<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 JUNE 30, 1998
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)
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
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 July 24, 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>
1 Financial statements:
Consolidated balance sheets-
June 30 and March 31, 1998 3
Consolidated statements of operations-
Three months ended June 30, 1998 and 1997 4
Consolidated statements of comprehensive income-
Three months ended June 30, 1998 and 1997 5
Consolidated statements of cash flows-
Three months ended June 30, 1998 and 1997 6
Notes to consolidated financial statements 7
2 Management's discussion and analysis of financial
condition and results of operations 10
PART II - OTHER INFORMATION
6 Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
2
<PAGE> 3
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
June 30 and March 31, 1998
<TABLE>
<CAPTION>
ASSETS 1998
-----------------------------------
June 30, March 31,
------------ ------------
<S> <C> <C>
(Unaudited)
Current assets:
Cash and cash equivalents $ 1,557,701 $ 304,988
Investment in available-for-sale securities 12,157,313 16,453,147
Current portion of notes receivable 206,855 215,292
Deposits (Note 2) 1,649,500 37,500
Other current assets 538,521 377,561
------------ ------------
Total Current Assets 16,109,890 17,388,488
Notes receivable, less current portion 1,300,292 1,386,403
Land held for sale 3,831,924 3,960,277
Water rights 16,246,014 15,264,710
Other water assets, net 3,175,707 3,188,357
Debt issue costs, net 593,310 613,782
Property and equipment, net 100,758 85,951
Other assets 4,000 4,000
------------ ------------
$ 41,361,895 $ 41,891,968
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 101,323 $ 19,274
Accrued expenses and other liabilities 391,487 732,954
Accrued interest 376,322 67,663
Current maturities of long-term debt 655,240 51,138
------------ ------------
Total Current Liabilities 1,524,372 871,029
Long-term debt, less current maturities 403,416 1,028,470
9% Convertible subordinated debentures 15,000,000 15,000,000
Deferred gain on sale 73,333 83,333
------------ ------------
Total Liabilities 17,001,121 16,982,832
Series C convertible redeemable preferred stock, $1,000 stated
value, 100,000 shares authorized; 9,466 shares issued and
outstanding (aggregate liquidation preference of $9,466,000)
at June 30 and March 31, 1998, respectively 9,057,065 9,049,033
Stockholders' equity:
Common stock, $0.001 par value, 20,000,000 shares
authorized; 8,235,816 shares issued and outstanding
at June 30 and March 31, 1998, respectively 8,236 8,236
Additional paid-in capital 24,225,539 24,198,539
Accumulated other comprehensive income (loss) (63,669) 117,233
Accumulated deficit ($14,405,252 of accumulated
deficit eliminated in quasi-reorganization of October 1, 1994) (8,866,397) (8,463,905)
------------ ------------
Total Stockholders' Equity 15,303,709 15,860,103
------------ ------------
$ 41,361,895 $ 41,891,968
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations
Three months ended June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Revenue:
Water $ 80,774 $ 45,592
Real estate 278,115 --
----------- -----------
358,889 45,592
----------- -----------
Costs of Revenue:
Water 14,581 14,581
Real estate 128,352 --
----------- -----------
142,933 14,581
----------- -----------
Gross Profit 215,956 31,011
General and Administrative Expenses 886,756 1,211,188
----------- -----------
Operating Income (Loss) (670,800) (1,180,177)
Other Income (Expenses):
Interest income 245,532 280,771
Interest expense (337,500) (337,500)
Loss from investment in limited liability company -- (307,623)
Gain on sale of investment in limited liability company 10,000 2,425,860
Other (Note 3) 360,708 (7,940)
----------- -----------
278,740 2,053,568
Income (Loss) before Income Taxes (392,060) 873,391
Income Taxes (Note 4) 2,400 2,400
----------- -----------
Net Income (Loss) (394,460) 870,991
Accretion of preferred stock to redemption value (8,032) --
----------- -----------
Net Income (Loss) Applicable to Common Stockholders $ (402,492) $ 870,991
=========== ===========
Basic and diluted net income (loss) per common share
applicable to common shareholders $ (0.05) $ 0.11
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Three months ended June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Net income (loss) applicable to common stockholders $(402,492) $ 870,991
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) arising during period (180,902) 15,438
Reclassification adjustment, net of tax -- (3,427)
--------- ---------
Other comprehensive income (loss) (180,902) 12,011
--------- ---------
Comprehensive income (loss) $(583,394) $ 883,002
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
WESTERN WATER COMPANY AND SUBSIDIARIES
