<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
FORM 10-Q
------------------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
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)
(858) 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
</TABLE>
<TABLE>
<S> <C>
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.001 PAR VALUE
RIGHT TO PURCHASE SERIES E JUNIOR PARTICIPATING
PREFERRED 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 November 11, 1999, there were 7,894,012 shares of registrant's common
stock outstanding.
<PAGE> 2
WESTERN WATER COMPANY AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item Page
- ---- ----
<S> <C>
1 Financial statements:
Consolidated balance sheets-
September 30 (unaudited) and March 31, 1999 3
Unaudited consolidated statements of operations and
comprehensive income-
Three months ended September 30, 1999 and 1998 4
Unaudited consolidated statements of operations and
comprehensive income-
Six months ended September 30, 1999 and 1998 5
Unaudited consolidated statements of cash flows-
Six months ended September 30, 1999 and 1998 6
Notes to consolidated financial statements 7
2 Management's discussion and analysis of financial
condition and results of operations 11
3 Quantitative and qualitative market risk disclosures 18
PART II - OTHER INFORMATION
4 Submission of Matters to Vote of Security Holders 18
6 Exhibits and Reports on Form 8-K 19
Signatures 20
</TABLE>
2
<PAGE> 3
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
September 30 and March 31, 1999
<TABLE>
<CAPTION>
1999
-------------------------------
ASSETS September 30, March 31,
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,420,200 $ 739,126
Investment in available-for-sale securities 5,830,852 14,061,410
Current portion of notes receivable 221,790 216,912
Other current assets 574,707 518,835
------------ ------------
Total Current Assets 9,047,549 15,536,283
Notes receivable, less current portion 905,549 1,169,491
Land held for sale 4,868,740 4,505,227
Water rights 19,594,849 18,716,519
Prepaid leasing costs, net of accumulated amortization 3,469,946 3,585,759
Other water assets, net of accumulated amortization 3,352,350 3,276,872
Deferred debt costs, net of accumulated amortization 386,350 598,966
Property and equipment, net of accumulated depreciation 200,362 189,659
Other assets 92,459 52,084
------------ ------------
$ 41,918,154 $ 47,630,860
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 71,249 $ 92,108
Accrued expenses and other liabilities 622,658 490,095
Accrued interest 62,152 91,988
Current maturities of long-term debt 656,315 1,245,721
------------ ------------
Total Current Liabilities 1,412,374 1,919,912
Long-term debt, less current maturities (Note 3) 3,438,382 2,972,349
9% Convertible subordinated debentures (Note 5) 9,740,000 14,740,000
Deferred gain on sale 23,333 43,333
------------ ------------
Total Liabilities 14,614,089 19,675,594
Series C convertible redeemable preferred stock, $1,000 stated value, 100,000
shares authorized; 10,165 shares issued and outstanding (aggregate liquidation
preference of $10,165,000) at September 30 and March 31, 1999, respectively 9,798,423 9,780,867
Series D convertible redeemable preferred stock, $1,000 stated value, 25,000
shares authorized; 10,000 shares issued and outstanding (aggregate liquidation
preference of $10,000,000) at September 30 and March 31, 1999, respectively 10,000,000 10,000,000
Stockholders' equity:
Common stock, $0.001 par value, 20,000,000 shares
authorized; 8,239,816 shares issued
at September 30 and March 31, 1999, respectively 8,240 8,240
Additional paid-in capital 24,398,144 24,347,502
Accumulated deficit ($14,405,252 of accumulated deficit eliminated in
quasi-reorganization of October 1, 1994) (15,525,872) (14,922,313)
Treasury stock, at cost, 341,200 and 292,200 shares at September 30,
and March 31, 1999, respectively (Note 2) (1,374,870) (1,259,030)
------------ ------------
Total Stockholders' Equity 7,505,642 8,174,399
------------ ------------
$ 41,918,154 $ 47,630,860
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 4
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income
Three months ended September 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Revenue:
Water $ 376,165 $ 64,587
Real estate -- 67,500
----------- -----------
376,165 132,087
----------- -----------
Costs of Revenue:
Water 244,759 15,808
Real estate -- 55,648
----------- -----------
244,759 71,456
----------- -----------
Gross Profit 131,406 60,631
General and Administrative Expenses 1,708,815 1,456,007
----------- -----------
Operating Income (Loss) (1,577,409) (1,395,376)
----------- -----------
Other Income (Expenses):
Interest income 162,962 195,474
