funds
legally available therefore, some or all of such holder's shares of
Series C Preferred Stock. The redemption price for each share of Series
C Preferred Stock shall be $1,000 per share, plus, in each case, all
declared and unpaid dividends, if any.
The holders of Series C Preferred Stock are entitled to receive annual
dividends in the amount of $72.50 per share, payable semi-annually on
January 15 and July 15 of each year. The first four semi-annual dividend
payments (July 15, 1997 through and including January 15, 1999) to be
made with respect to Series C Preferred Stock may be made, at the sole
discretion of the Board of Directors, in cash or, in full or in part, by
issuing additional shares of Series C Preferred Stock. Thereafter, all
dividend payments made with respect to the Series C Preferred Stock are
payable in cash.
On July 15, 1997, the Company paid dividends of $194,856, $59,856 was
paid in cash and $135,000 was paid through the issuance of 135 shares of
Series C Preferred Stock.
9
<PAGE> 10
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 5. INCOME TAXES:
Management does not expect there will be taxable income for the fiscal
year ended March 31, 1998. Accordingly, the Company has not recorded a
federal income tax liability and has recorded the minimum state income
tax provision for the three and six months ended September 30, 1997.
NOTE 6. PROPOSED ACQUISITION:
On August 8, 1997, the Company announced that it has agreed to purchase
the water rights and fixed assets of the Willows Water District in
Arapahoe and Douglas Counties. Closing is subject to due diligence and
is expected to take place in the first half of 1998. The agreement
provides for a purchase price of $15 million, of which $9.5 million
would be paid at closing and the balance over four years.
NOTE 7. SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
Six months ended September 30
-----------------------------
1997 1996
---- ----
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 883,043 $784,512
Interest capitalized during the period 126,534 97,570
Cash paid during the period for income taxes 2,400 2,400
Supplemental disclosure of noncash investing activities:
Water rights acquired in exchange for common stock 1,162,144 -
Exchange of Series B convertible preferred stock 4,000,000 -
Deferred gain on sale of investment in limited
liability company 103,333 -
Issuance of note receivable 1,336,000 -
Note receivable converted into investment in
available-for-sale security 1,358,840 -
Accrued closing costs 60,242 -
Preferred stock issued in lieu of cash dividend 135,000 -
Accretion of preferred stock issuance costs 14,991 -
Common stock issued upon exercise of stock options 13
</TABLE>
10
<PAGE> 11
WESTERN WATER COMPANY AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS
In addition to historical information contained herein, this Quarterly Report
contains forward-looking statements. The forward-looking statements contained
herein are subject to certain risks and uncertainties that could cause actual
results to differ materially from those reflected in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations". Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date hereof based on information
currently available to management. Western Water Company undertakes no
obligation to publicly revise these forward-looking statements to reflect events
or circumstances that arise after the date hereof. Readers should carefully
review the risk factors described in other documents the Company files from time
to time with the Securities and Exchange Commission, including the Quarterly
Reports on Form 10-Q to be filed by the Company in 1998, any Current Reports on
Form 8-K filed by the Company and any Registration Statements on Form S-3 filed
by the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
In 1994, due to the significant changes in the Company's business, an
improvement of the Company's earnings potential and a change in direction of the
intended method of disposing of the Company's discontinued silica operation, the
Company determined that it was appropriate to effect a quasi-reorganization. The
Company's Board of Directors authorized management to effect a
quasi-reorganization effective October 1, 1994, which reorganization was
ratified by the Company's stockholders in March 1995.
In a quasi-reorganization, assets and liabilities are restated to current values
as of the date of the reorganization. The amounts of increases, however, are
limited to the decreases in other assets. In this regard, effective October 1,
1994, the Company recognized a $1,830,914 write down in the value of its
non-operational silica sorting and grinding plant (the "Silica Plant"). This
write down was offset by a corresponding write up of a like amount which was
allocated proportionately, based on the relative excess of fair market value of
each asset over historic book basis, to land held for sale ($454,604), water
rights ($1,038,268), and water sale fees ($338,042). Further, the accumulated
deficit of $14,405,252, most of which was due to the Company's prior and now
discontinued operations, was eliminated by a corresponding decrease in the
Company's additional paid-in capital. Retained earnings in the future will
reflect only the results of operations subsequent to October 1, 1994.
