<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1996
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)
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 than the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES X NO
------- -------
As of February 11, 1996, 8,134,796 shares of $0.001 par value common
stock of the Registrant were issued and outstanding.
<PAGE> 2
WESTERN WATER COMPANY AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Page No.
Item 1. Financial statements:
Consolidated balance sheets
December 31, 1996 and March 31, 1996 3
Consolidated statements of operations
Three months ended December 31, 1996 and 1995 5
Consolidated statements of operations
Nine months ended December 31, 1996 and 1995 6
Consolidated statements of cash flows
Nine months ended December 31, 1996 and 1995 7
Notes to consolidated financial statements 9
Item 2. Management's discussion and analysis of financial
condition and results of operations 12
Item 4. Submission of matters to vote of security holders 20
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
WESTERN WATER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, March 31,
1996 1996
(unaudited)
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 21,549 $ 540,883
Investments in marketable securities 1,392,532 2,815,927
Current portion of notes receivable 168,933 343,530
Other current assets 263,589 252,654
----------- -----------
Total current assets 1,846,603 3,952,994
----------- -----------
NOTES RECEIVABLE, less current portion 1,697,147 2,342,426
----------- -----------
ASSETS HELD FOR SALE
Water rights 11,540,954 10,980,964
Real estate 5,851,430 5,626,857
----------- -----------
Total assets held for sale 17,392,384 16,607,821
----------- -----------
OTHER WATER ASSETS 3,221,731 3,234,816
----------- -----------
INVESTMENTS AND OTHER ASSETS
Investment in limited liability company 11,204,900 11,925,109
Deferred tax benefit 1,100,000 1,100,000
Debt issue costs, net 717,059 777,926
Silica plant 557,823 557,823
Property and equipment, net 73,182 50,994
----------- -----------
Total investments and other assets 13,652,964 14,411,852
----------- -----------
$37,810,829 $40,549,909
=========== ===========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
WESTERN WATER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, March 31,
1996 1996
(unaudited)
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 122,241 $ 310,905
Accrued expenses 817,461 636,248
Current maturities of long-term debt 172,691 160,272
------------ ------------
Total current liabilities 1,112,393 1,107,425
------------ ------------
DEPOSIT 100,000 100,000
------------ ------------
LONG-TERM DEBT, LESS CURRENT MATURITIES 3,109,500 3,275,408
------------ ------------
9% CONVERTIBLE SUBORDINATED DEBENTURES 15,000,000 15,000,000
------------ ------------
COMMITMENT AND CONTINGENCIES -- --
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value, 1,000,000
shares authorized; no shares issued or outstanding -- --
Common stock, $0.001 par value, 20,000,000
shares authorized; 8,092,296 and 8,068,486
shares issued at December 31, 1996 and
March 31, 1996, respectively 8,092 8,068
Additional paid-in capital 22,102,172 21,696,867
Unrealized loss on investments (40,079) (24,442)
Retained deficit ($14,405,252 of retained
deficit eliminated in the quasi-reorganization
as October 1, 1994) (3,581,249) (613,417)
------------ ------------
Total stockholders' equity 18,488,936 21,067,076
------------ ------------
$ 37,810,829 $ 40,549,909
============ ============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
WESTERN WATER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended December 31,
1996 1995
----------- -----------
<S> <C> <C>
REVENUES
Water rights $ 44,953 $ 47,884
Real estate 167,500 1,161,460
----------- -----------
Total revenues 212,453 1,209,344
COST OF REVENUES
Water rights 14,581 13,781
Real estate 18,913 978,272
----------- -----------