Statements of Cash Flows
Three months ended June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (394,460) $ 870,991
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 40,558 42,668
Compensation expense on vesting of unexercised
compensatory stock options 27,000 --
Gain on sale of investment in limited liability company (10,000) (2,425,860)
Loss from investment in limited liability company -- 307,623
Loss on disposition of property and equipment 1,982 --
Changes in assets and liabilities:
(Increase) decrease in:
Other current assets (160,960) (54,841)
Land held for sale 128,353 --
Other assets -- 1,609
Increase (decrease) in:
Accounts payable 82,049 4,737
Accrued expenses and other liabilities (341,467) 145,158
Accrued interest 308,659 346,966
------------ ------------
Net cash used in operating activities (318,286) (760,949)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits for purchase of land and water rights (1,612,000) --
Proceeds from disposition of discontinued operation -- 120,000
Proceeds from sale of investment in limited liability company liability company -- 12,024,000
Closing costs paid in conjunction with the sale of investment in
limited liability company -- (60,242)
Principal payments received on notes receivable 94,548 329,402
Purchase of property and equipment (22,294) (7,688)
Purchase of available-for-sale securities (208,415) (7,105,411)
Sales of available-for-sale securities 4,323,347 203,427
Additions to water rights (333,859) (111,172)
Purchase of water rights (647,445) (518,857)
Additions to other water assets (1,931) (9,900)
------------ ------------
Net cash provided by investing activities 1,591,951 4,863,559
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of redeemable
preferred stock -- 5,000,000
Payment of private placement costs -- (255,212)
Principal payments on long-term debt (20,952) (19,399)
------------ ------------
Net cash provided by (used in) financing activities (20,952) 4,725,389
------------ ------------
Net increase in cash and cash equivalents 1,252,713 8,827,999
Cash and cash equivalents, beginning of period 304,988 3,022,008
------------ ------------
Cash and cash equivalents, end of period $ 1,557,701 $ 11,850,007
============ ============
</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 AND PRACTICES:
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 June 30, 1998, the
statements of operations, comprehensive income and cash flows for the
three months ended June 30, 1998 and 1997. The financial statements are
consolidated to include the accounts of Western Water Company and its
subsidiaries, a corporation and two limited partnerships ("the
Company").
The accounting policies followed by the Company are set forth in Note 1
to the Company's consolidated financial statements as stated in its
report on Form 10-K for the fiscal year ended March 31, 1998.
Reporting Comprehensive Income
On April 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No.
130 requires the reporting of comprehensive income in addition to net
income from operations. Comprehensive income is a more inclusive
financial reporting methodology that includes disclosure of certain
financial information that historically has not been recognized in the
calculation of net income.
At June 30, 1998 and 1997 the Company held available-for-sale
securities which had pretax unrealized holding gains (losses) of
$(180,902) and $15,438 for the three months ended June 30, 1998 and
1997, respectively. No tax benefit was recorded as management does not
expect that the Company will recognize taxable income for the fiscal
year ended March 31, 1999.
Income (loss) per share
Basic earnings per share is computed by dividing earnings available to
common stockholders by the weighted average number of common shares
outstanding during each period. Diluted earnings per share 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 potentially dilutive common shares outstanding during the reporting
period. The weighted average shares used for basic and diluted earnings
per share were 8,235,816 and 8,146,924 shares for the three months
ended June 30, 1998 and 1997, respectively.
7
<PAGE> 8
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES: (CONTINUED)
Income (loss) per share (continued)
Stock options to purchase the following number of shares of common
stock at exercise prices ranging from $5.44-$18.70 for the three months
ended June 30, 1998 and 1997 were not included in the computation of
diluted earnings per share as their effect would have been
antidilutive:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Stock options 1,704,066 1,087,398
</TABLE>
Warrants to purchase 98,000 of common stock at $17.50 per share were
not included in the computation of diluted earnings per share for the
three months ended June 30, 1998 and 1997 as their effect would have
been antidilutive.