11
<PAGE> 12
WESTERN WATER COMPANY AND SUBSIDIARIES
GENERAL (CONTINUED)
On September 22, 1995, the Company completed the private placement of
$15,000,000 of its 9% Convertible Subordinated Debentures Due 2005 (the
"Debentures"). The Debentures bear interest at 9% per annum payable
semi-annually on September 30 and March 31 of each year, and mature on September
30, 2005. The Debentures are convertible at any time at the option of the holder
into shares of Common Stock at a conversion price of $15.865 per share, subject
to certain anti-dilution adjustments (the "Conversion Price"). After September
30, 1997, the Company may, at its option, redeem some or all of the Debentures
at a redemption price equal to 100% of the principal amount to be redeemed, plus
accrued and unpaid interest thereon through the redemption date, if on each of
the 20 consecutive trading days immediately prior to the mailing of the
redemption notice the trading price of the Common Stock is equal to or greater
than 150% of the then applicable Conversion Price.
In March 1996 the Company declared a 100% stock dividend (the "Stock Dividend").
A 100% stock dividend is effectively a two-for-one stock split. All share and
per-share information for prior periods has been restated to reflect the effects
of the Stock Dividend.
In February 1997 the Company issued shares of its Series B Convertible Preferred
Stock in the amount of $4,000,000 to two institutional investors, and in April
1997 the Company issued shares of its Series C Convertible Preferred Stock
("Series C Preferred Stock") in the amount of $5,000,000. Upon the issuance of
the $5,000,000 of Series C Preferred Stock, the shares of Series B Convertible
Preferred Stock were exchanged for shares of Series C Preferred Stock. There are
no shares of Series B Convertible Preferred Stock currently outstanding. Each
share of Series C Preferred Stock has a stated value of $1,000 and is
convertible at any time at the option of the holder into shares of Common Stock
at a conversion price of $16.62 per share. The conversion price and, therefore,
the number of shares of Common Stock issuable upon the conversion of the Series
C Preferred Stock, is subject to adjustment in certain events to prevent
dilution. The holders of the Series C Preferred Stock are entitled to receive,
when, as and if declared by the Board of Directors, dividends at the annual rate
of 7.25% of the stated value. Such dividends are payable semi-annually on
January 15 and July 15 of each year. The first four semi-annual dividend
payments may be made, at the discretion of the Board of Directors, in cash or,
in full or in part, by issuing fully paid and nonassessable shares of Series C
Preferred Stock of equal value. Commencing on April 1, 1999, the Company may
redeem, in whole or in part, shares of Series C Preferred Stock for cash at
$1,000 per share, plus any unpaid dividends thereon if the average trading price
of the Common Stock for 20 consecutive days prior to the date of giving notice
of such redemption is not less than 150% of the conversion price then in effect.
In April 1997 the Company sold its 35.3% interest in NLRC for a price of
$13,360,000, of which $12,024,000 was paid in cash and $1,336,000 was paid by
the delivery to the Company of a convertible note due on December 31, 1997. In
August 1997, the $1,336,000 promissory note and the related accrued interest of
$22,480 was converted into 723,911 common shares of Global Equity Corporation, a
Canadian corporation whose shares are traded on the Toronto Stock Exchange and
the Montreal Exchange. The Company had acquired its interest in NLRC in October
1995 for $12,000,000.
On August 8, 1997, the Company announced that it has agreed to purchase the
water rights and fixed assets of the Willows Water District in Arapahoe and
Douglas Counties. Closing is subject to due diligence and is expected to take
place in first half 1998. The agreement provides for a purchase price of $15
million, of which $9.5 million would be paid at closing and the balance over
four years.
12
<PAGE> 13
WESTERN WATER COMPANY AND SUBSIDIARIES
RESULTS OF OPERATIONS
The following is a description of the Company's results of operations for the
three and six months ended September 30, 1997 and 1996.