Total costs of revenues 33,494 992,053
----------- -----------
GROSS PROFIT 178,959 217,291
GENERAL AND ADMINISTRATIVE 639,233 482,042
----------- -----------
OPERATING LOSS (460,274) (264,751)
OTHER INCOME (EXPENSES)
Interest income 93,131 129,890
Interest expense (362,864) (373,633)
Rental income, net (Note 4) 23,048 19,469
Equity in loss of limited liability company (Note 3) (222,097) (101,283)
Other 500 --
----------- -----------
(468,282) (325,557)
----------- -----------
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES (928,556) (590,308)
INCOME TAXES (BENEFIT) -- (236,000)
----------- -----------
LOSS FROM CONTINUING OPERATIONS (928,556) (354,308)
DISCONTINUED OPERATIONS, AFTER TAX EFFECT (19,851) (5,126)
----------- -----------
NET LOSS $ (948,407) $ (359,434)
=========== ===========
PER COMMON SHARE (NOTE 2)
Continuing operations $ (.11) $ (.05)
Discontinued operations (.01) --
----------- -----------
Net Loss $ (.12) $ (.05)
=========== ===========
AVERAGE COMMON SHARES OUTSTANDING 8,092,312 7,910,132
=========== ===========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
WESTERN WATER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended December 31,
1996 1995
----------- -----------
<S> <C> <C>
REVENUES
Water rights $ 168,097 $ 830,027
Real estate 317,500 3,394,852
----------- -----------
Total revenues 485,597 4,224,879
COST OF REVENUES
Water rights 43,793 128,387
Real estate 116,097 1,780,327
----------- -----------
Total costs of revenues 159,890 1,908,714
----------- -----------
GROSS PROFIT 325,707 2,316,165
GENERAL AND ADMINISTRATIVE 1,699,502 1,509,523
----------- -----------
OPERATING INCOME (LOSS) (1,373,795) 806,642
OTHER INCOME (EXPENSES)
Interest income 266,717 319,174
Interest expense (1,083,350) (488,237)
Rental income, net (Note 4) 5,198 29,513
Equity in loss of limited liability company (Note 3) (720,209) (101,283)
Loss on discount of notes receivable -- (196,117)
Other (9,049) 600
----------- -----------
(1,540,693) (436,350)
----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (2,914,488) 370,292
INCOME TAXES 2,400 148,000
----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS (2,916,888) 222,292
DISCONTINUED OPERATIONS, AFTER TAX EFFECT (50,943) (23,136)
----------- -----------
NET INCOME (LOSS) $(2,967,831) $ 199,156
=========== ===========
PER COMMON SHARE (Note 2)
Continuing operations $ (.36) $ .03
Discontinued operations (.01) --
----------- -----------
Net Income (Loss) $ (.37) $ .03
=========== ===========
AVERAGE COMMON SHARES OUTSTANDING 8,077,285 7,909,926
=========== ===========
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 7
WESTERN WATER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended December 31,
1996 1995
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(2,967,831) $ 199,156
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 114,584 64,761
Equity in loss of limited liability company 720,209 101,283
Loss on discount of notes receivable -- 196,117
Changes in assets and liabilities:
Increase (decrease) in:
Notes receivable 819,876 692,257
Other current assets (10,935) (123,769)
Water rights held for sale (246,381) (1,876,371)
Real estate held for sale (224,573) 1,103,678
Other water assets (30,658) (727,033)
Deferred tax benefit -- 126,000
Deferred revenue -- (88,860)
Increase (decrease) in:
Accounts payable and accrued expenses (7,450) 255,222
Notes payable (153,489) (1,039,375)
----------- ------------
Net cash used in operating activities (1,986,648) (1,116,934)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (32,161) (10,060)
Sales of marketable securities 1,407,754 325,000
Investment in limited liability company -- (12,000,000)
Investment in marketable securities -- (3,121,509)
Disposition of assets - silica plant -- 36,000
----------- ------------
Net cash provided by (used in) investing activities 1,375,593 (14,770,569)
----------- ------------
</TABLE>
See accompanying notes to financial statements.