Convertible debentures, redeemable preferred stock and preferred stock
convertible into the following number of shares of common stock at
conversion prices of $15.86, $16.62 and $16.62 per share, respectively,
were not included in the computation of diluted earnings per share for
the three months ended June 30, 1998 and 1997 as their effect would
have been antidilutive:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Convertible debentures 945,763 945,763
Redeemable preferred stock 569,551 541,516
</TABLE>
Reclassifications
Certain reclassifications of prior period amounts have been made in
order to conform to the current year presentation.
NOTE 2. DEPOSITS:
During June 1998, the Company deposited $1,538,450 towards the purchase
of a 244-acre dairy farm located in San Bernardino County, California.
The cash purchase of $1,538,450, including closing costs, was completed
in July 1998. The Company intends to market the real property and all
personal property related to such real estate and retain the rights to
909 acre-feet of water that were acquired as part of the purchase.
8
<PAGE> 9
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 3. OTHER INCOME:
On June 30, 1998, the Company entered into an agreement with two of its
former officers to sell its 40% interest in an option to purchase
approximately 30% of the outstanding stock of Integrated Water
Technologies, Inc. In exchange for its 40% interest one of the former
officers agreed to pay the Company, on or before September 1, 1998,
$150,000 in cash, or an equivalent value of Company stock options, as
defined, currently held by the former officer. If the former officer
does not complete the purchase by September 1, 1998, then the Company
retains the 40% interest. Irrespective of the outcome of the foregoing,
options to purchase 296,000 shares of Western Water Company stock by
these two former officers were cancelled as of the date of the
agreement. In addition, the Company's obligation to pay $290,637 of the
remaining severance costs recorded in the prior fiscal year ended March
31, 1998 to one of the former officers, was cancelled as of May 15,
1998. Accordingly, this resulted in the Company recognizing other
income of $290,637 for the three months ended June 30, 1998.
NOTE 4. INCOME TAXES:
Management does not expect there will be taxable income for the fiscal
year ended March 31, 1999. Accordingly, the Company has not recorded a
federal income tax liability and has recorded the minimum state income
tax provision for the three months ended June 30, 1998.
NOTE 5. SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
Three months ended June 30,
---------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 51,680 $ 54,236
Interest capitalized during the period 38,140 63,702
Cash paid during the period for income taxes 2,400 2,400
Supplemental disclosure of noncash investing and financing
activities:
Water rights acquired in exchange for common stock -- 1,162,144
Exchange of Series B convertible preferred stock
for Series C redeemable preferred stock -- 3,807,517
Deferral (recognition) of gain on sale of investment in limited
liability company (10,000) 113,333
Issuance of note receivable in conjunction with
sale of limited liability company -- 1,336,000
Accretion of preferred stock issuance costs 8,032 --
Common stock issued upon exercise of stock options -- 13
Unrealized gain (loss) on available-for-sale securities (180,902) (12,011)
Write-off of property and equipment
and related accumulated depreciation:
Property and equipment (2,477) --
Accumulated depreciation 495 --
</TABLE>
9
<PAGE> 10
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 Annual Report
on Form 10-K for the year ended March 31, 1998, the Quarterly Reports on Form
10-Q to be filed by the Company in 1998 and 1999, 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 other water assets ($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. Accumulated deficit reflects 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
10
<PAGE> 11
WESTERN WATER COMPANY AND SUBSIDIARIES
GENERAL (CONTINUED)
Stock at a conversion price of $15.865 per share, subject to certain
anti-dilution adjustments (the "Conversion Price"). 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 February 1997, the Company issued $4,000,000 of its Series B Convertible
Preferred Stock to two institutional investors, and in April 1997, the Company
issued an additional $5,000,000 of its Series C Convertible Redeemable Preferred
Stock ("Series C Preferred Stock"). 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 and if declared by the
Board of Directors, out of funds legally available therefor, dividends at the
annual rate of 7.25% of the stated value of the Series C Preferred Stock ($1,000
per share). 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.