CONSOLIDATED
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
-----------------------------------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $ 1,140,000 $ 208,000 $ 1,186,000 $ 273,000
=========== =========== =========== ===========
Income (Loss) from Continuing Operations
Before Income Taxes $ (976,000) $(1,011,000) $ (103,000) $(1,986,000)
Income Taxes - - 2,000 2,000
----------- ----------- ----------- -----------
Income (Loss) from Continuing Operations (976,000) (1,011,000) (105,000) (1,988,000)
Discontinued Operations - (15,000) - (31,000)
----------- ----------- ----------- -----------
Net Income (Loss) (976,000) (1,026,000) (105,000) (2,019,000)
Accretion of preferred stock to
redemption value 15,000 - 15,000 -
Preferred stock dividend 195,000 - 195,000 -
----------- ----------- ----------- -----------
Net Income (Loss) applicable to
common stock $(1,186,000) $(1,026,000) $ (315,000) $(2,019,000)
=========== =========== =========== ===========
Net Income (Loss) Common Per Share $ (.14) $ (.13) $ (.04) $ (.25)
</TABLE>
The Company reports its continuing operations in two segments, water rights and
real estate. As a result, upon the purchase of assets that contain both real
estate and water rights, the basis of such assets is allocated to real estate
and water rights based on the relative fair values of the components at the time
of acquisition, and development costs are allocated to the appropriate component
whenever possible. Due to the limited number of comparable water sales in the
Cherry Creek Basin, the Company has relied on periodic evaluations prepared by
independent water engineers to determine the relative fair values of the water
rights acquired by the Company through its purchases of real estate for the
Cherry Creek Project.
Accordingly, as properties or water rights are sold, the allocated portion of
the basis is included in costs of revenue.
Management does not expect there will be taxable income for the fiscal year
ended March 31, 1998. Accordingly, the Company has not recorded a federal income
tax liability and has recorded the minimum state income tax provision for the
three and six months ended September 30, 1997.
13
<PAGE> 14
WESTERN WATER COMPANY AND SUBSIDIARIES
RESULTS OF OPERATIONS (CONTINUED)
WATER RIGHTS
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
-----------------------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $ 650,000 $58,000 $ 696,000 $123,000
Cost of Revenue 698,000 15,000 712,000 29,000
--------- ------- --------- --------
Gross Profit (Loss) $ (48,000) $43,000 $ (16,000) $ 94,000
========= ======= ========= ========
</TABLE>
Water rights revenue for the three and six months ended September 30, 1997
consisted primarily of a one-time sale of water rights in Cherry Creek for
$600,000 and the remaining revenue resulted from payments under the Cucamonga
Water Fee Agreement. Water rights revenue for the three and six months ended
September 30, 1996 resulted from payments under the Cucamonga Fee Agreement.
During Fiscal 1996, the Company acquired an additional 0.4878% interest in the
Cucamonga Water Fee Agreement for $350,000, and now receives payments equal to
3.7398% of certain sales of water by a third party to the Cucamonga County Water
District (San Bernardino County, California). Cost of revenue for the three and
six months ended September 30, 1997 includes the allocated purchase price of the
water rights sold, directly related development costs, sales commissions, other
sales costs and amortization of the Cucamonga Water Fee Agreement.
REAL ESTATE
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
--------------------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $490,000 $150,000 490,000 $150,000
Cost of Revenue 107,000 97,000 107,000 97,000
-------- -------- -------- --------
Gross Profit $383,000 $ 53,000 $383,000 $ 53,000
======== ======== ======== ========
</TABLE>
The Company has a program to dispose of real estate acquired in connection with
the acquisition of water rights, but not needed for water rights development.
The Company retains virtually all of the water rights on the properties sold.
Real estate revenue for the three and six months ended September 30, 1997 was
from the sale of 97 acres of its Cherry Creek property. Real estate revenue for
the three and six months ended September 30, 1996 was from the sale of 35 acres
of its Cherry Creek property. Cost of real estate revenue include the allocated
purchase price of the property sold, directly related development costs, sales
commissions and other sales costs.