Interest expense (318,066) (337,500)
Gain on sale of investment in limited liability company 10,000 10,000
Other (37,687) (40,709)
----------- -----------
(182,791) (172,735)
----------- -----------
Income (Loss) before Income Taxes (1,760,200) (1,568,111)
Income Taxes (Note 4) -- --
----------- -----------
Income (loss) before extraordinary item (1,760,200) (1,568,111)
Extraordinary income on early extinguishment of debt (Note 5) 3,489,803 --
----------- -----------
Net Income (Loss) 1,729,603 (1,568,111)
Accretion of preferred stock to redemption value (8,865) (8,191)
Preferred stock dividends (555,977) (343,148)
----------- -----------
Net Income (Loss) Applicable to Common Stockholders 1,164,761 (1,919,450)
Other comprehensive income (loss)
Unrealized holding gains (losses) arising during period -- (244,170)
----------- -----------
Comprehensive Income (Loss) $ 1,164,761 $(2,163,620)
=========== ===========
Earnings per share-Basic and Diluted:
Income (loss) applicable to common stockholders
excluding extraordinary item $ (0.29) $ (0.23)
Extraordinary item 0.44 --
----------- -----------
Net income (loss) $ 0.15 $ (0.23)
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 5
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income
Six months ended September 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Revenue:
Water $ 848,585 $ 145,361
Real estate -- 345,615
----------- -----------
848,585 490,976
----------- -----------
Costs of Revenue:
Water 489,517 30,389
Real estate -- 184,000
----------- -----------
489,517 214,389
----------- -----------
Gross Profit 359,068 276,587
General and Administrative Expenses 3,325,029 2,342,763
----------- -----------
Operating Income (Loss) (2,965,961) (2,066,176)
----------- -----------
Other Income (Expenses):
Interest income 382,594 441,006
Interest expense (702,633) (675,000)
Gain on sale of investment in limited liability company 20,000 20,000
Other (63,129) 319,999
----------- -----------
(363,168) 106,005
----------- -----------
Income (Loss) before Income Taxes (3,329,129) (1,960,171)
Income Taxes (Note 4) 3,200 2,400
----------- -----------
Income (loss) before extraordinary item (3,332,329) (1,962,571)
Extraordinary income on early extinguishment of debt (Note 5) 3,489,803 --
----------- -----------
Net Income (Loss) 157,474 (1,962,571)
Accretion of preferred stock to redemption value (17,556) (16,223)
Preferred stock dividends (743,477) (343,148)
----------- -----------
Net Income (Loss) Applicable to Common Stockholders (603,559) (2,321,942)
Other comprehensive income (loss)-
Unrealized holding gains (losses) arising during period -- (425,072)
----------- -----------
Comprehensive Income (Loss) $ (603,559) $(2,747,014)
=========== ===========
Earnings per share-Basic and Diluted:
Income (loss) applicable to common stockholders
excluding extraordinary item $ (0.52) $ (0.28)
Extraordinary item 0.44 --
----------- -----------
Net income (loss) $ (0.08) $ (0.28)
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE> 6
WESTERN WATER COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six months ended September 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 157,474 $(1,962,571)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 547,319 82,307
Compensation expense on vesting of unexercised
compensatory stock options 50,642 54,000
Gain on sale of investment in limited liability company (20,000) (20,000)
Loss on disposition of property and equipment 2,544 1,982
Extraordinary income on early extinguishment of debt (3,489,803) --
Allowance for water project costs 552,179 284,727
Changes in assets and liabilities:
(Increase) decrease in:
Other current assets (55,872) (75,959)
Land held for sale (363,513) (540,205)
Other assets (40,375) (25,094)
Increase (decrease) in:
Accounts payable (20,859) 8,292
Accrued expenses and other liabilities 132,563 (282,205)
Accrued interest 127,972 (44,121)
----------- -----------
Net cash used in operating activities (2,419,729) (2,518,847)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits for purchase of land and water rights -- (77,500)
Principal payments received on notes receivable 259,064 107,403
Purchase of property and equipment (38,277) (38,179)
Purchase of available-for-sale securities (667,345) (430,800)
Sales of available-for-sale securities 8,897,903 8,790,398
Additions to water rights (281,561) (755,115)
Purchase of water rights (975,000) (3,215,880)
Additions to other water assets (104,638) (6,932)
Prepayment of leasing costs (506,653) (3,568,200)
----------- -----------
Net cash provided by investing activities 6,583,493 805,195
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 800,000 3,560,000
Payment of debt issue costs -- (35,600)