On July 15, 1998, the Company paid dividends of $343,148, all of which was paid
through the issuance of 343 shares of its Series C Preferred Stock. 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. Commencing on April 1, 2006 and continuing
until March 31, 2007, each holder of shares 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.
In April 1997 the Company sold its 35.3% interest in Nevada Land & Resources
Company, LLC (the "Nevada LLC") 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 $22,840 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 the Nevada LLC in October 1995 for
$12,000,000.
11
<PAGE> 12
WESTERN WATER COMPANY AND SUBSIDIARIES
RESULTS OF OPERATIONS
The following is a description of the Company's results of operations for the
three months ended June 30, 1998 and 1997.
CONSOLIDATED
<TABLE>
<CAPTION>
Three months ended June 30,
-----------------------------
1998 1997
--------- ---------
<S> <C> <C>
Revenue $ 359,000 $ 46,000
========= =========
Income (Loss) Before Income Taxes $(392,000) $ 873,000
Income Taxes 2,000 2,000
--------- ---------
Net Income (Loss) (394,000) 871,000
Accretion of preferred stock to
redemption value 8,000 --
--------- ---------
Net Income (Loss) applicable to
common stockholders $ 402,000) $ 871,000
========= =========
Basic and diluted net income (loss)
applicable to common stockholders $ (.05) $ .11
========= =========
</TABLE>
The Company reports its 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 valuations 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 that the Company will recognize any taxable income
for the fiscal year ended March 31, 1999. Accordingly, the Company has not
recorded a federal income tax liability and has recorded the minimum state
income tax provision for the three months ended June 30, 1998.
WATER RIGHTS
<TABLE>
<CAPTION>
Three months ended June 30,
---------------------------
1998 1997
--------- --------
<S> <C> <C>
Revenue $81,000 $46,000
Cost of Revenue 15,000 15,000
------- -------
Gross Profit $66,000 $31,000
======= =======
</TABLE>
Water rights revenue for the three months ended June 30, 1998 resulted from the
lease of water rights ($33,000) and payments received under the Cucamonga Fee
Agreement. Water rights revenue for the three months ended June 30, 1997
resulted from payments received under the Cucamonga Fee Agreement. Cost of
revenue for the three months ended June 30, 1998 and 1997 consists of
amortization of the Cucamonga Water Fee Agreement.
12
<PAGE> 13
WESTERN WATER COMPANY AND SUBSIDIARIES
REAL ESTATE
<TABLE>
<CAPTION>
Three months ended June 30,
---------------------------
1998 1997
-------- -----
<S> <C> <C>
Revenue $278,000 $ --
Cost of Revenue 128,000 --
-------- -----
Gross Profit $150,000 $ --
======== =====
</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 months ended June 30, 1998 resulted from the
sale of 72 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.
GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
Three months ended June 30,
--------------------------
1998 1997
--------- ----------
<S> <C> <C>
General and Administrative Expenses $ 887,000 $1,211,000
</TABLE>
General and administrative expenses for the three months ended June 30, 1998
decreased by 27%, or $324,000, from the comparable period ended June 30, 1997.
The decrease was primarily due to $225,000 of advisory fees incurred during the
three months ended June 30, 1997 which were not incurred during the three months
ended June 30, 1998 and a decrease of $117,000 in payroll and related expenses
incurred during the three months ended June 30, 1997, relating to officers that
resigned in the latter part of Fiscal 1998, that were not incurred during the
three months ended June 30, 1998.
OTHER NON-SEGMENT INFORMATION
<TABLE>
<CAPTION>
Three months ended June 30,
---------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Interest income $ 246,000 $ 281,000
Interest expense (338,000) (338,000)
Loss from investment in limited
liability company -- (308,000)
Gain on sale of investment in
limited liability company, net 10,000 2,426,000
Other 361,000 (8,000)
</TABLE>
13
<PAGE> 14
WESTERN WATER COMPANY AND SUBSIDIARIES
Interest income is comprised of interest earned on the Company's cash and cash
equivalents 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 decreased for the three months ended June 30, 1998 from the
comparable period ended June 30, 1997 due to lower investment balances.