14
<PAGE> 15
WESTERN WATER COMPANY AND SUBSIDIARIES
RESULTS OF OPERATIONS (CONTINUED)
GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
--------------------------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
General and Administrative Expenses $1,322,000 $482,000 $2,533,000 $1,060,000
</TABLE>
General and administrative expenses for the three and six months ended September
30, 1997 increased by $840,000 and $1,473,000, respectively, from the comparable
period ended September 30, 1996. The increase was primarily due to additional
salaries and related expenses due to the addition of eight employees and
increased consulting and travel expenses incurred in connection with the
Company's expanded efforts in developing its new water transfer program. In
addition, during the three and six months ended September 30, 1997, the Company
incurred $25,000 and $250,000, respectively, in advisory fees in connection with
programs to finance the acquisition of additional water rights. Legal and
accounting expenses for the three and six months ended September 30, 1997
increased by $177,000 and $137,000, respectively, from the comparable period
ended September 30, 1996. The increase was primarily due to the resolution of
certain outstanding legal matters and increased accounting consultation.
OTHER NON-SEGMENT INFORMATION
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
------------------------------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income $ 322,000 $ 88,000 $ 603,000 $ 174,000
Interest expense (338,000) (360,000) (675,000) (720,000)
Loss from investment in limited
liability company - 321,000 (308,000) (498,000)
Gain on sale of investment in limited
liability company, net 10,000 - 2,436,000 -
</TABLE>
Interest income is comprised of interest earned on the Company's cash reserves
and investments and interest earned on the secured promissory notes received by
the Company in connection with the properties that it has sold. The secured
notes bear interest at rates between 8% and 10% per annum.
Interest income increased for the three and six months ended September 30, 1997
from the comparable period ended September 30, 1996 due to higher investment
balances resulting from proceeds received from the sale of the Company's
investment in NLRC and from the issuance of additional preferred stock.
15
<PAGE> 16
WESTERN WATER COMPANY AND SUBSIDIARIES
RESULTS OF OPERATIONS (CONTINUED)
Interest expense for both fiscal periods includes $337,500 of interest related
to the $15,000,000 principal amount of outstanding Debentures. Interest of
$62,832 and $48,544 and $126,534 and $97,570 on debt incurred in connection with
properties being developed was capitalized for the three and six months ended
September 30, 1997 and 1996, respectively.
The Company accounted for its investment in NLRC under the equity method of
accounting and, accordingly, income or losses were allocated according to the
Company's ownership interest in NLRC. The Company sold its interest in NLRC in
April 1997. In addition, the Company recognized $10,000 and $16,667 of deferred
gain relating to estimated future consulting services that will be provided in
accordance with the Consulting Agreement for the three and six months ended
September 30, 1997.
DISCONTINUED OPERATIONS
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
-------------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Loss from Discontinued Operations $ -- $15,000 $ -- $31,000
===== ======= ===== =======
</TABLE>
During the fourth quarter of fiscal year 1993, the Company adopted a formal plan
to discontinue the silica plant business. As of October 1994, the Board of
Directors determined it was in the best interest of the Company to alter its
plan for disposing of the discontinued silica operations. Under the revised
plan, the Company has been liquidating the silica plant assets rather than
selling the entire operation as a unit. Accordingly, the silica plant business
is reported as a discontinued operation for the period ended September 30, 1996.
Net assets of the discontinued operation at March 31, 1997 consist primarily of
property, plant, and equipment.
The Company completed the sale of the silica plant assets in September 1997.
During the three months and six months ended September 30, 1997, the Company
received $40,000 and $120,000, respectively, from the sale of silica plant
assets. No gain or loss was recognized on the sale since the silica plant assets
were previously written down to reflect this sale.
Loss from the silica plant operations for the three months ended September 30,
1997 amounted to $8,602 and was offset against the accrual for additional
anticipated operating losses.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per share" (SFAS
No. 128"). SFAS No. 128 simplifies the standards for computing earnings per
share and makes them comparable to international earnings per share standards.
It replaces the presentation of primary earnings per share with a presentation
of basic earnings per share. It also requires dual presentation of basic and
diluted earnings per share on the face
16
<PAGE> 17
WESTERN WATER COMPANY AND SUBSIDIARIES
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
of the income statement for all entities with a complex capital structure and
requires a certain reconciliation to be disclosed. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997. The
Company believes that adoption of SFAS No. 128 will not have a material effect
on the earnings per share amounts for future periods.