7
<PAGE> 8
WESTERN WATER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended December 31,
1996 1995
--------- ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from options 92,447 --
Net proceeds from issuance of debentures -- 14,345,000
Net debt issue costs -- (163,870)
Payments to acquire treasury stock (726) (8,569)
Other -- 1,985
--------- ------------
Net cash provided by financing activities 91,721 14,174,546
--------- ------------
Net decrease in cash and cash equivalents (519,334) (1,712,957)
CASH AND CASH EQUIVALENTS
Beginning 540,883 2,335,532
--------- ------------
Ending $ 21,549 $ 622,575
========= ============
</TABLE>
See accompanying notes to financial statements.
8
<PAGE> 9
WESTERN WATER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. 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 December 31, 1996 and the results
of their operations and their cash flows for the three and nine months
ended December 31, 1996 and 1995, respectively. The financial
statements are consolidated to include the accounts of Western Water
Company and its subsidiary companies (together "the Company").
Certain 1995 amounts have been reclassified to conform to current
period presentation. These reclassifications have no effect on
previously reported net income.
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, 1996.
NOTE 2. INCOME (LOSS) PER COMMON SHARE
Income (loss) per common share is based on the weighted average number
of common shares outstanding during the period. No material dilution of
earnings per share would result for the periods if it were assumed that
all outstanding stock options were exercised.
The income (loss) per common share computations, and the weighted
average common shares outstanding, for the three and nine month periods
ended December 31, 1995, were adjusted to reflect the effects of the
two-for-one stock split effected in the form of a stock dividend in
fiscal 1996.
9
<PAGE> 10
WESTERN WATER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3. INVESTMENT IN LIMITED LIABILITY COMPANY
Nevada Land and Resource Company, LLC ("NLRC") is a Delaware limited
liability company which is owned 35.3% by the Company and 64.7% by a
joint venture comprised of Morgan Stanley Real Estate Fund II, L.P. and
two other affiliates of that real estate partnership ("Morgan
Stanley"). The Company accounts for its investment in NLRC under the
equity method in accordance with Accounting Principles Board Opinion
No. 18, "The Equity Method of Investments in Common Stock" ("APB 18").
Accordingly, income or losses are allocated in proportion to ownership
interests. The Company consistently maintains a one quarter time lag in
applying the equity method. The Company's equity in the loss of NLRC
was $ 222,097 and $ 720,209 for the three and nine month periods ended
December 31, 1996, respectively. Intercompany profits and losses which
have not been realized have been eliminated, in accordance with APB 18.
The following information reflects the operations of NLRC for the
period of January 1, 1996 to September 30, 1996:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 1996 September 30, 1996
<S> <C> <C>
Net operating revenues $ 1,511,673 $ 2,077,203
General and administrative expenses (2,185,844) (4,252,454)
------------ -----------
Operating loss $ (674,171) $(2,175,251)
============ ===========
</TABLE>
NOTE 4. RENTAL INCOME, NET
Rental income, net is comprised of:
<TABLE>
<CAPTION>
Three months ended December 31, Nine months ended December 31,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Rental income $62,197 $61,482 $171,010 $180,873
Rental expenses 39,149 42,013 165,812 151,360
------- ------- -------- --------
Net $23,048 $19,469 $ 5,198 $ 29,513
======= ======= ======== ========
</TABLE>
10
<PAGE> 11
WESTERN WATER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5. SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITY
In September 1996, the Company issued 16,870 shares of common stock to
acquire 100 acre feet of water rights located in the Central Water
Basin, Los Angeles County, California, for a purchase price of
$320,000. The Company guaranteed the price of its stock, within an
agreed range, and subsequently was required to pay $6,392. The common
stock issued has been recorded at the purchase price less the amount of
the guarantee payment.
NOTE 6. SIGNIFICANT AGREEMENTS
In November 1996, the Company entered into an agreement with J.P.
Morgan Securities Inc. Under the terms of the agreement, J.P. Morgan
will serve as financial advisor and agent for the creation of a special
purpose entity to place approximately $150 million to $200 million of
non-recourse debt securities to fund acquisition of water rights for
the Company.
