<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 DECEMBER 31, 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
Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
<S> <C> <C>
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 January 22, 1998, there were 8,235,816 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> <C>
1 Financial statements:
Consolidated balance sheets-
December 31, 1997 and March 31, 1997 3
Consolidated statements of operations-
Three months ended December 31, 1997 and 1996 4
Consolidated statements of operations-
Nine months ended December 31, 1997 and 1996 5
Consolidated statements of cash flows-
Nine months ended December 31, 1997 and 1996 6
Notes to consolidated financial statements 7
2 Management's discussion and analysis of financial
condition and results of operations 12
PART II - OTHER INFORMATION
6 Exhibits and Reports on Form 8-K 21
Signatures 22
</TABLE>
2
<PAGE> 3
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
December 31 and March 31, 1997
<TABLE>
<CAPTION>
ASSETS 1997
------------------------------
December 31, March 31,
------------ ------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 7,529,730 $ 3,022,008
Short-term investment in available-for-sale securities 8,908,890 1,034,096
Current portion of notes receivables 317,534 563,629
Other currents assets 724,430 214,170
------------ ------------
Total Current Assets 17,480,584 4,833,903
Notes receivable, less current portion 1,414,807 1,799,094
Land held for sale 3,831,924 5,078,521
Water rights (Note 2) 15,617,140 12,400,686
Other water assets, net of accumulated amortization 3,187,243 3,212,996
Investment in limited liabillity company (Note 3) -- 11,068,188
Debt issue costs, net of accumulated amortization 634,254 695,670
Discontinued operation, net -- 120,000
Property and equipment, net of accumulated depreciation 92,204 108,994
Investment in available-for-sale security 1,722,632 --
Other assets 4,000 157,306
------------ ------------
$ 43,984,788 $ 39,475,358
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 25,408 $ 127,883
Accrued expenses 650,185 682,518
Accrued interest 380,363 119,104
Current maturities of long-term debt 51,138 117,315
------------ ------------
Total Current Liabilities 1,107,094 1,046,820
Deposit -- 100,000
Deferred gain on sale (Note 3) 93,333 --
Long-term debt, less current maturities 1,028,470 2,840,860
9% Convertible subordinated debentures 15,000,000 15,000,000
------------ ------------
Total Liabilities 17,228,897 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
December 31 and March 31, 1997, respectively 8,710,015 --
------------ ------------
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
December 31 and March 31, 1997, respectively -- 3,807,517
Common stock, $0.001 par value, 20,000,000 shares
authorized; 8,235,816 and 8,134,796 shares issued and outstanding at
December 31 and March 31, 1997, respectively 8,236 8,135
Additional paid-in capital 23,975,980 22,705,957
Unrealized gain (loss) on investment securities 363,792 (28,040)
Accumulated deficit ($14,405,252 of accumulated deficit eliminated in
quasi-reorganization of October 1, 1994) (6,302,132) (6,005,891)
------------ ------------
Total Stockholders' Equity 18,045,876 20,487,678
------------ ------------
$ 43,984,788 $ 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 December 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Revenue:
Water $ 196,253 $ 44,953
Real estate 2,500,000 167,500
----------- -----------
2,696,253 212,453
----------- -----------
Cost of Revenue:
Water 140,405 14,581
Real estate 1,322,020 18,913
----------- -----------
1,462,425 33,494
----------- -----------
Gross Profit 1,233,828 178,959
General and Administrative Expenses 1,314,120 639,233
----------- -----------
Operating Income (Loss) (80,292) (460,274)
----------- -----------
Other Income (Expenses):
Interest income 277,435 93,131
Interest expense (337,500) (362,864)
Loss from investment in limited liability company (Note 3) -- (222,097)
Gain on sale of investment in limited liability company, net (Note 3) 10,000 --
Other 156,584 23,548
----------- -----------
106,519 (468,282)
----------- -----------
Income (Loss) from Continuting Operarions
Before Income Taxes 26,227 (928,556)
Income Taxes (Note 5) -- --
----------- -----------
Income (Loss) from Continuing Operations 26,227 (928,556)
Discontinued Operations -- (19,851)
----------- -----------
Net Income (Loss) 26,227 (948,407)
Accretion of preferred stock to redemption value 7,720 --
Preferred stock dividend -- --
----------- -----------
Net Income (Loss) applicable to common stock $ 18,507 $ (948,407)
=========== ===========
Basic and Diluted Net Income (Loss) per common share including effects of
accretion and preferred stock dividend:
Continuing operations
Discontinued operations $ -- $ (0.11)
-- (0.01)
----------- -----------
Net Income (Loss)
$ -- $ (0.12)
=========== ===========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations
Nine months ended December 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Revenue:
Water $ 891,902 $ 168,097
Real estate 2,990,000 317,500
----------- -----------
3,881,902 485,597
----------- -----------
Cost of Revenue:
Water 852,657 43,793
Real estate 1,429,172 116,097
----------- -----------
2,281,829 159,890
----------- -----------
Gross Profit 1,600,073 325,707
General and Administrative Expenses 3,847,403 1,699,502
----------- -----------
Operating Income (Loss) (2,247,330) (1,373,795)
----------- -----------
Other Income (Expenses):
Interest income 880,164 266,717
Interest expense (1,012,500) (1,083,350)
Loss from investment in limited liability company (Note 3) (307,623) (720,209)
Gain on sale of investment in limited liability company, net (Note 3) 2,445,860 --
Other 165,155 (3,851)
----------- -----------
2,171,056 (1,540,693)
----------- -----------
Income (Loss) from Continuting Operarions
Before Income Taxes (76,274) (2,914,488)
Income Taxes (Note 5) 2,400 2,400
----------- -----------
Income (Loss) from Continuing Operations (78,674) (2,916,888)
Discontinued Operations -- (50,943)
----------- -----------
Net Income (Loss) (78,674) (2,967,831)
Accretion of preferred stock to redemption value 22,711 --
Preferred stock dividend 194,856 --
----------- -----------
Net Income (Loss) applicable to common stock $ (296,241) $(2,967,831)
=========== ===========
Basic and Diluted Net Income (Loss) per common share including effects of
accretion and preferred stock dividend:
Continuing operations $ (0.04) $ (0.36)
Discontinued operations -- (0.01)
----------- -----------
Net Income (Loss) $ (0.04) $ (0.37)
=========== ===========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine months ended December 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (78,674) $ (2,967,831)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 126,212 114,584
Compensation expense on unexercised stock options 112,501 --
Gain on sale of investment in limited liability company (2,445,860) --
Loss on disposition of property and equipment 3,423 --
Loss from investment in limited liability company 307,623 720,209
Gain on disposition of available-for-sale securities (12,711) --
Changes in assets and liabilities:
(Increase) decrease in:
Other current assets (510,260) (10,935)
Land held for sale 1,246,597 (224,573)
Other assets 153,306 --
Increase (decrease) in:
Accounts payable (162,717) (188,664)
Accrued expenses (32,333) (32,092)
Accrued interest 261,259 213,306
Deposit (100,000) --
------------ ------------
Net cash used in operating activities (1,131,634) (2,375,996)
------------ ------------
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) (32,161)
Purchase of available-for-sale securities (12,041,416) --
Sales of available-for-sale securities 4,207,373 1,407,754
Sales of water rights 808,913 --
Additions to water rights (2,288,306) --
Purchase of water rights (574,917) (246,381)
Additions to other water assets (17,991) (30,658)
------------ ------------
Net cash provided by investing activities 2,229,968 1,098,554
------------ ------------
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 -- 92,447
Payments to acquire treasury stock (4,519) (726)
Principal payments received on notes receivable 607,542 819,876
Principal payments on notes payable (1,878,567) (153,489)
------------ ------------
Net cash provided by financing activities 3,409,388 758,108
------------ ------------
Net increase (decrease) in cash and cash equivalents 4,507,722 (519,334)
Cash and Cash Equivalents, beginning of period 3,022,008 540,883
------------ ------------
Cash and Cash Equivalents, end of period $ 7,529,730 $ 21,549
============ ============
</TABLE>
See accompanying notes to 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 consolidated
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,
1997, the statements of operations for the three and nine months
ended December 31, 1997 and 1996, and the statements of cash flows
for the nine months ended December 31, 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
The Company adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share" ("SFAS No. 128") effective for the period
ending December 31, 1997. SFAS No. 128 simplifies the standards for
computing earnings per share and makes them comparable to
international earnings per share standards. All prior period earnings
per share ("EPS") data presented were restated to conform to SFAS No.
128.
Basic income earnings per share is computed by dividing earnings
available to common stockholders by the weighted average number of
common shares outstanding during each period. Earnings available to
common shareholders is adjusted to include the Series C Convertible
Redeemable Preferred Stock dividend of $194,856 and accretion of
$22,711 for the nine months ended December 31, 1997. Diluted EPS is
computed by dividing the amount of earnings for the period available
to each share of common stock outstanding during the period by each
share that would have been outstanding assuming the issuance of
common shares for all dilutive potential common shares outstanding
during the reporting period.