In addition, the FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure," SFAS No. 130, "Reporting Comprehensive Income," and "SFAS
No. 131, "Disclosure about Segments of an Enterprise and Related Information."
These statements, which are effective for periods beginning after December 15,
1997, expand or modify disclosures and, accordingly, will have no impact on the
Company's reported financial position, results of operations or cash flows.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997 the Company had working capital and a current ratio of
$17,630,997 and 21.91 as compared to $3,787,083 and 4.62, respectively, at March
31, 1997. The Company's liquidity increased primarily due to of net proceeds of
$4,744,788 received from the issuance in April 1997 of $5,000,000 of additional
convertible preferred stock. In addition, the Company received $12,024,000 in
April 1997 from the sale of its interest in NLRC.
Operating Activities. For the six months ended September 30, 1997, the Company
had net loss of $104,900 and net cash used in operating activities of
$2,684,174. Non-cash adjustments of $1,989,692, primarily relating to the gain
on the sale of the Company's interest in NLRC, are the most significant factors
in addition to the net loss that comprised the net cash used in operating
activities.
For the six months ended September 30, 1997, the Company completed its first
sale of water rights and continued to receive revenue from the sale of portions
of its real property located in the Cherry Creek basin. The Company intends to
continue such sales by marketing a significant portion of the additional 1,790
acres it is developing in Cherry Creek. The Company expects that its operating
revenues will continue to be highly volatile.
Future revenue from disposition of real estate will depend on the Company's
ability to dispose of real estate parcels on acceptable terms. There can be no
assurance that such disposition of real estate parcels can be made on acceptable
terms. Revenue from sale of water or water rights will likewise be dependent on
individually negotiated transactions. Revenues from leasing the Company's rice
farms and ranches, from the Cucamonga Water Fee Agreement, and from principal
and interest payments received on promissory notes held by the Company will be
more predictable, but will be insufficient by themselves to cover the Company's
general and administrative expenses and the Company's interest obligations under
the Debentures. Accordingly, until the Company can increase its revenue from
water sales of its own water rights, or of others acting as an agent, the
Company's cash flow will principally be derived from the sale of its remaining
real estate.
The Company's principal business plan is to develop, package and sell its water
and water rights to municipalities and other water users and to provide a
variety of water-related services to unaffiliated owners of water rights.
Accordingly, as a normal course of business, the Company has and plans to enter
17
<PAGE> 18
WESTERN WATER COMPANY AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
into water purchase and sales agreements. These agreements are typically subject
to various conditions which have to be met before a sale or purchase can take
place. Management believes that the Company will not have significant
obligations to purchase or sell water and water rights without other, offsetting
obligations which will minimize its net commitment.
Investing and Financing Activities. In April 1997, the Company received
approximately $4,745,000 of net proceeds from the private placement of an
additional 5,000 shares of its convertible preferred stock at a price of $1,000
per share. In addition, the Company sold its interest in NLRC for a price of
$13,360,000, of which $12,024,000 was paid in cash.
The Company is committed to certain material expenditures over the next several
years, including the following:
o Scheduled payments of principal and interest on existing outstanding
indebtedness, other than the Debentures, for the remainder of the fiscal
year ending March 31, 1998 and fiscal years ending March 31, 1999, 2000,
2001 and 2002 are approximately $240,000, $368,000, $1,055,000, $1,198,000,
and $54,000, respectively.
o The Company is required to make semi-annual interest payments of $675,000 on
the $15,000,000 principal amount of Debentures.
o The holders of Series C Preferred Stock are entitled to receive annual
dividends in the amount of $72.50 per share, payable semi-annually on
January 15 and July 15 of each year (aggregating $652,500 per year). The
first four semi-annual dividend payments (July 15, 1997 through and
including January 15, 1999) to be made with respect to Series C Preferred
Stock may be made, at the sole discretion of the Board of Directors, in cash
or, in full or in part, by issuing additional shares of Series C Preferred
Stock. Thereafter, all dividend payments made with respect to the Series C
Preferred Stock are required to be paid in cash.