The water rights, if and when acquired, will be used to supply water to
cities and water districts in Southern California pursuant to long term
contracts. The Company expects water rights to appreciate in value as
Southern California strives to meet its increasing need for municipal
water.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 these 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. The Company undertakes
no obligation to publicly release the results of any revision to these
forward-looking statements. 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 Annual Report on Form 10-K for
the fiscal year ended March 31, 1996, the Quarterly Reports on Form 10-Q filed
by the Company in fiscal 1997 and any Current Reports on Form 8-K by the
Company.
OVERVIEW
The Company was formed in 1984 as Yuba Silica, Inc. Until August 9, 1990, the
Company was a wholly owned subsidiary of Yuba Natural Resources, Inc. ("YNR"), a
publicly-held company. From the time the Company was formed in 1984 until May
1989, the Company's sole business was the sorting and grinding of silica at the
Company's silica plant (the "Silica Plant"). In August 1990, the Company, then
known as YG Development Company, was spun-off from its former parent (the
"Spin-off"). Subsequently, the Company changed its name from YG Development
Company, Inc. to Western Water Company and changed its primary business to (i)
acquiring, owning, developing, packaging and marketing water and water rights,
and (ii) selling real estate properties acquired in connection with its water
rights acquisition program and otherwise. In addition, the Company currently
provides services to unaffiliated third parties in identifying, developing and
marketing water assets owned by such third parties as well as effecting water
transfers from Northern California to Southern California. In October 1994, the
Board of Directors determined that it was in the best interests of the Company
to liquidate the Silica Plant assets.
Due to the significant changes in the Company's business, the continuing
improvement of the Company's earnings potential and a change in direction of the
intended method of disposing of the 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.
12
<PAGE> 13
In a quasi-reorganization, assets and liabilities are restated to current values
as of the date of the reorganization. The amount of increases, however, are
limited to the decreases in other assets. In this regard, effective October 1,
1994, the Company recognized a write down in the value of the Silica Plant of
$1,830,914. 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 real estate held for
resale of $454,604, water rights held for sale $1,038,268, and water sale fees
of $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 be dated to reflect only the results of operations
subsequent to October 1, 1994.
RESULTS OF OPERATIONS
Significant consolidated results are summarized.
CONSOLIDATED
<TABLE>
<CAPTION>
Three months ended December 31, Nine months ended December 31,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 212,000 $ 1,209,000 $ 486,000 $ 4,225,000
=========== =========== =========== ===========
Income (Loss) from
Continuing Operations
before income tax $(1,929,000) $ (590,000) $(2,914,000) $ 370,000
Income taxes (Benefit) -- (236,000) 3,000 148,000
----------- ----------- ----------- -----------
3,000
Net Income (Loss):
Continuing Operations (929,000) (354,000) (2,917,000) 222,000
Discontinued Operations (20,000) (5,000) (51,000) (23,000)
----------- ----------- ----------- -----------
Net Income (Loss) $ (948,000) $ (359,000) $(2,968,000) $ 199,000
=========== =========== =========== ===========
Net Income (Loss) Per Share $ (.12) $ (.05) $ (.37) $ .03
=========== =========== =========== ===========
</TABLE>
The Company reports its continuing operations in two segments, water rights and
real estate. As a result, the basis of each property that is acquired by the
Company is allocated to real estate and water rights based on the relative fair
market values of the components at the time of acquisition, and development
costs are allocated to properties whenever possible. Otherwise they are
allocated based on the relative fair value of the properties. 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 and market value of the water rights.
Accordingly, as properties or water rights are sold, the allocated portion of
the cost basis is included in costs of revenues.
13
<PAGE> 14
In March, 1996, the Company effected a two-for-one stock split in the form of a
100% stock dividend (the "Stock Dividend"). Accordingly, the weighted average
common shares outstanding and per-share information for the prior periods has
been restated to reflect the effects of the Stock Dividend.
