<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, 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)
<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 29, 1999, there were 8,239,816 shares of registrant's common stock
issued.
<PAGE> 2
WESTERN WATER COMPANY AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item Page
- ---- ----
<S> <C>
1 Financial statements:
Consolidated balance sheets-
December 31 and March 31, 1998 3
Consolidated statements of operations-
Three months ended December 31, 1998 and 1997 4
Consolidated statements of operations-
Nine months ended December 31, 1998 and 1997 5
Consolidated statements of comprehensive income-
Three and nine months ended December 31, 1998 and 1997 6
Consolidated statements of cash flows-
Nine months ended December 31, 1998 and 1997 7
Notes to consolidated financial statements 8
2 Management's discussion and analysis of financial
condition and results of operations 14
PART II - OTHER INFORMATION
3 Legal Proceedings 21
6 Exhibits and Reports on Form 8-K 22
Signatures 23
</TABLE>
2
<PAGE> 3
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
December 31 and March 31, 1998
<TABLE>
<CAPTION>
1998
-----------------------------------
ASSETS December 31, March 31,
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,469,718 $ 304,988
Investment in available-for-sale securities 14,580,036 16,453,147
Current portion of notes receivable 215,742 215,292
Deposits 178,000 37,500
Other current assets 923,482 377,561
------------ ------------
Total Current Assets 18,366,978 17,388,488
Notes receivable, less current portion 1,184,065 1,386,403
Land held for sale 4,501,482 3,960,277
Water rights, net 19,034,199 15,264,710
Prepaid leasing costs, net (Note 2) 3,533,522 --
Other water assets, net 3,151,545 3,188,357
Debt issue costs, net 633,021 613,782
Property and equipment, net 117,103 85,951
Other assets 156,719 4,000
------------ ------------
$ 50,678,634 $ 41,891,968
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 109,498 $ 19,274
Accrued expenses and other liabilities 313,938 732,954
Accrued interest 373,932 67,663
Current maturities of long-term debt (Note 2) 1,228,721 51,138
------------ ------------
Total Current Liabilities 2,026,089 871,029
Long-term debt, less current maturities (Note 2) 3,129,349 1,028,470
9% Convertible subordinated debentures 15,000,000 15,000,000
Deferred gain on sale 53,333 83,333
------------ ------------
Total Liabilities 20,208,771 16,982,832
Series C convertible redeemable preferred stock, $1,000 stated value, 100,000
shares authorized; 9,809 and 9,466 shares issued and outstanding (aggregate
liquidation preference of $9,809,000 and $9,466,000)
at December 31 and March 31, 1998, respectively 9,416,759 9,049,033
Series D convertible redeemable preferred stock, $1,000 stated value, 25,000
shares authorized; 10,000 and zero shares issued and outstanding (aggregate
liquidation preference of $10,000,000 and zero)
at December 31 and March 31, 1998, respectively (Note 3) 10,000,000 --
Stockholders' equity:
Common stock, $0.001 par value, 20,000,000 shares
authorized; 8,239,816 and 8,235,816 shares issued
at December 31 and March 31, 1998, respectively 8,240 8,236
Additional paid-in capital 24,322,181 24,198,539
Accumulated other comprehensive income (loss) (375,180) 117,233
Accumulated deficit ($14,405,252 of accumulated deficit eliminated in
quasi-reorganization of October 1, 1994) (12,336,411) (8,463,905)
Treasury stock, at cost, 117,600 and zero shares at December 31, 1998
and March 31, 1998, respectively (Note 4) (565,726) --
------------ ------------
Total Stockholders' Equity 11,053,104 15,860,103
------------ ------------
$ 50,678,634 $ 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 December 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Revenue:
Water $ 758,847 $ 196,253
Real estate -- 2,500,000
------------- -------------
758,847 2,696,253
------------- -------------
Costs of Revenue:
Water 728,768 140,405
Real estate -- 1,322,020
------------- -------------
728,768 1,462,425
------------- -------------
Gross Profit 30,079 1,233,828
General and Administrative Expenses 1,312,223 1,314,120
------------- -------------
Operating Income (Loss) (1,282,144) (80,292)
Other Income (Expenses):
Interest income 216,120 277,435
Interest expense (398,119) (337,500)
Gain on sale of investment in limited liability company 10,000 10,000
Other 16,100 156,584
------------- -------------
(155,899) 106,519
Income (Loss) before Income Taxes (1,438,043) 26,227
Income Taxes (Note 6) -- --
------------- -------------
Net Income (Loss) (1,438,043) 26,227
Accretion of preferred stock to redemption value (8,355) (7,720)
Preferred stock dividends (104,166) --
------------- -------------
Net Income (Loss) Applicable to Common Stockholders $ (1,550,564) $ 18,507
============= =============
Basic and diluted net income (loss) per common share
applicable to common stockholders $ (0.19) $ --
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations
Nine months ended December 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Revenue:
Water $ 904,208 $ 891,902
Real estate 345,615 2,990,000
------------- -------------
1,249,823 3,881,902
------------- -------------
Costs of Revenue:
Water 759,158 852,657
Real estate 184,000 1,429,172
------------- -------------
943,158 2,281,829