The Company believes that its existing capital resources will be sufficient to
fund the Company's foreseeable working capital needs for a period of at least
one year from the date of this report. The Company plans to meet its commitments
thereafter from revenues derived from the sale of water or water rights, from
refinancing or selling its remaining real estate assets and, if necessary, from
future debt or equity financings.
The Company does not believe that inflation has had a material impact on its
results of operations.
On August 8, 1997, the Company announced that it has agreed to purchase the
water rights and fixed assets of the Willows Water District in Arapahoe and
Douglas Counties. Closing is subject to due diligence and is expected to take
place in first half 1998. The agreement provides for a purchase price of $15
million, of which $9.5 million would be paid at closing and the balance over
four years. The Company is considering obtaining financing to effect the
foregoing acquisition. However, in the event the Company uses its existing
capital resources to pay the purchase price of the Willows Water District
assets, it could adversely affect the Company's working capital balances.
18
<PAGE> 19
WESTERN WATER COMPANY AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 1997, the Company entered into a water sale agreement with Santa
Margarita Water District ("SMW") pursuant to which SMW agreed, subject
to certain conditions still to be satisfied, to purchase from a
subsidiary of the Company 10,000 acre-feet of water annually during each
of the next ten years. In September 1997, the Company entered into a
water purchase agreement with the San Bernardino Valley Municipal Water
District ("SBVMWD") pursuant to which the SBVMWD agreed, subject to
certain conditions still to be satisfied, to sell to the Company 100,000
acre-feet of surplus California State Water Project water during the
next ten years. SMW operates within the service area of The Metropolitan
Water District of Southern California ("MWD").
On September 30, 1997, MWD filed a complaint in the Superior Court of
California for the County of Los Angeles against SBVMWD, the Company and
SMW. The complaint seeks injunctive and declaratory relief and a
petition for writ of mandate. The complaint alleges that the Company and
SMW acted as agents or co-conspirators with SBVMWD in attempting to
facilitate the sale of water by SBVMWD in MWD's service area. MWD
alleges that the California constitution and SBVMWD's contract with the
California Department of Water Resources ("DWR") prohibit the sale by
SBVMWD of water into MWD's service area without obtaining the consent of
DWR and MWD. Accordingly, MWD has asked the court to (i) enjoin SBVMWD
from selling its water for use within MWD's service area without the
express written consent of DWR and MWD and (ii) issue a peremptory writ
of mandate directing SBVMWD to set aside its agreement with the Company,
to prepare an environment impact report, and to comply with the
California Environmental Quality Act.
The Company is currently evaluating MWD's complaints. As of the date of
this report, the Company has not yet filed an answer or otherwise
responded to the complaint. The Company believes that this lawsuit will
not have a material adverse impact on the Company's financial condition
or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
27-Financial Data Schedule
(b) No reports on Form 8-K were filed during the prior fiscal
quarter.
19
<PAGE> 20
WESTERN WATER COMPANY AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.
WESTERN WATER COMPANY
Date: October 24, 1997 By: /s/ PETER L. JENSEN
-------------------------
Peter L. Jensen
President
Date: October 24, 1997 By: /s/ RONALD I. SIMON
-------------------------
Ronald I. Simon
Chief Financial Officer
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets, the consolidated statements of income and the
consolidated statements of cash flows and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 11366
<SECURITIES> 6311
<RECEIVABLES> 314
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 18474
<PP&E> 105
<DEPRECIATION> 0
<TOTAL-ASSETS> 44947
<CURRENT-LIABILITIES> 843
<BONDS> 15000
0
8702
<COMMON> 8
<OTHER-SE> 17959
<TOTAL-LIABILITY-AND-EQUITY> 44947
<SALES> 0
<TOTAL-REVENUES> 1186
<CGS> 0
<TOTAL-COSTS> 819
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 675
<INCOME-PRETAX> (103)
<INCOME-TAX> 2
<INCOME-CONTINUING> (105)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (105)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> 0
</TABLE>