WATER RIGHTS
<TABLE>
<CAPTION>
Three months ended December 31, Nine months ended December 31,
1996 1995 1996 1995
---- ---- ----- ----
<S> <C> <C> <C> <C>
Revenues $45,000 $47,000 $168,000 $830,000
Cost of Revenues 15,000 14,000 44,000 128,000
------- ------- -------- --------
Operating Income,
before Corporate
Expenses $30,000 $33,000 $124,000 $702,000
======= ======= ======== ========
</TABLE>
Water rights revenues in the three and nine month periods ended December 31,
1996, consisted primarily of payments under the Cucamonga Water Fee Agreement
under which the Company 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). The costs of revenues in each period consist of
amortization of the Cucamonga Water Fee Agreement.
During the nine-month period ended December 31, 1995, the Company received fees
of $700,000 for acting as agent for the sale of water rights under its agreement
with The Atchison, Topeka and Santa Fe Railway Company. Costs related to the
transaction were $90,000. In addition, the Company received payments in the
three and nine-month periods ended December 31, 1995 from the Cucamonga Water
Fee Agreement, of $40,000 and $110,000, respectively.
14
<PAGE> 15
REAL ESTATE
<TABLE>
<CAPTION>
Three months ended December 31, Nine months ended December 31,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $167,000 $1,161,000 $318,000 $3,395,000
Cost of Revenues 19,000 978,000 116,000 1,780,000
-------- ---------- -------- ----------
Operating Income,
before Corporate Expenses $148,000 $ 183,000 $202,000 $1,615,000
======== ========== ======== ==========
</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 revenues in the current nine-month period were from the sale of 70
acres of its Cherry Creek property. Costs of real estate revenues include the
allocated purchase price of the property sold, directly related development
costs, sales commissions and other sales costs. In the nine months ended
December 31, 1995, the Company also recognized real estate revenues of
$1,938,000 from the sale of 70 acres and the transfer of 257 acres in the Cherry
Creek basin in exchange for certain water rights, and $1,457,000 from the sale
of two portions of the Company's California rice farm and ranch comprising 812
acres.
GENERAL & ADMINISTRATIVE
<TABLE>
<CAPTION>
Three months ended December 31, Nine months ended December 31,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
General & Administrative $639,000 $482,000 $1,700,000 $1,509,000
======== ======== ========== ==========
</TABLE>
General and administrative expenses for the three and nine months ended December
31, 1996 increased from the prior year. Salaries and related expenses increased
due to the addition of two employees, whereas legal expenses decreased due to
the resolution of a lawsuit in fiscal 1996. Consulting and travel expenses also
increased primarily due to the Company's expanded efforts in developing its
water transfer program. During the current periods, the Company also had
amortization costs related to the sale of the $15,000,000 Subordinated
Debentures (the "Debentures"), which amortization amounted to $ 60,000 for the
nine-month period.
15
<PAGE> 16
OTHER NON-SEGMENT INFORMATION
<TABLE>
<CAPTION>
Three months ended December 31, Nine months ended December 31,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest Income $ 93,000 $ 130,000 $ 267,000 $ 319,000
Interest Expense (363,000) (374,000) (1,083,000) (488,000)
Rental Income, net 23,000 19,000 6,000 30,000
Equity in loss of Limited Liability
Company (222,000) (101,000) (720,000) (101,000)
Loss from disposition of assets -- -- -- (196,000)
</TABLE>
Interest income is comprised of interest earned on the Company's cash reserves
and investments and interest earned on the secured promissory notes the Company
received in connection with the properties that it has sold. The secured notes
bear interest at rates between 7% and 10% per annum.