Preferred stock dividends (743,477) --
Purchase of common stock (115,840) --
Proceeds from issuance of common stock -- 27,000
Purchase of convertible subordinated debentures (1,500,000) --
Principal payments on long-term debt (923,373) (133,809)
----------- -----------
Net cash (used in) provided by financing activities (2,482,690) 3,417,591
----------- -----------
Net increase in cash and cash equivalents 1,681,074 1,703,939
Cash and cash equivalents, beginning of period 739,126 304,988
----------- -----------
Cash and cash equivalents, end of period $ 2,420,200 $ 2,008,927
=========== ===========
</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 consolidated
balance sheet of Western Water Company and Subsidiaries as of September
30, 1999, the consolidated statements of operations and comprehensive
income for the three and six months ended September 30, 1999 and 1998
and the consolidated statements of cash flows for the six months ended
September 30, 1999 and 1998. The consolidated financial statements of
Western Water Company include Western Water Service Company and YG
Procyon Corporation, the Company's wholly-owned subsidiaries, YG Rice
Farms, L.P., a limited partnership directly and indirectly wholly-owned
and controlled by the Company, and Western Agua, L.P., a limited
partnership in which the Company owns a 70% interest ("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, 1999.
Income (loss) per share
The weighted average shares used for basic and diluted net income per
share were 7,899,725 and 7,932,468 shares for the three and six months
ended September 30, 1999, and 8,237,599 and 8,236,712 shares for the
three and six months ended September 30, 1998.
Stock options to purchase 1,986,708 and 1,628,208 shares of common
stock at exercise prices ranging from $3.63-$21.00 and $5.44-$21.00 for
the three and six months ended September 30, 1999 and 1998,
respectively, were not included in the computation of diluted net
income per share as their effect would have been antidilutive.
Warrants to purchase 83,000 and 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 six months ended September 30, 1999 and 1998,
respectively, as their effect would have been antidilutive.
Debentures convertible into 614,123 and 945,763 shares of common stock
at a conversion price of $15.86 per share were not included in the
computation of diluted net income per share for the three and six
months ended September 30, 1999 and 1998, respectively, as their effect
would have been antidilutive.
Series C redeemable preferred stock convertible into 611,593 and
569,551 shares of common stock at a conversion price of $16.62 per
share was not included in the computation of diluted net income per
share for the three and six months ended September 30, 1999 and 1998,
respectively, as its effect would have been antidilutive.
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
Series D redeemable preferred stock convertible into 1,112,347 shares
of common stock at a conversion price of $8.99 per share was not
included in the computation of diluted net income per share for the
three and six months ended September 30, 1999 as its effect would have
been antidilutive.
NOTE 2. 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 September 30, 1999, the Company
repurchased 34,000 shares of common stock at a cost of $60,562. Since
November 1998, the Company has repurchased 341,200 shares of common
stock at a cost of $1,374,870.
NOTE 3. LONG-TERM DEBT:
During June 1999, the Company acquired 240 acres of land and associated
water rights on property located in Inyo County, California. The
purchase price of $1,004,768 was allocated to water rights ($645,000)
and real estate held for sale ($359,768) based on the relative fair
values of the assets. The Company paid $204,768 in cash and $800,000
was financed with an 8% secured promissory note. Interest only payments
are payable semi-annually beginning December 1999 until February 28,
2001, at which time the entire unpaid principal balance together with
unpaid interest is due.
NOTE 4. INCOME TAXES:
Management does not expect there will be taxable income for the fiscal
year ended March 31, 2000. Accordingly, the Company has not recorded a
federal income tax liability and has recorded the minimum state income
tax provision for the three and six months ended September 30, 1999.
NOTE 5. EXTRAORDINARY INCOME:
On August 6, 1999, the Company repurchased $5,000,000 of its
outstanding 9% Debentures, plus accrued interest of $157,808, for
$1,500,000. After reducing related deferred debt costs of $272,956, net
of accumulated amortization of $104,951, the Company recognized a
$3,489,803 extraordinary gain on the early extinguishment of debt.