------------- -------------
Gross Profit 306,665 1,600,073
General and Administrative Expenses 3,654,986 3,847,403
------------- -------------
Operating Income (Loss) (3,348,321) (2,247,330)
Other Income (Expenses):
Interest income 657,126 880,164
Interest expense (1,073,119) (1,012,500)
Loss from investment in limited liability company -- (307,623)
Gain on sale of investment in limited liability company 30,000 2,445,860
Other (Note 5) 336,100 165,155
------------- -------------
(49,893) 2,171,056
Income (Loss) before Income Taxes (3,398,214) (76,274)
Income Taxes (Note 6) 2,400 2,400
------------- -------------
Net Income (Loss) (3,400,614) (78,674)
Accretion of preferred stock to redemption value (24,578) (22,711)
Preferred stock dividends (447,314) (194,856)
------------- -------------
Net Income (Loss) Applicable to Common Stockholders $ (3,872,506) $ (296,241)
============= =============
Basic and diluted net income (loss) per common share
applicable to common stockholders $ (0.47) $ (0.04)
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Three and nine months ended December 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
December 31,
-----------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Net income (loss) applicable to common stockholders $ (1,550,564) $ 18,507
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) arising during period (67,341) 19,035
Reclassification adjustment-realized holding gains -- --
------------- -------------
Other comprehensive income (loss) (67,341) 19,035
------------- -------------
Comprehensive income (loss) $ (1,617,905) $ 37,542
============= =============
</TABLE>
<TABLE>
<CAPTION>
Nine months ended
December 31,
-----------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Net income (loss) applicable to common stockholders $ (3,872,506) $ (296,241)
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) arising during period (492,413) 404,545
Reclassification adjustment-realized holding gains -- (12,713)
------------- -------------
Other comprehensive income (loss) (492,413) 391,832
------------- -------------
Comprehensive income (loss) $ (4,364,919) $ 95,591
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
WESTERN WATER COMPANY AND SUBSIDIARIES
Statements of Cash Flows
Nine months ended December 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (3,400,614) $ (78,674)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 365,784 126,212
Compensation expense on vesting of unexercised
compensatory stock options 96,646 112,501
Gain on sale of investment in limited liability company (30,000) (2,445,860)
Loss from investment in limited liability company -- 307,623
(Gain) loss on disposition of available-for-sale securities -- (12,711)
(Gain) loss on disposition of property and equipment 1,982 3,423
Allowance against water rights 429,282 --
Changes in assets and liabilities:
(Increase) decrease in:
Other current assets (545,921) (510,260)
Land held for sale (541,205) 1,246,597
Other assets (159,882) 153,306
Increase (decrease) in:
Accounts payable 90,224 (162,717)
Accrued expenses and other liabilities (427,454) (32,333)
Accrued interest 306,269 261,259
Deposit -- (100,000)
------------ ------------
Net cash used in operating activities (3,814,889) (1,131,634)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits for purchase of land and water rights (140,500) --
Proceeds from disposition of discontinued operation -- 120,000
Proceeds from sale of investment in limited liability company liability company -- 12,024,000
Principal payments received on notes receivable 201,888 607,542
Purchase of property and equipment (53,034) (7,688)
Purchase of available-for-sale securities (10,604,022) (12,041,416)
Sales of available-for-sale securities 11,984,720 4,207,373
Sales of water rights -- 808,913
Additions to water rights (982,891) (574,917)
Purchase of water rights (3,215,880) (2,288,306)
Additions to other water assets (6,932) (17,991)
Prepayment of leasing costs (3,754,400) --
------------ ------------
Net cash provided by investing activities (6,571,051) 2,837,510
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 3,560,000 --
Proceeds from issuance of common stock 27,000 --
Proceeds from issuance of redeemable
preferred stock 10,000,000 5,000,000
Payment of debt issue costs (84,900) --
Payment of private placement costs -- (255,212)
Preferred stock dividends (104,166) (59,856)
Purchase of common stock (565,726) (4,519)
Principal payments on long-term debt (281,538) (1,878,567)
------------ ------------
Net cash provided by (used in) financing activities 12,550,670 2,801,846
------------ ------------
Net increase in cash and cash equivalents 2,164,730 4,507,722
Cash and cash equivalents, beginning of period 304,988 3,022,008
------------ ------------
Cash and cash equivalents, end of period $ 2,469,718 $ 7,529,730
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
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 December 31, 1998, the
statements of operations, comprehensive income and cash flows for the
three and nine months ended December 31, 1998 and 1997. The financial
statements are consolidated to include the accounts of Western Water
Company and its subsidiaries, two corporations 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
annual report on Form 10-K for the fiscal year ended March 31, 1998.