During fiscal 1996, the Company sold or discounted secured promissory notes with
a principal amount of $1,267,000 from its promissory notes portfolio, which
resulted in lower interest income in the current periods as compared to the
prior year. At December 31, 1996, the outstanding balance on notes receivable
was $1,866,000, compared to $3,953,000 on December 31, 1995. These notes will
continue to generate interest income in future periods.
Interest expense increased significantly in the current fiscal year due to
interest expenses related to the $15,000,000 Debentures that were issued in
September 1995. Interest of $164,000 and $169,120 on debt incurred in connection
with the properties being developed for resale was capitalized during the nine
months ended December 31, 1996 and 1995, respectively.
Rental income and expenses are primarily related to the Company's California
rice farm and ranch. The Company also receives miscellaneous rents on certain of
the Cherry Creek, Colorado properties.
The Company is accounting for its investment in NLRC under the equity method of
accounting and, accordingly, income or losses are allocated according to the
ownership interests. For the three and nine months ended December 31, 1996, the
Company has recorded losses of $222,000 and $720,000, respectively. (See
Liquidity and Capital Resources below).
16
<PAGE> 17
DISCONTINUED OPERATIONS
<TABLE>
<CAPTION>
Three months ended December 31, Nine months ended December 31,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Loss from Discontinued Operations $20,000 $5,000 $51,000 $23,000
======= ====== ======= =======
</TABLE>
The Company is accounting for its inactive Silica Plant as discontinued
operations. The Company has engaged an equipment liquidator to sell the Silica
Plant. As of March 31, 1996, the Company had disposed of approximately 45% of
the remaining portion of the Silica Plant's equipment on which it recognized a
loss of $122,000. There have been no equipment sales in the current fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current liquidity was reduced by $519,000 during the nine-month
period ended December 31, 1996 due to lower revenues and increased expenses. As
a result, the Company's current ratio at December 31, 1996 was 1.7 to 1 compared
to 3.6 to 1 on March 31, 1996.
The Company expects to meet its working capital needs in the short term from its
existing capital resources, from proceeds it expects to derive from sales of
its assets and from its other on-going revenue sources.
The Company is currently negotiating with several municipal agencies in Southern
California to provide long-term water supply contracts. As part of this effort,
the Company has received a proposal from a major investment banking firm to
provide financing for these transactions. The proposed financing would enable
the Company to acquire major water interests for resale to municipal agencies,
which water interests the Company could not otherwise acquire with its existing
financial resources.
17
<PAGE> 18
OPERATING ACTIVITIES
During the current nine-month period, the Company had negative cash flow from
operations of $1,987,000. In addition to operating expenses, the Company used
cash reserves of $471,000 for a net increase in assets held for sale and
$153,000 for payments on notes payable. The cash outflow was partially offset by
cash received of $820,000 from payoffs on promissory notes receivable. Other
operating activities used cash of approximately $49,000.
The Company intends to continue sales of portions of its real property located
in the Cherry Creek basin and its rice farm and ranch. The Company expects,
however, that its operating revenues will continue to be highly volatile.
Continued revenues from disposition of real estate will be dependent on the
Company's ability to dispose of real estate parcels on acceptable terms, as to
which there can be no assurance. Revenues from the sale of water or water rights
will likewise be dependent on individually negotiated transactions. Revenues
from leasing the Company's three rice farms, 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 ongoing revenues from water sales of its own water
rights, or acting as an agent for others, the Company's liquidity will be
largely dependent upon its ability to sell real estate.
INVESTING AND FINANCING ACTIVITIES
The Company is committed to certain material expenditures over the next several
years, including the following:
- Scheduled payments of principal and interest on existing
outstanding indebtedness, other than the Debentures, for the
remainder of the fiscal year ending March 31, 1997, and fiscal
years ending March 31, 1998, 1999, 2000 and 2001 are approximately
$14,000, $447,000, $446,000, $1,115,000, and $302,000
respectively. In addition, balloon payments of approximately
$1,664,000 and $135,000 are due in the fiscal years ending March
31, 2002 and 2003, respectively.