8
<PAGE> 9
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 6. SEGMENT INFORMATION:
The Company has two operating segments: a) the acquisition and
development of water rights and the sale or lease of water, and b) the
sale of real estate interests acquired in connection with the
acquisition of water rights. Information concerning the operating
segments for the three and six months ended September 30, 1999 and 1998
is presented below:
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
----------------------------- -----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Segment revenue:
Water $ 376,165 $ 64,587 $ 848,585 $ 145,361
Real estate -- 67,500 -- 345,615
----------- ----------- ----------- -----------
$ 376,165 $ 132,087 $ 848,585 $ 490,976
=========== =========== =========== ===========
Net income (loss):
Segment
Water: $ 131,406 $ 48,779 $ 359,068 $ 114,972
Real estate -- 11,852 -- 161,615
Non-segment 1,598,197 (1,628,742) (201,594) (2,239,158)
----------- ----------- ----------- -----------
$1,729,603 $(1,568,111) $ 157,474 $(1,962,571)
=========== =========== =========== ===========
Depreciation and amortization expense:
Segment-Water $ 238,839 $ 14,581 $ 477,678 $ 29,162
Non-segment 32,343 27,168 69,641 53,145
----------- ----------- ----------- -----------
$ 271,182 $ 41,749 $ 547,319 $ 82,307
=========== =========== =========== ===========
</TABLE>
The Company recognized revenue of $45,000 and $90,000 from Fontana
Water Resources for the three and six months ended September 30, 1999
and 1998, respectively. For the three and six months ended September
30, 1999, the Company recognized revenue of $320,665 and $641,330 from
the City of Inglewood. No other recurring customer accounted for more
than 10% of the Company's revenue.
9
<PAGE> 10
WESTERN WATER COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 7. SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
Six months ended September 30,
------------------------------
1999 1998
--------- ---------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $614,680 $ 762,859
Interest capitalized during the period 40,020 59,038
Cash paid during the period for income taxes 3,200 2,400
Supplemental disclosure of non-cash investing and
financing activities:
Recognition of gain on sale of investment in
limited liability company (20,000) (20,000)
Preferred stock issued in lieu of cash dividends -- 343,148
Accretion of preferred stock to redemption value 17,556 16,223
Unrealized loss on available-for-sale securities -- (425,072)
Disposition of property and equipment and related accumulated
depreciation:
Property and equipment (2,678) (2,477)
Accumulated depreciation 134 495
</TABLE>
10
<PAGE> 11
WESTERN WATER COMPANY AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS
In addition to historical information contained herein, this Quarterly Report
contains forward-looking statements. The forward-looking statements contained
herein are subject to certain risks and uncertainties that could cause actual
results to differ materially from those reflected in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations". Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date hereof based on information
currently available to management. Western Water Company undertakes no
obligation to publicly revise these forward-looking statements to reflect events
or circumstances that arise after the date hereof. Readers should carefully
review the risk factors described in other documents the Company files from time
to time with the Securities and Exchange Commission, including the Annual Report
on Form 10-K for the year ended March 31, 1999, the Quarterly Reports on Form
10-Q filed by the Company in 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
Western Water Company (the "Company") identifies, acquires, develops,
sells and leases water and water rights in the western United States. For the
last few years, the Company has been developing this business through the
acquisition of water rights and other interests in water, the purchase of real
estate for the water rights associated with such real estate, and recently, the
sale or lease of water. The Company, directly and indirectly, owns a diverse
portfolio of water rights, as well as real estate, in California and Colorado.
The Company's current principal activity is the acquisition and development of
water rights and the sale or lease of its water. Although the Company has
commenced selling some of its water to municipalities and other users, prior to
the past fiscal year the Company derived most of its revenue from the sale of
real estate that it acquired for the associated water rights, and from assisting
unaffiliated owners of water rights to obtain revenue from their water rights.
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. Since November 1998, the Company repurchased 341,200 shares of common
stock at a cost of $1,374,870.
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"). On August 6,
1999, the Company repurchased $5,000,000 of the outstanding Debentures. Taking
into account prior repurchases, the amount of Debentures outstanding as of
September 30, 1999 was $9,740,000.