Water Rights
The Company capitalizes costs directly relating to water rights
projects under development that are considered probable. Effective July
1, 1998, the Company adopted a policy of providing an allowance for
these costs, based upon the Company's historical experience with
similar projects. For the three and nine months ended December 31,
1998, the Company recorded a provision of $144,555 and $429,282,
respectively. This amount is recorded as a reduction to water rights on
the balance sheet.
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. 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.
No tax benefit has been recorded for the current year's unrealized
holding losses as management does not expect that the Company will
generate taxable income for the fiscal year ended March 31, 1999.
Income (loss) per share
Basic net income per share is computed by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding during each period. Diluted net income per share is
computed by dividing the amount of net income 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.
8
<PAGE> 9
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
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
------------------------------ ------------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average shares used for
Basic EPS computation 8,214,849 8,235,852 8,229,398 8,206,524
Incremental shares from the
assumed conversion
of stock options and warrants -- 67,167 -- --
--------- --------- --------- ---------
Adjusted weighted average shares
used for Diluted EPS computation 8,214,849 8,303,019 8,229,398 8,206,524
========= ========= ========= =========
</TABLE>
Stock options to purchase 1,663,208 shares of common stock at exercise
prices ranging from $5.44-$21.00 for the three and nine months ended
December 31, 1998 were not included in the computation of diluted net
income per share as their effect would have been antidilutive. Stock
options to purchase 1,057,398 shares of common stock at exercise prices
ranging from $5.44-$18.18 for the nine months ended December 31, 1997
were not included in the computation of diluted net income per share as
their effect would have been antidilutive.
Warrants to purchase 20,000 shares of common stock at $5.75 per share
were not included in the computation of diluted net income per share
for the three months ended December 31, 1998 as their effect would have
been antidilutive. Warrants to purchase 98,000 of common stock at
$17.50 per share were not included in the computation of diluted net
income per share for the three and nine months ended December 31, 1998
and 1997 as their effect would have been antidilutive.
Convertible debentures, Series C redeemable preferred stock and Series
D redeemable preferred stock convertible into the following number of
shares of common stock at conversion prices of $15.86, $8.99 and $16.62
per share, respectively, were not included in the computation of
diluted net income per share for the three and nine months ended
December 31, 1998 and 1997 as their effect would have been
antidilutive:
<TABLE>
<CAPTION>
Three and nine months ended December 31,
----------------------------------------
1998 1997
------------- ------------------
<S> <C> <C>
Convertible debentures 945,763 945,763
Series C redeemable preferred stock 569,551 549,625
Series D redeemable preferred stock 1,112,347 --
</TABLE>
Reclassifications
Certain reclassifications of prior period amounts have been made in
order to conform to the current year presentation.
9
<PAGE> 10
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 2. PREPAID LEASING COSTS:
On September 30, 1998, the Company entered into a pumping rights lease
and a water sale agreement with the City of Inglewood, California
("City"). Beginning October 1, 1998, the City leased the rights to pump
4,450 acre-feet of water per year to the Company for a five-year
period. In consideration of the lease, the Company made a $3,603,200
lump-sum cash payment to the City. Under the water sale agreement, the
Company agreed to sell, and the City agreed to buy, 5,950 acre-feet of
water each year for the next five years. In the first year, the City
will pay $200 per acre-foot ($1,190,000). The per acre-foot price will
escalate over the remaining four-year period at a rate equal to the sum
of 3.75% per year plus 25% of any increase in the Metropolitan Water
District's ("MWD") rate for water, as defined. For the three months
ended December 31, 1998, the Company recognized revenue of $320,665 as
a result of the agreement with the City.