- The operating agreement of NLRC provides for additional cash
contributions if the executive committee, comprised of an equal
number of representatives from Morgan Stanley and the Company,
agree that a shortfall exists in the funds available to cover
necessary expenses. In lieu of cash contributions, the executive
committee may elect to obtain such funds through borrowing. The
Company, however, believes that NLRC has sufficient working
capital reserves to meet its requirements for at least one year
and that the Company will not be required to provide any
additional funds during the next twelve months. The Company had
previously announced that NLRC had entered into a non-binding
letter of intent to sell substantially all of NLRC's real estate
properties, which sale would have substantially increased the
Company's liquidity.
18
<PAGE> 19
The proposed sale of the real estate has been terminated. As part
of its plan to resell its real estate holdings, NLRC has recently
entered into an agreement with a major land auction firm to market
portions of NLRC's real estate holdings. The first auctions are
scheduled to be held during the first quarter of 1997. In
addition, to facilitate mineral transactions, NLRC is establishing
a wholly owned subsidiary to hold all of the precious metal rights
and mining royalties on its 1.4 million acre property.
- The Company is required to make semiannual interest payments of
$675,000 on the $15,000,000 principal amount of Debentures, which
payments began March 31, 1996.
19
<PAGE> 20
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on December 4, 1996.
The matters voted upon at the annual meeting were as follows: (i) the election
of one member of the Company's Board of Directors for the ensuing period; (ii)
the amendment of Article IV of the Certificate of Incorporation to increase the
number of authorized shares of Common Stock of the Company from 10,000,000 to
20,000,000 shares; (iii) the amendment of Article IV of the Certificate of
Incorporation to delete the reference to, and description of the previously
outstanding Series A Cumulative Convertible Redeemable Preferred Stock; (iv) the
approval of an amendment to the Company's 1993 Stock Option Plan to increase
from 400,000 to 800,000 the number of shares available for option grant; and (v)
the ratification of the appointment of Harlan & Boettger as the independent
accountants of the Company for the fiscal year ending March 31, 1997.
The voting on each proposal was set forth in the table below.
1. Election of directors:
Common stock
FOR WITHHOLD AUTHORITY
William D. Watt 6,803,693 -0-
No other person received any votes.
2. Amend the Certificate of Incorporation to increase the authorized
number of shares:
FOR AGAINST ABSTENTIONS (a)
6,636,169 Common stock 76,104 Common stock 27,083 Common stock
3. Amend the Certificate of Incorporation to delete any references to the
Series A Preferred Stock:
FOR AGAINST ABSTENTIONS (a)
4,086,287 Common stock 50,016 Common stock 36,580 Common stock
20
<PAGE> 21
4. Amend the Company's 1993 Stock Option Plan:
FOR AGAINST ABSTENTIONS (a)
6,551,516 Common stock 143,023 Common stock 44,884 Common stock
5. Ratify the appointment of Harlan & Boettger as the independent
accountants of the Company for the fiscal year ending March 31, 1997:
FOR AGAINST ABSTENTIONS (a)
6,751,505 Common stock 15,508 Common stock 28,016 Common stock
(a) Does not include "broker non-votes", which are abstentions by nominee
holders on behalf of beneficial owners who have given no instructions
to the nominee holder. When such nominee has no authority to vote
absent such instructions, the nominee is required to abstain from
voting, even though present or represented at the meeting. Such "broker
non-votes" are not considered present and entitled to vote with respect
to the referenced proposals and therefore have no effect on the outcome
of the vote.
21
<PAGE> 22
PART II - OTHER INFORMATION
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) None
22
<PAGE> 23
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: February 11, 1997 By: /s/ Peter L, Jensen
-------------------
Peter L. Jensen
President
Date: February 11, 1997 By: /s/ Edward A. Beeman
--------------------
Edward A. Beeman
Chief Financial Officer
23
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