7
<PAGE> 8
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following is a reconciliation of the denominator of the Basic EPS
computation to the denominator of the Diluted EPS computation:
<TABLE>
<CAPTION>
Three months ended December 31 Nine months ended December 31
------------------------------ -------------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average shares used for
Basic EPS computation 8,235,852 8,092,312 8,206,524 8,077,285
Incremental shares from the
assumed conversion
of stock options and warrants 67,167 -- -- --
--------- --------- --------- ---------
Adjusted weighted average shares
used for Diluted EPS computation 8,303,019 8,092,312 8,206,524 8,077,285
========= ========= ========= =========
</TABLE>
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 subsequently paid $117,856 related
thereto. The Common Stock issued was recorded at the purchase price
less the amount of the guarantee payment.
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 December 31, 1997, the Global Equity
Corporation shares were valued at $1,722,632 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
8
<PAGE> 9
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 3. INVESTMENT IN LIMITED LIABILITY COMPANY (CONTINUED)
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.
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 nine months ended December 31, 1997, $10,000 and $26,667,
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.
9
<PAGE> 10
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 4. PREFERRED STOCK (CONTINUED)
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, of which
$59,856 was paid in cash and $135,000 was paid through the issuance
of 135 shares of Series C Preferred Stock.
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 nine months ended
December 31, 1997.
NOTE 6. PROPOSED ACQUISITIONS:
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, Colorado. Closing is
subject to the completion of due diligence and the satisfaction of
certain conditions. 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.
On December 15, 1997, the Company announced that it had signed a
Letter of Intent to acquire Vidler Water Company ("Vidler") from
Global Equity Corporation. On January 14, 1998, the Company announced
that negotiations to acquire Vidler had been terminated. Acquisition
costs of approximately $429,000 were expensed in the quarter ended
December 31, 1997 as a result of the proposed transaction.
10
<PAGE> 11
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 7. SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
Nine months ended December 31
--------------------------------
1997 1996
---------- ----------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 928,319 $1,083,350
Interest capitalized during the period 177,078 145,305
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
company liability 93,333 --
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 22,711 --
Common stock issued upon exercise of stock options 13
</TABLE>
11
<PAGE> 12
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 Annual Report
on Form 10-K, 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.
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
12
<PAGE> 13
GENERAL (CONTINUED)
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, Colorado. Closing is subject to the completion of due
diligence and the satisfaction of certain conditions. 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.
On December 15, 1997, the Company announced that it had signed a Letter of
Intent to acquire Vidler Water Company ("Vidler") from Global Equity
Corporation. On January 14, 1998, the Company announced that negotiations to
acquire Vidler had been terminated. Acquisition costs of approximately $429,000
were expensed in the quarter ended December 31, 1997 as a result of the proposed
transaction.
13
<PAGE> 14
RESULTS OF OPERATIONS
The following is a description of the Company's results of operations for the
three and nine months ended December 31, 1997 and 1996.
CONSOLIDATED
<TABLE>
<CAPTION>
Three months ended December 31, Nine months ended December 31
------------------------------- -------------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ 2,696,000 $ 212,000 $ 3,882,000 $ 486,000
=========== =========== =========== ===========
Income (Loss) from Continuing Operations
Before Income Taxes $ 26,000 $ (928,000) $ (76,000) $(2,915,000)
Income Taxes -- -- 2,000 2,000
----------- ----------- ----------- -----------
Income (Loss) from Continuing Operations 26,000 (928,000) (78,000) (2,917,000)
Discontinued Operations
-- (20,000) -- (51,000)
----------- ----------- ----------- -----------
Net Income (Loss) 26,000 (948,000) (78,000) (2,968,000)
Accretion of preferred stock to
redemption value 8,000 -- 23,000 --
Preferred stock dividend
-- -- 195,000 --
----------- ----------- ----------- -----------
Net Income (Loss) applicable to
common stock $ 18,000 $ (948,000) $ (296,000) $(2,968,000)
=========== =========== =========== ===========
Basic and diluted net income (loss)
per common share $ (.00) $ (.12) $ (.04) $ (.37)
</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. 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 nine months ended December 31, 1997.