The Company financed the pumping rights lease lump-sum payment through
a $3,560,000 five-year amortizing term loan. The loan was obtained from
a commercial bank and is secured by the Company's rights under the
pumping rights lease with the City in addition to the water rights
associated with the other 1,500 acre-feet of water to be sold to the
City by the Company during the term of the loan. Principal payments of
$140,000 per quarter (for the first year) and interest on the loan are
due quarterly. The loan accrues interest at the bank's Reference Rate
or LIBOR (capped at 6%) plus 1.5%, at the Company's option. Scheduled
payments of principal on this loan for the remainder of the fiscal year
ending March 31, 1999 and fiscal years ending March 31, 2000, 2001,
2002 and 2003 are $280,000, $594,000, $668,000, $794,000 and $832,000,
respectively.
In order to secure a portion of the water that the Company agreed to
sell to the City, the Company entered into a five-year and a
fifteen-year water rights lease during the three months ended September
30, 1998. The five-year water rights lease is expected to provide 1,008
acre-feet per year for a payment of $150 per acre-foot in the first
year ($151,200), which was prepaid. This amount will escalate over the
remaining four-year period at $7.50 per acre-foot per year. The
fifteen-year water rights lease is expected to provide 250 acre-feet
per year for a payment of $135 per acre-foot in the first year
($33,750). The fees for subsequent years will be determined by
multiplying the fee for the first year by the ratio of the index price
for each subsequent year divided by the index price for the first year.
The index price is the sum of the price established by the MWD for full
service untreated water and the price components established by the
West Basin Municipal Water District for the MWD readiness-to-serve
charge and the West Basin surcharge for basic non-interruptible water.
The remaining 242 acre-feet of water to be supplied to the City is
owned by the Company.
In October 1998, the Company began recognizing water sale revenue on a
straight-line basis over the life of the agreement with the City.
Concurrently, the Company began amortizing the prepaid leasing costs
associated with the pumping rights lease and the two water rights
leases on a straight-line basis over the life of the leases.
10
<PAGE> 11
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 3. SERIES D CONVERTIBLE REDEEMABLE PREFERRED STOCK:
On October 27, 1998, the Company sold $10,000,000 of its Series D
Convertible Redeemable Preferred Stock ("Series D Preferred Stock") to
an affiliate of Sociedad General de Aguas de Barcelona, S. A.
("Agbar"). Each share of Series D Preferred Stock has a stated value of
$1,000, has a dividend rate of 7.5% of its stated value, and is
convertible at any time at the option of the holder into the number of
shares of common stock determined by dividing the amount of the
liquidation preference on the conversion date by the conversion price
of such shares in effect on the conversion date. The conversion price
is $8.99 per share and is subject to adjustment in certain events to
prevent dilution. Agbar has also agreed to make up to three subsequent
$5,000,000 purchases of Series D Preferred Stock to fund capital
expenditures of the Company, as needed for water projects which Agbar
approves, during the next two years (which can be extended to four
years by mutual agreement).
Commencing on October 1, 2007 and continuing through September 30,
2008, each holder of the Series D Preferred Stock may, from time to
time during such period, at such holder's option, cause the Company to
redeem up to one-half of the shares of Series D Preferred Stock held by
such holder on October 1, 2007 for cash, out of funds legally
available. Commencing on October 1, 2008, each holder of shares of
Series D 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 D Preferred Stock. The redemption price for each share of Series
D Preferred Stock will be $1,000 per share, plus, in each case, all
declared and unpaid dividends, if any.
In the event of any liquidation or winding up of the Company, the
holders of Series D Preferred Stock will be entitled to receive an
amount equal to $1,000 per share plus all declared but unpaid dividends
on the Series D Preferred Stock. The liquidation rights granted to the
holders of Series D Preferred Stock will be pari passu with the
liquidation rights granted to the holders of Series C Preferred Stock
and senior to the liquidation rights of any other shares of capital
stock of the Company. A merger, consolidation, sale of assets or other
transaction in which control of the Company is transferred will be
treated as a liquidation for the purpose of the Agbar agreement unless
holders of more than 50% of the shares of Series D Preferred Stock
otherwise agree.
11
<PAGE> 12
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 4. TREASURY STOCK PURCHASE PROGRAM:
In November 1998, the Company's Board of Directors authorized the
repurchase of up to 500,000 shares of the Company's common stock in the
open market. For the three months ended December 31, 1998, the Company
repurchased 117,600 shares of common stock at a cost of $565,726.
NOTE 5. 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 certain outstanding shares of Integrated Water Technologies,
Inc., an unaffiliated water consulting company. In exchange for this
option, one of the former officers agreed to the cancellation of 56,858
stock options to purchase Company common stock at $5.4375, and
additional options to purchase 296,000 shares of the 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, the sale of the option resulted in the Company
recognizing other income of $290,637 for the three months ended June
30, 1998.
NOTE 6. 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 nine months ended December 31, 1998.