11
<PAGE> 12
WESTERN WATER COMPANY AND SUBSIDIARIES
In 1997, the Company issued $9,000,000 of its Series C Preferred Stock.
Each share of Series C Preferred Stock 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, dividends at the annual rate of 7.25%
of the stated value of the Series C Preferred Stock. Such dividends are
currently payable semi-annually in cash.
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 for water projects which Agbar approves through October 2000.
RESULTS OF OPERATIONS
The following is a description of the Company's results of operations for the
three and six months ended September 30, 1999 and 1998.
CONSOLIDATED
<TABLE>
<CAPTION>
Three months ended September 30, Six months ended September 30,
-------------------------------- ------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ 376,000 $ 132,000 $ 849,000 $ 491,000
=========== =========== =========== ===========
Loss before income taxes $(1,760,000) $(1,568,000) $(3,330,000) $(1,961,000)
Income taxes -- -- 3,000 2,000
----------- ----------- ----------- -----------
Loss before extraordinary item (1,760,000) (1,568,000) (3,333,000) (1,963,000)
Extraordinary item on early
extinguishment of debt 3,490,000 -- 3,490,000 --
----------- ----------- ----------- -----------
Net income (loss) 1,730,000 (1,568,000) 157,000 (1,963,000)
Accretion of preferred stock to
redemption value (9,000) (8,000) (18,000) (16,000)
Preferred stock dividends (556,000) (343,000) (743,000) (343,000)
----------- ----------- ----------- -----------
Net income (loss) applicable to
common stockholders $ 1,165,000 $(1,919,000) $ (604,000) $(2,322,000)
=========== =========== =========== ===========
Basic and diluted net income (loss)
applicable to common stockholders $ .15 $ (.23) $ (.08) $ (.28)
=========== =========== =========== ===========
</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. When comparable
12
<PAGE> 13
WESTERN WATER COMPANY AND SUBSIDIARIES
water sales pricing information is not available, 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. 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, 2000. Accordingly, the Company has not recorded a
federal income tax liability and has recorded the minimum state income tax
provision for the three and six months ended September 30, 1999.
WATER RIGHTS
<TABLE>
<CAPTION>
Three months ended September 30, Six months ended September 30,
-------------------------------- ------------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $376,000 $65,000 $849,000 $145,000
Cost of Revenue 245,000 16,000 490,000 30,000
-------- ------- -------- --------
Gross Profit $131,000 $49,000 $359,000 $115,000
======== ======= ======== ========
</TABLE>
Water rights revenue resulted from $321,000 and $642,000 of water sales to the
City of Inglewood, zero and $107,000 from the lease of water rights, $45,000 and
$90,000 of payments received under the Cucamonga Fee Agreement, and $10,000 of
miscellaneous revenue for the three and six months ended September 30, 1999,
respectively. Water rights revenue of zero and $35,000 resulted from the lease
of water rights, $45,000 and $90,000 of payments received under the Cucamonga
Fee Agreement, and $20,000 and $20,000 of miscellaneous revenue for the three
and six months ended September 30, 1998. Since the agreement with the City of
Inglewood was entered into in September 1998, no revenues were received from
this agreement for the six months ended September 30, 1998. Cost of revenue for
the three and six months ended September 30, 1999 includes $230,000 and
$460,000, respectively, of fees and lease costs related to the water sales to
the City of Inglewood and amortization of the Cucamonga Water Fee Agreement.
Cost of revenue for the three and six months ended September 30, 1998 consists
of amortization of the Cucamonga Water Fee Agreement.