14
<PAGE> 15
RESULTS OF OPERATIONS (CONTINUED)
WATER RIGHTS
------------
<TABLE>
<CAPTION>
Three months ended December 31, Nine months ended December 31,
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
-------- -------- -------- --------
Revenue $196,000 $ 45,000 $892,000 $168,000
Cost of Revenue 140,000 14,000 853,000 44,000
-------- -------- -------- --------
Gross Profit $ 56,000 $ 31,000 $ 39,000 $124,000
======== ======== ======== ========
</TABLE>
Water rights revenue for the three months ended December 31, 1997 resulted from
the lease of water rights ($150,000) and payments under the Cucamonga Fee
Agreement. In addition, water rights revenue for the nine months ended December
31, 1997 included a one-time sale of water rights in Cherry Creek for $600,000.
Water rights revenue for the three and nine months ended December 31, 1996
resulted from payments received 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 nine
months ended December 31, 1997 includes the allocated purchase price of the
water rights sold, amortization of Cucamonga Fee Agreement costs, directly
related development costs, sales commissions and other sales costs.
REAL ESTATE
<TABLE>
<CAPTION>
Three months ended December 31, Nine months ended December 31,
----------------------------------- ----------------------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue $2,500,000 $ 167,000 2,990,000 $ 318,000
Cost of Revenue 1,322,000 19,000 1,429,000 116,000
---------- ---------- ---------- ----------
Gross Profit $1,178,000 $ 148,000 $1,561,000 $ 202,000
========== ========== ========== ==========
</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 nine months ended December 31, 1997
resulted from the sale of 1,510 and 1,607 acres, respectively, of its Cherry
Creek property. Real estate revenue for the three and nine months ended December
31, 1996 resulted from the sale of 35 and 70 acres, respectively, 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.
15
<PAGE> 16
RESULTS OF OPERATIONS (CONTINUED)
GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
Three months ended December 31, Nine months ended December 31,
-------------------------------- --------------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
General and Administrative Expenses $1,314,000 $ 639,000 $3,847,000 $1,700,000
---------- ---------- ---------- ----------
</TABLE>
General and administrative expenses for the three and nine months ended December
31, 1997 increased by $675,000 and $2,147,000, respectively, from the comparable
periods ended December 31, 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 nine months ended December 31, 1997, the Company
incurred $400,000 and $650,000, respectively, in advisory fees in connection
with programs to finance the acquisition of additional water rights. Legal and
accounting expenses for the three and nine months ended December 31, 1997
increased by $123,000 and $260,000, respectively, from the comparable periods
ended December 31, 1996. The increase was primarily due to the resolution of
certain outstanding legal matters and increased accounting consultation. For the
three-month period ended December 31, 1997, the Company also incurred severance
costs of approximately $128,000 related to the resignation of one of its
officers.
OTHER NON-SEGMENT INFORMATION
<TABLE>
<CAPTION>
Three months ended December 31, Nine months ended December 31,
---------------------------------- ----------------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income $ 277,000 $ 93,000 $ 880,000 $ 267,000
Interest expense (338,000) (363,000) (1,013,000) (1,083,000)
Loss from investment in limited
liability company -- (222,000) (308,000) (720,000)
Gain on sale of investment in limited
liability company, net 10,000 -- 2,446,000 --
</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 nine months ended December 31, 1997
from the comparable period ended December 31, 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.
16
<PAGE> 17
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
$45,276 and $47,735 and $177,078 and $145,305 on debt incurred in connection
with properties being developed was capitalized for the three and nine months
ended December 31, 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 $26,667 of deferred
gain relating to estimated future consulting services that will be provided in
accordance with the Consulting Agreement for the three and nine months ended
December 31, 1997.
DISCONTINUED OPERATIONS
<TABLE>
<CAPTION>
Three months ended December 31, Nine months ended December 31,
------------------------------- ------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Loss from Discontinued Operations $-- $20,000 $-- $51,000
=== ======= === =======
</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
was reported as a discontinued operation for the period ended December 31, 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 nine months ended December 31, 1997, the Company received $120,000
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.
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS No. 128") effective for the period ending December
31, 1997. SFAS No. 128 simplifies the standards for computing earnings per share
and makes them comparable to international earnings per share standards. All
prior period earnings per share data presented were restated to conform to SFAS
No. 128.
The Financial Accounting Standards Board also 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 fiscal years
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.
17
<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997 the Company had working capital and a current ratio of
$16,373,490 and 15.79 to l as compared to $3,787,083 and 4.62 to 1,
respectively, at March 31, 1997. The Company's liquidity increased primarily due
to 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 nine months ended December 31, 1997, the Company
had net loss of $78,674 and net cash used in operating activities of $1,131,631.
Since the Company has sold most of its Cherry Creek real estate properties,
revenues from the sale of real estate in the near future are not expected to be
sufficient to fund the Company's operations. For the nine months ended December
31, 1997, the Company completed its first sale of water rights, realized revenue
from the leasing of its 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 the remaining 280 acres of
real property it owns in Cherry Creek. The Company expects that its operating
revenues will continue to be highly volatile.