12
<PAGE> 13
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 7. SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
Nine months ended December 31,
------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 830,056 $ 928,319
Interest capitalized during the period 78,508 177,078
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
Convertible redeemable preferred stock -- 3,807,517
Deferral (recognition) of gain on sale of investment in limited
Liability company -- 93,333
Issuance of note receivable in conjunction with sale of limited
Liability company -- 1,336,000
Conversion of note receivable and related accrued interest
Receivable into investment in available-for-sale security:
Note receivable -- (1,336,000)
Other current assets -- (22,840)
------------- -------------
-- (1,358,840)
Accretion of preferred stock to redemption value 24,578 22,711
Common stock issued upon exercise of stock options 4 13
Preferred stock issued in lieu of cash dividends 343,148 135,000
Unrealized gain (loss) on available-for-sale securities (492,413) 391,832
Disposition of property and equipment
and related accumulated depreciation:
Property and equipment (2,477) (21,502)
Accumulated depreciation 495 18,079
</TABLE>
13
<PAGE> 14
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 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 Stock at a conversion price of $15.86 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
14
<PAGE> 15
WESTERN WATER COMPANY AND SUBSIDIARIES
GENERAL (CONTINUED)
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 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.
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
common shares of Global Equity Corporation ("Global"), which was acquired by
PICO Holdings, Inc., whose shares are traded on the Nasdaq Stock Exchange. The
Company had acquired its interest in the Nevada LLC in October 1995 for
$12,000,000. In connection with the sale, the Nevada LLC entered into a
consulting agreement with Western Agua, L.P. (the "Consulting Agreement").
Western Agua, L.P. is a Delaware limited partnership formed by the Company and
Western Land Joint Venture, an unaffiliated company. The Company owns a 70%
interest in Western Agua, L.P. and is the sole general partner of the
partnership. In exchange for providing consulting services to the Nevada LLC,
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
the Nevada LLC or refinancing of the Nevada LLC or other revenues derived from
the disposition of the Nevada LLC by Global after they both recoup their
investment in the Nevada LLC 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. See "Item 3. Legal
Proceedings," below.
On October 27, 1998, the Company sold $10,000,000 of its Series D Convertible
Redeemable Preferred Stock ("Series D Preferred Stock") to an affiliate of
Sociedad General de Aguas de Barcelona, S. A. ("Agbar"). Each share of Series D
Preferred Stock has a stated value of $1,000, has a dividend rate of 7.5% of its
stated value, and is convertible at any time at the option of the holder into
the number of shares of common stock determined by dividing the amount of the
liquidation preference on the conversion date by the conversion price of such
shares in effect on the conversion date. Dividends are paid quarterly in cash.
The conversion price is $8.99 per share and is subject to adjustment in certain
events to prevent dilution.
15
<PAGE> 16
WESTERN WATER COMPANY AND SUBSIDIARIES
RESULTS OF OPERATIONS
The following is a description of the Company's results of operations for the
three and nine months ended December 31, 1998 and 1997.
CONSOLIDATED
<TABLE>
<CAPTION>
Three months ended December 31, Nine months ended December 31,
------------------------------- ----------- -------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ 759,000 $ 2,696,000 $ 1,250,000 $ 3,882,000
=========== =========== =========== ===========
Income (Loss) Before Income Taxes $(1,438,000) $ 26,000 $(3,399,000) $ (76,000)
Income Taxes -- -- 2,000 2,000
----------- ----------- ----------- -----------
Net Income (Loss) (1,438,000) 26,000 (3,401,000) (78,000)
Accretion of preferred stock to
redemption value (8,000) (8,000) (25,000) (23,000)
Preferred stock dividends (104,000) -- (447,000) (195,000)
----------- ----------- ----------- -----------
Net Income (Loss) applicable to
common stockholders $(1,550,000) $ 18,000 $(3,873,000) $ (296,000)
=========== =========== =========== ===========
Basic and diluted net income (loss)
applicable to common stockholders $ (.19) $ (.00) $ (.47) $ (.04)
=========== =========== =========== ===========
</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 generate 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 and nine months ended December 31, 1998.
The preferred stock dividends for the three months ended December 31, 1998
represent dividends paid in cash on the Series D Preferred Stock and all other
dividends for the periods reported represent dividends paid in cash and
additional shares of preferred stock on the Series C Preferred Stock.