REAL ESTATE
<TABLE>
<CAPTION>
Three months ended September 30, Six months ended September 30,
-------------------------------- ------------------------------
1999 1998 1999 1998
------ -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ -- $68,000 $ -- $346,000
Cost of Revenue -- 56,000 -- 184,000
------ ------- -------- --------
Gross Profit $ -- $12,000 $ -- $162,000
------ ======= -------- ========
</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 three months ended September 30, 1998
13
<PAGE> 14
WESTERN WATER COMPANY AND SUBSIDIARIES
resulted from the sale of 20 acres of property in Glenn County, California. Real
estate revenue for the six months ended September 30, 1998 resulted from the
sale of 72 acres of Cherry Creek property in addition to the sale of the Glenn
County 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 September 30, Six months ended September 30,
------------------------------- -------------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
General and Administrative Expenses $1,709,000 $1,456,000 $3,325,000 $2,343,000
</TABLE>
General and administrative expenses for the three months ended September 30,
1999 increased by $253,000 (17%) from the comparable period ended September 30,
1998. The increase was primarily due to severance costs related to the
resignation of one of the Company's officers ($254,000), increased
non-capitalizable consulting and engineering ($151,000), and increased travel
expenses related to the Company's expanded efforts to develop its water sales
program ($26,000). The increased expenses were offset in part by decreased
salaries and fringe benefits ($150,000) and by a decrease in the allowance for
water rights projects under development ($90,000). General and administrative
expenses for the six months ended September 30, 1999 increased by $982,000 (42%)
from the comparable period ended September 30, 1998. The increase was primarily
due to increased allowance for water rights projects under development
($267,000), severance costs related to the resignation of one of its officers
($254,000), an increase in non-capitalizable consulting and engineering expenses
($234,000), and increased travel expenses related to the Company's expanded
efforts to develop its water sales program ($56,000).
OTHER NON-SEGMENT INFORMATION
<TABLE>
<CAPTION>
Three months ended September 30, Six months ended September 30,
---------------------------------- ----------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income $ 163,000 $ 195,000 $ 383,000 $ 441,000
Interest expense (318,000) (338,000) (703,000) (675,000)
Gain on sale of investment in
limited liability company 10,000 10,000 20,000 20,000
Other (38,000) (41,000) (63,000) 320,000
Extraordinary income 3,490,000 -- 3,490,000 --
</TABLE>
14
<PAGE> 15
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 and six months ended September 30, 1999 from the
comparable periods ended September 30, 1998 due primarily to lower investment
balances.
Interest expense includes $266,000 and $598,000 and $338,000 and $675,000 of
interest related to the principal amount of outstanding Debentures for the three
and six months ended September 30, 1999 and 1998, respectively. Interest expense
for the three and six months ended September 30, 1999 also includes $52,000 and
$105,000 of interest related to the $3,000,000 term loan. Interest of $22,751
and $20,899 and $40,020 and $59,038 was capitalized during the three and six
months ended September 30, 1999 and 1998, respectively, in connection with the
development of water rights.
The Company sold its interest in the Nevada Land & Resource Company ("Nevada
LLC") in April 1997. As a result of the sale the Company deferred gain of
$120,000 relating to estimated future consulting services that are to be
provided in accordance with a consulting agreement related to the Nevada LLC.
The Company realized $10,000 and $20,000 of the deferred gain during the three
and six months ended September 30, 1999 and 1998, respectively.
Other income/loss for the three and six months ended September 30, 1999 includes
net rental loss of $77,000 and $112,000 related to the Company's California rice
farm and ranch properties. Other income for the six months ended September 30,
1998 includes the reversal of $290,637 of severance costs recorded in the fiscal
year ended March 31, 1998 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.
On August 6, 1999, the Company repurchased $5,000,000 of its 9% outstanding
Debentures, plus accrued interest of $157,808, for $1,500,000. After reducing
related deferred debt costs of $272,956, net of accumulated amortization of
$104,951, the Company recognized a $3,489,803 extraordinary gain on the early
extinguishment of debt. The repurchase of these Debentures will reduce the
Company's annual interest expense by $450,000.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999 the Company had working capital and a current ratio of
$7,635,175 and 6.41 to l, as compared to $13,616,371 and 8.09 to 1,
respectively, at March 31, 1999.
Operating Activities
For the six months ended September 30, 1999, the Company had net income of
$157,474 primarily because the Company recognized a $3,489,803 extraordinary
non-cash gain on the early extinguishment of debt. For the six months ended
September 30, 1999, the Company had negative cash flow from operating activities
of $2,419,729. During prior periods, the Company generated cash from the sale of
its real estate, including in particular, its real estate in Cherry Creek.
However, the Company has made no real estate sales this fiscal year and it does
not expect real estate sales to be as significant in future periods. In
addition, revenues from the sale of real estate in the future are not expected
to be sufficient to fund the Company's operations.