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. Revenue
from sale of water or water rights and from the leasing of water rights will be
dependent on individually negotiated transactions. There can be no assurance
that such transactions can be made on acceptable terms. Since the Company has
sold most of its Cherry Creek real estate properties, revenues from the sale of
real estate in the near future are not expected to provide significant cash
flow. Accordingly, the Company's future operations will be funded primarily from
the Company's existing financial resources and from proceeds the Company may
derive from such future water sale/transfer transactions that the Company may
from time to time consummate.
The Company's principal business plan is to develop, package and sell its water
and water rights to municipalities and other water users, to acquire and sell
other water rights, and to provide a variety of water-related services to
unaffiliated owners of water rights. Accordingly, the Company has and plans to
enter into water purchase and water sales agreements. These agreements are
typically subject to various conditions which have to be met before a purchase
or sale can take place. Management intends to structure such agreements so that
the commitments for water purchases and water sales are reasonably in balance.
However, no assurance can be given that management will be able to balance such
agreements in the future.
18
<PAGE> 19
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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:
- - 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 none, $143,000, $829,000, $54,000, and $54,000,
respectively.
- - The Company is required to make semi-annual interest payments of $675,000
on the $15,000,000 principal amount of Debentures.
- - 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 has
elected to pay its entire January 15, 1998 dividend obligation through the
issuance of an additional 331 shares of Series C Preferred Stock.
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, Colorado. Closing is subject to the completion of due
diligence and the satisfaction of certain conditions. 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.
The Company does not expect a significant disruption in operations or any
significant expenditures as a result of computer software issues related to the
year 2000.
19
<PAGE> 20
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, and a
separate, but similar action was filed by the California Department of Water
Resources ("DWR") in the California Superior Court for the County of Sacramento
against SBVMWD and the Company on December 22, 1997. The MWD complaint makes a
number of allegations, including an allegation that the Company and SMW acted as
agents of or co-conspirators with SBVMWD in attempting to facilitate the sale of
State Water Project water by SBVMWD in MWD's service area, and it asks the court
for several considerations, including blocking the sale of State Water Project
water by SBVMWD to the Company for use within MWD's service area without the
written consent of MWD and DWR.
The Company is currently evaluating the complaints of MWD and DWR. As of the
date of this report, the Company has not filed an answer or otherwise responded
to either complaint. While the outcome of these proceedings cannot be predicted,
the Company believes that these lawsuits will not have a material adverse impact
on the Company's financial condition, or results of operations. Until the
lawsuits are settled, the Company does not expect to purchase any water under
its contract with SBVMWD.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on October 15, 1997.
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 approval of the adoption of the Company's 1997 Stock Option Plan; and (iii)
the ratification of the appointment of KPMG Peat Marwick LLP as the independent
accountants of the Company for the fiscal year ending March 31, 1998.
The voting on each proposal was set forth in the table below.
1. Election of director:
Peter L. Jensen FOR WITHHOLD AUTHORITY
6,982,776 0
No other person received any votes.
20
<PAGE> 21
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS (CONTINUED)
2. Adopt the Company's 1997 Stock Option Plan:
FOR AGAINST ABSTENTIONS(a)
4,967,094 481,912 58,980
3. Ratify the appointment of KPMG Peat Marwick LLP as the independent
accountants of the Company for the fiscal year ending March 31, 1998:
FOR AGAINST ABSTENTIONS(a)
6,964,732 22,168 39,038
(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.
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.
21
<PAGE> 22
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: January 29, 1998 By: /s/ Peter L. Jensen
--------------------
Peter L. Jensen
President
Date: January 29, 1998 By: /s/ Ronald I. Simon
--------------------
Ronald I. Simon
Chief Financial Officer
22
<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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-1-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,530
<SECURITIES> 8,909
<RECEIVABLES> 318
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 17,481
<PP&E> 92
<DEPRECIATION> 0
<TOTAL-ASSETS> 43,985
<CURRENT-LIABILITIES> 1,107
<BONDS> 15,000
0
8,710
<COMMON> 8
<OTHER-SE> 18,038
<TOTAL-LIABILITY-AND-EQUITY> 43,985
<SALES> 0
<TOTAL-REVENUES> 3,882
<CGS> 0
<TOTAL-COSTS> 2,282
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,013
<INCOME-PRETAX> (77)
<INCOME-TAX> 2
<INCOME-CONTINUING> (79)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (79)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