WATER RIGHTS
<TABLE>
<CAPTION>
Three months ended December 31, Nine months ended December 31,
------------- ------------- ------------- -------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue $ 759,000 $ 196,000 $ 904,000 $ 892,000
Cost of Revenue 729,000 140,000 759,000 853,000
------------- ------------- ------------- -------------
Gross Profit $ 30,000 $ 56,000 $ 145,000 $ 39,000
============= ============= ============= =============
</TABLE>
16
<PAGE> 17
WESTERN WATER COMPANY AND SUBSIDIARIES
Water rights revenue for the three months ended December 31, 1998 resulted from
$691,000 of water sales to the Santa Margarita Water District and the City of
Inglewood as well as payments received under the Cucamonga Fee Agreement. In
addition, water rights revenue for the nine months ended December 31, 1998
included revenue from the lease of water rights ($33,000). Water rights revenue
for the three months ended December 31, 1997 resulted from the lease of water
rights ($150,000) and payments received 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. Cost of
revenue for the three and nine months ended December 31, 1998 includes $714,000
of fees and lease costs related to the water sales to the Santa Margarita Water
District and the City of Inglewood and amortization of the Cucamonga Water Fee
Agreement. Cost of revenue for the three and nine months ended December 31, 1997
includes the allocated purchase price of the water rights sold, directly related
development costs, sales commissions, other sales costs and amortization of the
Cucamonga Water Fee Agreement.
The small gross margin (4%) for the water transactions for the three months
ended December 31, 1998 is not indicative of gross margins that the Company
expects to realize on similar water transactions in the future. Water revenue
for the three months ended December 31, 1998 included a sale to the Santa
Margarita Water District in a pilot program in cooperation with the Metropolitan
Water District of Southern California. Taking into account all costs and
expenses related to the pilot transaction, the Company incurred a net loss of
$110,000 on that transaction, which net loss negatively impacted the gross
margin for the period.
REAL ESTATE
<TABLE>
<CAPTION>
Three months ended December 31, Nine months ended December 31,
------------------------------ ------------------------------
1998 1997 1998 1997
----- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue $- $2,500,000 $ 346,000 $2,990,000
Cost of Revenue -- 1,322,000 184,000 1,429,000
----- ---------- ---------- ----------
Gross Profit $- $1,178,000 $ 162,000 $1,561,000
===== ========== ========== ==========
</TABLE>
The Company attempts to dispose of real estate acquired in connection with the
acquisition of water rights, but not needed for water rights development. The
Company retains a substantial portion of its water rights on the properties
sold. Real estate revenue for the nine months ended December 31, 1998 resulted
from the sale of 72 acres of Cherry Creek property and 20 acres of property sold
in Glenn County, California. 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. 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 December 31, Nine months ended December 31,
------------------------------ ------------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
General and Administrative Expenses $1,312,000 $1,314,000 $3,655,000 $3,847,000
</TABLE>
17
<PAGE> 18
WESTERN WATER COMPANY AND SUBSIDIARIES
General and administrative expenses for the three months ended December 31, 1998
decreased by $2,000 from the comparable period ended December 31, 1997. The
decrease was primarily due to $400,000 of one-time advisory fees in connection
with a proposed acquisition incurred during the three months ended December 31,
1997, which were not incurred during the three months ended December 31, 1998.
This decrease was offset, in part, by increased consulting and engineering
expenses ($177,000) primarily in connection with the Company's expanded efforts
in developing its water transfer program, from an allowance against water rights
projects under development ($145,000) and various other general and
administrative categories ($76,000). General and administrative expenses for the
nine months ended December 31, 1998 decreased by 5%, or $192,000 from the
comparable period ended December 31, 1997. The decrease in general and
administrative expenses was primarily due to $650,000 of one-time advisory fees
in connection with a proposed acquisition incurred during the nine months ended
December 31, 1997, which were not incurred during the nine months ended December
31, 1998, and a decrease of $423,000 in bonus and severance paid for the nine
months ended December 31, 1998 as compared to the nine month period ended
December 31, 1997. These decreases were offset in part by the $429,000 allowance
against water rights projects under development, increased consulting and
engineering expenses of $293,000, increased salaries and fringe benefits of
$96,000, and $74,000 of payroll taxes paid by the Company in connection with the
exercise of stock options by a former officer during the nine months ended
December 31, 1998.
OTHER NON-SEGMENT INFORMATION
<TABLE>
<CAPTION>
Three months ended December 31, Nine months ended December 31,
----------------------------------- -----------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest income $ 216,000 $ 277,000 $ 657,000 $ 880,000
Interest expense (398,000) (338,000) (1,073,000) (1,013,000)
Loss from investment in limited
liability company -- -- -- (308,000)
Gain on sale of investment in
limited liability company, net 10,000 10,000 30,000 2,446,000
Other 16,000 157,000 336,000 165,000
</TABLE>
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 and nine months ended December 31, 1998 from the
comparable periods ended December 31, 1997 due primarily 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 expense
for the three months ended December 31, 1998 also includes $60,000 of interest
related to the $3,420,000 principal amount on the outstanding term loan.