15
<PAGE> 16
WESTERN WATER COMPANY AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company has recently entered into water purchase and sale transactions that
are expected to generate water revenues, and is attempting to complete other
similar transactions. The completion of many of these transactions depend,
however, on certain regulatory, administrative, and environmental review and
decision-making processes, the outcome of which are not predictable. However,
while revenues from: (i) existing water sales contracts; (ii) leasing the
Company's rice farms and ranches; (iii) the Cucamonga Water Fee Agreement; (iv)
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 to cover general and administrative expenses, interest on
outstanding indebtedness and dividends when and if declared on its outstanding
preferred stock. Revenue from water operations will continue to be dependent on
individually negotiated transactions. Based on the Company's current estimates,
revenues from planned water sales and from its existing long-term water
development projects are expected to be insufficient to fund the Company's
working capital needs during the current fiscal year. Accordingly, the Company's
future operations will be funded primarily from the Company's existing financial
resources, from revenues derived from such water sales as the Company may from
time to time consummate, and from financing it may arrange.
Investing and Financing Activities
On August 6, 1999, the Company repurchased $5,000,000 of the Debentures plus
accrued interest of $157,808 for $1,500,000. After reducing related deferred
debt costs of $272,956, net of accumulated amortization of $104,951, the Company
recognized a non-cash $3,489,803 extraordinary gain on the early extinguishment
of debt.
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, 2000 and fiscal years
ending March 31, 2001, 2002, 2003 and 2004 are $322,000, $1,497,000,
$781,000, $903,000, and $463,000, respectively.
- - The Company is required to make semi-annual interest payments of
$438,300 on the $9,740,000 remaining outstanding principal amount of the
Debentures.
- - The holders of 10,165 shares of Series C Preferred Stock outstanding 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 $736,963 per year).
- - The holders of 10,000 shares 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).
- - Commencing October 1998, the Company entered into a five-year and a
fifteen-year water rights lease. 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 costs for subsequent years will be determined by
multiplying the cost for the first year by the ratio of the index price
for each subsequent year divided by the index price for the first
16
<PAGE> 17
WESTERN WATER COMPANY AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
year. The index price is the sum of the price established by the Metropolitan
Water District ("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 Company believes that its working capital and results of operations 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's ability to
operate over the longer term will be dependent upon its ability to derive
revenues from its water resources, arrange the purchase and sale of water it
doesn't own at a profit, and/or arrange additional financing. The Company's
ability to derive revenue from its own water assets depends, in part, on the
outcome of regulatory, administrative and environmental review processes. The
Company's ability to derive profits from the sale of water it does not currently
own depends on its ability to acquire such water, make sales to customers, and
arrange delivery, all on an economic basis. Consummation of profitable water
sales is subject to a variety of restrictions designed to protect third-party
water users and the environment. The Company believes that it can operate
profitably within these restrictions. However, public agencies which control
critical segments of the public infrastructure necessary to transport and
deliver water in California, the Company's principal area of operation at the
current time, have restricted access to such facilities through pricing and
administrative action. The Company believes that many of these latter
restrictions violate the State's Wheeling Act (Section 1810 of the California
Water Code). Therefore, and in order to permit it to complete profitable water
sales, the Company has undertaken a variety of administrative, legal, regulatory
and legislative initiatives to identify and remove such artificial barriers to
voluntary water transfers. There can, of course, be no assurance that the
Company's initiatives will result in removal of such artificial barriers to
voluntary water transfers in California or, if they are removed, when that might
happen.
Under its agreement with Agbar, the Company is required to use $5,596,897 of
its working capital to fund development costs of specific water projects that
were identified and agreed upon in conjunction with Agbar's purchase of Series
D Preferred Stock. Accordingly, to the extent that the terms of this agreement
are not modified to specifically allow the Company to use some or all of the
$5,596,897 for its anticipated working capital needs, then the amount that the
Company will have available to meet its working capital needs will be reduced.
YEAR 2000
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 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.
17
<PAGE> 18
WESTERN WATER COMPANY AND SUBSIDIARIES
NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective date of FASB Statement No. 133-an amendment of FASB Statement No.