Interest expense for both fiscal periods includes $337,500 of interest related
to the $15,000,000 principal amount of outstanding Debentures. Interest of
$38,140 and $63,702 was capitalized during the three months ended June 30, 1998
and 1997, respectively, in connection with the development of land held for sale
and water rights.
The Company accounted for its investment in the Nevada LLC under the equity
method of accounting and, accordingly, income or losses were allocated according
to the Company's ownership interest in the Nevada LLC. The Company sold its
interest in the Nevada LLC in April 1997. As a result of the sale, the Company
realized a gain of $2,419,193 net of legal and other closing costs totaling
$60,242 and deferred gain of $120,000 relating to estimated future consulting
services that are to be provided in accordance with the Consulting Agreement.
The Company realized $10,000 and $6,667 of the deferred gain during the three
months ended June 30, 1998 and 1997, respectively.
Other income for the three months ended June 30, 1998 includes the reversal of
$290,637 of severance costs recorded in the prior fiscal year related to the
resignation of an officer. This reversal resulted from the Company entering into
an agreement with two of its former officers to sell its interest in an option
to purchase approximately 30% of the outstanding stock of Integrated Water
Technologies, Inc.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998 the Company had working capital and a current ratio of
$14,585,518 and 10.57 to l as compared to $16,517,459 and 19.96 to 1,
respectively, at March 31, 1998.
Operating Activities
For the three months ended June 30, 1998, the Company had a net loss of $394,460
and net cash used in operating activities of $318,286. The Company deposited
$1,538,450 towards the purchase of a 244-acre dairy farm in San Bernardino
County, California. 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 three
months ended June 30, 1998, the Company 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 cash received from principal and interest payments 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
14
<PAGE> 15
WESTERN WATER COMPANY AND SUBSIDIARIES
individually negotiated transactions. There can be no assurance that such
transactions can be made on acceptable terms. Accordingly, the Company's future
operations will be funded primarily from the Company's existing financial
resources, from financing it may arrange using debt or equity 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 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.
Investing and Financing Activities
The Company is committed to certain material expenditures over the next several
years, including the following:
- - Scheduled payments of principal on existing outstanding indebtedness for
the remainder of the fiscal year ending March 31, 1999 and fiscal years
ending March 31, 2000, 2001, 2002 and 2003 are $30,000, $742,000, $29,000,
$32,000, and $71,000, 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, when and
if declared, 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 July 15, 1998 dividend obligation
through the issuance of an additional 343 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.
Software issues related to the year 2000 do not materially affect the Company's
water or real estate assets or the Company's services or competitive conditions.
Accordingly, 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.
15
<PAGE> 16
WESTERN WATER COMPANY AND SUBSIDIARIES
NEW ACCOUNTING PRONOUNCEMENTS
During June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Company
anticipates that the adoption of SFAS No. 133 will not have a material effect on
the financial position, results of operations or liquidity of the Company, nor
result in disclosures that will be materially different from those presently
included in its financial statements.
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) No reports on Form 8-K were filed during the prior fiscal quarter.
16
<PAGE> 17
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: July 24, 1998 By: /s/ Michael P. George
---------------------
Michael P. George
President
Date: July 24, 1998 By: /s/ Ronald I. Simon
-------------------
Ronald I. Simon
Chief Financial Officer
17
<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> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,558
<SECURITIES> 12,157
<RECEIVABLES> 207
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,110
<PP&E> 147
<DEPRECIATION> (46)
<TOTAL-ASSETS> 41,362
<CURRENT-LIABILITIES> 1,524
<BONDS> 15,000
0
9,057
<COMMON> 8
<OTHER-SE> 15,296
<TOTAL-LIABILITY-AND-EQUITY> 41,362
<SALES> 0
<TOTAL-REVENUES> 359
<CGS> 0
<TOTAL-COSTS> 143
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 338
<INCOME-PRETAX> (392)
<INCOME-TAX> 2
<INCOME-CONTINUING> (394)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (394)
<EPS-PRIMARY> (0.05)<F1>
<EPS-DILUTED> (0.05)
<FN>
<F1>For Purposes of This Exhibit, Primary means Basic.
</FN>
</TABLE>