Interest of $19,470 and $50,544 and $78,508 and $177,078 was capitalized during
the three and nine months ended December 31, 1998 and 1997, respectively, in
connection with the development of land held for sale and water rights.
18
<PAGE> 19
WESTERN WATER COMPANY AND SUBSIDIARIES
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 $30,000 of the deferred gain during the three
and nine months ended December 31, 1998, respectively.
Other income for the nine months ended December 31, 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 selling to
two of its former officers its 40% interest in an option to purchase certain
shares of stock of Integrated Water Technologies, Inc.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998 the Company had working capital and a current ratio of
$16,340,889 and 9.07 to l, as compared to $16,517,459 and 19.96 to 1,
respectively, at March 31, 1998.
Operating Activities
For the nine months ended December 31, 1998, the Company had a net loss of
$3,400,614 and net cash used in operating activities of $3,814,889. Since the
Company has sold most of its Cherry Creek real estate properties, revenues from
the sale of real estate in the future are not expected to be sufficient to fund
the Company's operations. In the past, the Company had received most of its
revenue from the sale of real estate, but it does not expect real estate sales
to be as significant in future periods.
The Company has recently entered into water lease and sale transactions that are
expected to generate certain recurring water revenues. However, while revenues
from water sales, leasing the Company's rice farms and ranches, from the
Cucamonga Fee Agreement, and cash received from principal and interest payments
on promissory notes held by the Company will be more predictable than periodic
income received on historic sales of real estate assets, such recurring revenues
will be insufficient for some time into the future to cover general and
administrative expenses, interest on outstanding indebtedness and dividends
declared on its outstanding preferred stock. Revenue from sale of water or water
rights and from the leasing of water rights will continue to be dependent on
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.
On September 30, 1998, the Company entered into a pumping rights lease and a
water sale agreement with the City of Inglewood, California ("City"). On October
1, 1998, the City leased the rights to pump
19
<PAGE> 20
WESTERN WATER COMPANY AND SUBSIDIARIES
4,450 acre-feet of water per year to the Company for a five-year period. In
consideration of the lease, the Company made a $3,603,200 lump-sum cash payment
to the City. Under the water sale agreement, the Company agreed to sell, and the
City agreed to buy, 5,950 acre-feet of water per year for the next five years at
a price of $200 per acre-foot in the first year ($1,190,000). The per acre-foot
price will escalate over the remaining four-year period at a rate equal to the
sum of 3.75% per year plus 25% of any increase in the Metropolitan Water
District's ("MWD") rate for water, as defined.
On December 24, 1998, the Company completed a pilot water sale in cooperation
with MWD. For the first time in its 70-year history, MWD exchanged water with a
private company for delivery within MWD's service territory. As a result of this
agreement, the Company completed a transfer of 1,000 acre-feet of water to the
Santa Margarita Water District and recognized revenue of $370,755. The
transaction involves water previously purchased by the Company in Central
California for $63,000. The water was delivered into the State Water Project,
where it was then conveyed to MWD by the California Department of Water
Resources. In exchange, MWD will store, treat and deliver the water to the
Municipal Water District of Orange County, and ultimately to the Santa Margarita
Water District over the ensuing year. The Company will pay MWD a total of
$410,313 for its participation in the pilot program. After considering other
related costs of $7,778, the Company realized a net loss of $110,336 on the
transaction. Although the foregoing transaction negatively impacted the
Company's liquidity, the Company completed the transaction as a pilot program.
The foregoing pilot program is not indicative of future water sales, and the
Company does not intend to regularly engage in such transactions.
INVESTING AND FINANCING ACTIVITIES
The Company is committed to certain material expenditures over the next several
years, including the following:
o 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 $140,000, $1,246,000, $697,000,
$781,000, and $903,000, respectively.
o The Company is required to make semi-annual interest payments of $675,000 on
the $15,000,000 principal amount of Debentures.
o The holders of Series C Preferred Stock are entitled to receive, 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 were paid by cash and the issuance of additional shares of
Series C Preferred Stock. In the future, however, all dividend payments made
with respect to the Series C Preferred Stock will have to be paid in cash.
o Commencing December 15, 1998, the holders of Series D Preferred Stock are
entitled to receive, when and if declared, annual dividends in the amount of
$75 per share, payable quarterly on March 15, June 15, September 15, and
December 15 of each year (aggregating $750,000 per year).
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.