133." 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES
The Company is exposed to market risk primarily due to fluctuations in interest
rates. The Company utilizes both fixed and variable rate debt. The Company's
interest rate risk management objective is to limit the impact of interest rate
changes on earnings and cash flows and to lower the Company's overall borrowing
costs. To achieve its objectives, the Company borrows primarily at fixed rates
and may enter into derivative financial instruments such as interest rate caps
in order to mitigate its interest rate risk on a related variable rate
obligation. The Company does not enter into any transactions for speculative or
trading purposes. The following table presents principal cash flows and related
weighted average interest rates of the Company's long-term fixed rate and
variable rate debt for the fiscal years ended is as follows:
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 Thereafter Total
------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed rate debt $ 8,000 $829,000 $ 32,000 $ 71,000 $ 26,000 $9,869,000 $10,835,000
Weighted average
interest rate 8.0% 8.0% 8.7% 8.3% 9.0% 9.0% 8.9%
Variable rate debt $314,000 $668,000 $749,000 $832,000 $437,000 -- $ 3,000,000
Weighted average
interest rate 6.8% 6.8% 6.8% 6.8% 6.8% -- 6.8%
</TABLE>
The Company's variable rate on its variable rate debt is capped at 7.5%.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on September 14, 1999.
The matters voted upon at the annual meeting were as follows: (i) the election
of two members of the Company's Board of Directors for the ensuing period; (ii)
the approval of the possible issuance of Common Stock equal to 20% or more of
the outstanding Common Stock (or voting power) upon the conversion of shares of
Series D Convertible Redeemable Preferred Stock that may be sold in the future;
and (iii) the ratification of the appointment of KPMG LLP as the independent
accountants of the Company for the fiscal year ending March 31, 2000.
18
<PAGE> 19
WESTERN WATER COMPANY AND SUBSIDIARIES
The voting on each proposal was set forth in the table below.
1. Election of directors:
<TABLE>
<CAPTION>
WITHHOLD
FOR AUTHORITY
--------- ---------
<S> <C> <C>
Ronald I. Simon
Common shares 4,983,867 2,189,814
Preferred shares 1,112,347 603,099
David A. Abel
Common shares 6,077,471 1,096,210
Preferred shares 1,715,446 0
</TABLE>
No other person received any votes.
2. Approve the possible issuance of Common Stock equal to 20% or more of the
outstanding Common Stock (or voting power) upon the conversion of shares of
Series D Convertible Redeemable Preferred Stock that may be sold in the
future:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS(a)
--------- ------- --------------
<S> <C> <C> <C>
Common shares 4,383,647 700,752 36,474
Preferred shares 603,099 0 1,112,347
</TABLE>
3. Ratify the appointment of KPMG LLP as the independent accountants of the
Company for the fiscal year ending March 31, 2000:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS(a)
--------- ------- --------------
<S> <C> <C> <C>
Common shares 7,117,505 24,437 31,739
Preferred shares 1,715,446 0 0
</TABLE>
(a) Does not include "broker non-votes", which are abstentions by nominee
holders on behalf of beneficial owners who have given no instructions to
the nominee holder. When such nominee has no authority to vote absent
such instructions, the nominee is required to abstain from voting, even
though present or represented at the meeting. Such "broker non-votes"
are not considered present and entitled to vote with respect to the
referenced proposals and therefore have no effect on the outcome of the
vote.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
27-Financial Data Schedule
(b) No reports on Form 8-K were filed during the prior fiscal quarter.
19
<PAGE> 20
WESTERN WATER COMPANY AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.
WESTERN WATER COMPANY
Date: November 11, 1999 By: /s/ Michael Patrick George
---------------------------------
Michael Patrick George
Chairman, President and Chief
Executive Officer
Date: November 11, 1999 By: /s/ Ronald I. Simon
---------------------------------
Ronald I. Simon
Executive Vice President and Chief
Financial Officer
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets, the consolidated statements of 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> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2420
<SECURITIES> 5831
<RECEIVABLES> 222
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9048
<PP&E> 294
<DEPRECIATION> (94)
<TOTAL-ASSETS> 41918
<CURRENT-LIABILITIES> 1412
<BONDS> 9740
0
19798
<COMMON> 8
<OTHER-SE> 7498
<TOTAL-LIABILITY-AND-EQUITY> 41918
<SALES> 0
<TOTAL-REVENUES> 849
<CGS> 0
<TOTAL-COSTS> 490
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (703)
<INCOME-PRETAX> (3,329)
<INCOME-TAX> 3
<INCOME-CONTINUING> (3,332)
<DISCONTINUED> 0
<EXTRAORDINARY> 3490
<CHANGES> 0
<NET-INCOME> 158
<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