20
<PAGE> 21
WESTERN WATER COMPANY AND SUBSIDIARIES
The Company formed a project team to identify Year 2000 impacts, resolve Year
2000 problems and implement compliance plans. The Company has completed its
inventory and assessment of Year 2000 implications for vendor-supplied software
and hardware. The Company has no internally developed software. The Company
developed a plan for converting impacted items, and has completed the conversion
at a cost of approximately $1,500. Consequently, the Company does not expect
that there will be any material adverse effect on the Company's business,
results of operations or financial condition as a result of Year 2000 problems
with its computer systems and operations.
The Company has initiated discussions with its significant vendors in order to
assess their ability to successfully resolve the Year 2000 issue. Most of the
Company's vendors have confirmed that they already are or will be Year 2000
compliant. In addition, the Company receives payments from a variety of
external sources. Although the Company has made reasonable efforts to identify
and protect itself with respect to external Year 2000 problems, there can be no
assurance that the Company will not be affected by such problems. The Company
will consider the necessity of implementing a contingency plan to mitigate any
adverse effects associated with the Year 2000 issue, should one arise.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, February 1998, June 1998 and October 1998, the Financial
Accounting Standards Board issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," SFAS No. 132, "Employers' Disclosure about
Pensions and Other Postretirement Benefits -an amendment of FASB Statements No.
87, 88 and 106," SFAS No.133, "Accounting for Derivative Instruments and Hedging
Activities", and SFAS No. 134, "Accounting for Mortgage-Backed Securities
Retained After the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise", respectively. The Company anticipates that the adoption of
SFAS Nos. 131, 132, 133 and 134 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 3. LEGAL PROCEEDINGS
As described in "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations-General," above, the Company is the general
partner of Western Agua, L.P. ("Western Agua"), a partnership that agreed to
provide consulting services to the Nevada LLC pursuant to the Consulting
Agreement. The Nevada LLC purported to terminate the Consulting Agreement on
March 13, 1998 based on Western Agua's purported willful breach of the
Consulting Agreement. On November 10, 1998, Western Agua filed an action in the
San Diego Superior Court against the Nevada LLC for breach of contract, specific
performances and an accounting relating to the Consulting Agreement. Western
Agua's complaint seeks a judicial declaration that the Consulting Agreement is
not terminated and remains in full force and effect. On December 23, 1998, the
Nevada LLC filed a cross-complaint against Western Agua, the Company, and Peter
L. Jensen, the Company's Chairman of the Board. The cross-complaint contains
claims for breach of contract, breach of fiduciary duty, concealment, negligent
misrepresentation and declaratory relief, and seeks compensatory damages in
excess of $100,000, an order enjoining cross-defendants from the development,
sale and/or management of sale of water in areas prohibited by section 5 of the
Consulting Agreement, and a judicial declaration that cross-defendants have
breached the Consulting Agreement and that the Nevada LLC has not. The Company
does not believe that the Nevada LLC has any grounds for terminating the
Consulting Agreement. Should, however, the court determine that the Consulting
Agreement has been validly terminated, Western Agua and the Company would lose
their right to receive part of certain net proceeds, if any, that the Nevada LLC
may derive from the sale or other disposition of the Nevada LLC's properties.
Cross-defendants have yet to respond to the cross-complaint, but intend to mount
a vigorous defense to its claims.
21
<PAGE> 22
WESTERN WATER COMPANY AND SUBSIDIARIES
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) A Current Report on Form 8-K dated October 27, 1998 was filed on
November 25, 1998 to report matters under Item 5 of Form 8-K.
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: January 29, 1999 By: /s/ Michael Patrick George
--------------------------
Michael Patrick George
President and Chief Executive Officer
Date: January 29, 1999 By: /s/ Ronald I. Simon
-------------------
Ronald I. Simon
Chief Financial Officer
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS, THE CONSOLIDATED STATMENTS OF OPERATIONS 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-31-1999
<PERIOD-START> APR-1-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,470
<SECURITIES> 14,580
<RECEIVABLES> 216
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 18,367
<PP&E> 177
<DEPRECIATION> (60)
<TOTAL-ASSETS> 50,679
<CURRENT-LIABILITIES> 2,026
<BONDS> 15,000
0
19,417
<COMMON> 8
<OTHER-SE> 11,045
<TOTAL-LIABILITY-AND-EQUITY> 50,679
<SALES> 0
<TOTAL-REVENUES> 1,250
<CGS> 0
<TOTAL-COSTS> 943
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,073
<INCOME-PRETAX> (3,399)
<INCOME-TAX> 2
<INCOME-CONTINUING> (3,401)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,041)
<EPS-PRIMARY> (0.47)
<EPS-DILUTED> (0.47)
</TABLE>
